tcmemo_2009_66 united_states tax_court estate of erma v jorgensen deceased jerry lou davis executrix and jerry lou davis and gerald r jorgensen co-trustees petitioner v commissioner of internal revenue respondent docket no filed date john f ramsbacher john w prokey and dennis i leonard for petitioner matthew a mendizabal chong s hong and jeffrey l heinkel for respondent memorandum findings_of_fact and opinion haines judge respondent determined a dollar_figure federal estate_tax deficiency against the estate of erma v jorgensen the estate after concessions the issues for decision are whether the values of the assets ms jorgensen transferred to two family limited_partnerships are included in the value of her gross_estate under sec_2036 and whether the estate is entitled to equitable_recoupment findings_of_fact many of the facts have been stipulated and are so found the stipulations of facts and the exhibits attached thereto are incorporated herein by this reference ms jorgensen was a resident of california when she died testate on date and her will was probated in that state the estate acts through its executrix jerry lou davis jerry lou and through jerry lou and gerald r jorgensen jr gerald as cotrustees of ms jorgensen’s trust jerry lou ms jorgensen’s daughter resided in california when the petition was filed gerald ms jorgensen’s son resided in nebraska when the petition was filed ms jorgensen was born in she earned a college degree from luther college after which she worked as a school teacher for about years during that time she met fell in love with and married gerald jorgensen who later became colonel jorgensen of the u s air force as a young man colonel jorgensen put himself through college and law school at the university of 1unless otherwise indicated section references are to the internal_revenue_code code as in effect on the date of ms jorgensen’s death rule references are to the tax_court rules_of_practice and procedure amounts are rounded to the nearest dollar nebraska at the onset of world war ii he joined the air force where he became a highly decorated bomber pilot seeing active combat in both world war ii and the korean war after colonel jorgensen returned from the second world war he and ms jorgensen started a family ms jorgensen left her job and became a full-time mother and housewife colonel jorgensen took over responsibility for the family’s financial matters when colonel jorgensen stopped flying he joined the judge advocate general’s office as an attorney later he served with the diplomatic corps of the air force in ethiopia and yugoslavia colonel jorgensen’s 30-year career in the air force entitled him to a pension and provided ms jorgensen with survivor’s benefits upon retiring from the air force colonel jorgensen served as an aide to u s congressman charles thone this entitled colonel jorgensen to a second pension and also provided ms jorgensen with survivor’s benefits having come of age during the great depression colonel and ms jorgensen sometimes the jorgensens were frugal they abhorred debt and saved as much as they could colonel jorgensen was a knowledgeable investor and over the years the couple’s portfolio of marketable_securities grew to over dollar_figure million colonel and ms jorgensen’s investments consisted primarily of marketable_securities i e stocks and bonds yielding cash dividends and interest in colonel jorgensen developed a relationship with barton green who became the family’s investment adviser colonel and ms jorgensen adhered to a buy and hold strategy premised on long-term growth and dividend reinvestment consequently there was very little trading activity though colonel jorgensen regularly researched investments and checked on his holdings ms jorgensen was not involved in the couple’s financial matters or investment decisions before the formation of the partnerships at issue the couple’s investments in marketable_securities were held in four accounts two were colonel jorgensen’s individual accounts one belonged to ms jorgensen individually and one was the couple’s joint account with right_of_survivorship ms jorgensen’s revocable_trust peter arntson was colonel and ms jorgensen’s estate_planning attorney mr arntson prepared ms jorgensen’s revocable_trust agreement at the direction of colonel jorgensen ms jorgensen first met mr arntson on date the day she executed her revocable_trust agreement titled erma jorgensen’s trust agreement on that same day ms jorgensen executed a durable_power_of_attorney naming colonel jorgensen jerry lou and gerald her attorneys-in-fact ms jorgensen later amended her revocable_trust agreement in date to name 2although ms jorgensen held one account individually she was not involved in any decisionmaking with respect to the investments jerry lou and gerald as successor trustees in the event of ms jorgensen’s inability to manage her affairs ms jorgensen was the sole beneficiary of her revocable_trust during her lifetime under the trust terms she had access to all trust income and corpus without restriction and the trustees had a duty to administer the trust solely for ms jorgensen’s benefit formation of jorgensen management association colonel jorgensen in consultation with mr arntson decided that he and his wife would form a family limited_partnership mr arntson and colonel jorgensen met several times to discuss the structure of the partnership neither ms jorgensen nor her children were involved in any of these discussions on date colonel jorgensen ms jorgensen jerry lou and gerald signed the jorgensen management association jma-i partnership_agreement the jma-i partnership_agreement states that the parties desired to pool certain assets and capital for the purpose of investing in securities on date a certificate of limited_partnership for jma-i was filed with the commonwealth of virginia on date colonel and ms jorgensen each contributed marketable_securities valued at dollar_figure to jma-i in exchange for 50-percent limited_partnership interests gerald and jerry lou along with their father were the general partners colonel and ms jorgensen had six grandchildren three were gerald’s and three were jerry lou’s gerald jerry lou and the six grandchildren were listed as limited partners and received their initial interests by gift neither gerald jerry lou nor any of the grandchildren made a contribution to jma-i although each was listed in the partnership_agreement as either a general or a limited_partner during his lifetime colonel jorgensen made all decisions with respect to jma-i in colonel jorgensen was diagnosed with cancer and he passed away on date before his death he and ms jorgensen moved to california where they lived in the house next door to jerry lou on date mr arntson wrote to ms jorgensen regarding colonel jorgensen’s estate_tax_return and her own estate_planning mr arntson recommended that colonel jorgensen’s estate claim a 35-percent discount on his interest in jma-i the estate’s interest in jma-i passed into colonel jorgensen’s family_trust the family_trust was funded with dollar_figure of assets including jma-i interests valued using minority interest and lack of marketability discounts all amounts over dollar_figure went to ms jorgensen mr arntson also 3our use of the term gift and other related terms is for convenience only we do not intend to imply that colonel and ms jorgensen’s transfers of limited_partnership interests were completed gifts for federal tax purposes recommended that ms jorgensen transfer her brokerage accounts to jma-i he explained hopefully this will allow your estate to qualify for the discount available to ownership of interests in limited_partnerships and at the same time facilitate your being able to make annual gifts to your children and grandchildren this is important if you wish to reduce the amount of your own estate which will be subject_to estate_taxes mr arntson also wrote to ms jorgensen on date he again recommended that ms jorgensen transfer her and colonel jorgensen’s estate’s brokerage accounts to jma-i the reason for doing this is so that hopefully your limited_partnership_interest in jma partnership will qualify for the discount instead of your estate having a value in various securities of about dollar_figure it would be about dollar_figure the difference of dollar_figure would result in a potential savings in estate_taxes to the beneficiaries of your estate of dollar_figure obviously no one can guarantee that the irs will agree to a discount of however even if irs agreed to only a discount of the savings to your children would be dollar_figure and there can be no discount if the securities owned by you continue to be held directly by you the formation of jma-ii although mr arntson wrote to ms jorgensen he did not personally meet with her to discuss additional contributions to jma-i instead all planning discussions were among mr arntson jerry lou jerry lou’s husband and gerald on the basis of these discussions they decided to form jma-ii on date mr arntson wrote to ms jorgensen regarding the formation of jma-ii he explained to a certain extent we are trying to reorganize your assets and those of colonel jorgensen into two different groups--one grouping jorgensen management associates two jma2 will hold basically high basis assets and the second grouping jma will hold basically low basis assets in the future you would primarily make gifts to your children and descendants from jma2 which will hold high basis assets jma-ii was formed on date when ms jorgensen’s children filed a certificate of limited_partnership_interest with the commonwealth of virginia on date ms jorgensen contributed dollar_figure in marketable_securities to jma-ii in exchange for her initial partnership_interest in date she contributed dollar_figure to jma-ii consisting of marketable_securities money market funds and cash also in date in her role as executrix of colonel jorgensen’s estate ms jorgensen contributed dollar_figure from his brokerage account consisting of marketable_securities money market funds and cash of the contribution dollar_figure was attributable to ms jorgensen as it was ms jorgensen’s marital bequest from colonel jorgensen after these contributions were completed ms jorgensen held a 6947-percent interest in jma-ii and colonel jorgensen’s estate held a 3053-percent interest the children and grandchildren did not contribute to jma-ii but gerald and jerry lou were general partners and gerald jerry lou and the grandchildren were listed as limited partners in jma-ii’s partnership_agreement the children and grandchildren received their interests in jma-ii from ms jorgensen the values were determined using the values of the securities held by jma-ii on date although the partnership interests were transferred in the summer of on the basis of their values in the summer of the partnership interests exceeded the dollar_figure gift_tax_exclusion gift_tax returns were therefore required but none was filed jerry lou consulted with attorney philip golden about the transfer of limited_partnership interests in jma-ii during ms jorgensen was considering transferring partnership interests valued at dollar_figure the estate and gift_tax exemption in in date mr golden wrote ms jorgensen a letter 4in and ms jorgensen transferred respectively 2-percent 462-percent and 36522-percent limited_partnership interests in jma-i to each of her two children and six grandchildren in and she transferred