Court Opinion

ID: 4474086
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:45.197733+00
Date Added: 2024-06-11T08:49:09.396906
License: Public Domain

Parr, J., dissenting: The majority, citing Frank Lyon Co. v. United States, 435 U.S. 561, 583-584 (1978), states: “the tax effects of a particular transaction are determined by the substance of the transaction rather than by its form.” Majority op. p. 484. The majority also cites a long line of cases, see Helvering v. Clifford, 309 U.S. 331, 336 (1940); Kuney v. Frank, 308 F.2d 719, 720 (9th Cir. 1962); Frazee v. Commissioner, 98 T.C. 554, 561 (1992); Harwood v. Commissioner, 82 T.C. 239, 258 (1984), affd. without published opinion 786 F.2d 1174 (9th Cir. 1986); Estate of Kelly v. Commissioner, 63 T.C. 321, 325 (1974); Estate of Tiffany v. Commissioner, 47 T.C. 491, 499 (1967), that require the Court to closely scrutinize family partnerships “because the family relationship ‘so readily lends itself to paper arrangements having little or no relationship to reality’”, majority op. p. 484 (quoting Kuney v. Frank, 308 F.2d 719, 720 (9th Cir. 1962)). The majority is “skeptical of the estate’s claims of business purposes related to executor’s and attorney’s fees or potential tort claims”, majority op. p. 485, is not persuaded that SFLP was formed to protect assets from will contests, does not believe that a joint investment vehicle was the purpose of the partnership, found that the formation and control of SFLP were orchestrated by Mr. Gulig without regard to joint enterprise, and found that the management of the assets contributed to sflp was not the purpose of sflp. In this case, the facts clearly demonstrate that the paper arrangement, the written partnership agreement, had no relationship to the reality of decedent’s ownership and control of the assets contributed to the partnership. Although under the partnership agreement a limited partner could not demand a distribution of partnership capital or income, the partnership (1) paid for Stone’s surgery when she injured her back while caring for decedent, (2) distributed $3,187,800 to decedent’s estate for State and Federal estate and inherit-anee taxes, (3) distributed $563,000 in 1995 and 1996 and $102,500 in 1998 to each of the Strangi children, (4) divided its primary Merrill Lynch account into four separate accounts in each of the Strangi children’s names, (5) extended lines of credit to John Strangi, Albert T. Strangi, and Mrs. Gulig, and (6) advanced to decedent’s estate $3.32 million to post bond with the Internal Revenue Service. It is clear that, contrary to the written partnership agreement, decedent and his successor in interest to his partnership interest (decedent’s estate) had the ability to withdraw funds at will. If a hypothetical third party had offered to purchase the assets held by the partnership for the full fair market value of those assets, there is little doubt that decedent could have had the assets distributed to himself to complete the sale. The majority, however, holds that, because the formalities were followed and SFLP was validly formed under State law, the partnership had sufficient substance to be recognized for tax purposes. The majority then values decedent’s partnership interest as if the restrictions in the written partnership agreement were actually binding on the partners. The majority states: “The actual control exercised by Mr. Gulig, combined with the 99-percent limited partnership interest in SFLP and the 47-percent interest in Stranco, suggest the possibility of including the property transferred to the partnership in decedent’s estate under section 2036.” Majority op. p. 486. It seems incongruous that for purposes of section 2036 this Court could look to the actual control decedent exercised over the assets of the partnership, but for purposes of determining the appropriate discounts for valuing decedent’s interest in the partnership this Court is limited to the written partnership agreement. Assuming, arguendo, that the partnership must be recognized for Federal estate tax purposes, I would value the interest under the agreement that existed in fact, rather than under the written partnership agreement that had no relationship to the reality of decedent’s ownership and control of the assets contributed to the partnership. A person who maintains control over the ultimate disposition of property is, in practical effect, in a position similar to the actual owner of the property. See, e.g., Estate of Kurz v. Commissioner, 101 T.C. 44, 50-51, 59-60 (1993), supple-merited by T.C. Memo. 1994r-221, affd. 68 F.3d 1027 (7th Cir. 1995). The Court should not allow a taxpayer who is not in fact limited by an agreement to claim a discount that is premised on that very limitation. A minority discount is allowed because a limited partner cannot cause the partnership to make distributions. Decedent and decedent’s estate in fact caused the partnership to make distributions at will. The minority discount is not appropriate in this case. Additionally, a discount for lack of marketability