Opinion ID: 3013839
Heading Depth: 2
Heading Rank: 3

Heading: calculated these values by applying a 40%

Text: 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