respectively 4356-percent and 3201-percent limited_partnership interests in jma-ii to each of her children and grandchildren in and ms jorgensen transferred respectively 5888-percent and 5020-percent interests in jma-ii to her children in and she also transferred respectively 5905-percent and 6670-percent interests in jma-ii to each of her grandchildren in and she transferred respectively 6426-percent and 7352-percent interests in jma-ii to each of her children and grandchildren the and transfers_of_partnership_interests were valued using a 50-percent discount absent the discount their values would have exceeded the dollar_figure annual_gift_tax_exclusion the transfers were valued using a 42-percent discount gift_tax returns were not filed for the transfers made through but were filed for and thereafter explaining the concept of using discounts for lack of marketability and minority interests the letter stated that they needed to hire an expert to value the interests to have any chance of justifying the discounted value of a limited_partnership_interest if a gift_tax or estate_tax_return is audited on date mr golden requested an appraisal of a 1-percent limited_partnership_interest in jma-ii the letter stated that the partnership’s sole activity is to hold and invest securities operation of the partnerships neither jma-i nor jma-ii operated a business the partnerships held passive investments only primarily marketable_securities jerry lou maintained the checking accounts for the partnerships but they went unreconciled and gerald never looked at the check registers neither of the partnerships maintained formal books_or_records jerry lou and gerald received monthly brokerage statements from their broker and they spoke with their broker approximately every months at one point gerald called mr golden to ask whether there was a way to access some of this money that’s mine mr golden explained that gerald could take a loan but gerald was surprised that he would have to pay interest gerald testified that it took a while to get my head around the fact that it wasn’t just like a bank account you can get money out of in date gerald borrowed dollar_figure from jma-ii to purchase a home on date gerald made his first interest payment of dollar_figure on date he made a second and final interest payment of dollar_figure jerry lou believed that if gerald did not repay the loan she would take it out of his partnership_interest however each of the partnerships required that all distributions be pro_rata the mingling of partnership and personal funds although the partnership agreements state that withdrawals shall only be made by general partners ms jorgensen was authorized to write checks on the jma-ii checking account and she wrote checks on both the jma-i and jma-ii accounts in she signed several checks on the jma-i account including cash gifts to family members on date ms jorgensen signed checks drawn on jma-i’s checking account giving gifts of dollar_figure to three family members on date ms jorgensen deposited dollar_figure into the jma-ii account to repay the dollar_figure she had withdrawn from the jma-i account for gift-giving the record does not indicate why the amount was taken from jma-i but repaid to jma-ii nor is there any indication that the error was corrected on date jerry lou’s husband wrote and ms jorgensen signed a dollar_figure check drawn on ms jorgensen’s personal account to purchase a cadillac for gerald the parties characterized it as a loan which was forgiven in date however the gift was not reported on a gift_tax_return in or on date ms jorgensen wrote a dollar_figure check drawn on the jma-i account to jerry lou because ms jorgensen wished to make an equalizing gift but did not have sufficient funds in her personal checking account the gift to jerry lou was not reported on a gift_tax_return on date ms jorgensen deposited dollar_figure into the jma-ii account to repay the dollar_figure she had withdrawn from the jma-i account the record does not indicate why the amount was taken from jma-i but repaid to jma-ii nor is there any indication that the error was corrected ms jorgensen also used the jma-i account to pay her quarterly estimated federal taxes of dollar_figure and her california state taxes of dollar_figure the record does not indicate that these amounts were returned to the partnership although the estate contends that jma-i’s federal tax_return shows the amounts as due from ms jorgensen ms jorgensen also paid dollar_figure of colonel jorgensen’s estate’s administration_expenses using jma-ii’s checking account the record does not indicate that colonel jorgensen’s estate or 5the return reports that dollar_figure was due from ms jorgensen this includes three dollar_figure checks written to family members less partnership expenses paid_by ms jorgensen it is unclear whether the amount due from ms jorgensen includes the amounts paid for taxes ms jorgensen repaid the dollar_figure to jma-ii jma-ii also paid colonel jorgensen’s estate’s federal_income_tax and legal services related to the filing of his estate’s federal estate_tax_return the record does not indicate that these amounts were repaid to jma-ii jma-ii also paid expenses related to ms jorgensen’s and gift_tax returns the record does not indicate that these amounts were repaid to jma-ii in and ms jorgensen paid both partnerships’ accounting fees registered agent’s fees and annual registration fees with the commonwealth of virginia in she paid attorney’s fees to mr golden that related to his conversations with an appraiser regarding the partnerships’ structure as well as the preparation of a promissory note related to jma-ii’s dollar_figure loan to gerald mr golden did not issue separate bills for his work with respect to the partnerships and with respect to ms jorgensen after ms jorgensen’s death ms jorgensen died on date on date jerry lou and her husband sent gerald a letter informing him of the various issues related to the administration of the estate the letter stated in part phil golden highly recommends that you pay back jorgensen management ii partnership the dollar_figure you borrowed you paid the interest in july for dollar_figure so you are just about square he says it will clean up the partnership and things will look much better should we get and we probably will audited in the upcoming months guess we have to be real straight on who borrowed what etc so the partnership looks very legit the letter also stated that gerald had received or was about to receive dollar_figure which we presume was related to the settlement of the estate the dollar_figure loan was repaid on date also on date jma-ii paid ms jorgensen’s dollar_figure federal estate_tax liability and dollar_figure california estate_tax liability as calculated by the estate in through jma-i and jma-ii sold certain assets including stock in payless shoesource inc and may department stores co which ms jorgensen had contributed to the partnerships during her lifetime in computing the gain on the sale of those assets the partnerships used ms jorgensen’s original cost_basis in the assets as opposed to a step-up_in_basis equal to the fair_market_value of the assets on ms jorgensen’s date of death under sec_1014 the jma-i and jma-ii partners reported the gains on their respective form sec_1040 u s individual_income_tax_return and paid the income taxes due between april and the jma-i and jma-ii partners submitted to respondent untimely protective claims for 6the dollar_figure loan was not reflected as an asset in the valuation of jma-ii and was not reported on ms jorgensen’s federal estate_tax_return the estate conceded this was an error refund of income taxes paid on the sale of the assets ms jorgensen contributed to the partnerships i burden_of_proof opinion generally the taxpayer bears the burden of proving the commissioner’s determinations are erroneous rule a however with respect to a factual issue relevant to the liability of a taxpayer for tax the burden_of_proof may shift to the commissioner if the taxpayer has produced credible_evidence relating to the issue met substantiation requirements maintained records and cooperated with the secretary’s reasonable requests for documents witnesses and meetings sec_7491 a showing by the taxpayer that the commissioner’s determinations in the notice_of_deficiency are arbitrary excessive or without foundation also shifts the burden_of_proof to the commissioner 116_f3d_1309 9th cir the estate argues that the burden_of_proof shifts to respondent under both these theories our resolution of the issues is based on the preponderance_of_the_evidence rather than the allocation of the burden_of_proof therefore we need not address the estate’s arguments with respect to the burden_of_proof see 394_f3d_1030 8th cir affg tcmemo_2003_212 366_f3d_608 8th cir affg tcmemo_2002_145 knudsen v commissioner t c ___ ii sec_2036 ‘ sec_2036 is intended to prevent parties from avoiding the estate_tax by means of testamentary substitutes that permit a transferor to retain lifetime enjoyment of purportedly transferred property ’ 503_f3d_955 9th cir quoting 417_f3d_468 5th cir affg t c memo affg tcmemo_2005_65 sec_2036 is applicable when three conditions are met the decedent made an inter_vivos transfer of property the decedent’s transfer was not a bona_fide sale for adequate_and_full_consideration and the decedent retained an interest or right enumerated in sec_2036 or or b in the transferred property which the decedent did not relinquish before her death if these conditions are met the full value of the transferred property will be included in the value of the decedent’s gross_estate 124_tc_95 a whether there was a sec_2036 transfer the estate argues that ms jorgensen’s transfers of securities to the partnerships were not transfers within the meaning of sec_2036 the term transfer as used in sec_2036 is broadly defined reflecting the purpose of sec_2036 which is to include in the value of a decedent’s gross_estate the values of all property she transferred but retained an interest in during her lifetime estate of bongard v commissioner supra pincite a sec_2036 transfer includes any inter_vivos voluntary act of transferring property id ms jorgensen’s contributions to the partnerships were voluntary inter_vivos transfers of property and thus are transfers within the meaning of sec_2036 b whether the transfers were bona_fide sales for adequate_and_full_consideration sec_2036 excepts from its application any transfer of property otherwise subject_to that section which is a bona_fide sale for an adequate_and_full_consideration in money or money’s worth the exception is limited to a transfer of property where the transferor has received benefit in full consideration in a genuine arm’s length transaction 17_tc_495 the exception is satisfied in the context of a family limited_partnership where the record establishes the existence of a legitimate and significant nontax reason for creating the family limited_partnership and the transferors received partnership interests proportionate to the value of the property transferred the objective evidence must indicate that the nontax reason was a significant factor that motivated the partnership’s creation a significant purpose must be an actual motivation not a theoretical justification by contrast the bona_fide sale exception is not applicable where the facts fail to establish that the transaction was