Filed: Sep. 01, 2004
Latest Update: Apr. 11, 2017
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 9-1-2004 Turner v. Commissioner IRS Precedential or Non-Precedential: Precedential Docket No. 03-3173 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "Turner v. Commissioner IRS" (2004). 2004 Decisions. Paper 291. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/291 This decision is brought to you for free and open access by the Opinions
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 9-1-2004 Turner v. Commissioner IRS Precedential or Non-Precedential: Precedential Docket No. 03-3173 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "Turner v. Commissioner IRS" (2004). 2004 Decisions. Paper 291. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/291 This decision is brought to you for free and open access by the Opinions ..
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Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
9-1-2004
Turner v. Commissioner IRS
Precedential or Non-Precedential: Precedential
Docket No. 03-3173
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004
Recommended Citation
"Turner v. Commissioner IRS" (2004). 2004 Decisions. Paper 291.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/291
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PRECEDENTIAL Michael J. Haungs, Esquire (Argued)
Jonathan S. Cohen, Esquire
UNITED STATES United States Department of Justice
COURT OF APPEALS Tax Division
FOR THE THIRD CIRCUIT P.O. Box 502
Washington, D.C. 20044
Attorneys for Appellee
No. 03-3173
OPINION OF THE COURT
BETSY T. TURNER,
Executrix of the Estate of
Theodore Thompson, Deceased, SCIRICA, Chief Judge.
Appellant
This case involves the application
of § 2036(a) of the Internal Revenue Code,
v.
26 U.S.C. § 2036(a), to assets transferred
inter vivos to family limited partnerships.
COMMISSIONER OF
Theodore R. Thompson transferred $2.8
INTERNAL REVENUE
million in securities and other assets to two
family limited partnerships in exchange for
pro-rata partnership interests. Upon his
On Appeal from the
death, Thompson’s estate filed a federal
United States Tax Court
estate tax return which applied a forty
Tax Court Docket No. 7578-99
percent discount to the value of decedent’s
(Honorable Julian I. Jacobs)
partnership interests for lack of control and
marketability. The Commissioner of
Internal Revenue filed a notice of estate
Argued April 21, 2004
tax deficiency in the amount of $707,054,
applying § 2036(a) to return to the gross
Before: SCIRICA, Chief Judge,
estate the full date of death value of the
ROSENN and GREENBERG,
transferred assets. The Tax Court
Circuit Judges
sustained application of § 2036(a) after
finding decedent retained lifetime control
(Filed: September 1, 2004)
and enjoyment of the transferred assets,
and concluding the transfer of assets was
Victor F. Keen, Esquire (Argued)
not a bona fide sale for adequate and full
Thomas W. Ostrander, Esquire
consideration. Estate of Theodore R.
Duane Morris LLP
Thompson v. Comm’r, T.C. Memo 2002-
One Liberty Place, 37th Floor
246; 2002 Tax Ct. Memo LEXIS 254; 84
1650 Market Street
T.C.M. (CCH) 374 (2002). The estate
Philadelphia, Pennsylvania 19103-7396
appeals. We will affirm.
Attorneys for Appellant
I. the preservation of assets, (3) reducing
income taxes by having the corporate
In the early 1990s, decedent
general partner provide medical,
Theodore R. Thompson, along with his
retirement, and ‘income splitting’ benefits
son Robert Thompson and daughter Betsy
for family members, and (4) facilitating
Turner, began to investigate estate plans
family and charitable giving.” Thompson,
for managing his assets.1 In April 1993,
84 T.C.M. at 376. The advisor also stated
they implemented the Fortress Plan,2 an
that, “[a]ll of the benefits above can be
estate plan offered by the Fortress
achieved while total control of all assets is
Financial Group, Inc. that utilized family
retained by the directors of the Corporate
limited partnerships to protect family
General Partner.” Id. Pursuant to the plan,
assets. A financial advisor to decedent’s
decedent and his family formed two
family stated the primary advantages of the
limited partnerships and two corporations
Fortress Plan included: “(1) lowering the
to serve as general partners.
taxable value of the estate, (2) maximizing
A.
1
On April 21, 1993, decedent, his
In 1979, decedent executed a will, daughter Betsy and her husband George
subsequently amended by four codicils, Turner formed the Turner Partnership and
which provided specific gifts to Robert Turner Corporation. Decedent contributed
Thompson, Betsy Turner, and decedent’s $1,286,000 in securities, along with notes
grandchildren and great-grandchildren. receivable from Betsy Turner’s children
The residue of decedent’s estate went to a totaling $125,000, in exchange for a 95.4%
revocable trust, established on January 16, limited partnership interest in the Turner
1969. Decedent amended the trust on Partnership. George Turner contributed
March 17, 1993, to create a new revocable $1,000 in cash and real property in the
trust funded with the assets of the 1969 state of Vermont valued at $49,000 in
trust, which then totaled approximately exchange for a 3.54% limited partnership
$1.5 million. interest. Turner Corporation, the sole
2 general partner, held the remaining 1.06%
The Tax Court previously examined
interest. 3 Shares in Turner Corporation
inter vivos transfers to family limited
were issued to decedent (490 shares or
partnerships created under the “Fortress
49%), Betsy Turner (245 shares or 24.5%),
P l a n ” i n Esta te of S trang i v .
Commissioner, T.C. Memo 2003-145;
2003 Tax Ct. Memo LEXIS 144; 85
3
T.C.M. 1331 (2003). In that case, Turner Corporation did not pay for its
the Tax Court applied § 2036 to return to partnership interest directly, but rather
decedent’s gross estate the value of issued decedent a non-interest bearing
property transferred to a family limited promissory note in the amount of $15,000
partnership pursuant to the Fortress Plan. for its 1.06% interest.
2
George Turner (245 shares or 24.5%), and expectancy of 4.1 years. Theodore R.
National Foundation, Inc. (20 shares or Thompson died on May 15, 1995.
2%), an unrelated tax-exempt entity.
B.
Decedent, Betsy and George Turner served
as directors and officers of Turner 1.
Corporation.
The Turner Partnership assets
Decedent and his son Robert consisted primarily of marketable
Thompson formed the Thom pson securities contributed by decedent, which
Partnership on April 30, 1993, and the the partnership continued to hold in
Thompson Corporation on April 21, 1993. decedent’s brokerage account with
Decedent contributed $1,118,500 in minimal post-transfer trading. After
securities, along with notes receivable formation, however, individual partners
totaling $293,000, in exchange for a contributed additional assets to the Turner
62.27% limited partnership interest. Partnership. In December 1994, Betsy and
Robert Thompson contributed mutual George Turner contributed a 22-acre
funds worth $372,000, and a ranch parcel of land adjacent to their private
property in Norwood, Colorado, appraised residence, known as the Woodlands
at $460,000, in exchange for a 36.72% Property. Betsy and George Turner also
limited partnership interest. Thompson assigned to the Turner Partnership their
Corporation, as general partner, held the interests in a real estate partnership, known
remaining 1.01% interest. Decedent and as Woodside Properties, which held six
Robert Thompson each held 490 shares apartment units. Phoebe and Betsy Turner
(49%) of Thompson Corporation. Robert retained title to the underlying real estate
H. Thompson, an unrelated third party, assets after transfer.
held the remaining 2% interest. Robert
The Turner Partnership engaged in
Thompson, Robert H. Thompson and
several business transactions, although
decedent served as officers and directors
none produced economic gains for the
of Thompson Corporation.
partnership. The structure of the Turner
As of July 1993, decedent, then age Partnership facilitated this result. The
ninety-five, had transferred $2.8 million in partners amended the Turner Partnership
assets— $2.5 million in the form of agreement in 1994, retroactively effective
marketable securities—to the Turner and to April 23, 1993, to allocate all gains and
Thompson Partnerships. Decedent losses from, and distribution of, real estate
retained $153,000 in personal assets, and contributed to the partnership to the
received an annual income of $14,000 individual contributing partners. As a
from two annuities and Social Security. At result, income from the sale of timber from
the time of transfer, decedent had annual the Vermont property went directly to the
expenses of $57,202, and an actuarial life contributing partner, George Turner, and
not to the partnership as a whole.
