Estate of Purdue v. Comm'r
This text of 2015 T.C. Memo. 249 (Estate of Purdue v. Comm'r) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
Decisions will be entered under
GOEKE,
(1) whether the value of the assets transferred by Barbara M. Purdue (decedent) to the Purdue Family LLC (PFLLC) is includible in the value of her gross estate under
(2) whether decedent's gifts of PFLLC interests from 2001 through 2007 to the Purdue Family Trust (PFT) are present interest gifts which qualify for exclusion under
(3) whether the estate is entitled to deduct interest on loans from the beneficiaries of the*257 estate used to pay the estate tax liabilities. We hold that it is.
Decedent was a resident of Washington when she died on November 27, 2007, at the age of 95. Four of the five Purdue children, William J. Purdue, Susan P. Christoff, Nancy P. Myhre, and Hazel P. Beatty (Purdue children), are personal representatives of the estate. Three of the four representatives also resided in Washington when the petition was filed; the fourth resided in Colorado.
Decedent was married to Robert A. Purdue (Mr. Purdue) and had five children and multiple grandchildren and great-grandchildren. Mr. Purdue was an attorney and a founding partner of Montgomery Purdue Blankinship & Austin PLLC (MPBA). Decedent was a homemaker, and her participation in the control and management of the PFLLC assets was limited.
Mr. Purdue invested in Tele-Vue Systems, Inc. (Tele-Vue), a pioneering cable company, when it was a startup company in the 1960s for a nominal value. Tele-Vue was acquired in 1969 by Columbia Broadcasting System in an income tax-free exchange. Substantially all of the low-basis telecommunications stocks were derived from that exchange, and later related income tax-free spin-offs*258 and in-kind stock distributions.
At the end of 1999 decedent and Mr. Purdue (parents) had a net worth of approximately $28 million, consisting mostly of marketable securities worth approximately $24 million. In 2000 the marketable securities were held in five different brokerage accounts at three management firms. The three separate management firms provided independent advice to Mr. Purdue; the management firms did not consult with one another or consider Mr. Purdue's assets managed by the other firms.
*252 The parents also had an undivided one-sixth interest in a commercial building in Honolulu, Hawaii (Hocking Building), valued at approximately $480,000 as of December 1999. The Hocking Building was subject to a 55-year triple net lease through 2022 and has been managed by a real estate management firm since 1982.
In 1995 the parents engaged Alan Montgomery, an attorney and member at MPBA, for estate and gift tax planning and advice. To reduce estate tax Mr. Montgomery advised the parents to use their available gift and estate tax exemptions and exclusions, generation-skipping transfer tax exemptions, and gift and estate tax valuation discounts. In a letter summarizing the recommendations*259 Mr. Montgomery also suggested that they form a family limited partnership to hold their stock interests and their interest in the Hocking Building to centralize management and take advantage of valuation discounts.
The parents requested that the Purdue children receive copies of most or all of the MPBA correspondence commencing in early 2000. On January 20, 2000, Mr. Montgomery recommended various estate planning strategies, including the creation of an irrevocable family gift trust, qualified personal residence trusts, and a member-managed Washington family limited liability company. Mr. *253 Montgomery noted that it was not necessary for Mr.
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Decisions will be entered under
GOEKE,
(1) whether the value of the assets transferred by Barbara M. Purdue (decedent) to the Purdue Family LLC (PFLLC) is includible in the value of her gross estate under
(2) whether decedent's gifts of PFLLC interests from 2001 through 2007 to the Purdue Family Trust (PFT) are present interest gifts which qualify for exclusion under
(3) whether the estate is entitled to deduct interest on loans from the beneficiaries of the*257 estate used to pay the estate tax liabilities. We hold that it is.
Decedent was a resident of Washington when she died on November 27, 2007, at the age of 95. Four of the five Purdue children, William J. Purdue, Susan P. Christoff, Nancy P. Myhre, and Hazel P. Beatty (Purdue children), are personal representatives of the estate. Three of the four representatives also resided in Washington when the petition was filed; the fourth resided in Colorado.
