Court Opinion

ID: 4340258
Source: CourtListenerOpinion
Date Created: 2018-11-14 08:22:58.394951+00
Date Added: 2024-06-11T14:48:34.521806
License: Public Domain

T.C. Memo. 2016-51

                         UNITED STATES TAX COURT

            ESTATE OF SARAH D. HOLLIDAY, DECEASED,
  JOSEPH H. HOLLIDAY, III, AND H. DOUGLAS HOLLIDAY, PERSONAL
            REPRESENTATIVES/EXECUTORS, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent

      Docket No. 8143-13.                           Filed March 17, 2016.

      Winston S. Evans and Joseph Allen Reynolds III, for petitioners.

      Rebecca Dance Harris, for respondent.

            MEMORANDUM FINDINGS OF FACT AND OPINION

      GERBER, Judge: Respondent determined a $785,019 deficiency in the

Federal estate tax of the Estate of Sarah D. Holliday (estate). The issue remaining

for our consideration is whether the value of the assets decedent transferred to Oak

Capital Partners, LP, a limited partnership (Oak Capital), is includible in the value
                                        -2-

[*2] of her gross estate pursuant to section 2036(a).1 If we decide that the value of

the assets is includible, we must then decide the amount of any discount due to the

assets’ being held in the Oak Capital entity.

                               FINDINGS OF FACT

      Decedent was a resident of Tennessee when she died on January 7, 2009, at

the age of 84. Decedent’s two sons, Joseph H. Holliday III (Mr. Holliday) and H.

Douglas Holliday (Dr. Holliday), are the estate’s personal representatives. Dr.

Holliday was a resident of Tennessee and Mr. Holliday was a resident of

Connecticut when the petition was filed.

      Decedent married Joseph H. Holliday, Jr., in 1946. Joseph H. Holliday, Jr.,

owned a heating and air conditioning wholesale business and was involved in real

estate development. The Hollidays were frugal and accumulated substantial assets

by the time of Joseph H. Holliday, Jr.’s death during 1999. Joseph H. Holliday,

Jr.’s will directed that his assets be placed in three trusts. The income from two of

those trusts was payable to decedent on a regular basis, and the principal of all

three could be used for her benefit. Further, at the time of Joseph H. Holliday,

Jr.’s death, decedent had substantial assets of her own.

      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the date of decedent’s death. Rule references are to the
Tax Court Rules of Practice and Procedure.
                                         -3-

[*3] Decedent continued to live in the home she had shared with Joseph H.

Holliday, Jr., until it was decided that it was best she no longer live alone because

she had fallen more than once and had scoliosis. During August 2003 decedent

moved to Richland Place, a nursing home, and granted Dr. Holliday and Mr.

Holliday a power of attorney. Dr. Holliday attended to decedent’s day-to-day

financial needs and Mr. Holliday managed her financial assets using the power of

attorney.

      Decedent executed Oak Capital’s certificate of limited partnership and

limited partnership agreement on November 30, 2006. The limited partnership

agreement describes Oak Capital’s purpose in broad terms. However, one stated

purpose was to provide “a means for members of the Holliday family to acquire

interests in the Partnership business and property, and to ensure that the

Partnership’s business and property is continued by and closely-held by members

of the Holliday family.” Oak Capital’s limited partnership agreement also

provides that limited partners do not have the right or power to participate in Oak

Capital’s business, affairs, or operations.

      Also on November 30, 2006, decedent executed the articles of organization

of OVL Capital Management, LLC, a limited liability company (OVL Capital) and

OVL Capital’s operating agreement. Following OVL Capital’s formation,
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[*4] decedent was the sole member. OVL Capital was created for the primary

purpose of being Oak Capital’s general partner.

      On December 6, 2006, Oak Capital was funded with marketable securities

transferred from decedent’s account. A portion of this contribution was made “on

behalf of” OVL Capital. The gross value of Oak Capital’s assets without discount

or adjustment on December 6, 2006, was $5,919,683.2 This was the only capital

contribution made to Oak Capital. In consideration for her contribution decedent

received a 99.9% interest in Oak Capital as a limited partner, and OVL Capital

received a 0.1% interest as a general partner.

      Subsequently, also on December 6, 2006, decedent assigned her interest in

OVL Capital to Mr. Holliday and Dr. Holliday in exchange for $2,959.84 from

each. The aggregate price paid by Mr. Holliday and Dr. Holliday equaled the

gross value of 0.1% of Oak Capital’s assets on December 6, 2006, without a

discount or other adjustment. Mr. Holliday and Dr. Holliday’s purchase of

decedent’s interest in OVL Capital created the appearance that decedent had no

control over the assets she transferred to Oak Capital.

      2
       The assets were valued at the median of the highest and lowest price at
which the securities publicly traded on December 6, 2006.
                                        -5-

[*5] After decedent’s transfer of her interest in OVL Capital to Mr. Holliday and

Dr. Holliday, on the same day she gave 10% of her limited partnership interest in

Oak Capital to the 2006 Holliday Irrevocable Trust. Decedent executed the 2006

Holliday Irrevocable Trust on November 30, 2006--the same day OVL Capital and

Oak Capital were formed. Following the transfer of 10% of decedent’s interest in

Oak Capital to the 2006 Holliday Irrevocable Trust, decedent held an 89.9%

limited partnership interest in Oak Capital, which she held until her death.