3
Likewise, when Betsy and George Turner 2.
sold the Woodlands Property along with
Like the Turner Partnership, most
their residence for $550,000, the Turner
of the Thompson Partnership assets
Partnership received $12,351 of the
consisted of m arketa ble sec urities
proceeds, an amount equal to its basis 4 in
contributed by decedent and Robert
the property.
Thompson. Here again, post-transfer
In 1993, the Turner Partnership trading in the securities was low. The only
invested $186,000 in a modular home other operational activities of the
construction project brokered by Phoebe Thompson Partnership related to the
Turner known as the Lewisville Properties. Norwood, Colorado ranch contributed by
The property was sold in 1995 for a loss of Robert Thompson. Robert previously used
$60,000. Phoebe Turner received a $9,120 the ranch as his primary residence, and
commission on the transaction. continued to do so after transfer paying an
annual rent of $12,000. Likewise, Robert
The Turner Partnership also made
Thompson continued to raise mules on the
loans to members of the Turner family.
property and directly received income
Although the partnership formally charged
from the sale of mules. The record does
family members interest on these loans,
not demonstrate any other business or
interest payments were often late or not
commercial activities on the Norwood
paid at all, and loans were frequently
ranch. Nevertheless, for the years 1993
reamortized. But the partnership never
through 1995, the Thompson Partnership
pursued enforcement action against any of
paid the Thompson Corporation an annual
its debtors nor made loans to anyone
management fee for the Norwood ranch in
outside the Turner family.
the amounts of $23,625, $45,000, and
$47,500, respectively. Thompson
Corporation in turn paid Robert Thompson
an annual salary of $32,001, and Karen
Thompson, Robert’s wife, a monthly
4
See Black’s Law Dictionary 145 (7th salary of $350. Thompson Corporation
ed. 1999) (defining “basis” as the “value also carried insurance on Robert and
assigned to a taxpayer’s investment in Karen Thompson, and paid various
property and used primarily for computing personal expenses. The Thompson
gain or loss from a transfer of the Partnership claimed losses from the
property”); Eitan A. Avneyon, Dictionary operation of the ranch on its tax returns for
of Finance 53 (1987) (defining “basis” as the years 1993 through 1996.
“the cost of an asset, or the asset’s value
3.
(in the case of an asset obtained by some
means other than purchase) used to In addition to the foregoing
calculate depreciation, profits and capital activities, both the Turner and Thompson
gains.”).
4
Partnerships made distributions of cash and $350,000 in securities to partially fund
and partnership interests to decedent bequests in decedent’s will and pay
during his lifetime. In 1993, the Turner decedent’s estate taxes.
and Thompson Partnerships made cash
Decedent’s executors filed a federal
distributions of $40,000 each to decedent
estate tax return, Form 706, with the
which he used to provide holiday gifts to
Internal Revenue Service on February 21,
family members. Again in 1995, the
1996, and filed a supplemental return on
Thompson and Turner Partnerships made
December 10, 1996. The estate reported
cash distributions to decedent of $45,500
decedent held a 87.65% interest in the
and $45,220 respectively. During the
Turner Partnership and a 54.12% interest
same time period, decedent made gifts of
in the Thompson Partnership valued at
interests in both partnerships to individual
$875,811 and $837,691 respectively. The
family members. In March 1995, the
estate reported decedent held 490 shares of
Thompson Partnership distributed $12,500
Turner Corporation stock and 490 shares
to decedent to pay for certain personal
of Thompson Corporation stock valued at
expenses.5 All of these distributions were
$5,190 and $7,888 respectively. The estate
reflected on decedent’s Schedule K-1 and
also reported prior adjusted taxable gifts of
recorded as reductions in his partnership
$19,324 related to decedent’s lifetime gifts
capital accounts.
of partnership interests. The estate
C. calculated these values by applying a 40%
discount rate to the net asset value of the
As noted, decedent died testate on
partnerships and corporations for lack of
May 15, 1995, at age ninety-seven. At the
control and marketability.
time of his death, decedent held
approximately $89,000 in liquid assets, a In January 1999, the IRS issued a
promissory note in principal amount of notice of deficiency in the amount of
approximately $9,000, a majority interest $707,054, adjusting decedent’s taxable
in the Turner and Thompson Partnerships, estate from $1,761,219 to $3,203,506. The
and shares in their respective corporate most significant adjustment involved the
general partners. On or about May 27, reported value of decedent’s interests in
1995, the Turner and Th ompson the family limited partnerships.6 The
Partnerships respectively sold $347,000 Commissioner explained the “20 percent
5 6
The Tax Court found that prior to this The Commissioner also increased the
distribution, Betsy Turner wrote a letter to taxable estate by $4,993 for adjustments to
Robert Thompson detailing decedent’s decedent’s reported interest in Thompson
1994 expenses of $57,202.40 and stating Corporation and Turner Corporation, and
d e c e d e n t n e e d e d a n “ i n f u si o n .” increased the reported taxable gifts from
Thompson, 84 T.C.M . at 380. $19,324 to $166,167.
5
minority discount and the 20 percent II.
marketability discount has been disallowed
The Tax Court found the family
on each of the [Turner and Thompson]
partnerships were validly formed and
partnership s.” As a result, the
properly recognized for federal estate tax
Commissioner increased the value of
purposes.8 The court nevertheless
decede nt’s interest in the Turner
sustained application of § 2036(a)(1)9 to
Partnership from $875,811 to $1,717,977,
and increased the value of his interest in
the Thompson Partnership from $837,691 8
The Tax Court concluded the
to $1,396,152. These adjustments Commissioner had the burden of proof on
increased decedent’s taxable estate by whether the partnerships were validly
$1,400,627.7 formed for tax purposes, and whether the
In its amended answer to the transferred assets should be returned to the
estate’s petition for redetermination in the estate under § 2036 because those
Tax Court, the Commissioner asserted the arguments were not presented in the notice
family partnerships and corporations of deficiency. See Wayne Bolt & Nut Co.
should be disregarded for tax purposes, v. Comm’r, 93 T.C.M. 500, 507 (1989)
and therefore decedent’s gross estate (when a new theory on which the
should include the undiscounted value of Commissioner relies is not stated or
his pro-rata share of the underlying assets. described in the notice of deficiency, the
In the alternative, the Commissioner Commissioner bears the burden of proof
contended the full fair market value of the on that issue).
assets transferred by the decedent to the 9
Section 2036(a) provides, in part:
Turner and Thompson Partnerships should
be returned to decedent’s gross estate Transfers with retained life estate.
