t c memo united_states tax_court bestate of therodore r thompson deceased betsy t turner executrix petitioner v commissioner of internal revenue respondent docket no filed date victor f keen and thomas w ostrander for petitioner joseph m abele joellyn r cattell james c fee jr or and david a breen for respondent memorandum findings_of_fact and opinion jacobs judge respondent determined a dollar_figure deficiency in the federal estate_tax of the estate of theodore r thompson hereinafter theodore r thompson is referred to as decedent and his estate as decedent’s estate - - after concessions by decedent’s estate the issue remaining for decision is whether decedent’s gross_estate includes the value of interests in two family limited_partnerships namely the thompson turner family limited_partnership the turner partnership and the thompson family limited_partnership the thompson partnership and in the respective corporate general partners of those partnerships that decedent possessed at death or transferred prior to death and if so the value of those interests or pursuant to sec_2036 the value of the property which decedent transferred to the family limited_partnerships and to the respective corporate general partners of those partnerships and if so the value of such property all section references are to the internal_revenue_code as amended and in effect as of the date of decedent’s death and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found the stipulations of facts and exhibits submitted therewith are incorporated herein by this reference rt background decedent was a resident of the state of delaware at the time of his death on date decedent’s estate was administered in delaware betsy thompson turner decedent’s daughter and executrix of his estate resided in kennett square pennsylvania when the petition in this case was filed a decedent and his family decedent was born on january in kennett square pennsylvania in the 1920s he attended college at swarthmore college for years he left college to help his father start a family rose-growing business thompson roses in kennett square pennsylvania after his father’s death in decedent operated thompson roses with his brother howard decedent and his wife marian had two children betsy and robert robert attended penn state university and subsequently enlisted in the military for years upon discharge from the military he entered cornell university majoring in horticulture upon graduation from college robert began working at thompson roses in decedent gave his one-half interest in thompson roses to robert and to betsy’s husband george turner decedent’s brother continued to own the remaining half of the business decedent retired from thompson roses in after decedent retired he and marian divided their time between a condominium at cokesbury village a retirement community in hockessin delaware and a winter home in naples florida decedent’s retirement activities included golf fishing bridge and woodworking - marian died in after which decedent moved into an assisted living facility at cokesbury village decedent resided in this facility until his death in robert retired from thompson roses in and moved to colorado george retired in betsy and george’ had four children--george clayton jr clay william joel bill phoebe and robert--and five grandchildren robert had four children --amy margaret theodore robert and john--and four grandchildren b decedent’s finances by a deed_of_trust dated date decedent established a revocable_trust with the meridian trust co the trust decedent executed his will in the will as subsequently amended by four codicils provided for among other things specific bequests of dollar_figure to betsy and robert gifts in varying amounts to his grandchildren and gifts of dollar_figure to each of his great-grandchildren the residue of decedent’s estate went into the trust in decedent executed a durable power of george died in robert divorced in and remarried in his children are from his first marriage the trustee was originally the national bank and trust co of kennett square which merged with and became part of the american bank and trust co of reading which in turn merged with and became meridian trust co - - attorney appointing betsy and robert as his attorneys in fact and granting them power to handle all of his financial affairs on date decedent executed an amendment to the trust as a consequence of this amendment a new revocable_trust the trust was created the trust was funded with the assets of the trust betsy and robert were the trustees of the trust the assets worth approximately dollar_figure million transferred to the trust consisted of securities and cash held in an account at dean witter reynolds inc dean witter from to virginia newnam was the account executive of decedent’s trust’s holdings at dean witter in ms newnam changed her employment to alex brown inc and the trust portfolio was then transferred to that brokerage firm decedent received the income from the securities held in the trust in addition decedent received annual income of approximately dollar_figure from social_security and approximately dollar_figure from annuities with cigna insurance co and provident mutual life_insurance co decedent had other assets including shares ina mutual_fund funds in a checking account and loans receivable owed to him by family members decedent’s lifestyle was simple and his expenses were fairly consistent from to his death in decedent often made substantial gifts of cash bonds or insurance policies to his children and grandchildren from time to time he made loans to his grandchildren in exchange for promissory notes decedent made the following loans to robert’s children on date decedent made a dollar_figure mortgage loan to theodore robert pincite-percent interest payable over years on date decedent made a dollar_figure mortgage loan to amy payable over years and on date decedent lent dollar_figure to margaret decedent made the following loans to betsy’s children decedent lent dollar_figure to phoebe on date decedent lent dollar_figure to william on date and decedent lent dollar_figure to clay on date and dollar_figure on date il formation of the family limited_partnerships and corporations a introduction to the fortress plan sometime in or betsy robert and their spouses met with christian devol and william w warder mr devol was a self- employed financial adviser mr warder was an insurance salesman and financial adviser with aps financial services inc aps aps was the licensee for the fortress financial group inc and as a licensee aps was authorized to assist in the implementation of the fortress plan ’ in strangi v commissioner 115_tc_478 affd in part and revd in part 293_f3d_279 5th cir we described the fortress plan promoted by fortress financial group inc fortress as follows continued messrs warder and devol introduced betsy and robert to charles g cheleden an attorney licensed in the state of pennsylvania mr cheleden reviewed decedent’s existing trust documents and will in february or date messrs cheleden and warder described to betsy and robert an estate plan that used family limited_partnerships ina letter dated date mr warder recommended using two family limited_partnerships each headed by a corporate general_partner one for betsy and her family and one for robert and his family in promoting this arrangement mr warder indicated the primary advantages of the program were lowering the taxable value of the estate maximizing the preservation of assets reducing income taxes by having the corporate general_partner provide medical retirement and income_splitting benefits for family members and facilitating family and charitable giving in addition he stated that all of the continued fortress trains and educates professionals on the use of family limited_partnerships as a tool to reduce income_tax reduce the reported value of property in an estate preserve assets and facilitate charitable giving the fortress plan recommends contributing assets to a family limited_partnership with a corporate general_partner being created for control purposes the fortress plan also suggests that shares of stock of the corporate general_partner or an interest in the family limited_partnership be donated to a charity to facilitate the plan fortress licenses the use of copyrighted limited_partnership agreements and shareholders’ agreements --- - benefits above can be achieved while total control of all assets is retained by the directors of the corporate general_partner the decision to form the family limited_partnerships was’ made approximately a week later at a meeting at betsy and george’s home attended by decedent betsy george robert and messrs cheleden and warder on date george p brown president of aps wrote to decedent betsy and robert mr brown outlined the services aps agreed to provide in implementing the fortress plan he further explained that the fee for those services would be dollar_figure which fee would be shared with mr cheleden a letter of the same date from mr cheleden to decedent betsy and robert accompanied the date letter from aps in his letter mr cheleden stated that the fortress plan was designed to protect assets from third party claims maximize the amount that passes to heirs and allow the family to maintain control to the extent possible consistent with the above he advised decedent betsy and robert that the limited_partnership interests were expected to enjoy the benefit of ‘discounting’ for gifts and estate_tax_valuation purposes mr cheleden indicated that a 40-percent discount was a realistic expectation decedent robert betsy and george agreed to form two family limited_partnerships and two corporations to serve as the corporate general partners--the turner partnership and turner corp for --- - betsy’s family and the thompson partnership and r p thompson corp thompson corp for robert’s family the turner partnership and turner corp were to be established under the laws of pennsylvania where betsy resided and the thompson partnership and thompson corp were to be established under the laws of colorado where robert lived in implementing the fortress plan mr cheleden prepared the partnership and shareholder agreements for the turner partnership and turner corp the pennsylvania entities because mr cheleden was not licensed outside of pennsylvania he arranged for the partnership and shareholder agreements for the thompson partnership and thompson corp to be prepared by frederick meyer an attorney licensed