Decedent was married to Robert A. Purdue (Mr. Purdue) and had five children and multiple grandchildren and great-grandchildren. Mr. Purdue was an attorney and a founding partner of Montgomery Purdue Blankinship & Austin PLLC (MPBA). Decedent was a homemaker, and her participation in the control and management of the PFLLC assets was limited.
Mr. Purdue invested in Tele-Vue Systems, Inc. (Tele-Vue), a pioneering cable company, when it was a startup company in the 1960s for a nominal value. Tele-Vue was acquired in 1969 by Columbia Broadcasting System in an income tax-free exchange. Substantially all of the low-basis telecommunications stocks were derived from that exchange, and later related income tax-free spin-offs*258 and in-kind stock distributions.
At the end of 1999 decedent and Mr. Purdue (parents) had a net worth of approximately $28 million, consisting mostly of marketable securities worth approximately $24 million. In 2000 the marketable securities were held in five different brokerage accounts at three management firms. The three separate management firms provided independent advice to Mr. Purdue; the management firms did not consult with one another or consider Mr. Purdue's assets managed by the other firms.
*252 The parents also had an undivided one-sixth interest in a commercial building in Honolulu, Hawaii (Hocking Building), valued at approximately $480,000 as of December 1999. The Hocking Building was subject to a 55-year triple net lease through 2022 and has been managed by a real estate management firm since 1982.
In 1995 the parents engaged Alan Montgomery, an attorney and member at MPBA, for estate and gift tax planning and advice. To reduce estate tax Mr. Montgomery advised the parents to use their available gift and estate tax exemptions and exclusions, generation-skipping transfer tax exemptions, and gift and estate tax valuation discounts. In a letter summarizing the recommendations*259 Mr. Montgomery also suggested that they form a family limited partnership to hold their stock interests and their interest in the Hocking Building to centralize management and take advantage of valuation discounts.
The parents requested that the Purdue children receive copies of most or all of the MPBA correspondence commencing in early 2000. On January 20, 2000, Mr. Montgomery recommended various estate planning strategies, including the creation of an irrevocable family gift trust, qualified personal residence trusts, and a member-managed Washington family limited liability company. Mr. *253 Montgomery noted that it was not necessary for Mr. Purdue or decedent to absorb all of the information but strongly recommended that the Purdue children do so. Included in the memorandum was a draft of the PFLLC operating agreement. The purposes stated in the draft agreement, identical to those in the final agreement, were to: (1) consolidate the management and control of certain property and improve the efficiency of the management by holding the properties in a single, flexible entity; (2) avoid fractionalization of ownership; (3) keep ownership of the assets within the extended family;*260 (4) protect assets from unknown future creditors; (5) provide flexibility in management of assets not available through other business entities; and (6) promote education of, and communication among, members of the extended family with respect to financial matters.
On August 2, 2000, the parents formed the PFLLC and the Purdue Family Residence Trusts (PFRTs). Decedent retained the right to income and distributions from the property she transferred to the PFLLC in proportion to her PFLLC ownership percentage. The following day MPBA sent the parents and the Purdue children a memorandum, again recommending that the Purdue children study the information. The memorandum noted the tax savings the PFLLC could provide the parents as one of the five advantages to the formation of the PFLLC. *254 The memorandum describes four nontax business reasons: (1) limited liability; (2) passthrough income taxation; (3) minimal formalities; and (4) the LLC's being an ideal entity for owning real estate. On or around August 14, 2000, the parents transferred their respective 50% interests in the Purdue residence, then appraised for $2,800,000, to the PFRTs.
On or around August 25, 2000, the parents lent $375,000*261 to Beverly Purdue in exchange for a demand promissory note secured by a mortgage on a beach house in Delaware, acquired by Beverly Purdue with the loan. In November 2000 the parents funded the PFLLC by contributing $22 million of marketable securities, their interest in the Hocking Building valued at approximately $900,000, a $375,000 promissory note from Beverly Purdue, and an $865,523 certificate of deposit, in exchange for 100% of the interests in the PFLLC. On November 24, 2000, the parents signed new wills incorporating a bypass trust, a qualified marital trust, and a GSTT-exempt qualified trust.