under § 2036(a) of the Internal Revenue (a) General Rule. The value of the
Code because decedent retained control gross estate shall include the value
and enjoyment over the transferred assets of all property to the extent of any
during his lifetime. interest therein of which the
decedent has at any time made a
transfer (except in the case of a
bona fide sale for an adequate and
full consideration in money or
7
Form 3228 of the statutory notice of money’s worth), by trust or
deficiency reflected an adjustment of otherwise, under which he has
$1,406,933 to the gross estate. The retained for his life or for any
additional adjustment resulted from the period not ascertainable without
inclusion of Delaware state tax refunds for reference to his death or for any
the years 1994 and 1995 in the amounts of period which does not in fact end
$1,459 and $4,847. before his death–
6
return decedent’s transferred assets back to that the contributed property
the estate. The Tax Court found an constituted the majority of
implied agreement existed at the time of decedent’s assets, including
transfer that decedent would retain lifetime nearly all of his investments,
enjoyment and economic benefit of the the establishment of the
transferred assets. In support of this partnerships is far more
finding, the court noted both Betsy and consistent with an estate
George Turner sought assurances from plan than with any sort of
financial advisors that decedent would be arm’s-length joint enterprise
able to withdraw assets from the between partners. In
partnerships to make gifts to family summary, we are satisfied
members, and that the partnerships in fact that the partnerships were
made such distributions to decedent. The created principally as an
court further noted decedent “parted with alternate vehicle through
almost all of his wealth” and found this wh ich decedent would
“outright transfer of the vast bulk of provide for his children at
[decedent’s] assets . . . can only be his death.
explained if decedent had at least an
Id.
implied understanding that his children
would agree to his requests for money The court also determined the
from the assets he contributed to the transfer was not exempt from § 2036(a) as
partnerships, and that they would do so for a “bona fide sale for adequate and full
as long as he lived.” Thompson, 84 consideration.” The Tax Court explained
T.C.M. at 386-87. While acknowledging that “[w]hen a family partnership is only a
the transfers altered the “formal vehicle for changing the form in which the
relationship” between decedent and his decedent held his property—a mere
assets, the court concluded, as a practical ‘recycling of value’— the decedent’s
matter, that “nothing but legal title receipt of a partnership interest in
changed.” Id. at 387. The court exchange for his testamentary assets is not
summarized: full and adequate consideration within the
meaning of section 2036.” Id. at 388. The
In light of decedent’s
Tax Court found neither partnership
personal situation, the fact
conducted a legitimate business enterprise,
and the individual partners did not pool
their assets in the partnerships.
(1) the possession or Furthermore, the court found neither
enjoyment of, or the right to partne rship e nga ge d in busin e ss
the income from , the transactions with anyone outside the
property . . . family, and the partnership loans to family
members were “testamentary in nature.”
26 U.S.C. § 2036(a).
7
Id. at 389. As a result, the court concluded valued at $166,167. As a result of these
there was no transfer for “adequate and adjustments, the Tax Court reduced the
full consideration” within the meaning of Commissioner’s notice of deficiency from
§ 2036(a). $3,335,177 to $2,939,836.11
Accordingly, the Tax Court applied The estate filed a timely notice of
§ 2036(a)(1) to return to the gross estate appeal.12
the date of death value of decedent’s
III.
transferred assets as well as new
partnership assets derived from the assets A.
contributed by decedent. 10 The Tax Court
The Internal Revenue Code
also found decedent’s stock in Turner
imposes a federal tax on “the taxable estate
Corporation and Thompson Corporation
of every decedent who is a citizen or
had no v alue a part fro m th ose
resident of the United States.” 26 U.S.C.
corporations’ interests in the family
§ 2001(a). A “taxable estate” is defined as
partnerships, and thus attributed no
“the value of the gross estate,” less
additional value from this stock to
applicable deductions, id. § 2051, where
decedent’s gross estate. Likewise, the Tax
the value of the “gross estate” includes
Court did not include in decedent’s gross
“the value of all property to the extent of
estate a separate value attributable to
decedent’s lifetime transfers of partnership
interests, which the Commissioner had 11
The Commissioner subsequently
agreed the estate was entitled to a
deduction of $474,195 for attorneys fees as
10
The Tax Court found decedent’s gross an expense of estate administration, and a
estate included secu rities totalin g deduction of $184,674 for interest incurred
$1,232,076 transferred to the Turner and paid on the estate tax deficiency. The
Partnership, plus $257,015 in new Tax Court entered a final deficiency for
partnership assets derived from those the reduced amount of $240,769.
securities. The Tax Court therefore
12
returned $1,489,091 to decedent’s gross We have jurisdiction under 26 U.S.C.
estate on account of assets transferred to § 7482(a)(1). We exercise plenary review
the Turner Partnership. The court also over the Tax Court’s conclusions of law,
returned $1,450,745 to decedent’s estate including its construction and application
for assets transferred to the Thompson of the Internal Revenue Code. PNC
Partnership. The Tax Court did not Bancorp. v. Comm’r, 212 F.3d 822, 827
include in decedent’s gross estate (3d Cir. 2000). We review the Tax
$221,850 in new, post-formation Court’s factual findings for clear error. Id.
Thompson Partnership assets because it Because the estate’s executor resides in
did not find these new assets were derived Pennsylvania, venue is proper under 26
from decedent’s contributed assets. U.S.C. § 7482(b)(1).
8
the interest therein of the decedent at the Section 2036 addresses the concern
time of his death.” Id. § 2033. In that inter vivos transfers often function as
addition, § 2036 returns to decedent’s will substitutes, with the transferor
gross estate any property transferred inter continuing to enjoy the benefits of his
vivos over which the decedent retains property during life, and the beneficiary
enjoyment, possession or right to income receiving the property only upon the
during his lifetime. See generally Richard transferor’s death. See United States v.
B. Stephens, et al., Federal Estate and Gift Grace, 395 U.S. 316, 320 (1969) (“[T]he
Taxation ¶ 4.08 (8th ed. 2002). As noted, general purpose of the statute was to
§ 2036(a) provides, in part: include in a decedent’s gross estate
transfers that are essen tially
Transfers with retained life estate.
testamentary.”). As such, § 2036(a)(1)
(a) General Rule. The value of the
returns property transferred inter vivos to
gross estate shall include the value
the gross estate if the decedent retains
of all property to the extent of any
possession, enjoyment, or the right to
interest therein of which the
income from the property during his
decedent has at any time made a
lifetime.13 Estate of D’Ambrosio v.
transfer (except in the case of a
Comm’r, 101 F.3d 309, 312 (3d Cir. 1996)
bona fide sale for an adequate and
(“Section 2036(a) effectively discourages
full consideration in money or
manipulative transfers of remainder
money’s worth), by trust or
interests which are really testamentary in
otherwise, under which he has
retained for his life or for any
period not ascertainable without
13
reference to his death or for any The statute also discourages situations
period which does not in fact end where the decedent retains the right to
before his death-- determine who, other than himself, will
possess or enjoy the transferred property.
(1) the possession or
See 26 U.S.C. § 2036(a)(2). In its reply
enjoyment of, or the right to
brief, the Commissioner argues in the
the income from, the
alternative the transferred property should
property, or
be included in the gross estate under §
(2) the right, either alone or 2036(a)(2) because decedent retained the
in conjunction with any right to designate persons to possess or
person, to designate the enjoy the property or income from the
persons who shall possess or property. The parties did not raise this
enjoy the property or the argument before the Tax Court. Because
income therefrom. we affirm the Tax Court’s decision with
respect to § 2036(a)(1), we do not reach
26 U.S.C. § 2036(a); see also 26 C.F.R. §
the question of whether § 2036(a)(2)
20.2036-1(a).
applies in this case.