to practice in colorado b formation of the turner partnership and turner corp on date turner corp and the turner partnership were formed under the laws of pennsylvania articles of incorporation for turner corp and a certificate of limited_partnership for the turner partnership were filed with the department of state of the commonwealth of pennsylvania the registered office and place of business of both turner entities was woodside farm kennett square pennsylvania woodside farm was the residence of betsy and george stock certificates were issued to decedent shares betsy shares george shares and national foundation inc -- - shares an unrelated tax-exempt_entity decedent betsy and george were the directors and officers of turner corp decedent was the chief_executive_officer betsy was secretary and george was treasurer an agreement of limited_partnership of the turner partnership was executed by all of its partners decedent signed on behalf of turner corp decedent through the trust contributed to the partnership approximately dollar_figure of his listed securities plus notes receivable due from betsy’s children george contributed to the partnership dollar_figure in cash and real_property in vermont valued at dollar_figure at the time of the formation of the turner partnership decedent held a 4-percent limited_partnership_interest george held a 54-percent limited_partnership_interest and turner corp as the sole general_partner of the turner partnership held the remaining dollar_figure percent the assets of the turner partnership and the values of those assets as of date were as follows shares value decedent’s contribution municipal_bonds turner corp was to pay dollar_figure to the partnership for its general_partnership interest however it did not pay the dollar_figure in cash for its interest rather the corporation issued a noninterest bearing promissory note in favor of decedent for it sec_1 06-percent interest chester co --- dollar_figure madison co ---- pa higher ed --- big_number puerto rico --- big_number dela state big_number shares value stocks atlantic richfield big_number coca cola big_number big_number gte big_number big_number general electric big_number big_number intercap qual muni inv big_number big_number intercap qual muni inc big_number big_number ibm big_number johnson johnson big_number merck big_number meridian bankcorp big_number big_number 3m big_number phila elec peco energy big_number petrolite big_number big_number xerox big_number big_number mutual funds john hancock big_number loans receivable phoebe turner --- big_number william turner --- big_number george turner jr --- decedent’s total big_number betsy georges’s contribution cash checking account --- big_number real_property vermont property --- big_number betsy george’s total big_number total assets big_number in after george contributed the vermont property to the turner partnership mr cheleden advised him that the initial capitalization of the partnership might present certain investment_company issues pursuant to sec_721 which could affect the intended nonrecognition treatment of capital contributions to the partnership accordingly mr cheleden recommended that the turner partnership limited_partnership agreement be amended to allocate the gains losses and distributions from the vermont property to george by an undated amendment to the limited_partnership agreement retroactive to date the partners allocated all gains and losses from and distribution of real_estate contributed to the partnership to the contributing_partner the amendment was intended to apply only to certain real_property held in vermont by george in accordance with the amendment george was entitled to keep all net_proceeds from the timber sales generated from the vermont property owned by the partnership cc the thompson partnership and thompson corp thompson corp was duly formed and organized as a colorado corporation on date the thompson partnership was duly formed and organized as a colorado limited_partnership on date robert was the registered agent his ranch in norwood colorado was the registered office and place of business for both the thompson partnership and thompson corp thompson corp was the corporate general_partner of the thompson partnership decedent and robert each held percent shares of the stock of thompson corp robert h thompson an unrelated third party held the remaining percent shares robert was the president robert h thompson was the vice-president and decedent was the secretary treasurer upon formation of the thompson partnership - - decedent contributed approximately dollar_figure of his listed securities along with notes receivable from robert’s family members to the partnership robert contributed to the partnership his interest in t rowe price mutual funds worth approximately dollar_figure and his norwood ranch in colorado appraised at dollar_figure the assets of the thompson partnership and the values of those assets as of date were as follows shares value decedent’s contributions municipal_bonds dist columbia --- dollar_figure dover dela wtr swr ---- big_number dover dela wtr swr ---- big_number orlando waste ---- big_number dela hlth --- big_number tampa wtr swr --- big_number stocks atlantic richfield big_number coca cola big_number big_number gte big_number big_number general electric big_number big_number intercapital invest big_number big_number intercapital income big_number ibm big_number johnson johnson big_number merck big_number meridian bankcorp big_number big_number 3m big_number phila elec peco energy big_number xerox big_number big_number mutual funds john hancock freedom big_number loans receivable amy thompson --- big_number ted thompson --- big_number margaret thompson --- decedent’s total big_number robert’s contributions shares value mutual funds equity income --- dollar_figure kuropean stock --- big_number intl stock ---- big_number japan fund --- big_number new american growth --- big_number new asia ---- big_number science technology --- big_number high yield --- big_number intl bond --- big_number prime reserve-cash --- big_number ranch in norwood co ---- big_number robert’s total big_number total assets big_number at the time of the formation of the partnership decedent held a 27-percent limited_partnership_interest and robert held a 72-percent limited_partnership_interest the thompson corp as the general_partner of the thompson partnership held the remaining 01-percent interest til operation of the partnerships a decedent’s financial affairs through the turner partnership and the thompson partnership before forming the partnerships and corporations betsy robert and decedent had agreed that decedent would be taken care of financially they also wanted to make sure that decedent could access money in the partnerships in order to continue making gifts to his children grandchildren and great-grandchildren in a letter dated date to mr warder betsy asked how decedent’s access to his checking account with his broker would be affected by the family partnerships she specifically asked - - whether her father would be able to draw money from the dean witter account in order to give dollar_figure gifts to children grandchildren and great-grandchildren each year in a letter dated date george wrote to mr devol asking how does betsy’s father get dollar_figure to give away as christmas presents with checks dated date bob thompson has a similar question in both the turner partnership and thompson partnership made distributions of dollar_figure to decedent in order that he could continue his practice of giving gifts at christmastime to family members the dollar_figure distributions from the partnerships were shown on decedent’s schedule_k-1 beneficiary’s share of income deductions credits etc as a distribution withdrawal for that year and as a reduction in his capital_account on date the thompson partnership made a distribution of dollar_figure to decedent’s checking account in order that decedent’s christmas checks to robert his children and his grandchildren would not bounce on the same date the turner partnership made a distribution of dollar_figure to decedent’s checking account in order that decedent’s christmas checks to betsy her children and her grandchildren would not bounce in and or in addition to some cash gifts decedent made gifts of interests in the turner partnership and the thompson partnership gift_tax returns filed by decedent or on his behalf - reported adjusted_taxable_gifts of dollar_figure for gifts of the turner partnership interests and dollar_figure for gifts of the thompson partnership interests the partnerships distributed funds to decedent to pay for his personal expenses in a date handwritten letter to robert betsy wrote here is a list of dad’s expenses the keely mgt fee will not be repeated the miscellaneous will not be quite as high as he no longer buys lumber but as you can see he will need an infusion he still has in his alex brown acct as of today dollar_figure dollar_figure of this in cash c g cheleden suggested we transfer securities into his personal alex brown acct rather than each partnership selling something transferring cash i just looked at our partnership statement we could transfer a penna higher ed facility big_number shares worth dollar_figure of it worth dollar_figure dad could sell these off as he needed them do you think dollar_figure from each of us is the right amount let me know what you think he’s okay for now as there is enough cash in the account for february attached to the letter was a schedule of decedent’s expenses in totaling dollar_figure this amount included delaware state tax of dollar_figure federal_income_tax of dollar_figure and cokesbury assisted living center expenses of dollar_figure the dollar_figure total did not include dollar_figure which betsy identified as a keely mgt fee for discounting partnerships the thompson partnership distributed dollar_figure to decedent in date b operation of the turner partnership securities the investment strategies for decedent’s trust holdings did not change significantly after they were transferred to the turner partnership ms newnam remained as adviser and decedent’s securities continued to be held in the alex brown account the amount of activity of the turner partnership account was low indeed at trial ms newnam could not characterize the trading activity of the account as even moderately traded life_insurance policies the turner partnership owned insurance policies on