motivated by a legitimate and significant nontax purpose a list of factors that support such a finding includes the taxpayer standing on both sides of the transaction the taxpayer’s financial dependence on distributions from the partnership the partners’ commingling of partnership funds with their own and the taxpayer’s actual failure to transfer the property to the partnership estate of bongard v commissioner supra pincite citations omitted we separate the bona_fide sale exception into two prongs whether the transaction qualifies as a bona_fide sale and whether the decedent received adequate_and_full_consideration id pincite ms jorgensens’s nontax reasons for forming the partnerships whether a sale is bona_fide is a question of motive we must determine whether ms jorgensen had a legitimate and significant nontax reason established by the record for transferring her property the estate argues that ms jorgensen had several nontax reasons for transferring her property to jma-i and jma-ii respondent disputes the significance and legitimacy of those reasons and offers several factors to support his argument that tax savings were the primary reason ms jorgensen transferred her brokerage accounts to the partnerships a management succession ms jorgensen was not involved in investment decisions during colonel jorgensen’s lifetime and she made it known that she did not want the responsibility if he predeceased his wife as ultimately occurred colonel jorgensen wanted gerald and jerry lou to manage his wife’s investments for her the estate points to several cases in support of its argument that providing for management succession is a legitimate and significant reason for the transfer of assets to a limited_partnership the u s court_of_appeals for the fifth circuit has held that transfers to a family_partnership were bona_fide sales where the purpose was to maintain control and authority to manage working oil_and_gas interests 371_f3d_257 5th cir more recently we held that transfers to a family_partnership were bona_fide sales where the purposes included requiring the decedent’s children to maintain joint management of business matters related to patents and patent licensing agreements including related litigation estate of mirowski v commissioner tcmemo_2008_74 n 7the estate also directs us to two additional cases that do not involve transfers to family limited_partnerships in 69_tc_32 we held that maintaining control of a majority of shares of a pork processing business was a legitimate business_purpose for entering into buy-sell agreements at the partnership level and thus limiting the amount includable in the decedent’s gross_estate to the amount_paid under the agreement in 55_tc_172 we held that a voting_trust agreement factored into the valuation of a decedent’s estate when the principal purpose of the agreement was to assure the continuity of a life_insurance company’s management and policies these cases both involve the management of an active business not a portfolio of untraded securities and therefore are distinguishable from this case we are mindful that the u s court_of_appeals for the ninth circuit to which an appeal in this case would ordinarily lie has stated that efficient management may count as a credible nontax purpose but only if the business of the family_partnership required some kind of active_management as in kimbell v united_states supra estate of bigelow v commissioner f 3d pincite see also strangi v commissioner f 3d pincite transfer of assets had no legitimate nontax rationale where the partnership never made any investments or conducted any active business following its formation in both kimbell and estate of mirowski the assets transferred to the partnership required active_management the estate argues that colonel jorgensen and later gerald and jerry lou engaged in some kind of active_management with respect to the partnerships the estate further argues that because the partnerships invested in specific companies rather than mutual funds active_management was required colonel jorgensen was a 8the estate argues that the efficient management argument in 503_f3d_955 9th cir affg tcmemo_2005_65 is different from its argument with respect to management succession and therefore we should disregard estate of bigelow on this issue we disagree the u s court_of_appeals for the ninth circuit cites 371_f3d_257 5th cir which relates to management of oil_and_gas interests after the transferor’s death we therefore conclude that for management succession to be a legitimate nontax purpose under estate of bigelow v commissioner supra pincite there must be at least some kind of active_management well-read self-taught knowledgeable investor he researched stocks tracked his investments and kept notes and a journal with respect to his investments nevertheless he made very few trades after his death gerald and jerry lou were responsible for investment decisions they were not nearly as knowledgeable or as interested in investing as their father was they did not research investments or keep records as their father had and they did not consult with their investment adviser often consequently there was very little trading in the partnerships’ accounts jma-i and jma-ii were passive investment vehicles the general partners’ activities with respect to the management of the partnerships did not rise to the level of active_management as the u s court_of_appeals for the third circuit has suggested the mere holding of an untraded portfolio of marketable_securities weighs against the finding of a nontax benefit for a transfer of that portfolio to a family entity see 382_f3d_367 3d cir affg tcmemo_2002_246 9in a new adviser took over their account the new adviser contacted jerry lou approximately every weeks to suggest investment options however jerry lou indicated that even this limited contact was more than she wanted she testified that often i just tell him no we’re happy with things the way they are furthermore the partnerships were not needed to help ms jorgensen manage her assets because her revocable_trust which had her children as trustees already served that function colonel jorgensen had a similar plan in the trust he established at the same time as ms jorgensen’s ms jorgensen’s trust was authorized to hold substantially_all her assets and provided her with centralized_management and control furthermore gerald and jerry lou were also her attorneys-in-fact and thus authorized to manage her assets under a durable_power_of_attorney the estate has not shown how the limited_partnerships accomplished the goal of managing ms jorgensen’s assets in a way that the trustees of her revocable_trust or her attorneys-in-fact could not see estate of bigelow v commissioner supra pincite court rejected estate’s argument that management of decedent’s assets transferred to partnership was a legitimate nontax reason for transfer where general_partner was also trustee of decedent’s trust estate of erickson v commissioner tcmemo_2007_107 centralized_management of taxpayer’s assets was not a legitimate nontax reason for transferring assets to a family_partnership where general_partner was also decedent’s attorney-in-fact in sum the general partners’ management of jma-i’s and jma- ii’s portfolios of marketable_securities was not active therefore management succession was not a legitimate reason for ms jorgensen’s transferring the bulk of her assets to the partnerships b financial education of family members and promotion of family unity the estate argues that colonel jorgensen intended to use jma-i as a financial education tool to teach his children about investing the estate also argues that he hoped that the partnership would promote family unity by requiring the children to work together the record does not indicate that colonel jorgensen actually taught his children much about investing although they were general partners in jma-i they did not participate in its activities colonel jorgensen made all decisions in fact the children testified that after their father died they faced a steep learning curve in operating the partnerships they further testified that after their father’s death they did not make any trades and their investment adviser left them alone the estate argues that colonel jorgensen hoped jma-i would promote family unity however considering colonel jorgensen’s failure to involve his children in decisionmaking with respect to jma-i we are unconvinced that this was anything more than a theoretical purpose when jma-ii was formed and funded jma-i already ostensibly served to promote family unity we do not see how jma-ii advanced the goal of family unity furthermore because the partnerships required pro_rata distributions gerald and jerry lou’s differing spending habits gerald was a spendthrift jerry lou was frugal combined with their roles as general partners seem as likely to cause family disunity as unity c perpetuation of the jorgensens’ investment philosophy and motivating participation in the partnerships the estate argues that the partnerships were formed to perpetuate colonel jorgensen’s investment philosophy premised on buying and holding individual stocks with an eye toward long-term growth and capital preservation gerald testified that he wants the partnerships to operate indefinitely so that his parents’ philosophy can be instilled in successive generations the estate’s argument is unconvincing under these circumstances perpetuation of a buy and hold strategy for marketable_securities is not a legitimate or significant nontax reason for transferring the bulk of one’s assets to a partnershipdollar_figure nor is capital preservation there are no special skills to be taught when adhering to a buy and hold 10in the unique circumstances of estate of schutt v commissioner tcmemo_2005_126 we held that a buy and hold strategy with respect to exxon and dupont stock was a legitimate and significant motive for transferring assets to two business trusts the decedent’s wife was the daughter of eugene e dupont and the decedent hoped to maintain ownership of the stock traditionally held by the family including stock held by certain trusts created for the benefit of his children and grandchildren in the event those trusts terminated similar factors are not present in this case strategy especially when one pays an investment adviser to recommend what to buy and when to sell this is not a situation where future generations are taught how to manage an ongoing business the estate also argues that transferring interests in the partnerships to their children motivated them to actively participate in the partnerships we also find this argument unconvincing as previously discussed colonel jorgensen did not include gerald and jerry lou in the decisionmaking process and the grandchildren received limited_partnership interests the partnership agreements precluded the limited partners from participating in the decisionmaking process the estate recognizes that simplifying gift-giving is not a legitimate and significant nontax purpose see estate of bigelow v commissioner f 3d pincite however the estate argues that gift-giving was the means to the end ie participation in the partnerships we are not persuaded that the transfers of limited_partnership interests led to any meaningful participation in the partnerships perhaps the annual receipt of schedules k-1 partner’s share of income credits deductions etc reflecting the