9
character by ‘pulling back’ the full, fee with his death.”). An implied agreement
simple value of the transferred property may be inferred from the circumstances
into the gross estate.”). Section 2036 surrounding both the transfer and
provides an exception for any inter vivos subsequent use of the property. Estate of
transfer that is a “bona fide sale for an Reichardt v. Comm’r, 114 T.C. 144, 151
adequate and full consideration in money (2000). Whether an implied agreement
or money’s worth.” 26 U.S.C. § 2036(a). existed between decedent and his family at
the time of the transfer is a question of
B.
fact, which we review for clear error. See
Section 2036(a)(1) returns an inter Estate of Maxwell v. Comm’r, 3 F.3d 591,
vivos transfer to decedent’s gross estate if 594 (2d Cir. 1993).
there is an express or implied agreement at
After reviewing the record
the time of transfer that the transferor will
evidence, we see no clear error in the Tax
retain lifetime possession or enjoyment of,
Court’s finding of an implied agreement
or right to income from, the transferred
between decedent and his family that
property. 26 C.F.R. § 20.2036-1(a) (“An
decedent would “continue[] to be the
interest or right is treated as having been
principal economic beneficiary of the
retained or reserved if at the time of
contributed property” and retain enjoyment
transfer there was an understanding,
of the transferred property sufficient to
express or implied, that the interest or right
trigger § 2036(a)(1). Thompson, 84
would later be conferred.”); see also Estate
T.C.M. at 387. Decedent transferred 95%
of McNichol v. Comm’r, 265 F.2d 667, 671
of his assets to the family partnerships
(3d Cir. 1959). The existence of formal
when he was ninety-five years old. As the
legal structures which prevent de jure
Tax Court correctly found, decedent did
retention of benefits of the transferred
not retain sufficient assets to support
property does not preclude an implicit
himself for the remainder of his life, as
retention of such benefits. Strangi, 85
calculated at the time of transfer.14 This
T.C.M. at 1338 (“[A lthough] the
fact supports the inference that decedent
proverbial ‘i’s were dotted’ and ‘t’s were
had “an implied understanding that his
crossed’. . . [t]hey do not preclude implicit
retention by decedent of economic benefit
from the transferred property.”) (internal 14
Decedent retained assets of $153,000
citation omitted); McNichol, 265 F.2d at
and had an annual income of $14,000.
673 (“Substance and not form is made the
These assets were sufficient to cover
touchstone of taxability . . . [T]echnical
decedent’s fixed annual expenses of
concepts pertaining to the law of
$57,202 for approximately three and half
conveyancing cannot be used as a shield
years. That is: $153,000/($57,202 -
against the impact of death taxes when in
$14,000) = 3.54. Decedent had an
fact possession of enjoyment of the
actuarial life expectancy of 4.1 years at the
property by the transferor . . . ceases only
time of transfer.
10
children would agree to his requests for assets he contributed to the partnership, . .
money from the assets he contributed to . [the] practical effect of these changes
the partnerships, and that they would do so during decedent’s life was minimal.”
for as long as he lived.” Id. at 387. The Thompson, 84 T.C.M. at 387. Decedent
record reflects Betsy and George Turner could not formally withdraw funds from
anticipated and prepared for this the partnerships without the permission of
eventuality by seeking assurances from their respective corporate general partners,
financial advisors that decedent would be in each case, a corporation directed by
able to withdraw assets from the Betsy Turner or Robert Thompson in
partnerships to make cash gifts to the which decedent held a 49% interest. But
family. 15 Moreover, when decedent’s both Betsy Turner and Robert Thompson
remaining assets eventually ran low, Betsy testified, and the estate concedes, they
Turner secured approval from the limited would not have refused decedent’s request
partnership to provide decedent with an for such distributions. As such, it is clear
“infusion” to cover his expenses. from the operation of the partnerships
during decedent’s lifetime that “nothing
Decedent’s de jure lack of control
beyond formal title changed in decedent’s
over the transferred property does not
relationship to his assets.” Strangi, 85
defeat the inference of an implied
T.C.M. at 1339.16 The fact that the other
agreement in these circumstances. See
McNichol, 265 F.2d at 673 (“Substance
and not form is made the touchstone of
16
taxability.”). The Tax Court recognized The estate argues the partnership
that although “some change ensued in the d i s tr i b u ti o n s t o d e c e d e n t w e r e
formal relationship of decedent to the accompanied by reductions in decedent’s
partnership interests, and were credited to
his partnership capital accounts. The
15
In a letter dated April 4, 2003, Betsy estate avers the distributions to decedent’s
Turner asked a financial advisor whether partnership capital accounts (totaling
decedent would be able to withdraw $183,220) do not constitute “enjoyment”
money from the Dean W itter securities of the property, but merely involve a
account in order to make $10,000 gifts to partial sale of decedent’s partnership
his children, grandchildren and great- interests. Here again, “substance and not
grandchildren. Likewise, in a letter dated form” guides our analysis. Under these
November 28, 1993, George Turner wrote circumstances, the fact that decedent
to a different financial advisor asking: complied with the formalities of
“How does Betsy’s father get $40,000 to partnership distribution does not defeat an
give away as Christmas presents (with inference that he retained control over the
checks dated January 1994)? (Bob assets after transfer. See Strangi, 85
Thompson has a similar question.).” T.C.M. at 1339 (“[A]ccounting entries
Thompson, 84 T.C.M . at 379. alone are of small moment in belying the
11
partners similarly retained de facto control volume of assets to family partnerships
over assets contributed to the partnerships under these circumstances is more
further supports this inference.17 Where a consistent with an estate plan than an
decedent’s relationship to the transferred investment in a legitimate business.
assets remains the same both before and
In sum, we see no clear error in the
after transfer, § 2036(a)(1) returns those
Tax Court’s finding of an implied
assets to the gross estate. Guynn v. United
agreement at the time of transfer that
States, 437 F.2d 1148, 1150 (4th Cir.
decedent would retain enjoyment and
1971).
economic benefit of the property
Finally, the general testamentary transferred to the f amily limited
character of the partnership arrangements partnerships, and that decedent, in fact,
supports the inference of an implied continued to be the principal economic
agreement. Decedent transferred the vast beneficiary of the transferred property
majority of his investment assets to two during his lifetime.19
family limited partnerships when he was
ninety-five years old. The record reveals,
with one exce ption, th at neither and a third-party brokered by Phoebe
partnership engaged in business or loan Turner.
transactions with anyone outside of the
19
family. 18 Transferring this type and The Commissioner argues §
2036(a)(1) applies for the additional
reason that decedent expressly retained a
“right to income” from the transferred
property as a limited partner in the family
existence of an agreement for retained
partnerships. The estate contends
possession and enjoyment.”).
decedent retained a legal right to income
17
For example, Betsy and Phoebe from the property only in his capacity as
Turner each contributed partnership partner, and that this interest alone is
interests in a real estate partnership to the insufficient to trigger § 2036(a)(1).
Turner Partnership, but retained title to the We are not convinced decedent
underlying real estate assets. Likewise, expressly retained a “right to income”
George Turner retained the right to income from the transferred property. The cases
from timber produced on the Vermont relied upon by the Commissioner involved
property he contributed to the Turner an explicit reservation of rights in the
Partnership. governing partnership or trust documents
not present in this case. For example, in
18
The exception is the Lewisville Strangi v. Commissioner, 85 T.C.M.
Properties purchased by the Turner (CCH) 1331, the Tax Court found
Partnership. Apparently, this was a decedent retained a right to income from a
transaction between the Turner Partnership family limited partnership established, as
12
IV.