the lives of george and betsy the amount of insurance on george’s life was dollar_figure with a term rider of dollar_figure for which the partnership paid an annual premium of dollar_figure the amount on betsy’s life was dollar_figure for which the partnership paid an annual premium of dollar_figure lewisville properties in date betsy george and their daughter phoebe discussed investing in a real_estate project known as the lewisville properties lewisville properties was a modular home construction venture phoebe a real_estate broker believed that little risk was involved in making the investment and that she the proceeds of the life_insurance_policy were paid to the turner partnership after george’s death in -- - expected the investment could generate a profit of approximately dollar_figure on date phoebe brokered an agreement of sale between the sellers and george turner betsy turner or their assignee in date george opened a checking account in the name of ttlp t a lewisville properties at first national bank of west chester the account was opened with a check from the turner partnership in the amount of dollar_figure george advised the bank that phoebe betsy himself and william robinson a c p a would have signatory authority for the account on date lewisville properties was purchased by the turner partnership for approximately dollar_figure the partnership financed the purchase and construction costs of lewisville properties through a margin loan made on the brokerage account of the turner partnership the total investment in the property was approximately dollar_figure ’ woodlands property woodside farm was the private residence of betsy and george it was listed as the principal_place_of_business for both the turner partnership and turner corp adjacent to woodside farm were acres known as woodlands property the property contained a swimming pool and small pool house trails a pond and adam on in date lewisville properties was sold for a net_loss to the turner partnership of approximately dollar_figure phoebe received a commission of dollar_figure she applied this amount toward a dollar_figure loan borrowed from decedent date betsy and george contributed woodlands property to the turner partnership before contributing woodlands property to the partnership the turners placed on the property a conservation_easement that prohibited the cutting or removal of trees from the property woodside properties partnership_interest betsy and george each held a 35-percent partnership_interest in a real_estate partnership known as woodside properties phoebe held the remaining 30-percent partnership_interest woodside properties consisted of six residential apartment units in two buildings located in west chester pennsylvania woodside properties’ real_estate was titled in the names of phoebe and betsy phoebe was the managing partner and listing agent for woodside properties in date betsy and george each assigned their interests in woodside properties to the turner partnership after the assignment woodside properties’ real_estate remained titled in the names of phoebe and betsy in betsy and george listed woodside farm for sale and included the 22-acre woodlands property woodside farm and woodlands property were sold to a single purchaser for a gross_sales price of dollar_figure after reduction for settlement charges dollar_figure and the first mortgage loan dollar_figure betsy and george received net_proceeds of dollar_figure upon the sale of the property betsy and george allocated to the turner partnership dollar_figure of the woodside farm woodlands property sales proceeds which amount equaled the partnership’s adjusted_basis in the woodlands property loans notes the turner partnership was used to continue decedent’s practice of lending money to betsy’s children and grandchildren in date the turner partnership lent dollar_figure to betsy’s son robert and his wife in date the principal of the loan was increased to dollar_figure and subsequently increased to dollar_figure in date the turner partnership lent dollar_figure to betsy’s son bill it lent an additional dollar_figure to bill in date the turner partnership maintained records of the amounts that were owed and paid on the loans rach partnership determined the current rate of interest to be charged on the loans although monthly interest payments were provided as a term on the loans held by the partnerships those interest payments were often either late or not paid at all the principal of such loans was payable on demand when a principal payment was made often the loan was reamortized and subsequent interest payments reduced no enforcement action was taken against any family_member borrower when payment on the loans was not made no loans were made to anyone outside the turner thompson family c operation of the thompson partnership robert lived on the 312-acre norwood ranch in colorado both before and after it was contributed to the partnership after he contributed the ranch to the partnership he entered into a lease --- - with the partnership under the terms of the lease robert was required to pay rent of dollar_figure per year before contributing the ranch to the partnership robert did not treat the ranch as a business he maintained the ranch in the same manner both before and after its transfer robert raised and trained mules on the ranch any income from the sale of the mules went to robert individually not to the partnership on the thompson partnership tax returns for the years through however the partnership claimed losses from the operation of the ranch on several occasions the partnership paid the rent it received from robert to thompson corp as a management fee for the years and management fees were paid_by the thompson partnership to thompson corp in the amounts of dollar_figure dollar_figure and dollar_figure respectively ’ robert was paid an annual salary of dollar_figure as president of thompson corp robert’s wife karen was paid a salary of dollar_figure a month for assisting with recordkeeping she used the money to fund her retirement account thompson corp carried workman’s compensation insurance on robert and karen that covered any injury or accident they suffered in their home in addition the corporation paid the following for the years and management fees were paid_by the thompson partnership to thompson corp in the amounts of dollar_figure and dollar_figure respectively -- - personal expenses robert’s american association of retired persons aarp supplemental insurance of dollar_figure month karen’s health insurance of dollar_figure per quarter and a subscription to the wall street journal in addition the corporation paid robert dollar_figure a month for use of his truck in maintaining the ranch iv decedent’s estate a transactions with the partnerships decedent died on date at the age of upon decedent’s death the trust was to terminate and the entire trust balance was to be paid and distributed to decedent’s then- living lineal_descendants per stirpes the trustees were empowered to transfer money from the trust to decedent’s estate to permit the funding of any monetary bequests made in decedent’s will and the payment of any expenses at the time of his death decedent held a majority interest in the turner and thompson partnerships as well as stock in their corporate general partners he also held an interest in a brokerage account of approximately dollar_figure an interest in a mutual_fund of approximately dollar_figure a checking account of approximately dollar_figure and a promissory note in the amount of dollar_figure the assets of the turner partnership and the values of those assets as of decedent’s date of death were as follows assets value first national bank general dollar_figure lewisville big_number assets value total dollar_figure marketable_securities municipal_bonds chester co big_number madison co big_number pa higher ed big_number puerto rico big_number stocks atlantic richfield big_number coca cola gte big_number general electric intercap qual muni big_number ibm big_number johnson johnson big_number merck big_number meridian bankcorp big_number 3m big_number peco energy big_number petrolite big_number xerox big_number mutual funds----john hancock big_number margin loan big_number total big_number real_property vermont property big_number lewisville property big_number woodlands big_number woodside properties’ big_number total big_number loans receivable phoebe turner big_number william turner big_number george turner jr big_number william turner iv big_number robert lorraine turner big_number bill’s bloom inc big_number total big_number accrued int div big_number cash_value life_insurance george big_number betsy big_number unearned_premium big_number total big_number decedent’s estate valued woodside properties at dollar_figure dollar_figure the assets of the thompson partnership and the value of those assets -- the estate’s total value ascribed to the assets was as of decedent’s date of death were as follows assets cash marketable_securities municipal_bonds dist columbia dover dela wtr swr dela hlth intercapital invest intercapital income stocks atlantic richfield barrick gold coca cola fluor corp gte general electric glaxo wellcome plc ibm johnson johnson merck meridian bankcorp 3m peco energy xerox mutual funds john hancock freedom equity income intl stock latin america mid-cap growth new asia science technology intl bond u s treasury total loans receivable amy thompson ted thompson margaret thompson total big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number value dollar_figure big_number big_number - - assets value accrued interest dividends dollar_figure ranch in norwood co big_number total big_number decedent’s estate valued marketable_securities at dollar_figure decedent’s estate’s total value ascribed to the assets was dollar_figure on date the turner partnership sold over dollar_figure of securities it held through the alex brown account around the same time the thompson partnership sold more than dollar_figure in securities on date distributions were made from the trust in partial satisfaction of specific bequests in decedent’s will as follows betsy’s children george turner jr dollar_figure phoebe turner big_number robert j turner big_number robert’s children amy thompson dollar_figure margaret thompson big_number john w thompson big_number theodore r thompson big_number in date the turner partnership and the thompson partnership each paid dollar_figure or a total of