No additional assets have been contributed to the PFLLC since the initial funding in November 2000 and three deposits of Idaho Warehouse partnership distributions totaling $3,563, $2,578 of which was refunded to decedent by the PFLLC on December 12, 2003.
*255 On November 24, 2000, the parents formed the PFT. The PFT beneficiaries were the parents' descendants and the spouses of their descendants. The PFT agreement provided the beneficiaries with
On December 28, 2000, the parents funded the PFT with a gift of $400,000, $354,000 coming from the PFLLC Bank of America account and the remaining $46,000 coming from the parents' personal Bank of America account. On December 29, 2000, the PFT distributed $235,000 of the cash to the Purdue children and other PFT beneficiaries. The remaining cash was distributed to the Purdue children during 2001.
On June 14, 2001, the Purdue children held a combined meeting of the PFLLC and the PFT in their capacities as cotrustees of the PFT, coattorneys in fact for the parents, and members of the PFLLC on behalf of the PFT and the parents. The parents never attended any of these meetings. The Purdue children met with *256 Mr. Montgomery and representatives from the Rainier Group, Inc. (Rainier Group), a professional management advisory firm, and agreed that an annual meeting would be held and that minutes and materials would be filed.
Since 2001 the Purdue children have held annual meetings*263 in their capacities as trustees and beneficiaries of the PFT and the Purdue Testamentary Trusts, personal representatives and beneficiaries of the parents' estates, attorneys in fact for the parents, and individual members of the PFLLC. They discussed the Purdue family's accounts and assets, ratified prior PFLLC distributions, approved annual cash distributions, heard presentations from the Rainier Group investment manager, and received estate tax planning updates and advice from Mr. Montgomery.
Before 2000 Mr. Purdue and decedent generally made annual cash gifts of $40,000 to each of the Purdue children and made annual cash gifts in other amounts to the Purdue grandchildren.
From 2002 until 2007 decedent generally made an annual exclusion gift of PFLLC interests to the PFT effective on January 1 of each year in an amount based upon the current number of PFT beneficiaries and then made an additional annual exclusion gift effective on December 31 of that year if the number of PFT *257 beneficiaries increased during the year or the value of the PFLLC fell during the year. The values of the PFLLC gift interests were based upon valuation summaries that Mr. Montgomery prepared except*264 for the value of the September 30, 2002, gift, which was based upon Moss Adams Advisory Services' February 3, 2002, appraisal. Each year MBPA provided the Purdue children with withdrawal right waivers with respect to the prior year's gifts of PFLLC interests to the PFT, reflecting that all PFT beneficiaries had waived their withdrawal rights.
From 2001 to 2007 the Purdue children received, in approximately equal shares, cash distributions totaling $1,997,304 in their capacities as PFT beneficiaries. Of the $1,997,304 of PFT cash distributions, $51,920 was net rent paid to the PFT for its 50% interest in the Purdue residence and $1,945,384 was its share of net cash loans and dividends from the PFLLC.
Decedent was severely injured by a golf cart in 1984, sustaining complex, lower extremity fractures. She never fully recovered and was increasingly unable to walk safely without assistance. Complications from the injury and osteoporosis eventually caused her to become a semiinvalid unable to safely stand, walk, or be seated without physical assistance from caregivers.
*258 Decedent suffered a stroke or transient ischemic attack on October 16, 2000. Decedent's treating physician*265 believed the event was cause by a transient ischemic attack that was completely reversible and did not represent a stroke. He believed that there was no residual neurological impairment.
Decedent required in-home healthcare; from August 2001 until her death, she required 24-hour in-home healthcare. Except for the 1984 physical injuries and osteoporosis that limited her mobility, decedent suffered from no other chronic, terminal, or life-threatening diseases from 2000 through her death (no cancer, heart disease, or other similar illnesses), nor did she suffer from dementia, Alzheimer's disease, or any similar intellectual disability. The parents paid a caregiver $17,550 from June to November 2001 from the parents' individual bank accounts. From 2001 through 2007 decedent paid approximately $705,000, or $9,500 per month, to Family Resource Home Care for in-home healthcare from the parents' individual bank accounts.
