Court Opinion

ID: 9576056
Source: CourtListenerOpinion
Date Created: 2023-08-21 21:20:15.422354+00
Date Added: 2024-06-11T12:56:06.375350
License: Public Domain

MR. JUSTICES BOTTOMLY and ADAIR:
We dissent:
Henry Keating died on the 12th day of November, 1952, at Columbus, Stillwater County, Montana, where all of his estate and property was located. Less than one year prior to his death, Henry Keating gave by an inter vivos transfer an undivided one-seventh interest in certain real and personal property to his wife, and a like interest to each of his five children. He retained a one-seventh interest for himself. The value of the transferred interests was $210,004.41. When the petition for determination of inheritance tax was filed during the probate of Henry Keating’s estate, the value of these gifts was not included. The State Board of Equalization objected to such omission and pursuant to their objections a hearing was had to determine whether such gifts were taxable by the inheritance tax laws of the State of Montana. The Board of Equalization asserted that the value of the gifts should be included for inheritance tax purposes under the provisions of section 91-4402, R.C.M. 1947, which provides:
“When the transfer is of property made by a resident or by a nonresident when such nonresident’s property is within the state, or within its jurisdiction, by deed, grant, bargain, sale or gift, made in contemplation of the death of the grantor, vendor, or donor, or intended to take effect in possession or enjoyment at or after such death. Every transfer by deed, grant, bargain, sale or gift, made within three (3) years prior to the death of the grantor, vendor or donor,, of a material part of his estate, or in the nature of a final disposition or distribution thereof, and without a fair consideration in money or money’s worth shall, unless shown to the contrary be deemed *378to have been made in contemplation of death ivithin the meaning of this section.” Emphasis supplied.
The Board contended that the applicable part of the statute-in this case was the latter provision wherein gifts made within three years of the death of a decedent are deemed made in contemplation of death unless it is shown to the contrary that the transfer was not in fact made in contemplation of death. The statute imposes the burden of proof upon the estate to make-such a showing, where as here, the transfers were made within-, three years of the death of the decedent.
Relying upon the presumption that the transfers in question were in contemplation of death the State offered no other evidence. To make a showing that the transfers were not in contemplation of death the estate introduced testimony. The lower-court after hearing the testimony held that the evidence introduced by the estate successfully rebutted the Board’s presumption that the gifts were in contemplation of death and that since-it had been shown that the gifts were not made in contemplation of death, the value of the transferred property was not subject to tax. The Board appealed from this decision. The question for determination on appeal is whether the evidence offered, by the estate sustains the contentions of the estate.
In our opinion the evidence offered fails to sustain the estate’s, contention, is insufficient to overcome the presumption of the-statute, and actually affirmatively proves that the gifts were in the nature of a final testamentary distribution and therefore-subject to inheritance tax.
In any contemplation of death case the question as to whether transfers were for motives associated with death is always one of .fact.
The estate asserts that the evidence produced at the hearing-to determine inheritance tax proved that the compelling motives for the transfers are as follows: (1) To reduce income taxes; (2) To invest his wife and children with property and income which could be used at once and during his lifetime; (3) To divest himself of responsibility of management of the business, *379retain a share in the business and its income and give him time for leisure and travel.
(1) The reduction of Income Taxes. This motive of itself is generally held to be a legitimate motive if it is established that this is the dominant reason for the gift. The estate asserts that the decedent created a family partnership for the express purpose of dividing the income from the ranch among himself, his wife, and each of his five children. Thus the first thing necessary to prove was the establishment of the family partnership as a legal entity. Admittedly the decedent on December 10, 1951, divided certain real and personal property of which he was the sole owner into seven undivided shares. Admittedly the recipients of the six shares formerly owned by the decedent paid no consideration for the share received and thus were the donees of a gift. The seven owners were tenants in common as a result of the transfer of December 10,1951. Did this make them partners? No articles of partnership were introduced! No partnership income tax returns were introduced! R.C.M. 1947, section 63-107, subsection (2) provides:
“(2) Joint tenancy, tenancy in common, tenancy by the entireties,, joint property, common property, or part ownership does not of itself establish a partnership, whether such co-owners do or do not share any profits made by the use of the property. ’ ’
The creation of the tenancy in common and the gift of themselves do not prove the creation of the partnership.