dollar_figure to a checking account to fund the specific bequests set forth in decedent’s will these distributions reduced the estate’s interests in the partnerships’ assets likewise the partnerships provided funds to pay decedent’s estate_taxes - - on date because the estate contained insufficient assets to fund all bequests in decedent’s will an assignment of partnership_interest in the turner partnership was executed between decedent’s estate and betsy’s five grandchildren transferring partial_interests in the turner partnership to them b bhstate tax_return a form_706 united_states estate and generation-skipping_transfer_tax return was filed on date a supplemental estate_tax_return was filed on date on the return decedent’s estate reported that decedent held an 65-percent interest in the turner partnership with a value of dollar_figure and a 12-percent interest in the thompson partnership with a value of dollar_figure the return reported that decedent held shares of turner corp stock valued at dollar_figure and shares of thompson corp stock valued at dollar_figure the values reported on the return were determined by applying a 40-percent combined discount for minority interest and lack of marketability to the net asset value of the assets of the partnerships the estate_tax_return reported dollar_figure as prior adjusted_taxable_gifts pursuant to sec_2001 related to decedent’s gifts of the partnership interests in the turner partnership and the thompson partnership the value of the prior gifts had also been determined by applying a 40-percent combined discount for minority interest and lack of marketability -- p7 - cc notice_of_deficiency respondent issued a notice_of_deficiency determining a dollar_figure deficiency in federal estate_tax in the notice_of_deficiency respondent increased the values of decedent’s interests in the limited_partnerships and increased the amount of taxable_gifts related to decedent’s lifetime gifts of partnership interests in those partnerships respondent determined that the value of decedent’s interest in the thompson partnership was dollar_figure rather than dollar_figure and the value of his interest in the turner partnership was dollar_figure rather than dollar_figure as a result of those determinations respondent increased decedent’s taxable_estate by dollar_figure respondent also determined that the value of decedent’s shares of thompson corp was dollar_figure rather than dollar_figure and the value of his shares of turner corp was dollar_figure rather than dollar_figure as a result of those determinations respondent increased decedent’s taxable_estate by dollar_figure respondent’s notice_of_deficiency also proposed to increase the prior taxable_gifts from dollar_figure to dollar_figure opinion as a general_rule sec_2001 of the internal_revenue_code imposes a federal tax on the transfer of the taxable_estate of every decedent who is a citizen or resident_of_the_united_states sec_2001 provides that the estate_tax is based - - upon the value of the taxable_estate plus taxable_gifts made after and not includable in the gross_estate less gift_taxes payable on post-1976 taxable_gifts a decedent’s taxable_estate is determined by determining the value of the decedent’s gross_estate and by deducting therefrom those deductions provided for in sec_2053 through sec_2051 the parties in this case disagree as to whether decedent’s gross_estate includes the value of interests in family limited_partnerships and in the corporate general_partner of those partnerships that decedent possessed at death or transferred prior to death and if so the value of such interests or pursuant to sec_2036 the value of the property which decedent transferred to the family limited_partnerships and related corporate general partners decedent’s estate maintains that decedent’s gross_estate includes the value of his interests in the family limited_partnerships not the value of the property transferred by him to the partnerships and that the value of each of his partnership interests at the date of transfer that is the date of the gift or the date of decedent’s death is decedent’s proportionate share of the fair_market_value of the assets of the partnership at the date of transfer discounted by percent to reflect lack of control as well as a lack of marketability on the other hand asserting two alternative theories - - respondent contends that the full fair_market_value of the assets decedent contributed to the partnerships is includable in decedent’s gross_estate respondent argues first that the partnerships lacked economic_substance and thus should be disregarded for transfer_tax purposes alternatively respondent argues because decedent retained the economic benefit and control of the transferred assets sec_2036 applies so that the date-of-death value of the assets decedent transferred to the partnerships is includable in decedent’s gross_estate finally respondent asserts that if the partnerships are recognized for estate_tax purposes and if sec_2036 does not apply then the amount of the combined minority and lack of marketability discounts to apply in valuing decedent’s interests in the partnerships is less than percent as claimed by decedent’s estate it burden_of_proof as a preliminary matter decedent’s estate maintains that the issues of whether the partnerships are to be recognized for estate_tax purposes and the applicability of sec_2036 are new matters which were not raised in the notice_of_deficiency the estate thus concludes that the burden_of_proof as to those issues is placed upon respondent we agree generally except as otherwise provided by statute or -- - determined by the court the burden_of_proof is on the taxpayer rule a 290_us_111 the burden_of_proof is on the commissioner however in respect of any new_matter not raised in the notice_of_deficiency increases in deficiency and affirmative defenses raised by the commissioner in an answer rule a a notice_of_deficiency must describe the basis for the tax_deficiency sec_7522 in some situations failure to describe the basis for the tax_deficiency in the notice_of_deficiency results in a new_matter being raised under rule a 112_tc_183 93_tc_500 estate of ballantyne v commissioner tcmemo_2002_160 a new_matter is raised when the basis or theory on which the commissioner relies is not stated or described in the notice_of_deficiency and the new_theory or basis requires the presentation of different evidence wayne bolt nut co v commissioner supra pincite in such situation the burden_of_proof is placed on the commissioner with respect to that issue id in certain circumstances if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the proper tax_liability sec_7491 places the burden_of_proof on the commissioner sec_7491 rule a decedent’s estate does not contend that sec_7491 applies in this case in the case herein respondent’s notice_of_deficiency increased the value of decedent’s interest in the turner partnership from dollar_figure as reported on the return to dollar_figure and increased the value of decedent’s interest in the thompson partnership from dollar_figure as reported on the return to dollar_figure respondent explained the changes to the value of his partnership interests as follows the minority discount and lack of marketability discount has been disallowed on each of the above limited_partnerships in addition respondent decreased the value of decedent’s turner corp stock from dollar_figure as reported on the return to dollar_figure and increased the value of his thompson corp stock from dollar_figure as reported on the return to dollar_figure in an amendment to the answer respondent asserted that the limited_partnerships and the two family corporations should be disregarded for federal estate_tax purposes and that the property includable in decedent’s gross_estate is his share of the underlying assets owned by the partnerships as of the date of his death in the alternative respondent asserted in the amendment to the answer that with respect to the assets transferred by decedent to the partnerships decedent retained control and enjoyment sufficient to include the date-of-death value of those assets in the gross_estate pursuant to sec_2036 the adjustments made by respondent in the notice_of_deficiency resulted from respondent’s disallowance of any discounts for - - minority interest or lack of marketability the disallowance of those discounts did not call into question the economic_substance of the partnerships or raise the applicability of sec_2036 moreover the amount of discount for lack of control and marketability requires different evidence than that required for the matters first raised in the amendment to the answer entitlement to the discounts requires proof that a willing buyer would pay less for decedent’s interest in the partnerships than net asset value because the interests did not have control_over the partnership and because there was no ready market for the sale of the partnership interests evidence required to establish that the entities should be respected for estate and gift_tax purposes includes evidence that the entities were properly established under state law and that other formalities have been followed evidence required to prove that sec_2036 does not apply includes evidence that decedent did not retain the enjoyment of the property or control_over who has the enjoyment of the property or that decedent transferred the property for adequate_consideration see infra pp these are new matters raised in the amendment to the answer il whether the turner partnership and the thompson partnership will be recognized for federal estate_tax purposes respondent contends that the thompson partnership and the turner partnership should be disregarded for federal tax purposes because they lack economic_substance and business_purpose mere - - suspicion and speculation about a decedent’s estate_planning and testamentary objectives are not sufficient to disregard an agreement in the absence of persuasive evidence that the agreement is not susceptible of enforcement or would not be enforced by parties to the agreement 115_tc_478 affd on this issue revd and remanded 293_f3d_279 5th cir hall v commissioner 92_tc_312 the thompson partnership and thompson corp were validly formed pursuant to colorado law and the turner partnership and turner corp were validly formed pursuant to pennsylvania law potential purchasers of decedent’s assets would not disregard the partnership thus the partnerships had