Mr. Purdue died unexpectedly on August 3, 2001, but at the time of the formation and funding of the PFLLC, he appeared to be in good physical health and enjoyed an active lifestyle. However, Mr. Purdue's memory problems were evident to the Purdue children at the time assets*266 were contributed to the PFLLC. He was later diagnosed with Alzheimer's disease.
The values of some telecommunication stocks, including AT&T Corp., experienced some volatility after September 30, 1999. By December 2000 the parents had questions about the previous large account "Short Against the Box" investment strategy under which a short position was taken, in what was then the AT&T Corp. and Liberty Media stocks, financed by a margin loan secured by the long position in the same stocks.
As early as January 2000 Mr. Montgomery spoke with the parents and certain Purdue children about engaging the Rainier Group to provide investment management services to the PFLLC and the parents. In January 2001 Mr. Montgomery referred the parents to the Rainier Group to explore investment management services to be provided to the PFLLC and the parents. In March 2001 the Rainier Group provided the parents with a proposal and engagement agreement offering to provide various investment management and advisory services to the parents and the PFLLC.
On April 4, 2001, Mr. Purdue signed the Consulting Services and Implementation Agreement with the Rainier Group on behalf of the parents and*267 for the PFLLC. Rainier Group formulated an investment strategy for the parents and the PFLLC, outlined in the Investment Policy Statement dated July 1, 2001, *260 signed by Mr. Purdue, decedent, and the Purdue children. Thereafter, all the assets formerly held by the parents individually in the five accounts at three different management firms were consolidated into PFLLC accounts with the Rainier Group subject to an overall, well-coordinated professional investment strategy applied to all of the investments as a whole.
After Mr. Purdue's death in August 2001 his will established three trusts for the benefit of decedent, into which the value of Mr. Purdue's undivided 50% share in his and decedent's community property was transferred. The first of the three trusts established under Mr. Purdue's will was the Bypass Trust. The second and third trusts established under Mr. Purdue's will for the benefit of decedent were the Non-GSTT Exempt Qualified Trust and the GSTT-Exempt Qualified Trust (collectively, QTIP Trust).
Mr. Montgomery sent a letter to the Purdue children dated August 18, 2008, explaining the options for paying the estate tax liabilities, including a $6,245,744*268 loan from the PFLLC to the estate and the QTIP Trust or a $9,863,571 dividend from the PFLLC. The Purdue children's rights were limited. The members of the PFLLC could not transfer their interests without unanimous consent by the other members. Beverly refused to approve a PFLLC dividend sufficient for the estate *261 and the QTIP Trust to pay their estate tax liabilities with their proportionate shares in order to induce her siblings to approve a large lump-sum PFLLC dividend that she wanted but that they opposed (deadlock). For the same reason, she also refused to approve PFLLC dividends necessary for the QTIP Trust and the Bypass Trust to pay their income tax liabilities. The $5,040,090 of combined PFLLC dividend shares of the estate and the QTIP Trust was insufficient to pay their estate tax liabilities. The remaining distributees aggregated their distributions and made loans totaling $1,233,897 to the estate and the QTIP Trust.
At the time of her death, decedent individually owned approximately $3,228,125 of assets outside of the QTIP Trust and the PFLLC. The QTIP Trust's share of the combined estate tax liability was approximately $3,345,126 under the tax payment clause of Mr. Purdue's*269 will, and the estate's share was approximately $2,928,861 under the tax payment clause of decedent's will. The PFLLC was owned as follows: 24.9247% by decedent outright; 42.1608% by the QTIP Trust; 20.7615% by the PFT; 7.2969% by the Purdue children; and 4.8561% by the Bypass Trust.
The estate timely filed its Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, on March 1, 2009. Respondent issued the estate tax notice of deficiency on February 21, 2012, and the gift tax notice of deficiency *262 for the taxable years 2001, 2002, and 2004 through 2007 on September 12, 2012.
Generally, taxpayers bear the burden of proving by a preponderance of the evidence that the determinations of the Commissioner in a notice of deficiency are incorrect.
The purpose of
Respondent argues that these three conditions were satisfied by decedent's transfer to the PFLLC, while the estate argues that the latter two conditions were not satisfied. The parties agree that decedent made an inter vivos transfer of property.