income of the partnerships would cause the grandchildren to become interested in investing but this is merely a theoretical purpose d pooling of assets the estate argues that the partnerships were created in part to pool assets jma-i was funded equally by colonel and ms jorgensen through their transfer of marketable_securities to the partnership colonel jorgensen managed those assets before and after their transfer ms jorgensen had no involvement in managing the assets or in the decision to transfer them to jma-i under these circumstances the pooling of assets was not a significant purpose for the formation of jma-i jma-ii was funded by ms jorgensen acting through her revocable_trust and as executor of colonel jorgensen’s estate there is no credible_evidence that ms jorgensen wished to pool assets the estate argues that because colonel and ms jorgensen intended to give gifts to their children and grandchildren doing so through the partnerships allowed for the pooling of those assets achieving economies of scale resulting in lower operating costs less need for administrative compliance and better attention from service providers however there is little evidence to support this argument the jorgensens’ investment adviser testified that if the gifts given to the children and grandchildren had been securities rather than limited_partnership interests and they had held their own investment accounts those accounts would have received less attention however he further testified that family members would have received the same attention simply by linking the accounts together we also doubt that giving securities to each of the children and grandchildren would have been less costly or complicated than creating two limited_partnerships each registered with the commonwealth requiring registered agents annual reports to the commonwealth and the filing of annual federal_income_tax returns and schedules k-1 e spendthrift concerns the estate argues that colonel and ms jorgensen transferred their assets to the partnerships because they intended to make gifts to their children and grandchildren and they had spendthrift concerns specifically they were worried about divorces affecting family members and they did not want to give assets to minors who might spend the windfall unwisely they were also concerned because gerald was a free spender who had never saved a dime therefore the estate argues they sought a management succession vehicle which would incorporate purposeful illiquidity and transfer restrictions gerald may have been a spendthrift but he was also a general_partner in both partnerships although the general partners had to agree on distributions he was in a position to exert influence jerry lou the other general_partner was frugal and thus likely to resist large distributions the estate argues these opposing views were likely to curb gerald’s spending indeed since the creation of the partnerships gerald has become more conservative with his money however if gerald’s money-management habits had been a significant concern it is unlikely colonel jorgensen would have decided to make him a general_partner gerald despite being a general_partner in both partnerships believed until that the partnerships were like bank accounts and he could access money whenever he wanted yet he made no attempt to access the money until when he was told he could take a loan he subsequently borrowed dollar_figure to purchase a home no payments were made on the loan for years and at that time only interest was paid the loan was finally repaid when jerry lou and her husband suggested that it be repaid to make the partnership look very legit at that point gerald had received or was about to receive dollar_figure which we presume was related to the settlement of his mother’s estate more than enough to satisfy the dollar_figure loan gerald’s ability to access funds in the form of a loan without making payment on the loan for years suggests that curbing his spending was not a significant reason for the formation of the partnerships the estate also argues that the partnerships protected the family’s assets from creditors there is no evidence that ms jorgensen or any other partner was likely to be liable in contract or tort for any reason the only colorable concern is that gerald could have overextended himself financially causing problems with creditors however this is a purely theoretical concern cf kimbell v united_states f 3d pincite acknowledging legitimate risk of personal liability where decedent transferred working interests in oil_and_gas_properties into a family_partnership and absent partnership formation family members as individuals would have faced exposure for environmental torts arising on those properties f providing for children and grandchildren equally the estate argues that ms jorgensen’s desire to provide for her children and grandchildren equally was a significant motivating factor in forming the partnerships ms jorgensen did provide for her children and grandchildren equally by giving them limited_partnership interests however she could have provided for them equally well by giving securities directly the only assistance the partnerships provided was to facilitate and simplify gift-giving equal to the annual_gift_tax_exclusion which is not a significant and legitimate nontax reason for transferring one’s assets to a limited partnershipdollar_figure see estate 11this court has held that providing for children equally was a significant and legitimate nontax reason for transferring assets to a family limited_partnership estate of mirowski v commissioner tcmemo_2008_74 however that case involved the management of patents patent licensing agreements and continued of bigelow v commissioner f 3d pincite estate of bongard v commissioner t c pincite factors indicating the transfers were not bona_fide sales a valuation discounts the estate argues that tax savings could not have been the primary factor in forming the partnerships because discounts were not used in valuing colonel and ms jorgensen’s gifts of partnership interests in through however discounts were taken in valuing colonel jorgensen’s estate after his death in around that same time ms jorgensen’s estate planner recommended that she transfer her remaining brokerage accounts to jma-i he wrote the reason for doing this is so that hopefully your limited_partnership_interest in jma partnership will qualify for the discount ms jorgensen did not transfer her remaining assets to jma-i instead she created jma- ii and transferred her brokerage accounts to that partnership there is little contemporaneous documentary_evidence with respect to the purpose for forming jma-i this is most likely because the purposes were discussed between colonel jorgensen and his attorney because jma-ii was formed with little direct input continued related litigation which could not be readily divided into equal shares as opposed to a portfolio of marketable_securities which could see id from ms jorgensen her attorney wrote her letters discussing the reasons for transferring her remaining brokerage assets to a limited_partnership those letters show that reducing the value of ms jorgensen’s taxable_estate and thus tax savings was the primary reason for the formation and funding of jma-ii the only documentary_evidence showing a different reason for the formation and funding of the partnerships is a letter from mr golden to ms jorgensen in date it discusses her giving an additional dollar_figure of limited_partnership interests valued using significant discounts for lack of marketability and minority interests it further discusses the potential for an internal_revenue_service audit of the gift because jma-ii held only passive investments it cites estate of schauerhamer v commissioner tcmemo_1997_242 and discusses the commissioner’s arguments and the reasons the court determined that the taxpayer’s family_partnership should not be respected the letter states that ms jorgensen had several nontax reasons for creating jma-ii including the ability to transfer assets without disrupting the recipient’s initiative cost savings from the pooling of assets simplification of gift-giving protection against creditors protection in the case of divorce and the education of younger family membersdollar_figure the letter was written 12we have previously observed that taxpayers often disguise tax-avoidance motives with a rote recitation of nontax purposes continued well after the formation and funding of the partnerships by an attorney preparing for potential litigation with respect to the gift thus we give it little weight b disregard of partnership formalities neither partnership maintained books_and_records other than a checkbook that went unreconciled and monthly brokerage statements the partnerships’ return preparer used the partnerships’ brokerage statements to prepare the partnership returns there were no formal meetings between the partners and no minutes were ever kept ms jorgensen and her children often failed to treat the partnerships as separate entities ms jorgensen used partnership assets to pay personal expenses and she paid partnership expenses with her personal assets for example ms jorgensen used partnership assets to give dollar_figure of cash gifts to family members the mingling of personal funds with partnership funds suggests that the transfer of property to a family limited_partnership was not motivated by a legitimate and significant nontax reason 114_tc_144 although ms jorgensen was not financially dependent on distributions from the partnerships for her day-to-day expenses continued estate of hurford v commissioner tcmemo_2008_278 see 124_tc_95 she was dependent on the partnerships when her personal funds became insufficient to satisfy her gift-giving program a taxpayer’s financial dependence on distributions from the partnership suggests that the transfer of property to a family limited_partnership was not motivated by a legitimate and significant nontax reason estate of thompson v commissioner tcmemo_2002_246 estate of harper v commissioner tcmemo_2002_121 jma-ii also made significant loans to its partners gerald borrowed dollar_figure for the purchase of a home after he was told that he could not withdraw money outright although he borrowed the money in date he did not make any payments on the loan until date if gerald had not repaid the loan jerry lou believed she would have taken it out of his partnership_interest although doing so would have violated the partnership’s requirement that distributions be pro_rata c whether the transfers to jma-i and jma-ii were at arm’s length where a taxpayer stands on both sides of a transaction we have concluded that there is no arm’s-length bargaining and thus the bona_fide transfer exception does not apply e g estate of strangi v commissioner tcmemo_2003_145 estate of harper v commissioner supra on the other hand we have found an arm’s- length bargain in the intrafamily context when the interests of the family members were sufficiently divergent e g stone v commissioner tcmemo_2003_309 although intrafamily transfers are permitted under sec_2036 they are subject_to heightened scrutiny estate of bigelow v commissioner f 3d pincite kimbell v united_states f 3d pincite colonel jorgensen decided to form and fund jma-i although he and ms jorgensen contributed equal amounts to the partnership ms jorgensen had no involvement in the decision or