sufficient substance to be recognized for federal estate and gift_tax purposes 115_tc_506 estate of strangi v commissioner supra dailey v commissioner tcmemo_2001_263 tii whether the assets decedent transferred to the partnerships should be included in decedent’s gross_estate under sec_2036 a sec_2051 defines the taxable_estate as the value of the gross_estate less applicable deductions sec_2031 a specifies that the gross_estate comprises all property real or personal tangible or intangible wherever situated sec_2033 broadly states that the value of the gross_estate shall include the value of all property to the extent of the interest therein of - - the decedent at the time of his death sec_2034 through include in the gross_estate several narrowly defined classes of assets among these specific sections is sec_2036 which reads in pertinent part as follows sec_2036 transfers with retained_life_estate a general_rule --the value of the gross_estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer except in case of a bona_fide sale for an adegquate and full consideration in money or money’s worth by trust or otherwise under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death-- the possession or enjoyment of or the right to the income from the property or the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2036 effectively includes in the gross_estate the full fair_market_value at the date of death of all property transferred in which the decedent had retained an interest rather than the value of only the retained_interest 324_us_108 this furthers the legislative policy to include in a decedent’s gross_estate transfers that are essentially testamentary---ie transfers which leave the transferor a significant interest in or control_over the property transferred during his lifetime 395_us_316 thus an asset - - transferred by a decedent while he was alive cannot be excluded from his gross_estate unless he absolutely unequivocally irrevocably and without possible reservations parts with all of his title and all of his possession and all of his enjoyment of the transferred property 335_us_632 application of sec_2036 depends upon practical considerations its effects are not dependent upon ‘various niceties of the art of conveyancing’ id pincite quoting 283_us_231 a whether decedent retained possession enjoyment or the right to the income from the transferred property during his lifetime sec_2036 for purposes of sec_2036 a transferor retains the enjoyment of property if there is an express or implied agreement at the time of the transfer that the transferor will retain the present economic benefits of the property even if the retained right is not legally enforceable see 437_f2d_1148 4th cir 265_f2d_667 3d cir affg 29_tc_1179 114_tc_144 see also sec_20_2036-1 estate_tax regs the existence of such an implied agreement or understanding can be inferred from the facts and circumstances surrounding both the transfer itself and the subsequent use of the property estate of reichardt v commissioner supra estate of spruill v commissioner t c - - 73_tc_82 in this case the circumstances surrounding establishment of the partnerships show that at the time of the transfer there was an implied agreement or understanding that decedent would retain the enjoyment and economic benefit of the property he had transferred before the partnerships were formed betsy sought assurances from the financial advisers that decedent would be able to withdraw assets from the partnerships in order to make cash gifts each year to his’ children grandchildren and great grandchildren in late date after the partnerships were formed george asked the advisers how decedent could get dollar_figure out of the partnerships to give as christmas presents the implied agreement among decedent robert betsy and george that decedent would retain the enjoyment and economic benefit of the transferred property is reflected also by the distributions made by the partnerships to decedent late in and again in both the turner partnership and the thompson partnership made distributions to decedent of dollar_figure so that he could continue his practice of giving substantial gifts at christmastime to his family members the circumstances also demonstrate an understanding that decedent’s interest in the transferred property would last until his death when the partnerships were established decedent parted with almost all of his wealth retaining enough to support himself - - for less than years betsy’s correspondence in early to robert shows that the amount decedent retained was insufficient---- his original holdings had diminished to dollar_figure while his expenses for the prior year totaled dollar_figure betsy informed robert that decedent would need an infusion of funds to cover the balance of decedent’s anticipated expenses she proposed that the turner partnership and the thompson partnership transfer assets of equal value to their father in date the thompson partnership distributed dollar_figure to decedent we are not persuaded otherwise by the insistence of decedent’s estate that decedent always asked betsy and robert in their respective capacity as officers of the corporate general partners of their partnerships for the cash decedent needed to provide christmas gifts the fact that decedent requested those sums does not vitiate the existence of an understanding that he would receive them here decedent’s outright transfer of the vast bulk of his assets to the partnerships would have deprived him of the assets further sec_2036 applies when the decedent has the right either alone or in conjunction with any person to designate the persons who shall possess or enjoy the property or the income therefrom sec_2036 emphasis added the parties have limited their arguments to the application of sec_2036 since we find that decedent retained enjoyment of the property within the meaning of sec_2036 we leave to another day the application of sec_2036 to family limited_partnerships such as those existing in this case -- - needed for his own support thus the transfers from the partnerships to decedent can only be explained if decedent had at least an implied understanding that his children would agree to his requests for money from the assets he contributed to the partnerships and that they would do so for as long as he lived while we acknowledge that as a result of the creation of the partnerships prior to decedent’s death some change ensued in the formal relationship of decedent to the assets he contributed to the partnerships we are satisfied that the practical effect of these changes during decedent’s life was minimal decedent continued to be the principal economic beneficiary of the contributed_property after the partnerships were created based on these facts we conclude that nothing but legal_title changed in the decedent’s relationship to his assets after he transferred them to the partnerships estate of reichardt v commissioner supra pincite any control_over management and distributions by betsy and robert is likewise of little import documents in the record show that the composition of the portfolio changed little prior to decedent’s death we place little weight on averments concerning change during decedent’s life in the partners’ relationships to the contributed_property in 831_f2d_641 6th cir the court explained -- -- the general purpose of the statute was to include ina decedent’s gross_estate transfers that are essentially testamentary----ie transfers which leave the transferor a significant interest in or control_over the property transferred during his lifetime by taxing essentially testamentary transactions sec_2036 prevents circumvention of federal estate_tax by use of schemes which do not significantly alter lifetime beneficial_enjoyment of property supposedly transferred by a decedent the applicability of sec_2036 therefore is not controlled by the various niceties of the art of conveyancing but is instead dependent upon the nature and operative effect of the transfer as such the statute operates to tax transfers of property that are too much akin to testamentary dispositions not to be subjected to the same excise we have applied the aforementioned principles to the creation of family partnerships we have often held that sec_2036 applies to return to the estate the assets of an elderly and wealthy individual who had placed the bulk of his or her assets into a partnership that is controlled by that individual and his family while the individual possessed continued use of the assets so transferred see 114_tc_144 estate of harper v commissioner tcmemo_2002_121 estate of schauerhamer v commissioner tcmemo_1997_242 in light of decedent’s personal situation the fact that the contributed_property constituted the majority of decedent’s assets including nearly all of his investments the establishment of the partnerships is far more consistent with an estate plan than with any sort of arm’s-length joint enterprise between partners in summary we are satisfied that the partnerships were created -- - principally as an alternate vehicle through which decedent would provide for his children at his death estate of schauerhamer v commissioner supra we conclude that decedent retained enjoyment of the contributed_property within the meaning of sec_2036 b whether decedent transferred property to the partnership in a bona_fide sale for full and adequate_consideration sec_2036 does not apply to a transfer that is a bona_fide sale for an adequate_and_full_consideration in money or money’s worth decedent’s estate contends that decedent’s transfer of his assets to the partnerships falls within that exception we disagree we believe that decedent’s transfer of his property to the partnerships does not constitute a bona_fide sale for an adequate_and_full_consideration within the meaning of sec_2036 the exemption under sec_2036 is limited to those transfers where the transferor has received full consideration in a genuine arm’s-length transaction 17_tc_495 the exemption is not allowed where there is only contractual consideration but not adequate_and_full_consideration in money or money’s worth id when a family_partnership is only a vehicle for changing the form in which the decedent held his property--a mere recycling of value --the decedent’s receipt of a partnership_interest in - al --- exchange for his testamentary assets is not full and adequate_consideration within the meaning of sec_2036 in estate of harper v commissioner supra we rejected