In the context of family limited partnerships, the bona fide sale for adequate and full consideration exception is met where the record establishes the existence of a legitimate and significant nontax reason for creating the family limited partnership and the transferors received partnership interests proportional to the value*271 of the property transferred.
Whether a transfer is a bona fide sale is a question of motive.
The estate argues that decedent had seven nontax motives for transferring the property to the PFLLC: (1) to relieve decedent and Mr. Purdue from the burdens of managing their investments; (2) to consolidate investments with a single adviser to reduce volatility according to a written investment plan; (3) to educate the five Purdue children to jointly manage a family investment company; (4) to avoid repetitive asset transfers among multiple generations; (5) to create a common ownership of assets for efficient management and meeting minimum investment requirements; (6) to provide voting and dispute resolution rules and transfer restrictions appropriate for joint ownership and management by a large number of family members; and (7) to provide the Purdue children with a minimum annual cashflow. Respondent argues that the PFLLC was a testamentary substitute and*273 that transfer tax savings were the primary motivation for the formation and funding of the PFLLC.
Decedent transferred property to the PFLLC to simplify the gift giving process and to assure transfer tax savings. Respondent claims that the PFLLC was *266 created only for tax savings and the other nontax reasons were purely hypothetical. While we agree with respondent that gift giving alone is not an acceptable nontax motive, we disagree that gift giving was decedent's only motive in transferring property to the PFLLC.
Testimony at trial, coupled with the memorandum from MPBA and the PFLLC operating agreement, establishes that a significant purpose of decedent's transfer of property to the PFLLC was to consolidate investments into a family asset managed by a single adviser. Before the transfer, the marketable securities were maintained across five different brokerage accounts at three management firms, subject to individual advice from the three different management firms.
Following the formation of the PFLLC and formulation of an investment plan with the Rainier Group, the parents' assets were consolidated into PFLLC accounts with the Rainier*274 Group subject to an overall, well-coordinated professional investment strategy applied to all of the investments. Before the formation of the PFLLC, Mr. Purdue handled all of the financial decisions regarding the marketable securities. After the formation of the PFLLC, the Purdue children made the PFLLC investment decisions jointly.
*267 Although this transfer to the PFLLC was also made with testamentary purposes in mind, we have previously noted that "[l]egitimate nontax purposes are often inextricably interwoven with testamentary objectives."
The estate concedes that decedent was advised of the transfer tax savings. Therefore, decedent discounted the value of the partnership*275 interest relative to the value of property contributed, and this factor weighs against the estate.
Respondent argues that other facts show a nontax purpose did not actually exist. Respondent first argues that decedent stood on both sides of the transaction, as Mr. Purdue and decedent transferred all of the assets and there were no *268 negotiations over the terms of the PFLLC operating agreement between the parents and the Purdue children. Respondent contends that the Purdue children did not retain an independent adviser or attorney to represent them in the formation of the PFLLC.
Where a taxpayer stands on both sides of a transaction, we have concluded that there is no arm's-length bargaining and thus the bona fide transfer exception does not apply.
We have already found the existence of a legitimate nontax motive for the transaction between decedent and the PFLLC. We also believe decedent received interests*276 in the PFLLC proportional to the property she contributed.
Other factors, however, support the estate's argument that a bona fide sale occurred. First, decedent and Mr. Purdue were not financially dependent on *269 distributions from the PFLLC. Decedent retained substantial assets outside of the PFLLC to pay her living expenses. Second, aside from a minimal dollar amount across three deposits to the PFLLC account, there was no commingling of decedent's funds with the PFLLC's funds. Further, the formalities of the PFLLC were respected. The PFLLC maintained its own bank accounts and held meetings at least annually with written agendas, minutes, and summaries. Third, Mr. Purdue and decedent transferred the property to the PFLLC. Lastly, the evidence shows that decedent and Mr. Purdue were in good health at the time the transfer was made to the PFLLC. Although decedent was 88 at the time of transfer in 2000, she lived until 2007. Aside from the accident in 1984 and the incident in 2000, decedent never experienced any mental illness or life-threatening illnesses. Mr. Purdue was 83 at the time of the transfer and experienced*277 symptoms of Alzheimer's disease. Otherwise, Mr. Purdue lived an active lifestyle until his death in 2001.
