REVISED AUGUST 20, 2002
IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
__________________________
No. 01-60538 __________________________
ROSALIE GULIG, Independent Executrix, on behalf of the Estate of Albert Strangi, Deceased, Petitioner-Appellee,
versus
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
__________________________________________________
Appeal from a Decision of the United States Tax Court ___________________________________________________ June 17, 2002
Before DUHÉ, DeMOSS, and CLEMENT, Circuit Judges.
CLEMENT, Circuit Judge:
I. FACTS AND PROCEEDINGS
In August 1994, Michael Gulig, as decedent Albert Strangi’s
attorney in fact,1 formed Strangi Family Limited Partnership
(“SFLP”) and its corporate general partner, Stranco, Inc.
(“Stranco”), under Texas law. Strangi purchased 47 percent of
1 On July 19, 1988, decedent executed a power of attorney, naming Michael Gulig his attorney in fact. Michael Gulig is petitioner’s husband and decedent’s son-in- law.
1 Stranco for $49,350 and his four children purchased the remaining
53 percent for $55,650.2 Stranco transferred $100,333 to SFLP in
return for a 1 percent general partnership interest. Strangi
transferred property with a fair market value of $9,876,929,
approximately 75 percent of which was cash and securities, to SFLP
for a 99 percent limited partnership interest.
Decedent and his four children sat on Stranco’s initial board
of directors, with Rosalie Gulig serving as president. The
partnership agreement provided that Stranco had sole authority over
SFLP’s business affairs; limited partners needed Stranco’s consent
to act on SFLP’s behalf. Stranco employed Michael Gulig to manage
the day-to-day affairs of SFLP and Stranco. SFLP’s partnership
agreement allowed it to lend money to partners, affiliates, or
other persons or entities. Decedent’s estate and the Strangi
children have received various distributions from SFLP. On August
18, 1994, a charitable gift of 100 Stranco shares was given to
McLennan Community College Foundation in decedent’s memory.
Domiciled in Waco, Texas, Strangi died of cancer at the age of
81 on October 14, 1994. When decedent’s will was admitted to
probate on April 12, 1995, Rosalie Gulig was appointed sole
executor of the estate. No claim against the estate or will
contest was filed.
2 Rosalie Gulig loaned her siblings the money needed to purchase the Stranco shares. Jeanne, John, and Albert T. Strangi each executed unsecured notes to Rosalie Gulig, with face amounts of $13,912.50 and an interest rate of 8 percent.
2 Strangi’s estate reported Strangi’s interest in SFLP as having
a date-of-death value of $6,560,730, approximately $3 million lower
than the value the assets had at the time of transfer from Strangi
to the partnership. At the date of death, the property held by
SFLP had increased in value to $11,100,922 due to the appreciation
of securities. The valuation report applied a combined 33 percent
minority interest discount for lack of marketability and lack of
control.
On December 1, 1998, the Internal Revenue Service (“IRS”)
issued a notice of deficiency for $2,545,826 in federal estate
taxes or, alternatively, $1,629,947 in federal gift taxes. Rosalie
Gulig petitioned the tax court for a redetermination of the
deficiencies. The tax court, sitting in review, considered whether
SFLP should be disregarded for tax purposes under the business
purpose and economic substance doctrine or alternatively as a
restriction on the sale or use of property under I.R.C. §
2703(a)(2). Determining (with a 9-5 decision) that the partnership
had economic substance and that § 2703 did not apply, the court
proceeded to consider whether a taxable gift occurred to the extent
that the value of assets Strangi transferred exceeded the value of
his partnership interest and also determined the fair market value
of decedent’s interest at the date of death. Finding that Strangi
retained enough control over the assets transferred to compensate
for the disparity between value given and value received, the court
3 did not find a taxable gift. The court accepted the 31 percent
combined discount reached by the IRS’s expert. Though ruling for
the estate on all claims except valuation, the tax court suggested
that if the Commissioner had timely filed his notice to amend to
add an I.R.C. § 2036 claim, it might have used that section to
include in the estate the assets Strangi transferred to SFLP.
II. ANALYSIS
A. Leave to amend to add a § 2036 claim
Fifty-two days before trial, the Commissioner filed a motion
to amend to add a claim that under § 2036 the estate should include
the value of SFLP’s assets transferred from the decedent. The tax
court denied the motion to amend, apparently because it considered
the motion untimely. We review the tax court’s decision to deny
leave to amend for abuse of discretion. Halbert v. City of
Sherman, Tex., 33 F.3d 526, 529 (5th Cir. 1994). “A decision to
grant leave is within the discretion of the court, although if the
court lacks a substantial reason to deny leave, its discretion is
not broad enough to permit denial.” State of Louisiana v. Litton
Mortgage Co., 50 F.3d 1298, 1302-03 (5th Cir. 1995) (internal
citations and quotes omitted). “In the absence of any apparent or
declared reason--such as undue delay, bad faith or dilatory motive
on the part of the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the opposing
party by virtue of allowance of the amendment, futility of
4 amendment, etc.--the leave sought should, as the rules require, be
‘freely give.’” Foman v. Davis, 371 U.S. 178, 182 (1962).