the taxpayer’s argument that the decedent’s receipt of a partnership_interest in exchange for his trust assets was a bona_fide sale for an adequate_and_full_consideration in money or money’s worth we observe therein that in reality the assets were not invested in a business_enterprise they were only recycled and where a transaction involves only the genre of value recycling and does not appear to be motivated primarily by legitimate business concerns no transfer for consideration within the meaning of sec_2036 has taken place id in estate of harper v commissioner supra we further observed that our interpretation of adequate_consideration for transfers to family partnerships was consistent with and supported by our holdings in other cases including estate of reichardt v commissioner supra and estate of schauerhamer v commissioner supra in contrast to those situations involving alternative testamentary vehicles we have also addressed cases wherein a decedent has transferred his or her assets into a valid functioning business_enterprise in those cases we generally have found that the transfer was made for full and adequate_consideration as such the decedent’s receipt of income from the enterprise will not - -- cause the value of the property he contributed to the enterprise to be returned to his estate see eg estate of harrison v commissioner tcmemo_1987_8 estate of michelson vv commissioner tcmemo_1978_371 in those cases there was no expressed or implied agreement between the partners in the partnerships that the decedents could continue to use possess or enjoy partnership property within the meaning of sec_2036 in the case before us however the transactions were not motivated by the type of legitimate business concerns that furnished adequate_consideration as described in estate of harrison v commissioner supra and estate of michelson v commissioner supra further we have found that in the case before us the partners did in fact have an expressed or implied understanding that decedent could continue to use the assets he transferred to the partnerships a number of factors influence our finding initially we note that none of the individual partners in either of the partnerships was involved in the conduct of an active business additionally it is clear that robert betsy and george did not actually pool their assets with those of decedent to the extent the partnerships could have generated income resulting from their separate activities they arranged matters so that any such income went to them directly and not to the partnerships for example in robert’s case any income from the sale of the mules went to him -- - individually not to the partnership in the case of betsy and george their partnership_agreement was amended in so that george and not the partnership received all income from the sale of timber on the vermont property that prior to the amendment george had contributed to the partnership thus although each of decedent’s children and or their spouses invested in the partnerships they kept their own assets as well as any income those assets may have generated effectively separate from those of decedent they like decedent merely recycled their property through the partnership form moreover although decedent’s stocks and bonds formed the principal assets of both partnerships no substantial change in investment strategy or activity took place from the date decedent transferred the assets to the partnerships to the date of his death in the final analysis neither decedent nor his family conducted the partnerships in a businesslike manner none of the parties involved in the partnerships joined together with the intent to either form business enterprises or otherwise to conduct the practice continued after decedent’s death when betsy and george sold their private residence woodside farm they included the acres of woodlands property adjacent to their home in the same sale after the sale they allocated to the turner partnership an amount of the woodside farm woodlands property sales proceeds that exactly equaled the partnership’s basis in the woodlands property in so doing they effectively eliminated any partnership gain_or_loss from the sale for federal tax purposes - any trade_or_business the partnerships did not engage in transactions with anyone outside the family loans and gifts were made to family members only the lending activities of the partnerships lacked any semblance of legitimate business transactions this exclusivity might be consistent with decedent’s generosity towards his family members but it was inconsistent with any valid business operation ’ in reality these loans continued to be testamentary in nature using decedent’s money as a source of financing for the needs of individual family members not for business purposes in conclusion we find that there was no bona_fide sale for adequate_and_full_consideration consequently we hold that the full date-of-death value of the assets that decedent transferred from his trusts to the thompson and turner partnerships is includable in his gross_estate pursuant to sec_2036 after decedent’s death the turner partnership and thompson partnership continued making loans to family members some of these loans included underwriting phoebe’s dollar_figure loss in the construction of lewisville properties an auto loan of dollar_figure to phoebe since partially repaid and a loan to betsy’s 17-year old grandson to purchase a lobster boat in addition the turner partnership made loans to betsy’s son william to start a rose- growing business and made additional loans for his business despite the ultimate failure of the business venture there is nothing to support that either robert or betsy made partnership investment decisions in their children’s and grandchildren’s ventures with the same careful consideration one would expect to be exercised by a managing partner of a partnership having a valid business_purpose - -- c amount included in decedent’s estate under sec_2036 a we now turn to the issue of which assets are to be included in decedent’s gross_estate bearing in mind that the burden_of_proof is on respondent the assets of the turner partnership and the values of those assets as of date upon contribution to the partnership and date decedent’s date of death were as follows shares value shares value decedent’s contribution municipal_bonds chester co --- dollar_figure --- big_number madison co --- big_number --- big_number pa higher ed --- big_number --- big_number puerto rico --- big_number --- big_number dela state --- big_number --- --- stocks atlantic richfield big_number big_number coca cola big_number big_number big_number big_number gte big_number big_number big_number big_number general electric big_number big_number big_number big_number intercap qual muni inv big_number big_number big_number big_number intercap qual muni inc big_number big_number --- --- ibm big_number big_number johnson johnson big_number big_number merck big_number big_number meridian bankcorp big_number big_number big_number big_number 3m big_number big_number phila elec peco energy big_number big_number petrolite big_number big_number big_number big_number xerox big_number big_number big_number big_number mutual funds john hancock big_number big_number margin loan --- --- --- big_number loans receivable phoebe turner ---t big_number --t william turner --- big_number --- big_number george turner jr decedent’s total betsy george’s contribution cash checking account real_property vermont property woodlands woodside properties betsy’s total big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -- - shares value shares value new assets first national bank account general --- --- --- big_number lewisville --- --- --- big_number real_property lewisville property --- --- --- big_number cash_value life_insurance george --- --- --- big_number betsy ---- ---- ---- big_number total big_number unearned premium-- life_insurance --- --- --- big_number loans receivable william turner iv ---t ---t --t big_number robert lorraine turner --- --- --- dollar_figure bill’s bloom inc ---t ---t --t big_number accrued int div ---- ---- big_number unattributed total big_number total assets big_number big_number the securities totaling dollar_figure were assets transferred to the turner partnership by decedent in addition to those securities new assets that derived from assets transferred by decedent are included in decedent’s taxable_estate under sec_2036 the lewisville property was funded with the margin loan attributable to the securities contributed by decedent none of the real_estate contributed by george to the partnership produced any income at most the dollar_figure in the lewisville properties account could be attributed to the dollar_figure contributed by george on the formation of the partnership the remaining dollar_figure dollar_figure -- dollar_figure of the new assets held by the partnership at decedent’s death must have derived from the assets contributed by decedent we find therefore that assets totaling dollar_figure dollar_figure dollar_figure held by the turner partnership at the date of decedent’s death are included in the taxable_estate under sec_2036 -- - the assets of the thompson partnership and the values of those assets as of date upon contribution to the partnership and date decedent’s date of death were as follows shares value shares value decedent’s contributions municipal_bonds dist columbia ---- dollar_figure --- dollar_figure dover dela wtr swr big_number dover dela wtr swr ---- big_number ---- big_number orlando waste ---- big_number --- --- dela hlth ---- big_number ---- big_number tampa wtr swr --- big_number --- total big_number big_number stocks atlantic richfield big_number big_number coca cola big_number big_number big_number gte big_number big_number big_number big_number general electric big_number big_number big_number big_number intercapital invest big_number big_number big_number big_number intercapital income big_number big_number big_number ibm big_number big_number johnson johnson big_number big_number merck big_number big_number meridian bankcorp big_number big_number big_number big_number 3m big_number big_number phila elec peco energy big_number big_number xerox big_number big_number big_number total big_number mutual funds john hancock freedom big_number big_number loans receivable amy thompson --- big_number --- big_number ted thompson ---- big_number ---- big_number margaret thompson --- --- total big_number