A.
here, pursuant to the Fortress Plan. The
An inter vivos transfer with a
partnership agreement in Strangi permitted
retained lifetime interest will not be
distributions of partnership proceeds at the
returned to the gross estate if the transfer
sole discretion of the managing corporate
constitutes a “bona fide sale for adequate
general partner. The corporate general
and full consideration.” 26 U.S.C. §
partner appointed decedent’s attorney-in-
2036(a). The Tax Court concluded there
fact to manage the day-to-day operation of
were no transfers for consideration in this
both the partnership and corporate general
case because the transactions “were not
partner. As a result, the Tax Court found
motivated by . . . legitimate business
the “governing documents contain no
concerns.” Thompson, 84 T.C.M. at 388.
restrictions that would preclude decedent
It found none of the individual partners
himself, acting through [his attorney-in-
conducted an active business in the
fact], from being designated as a recipient
partnerships or pooled their assets with the
of income from [the partnership].” Id. at
assets contributed by the decedent. Each
1337. Based on the language in the
contributing partner directly received any
governing documents, the court concluded
income derived from the assets he or she
decedent retained a “right to income” from
contributed to the partnerships.20 The
the partnership assets. Id.; see also Estate
partnerships held the securities transferred
of Pardee v. Comm’r, 49 T.C. 140, 148
by the decedent without any substantial
(1967) (finding a “right to income” within
the meaning of § 2036(a)(1) where trust
indenture expressly enabled decedent as transfer that decedent would retain the
trustee to pay out corpus and income for enjoyment and economic benefit of the
the “education, maintenance, medical transferred property, and that decedent
expenses, or other needs of the continued to be the principal economic
Beneficiaries occasioned by emergency”). beneficiary of the transferred property
Here, by contrast, neither the during his lifetime.
partnership nor corporate documents
20
expressly provide decedent a legal right to For example, by an undated
receive income distributions from the amendment to the Turner Partnership
partnerships. Such distributions still agreement, retroactive to April 23, 1993,
required the approval of the corporate the partners allocated all gains and losses
general partner, even though such approval from, and distribution of real estate
was all but guaranteed as a practical contributed to, the partnership to the
matter. Nevertheless, we do not rely on contributing partner. Similarly, income
this ground as a basis for applying § from the sale of mules raised on the
2036(a)(1), given the Tax Court found that Norwood, Colorado ranch was paid
an implied agreement existed at the time of directly to Robert Thompson.
13
change in investment strategy, and did not section 2036 to a myriad of
engage in business transactions with abuses engendered by
anyone outside of the family. As such, the unilateral paper
Tax Court found the family limited transformations.
partnerships served as “a vehicle for
Id. at 1653. The Tax Court concluded that
changing the form in which the decedent
where a “transaction involves only the
held his property— a mere ‘recycling of
genre of value ‘recycling’ . . . and does not
value,’” and therefore concluded there was
appear to be motivated primarily by
no transfer for consideration within the
legitimate business concerns, no transfer
meaning of § 2036(a). Id.
within the meaning of section 2036(a) has
The Tax Court first announced the taken place.” Id. at 1654.
“recycling” of value concept in Estate of
More recently, the Tax Court
Harper v. Commissioner, T.C. Memo
affirmed this reasoning in Strangi v.
2002-121; 2002 Tax Ct. Memo LEXIS
Commissioner, 85 T.C.M. 1331
127; 83 T.C.M . (CCH) 1641 (2002). In
(2003). Similar to the facts at issue here,
Harper, the Tax Court denied the bona
Strangi involved an inter vivos transfer of
fide sale exception to an inter vivos
assets to a family limited partnership as
transfer where:
part of a Fortress estate plan. Decedent
[A]ll decedent did was transferred 98% of his total assets,
change the form in which he including his residence, to a family limited
held his beneficial interest partnership. From the time of its funding
in the contributed property . until decedent’s death, the Strangi family
. . . Essentially, the value of limited partnership engaged in no business
the partnership interest the operations or commercial transactions.
Trust received derived The only economic activity conducted by
solely from the assets the the partnership involved paying for
Trust had just contributed. decedent’s health and nursing expenses,
W i t h o u t a n y c h an g e funeral and estate tax costs. As such, the
whatsoever in the Tax Court concluded decedent’s inter
underlying pool of assets or vivos transfers to the family limited
prospect for profit . . . there partnership were not transfers for
exists noth ing b ut a consideration within the meaning of §
circuitous “recycling” of 2036(a):
value. We are satisfied that
We see no distinction of
such instances of pure
consequence between the
recycling do not rise to the
scenario analyzed in Estate
level of a payment of
of Harper v. Commissioner,
consideration. To hold
supra, and that of the
oth erwise would open
14
present case. Decedent $12,000. The Norwood ranch was not
contributed more than 99 otherwise operated as an income
percent of the total property producing business, either before or after
placed in the [family limited Robert Thompson contributed the property
partnership] and received to the partnership. Robert Thompson
back an interest the value of apparently generated some income from
w h ich derived almost the sale of mules raised on the property,
exclusively from the assets but income from these sales went to
he had just assigned. Robert directly and not to the partnership.
Furthermore, the [family Nevertheless, the Thompson Partnership
limited partnership] patently paid an annual “management fee” ranging
fails to qualify as the sort of between $23,625 and $47,500 to the
f u n c t io n i n g busin ess Thompson Corporation, which in turn paid
e n t e r p ri s e t h a t co u l d Robert Thompson an annual salary of
potentially inject intangibles $32,001. We see no error in the Tax
that would lift the situation Court’s finding this putative business
beyond mere recycling. arrangement amounted to no more than a
contrivance, and did not constitute the type
Strangi, 85 T.C.M . at 1344.
of legitimate business operations that
For essentially the same reasons, we might provide a substantive non-tax
conclude there was no transfer for benefit for transferring assets to the
consideration within the meaning of § Thompson Partnership.
2036(a). The record demonstrates that
The operations of the Turner
neither the Turner Partnership nor the
Partnership were more extensive, but still
Thompson Partnership engaged in any
fail to provide sufficient objective indicia
valid, functioning business enterprise. As
of a legitimate business operation.
the estate concedes “the primary objective
Although the Turner Partnership made
of the partners in forming the Partnerships
numerous loans to Betsy Turner’s children
was not to engage in or acquire active
and grandchildren, this lending activity
trades or business.” Although the
appears largely testamentary in practice.
partnerships did conduct some economic
Loans were not made to anyone outside
activity, these transactions did not rise to
the extended Turner family, interest
the level of legitimate business operations.
payments were often late or never paid,
In the case of the Thompson and the partnership took no enforcement
Partnership, the only “active operations” action against delinquent debtors. We
claimed by the estate involved leasing the agree with the Tax Court that these lending
Norwood, Colorado ranch back to its activities “lacked any semblance of
contributing partner and former resident, business transactions,” and were
Robert Thompson, for an annual fee of “testamentary in nature, using decedent’s
15
money as a source of financing for the with a third-party. 22 However, based on
needs of individual family members, not the record evidence in this case, we
for business purposes.” Thompson, 84 conclude that any legitimizing effect of the
T.C.M. at 388. Furthermore, the partners Turner Partnership’s investment in the
a m e n d e d the T urner P artner ship Lewisville Properties is overwhelmed by
agreement, retroactive to April 23, 1993, the testamentary nature of the transfer and
to allocate all gains and losses from, and subsequent operation of the partnership.