is allowed because a hypothetical third party would pay less for the partnership interest than for the assets. But in this case, under the actual partnership arrangement, decedent could have had all the assets distributed to himself and then sold them directly to the buyer. The lack of marketability discount, therefore, also is inappropriate in this case. Because the actual partnership arrangement provided for distributions at will, I would value the partnership interest at the value of the partnership’s assets without any discount. For the above reasons, I respectfully dissent. Beghe and Marvel, JJ., agree with this dissenting opinion. Ruwe, J., dissenting: Decedent transferred property to a newly formed partnership in return for a 99-percent limited partnership interest. This was done 2 months before he died, as part of a plan to reduce tax on his estate. The estate presented testimony to support its argument that these actions were taken for business purposes. The trial Judge clearly rejects these arguments and describes the testimony offered by the estate as “mere window dressing to conceal tax motives.” Majority op. p. 485. Tax savings was the only motivating factor for transferring property to the partnership. Nevertheless, the majority validates this scheme by valuing decedent’s 99-percent partnership interest at 31 percent below the value of the property that decedent transferred to the partnership. Respondent argues that if the partnership interest that decedent received is to be valued at 31 percent less than the value of the property that decedent transferred to the partnership, then the difference should be considered a gift. The majority rejects respondent’s gift argument.1  Respondent’s gift tax argument is supported by the applicable statutes, regulations, and controlling opinions. If the value of the property that decedent transferred to the partnership was more than the value of the consideration that he received, and the transfer was not made for bona fide nontax business reasons, then the amount by which the value of the property transferred exceeds the value of the consideration is deemed to be a gift pursuant to section 2512(b). Section 2512(b) provides: SEC. 2512. VALUATION OF GIFTS. (b) Where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. Section 25.2512-8, Gift Tax Regs., provides: § 25.2512-8. Transfers for insufficient consideration. — Transfers reached by the gift tax are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money’s worth of the consideration given therefor. * * * Transactions made in the ordinary course of business are exempt from the above gift tax provisions. Thus, section 25.2512-8, Gift Tax Regs., provides: However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth. * * * The Supreme Court has described previous versions of the gift tax statutes (section 501 imposing the tax on gifts and section 503, which is virtually identical to present section 2512(b)) in the following terms: Sections 501 and 503 are not disparate provisions. Congress directed them to the same purpose, and they should not be separated in application. Had Congress taxed “gifts” simpliciter, it would be appropriate to assume that the term was used in its colloquial sense, and a search for “donative intent” would be indicated. But Congress intended to use the term “gifts” in its broadest and most comprehensive sense. H. Rep. No. 708, 72d Cong., 1st Sess., p.27; S. Rep. No. 665, 72d Cong., 1st Sess., p.39; cf. Smith v. Shaughnessy, 318 U.S. 176; Robinette v. Helvering, 318 U.S. 184. Congress chose not to require an ascertainment of what too often is an elusive state of mind. For purposes of the gift tax it not only dispensed with the test of “donative intent.” It formulated a much more workable external test, that where “property is transferred for less than an adequate and full consideration in money or money’s worth,” the excess in such money value “shall, for the purpose of the tax imposed by this title, be deemed a gift . . .” And Treasury Regulations have emphasized that common law considerations were not embodied in the gift tax. To reinforce the evident desire of Congress to hit all the protean arrangements which the wit of man can devise that are not business transactions within the meaning of ordinary speech, the Treasury Regulations make clear that no genuine business transaction comes within the purport of the gift tax by excluding “a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent).” Treas. Reg. 79 (1936 ed.) Art. 8. Thus on finding that a transfer in the circumstances of a particular case is not made in the ordinary course of business, the transfer becomes subject to the gift tax to the extent that it is not made “for an adequate and full consideration in money or money’s worth.” See 2 Paul, Federal Estate and Gift Taxation (1942) p. 1113. [Commissioner v. Wemyss, 324 U.S. 303, 306 (1945); in. ref. omitted; emphasis added.] In light of what the Supreme Court said, the estate attempted to portray the transfer of property to the partnership as a business transaction. The