The only insight we have into the tax court’s reasoning for
the denial is its statement that, even though § 2036 might apply on
the facts, it was “not an issue in this case, however, because
respondent asserted it only in a proposed amendment to answer
tendered shortly before trial. Respondent’s motion to amend the
answer was denied because it was untimely.” However, the motion
was made nearly two months, not “shortly,” before trial and was
unlikely to cause delay or prejudice. If the tax court’s true
reasoning was that the Commissioner could have sought to assert the
applicability of § 2036 earlier in the proceedings, it did not
assert such and did not discuss any evidence of bad faith or
dilatory motive. We cannot assume bad faith on the record here.
The record does not present an obvious reason for denial of leave
to amend. See Ashe v. Corley, 992 F.2d 540, 542-43 (5th Cir. 1993)
(“Where reasons for denying leave to amend are ‘ample and obvious,’
the district court's failure to articulate specific reasons does
not indicate an abuse of discretion.” ).
B.
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REVISED AUGUST 20, 2002
IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
__________________________
No. 01-60538 __________________________
ROSALIE GULIG, Independent Executrix, on behalf of the Estate of Albert Strangi, Deceased, Petitioner-Appellee,
versus
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
__________________________________________________
Appeal from a Decision of the United States Tax Court ___________________________________________________ June 17, 2002
Before DUHÉ, DeMOSS, and CLEMENT, Circuit Judges.
CLEMENT, Circuit Judge:
I. FACTS AND PROCEEDINGS
In August 1994, Michael Gulig, as decedent Albert Strangi’s
attorney in fact,1 formed Strangi Family Limited Partnership
(“SFLP”) and its corporate general partner, Stranco, Inc.
(“Stranco”), under Texas law. Strangi purchased 47 percent of
1 On July 19, 1988, decedent executed a power of attorney, naming Michael Gulig his attorney in fact. Michael Gulig is petitioner’s husband and decedent’s son-in- law.
1 Stranco for $49,350 and his four children purchased the remaining
53 percent for $55,650.2 Stranco transferred $100,333 to SFLP in
return for a 1 percent general partnership interest. Strangi
transferred property with a fair market value of $9,876,929,
approximately 75 percent of which was cash and securities, to SFLP
for a 99 percent limited partnership interest.
Decedent and his four children sat on Stranco’s initial board
of directors, with Rosalie Gulig serving as president. The
partnership agreement provided that Stranco had sole authority over
SFLP’s business affairs; limited partners needed Stranco’s consent
to act on SFLP’s behalf. Stranco employed Michael Gulig to manage
the day-to-day affairs of SFLP and Stranco. SFLP’s partnership
agreement allowed it to lend money to partners, affiliates, or
other persons or entities. Decedent’s estate and the Strangi
children have received various distributions from SFLP. On August
18, 1994, a charitable gift of 100 Stranco shares was given to
McLennan Community College Foundation in decedent’s memory.
Domiciled in Waco, Texas, Strangi died of cancer at the age of
81 on October 14, 1994. When decedent’s will was admitted to
probate on April 12, 1995, Rosalie Gulig was appointed sole
executor of the estate. No claim against the estate or will
contest was filed.
2 Rosalie Gulig loaned her siblings the money needed to purchase the Stranco shares. Jeanne, John, and Albert T. Strangi each executed unsecured notes to Rosalie Gulig, with face amounts of $13,912.50 and an interest rate of 8 percent.
2 Strangi’s estate reported Strangi’s interest in SFLP as having
a date-of-death value of $6,560,730, approximately $3 million lower
than the value the assets had at the time of transfer from Strangi
to the partnership. At the date of death, the property held by
SFLP had increased in value to $11,100,922 due to the appreciation
of securities. The valuation report applied a combined 33 percent
minority interest discount for lack of marketability and lack of
control.
On December 1, 1998, the Internal Revenue Service (“IRS”)
issued a notice of deficiency for $2,545,826 in federal estate
taxes or, alternatively, $1,629,947 in federal gift taxes. Rosalie
Gulig petitioned the tax court for a redetermination of the
deficiencies. The tax court, sitting in review, considered whether
SFLP should be disregarded for tax purposes under the business
purpose and economic substance doctrine or alternatively as a
restriction on the sale or use of property under I.R.C. §
2703(a)(2). Determining (with a 9-5 decision) that the partnership
had economic substance and that § 2703 did not apply, the court
proceeded to consider whether a taxable gift occurred to the extent
that the value of assets Strangi transferred exceeded the value of
his partnership interest and also determined the fair market value
of decedent’s interest at the date of death. Finding that Strangi
retained enough control over the assets transferred to compensate
for the disparity between value given and value received, the court
3 did not find a taxable gift. The court accepted the 31 percent
combined discount reached by the IRS’s expert. Though ruling for
the estate on all claims except valuation, the tax court suggested
that if the Commissioner had timely filed his notice to amend to
add an I.R.C. § 2036 claim, it might have used that section to
include in the estate the assets Strangi transferred to SFLP.