the transfer colonel jorgensen’s attorney believed that colonel jorgensen represented ms jorgensen during their meetings neither ms jorgensen nor any of their children or grandchildren were consulted under these circumstances we conclude that the transfer of assets to jma-i was not at arm’s length ms jorgensen formed and funded jma-ii through her revocable_trust and in her role as executrix of her husband’s estate although she formed and funded jma-ii the decision to do so was largely made by her children in consultation with the family’s attorney considering that ms jorgensen stood on both sides of the transaction although in different roles we conclude that the transfer of assets to jma-ii was not at arm’s length conclusion with respect to whether the transactions were a bona_fide sale taking into account the totality of the facts and circumstances surrounding the formation and funding of the partnerships on the preponderance_of_the_evidence we conclude that ms jorgensen did not have a legitimate and significant nontax reason for transferring her assets to jma-i and jma-ii and therefore these were not bona_fide sales we find especially significant that the transactions were not at arm’s length and that the partnerships held a largely untraded portfolio of marketable_securities see estate of thompson v commissioner f 3d pincite holding of an untraded portfolio of marketable_securities weighs against finding of a nontax reason for transfer of portfolio to a family limited_partnership although the estate recites a number of purported nontax reasons for the formation and funding of the partnerships none of those alleged reasons are mentioned in contemporaneous documentation and the estate has failed to establish that any of the reasons was significant and legitimate whether the transactions were for full and adequate_consideration the general test for deciding whether transfers to a partnership are made for adequate_and_full_consideration is to measure the value received in the form of a partnership_interest to see whether it is approximately equal to the property given up kimbell v united_states f 3d pincite estate of bongard v commissioner t c pincite under kimbell v united_states supra pincite we focus on three things whether the interests credited to each of the partners was proportionate to the fair_market_value of the assets each partner contributed to the partnership whether the assets contributed by each partner to the partnership were properly credited to the respective capital accounts of the partners and whether on termination or dissolution of the partnership the partners were entitled to distributions from the partnership in amounts equal to their respective capital accounts respondent does not dispute that the transfers were made for full and adequate_consideration c whether ms jorgensen retained the possession or enjoyment of or the right to the income from the property she transferred to jma-i and jma-ii an interest or right is treated as having been retained or reserved if at the time of the transfer there was an understanding express or implied that the interest or right would later be conferred sec_20_2036-1 estate_tax regs the existence of formal legal structures which prevent de jure retention of benefits of the transferred property does not preclude an implicit retention of such benefits estate of thompson v commissioner f 3d pincite 265_f2d_667 3d cir affg 29_tc_1179 estate of bongard v commissioner supra pincite the existence of an implied agreement is a question of fact that can be inferred from the circumstances surrounding a transfer of property and the subsequent use of the transferred property estate of bongard v commissioner supra pincite we have found implied agreements where the decedent used partnership assets to pay personal expenses eg estate of rosen v commissioner tcmemo_2006_115 the decedent transferred nearly all of his assets to the partnership eg 114_tc_144 and the decedent’s relationship to the assets remained the same before and after the transfer eg id estate of rosen v commissioner supra although ms jorgensen retained sufficient assets outside the partnership for her day-to-day expenses she lacked the funds to satisfy her desire to make cash gifts thus ms jorgensen used partnership assets to make significant cash gifts to her family members after ms jorgensen’s death jma-ii made principal distributions of dollar_figure and dollar_figure which the estate used to pay transfer_taxes legal fees and other estate obligations the use of a significant portion of partnership assets to discharge obligations of a taxpayer’s estate is evidence of a retained_interest in the assets transferred to the partnership see estate of rosen v commissioner supra estate of korby v commissioner tcmemo_2005_103 estate of thompson v commissioner tcmemo_2002_246 p art of the ‘possession or enjoyment’ of one’s assets is the assurance that they will be available to pay various debts and expenses upon one’s death strangi v commissioner f 3d pincite the estate denies the existence of any agreement or understanding that ms jorgensen would retain economic use and benefit of the assets transferred to the partnerships however the actual use of a substantial amount of partnership assets to pay ms jorgensen’s predeath and postdeath obligations undermines the claim this is true regardless of whether the distributions were charged against her percentage ownership in the partnerships and especially relevant considering that under the terms of the partnership agreements all distributions were to be pro_rata under these circumstances we conclude that there was an implied agreement at the time of the transfer of ms jorgensen’s assets to the partnerships that she would retain the economic benefits of the property even if the retained rights were not legally enforceable respondent makes an alternative argument related to the legal effect of gerald’s and jerry lou’s dual roles as general partners of the partnerships and cotrustees of ms jorgensen’s revocable_trust ms jorgensen was the sole beneficiary of her revocable_trust during her lifetime under the trust terms she had access to all trust income and corpus without restriction jerry lou and gerald as cotrustees had the duty to administer the trust solely for their mother’s benefit ms jorgensen through her revocable_trust owned significant interests in jma-i and jma-ii whose general partners were gerald and jerry lou gerald and jerry lou were under a fiduciary obligation to administer the trust assets including the jma-i and jma-ii partnership interests solely for ms jorgensen’s benefit and as general partners of jma-i and jma-ii they had express authority to administer the partnership assets at their discretion under these circumstances we also conclude that ms jorgensen retained the use benefit and enjoyment of the assets she transferred to the partnerships d conclusion with respect to whether the values of the assets transferred to jma-i and jma-ii are includable in the value of the gross_estate we conclude that sec_2036 includes in the value of the gross_estate the values of the assets ms jorgensen transferred to jma-i and jma-ii respondent argues in the alternative that sec_2038 requires inclusion in the value of the gross_estate of the values of the assets transferred into the partnerships because the asset values are included under sec_2036 we need not address respondent’s alternative argumentdollar_figure 13with respect to jma-i the parties stipulated that if we find that sec_2036 applies giving no consideration to ms jorgensen’s transfers of jma-i interests made during her lifetime the value of a 146-percent interest in jma-i is includable in the value of her gross_estate the parties did not stipulate the includable percentage interest in jma-ii however we find that giving no consideration to ms jorgensen’s transfers of jma-ii interests during her lifetime the value of a 6947-percent interest in jma-ii is includable in the value of her gross_estate continued iii equitable_recoupment in congress amended sec_6214 to provide that we may apply the doctrine_of equitable_recoupment to the same extent that it is available in civil tax cases before the district courts of the united_states and the united_states court of federal claims pension_protection_act of publaw_109_ sec_858 120_stat_1020 menard inc v commissioner continued the estate asserts although only in objecting to one of respondent’s proposed finding of facts that if sec_2036 applies it applies only to the assets ms jorgensen held on the date of her death plus those transfers she made within years of her death which would be included in the gross_estate under sec_2035 we assume the estate is referring to the possibility that ms jorgensen sufficiently severed her ties to a portion of the retained assets so that sec_2036 would not include those assets in her gross_estate the estate’s failure to argue the issue beyond a vague assertion within an objection to a proposed finding of fact leads us to conclude that the issue has been waived or abandoned see rule e 100_tc_367 89_tc_46 84_tc_693 affd without published opinion 789_f2d_917 4th cir nevertheless were the issue not waived or conceded on the record before us we would not find that ms jorgensen terminated a portion of her interest in the partnership assets the record indicates that ms jorgensen retained the use benefit and enjoyment of the assets she transferred to the partnerships see supra pp 130_tc_54 dollar_figure we recently described the doctrine as follows the doctrine_of equitable_recoupment is a judicially created doctrine that under certain circumstances allows a litigant to avoid the bar of an expired statutory limitation period the doctrine prevents an inequitable windfall to a taxpayer or to the government that would otherwise result from the inconsistent tax treatment of a single transaction item or event affecting the same taxpayer or a sufficiently related_taxpayer equitable_recoupment operates as a defense that may be asserted by a taxpayer to reduce the commissioner’s timely claim of a deficiency or by the commissioner to reduce the taxpayer’s timely claim for a refund when applied for the benefit of a taxpayer the equitable_recoupment doctrine allows a taxpayer to recoup the amount of a time-barred tax overpayment by allowing the overpayment to be applied as an offset against a deficiency if certain requirements are met as a general_rule the party claiming the benefit of an equitable_recoupment defense must establish that it applies in order to establish that equitable_recoupment applies a party must prove the following elements the overpayment or deficiency for which recoupment is sought by way of offset is barred by an expired period of limitation the time-barred overpayment or deficiency arose out of the same transaction item or taxable_event as the overpayment or deficiency before the court the transaction item or taxable_event has been inconsistently subjected to two taxes and if the transaction item or taxable_event involves two or more taxpayers there is sufficient identity of interest between the taxpayers subject_to the two taxes that the taxpayers should be treated as one 14before the amendment to sec_6214 the courts of appeals that considered whether we may entertain an equitable_recoupment claim split on the question compare 153_f3d_302 6th cir affg on other grounds 107_tc_189 with 264_f3d_904 