distribution of real estate contributed to the
In addition to the lack of legitimate
partnership, to the individual contributing
business operations, the form of the
partner. Aside from decedent’s securities,
t r a n sf e r r e d a s s e ts — p r e d o m i n a t e ly
the Turner Partnership consisted primarily
marketable securities—is significant to our
of real estate assets. Directing all income
assessment of the potential non-tax
derived from the partnership’s real estate
benefits available to decedent as a result of
assets to the contributing
the transfer. Other than favorable estate
p artn er— including any appreciation
tax treatment resulting from the change in
r e a l i z e d i n t h e sa l e o f s u ch
form, it is difficult to see what benefit
assets 21 —denied decedent any non-tax
could be derived from holding an untraded
benefit potentially derived from the assets
portfolio of securities in this family limited
collected in the partnership.
partnership with no ongoing business
The Turner Partnership’s $186,000 operations. Compare Church v. United
investment in the Lewisville Properties States, No. SA-97-CA-0774-OG, 2000 U.S.
gives us some pause, but ultimately does Dist. LEXIS 714 (W.D. Tex. Jan 18,
not alter our conclusion. Unlike the other 2000), aff’d without published opinion,
activities of the Turner and Thompson 268 F.3d 1063 (5th Cir. 2001) (applying §
Partnerships, this investment seems to 2036(a) exception to assets transferred to
qualify as a legitimate business transaction a limited partnership that consolidated
undivided ownership interests and
administration of a family ranching
21
This is evident in the sale of the business); Estate of Stone v. Comm’r, T.C.
Woodlands Property. When Betsy and Memo 2003-309; 2003 Tax Ct. Memo
George Turner sold the 22-acre LEXIS 312; 86 T.C.M. 551 (2003)
Woodlands Property parcel along with (applying § 2036(a) exception to assets
their Woodside Farm residence, they transferred to family partnerships operated
allocated to the Turner Partnership an
amount of the Woodside Farm/Woodland
22
Property sale proceeds exactly equal to the With respect to the Turner Partnership
Turner Partnership’s basis in the therefore, the Tax Court erred in finding
Woodlands Property. This effectively the “partnerships did not engage in
eliminated any gain or loss in the sale transactions with anyone outside the
price. family.” Thompson, 84 T.C.M . at 388.
16
as going concern businesses in order to consideration’ for the purposes of either
transfer management of businesses to the estate or gift tax.”).
children); Kimbell v. United States, 371
That said, the Tax Court has held
F.3d 257, 267-68 (5th Cir. 2004) (applying
that the dissipation of value resulting from
§ 2036(a) exception to working oil and gas
the transfer of marketable assets to a
interests transferred to a family partnership
closely-held entity will not automatically
to provide, among other things, centralized
constitute inadequate consideration for
management and protection from personal
purposes of § 2036(a). See Harper, 83
environmental liabilities). The form of
T.C.M. at 1654 (noting partnership
assets transferred supports our conclusion
interests may constitute “adequate and full
there was no transfer for consideration
consideration” if there is also a “potential
within the meaning of § 2036(a).
[for] intangibles stemming from pooling
The estate claims decedent’s for joint enterprise”); Stone, 86 T.C.M. at
transfer of liquid, marketable securities 581 (concluding the lack of marketability
and other assets to the family limited discount applied to limited partnership
partnerships reduced the value of those interests does not, on its own, result in
assets by 40% because of the resulting lack inadequate consideration for purposes of §
of control and marketability. Indeed, as 2036).
the Tax Court found, decedent’s financial
Nonetheless, we believe this sort of
advisors presented this reduction in value
dissipation of value in the estate tax
for estate tax purposes as one of the
context should trigger heightened scrutiny
primary advantages of using the Fortress
into the actual substance of the transaction.
Plan. In one sense, claiming an estate tax
Where, as here, the transferee partnership
discount on assets received in exchange
does not operate a legitimate business, and
for an inter vivos transfer should defeat the
the record demonstrates the valuation
§ 2036(a) exception outright. If assets are
discount provides the sole benefit for
transferred inter vivos in exchange for
converting liquid, marketable assets into
other assets of lesser value, it seems
illiquid partnership interests, there is no
reasonable to conclude there is no transfer
transfer for consideration within the
for “adequate and full consideration”
meaning of § 2036(a).
because the decedent has not replenished
the estate with other assets of equal value. B.
See Wheeler v. United States, 116 F.3d
We also conclude decedent’s
749, 762 (5th Cir. 1997) (“[U]nless a
transfers to the family limited partnership
transfer that depletes the transferor’s estate
do not constitute “bona fide sales” within
is joined with a transfer that augments the
the meaning of § 2036(a), although for
estate by a commensurate (monetary)
somewhat different reasons than the
amount, there is no ‘adequate and full
C o m m i s s i o n e r s u g g e s ts . The
Commissioner argues there was no “bona
17
fide sale” in this case because decedent That said, however, neither the
“stood on both sides of the transaction” as Internal Revenue Code nor the governing
transferor and a limited partner of the Treasury Regulations define “bona fide
family partnerships. The Commissioner’s sale” to include an “arm’s length
position is supported by several cases transaction.” Treasury Regulation
which have concluded that a “bona fide 20.2036-1(a) defines “bona fide sale for an
sale” requires an arm’s length bargain. adequate and full consideration” as a
See, e.g., Bank of New York v. United transfer made “in good faith” and for a
States, 526 F.2d 1012, 1016 (3d Cir. 1975) price that is “adequate and full equivalent
(“[T]he value of the claim settled by the reducible to a money value.” 26 C.F.R. §
estate may not be deducted if the 20.2036-1(a) (referring to 26 C.F.R. §
agreement on which the claim was based 20.2043-1(a)). Based in part on an
was not bargained at arm’s length.”); interpretation of this regulation, the Court
Harper, 83 T.C.M. at 1653 (denying the § of Appeals for the Fifth Circuit concluded
2036 exception, in part, where there was a “bona fide sale” only requires “a sale in
no “arm’s length bargaining” because which the decedent/transferor actually
decedent “stood on both sides of the parted with her interest in the assets
transaction”); Strangi, 85 T.C.M. at 1343 transferred and the partnership/transferee
(finding no bona fide sale where “decedent actually parted with the partnership
essentially stood on both sides of the interest issued in exchange.” See Kimbell,
transaction”). As a practical matter, an 371 F.3d at 265. The court reasoned:
“arm’s length” transaction provides good
[J]ust because a transaction
evidence of a “bona fide sale,” especially
takes place between family
with intra-family transactions. But some
members does not impose
courts have also found a bargained-for
an additional requirement
exchange in the family context when the
not set forth in the statute to
interests of individual family members
establish that it is bona fide.
were sufficiently divergent. See, e.g.,
A transaction that is a bona
Bank of New York, 526 F.2d at 1017
fide sale between strangers
(“Even a family agreement, although
must also be bona fide
achieved without apparent bitterness, has
between members of the
been regarded as bargained for when
same family. In addition,
members of the family had interests
the absence of negotiations
contrary to those of other family
between family members
members.”); Stone, 86 T.C.M. at 579
over price or terms is not a
(finding an arm’s length bargain in intra-
compelling factor in the
family transaction where each family
determ ination . . .
member retained independent counsel).
particularly when the
18
exchange value is set by partnerships. See id. (“[The] existence of
objective factors. the family relationship does not create a
status which itself determines tax
Id. at 263 (discussing Wheeler, 116 F.3d
questions, but is simply a warning that
749) (internal citations omitted).
things may not be what they seem.”);
We similarly believe a “bona fide Kimbell, 371 F.3d at 265 (“[W]hen the
sale” does not necessarily require an transaction is between family members, it
“arm’s length transaction” between the is subject to heightened scrutiny.”).
transferor and an unrelated third-party. Of
Moreover, the facts here are
course, evidence of an “arm’s length
distinguishable from those Tax Court cases
transaction” or “bargained-for exchange”
which have denied the “bona fide sale”
is highly probative to the § 2036 inquiry.
