Turner v. Commissioner IRS

Opinion

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Turner v. Commissioner IRS Precedential or Non-Precedential: Precedential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

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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.

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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.

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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.”).

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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.

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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–

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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).

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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

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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).

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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

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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.

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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.

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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

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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

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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

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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

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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-inconducted 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

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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.

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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. (CCH) 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

15

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

16

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. (CCH) 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.

17

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

18

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 intracompelling factor in the

family transaction where each family determ ination . . .

member retained independent counsel).

particularly when the

19

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

20

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

21

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.

22

“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

23

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

24

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

25

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 transferenacted 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

26

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.

Footnotes

1. 1On 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. (CCH) 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.