Opinion ID: 3013839
Heading Depth: 1
Heading Rank: 1

Heading: the preservation of assets, (3) reducing

Text: income taxes by having the corporate In the early 1990s, decedent general partner provide medical, Theodore R. Thompson, along with his retirement, and ‘income splitting’ benefits son Robert Thompson and daughter Betsy for family members, and (4) facilitating Turner, began to investigate estate plans family and charitable giving.” Thompson, for managing his assets.1 In April 1993, 84 T.C.M. at 376. The advisor also stated they implemented the Fortress Plan,2 an that, “[a]ll of the benefits above can be estate plan offered by the Fortress achieved while total control of all assets is Financial Group, Inc. that utilized family retained by the directors of the Corporate limited partnerships to protect family General Partner.” Id. Pursuant to the plan, assets. A financial advisor to decedent’s decedent and his family formed two family stated the primary advantages of the limited partnerships and two corporations Fortress Plan included: “(1) lowering the to serve as general partners. taxable value of the estate, (2) maximizing
1 On April 21, 1993, decedent, his In 1979, decedent executed a will, daughter Betsy and her husband George subsequently amended by four codicils, Turner formed the Turner Partnership and which provided specific gifts to Robert Turner Corporation. Decedent contributed Thompson, Betsy Turner, and decedent’s $1,286,000 in securities, along with notes grandchildren and great-grandchildren. receivable from Betsy Turner’s children The residue of decedent’s estate went to a totaling $125,000, in exchange for a 95.4% revocable trust, established on January 16, limited partnership interest in the Turner 1969. Decedent amended the trust on Partnership. George Turner contributed March 17, 1993, to create a new revocable $1,000 in cash and real property in the trust funded with the assets of the 1969 state of Vermont valued at $49,000 in trust, which then totaled approximately exchange for a 3.54% limited partnership $1.5 million. interest. Turner Corporation, the sole 2 general partner, held the remaining 1.06% The Tax Court previously examined interest. 3 Shares in Turner Corporation inter vivos transfers to family limited were issued to decedent (490 shares or partnerships created under the “Fortress 49%), Betsy Turner (245 shares or 24.5%), P l a n ” i n Esta te of S trang i v . Commissioner, T.C. Memo 2003-145; 2003 Tax Ct. Memo LEXIS 144; 85 3 T.C.M. (CCH) 1331 (2003). In that case, Turner Corporation did not pay for its the Tax Court applied § 2036 to return to partnership interest directly, but rather decedent’s gross estate the value of issued decedent a non-interest bearing property transferred to a family limited promissory note in the amount of $15,000 partnership pursuant to the Fortress Plan. for its 1.06% interest. 2 George Turner (245 shares or 24.5%), and expectancy of 4.1 years. Theodore R. National Foundation, Inc. (20 shares or Thompson died on May 15, 1995. 2%), an unrelated tax-exempt entity.
Decedent, Betsy and George Turner served as directors and officers of Turner 1. Corporation. The Turner Partnership assets Decedent and his son Robert consisted primarily of marketable Thompson formed the Thom pson securities contributed by decedent, which Partnership on April 30, 1993, and the the partnership continued to hold in Thompson Corporation on April 21, 1993. decedent’s brokerage account with Decedent contributed $1,118,500 in minimal post-transfer trading. After securities, along with notes receivable formation, however, individual partners totaling $293,000, in exchange for a contributed additional assets to the Turner 62.27% limited partnership interest. Partnership. In December 1994, Betsy and Robert Thompson contributed mutual George Turner contributed a 22-acre funds worth $372,000, and a ranch parcel of land adjacent to their private property in Norwood, Colorado, appraised residence, known as the Woodlands at $460,000, in exchange for a 36.72% Property. Betsy and George Turner also limited partnership interest. Thompson assigned to the Turner Partnership their Corporation, as general partner, held the interests in a real estate partnership, known remaining 1.01% interest. Decedent and as Woodside Properties, which held six Robert Thompson each held 490 shares apartment units. Phoebe and Betsy Turner (49%) of Thompson Corporation. Robert retained title to the underlying real estate H. Thompson, an unrelated third party, assets after transfer. held the remaining 2% interest. Robert The Turner Partnership engaged in Thompson, Robert H. Thompson and several business transactions, although decedent served as officers and directors none produced economic gains for the of Thompson Corporation. partnership. The structure of the Turner As of July 1993, decedent, then age Partnership facilitated this result. The ninety-five, had transferred $2.8 million in partners amended the Turner Partnership assets— $2.5 million in the form of agreement in 1994, retroactively effective marketable securities—to the Turner and to April 23, 1993, to allocate all gains and Thompson Partnerships. Decedent losses from, and distribution of, real estate retained $153,000 in personal assets, and contributed to the partnership to the received an annual income of $14,000 individual contributing partners. As a from two annuities and Social Security. At result, income from the sale of timber from the time of transfer, decedent had annual the Vermont property went directly to the expenses of $57,202, and an actuarial life contributing partner, George Turner, and not to the partnership as a whole. 