exception after finding decedent “stood on
But we see no statutory basis for adopting
both sides of the transaction.” For
an interpretation of “bona fide sale” that
example, in Harper, the Tax Court was
would automatically defeat the § 2036
“unable to find any other independent
exception for all intra-family transfers.
party involved in the creation” of the
Wheeler, 116 F.3d at 766 (“Unless and
family partnerships. 83 T.C.M. at 1653.
until the Congress declares that intrafamily
The Tax Court found that “[d]ecedent,
transfers are to be treated differently . . .
independently of any other anticipated
we must rely on the objective criteria set
interest-holder, determined how the
forth in the statute and Treasury
[partnership] was to be structured and
Regulations to determine whether a sale
operated, decided what property would be
comes within the ambit of the exception to
contributed to capitalize the entity, and
section 2036(a).”).
declared what interest the Trust would
We are mindful of the mischief that receive therein.” Id. Likewise in Strangi,
may arise in the family estate planning decedent’s attorney-in-fact prepared the
context. As the Supreme Court observed, family partnership structure, including the
“the family relationship often makes it assets c o ntr ib ute d , w i t h o u t a n y
possible for one to shift tax incidence by participation from the contributing family
surface changes of ownership without members. 85 T.C.M. at 1344. In both
disturbing in the least his dominion and cases, the decedent contributed over 99%
control over the subject of the gift or the of the total partnership assets. See id.;
purposes for which the income from the Harper, 83 T.C.M. at 1653. Here, by
property is used.” Comm’r v. Culbertson, contrast, both the formation and funding of
337 U.S. 733, 746 (1949). But such the Turner and Thompson Partnerships
mischief can be adequately monitored by involved substantial participation by
heightened scrutiny of intra-family decedent’s family members and their
transfers, and does not require a uniform respective spouses.
prohibition on transfers to family limited
19
However, while a “bona fide sale” because neither the Thompson Partnership
does not necessarily require an “arm’s nor Turner Partnership conducted any
length transaction,” it still must be made in legitimate business operations, nor
good faith. See 26 C.F.R. § 20.2043-1(a). provided decedent with any potential non-
A “good faith” transfer to a family limited tax benefit from the transfers.
partnership must provide the transferor
V.
some potential for benefit other than the
potential estate tax advantages that might For the foregoing reasons, we will
result from holding assets in the affirm the decision of the Tax Court.
partnership form. Even when all the “i’s
are dotted and t’s are crossed,” a
transaction motivated solely by tax
planning and with “no business or
corporate purpose . . . is nothing more than
a contrivance.” Gregory v. Helvring, 293
U.S. 465, 469 (1935). “To hold otherwise
would be to exalt artifice above reality and
to deprive the statutory provision in
question of all serious purpose.” Id. As
discussed in the context of “adequate and
full consideration,” objective indicia that
the partnership operates a legitimate
business may provide a sufficient factual
basis for finding a good faith transfer. But
if there is no discernable purpose or
benefit for the transfer other than estate tax
savings, the sale is not “bona fide” within
the meaning of § 2036. See, e.g., id.
(ignoring a transaction for estate tax
purposes after finding “no business or
corporate purpose” for the transaction);
compare Kimbell, 371 F.3d at 267 (finding
a “bona fide sale” where the transaction
was entered into for “substantial business
and other non-tax reasons”).
After a thorough review of the
record, we agree with the Tax Court that
decedent’s inter vivos transfers do not
qualify for the § 2036(a) exception
20
unassailable inasmuch as section 2036(a)
sets the standard for “adequate and full
Turner v. Commissioner of Internal
consideration” in the unmistakable term of
Revenue, No. 03-3173
“money or money’s worth” and thus does
not permit the use of intangible
n o n m o n e t a r y c o n s i d e r a t i o n s in
GREENBERG, Circuit Judge, concurring.
determining value. Therefore, a transfer of
$1,000,000 in assets will be for an
adequate and full consideration if it is for
I join in Chief Judge Scirica’s
$1,000,000 in money. If a transfer is for
opinion in this case without reservation but
property then the “money’s worth” of the
want to add a few thoughts with respect to
property should be of the same value as
the issue of whether we are dealing with
money received for the transferred
transfers for “adequate and full
property would have had to have been, i.e.,
consideration in money or money’s
$1,000,000.23
worth.” Preliminarily on this point I think
that Chief Judge Scirica gets to the heart of
In this case, inasmuch as the
the matter by noting that “[i]n one sense,
transfers were not for money the exception
claiming an estate tax discount on assets
can apply only if the transfers were for
received in exchange for an inter vivos
property that can be regarded as being for
transfer should defeat the § 2036(a)
“money’s worth.” Yet one of the
exception outright [for] [i]f assets are
motivations for the transfers was that there
transferred inter vivos in exchange for
would be a substantial discount, claimed
other assets of lesser value, it seems
by the estate to be 40%, when the assets
reasonable to conclude that there is no
transferred instead of being valued directly
t r a n sf e r for ‘adequate and f ull
were valued indirectly as the direct
consideration’ because the decedent has
valuation for estate tax purposes was of
not replenished the estate with other assets
the estate’s interests in the partnerships
of equal value.” Maj. opinion at 17.
and corporations holding the assets. To
me nothing could be clearer than a
This conclusion is consistent with
conclusion that if the discount was
Estate of D’Ambrosio v. Commissioner,
justified (even if in a lesser percentage
101 F.3d 309, 312 (3d Cir. 1996) (quoting
than the estate claimed) in a valuation
Estate of Frothingham v. Commissioner,
sense then the decedent could not have
60 T.C. 211, 215 (1973)), in which we
r e c e iv e d a n a d e q u a t e a n d f u ll
indicated that a transfer is for adequate and
consideration for his transfers in terms of
full consideration when “the transferred
property is replaced by other property of
equal value received in exchange.” Our
23
conc lusion in D’A mb rosio w as I do not suggest that absolute parity is
required.
21
“money’s worth.” Thus, I think it clear [The decedent’s]
that the Fortress Plan as applied in a case contribution did not enhance
in which the decedent retained for his life any other partner’s interests.
the enjoyment from the transferred None of the partners
property should be completely ineffective received any property from
to create a tax benefit by reducing the [the decedent] directly or
value of the decedent’s estate as the indirectly when the
transferred property must be recaptured by Partnerships were formed.
the estate for estate tax purposes. Therefore, no gratuitous
Accordingly, in joining in Chief Judge transfer occurred upon the
Scirica’s opinion I agree with it on the formation of the
consideration issue. Partnerships and section
2036(a)(1) is inapplicable.