After considering all facts presented, we find that decedent had a legitimate and actual nontax motive in transferring the property to the PFLLC. We therefore find that the bona fide sale prong is satisfied.
A taxpayer's receipt of a partnership interest is not part of a bona fide sale for full and adequate consideration where an intrafamily transaction merely attempts to change the form in which the decedent holds property. [w]ithout any change whatsoever in the underlying pool of assets or prospect for profit, as, for example, where others make contributions of property or services in the interest of true joint ownership or enterprise, there exists nothing but a circuitous "recycling" of value. We are satisfied that such instances of pure recycling do not rise to the level of a payment of consideration. To hold otherwise would open
We have already found that decedent had a legitimate and actual nontax purpose in transferring the property to the PFLLC. Therefore, we find that the transfer was not merely an attempt to change the form in which decedent held the *271 property and that the full and adequate consideration prong is satisfied.2
We have found that decedent's transfer of property to the PFLLC was a bona fide transfer and that decedent received full and adequate consideration from the PFLLC as a result of the transfer. Because decedent's transfer was bona fide and for adequate and full consideration,
The parties disagree as to whether the gifts of PFLLC interests are present interests and thereby qualify for the annual gift tax exclusion under section *272 2503(b). The estate bears the burden of proving that the gifts qualify for the annual exclusion.
*273 The property in these cases is an ownership interest in limited liability company interests. A gift in the form of an outright transfer of an equity interest in a business or property, such as limited partnership interests, is not necessarily a present interest gift.
When determining whether a gift is of a present interest, we examine all facts and circumstances as they existed on the date of the gift.
With respect to the PFLLC interests themselves, the primary source of the donees' rights and restrictions to the use, possession, or enjoyment of the property is the PFLLC operating agreement. The donees' rights, however, are limited. The members of the PFLLC could not transfer their interests without unanimous *274 consent by the other members. Therefore, the donees did not receive unrestricted and noncontingent rights to immediate use, possession, or enjoyment of the PFLLC interests themselves. Instead, we will consider whether the donees received such rights in the income.
To ascertain whether rights to income satisfy the criteria for a present interest under
First, the PFLLC held an interest in the Hocking Building, subject to a 55-year lease, expected*282 to generate rent income, as well as dividend paying marketable securities. Second, the PFT made annual distributions from 2000 through 2008, totaling $1,997,304. Further, the PFLLC operating agreement and applicable State law impose a fiduciary duty on the PFLLC to make proportionate cash distributions sufficient for the QTIP Trust and the Bypass Trust to pay their income tax liabilities.
Accordingly, the gifts qualify for the annual gift tax exclusion under
The estate argues that the $20,891 in interest that accrued on the loans from the PFLLC members to the estate was necessarily incurred by the estate and, therefore, allowable*283 as an administration expense deduction under
The estate has met the burden of showing that the interest on the loans from the PFLLC members is deductible under
In reaching our holding herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
Footnotes
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Respondent also argues that the undervaluation of PFLLC interests used to fund decedent's community share coupled with the non-pro rata distribution of Mr. Purdue's estate resulted in a taxable gift from decedent to the Purdue children in 2002. Since we have found that the transfer was for full and adequate consideration, this argument is moot.↩
3. Neither party suggests that Washington law bars the executor of an estate from claiming an interest expense as an administration expense with respect to the estate. Therefore, for purposes of these cases, we find that the interest expense for which the estate claims a deduction was properly incurred under Washington law, despite the absence of evidence that it was specifically approved by a Washington court.
See sec. 20.2053-1(b)(3)(ii)↩ , Estate Tax Regs.
Related
Cite This Page — Counsel Stack
2015 T.C. Memo. 249, 110 T.C.M. 627, 2015 Tax Ct. Memo LEXIS 256, Counsel Stack Legal Research, https://law.counselstack.com/opinion/estate-of-purdue-v-commr-tax-2015.