3 Likewise, when Betsy and George Turner 2. sold the Woodlands Property along with Like the Turner Partnership, most their residence for $550,000, the Turner of the Thompson Partnership assets Partnership received $12,351 of the consisted of m arketa ble sec urities proceeds, an amount equal to its basis 4 in contributed by decedent and Robert the property. Thompson. Here again, post-transfer In 1993, the Turner Partnership trading in the securities was low. The only invested $186,000 in a modular home other operational activities of the construction project brokered by Phoebe Thompson Partnership related to the Turner known as the Lewisville Properties. Norwood, Colorado ranch contributed by The property was sold in 1995 for a loss of Robert Thompson. Robert previously used $60,000. Phoebe Turner received a $9,120 the ranch as his primary residence, and commission on the transaction. continued to do so after transfer paying an annual rent of $12,000. Likewise, Robert The Turner Partnership also made Thompson continued to raise mules on the loans to members of the Turner family. property and directly received income Although the partnership formally charged from the sale of mules. The record does family members interest on these loans, not demonstrate any other business or interest payments were often late or not commercial activities on the Norwood paid at all, and loans were frequently ranch. Nevertheless, for the years 1993 reamortized. But the partnership never through 1995, the Thompson Partnership pursued enforcement action against any of paid the Thompson Corporation an annual its debtors nor made loans to anyone management fee for the Norwood ranch in outside the Turner family. the amounts of $23,625, $45,000, and $47,500, respectively. Thompson Corporation in turn paid Robert Thompson an annual salary of $32,001, and Karen Thompson, Robert’s wife, a monthly 4 See Black’s Law Dictionary 145 (7th salary of $350. Thompson Corporation ed. 1999) (defining “basis” as the “value also carried insurance on Robert and assigned to a taxpayer’s investment in Karen Thompson, and paid various property and used primarily for computing personal expenses. The Thompson gain or loss from a transfer of the Partnership claimed losses from the property”); Eitan A. Avneyon, Dictionary operation of the ranch on its tax returns for of Finance 53 (1987) (defining “basis” as the years 1993 through 1996. “the cost of an asset, or the asset’s value 3. (in the case of an asset obtained by some means other than purchase) used to In addition to the foregoing calculate depreciation, profits and capital activities, both the Turner and Thompson gains.”). 4 Partnerships made distributions of cash and $350,000 in securities to partially fund and partnership interests to decedent bequests in decedent’s will and pay during his lifetime. In 1993, the Turner decedent’s estate taxes. and Thompson Partnerships made cash Decedent’s executors filed a federal distributions of $40,000 each to decedent estate tax return, Form 706, with the which he used to provide holiday gifts to Internal Revenue Service on February 21, family members. Again in 1995, the 1996, and filed a supplemental return on Thompson and Turner Partnerships made December 10, 1996. The estate reported cash distributions to decedent of $45,500 decedent held a 87.65% interest in the and $45,220 respectively. During the Turner Partnership and a 54.12% interest same time period, decedent made gifts of in the Thompson Partnership valued at interests in both partnerships to individual $875,811 and $837,691 respectively. The family members. In March 1995, the estate reported decedent held 490 shares of Thompson Partnership distributed $12,500 Turner Corporation stock and 490 shares to decedent to pay for certain personal of Thompson Corporation stock valued at expenses.5 All of these distributions were $5,190 and $7,888 respectively. The estate reflected on decedent’s Schedule K-1 and also reported prior adjusted taxable gifts of recorded as reductions in his partnership $19,324 related to decedent’s lifetime gifts capital accounts. of partnership interests. The estate
discount rate to the net asset value of the As noted, decedent died testate on partnerships and corporations for lack of May 15, 1995, at age ninety-seven. At the control and marketability. time of his death, decedent held approximately $89,000 in liquid assets, a In January 1999, the IRS issued a promissory note in principal amount of notice of deficiency in the amount of approximately $9,000, a majority interest $707,054, adjusting decedent’s taxable in the Turner and Thompson Partnerships, estate from $1,761,219 to $3,203,506. The and shares in their respective corporate most significant adjustment involved the general partners. On or about May 27, reported value of decedent’s interests in 1995, the Turner and Th ompson the family limited partnerships.6 The Partnerships respectively sold $347,000 Commissioner explained the “20 percent 5 6 The Tax Court found that prior to this The Commissioner also increased the distribution, Betsy Turner wrote a letter to taxable estate by $4,993 for adjustments to Robert Thompson detailing decedent’s decedent’s reported interest in Thompson 1994 expenses of $57,202.40 and stating Corporation and Turner Corporation, and d e c e d e n t n e e d e d a n “ i n f u si o n .” increased the reported taxable gifts from Thompson, 84 T.C.M . at 380. $19,324 to $166,167. 