big_number decedent’s total robert’s contributions mutual funds equity income european stock intl stock japan fund new american growth new asia science technology high yield intl bond prime reserve-cash total big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -- - shares value shares value ranch in norwood co --t ---t big_number robert’s total big_number big_number new assets cash ---- ---- ---- big_number stock barrick gold ---- ---- big_number fluor corp --- --- big_number glaxo wellcome plc ---- ---- --- big_number mutual funds latin america ---- ---- --- big_number mid-cap growth --- --- --- big_number u s treasury --- --- --- big_number accrued int div ---- ---- ---- big_number total unattributed assets big_number total assets big_number big_number the new assets held by the thompson partnership on the date of decedent’s death could have derived from mutual funds contributed to the partnership by robert we are not persuaded that any of the new assets derived from the assets contributed by decedent we find therefore that assets totaling dollar_figure held by the thompson partnership at the date of decedent’s death are included in the taxable_estate under sec_2036 the record establishes that george and robert retained enjoyment and control_over the property they contributed to the partnership decedent’s interests in the partnerships had no value attributable to the property contributed by george and robert to the partnerships we find therefore that no additional value attributable to the partnerships over the value of the property included in decedent’s estate under sec_2036 is included in decedent’s taxable_estate --- - further decedent’s stock in turner corp and thompson corp had no value apart from the corporations’ interests in the partnerships the value of decedent’s stock in the corporations is included in the value of the assets included in his estate under sec_2036 we find therefore that no additional value attributable to such stock is included in computing decedent’s taxable_estate d adjusted_taxable_gifts decedent’s estate’s estate_tax_return included as part of the gross_estate dollar_figure as adjusted_taxable_gifts pursuant to sec_2001 for lifetime transfers of decedent’s interest in the partnerships respondent’s notice_of_deficiency proposed to increase this amount to dollar_figure neither party addresses the impact of the application of sec_2036 on the value of the prior gifts of partnership interests we have found that pursuant to sec_2036 decedent’s taxable_estate includes the full value as of decedent’s death of assets transferred by him to the partnerships and held by the partnerships at decedent’s death we have also found that decedent’s interests in the partnerships had no value apart from the assets he contributed to the partnerships because betsy and robert maintained control_over the property they transferred to their respective partnerships therefore we hold that in computing the proper estate_tax due it is not appropriate to -- - include a separate value attributable to decedent’s lifetime transfers_of_partnership_interests see estate of harper v commissioner tcmemo_2002_121 be conclusion the value of decedent’s interests in the partnerships as reported on decedent’s estate_tax_return and as determined by respondent in the notice_of_deficiency and the value of the assets that we have found are to be included in the estate under sec_2036 are as follows estate_tax notice of sec return deficiency thompson partnership dollar_figure dollar_figure dollar_figure turner partnership big_number big_number big_number thompson corp big_number big_number turner corp big_number big_number prior taxable_gifts big_number big_number total big_number big_number big_number to reflect the foregoing decision will be entered under rule


significant index no department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division jul et ja tar this letter is in response to your request with respect to the above-referenced defined benefit pension_plan pursuant to revproc_90_49 for the plan_year commencing date revproc_90_49 sets forth the procedure whereby under certain circumstances a disallowance of the deduction of employer contributions to a qualified defined benefit pension_plan may be obtained thereby fulfilling a condition under which such contributions could revert to the employer based upon the information submitted we have determined that contributions amounting to a which were made for the plan_year commencing date may be considered as disallowed to the extent that they are not deductible solely for the purpose of applying revrul_91_4 1991_1_cb_57 therefore the return of contributions not exceeding would not adversely affect the qualified status of the plan provided this reversion occurs no later than one year from the date of this letter however if it is not returned by your tax filing_date including extensions filed for and granted the tax under sec_4972 would apply in granting this approval we are not expressing any opinion as to the accuracy or acceptability of any calculations or other material submitted with your request this ruling is directed only to the taxpayer that requested it sec_6110 of the internal_revenue_code provides that it may not be used or cited by others as precedent when filing form_5500 for the plan_year commencing date a copy of this letter must be attached to the schedule b actuarial information hence a copy of this letter should be provided to the enrolled_actuary servicing the plan we have sent a copy of this letter to the manager ep classification in manager ep compliance unit in ‘ pursuant to a power_of_attorney on file in this office this matter please contact and to your authorized representative if you require further assistance in _ to the sincerely yours donna m prestia manager employee_plans actuarial group


department of the treasury internal_revenue_service p o box irs cincinnati oh number release date uil dear date date employer id number contact person id number contact telephone number form you must file tax years this letter is our final_determination that you don’t qualify for tax-exempt status under sec_501 of the internal_revenue_code the code recently we sent you a proposed adverse determination in response to your application the proposed adverse determination explained the facts law and basis for our conclusion and it gave you days to file a protest because we didn’t receive a protest within the required days the proposed determination is now final you must file federal_income_tax returns for the tax years listed at the top of this letter using the required form also listed at the top of this letter within days of this letter unless you request an extension of time to file we’ll make this final adverse determination_letter and the proposed adverse determination_letter available for public inspection as required under sec_6110 of the code after deleting certain identifying information please read the enclosed notice notice of intention to disclose and review the two attached letters that show our proposed deletions if you disagree with our proposed deletions follow the instructions in the notice on how to notify us if you agree with our deletions you don’t need to take any further action if you have questions about this letter you can contact the person listed at the top of this letter if you have questions about your federal_income_tax status and responsibilities call our customer service number pincite-829-1040 tty for deaf or hard of hearing or customer service for businesses pincite-829-4933 letter rev catalog number 47635z sincerely stephen a martin director exempt_organizations rulings and agreements enclosures notice redacted letter proposed adverse determination under sec_501 other than c redacted letter final adverse determination under sec_501 other than c - no protest letter rev catalog number 47635z department of the treasury internal_revenue_service irs p o box cincinnati oh legend b number c name d location x state y date m dollars amount dear date date employer id number contact person id number contact telephone number contact fax number uil we considered your application_for recognition of exemption from federal_income_tax under internal_revenue_code irc sec_501 we determined that you don’t qualify for exemption under sec_501 this letter explains the reasons for our conclusion please keep it for your records issues do you qualify for exemption under sec_501 of the code no for the reasons stated below facts you were formed as an x nonprofit corporation on y under the x nonprofit corporation act and the x condominium act your articles of incorporation indicate that you are organized for the purpose of operating and managing the condominium and the condominium property for the use and benefit of the owners in part the articles also indicate you are authorized to levy and collect assessments and special_assessments when necessary from the owners for common expenses and limited common expenses and to utilize the proceeds of assessments and special_assessments in the exercise of your powers and duties establish reserves for maintenance improvements replacements working_capital bad_debts obsolescence and other purposes appropriate to your function institute defend or intervene in litigation or administrative proceedings in your name on behalf of yourself or two or more owners on matters affecting the condominium property a w regulate the administration use maintenance repair replacement and modification of the condominium property cause additional improvements to be made to the common elements and limited common elements grant servitudes easements leases licenses and concessions through or over the common elements and limited common elements and impose and receive payments fees or charges for the use rental or operation of the common elements and limited common elements to impose and receive payments fees or charges for the use rental or operation thereof on those to whom the common elements and limited common elements are allocated your bylaws indicate the following e your members shall consist of the owners of the b condominium units in the c development located at d interest of any member and the shares of a member in your funds and assets of as well as membership voting rights cannot be assigned alienated sold transferred mortgaged pledged pawned encumbered or conveyed in any manor except as an appurtenance to their unit membership is automatic when someone purchases a unit all