1 Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years in

(continued...)

T.C. Memo. 2000-202

UNITED STATES TAX COURT

ESTATE OF MORTON B. HARPER, DECEASED, MICHAEL A. HARPER,

EXECUTOR, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 19336-98. Filed June 30, 2000.

Warren J. Kessler and Joan B. Kessler, for petitioner.

Donna F. Herbert and Steven M. Roth, for respondent.

MEMORANDUM OPINION

WELLS, Chief Judge: The instant case is before us on

respondent's motion for partial summary judgment pursuant to Rule

121(a)1. The issue to be decided is whether, pursuant to section
- 2 -

1(...continued)

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure. 

2704(b), restrictions on the right to liquidate certain limited

partnership interests in Harper Financial Co., L.P., should be

disregarded to the extent that such restrictions are more

restrictive than the default provisions of California law. 

Summary judgment may be granted if the pleadings and other

materials demonstrate that no genuine issue exists as to any

material fact and that a decision may be entered as a matter of

law. See Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C.

518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994). Partial

summary judgment may be granted with regard to a single issue if

the conditions for summary judgment are otherwise satisfied,

notwithstanding that all of the issues in the case are not

concluded. See Rule 121(b); U.S. Bancorp v. Commissioner, 111

T.C. 231, 236 (1998). The record shows and the parties do not

dispute that there is no genuine issue as to any material fact

with respect to the issue presented by respondent's motion for

partial summary judgment. Accordingly, we may render judgment on

the issue as a matter of law. See Rule 121(b).

For the purpose of ruling on the instant motion only, we

adopt the following facts set forth in the parties' moving

papers. On December 18, 1990, Morton Harper (decedent) created a

revocable inter vivos trust (trust). The trust instrument named
- 3 -

decedent as original trustee and designated his children Michael

A. Harper (Mr. Harper) and Lynn H. Factor (Ms. Factor) as

successor trustees. The assets held by the trust consisted of

marketable securities and mutual funds, plus a note receivable

for a $450,000 loan which the decedent had made to an unrelated

individual (the portfolio). Decedent reserved a life estate in

both the income and corpus of the trust and directed that upon

his death the assets should be distributed 40 percent to Mr.

Harper and 60 percent to Ms. Factor. 

On January 1, 1994, decedent, Mr. Harper, and Ms. Factor

entered into an agreement entitled, Agreement for Limited

Partnership for Harper Financial Co., L.P. (partnership

agreement) that created a California limited partnership. Under

the terms of the partnership agreement, Mr. Harper and Ms. Factor

became general partners with interests in the partnership of 0.4

percent and 0.6 percent respectively, and the trust became the

sole limited partner with an interest of 99 percent in the

partnership. The trust made an initial capital contribution of

the portfolio to the partnership.

On July 1, 1994, the parties entered into an amendment to

the partnership agreement that divided the trust's limited

partnership interest into two classes of limited partnership

interests, consisting of: (1) A Class A limited partnership

interest of 39 percent which the trust retained, and (2) a Class
- 4 -

B limited partnership interest of 60 percent which the trust

assigned to Ms. Factor and Mr. Harper.

Section 20.1 of the partnership agreement provides that:

The Partnership shall be dissolved upon the earlier of:

(a) January 1, 2034.

(b) The retirement, withdrawal, death or insanity

of any General Partner or any other event or condition,

other than removal, which, pursuant to the Act and

unless otherwise provided in this Agreement, results in

a General Partner ceasing to be a General Partner,

unless (i) at the time there is at least one remaining

General Partner to continue the business of the

Partnership and such remaining General Partner chooses

to do so, or (ii) all the Partners, as provided in

Paragraph 12.5(l), above, agree in writing within 60

days thereof to continue the business of the

Partnership and, if necessary, to the admission of one

or more additional General Partners.

(c) An election to dissolve the Partnership made

in writing by the General Partners and the Limited

Partners, all as provided in Paragraph 12.5(f), above.

(d) The failure to elect, as provided in Paragraph

12.5(m), above, a successor General Partner within 60

days from and after removal of the last General

Partner.