II. ANALYSIS
A. Leave to amend to add a § 2036 claim
Fifty-two days before trial, the Commissioner filed a motion
to amend to add a claim that under § 2036 the estate should include
the value of SFLP’s assets transferred from the decedent. The tax
court denied the motion to amend, apparently because it considered
the motion untimely. We review the tax court’s decision to deny
leave to amend for abuse of discretion. Halbert v. City of
Sherman, Tex., 33 F.3d 526, 529 (5th Cir. 1994). “A decision to
grant leave is within the discretion of the court, although if the
court lacks a substantial reason to deny leave, its discretion is
not broad enough to permit denial.” State of Louisiana v. Litton
Mortgage Co., 50 F.3d 1298, 1302-03 (5th Cir. 1995) (internal
citations and quotes omitted). “In the absence of any apparent or
declared reason--such as undue delay, bad faith or dilatory motive
on the part of the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the opposing
party by virtue of allowance of the amendment, futility of
4 amendment, etc.--the leave sought should, as the rules require, be
‘freely give.’” Foman v. Davis, 371 U.S. 178, 182 (1962).
The only insight we have into the tax court’s reasoning for
the denial is its statement that, even though § 2036 might apply on
the facts, it was “not an issue in this case, however, because
respondent asserted it only in a proposed amendment to answer
tendered shortly before trial. Respondent’s motion to amend the
answer was denied because it was untimely.” However, the motion
was made nearly two months, not “shortly,” before trial and was
unlikely to cause delay or prejudice. If the tax court’s true
reasoning was that the Commissioner could have sought to assert the
applicability of § 2036 earlier in the proceedings, it did not
assert such and did not discuss any evidence of bad faith or
dilatory motive. We cannot assume bad faith on the record here.
The record does not present an obvious reason for denial of leave
to amend. See Ashe v. Corley, 992 F.2d 540, 542-43 (5th Cir. 1993)
(“Where reasons for denying leave to amend are ‘ample and obvious,’
the district court's failure to articulate specific reasons does
not indicate an abuse of discretion.” ).
B. Business purpose and economic substance doctrine
We review the question of whether SFLP has a business purpose
and economic substance, such that it should not be disregarded for
tax purposes, for clear error. See Merryman v. Commissioner, 873
F.2d 879, 881 (5th Cir. 1989); ACM Partnership v. Commissioner, 157
5 F.3d, 231, 245 (3rd Cir. 1998). Under this standard of review, we
agree with the tax court that the partnership has enough economic
substance for SFLP to be recognized for federal estate tax
purposes.
As the tax court noted, “[m]ere suspicion and speculation
about a decedent’s estate planning and testamentary objectives are
not sufficient to disregard an agreement in the absence of
persuasive evidence that the agreement is not susceptible of
enforcement or would not be enforced by parties to the agreement.”
See Hall v. Commissioner of Internal Revenue, 92 T.C. 312, 335
(1989). SFLP’s partnership agreement changed the legal
relationships between decedent and his heirs and creditors.
Potential purchasers of decedent’s assets would not disregard the
partnership. As the tax court stated, “[r]egardless of subjective
intentions, the partnership had sufficient substance to be
recognized for tax purposes.”
C. The remaining claims
Having carefully reviewed the record and read the briefs, we
affirm the tax court’s conclusions regarding § 2703 for essentially
the reasons stated in that court’s opinion. Section 2703 does not
alter the determination that the estate included the decendent’s
interests in SFLP and Stranco and the tax court did not have to
consider the applicability of the safe harbor provisions of section
2703(b) to the partnership agreement. We also affirm the tax
6 court’s conclusion that decedent’s transfer of property to the
partnership was not a taxable gift for essentially the reasons
stated in that court’s opinion. Finally, we adopt the tax court’s
ruling concerning the discounts and the fair market value of
decedent’s interest in SFLP at the date of death. However, the tax
court may revisit this topic if it considers the § 2036 claim.
III. CONCLUSION
We REVERSE the Tax Court’s denial of leave to amend and REMAND
with instructions that the court either (1) set forth its reasons
for adhering to its denial of the Commissioner’s motion for leave
to amend, bearing in mind the mandate of the Federal Rule of Civil
Procedure 15(a), or (2) reverse its denial of the Commissioner’s
motion, permit the amendment, and consider the Commissioner’s claim
under § 2036. We AFFIRM all other conclusions made by the tax
court.