members have automatic voting rights in addition the bylaws state that your directors and officers are required to be condominium_owners in c your officers currently consist of your president vice president and secretary treasurer you are paying your secretary treasurer m dollars per month and the monthly assessment on their unit as your property manager your form_1024 indicates that your activities consist of collecting assessments to provide services to the owners of the units in a two-story building and include paying for the water the security lights the utilities and the trash maintaining the landscaping of the common areas providing for the upkeep of painting the parking lot and roofing providing for the annual termite inspection and or treatment and paying for the insurance for the outside of your structure n w r w you provided a copy of your guidelines for being a good neighbor and homeowner which is given to each homeowner this document explains owners’ responsibilities including guest policies pet policies and restrictions on alternating units you are funded by owner assessments disbursements are for maintenance of common areas finally upon dissolution your assets if any will be divided equally among the b owners law sec_501 of the code provides for the exemption from federal_income_tax of organizations not organized for profit but operated exclusively for the promotion of social welfare further exemption shall not apply to an entity unless no part of the net_earnings of such entity inures to the benefit of any private_shareholder_or_individual letter rev catalog number 47628k sec_1_501_c_4_-1 states a civic_league_or_organization may be exempt as an organization described in sec_501 of the code if it is not organized or operated for profit and it is operated exclusively for the promotion of social welfare sec_1_501_c_4_-1 provides that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community an organization embraced within this section is one that is operated primarily for the purpose of bringing about civic betterments and social improvements in revrul_74_17 1974_1_cb_130 an organization formed by the unit owners of a condominium housing project to provide for the management maintenance and care of the common areas of the project as defined by state statute with membership assessments paid_by the unit owners does not qualify for exemption under sec_501 of the code condominium ownership involves ownership in common by all condominium unit owners of a great many so-called common areas the maintenance and care of which necessarily constitutes the provision of private benefits for the unit owners since the organization's activities are for the private benefit of its members it cannot be said to be operated exclusively for the promotion of social welfare in revrul_74_99 1974_1_cb_131 a homeowners_association to qualify for exemption under sec_501 of the code must serve a community which bears a reasonable recognizable relationship to an area ordinarily identified as governmental it must not conduct activities directed to the exterior maintenance of private residences and the common areas or facilities it owns and maintains must be for the use and enjoyment of the general_public in rancho santa fe association v u s u s t c s d cal the court held that a homeowner’s association representing property owners within an independent community was exempt under sec_501 despite closing certain recreational facilities for use by the general_public it was reasoned even though the association served the community that existed within rancho santa fe and the facilities were only open for use by members the association still served to promote the common good and general welfare of the people of the requisite of the community the court also determined that the rancho santa fe development was an independent community within the meaning of the statute as it was significant in size and self-contained in orientation the court reasoned that rancho santa fe was not the ordinary residential grouping of tract homes but was an independent community separated geographically from the city of san diego of which rancho santa fe was a sub-part in flat top lake ass'n v united_states circuit the court held that a homeowner’s association did not qualify for exemption under sec_501 of the code when it did not benefit a community bearing a recognizable relationship to a governmental_unit and when its common areas or facilities were not for the use and enjoyment of the general_public application of law you are not as described in sec_501 of the code and sec_1_501_c_4_-1 because your activities do not primarily promote civic betterment or social welfare you are primarily operating for the convenience and benefit of your members for example you are collecting assessments from members to pay for insurance utilities water painting and other services in addition your net assets upon dissolution will be letter rev catalog number 47628k divided equally among your members these facts illustrate you are serving the private interests of the member owners not the people of a community moreover you do not meet the provisions of sec_1_501_c_4_-1 because your activities are focused on providing services and amenities to the b member owners and do not primarily promote civic betterment or social welfare you are nearly identical to the organization that was denied exemption in revrul_74_17 like this organization you are a condominium housing project as defined by state statute your owner members benefit from your activities on the common areas through their undivided ownership_interest in the common areas your members pay assessments which are used to provide for the maintenance of common areas like the organization in the revenue_ruling because your activities such as providing landscaping maintaining parking areas are directed for the benefit of members you are not operated primarily for the promotion of social welfare contrary to revrul_74_99 you do not serve a community that resembles an area that could reasonably be identified as governmental because you are a condominium association of b owners in addition your activities such as paying for the water the security lights and maintaining the landscaping of the common areas benefit the b owners like the organization in the court case flat top lake ass'n v united_states you do not serve a community which bears a reasonable recognizable relationship to an area ordinarily identified as governmental rather the persons you serve are the b owners of condominiums furthermore your common areas are not for the use and enjoyment of the general_public therefore you are not primarily operating for the promotion of social welfare conclusion because you operate primarily for the benefit of your members and not for the social welfare or common good of the community in general you do not qualify for exemption under sec_501 of the code if you agree if you agree with our proposed adverse determination you don’t need to do anything if we don’t hear from you within days we’ll issue a final adverse determination_letter that letter will provide information on your income_tax filing_requirements if you don't agree you have a right to protest if you don’t agree with our proposed adverse determination to do so send us a protest within days of the date of this letter you must include your name address employer_identification_number ein and a daytime phone number a statement of the facts law and arguments supporting your position a statement indicating whether you are requesting an appeals_office conference the signature of an officer director trustee or other official who is authorized to sign for the letter rev catalog number 47628k organization or your authorized representative the following declaration for an officer director trustee or other official who is authorized to sign for the organization under penalties of perjury i declare that i have examined this request or this modification to the request including accompanying documents and to the best of my knowledge and belief the request or the modification contains all relevant facts relating to the request and such facts are true correct and complete your representative attorney certified_public_accountant or other individual enrolled to practice_before_the_irs must file a form_2848 power_of_attorney and declaration of representative with us if they haven’t already done so you can find more information about representation in publication practice_before_the_irs and power_of_attorney we’ll review your protest statement and decide if you gave us a basis to reconsider our determination if so we’ll continue to process your case considering the information you provided if you haven’t given us a basis for reconsideration we’ll send your case to the appeals_office and notify you you can find more information in publication how to appeal an irs decision on tax-exempt status if you don’t file a protest within days you can’t seek a declaratory_judgment in court later because the law requires that you use the irc administrative process first sec_7428 where to send your protest send your protest form_2848 if applicable and any supporting documents to the applicable address u s mail street address for delivery service internal_revenue_service eo determinations quality assurance mail stop p o box cincinnati oh internal_revenue_service eo determinations quality assurance main street mail stop cincinnati oh you can also fax your protest and supporting documents to the fax number listed at the top of this letter if you fax your statement please contact the person listed at the top of this letter to confirm that they received it you can get the forms and publications mentioned in this letter by visiting our website at www irs gov forms- pubs or by calling 800-tax-form if you have questions you can contact the person listed at the top of this letter contacting the taxpayer_advocate_service the taxpayer_advocate_service tas is an independent organization within the irs that can help protect your taxpayer rights tas can offer you help if your tax problem is causing a hardship or if you’ve tried but haven’t letter rev catalog number 47628k been able to resolve your problem with the irs if you qualify for tas assistance which is always free tas will do everything possible to help you visit www taxpayeradvocate irs gov or call sincerely stephen a martin director exempt_organizations rulings and agreements catalog number 47628k letter rev