Section 13.2 of the partnership agreement provides that:

No General Partner shall have the right to withdraw

from the Partnership without the consent of the Limited

Partners.

On his timely filed Federal Gift Tax return for 1994,

decedent reported a gift of a 0.4-percent general partnership

interest and a 24-percent Class B limited partnership interest in

Harper Financial Co., L.P., to Mr. Harper with values at the date

of the gifts of $6,400 and $230,400, respectively. Decedent also
- 5 -

reported a gift of a 0.6-percent general partnership interest and

a 36-percent Class B limited partnership interest in the

partnership to Ms. Factor with values as of the date of the gifts

of $9,600 and $345,600, respectively.

On February 1, 1995, decedent died. On the Federal Estate

Tax return filed for decedent's estate on November 2, 1995,

decedent's estate reported a 39-percent Class A limited

partnership interest in the partnership with a value at the date

of death of $410,100.

We must decide whether, as respondent contends, the

restrictions on the right to liquidate the partnership contained

in the partnership agreement are applicable restrictions within

the meaning of section 2704 and are accordingly to be disregarded

when valuing the shares of the partnership. Petitioner contends

that the restrictions on the right to liquidate the partnership

contained in the partnership agreement are not more restrictive

than the default restrictions of California law which would apply

in absence of a partnership agreement. Accordingly, petitioner

argues that such restrictions are not applicable restrictions

within the meaning of section 2704.

Section 2704(b) provides:

SEC. 2704(b). Certain Restrictions on Liquidation

Disregarded.--

(1) In general.--For purposes of this subtitle, if--
- 6 -

(A) there is a transfer of an interest in a

corporation or partnership to (or for the benefit of) a

member of the transferor's family, and

(B) the transferor and members of the transferor's

family hold, immediately before the transfer, control

of the entity,

any applicable restriction shall be disregarded in

determining the value of the transferred interest.

(2) Applicable restriction.--For purposes of this

subsection, the term "applicable restriction" means any

restriction--

(A) which effectively limits the ability of the

corporation or partnership to liquidate, and

(B) with respect to which either of the following

applies: 

(i) The restriction lapses, in whole or in

part, after the transfer referred to in paragraph

(1).

(ii) The transferor or any member of the

transferor's family, either alone or collectively,

has the right after such transfer to remove, in

whole or in part, the restriction.

(3) Exceptions.--The term "applicable restriction"

shall not include--

* * * * * * *

(B) any restriction imposed, or required to be

imposed, by any Federal or State law.

Section 25.2704-2(b), Gift Tax Regs., further defines an

applicable restriction as follows:

(b) Applicable restriction defined. An applicable

restriction is a limitation on the ability to liquidate the

entity (in whole or in part) that is more restrictive than

the limitations that would apply under the State law

generally applicable to the entity in the absence of the

restriction. * * * 
- 7 -

In our recent opinion in Kerr v. Commissioner, 113 T.C. 449

(1999), we held that provisions in a partnership agreement

substantially similar to those in issue in the instant case were

not more restrictive than the requirements of the applicable

limited partnership law of the State of Texas. Respondent does

not dispute that the provisions of the limited partnership

agreement in the instant case are substantially similar to those

at issue in Kerr. Moreover, respondent does not dispute that

there is no substantial difference between California and Texas

law with respect to the liquidation of a limited partnership. 

Unable to distinguish the facts or the law at issue in Kerr,

respondent urges this Court to reconsider our opinion in that

case. Because the facts of the instant case are

indistinguishable from those in issue in Kerr, we need not

reiterate our analysis undertaken in Kerr, which we adopt in this

opinion. 

Accordingly, we hold that the limitations on liquidation

contained in the partnership agreement are not applicable

restrictions within the meaning of section 2704(b) and,

consequently, must be taken into account in valuing the limited 

partnership interests in issue in the instant case. Therefore we

shall deny respondent's motion for partial summary judgment. 
- 8 -

To reflect the foregoing,

An appropriate order

will be issued.