9th cir affg 113_tc_6 menard inc v commissioner supra pincite citations omitted the estate contends that it is entitled to equitable_recoupment for income taxes paid_by ms jorgensen’s children and grandchildren jma-i and jma-ii partners on sales of stock that occurred in through the values of which we have held are properly included in the value of ms jorgensen’s gross_estate under sec_2036 a whether a refund is barred by an expired period of limitations the children and grandchildren filed their income_tax returns on or about date they filed protective claims for refund for the years through respondent rejected the claims as untimely the claims for through have not been ruled on but they appear timelydollar_figure therefore the first element of the equitable_recoupment claim is met only with respect to income taxes overpaid in b whether the overpayment arose out of a single transaction item or event a claim of equitable_recoupment will lie only where the government has taxed a single transaction item or taxable_event under two inconsistent theories estate of branson v 15the parties stipulated that the claims for refund were submitted between apr and we presume that the claims were submitted at the same time claims for refund with respect to the tax_year would have to have been filed on or before date assuming the returns were timely filed see sec_6511 sec_6513 commissioner 113_tc_6 affd 264_f3d_904 9th cir in estate of branson the decedent’s estate included stock in two closely held corporations to pay applicable estate_taxes the estate sold a portion of the stock the stock was sold for considerably more than its value reported on the estate_tax_return under sec_1014 the value of the stock as declared on the estate_tax_return was used as its basis for determining gain from the sale the estate did not pay the tax on the sale but distributed the gain to the estate’s residuary beneficiary who paid the tax due the commissioner determined a deficiency in estate_tax on the ground that the closely_held_corporation stock was worth substantially more than declared in estate of branson v commissioner tcmemo_1999_231 we agreed with the commissioner our revaluation of the stock resulted in an estate_tax deficiency since pursuant to sec_1014 the same valuation was used to determine the residuary beneficiary’s gain on the sale of the stock it followed that the residuary beneficiary had overpaid her income_tax estate of branson v commissioner f 3d pincite we have held that the values of the assets ms jorgensen transferred to jma-i and jma-ii are included in the value of her sec_1014 generally provides a basis for property_acquired_from_a_decedent that is equal to the value placed upon the property for purposes of the federal estate_tax see estate of branson v commissioner t c pincite sec_1_1014-1 income_tax regs gross_estate jma-i and jma-ii sold some of those assets during and the partners paid capital_gains_tax on the proceeds the estate argues that the single item in question is the stock contributed by ms jorgensen to the partnerships and sold by the partnerships during in estate of branson closely_held_corporation stock included in the decedent’s gross_estate and then sold by the estate satisfied the single item requirement in this case stock included in ms jorgensen’s gross_estate and sold by the partnerships in is a single item thus the second element of the equitable_recoupment claim is met c whether the single item would be subjected to two taxes inconsistently the value of stock contributed by ms jorgensen and sold by the partnerships in was included in both the value of ms jorgensen’s gross_estate and her children’s and grandchildren’s taxable_income to the extent of the gain resulting from the stock sale the inclusion of the item in the gross_estate results in an increase in the stock’s basis in the hands of the partnership pursuant to sec_1014 increased basis in the assets results in a decrease of the gain and resulting income_tax on the sale of those assets however the partners’ claims for income_tax refunds are barred under sec_6511 therefore the estate_tax and income_tax have been imposed on the same item inconsistently see estate of branson v commissioner f 3d pincite the ‘single transaction’ prerequisite to equitable_recoupment is satisfied where the same item is taxed as both the corpus of the estate and income to the beneficiary d sufficient identity of interest the final element of an equitable_recoupment claim is that the taxpayers involved the estate and the jma-i and jma-ii partners have a sufficient identity of interest so that they should be treated as a single_taxpayer in equity 301_us_532 110_f3d_678 9th cir both estate of branson and this case involve the judicial determination of an estate_tax deficiency resulting from the increased values of securities held by the decedent on the date of death pursuant to sec_1014 the value of the securities used in calculating the estate’s federal estate_tax as determined by this court became the basis of those assets after ms jorgensen’s death during jma-i and jma-ii sold assets ms jorgensen had contributed and calculated the gain on sale with respect to the bases of the assets in ms jorgensen’s hands at the time they were contributed as a result of our determination the bases of the assets were increased and it follows that jma-i’s and jma-ii’s partners overpaid their income_tax respondent argues that if we determine the estate is entitled to equitable_recoupment we should limit the recoupment to the income taxes paid_by jerry lou and gerald who pursuant to ms jorgensen’s will and revocable_trust are ultimately responsible for the estate_tax liability the grandchildren are not liable for the estate_tax deficiency in estate of branson the residuary beneficiary like gerald and jerry lou was responsible for the estate_tax liability and was the one who overpaid income_tax thus entitling the estate to equitable_recoupment however the relevant caselaw does not indicate that the taxpayer who overpaid tax must be the one responsible for the related deficiency for equitable_recoupment to apply we have found that there was an implied agreement that ms jorgensen would retain control of the assets she contributed to the partnerships even though she purported to give partnership interests to her children and grandchildren the partnerships paid her expenses including her federal and california estate_tax liabilities as calculated on the estate_tax returns the assets were included in her gross_estate as if they had not been transferred to the partnerships the goal of ms jorgensen’s gift program was to reduce the value of her estate ie a testamentary goal because of the program the objects of her bounty her children and grandchildren paid income taxes on assets that were later determined to be properly included in valuing her gross_estate thus subjecting those assets to improper double_taxation under these circumstances we find that there is sufficient identity of interest between ms jorgensen’s estate and her children and grandchildren it would be inequitable for the assets to be included in the value of ms jorgensen’s gross_estate under sec_2036 on the one hand and on the other hand for the estate not to recoup the income taxes her children and grandchildren overpaid on their sale of those very same assets but are unable to recover in a refund_suit accordingly the estate is entitled to equitable_recoupment of the income taxes overpaid by ms jorgensen’s children and grandchildren as a result of our determination that the values of the assets ms jorgensen transferred to the partnerships are included in the value of her gross_estate under sec_2036 to reflect the foregoing and the concessions of the parties an appropriate order will be issued denying petitioner’s motions to shift the burden_of_proof and decision will be entered under rule


internal_revenue_service number release date index number --------------------------- --------------------- --------------------- --------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------------ id no ----------------- telephone number --------------------- refer reply to cc psi plr-102484-10 date september legend x ----------------------- --------------------------------------------------------------------- dear ------------ this letter responds to a letter dated date and supplemental correspondence submitted on behalf of x requesting a ruling that x is not the manufacturer producer or importer for purposes of the excise_tax on archery equipment under sec_4161 of the internal_revenue_code code according to the facts submitted x is a domestic_corporation that manufactures and sells archery equipment including both patented and non-patented ---------------- additionally x has developed ------------------------------and ---------------that x is planning to introduce to the market ----------------------- x does not currently hold any patents with respect to its ---------- and -------- x has filed a patent application_for its -------design but does not know whether any patents will be issued with respect to its -------- design x - ------------------------------------------------------has since determined not to pursue a patent ------------------------------------------------------------------------------------------------------------ ---------------------------------- x has also determined that it will not manufacture the --------- ---------- and -------- it recently developed x proposes the following plan for the production of its ------------------------------------------- referred to herein collectively as the products or individually as a product the transaction will be substantially_similar for all types of products however a given transaction may vary slightly from the facts described below depending on the type of product being produced x has identified an import broker broker from whom it intends to purchase products that will be manufactured outside of the united_states u s x will place a purchase order with broker x will also provide broker with design specifications plr-102484-10 broker in turn will find a foreign manufacturer or manufacturers to produce finished products according to the specifications x provides after the foreign manufacturer produces the products broker will transport the finished products to the u s broker will be the importer of record and will be responsible for ensuring that all importation requirements are met once in the u s broker will sell the products to x x will affix its trade_name and branding to the products and package them for sale x will have the right to refuse any products that do not meet x’s specifications x anticipates a four to ten month time period from the time it places an order until the time of delivery x and broker will negotiate an all-inclusive purchase_price which covers the manufacturing costs profit margins insurance import export duties and sipping costs at the time x places an order and broker will bear the risk of any change in the cost of manufacturing or transportation that occurs between the time x places an order and broker delivers the finished products broker will also bear the risk for any loss that may occur while the products are being transported the purchase order will specifically provide that the price is inclusive of excise_tax and that broker will assume all responsibility for reporting and remitting any and all federal excise_tax