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Estate tax distribution shifts, 2019–2021
in a partnership with C. The GCM cited
Culbertson, 337 U.S. 733 (1949), for the
premise that a partnership is an organi-
$12,000
zation for the production of income to
which each partner contributes capital
or services. However, since in Farley, Z’s
$10,000
entire “contribution” was made as a loan,
 2019  2021
the GCM concluded that there was no Filing year
basis for finding that Z intended to join $8,000
with the corporation as a partner in the
present conduct of the enterprise and,
thus, no basis for finding the existence of Net estate tax (millions) $6,000
a partnership. Although conceding that
the economic realities of the arrange-
ments in Farley warranted recognition $4,000
of both debt and equity elements, GCM
36,702 observed that there would be
serious computational problems in allo- $2,000
cating a single contribution to severable
debt and equity interests. These com-
0
putational problems could be avoided if
Under $10 million $10 million to $10 million to $50 million or
the entire contribution was allocated to a under $20 million under $50 million more
single equity interest.
Size of gross estate
In Deitch, the IRS maintained the
position described in GCM 36,702 and Source: Tax Policy Center, Urban Institute & Brookings Institution.
did not argue that PLI’s advances under
the loan agreements and additional
interest agreement should be bifurcated
between an equity interest and a debt could suggest that PLI held an equity In evaluating whether PLI and
interest. The IRS’s primary argument for investment). WTS formed a partnership, the court
disallowing deductions for payments on However, the court first evaluated looked to the factors set forth in Luna,
the additional interest agreement was whether the arrangement between WTS 42 T.C. 1067, 1077 (1964), which are
that the loan agreements and additional and PLI gave rise to a partnership in frequently cited in determining whether
interest agreement constituted equity in which PLI might obtain an equity inter- an economic relationship constitutes a
their entirety. est. Originally, the IRS had contended partnership or whether a taxpayer is a
In evaluating whether a particular that the amount paid to PLI reduced the partner in a partnership:
instrument is treated as a partnership capital gain income of WTS (and of its 1. The agreement of the parties and
interest (i.e., equity) versus partner- partners) and was a nondeductible return their conduct in executing its terms;
ship debt, courts have often employed on PLI’s equity interest in WTS. Sub- 2. The contributions, if any, that each
multifactor facts-and-circumstances tests sequently, the IRS refined its position party has made to the venture;
similar to those used in debt-versus- and asserted that the additional interest 3. The parties’ control over income and
equity analyses for corporations (see agreement created a joint venture be- capital and the right of each to make
Hambuechen, 43 T.C. 90 (1964)). The tween WTS and PLI so that the amount withdrawals;
IRS argued that the 13 debt-versus- paid to PLI was a nondeductible return 4. Whether each party was a principal
equity factors typically employed by the on PLI’s equity interest not in WTS but and coproprietor, sharing a mutual
Eleventh Circuit (the circuit to which in a joint venture between WTS and proprietary interest in the net profits
an appeal of the case would lie) clearly PLI. If the IRS’s position were correct, and having an obligation to share
demonstrated that PLI’s advance was then the payments made to PLI under losses, or whether one party was
made in respect of an equity interest the additional interest agreement might the agent or employee of the other,
and not debt (for instance, WTS’s thin simply be allocations of partnership receiving for its services contingent
capitalization and PLI’s entitlement to a income rather than payments by WTS compensation in the form of a
share of the Rome property’s net profits of deductible interest. percentage of income;

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