The court in Porter v. Moore, 130 Mont. 259, 265, 300 Pac. (2d) 513, 517, quoting Gaspar v. Buckingham, 116 Mont. 236, 153 Pac. (2d) 892, held: “However the existence of a partnership depends upon the intention of the parties which must he ascertained from all the facts amd circumstances and the actions and conduct óf the parties.” Emphasis supplied. And see also Denton v. Salveson, 132 Mont. 431, 317 Pac. (2d) 1085.
Due proof of the creation of the partnership must show more than a creation of a, tenancy in common, it must affirmatively show the intention of all concerned to join together to form a *380partnership. If the intention to form a partnership can be shown, it-is not generally necessary that the partnership agreement be in writing. But the purported partnership sought to-be shown here was a special type of partnership.
It is here contended by the estate that the purported family partnership was created under the provisions of the Revenue Act of 1951, 26 U.S.C.A. sections 191, 3797. It is asserted that the passage of the Revenue Act of 3951 opened the way for creation by the Keating family of a valid family partnership implying of course that a valid partnership could not have been created prior to that time by this family. The Revenue Act of 1951 did not simply make all family partnerships valid, it set out certain rules which if followed would create a valid family-partnership. The rules apply only where capital is a material income producing factor. But where, as here, a gift is present it is also required that an allocation of income be made as between the partners. That is, the Act requires that the partnership income be allocated in accordance with capital ownership and services performed. The donor must be compensated for the services he performs and then the residue is to be divided among the partners in proportions to their capital accounts. This allocation must be set up in order to comply with the Federal Revenue Act of 1951.
While under state law, if the donor and donees had proved their intent to enter into a partnership, a valid partnership could have been created. Yet such a partnership prior to 1951 would not necessarily have been valid for income splitting purposes under the Internal Revenue Code. The case law relating to family partnerships for Federal Income tax purposes prior to 1951 was in a state of uncertainty. The Supreme Court of the United States in 1946 in the cases of Commissioner of Internal Revenue v. Tower, 327 U. S. 280, 66 S. Ct. 532, 90 L. Ed. 670, and Lusthaus v. Commissioner, 327 U. S. 293, 66 S. Ct. 539, 90 L. Ed. 679, had set out certain criteria which had to be met to control the validity of family partnerships.
It was generally believed these were the sole criteria which *381must be met before a valid family partnership could be created. Yet in 1949 the Supreme Court held in Commissioner of Internal Revenue v. Culbertson, 337 U. S. 733, 69 S. Ct. 1210, 1214, 93 L. Ed. 1659, that the criteria of the Tower and Lusthaus cases, supra, were merely circumstances to be taken into consideration and that the crux of the question as to validity of the family partnership was whether considering all the facts “the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise. ’1 This rule however was so broad that it did little to bring order to the law. For that reason specific legislation was enacted in the Revenue Act of 1951.
It is apparent then, that to prove a partnership was created to save income tax that, compliance with the Federal Revenue Act be shown in addition to showing the intention of all parties to the partnership. The actual formation of the partnership, including in this case the allocation of income to the donor must be proved. Yet not one bit of evidence was introduced to prove that the Revenue Act of 1951 had been complied xvith in order to show a valid family partnership for income tax purposes had been created, because in this situation to show the allocation it becomes essential to have a written instrument. The validity of the partnership depends upon compliance with the Act. Yet no written instrument was introduced. To prove the existence of the partnership, the intention to create a partnership must exist. On this point two of the purported partners testified. The widow, whose gift saved no income taxes, testified that the decedent decided to make a transfer in 1951 after reading about the Federal Revenue Act provisions. The decedent and his wife, and only the decedent and his wife, then consulted an attorney who drew the instrument transferring the property to the widow and five children. This transfer is all that was accomplished. In the widow’s own words what was done was this: “We went in and talked about giving it — we swore them all to secrecy. We wanted it to be Christmas presents for the children. We did not want them to know what we were doing until *382the papers were all signed.” Those sworn to secrecy ivere the attorneys. Ted Keating, the son of decedent, testified: “Q. Was the formation of a family partnership ever discussed with you prior to December 10, 1951 f A. I do not think a partnership ever was. He was considering incorporation up to that time. It may have been discussed, hut I do not know.”