due broker will be solely responsible for finding the foreign manufacturer and ensuring that the products meet x’s design specifications x will not approve or disapprove of broker’s choice of a foreign manufacturer will not have direct contact with the foreign manufacturer and will not inspect or observe the production facilities x may receive samples from the foreign manufacturer through broker for x’s approval before full production begins x will not provide materials to the broker or foreign manufacturer to make the products x will not generally advance any type of payment to either broker or the foreign manufacturer except in situations when the foreign manufacturer must make molds or undertake machine retooling specifically to make a product to x’s specifications otherwise x will be obligated to pay only after the products are imported into the u s if x rejects the products brought into the u s by broker x’s payment obligation to broker will cease x will have no control_over what broker does with any rejected products however broker will not be able to sell patented products in the u s without the risk of patent infringement actions x and broker as well as x and the foreign manufacturer will be unrelated parties they will not share management or office facilities or have common ownership all agreements made between x and broker will be the result of arm’s length negotiations furthermore although x has identified a specific broker and broker has entered into discussions with a specific foreign manufacturer there are no exclusive contracts x is free to negotiate with other brokers or other manufacturers foreign or domestic either in conjunction with or in lieu of broker broker and the foreign manufacturer are also free to provide their respective services to other businesses including x’s competitors as previously mentioned broker is free to use any manufacturer or manufacturers to produce a finished product that x can brand and package plr-102484-10 sec_4161 imposes an tax on the sale by the manufacturer producer or importer- i of any part or accessory suitable for inclusion in or attachment to a bow described in sec_4161 and ii of any quiver broadhead or point suitable for use with an arrow described in sec_4161 sec_48_0-2 of the manufacturers and retailers excise_taxes regulations provides in part that the term manufacturer includes any person who produces a taxable article from scrap salvage or junk material or from new or raw material by processing manipulating or changing the form of an article or by combining or assembling two or more articles the term also includes a producer and an importer an importer of a taxable article is any person who brings such an article into the u s from a source outside the u s or who withdraws such an article from a customs bonded_warehouse for sale or use in the u s if the nominal importer of a taxable article is not its beneficial_owner for example the nominal importer is a customs broker engaged by the beneficial_owner the beneficial_owner is the importer of the article for purposes of chapter and is liable for tax on his sale or use of the article in the u s sec_48_0-2 provides that under certain circumstances as where a person manufactures or produces a taxable article for another person who furnishes materials under an agreement whereby the person who furnished the materials retains title thereto and to the finished article the person for whom the taxable article is manufactured or produced and not the person who actually manufactures or produces it will be considered the manufacturer the importer for purposes of the manufacturers excise_tax is the person who as principal and not as agent arranges for or is the inducing and efficient cause of goods being brought into the u s for sale or use by him 338_f2d_361 ct_cl 368_f2d_577 ct_cl revrul_68_197 1968_1_cb_455 revrul_69_393 1969_2_cb_206 the passing of title to the goods either at the time of shipment or upon arrival in the u s is not a controlling factor revrul_68_197 it is necessary to look to the substance rather than the form of a transaction in order to determine whether the nominal importer actually functions as a typical import merchant or merely serves in a representative capacity revrul_67_209 in import wholesalers corporation v u s the court held that the plaintiff an automobile dealer was the importer when another party placed the order with the foreign supplier and was named as importer in all of the documents but plaintiff provided all of the financing to make importation possible and paid the other party a competitive market price plus dollar_figure for each automobile the court determined that the technicalities of importation were outweighed by the financing arrangements and that the small fee paid_by the plaintiff was adequate payment for the risks and responsibilities assumed by the other party plr-102484-10 in 524_f2d_1017 9th cir cert_denied 425_us_912 the court determined that a party was not the importer because it performed no substantial promotional activities bore none of the usual risks associated with shipments in transit performed no function other than as a conduit and earned little profit in 899_f2d_1199 fed cir the plaintiff was in the business of selling distributing and retreading tires it ordered the tires from a foreign tire company canada tire that had no business facilities in the u s the plaintiff purchased tires when visited by a canada tire representative or by placing orders over the telephone at the time of placing its orders the plaintiff negotiated an inclusive price that covered the tires shipping freight charges brokerage fees and customs duty after the plaintiff placed an order canada tire shipped tires from canada or arranged to release tires it stored at a u s customs bonded_warehouse the plaintiff had the right to refuse a shipment if the tires were defective the court held that because the plaintiff induced and caused the tires to be brought into the u s the plaintiff must be regarded as the importer for purposes of the manufacturers excise_tax x requests a ruling that it is not the manufacturer producer or importer of the products for purposes of sec_4161 we find that under the circumstances described above x is not the manufacturer or producer of such products with regard to the question of whether x is the importer for purposes of sec_4161 the key inquiry is whether x is the beneficial_owner of the taxable article ie the products to make that determination we must consider whether x as principal and not as agent arranges for or is the inducing and efficient cause of the products being brought into the u s for sale by x in the proposed transaction broker will be a pre-existing unrelated entity in which x retains no financial interest ------------------------------------------------------------------- ---------------------------------------------------------- x will provide broker with design specifications and broker will find a foreign manufacturer or manufacturers to produce finished products in accordance with the specifications x provides the foreign manufacturer will provide all of the tooling equipment personnel and raw materials required for the fabrication of the products x will not supply anything other than product drawings mock-ups specification documents and one-time mold production fees in addition broker will be responsible for arranging all transportation and paying all freight charges and will bear the risk of loss until title to the products passes to x x will pay for the finished products only after------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ once it receives the products from broker x will retain the right to reject any products not meeting x’s specifications or quality standards plr-102484-10 in the case of non-patented products broker and or the foreign manufacturer may sell or distribute any such products in the u s including to x’s competitors without additional cost consequence or restriction with respect to x in other words broker may bring non-patented products manufactured to x’s specifications into the u s in excess of the quantity ordered by x and then sell such products to a party other than x this when combined with other factors including but not limited those described in the preceding paragraph leads us to conclude that x is not the inducing and efficient cause of these non-patented products being brought into the u s accordingly for purposes of sec_4161 x is not the importer of the non-patented products brought into the u s in accordance with the proposed transaction we reach a different conclusion however with respect to x’s patented products because of x’s patents broker can only bring patented products into the u s for sale to x and can only do so with respect to the products included in a pending purchase order from x thus x is the inducing and efficient cause of its patented products being brought into the u s accordingly we conclude that for purposes of sec_4161 x is the importer of any patented products brought into the u s in accordance with the proposed transaction except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter are being sent to x’s authorized representative sincerely stephanie bland senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number --------------------------------------------------------- ------------------------------------- ------------------------------------------------ ----------------------- ------------ --------------------------------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- ------------------------ telephone number -------------------- refer reply to cc pa apjp b01 plr-111179-06 date october sec_3406 -- backup withholding backup withholding sec_6041 -- information_at_source fixed or determinable gains profits or income payments specifically included sec_6045 -- returns of broker sec_6045 returns of brokers sec_6049 -- returns regarding payments of interest reportable interest legend taxpayer -------------------------------------------------------- fund -------------------------------------------------------- x -------------------------------------------------- y ------------------------------------------- years -------------- year ------ dollar_figurea ---------------- dear ------------------ this letter responds to the letter dated date submitted on behalf of the fund requesting the following rulings plr-111179-06 settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6041 of the internal_revenue_code except in the case of payments made directly to participants in tax-qualified retirement plans settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6045 settlement payments from the fund to mutual_fund investors are not subject_to information reporting under sec_6049 for purposes of meeting any obligations it may have under sec_3406 as a payor of reportable payments the fund need not solicit taxpayer identification numbers tins from the individuals to whom it will make distributions the fund may obtain the tins from the mutual funds or tax-qualified plans in which such individuals held accounts or from transfer agents performing services for the funds or plans facts based upon the facts and the representations made the fund is a qualified_settlement_fund qsf as described in sec_468b and the regulations thereunder the fund was created in year to resolve an administrative_proceeding brought by the securities_and_exchange_commission