5 minority discount and the 20 percent II. marketability discount has been disallowed The Tax Court found the family on each of the [Turner and Thompson] partnerships were validly formed and partnership s.” As a result, the properly recognized for federal estate tax Commissioner increased the value of purposes.8 The court nevertheless decede nt’s interest in the Turner sustained application of § 2036(a)(1)9 to Partnership from $875,811 to $1,717,977, and increased the value of his interest in the Thompson Partnership from $837,691 8 The Tax Court concluded the to $1,396,152. These adjustments Commissioner had the burden of proof on increased decedent’s taxable estate by whether the partnerships were validly $1,400,627.7 formed for tax purposes, and whether the In its amended answer to the transferred assets should be returned to the estate’s petition for redetermination in the estate under § 2036 because those Tax Court, the Commissioner asserted the arguments were not presented in the notice family partnerships and corporations of deficiency. See Wayne Bolt & Nut Co. should be disregarded for tax purposes, v. Comm’r, 93 T.C.M. 500, 507 (1989) and therefore decedent’s gross estate (when a new theory on which the should include the undiscounted value of Commissioner relies is not stated or his pro-rata share of the underlying assets. described in the notice of deficiency, the In the alternative, the Commissioner Commissioner bears the burden of proof contended the full fair market value of the on that issue). assets transferred by the decedent to the 9 Section 2036(a) provides, in part: Turner and Thompson Partnerships should be returned to decedent’s gross estate Transfers with retained life estate. under § 2036(a) of the Internal Revenue (a) General Rule. The value of the Code because decedent retained control gross estate shall include the value and enjoyment over the transferred assets of all property to the extent of any during his lifetime. interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for an adequate and full consideration in money or 7 Form 3228 of the statutory notice of money’s worth), by trust or deficiency reflected an adjustment of otherwise, under which he has $1,406,933 to the gross estate. The retained for his life or for any additional adjustment resulted from the period not ascertainable without inclusion of Delaware state tax refunds for reference to his death or for any the years 1994 and 1995 in the amounts of period which does not in fact end $1,459 and $4,847. before his death– 6 return decedent’s transferred assets back to that the contributed property the estate. The Tax Court found an constituted the majority of implied agreement existed at the time of decedent’s assets, including transfer that decedent would retain lifetime nearly all of his investments, enjoyment and economic benefit of the the establishment of the transferred assets. In support of this partnerships is far more finding, the court noted both Betsy and consistent with an estate George Turner sought assurances from plan than with any sort of financial advisors that decedent would be arm’s-length joint enterprise able to withdraw assets from the between partners. In partnerships to make gifts to family summary, we are satisfied members, and that the partnerships in fact that the partnerships were made such distributions to decedent. The created principally as an court further noted decedent “parted with alternate vehicle through almost all of his wealth” and found this wh ich decedent would “outright transfer of the vast bulk of provide for his children at [decedent’s] assets . . . can only be his death. explained if decedent had at least an Id. implied understanding that his children would agree to his requests for money The court also determined the from the assets he contributed to the transfer was not exempt from § 2036(a) as partnerships, and that they would do so for a “bona fide sale for adequate and full as long as he lived.” Thompson, 84 consideration.” The Tax Court explained T.C.M. at 386-87. While acknowledging that “[w]hen a family partnership is only a the transfers altered the “formal vehicle for changing the form in which the relationship” between decedent and his decedent held his property—a mere assets, the court concluded, as a practical ‘recycling of value’— the decedent’s matter, that “nothing but legal title receipt of a partnership interest in changed.” Id. at 387. The court exchange for his testamentary assets is not summarized: full and adequate consideration within the meaning of section 2036.” Id. at 388. The In light of decedent’s Tax Court found neither partnership personal situation, the fact conducted a legitimate business enterprise, and the individual partners did not pool their assets in the partnerships. (1) the possession or Furthermore, the court found neither enjoyment of, or the right to partne rship e nga ge d in busin e ss the income from , the transactions with anyone outside the property . . . family, and the partnership loans to family members were “testamentary in nature.” 26 U.S.C. § 2036(a). 7 Id. at 389. As a result, the court concluded valued at $166,167. As a result of these there was no transfer for “adequate and adjustments, the Tax Court reduced the full consideration” within the meaning of Commissioner’s notice of deficiency from § 2036(a). $3,335,177 to $2,939,836.11 Accordingly, the Tax Court applied The estate filed a timely notice of § 2036(a)(1) to return to the gross estate appeal.12 the date of death value of decedent’s