I, however, wish to make three
additional points. The first point relates to Appellant’s br. at 24 (footnote omitted).
the estate’s vigorous argument, which The estate’s predicate for the argument is
Chief Judge Scirica does not address, that that the gift tax and estate tax are in pari
the decedent did not make a gift for gift materia so that a transfer made for an
tax purposes upon the formation of the adequate and full consideration for gift tax
partnerships and therefore there must have purposes also is made for an adequate and
been an adequate and full consideration for full consideration under section 2036(a).
his transfers. The estate explains its The Commissioner answers that “[t]here
argument as follows: were no gifts on formation [of the
partnerships] not because there was full
Here, the IRS has not consideration, but because there were no
contended nor did the Tax gifts at all. Decedent’s retention of control
Court find that there was a over the assets is inconsistent with a
gift on formation of the donative transfer.” Appellee’s br. at 47
Partnerships and no such n.12.
gift was m ade . No
gratuitous transfer occurred The Commissioner is not being
upon the formation of the inconsistent in contending that there was
Partnerships because each not an adequate and full consideration for
participant’s interest in the the transfers under section 2036(a) while
Partnerships was acknowledging that the decedent did not
proportional to the capital make taxable gifts upon the creation of the
contributed. The partners partnerships. Even if the estate’s claim
received a pro-rata interest that the discount is justified would be well
in each Partnership equal to founded were it not for section 2036(a),
their pro-rata contribution. that assumption does not mean that the
22
value decedent lost upon the creation of Here, however, we have a narrow
the partnerships went to someone else. situation in which the partnerships were
Rather, the recycling of the assets so that created in furtherance of what the estate
they were valued indirectly rather than calls an “estate plan” with “[t]he primary
directly simply caused them to lose value. purposes . . . to provide a vehicle for gift
Therefore, precisely as the Commissioner giving, to preserve assets and ultimately to
contends, there were no gifts at all when transfer the partnership interests . . . in an
the partnerships were formed. Indeed, as orderly and efficient fashion.” Appellant’s
the estate’s brief plainly reveals, the estate, br. at 5. In addition, as the Tax Court
perhaps not recognizing the significance of pointed out, the parties intended that
its concession, acknowledges that none of implementation of the plan save taxes by
the partners received any property from the lowering the taxable value of the estate.
decedent “directly or indirectly” when the Furthermore, as the estate acknowledges,
partnerships were formed. Thus, there “the primary objective of the partners in
were no gifts and the estate’s observation forming the Partnerships was not to
that the gift tax and estate tax are in pari engage in or acquire active trades and
materia is immaterial as this relationship businesses, [though] the Partnerships were
does not change the fact that the decedent involved in various investments and
enjoyed the property he transferred until activities.” Id. at 29. In fact, the
his death and did not receive adequate and Commissioner emphasizes that the “estate
full consideration for it in money’s worth. concedes that the partnerships never
intended to carry on any sort of active
The second point I make is that the trade or business,” and he points out that
logic of the court in this case should not be “the partnerships [did not] carry on any
applied too broadly and I see no reason sort of common investment activity of any
why it will be. In this regard I significance.” Appellee’s br. at 45-46. It
acknowledge that there surely are therefore appears that the Commissioner
numerous partnerships in which a partner implicitly recognizes that there are
dies after contributing assets to the limitations on his argument.
partnership and therefore has made a
transfer that arguably could be said to be I make this second point as I do not
within section 2036(a). Certainly the court want it thought that the court’s reasoning
is not holding that in all such here should be applied in routine
circumstances section 2036(a) could be commercial circumstances and in this
applicable requiring that the valuation of regard I note that Chief Judge Scirica
the decedent’s interest at death be made by observes that the partnerships do not
looking through his interest in the o p e r a t e l e g i ti m a t e b u s in e s s e s.
partnership directly to its assets, thus Accordingly, I believe that the court’s
disregarding the partnership’s existence opinion here should not discourage
for purposes of estate tax valuation. transfers in ord inary com merc ial
23
transactions, even within families. Cf. similar to that of the estate that I quoted
Estate of Strangi, 115 T.C. 478, 484 above, the court indicated:
(2000) (“Family partnerships have long
been recognized where there is a bona fide [The Commissioner]
business carried on after the partnership is nonetheless argues that,
formed.”), aff’d in part, rev’d in part on because Mr. Stone and M s.
other grounds,
293 F.3d 279 (5th Cir. Stone received respective
2002). Rather, we are addressing a partnership interests in each
situation in which the family partnerships of the Five Partnerships the
obviously were used as tax dodges in value of which, taking into
circumstances that section 2036(a) was account approp riate
intended to thwart. Therefore, the result discounts, was less than the
the court reaches on the adequate and full value of the respective
consideration issue readily accommodates assets that they transferred
the estate’s observation that “[a]n interest to each such partnership,
received in a closely held business entity the y did not receiv e
typically has a value less than a pro rata adequate and full
part of the contributed assets for reasons consideration for the assets
relating to lack of marketability, minority transferred. [The
interest and the like.” Appellant’s reply Commissioner’s] argument
br. at 14. in effect reads out of section
2036(a) the exception for ‘a
This second point is important bona fide sale for an
because courts should not apply section adequate and full
2036(a) in a way that will impede the consideration in money or
socially important goal of encouraging money’s worth’ in any case
accumulation of capital for commercial where there is a bona fide,
enterprises. Therefore in an ordinary arm’s-length transfer of
commercial context there should not be a property to a business entity
recapture under section 2036(a) and thus (e.g., a partnership or a
the value of the estate’s interest in the corporation) for which the
entity, though less than the value of a pro transferor rece ives an
rata portion of the entity’s assets, will be interest in such entity (e.g., a
determinative for estate tax purposes. This partnership interest or stock)
case simply does not come within that that is proportionate to the
category. fair market value of the
property transferred to such
My third point relates to Estate of entity and the determination
Stone v. Commissioner, 86 T.C.M. (CCH) of the value of such an
551, 581 (2003), in which, in language interest takes into account
24
a p p r o p r i a t e
discounts. We reject
such an argument by
adequate and full
[the Commissioner]
consideration under §
that reads out of
2036(a). This conflation
section 2036(a) the
misses the mark: The
e x c e p t io n th at
b u s i n e s s d e c i s io n t o
Congress expressly
exchange cash or other
prescribed when it
assets for a transfer-
enacted that statute.
restricted, non-managerial
interest in a limite d
The Commissioner correctly recognizes
partnersh ip involves
that Stone is inconsistent with his position
financial considerations
here and the estate understandably relies
other than the purchaser’s
on Stone. I reject Stone on the quoted
ability to turn right around
point as the Commissioner’s position in no
and sell the newly acquired
way reads the exception out of section
limited partnership interest
2036(a) and the Tax Court does not
for 100 cents on the dollar.
explain why it does.24 Rather, the
Investors who acquire such
interests do so with the
expectation of realizing
24
In Kimbell v. United States, 371 F.3d benefits such as
257, 265-66 (5th Cir. 2004), the court m a n a ge me nt expe rtis e ,
quoted the above language from Stone security and preservation of
with approval and went on to point out assets, capital appreciation
that: and avoidance of personal
liability. Thus there is
We would only add nothing inconsiste nt in
to the Tax Court’s rejection acknowledging, on the one
of the government’s hand, that the investor’s
inconsistency argument that dollars have acquired a
it is a classic mixing of limited partnership interest
apples and oranges: The at arm’s length for adequate
government is attempting to and full consideration and,
e q u a te t h e v e n e ra b le on the other hand, that the
‘ w i l li n g b u y e r - wil l i n g asset thus acquired has a
seller’ test of fair market present fair market value,
value (which applies when i . e . , i m m ed i a t e s a l e
calculating gift or estate tax) potential, of substantially
with the proper test for less than the dollars just
25
Commissioner seeks to apply the exception
precisely as written as his position should
not be applied in ordinary commercial
circumstances even though the decedent
may be said to have enjoyed the property
until his death.
Judge Rosenn joins in this
concurring opinion.
paid--a classic
informed trade-off.
I believe, however, that Kimbell
does not take into account that to avoid the
recapture provision of section 2036(a) the
property transferred must be “replaced by
property of equal value that could be
exposed to inclusion in the decedent’s
gross estate” D’Ambrosio, 101 F.3d at
313 (quoting Frothingham, 60 T.C. at 216
(omitting emphasis)), on a “money or
money’s worth” basis.
26