commission against x and y relating to investment advice provided to certain mutual funds the proceeding related to the inadequate or nonexistent disclosure of x and y’s policies allowing market timing trading of mutual_fund units units and to the oversight monitoring or management of trades of such units trades from at least year through late year in an order instituting proceedings oip directed at x and y the commission alleged that x and y made various material omissions and misrepresentations regarding market timing of funds and committed certain other wrongful acts relating to trades in the units improper market timing impairs the value of mutual_fund shares by depressing their net asset value improper market timing also generates excess trading volume and thus increases the advisory and other fees mutual funds must pay to investment advisors such as x and distributors such as y therefore the conduct of x and y resulted in damage to the investors and a loss of capital the commission based on the improper conduct described above and the resulting damage to mutual_fund investors sought profit disgorgement and civil penalties after investigation and negotiations x and y agreed to pay dollar_figurea to settle the commission’s claims pursuant to section a of the sarbanes-oxley_act of u s c the oip authorized a fair fund for the disgorgement and penalty components of the settlement thus permitting both components to be paid to injured investors those investors holding units of the mutual funds during any portion of the time period specified in the oip will be eligible to receive distributions from the fund the plr-111179-06 distributions will be based on the commission’s oip the amount available for distribution is the net settlement pool which includes the sum of dollar_figurea the amount transferred by x and y into the fund and the amount of net_income earned by the fund law and analysis ruling sec_1_468b-2 of the treasury regulations provides that in general distributions by a qsf are subject_to certain information reporting and withholding requirements sec_1_468b-2 provides that a qsf must make a return for or must withhold tax on a distribution to a claimant if one or more transferors would have been required to make a return or withhold tax had that transferor made the distribution directly to the claimant the regulations further provide that for purposes of sec_6041 and sec_6041a if a qsf makes a distribution on behalf of a transferor or a claimant the fund is deemed to make the distribution to the recipient of that payment or distribution in the course of a trade_or_business in such a situation the qsf is also deemed to have made the distribution to the transferor or claimant see sec_1_468b-2 c - d sec_6041 requires all persons engaged in a trade_or_business and making payment in the course of such trade_or_business to another person of rent salaries wages premiums annuities compensations remunerations emoluments or other fixed or determinable gains profits and income of dollar_figure or more in any taxable_year to file an information_return with the service and to furnish an information statement to the payee sec_1_6041-1 provides that payments are fixed when they are paid in amounts definitely predetermined income is determinable whenever there is a basis of calculation by which the amount to be paid may be ascertained sec_1 a requires a payor to report sec_6041 amounts on form_1099 thus payments that are not fixed or determinable are not subject_to information reporting under sec_6041 amounts a taxpayer receives to restore a loss of capital are not income except to the extent that the payment exceeds the taxpayer’s basis in the injured property that is the subject of the payment 144_f2d_110 1st cir fund payments to investors for losses the mutual funds suffered from market timing appear to constitute compensation_for a loss of capital market timing conducted by x and y’s parent company and permitted by x and y depressed the net asset value of mutual_fund shares compensation from the fund will compensate at least partially for this damage because the fund has no access to the investors’ tax basis in their mutual_fund accounts and has no need or occasion to collect information on tax basis the fund is unable to calculate how much of this compensation_for mutual_fund losses constitutes fixed or determinable income accordingly the fund has no information reporting obligations under sec_6041 for such compensation plr-111179-06 although fund payments may constitute gross_income to investors versus compensation_for loss of capital the fund lacks the data collection authority necessary to calculate such gross_income that income therefore is not fixed or determinable within the meaning of the regulations under sec_6041 accordingly subject_to the exception noted below pertaining to distributions to qualified_retirement_plan participants the fund has no information reporting obligations under sec_6041 the fund states that it may make a certain number of distributions directly to participants in tax-qualified retirement plans sec_72 of the code controls the taxation of such distributions and the distributions must be reported on form 1099-r pursuant to sec_6041 subject_to the dollar_figure reporting threshold set forth in sec_6041 and sec_1_6041-1 ruling sec_1_468b-2 provides that a qsf must make a return for a distribution to a claimant if one or more transferors would have been required to make a return had that transferor made the distribution directly to the claimant sec_6045 provides generally that every person doing business as a broker shall when required by the secretary make a return in accordance with such regulations as the secretary may prescribe sec_6045 defines the term broker to include a dealer a barter_exchange and any other person who for a consideration regularly acts as a middleman with respect to property or services the regulations further define the term broker to mean a person that in the ordinary course of a trade_or_business during the calendar_year stands ready to effect sales to be made by others see sec_1_6045-1 sec_1_6045-1 provides generally that a broker shall make an information_return for each sale effected by the broker in the ordinary course of the broker’s trade_or_business sec_1_6045-1 defines a sale as any disposition of securities commodities regulated_futures_contracts or forward contracts for cash and as including redemptions of stock retirements of indebtedness and entering into short_sales the fund’s payments to investors do not result from a sale as that term is defined above the fund therefore has no information reporting obligations under sec_6045 with respect to these payments ruling sec_6049 provides that every person who makes payments of interest aggregating dollar_figure or more to any other person during any calendar_year or receives payments of interest as a nominee and who makes payments aggregating dollar_figure or more during any calendar_year to any other person with respect to the interest so received shall make a return according to the forms or regulations prescribed by the secretary plr-111179-06 sec_6049 b provides that the term_interest includes interest on any obligation issued in_registered_form or of a type offered to the public other than any obligation with a maturity at issue of a year or less which is held by a corporation pursuant to sec_6049 interest also includes interest on deposits with brokers as defined in sec_6045 the fund distributions in the present case do not relate to deposits with brokers or obligations issued in_registered_form and do not otherwise qualify as interest within the meaning of sec_6049 this is so even though interest earnings may have accrued on the funds to be paid to investors from the time x and y paid such funds to the fund the fund distributions to investors relate to violations of securities law and compensation_for financial harm not to obligations issued in_registered_form or other instruments that generate interest as sec_6049 defines that term accordingly the fund has no information reporting obligations under sec_6049 regarding its distributions to the investors ruling sec_3406 generally provides that in the case of any reportable_payment if a the payee fails to furnish his or her tin to the payor in the manner required b the secretary notifies the payor that the tin furnished by the payee is incorrect c there has been a notified_payee_underreporting of interest and dividends or d there has been a certification failure collectively referred to as payee failures then the payor shall deduct and withhold from such reportable_payment a backup withholding amount totaling of such payment sec_3406 provides that the term reportable_payment means any reportable_interest_or_dividend_payment and any other_reportable_payment sec_3406 provides that the term other_reportable_payment includes any payment of a kind and to a payee required to be shown on a return under sec_6041 or sec_6045 in light of rulings one through three above only direct payments by the fund to participants in tax-qualified plans will be reportable payments subject_to backup withholding under sec_3406 in order to meet its obligations under sec_3406 and to include tins on information returns it must provide for these reportable payments the fund plans to obtain those tins from one of the following sources the plan_administrator the mutual funds in which the participants invested or the transfer agents that provide services to the administrator or mutual funds obtaining the tins in this manner should prove more reliable and less burdensome and costly to the fund than soliciting the tins from the plan participants in light of the authority it has been granted by the commission the fund will be able to obtain the tins of plan participants from the plan administrators mutual funds or transfer agents the fund will not be required to solicit tins from the participants for purposes of applying the backup withholding rules of sec_3406 plr-111179-06 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter furthermore this letter expresses no opinion about information reporting requirements for fund distributions that are not made directly to the injured investors this letter also expresses no opinion about the income_tax consequences to investors of fund distributions this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination enclosure carol p nachman acting senior technician reviewer office of associate chief_counsel procedure and administration administrative provisions and judicial practice sincerely


id uilc cca_2014122413065046 number release date from sent wednesday date pm to cc bcc subject re and question --------- as a general matter the calculation of the penalties under sec_6721 and sec_6722 would be correct if there were errors on the forms 1042-s filed by the withholding_agent however based on the information provided the withholding_agent correctly reported the amounts actually withheld in box on its forms 1042-s see instructions for form 1042-s p the irs should therefore not assess penalties against the withholding_agent under sec_6721 and sec_6722 with regard to this investigation please let me know if you have any questions regards ------------- -------------- -------------- -------------------- --------------------------------------- --------------------------------------------------------------