He further testified: “Q. Did you ever have discussions with him about these particular gifts, which are the subject of this hearing today, and about the formation of a family partnership? A. No, I do not think I ever did.”
From these purported partners’ own testimony, it is evident that the children were not informed of the alleged partnership on December 10, 1951. Without their intention to join the partnership none was created. There is no evidence at all that a partnership was formed after that date. Tou cannot form a partnership 'with a person who is not informed that he is to he a partner since he cannot have an intent to join a partnership when he does not know it exists. The estate failed to prove the formation of a partnership and in fact conclusively proved that no such partnership was formed on December 10, 1951, or on any other date. If the gift .was delivered on December 10, 1951, or at all, all that was accomplished was the transfer of property. The motives of the decedent must he proved hy what he did, not hy what you say he did. Although he made a gift of his property, there is no proof he formed a partnership with the intention to save income taxes or for any other purpose, as there is no proof he ever formed a partnership at all.
(2) Investment of wife and children with property during lifetime. The proof of this motive by the decedent rests again upon proof of the creation of a valid family partnership. Failing to prove such was created fails to prove the motive existed. In addition any predisposition of property will give ownership of such property to the donee but ownership during the decedent’s lifetime does not therefore mean the gift was not a substitute for a testamentary disposition. There is some contention that these gifts were part of a gift program of giving *383to the children. Ted Keating, the decedent’s son, who worked on the ranch testified as to these bonuses: “We got a bonus for working there that our sisters did not get.” Listed as an asset of the estate is a note from a married daughter, Mrs. Francion Paris, in the amount of $3,000 made in September 1952. This loan made after the purported partnership was supposed to be formed is inconsistent with the theory that Mrs. Paris owned a one-seventh interest in the income from the ranch or that she was regularly the recipient of a bonus.
To divest himself of responsibility of management of the  business, retain a share in the business and its income and give him time for leisure and travel. For the five years previous to the gifts Henry Keating had had his son and his son-in-law actually living at the ranch, working there.
The widow testified that ‘ ‘ He [Henry Keating] managed the ranch, he called himself the manager and the boys the foremen.” There was no change in this situation after the gifts. He had already transferred some authority to these boys and the gift did not further accomplish a transfer of authority. If the gift was to give the son more authority why was the son-in-law omitted? He had worked for over nine years on the ranch, yet no mention was made of him in the purported partnership, nor in the transfer of authority. Henry Keating was not freed of responsibility by the gift, this had been accomplished prior to this time without the gift. The gift did not give- him an interest in the business, he had that at all times before. The gift did not suddenly allow him time for leisure and travel. As to his conduct before the gift, Mrs. Keating testified:
“Q. Tell us what kind of trips you took in the years immediately preceding 1951. A. We went to Europe. We visited fourteen countries in Europe. We went to Mexico City. We went to Cuba and we went to Alaska. We went up the Alaskan highway. We were in Hawaii, we did quite a bit of traveling for several years.”
The estate did not prove that such motives were the dominant *384motives for the transfers. What Henry Keating did was to transfer in his old age, a major portion of his estate to the natural objects of his bounty for the following reasons as testified to by the widow: “Did you have any other reason for making the gifts? A. Because we wanted the children to have the place. The only other reason I can think of was we did not want to give one one parcel and another another parcel, because we thought they might get hard up and one would want to sell their part and break up the ranch. We built up a good ranch and thought it better to keep' it that way and give the children the whole thing rather than some of them a part of it.”
This whole scheme was nothing more than a substitute for a testamentary disposition. The estate has failed to prove that “life” motives inspired the gift. We would reverse the district court and hold that the value of the gifts is subject to inheritance tax. In the event the majority opinion prevails, this inheritance tax law, sections 91-4401 to 91-4450, R.C.M. 1947, is, for all intents and purposes for which it was enacted by our legislature, worthless. In the event the legislature desires £o plug some of the tax loopholes, here is an ideal opportunity.