majority soundly rejects this as a masquerade. Indeed, it is clear that the transfer was made to reduce the value of decedent’s assets for estate tax purposes, while at the same time allowing the full value of decedent’s property to pass to his children. The Supreme Court has described the objective of the gift tax as follows: The section taxing as gifts transfers that are not made for “adequate and full [money] consideration” aims to reach those transfers which are withdrawn from the donor’s estate. * * * [Commissioner v. Wemyss, supra at 307.] Under the applicable gift tax provisions and Supreme Court precedent, it is unnecessary to consider what decedent’s children received on the date of the transfer in order to determine the value of the deemed gift under section 2512(b). Indeed, it is not even necessary to identify the donees. Section 25.2511-2(a), Gift Tax Regs., provides: Sec. 25.2511-2. Cessation of donor’s dominion and control. — (a) The gift tax is not imposed upon the receipt of the property by the donee, nor is it necessarily determined by the measure of enrichment resulting to the donee from the transfer, nor is it conditioned upon ability to identify the donee at the time of the transfer. On the contrary, the tax is a primary and personal liability of the donor, is an excise upon his act of making the transfer, is measured by the value of the property passing from the donor, and attaches regardless of the fact that the identity of the donee may not then be known or ascertainable. In Robinette v. Helvering, 318 U.S. 184 (1943), the taxpayer argued that there could be no gift of a remainder interest where the putative remaindermen (prospective unborn children of the grantor) did not even exist at the time of the transfer. The Supreme Court rejected this argument, stating that the gift tax is a primary and personal liability of the donor measured by the value of the property passing from the donor. This case involves an attempt by a dying man (or his attorney) to transfer property to a partnership in consideration for a 99-percent partnership interest that would be valued at substantially less than the value of the assets transferred to the partnership, while at the same time assuring that 100 percent of the value of the transferred assets would be passed to decedent’s beneficiaries. Assuming, as the majority has found, that decedent’s partnership interest was worth less than the property he transferred,2 section 2512(b) should be applied. Pursuant to that section the excess of the value of the property decedent transferred to the partnership over the value of the consideration he received is “deemed a gift” subject to the gift tax. By failing to apply section 2512(b) in this case, the majority thwarts the purpose of section 2512(b), which the Supreme Court described as “the evident desire of Congress to hit all the protean arrangements which the wit of man can devise that are not business transactions”. Commissioner v. Wemyss, supra at 306. Parr, Beghe, Gale, and Marvel, JJ., agree with this dissenting opinion.   One of the reasons given by the majority for rejecting respondent’s gift argument is “we do not believe that decedent gave up control over the assets”. Majority op. p. 490. This finding is inconsistent with the majority’s allowance of a 31-percent discount. If decedent owned assets worth $9,876,929, transferred legal title to those assets to a partnership in which he had a beneficial interest that exceeded 99 percent, and thereafter retained control over the transferred assets, how could the value of his property rights be 31 percent less after the transfer? Certainly, a hypothetical willing buyer and seller with reasonable knowledge of the relevant facts would be aware that decedent’s property interests included control over the assets. The majority’s analysis fails to adequately explain this apparent anomaly.    The majority’s allowance of a 31-percent discount is in stark contrast to its rejection of respondent’s gift argument on the ground that decedent did not give up control of the assets when he transferred them to the partnership. See majority op. p. 490. While the basis for finding that decedent did not give up control of the assets is not fully explained, it appears not to be based on the literal terms of the partnership agreement which gave control to Stranco, the corporate general partner. Decedent owned only 47 percent of the Stranco stock. Since the majority also rejects respondent’s economic substance argument, the only other conceivable basis for concluding that decedent retained control over the assets that he contributed to the partnership is that the partnership arrangement was a factual sham. If that were the case, the partnership arrangement itself would be “mere window dressing” masking the true facts, and the terms of the partnership arrangement should be disregarded. In an analogous situation the Court of Appeals for the Tenth Circuit disregarded the written terms of a transfer document as fraudulent. See Heyen v. United States, 945 F.2d 359 (10th Cir. 1991).