      At all times before decedent’s death, on the day she died, and on the

alternate valuation date, Oak Capital’s assets consisted solely of investment assets,

such as marketable securities, and cash. Decedent held substantial assets that she

did not transfer to Oak Capital. Decedent was not involved in deciding how her

assets would be held. She left this up to Mr. Holliday, Dr. Holliday, and her

attorney. Decedent was not advised that the assets transferred to Oak Capital were

selected because there was concern that someone might take advantage of her.

      In March 2007 Oak Capital made a pro rata distribution of $35,000 to its

partners. This was the only distribution Oak Capital made during decedent’s

lifetime. Section 5 of Oak Capital’s limited partnership agreement, however,

provides, in part: “To the extent that the General Partner determines that the

Partnership has sufficient funds in excess of its current operating needs to make
                                         -6-

[*6] distributions to the Partners, periodic distributions of Distributable Cash shall

be made to the Partners on a regular basis according to their respective Partnership

Interests.”

      Decedent died on January 7, 2009, and July 7, 2009, was selected as the

alternate valuation date for decedent’s estate as allowed by section 2032. The fair

market value of all of the assets owned by Oak Capital, without discount or other

adjustment, on July 7, 2009, was $4,064,759. The value of decedent’s interest in

Oak Capital was reported on Schedule F, Other Miscellaneous Property, of her

estate’s tax return as $2,428,200 as a result of discounts that were applied to her

89.9% limited partnership interest.

      Respondent issued a notice of deficiency determining a $785,019 deficiency

in estate tax. The parties have been able to reach agreement on all of the issues in

the notice of deficiency except for respondent’s determination that the value of the

assets of Oak Capital is includible in the value of decedent’s gross estate.

                                      OPINION

       Estate tax is imposed on the transfer of a decedent’s taxable estate. Sec.

2001(a). The taxable estate consists of the value of the gross estate after

applicable deductions. Sec. 2051. Except to the extent provided in sections 2033

through 2046, the gross estate includes “all property, real or personal, tangible or
                                         -7-

[*7] intangible, wherever situated.” Sec. 2031(a). The value of the gross estate

includes the value of such property, to the extent of the decedent’s interest in it, at

the time of death. Sec. 2033.

      Section 2036 is intended to include in a decedent’s gross estate inter vivos

transfers that were testamentary in nature. United States v. Estate of Grace, 395
U.S. 316, 320 (1969); Estate of Bongard v. Commissioner, 124 T.C. 95, 112

(2005). Accordingly, a decedent’s gross estate includes the value of all property

that the decedent transferred but retained the possession or enjoyment of, or the

right to the income from, for the decedent’s life. Sec. 2036(a). This rule,

however, does not apply in cases where the transfer was a bona fide sale for

adequate and full consideration. Id. Section 2036(a) applies if the following three

conditions are met: (1) the decedent made an inter vivos transfer of property; (2)

the decedent retained an interest or right enumerated in section 2036(a)(1) or (2)

or (b) in the transferred property, which the decedent did not relinquish before her

death; and (3) the decedent’s transfer was not a bona fide sale for adequate and

full consideration. Estate of Bongard v. Commissioner, 124 T.C. 112; Estate of

Jorgensen v. Commissioner, T.C. Memo. 2009-66, aff’d, 432 F. App’x 544 (9th

Cir. 2011). The parties do not dispute that decedent made an inter vivos transfer
                                         -8-

[*8] of property, but controversy remains about whether the second and third

conditions were met.

I. Whether Decedent Retained Possession or Enjoyment of Transferred Property

      “An interest or right is treated as having been retained or reserved if at the

time of the transfer there was an understanding, express or implied, that the

interest or right would later be conferred.” Sec. 20.2036-1(c)(1)(i), Estate Tax

Regs. This principle applies even if the retained right is not legally enforceable.

Estate of Reichardt v. Commissioner, 114 T.C. 144, 151 (2000). In determining

whether an implied agreement exists we consider the facts and circumstances

surrounding the transfer and the property’s use after the transfer. Id.; Estate of

Liljestrand v. Commissioner, T.C. Memo. 2011-259. The taxpayer bears the

burden of proving that an implied agreement or understanding did not exist at the

time of the transfer. See Estate of Skinner v. United States, 316 F.2d 517, 520 (3d

Cir. 1963); Estate of Reichardt v. Commissioner, 114 T.C. 151-152; Estate of

Liljestrand v. Commissioner, T.C. Memo. 2011-259. This burden is “particularly

onerous when intrafamily arrangements are involved.” Estate of Maxwell v.

Commissioner, 98 T.C. 594, 602 (1992), aff’d, 3 F.3d 591 (2d Cir. 1993); Estate

of Rapelje v. Commissioner, 73 T.C. 82, 86 (1979).
                                        -9-

[*9] Decedent transferred securities from her account to an account in Oak

Capital’s name. After the dust settled, following a series of transactions, the

interests in Oak Capital were held as follows: OVL Capital held a 0.1% general

partner interest; decedent held an 89.9% limited partner interest; and the 2006

Holliday Irrevocable Trust held a 10% limited partner interest. Decedent held

only a limited partner interest in Oak Capital, and Oak Capital’s limited

partnership agreement provides that limited partners do not have the right or

power to participate in Oak Capital’s business, affairs, or operations.

      The estate denies the existence of an implied or oral agreement that allowed

decedent to retain control of the assets transferred to Oak Capital. The estate

asserts that after decedent sold her interest in OVL Capital to Mr. Holliday and Dr.

Holliday she did not retain possession or enjoyment of, or the right to income

from, the assets that were transferred to Oak Capital. The estate further contends

that decedent had no right to designate who would possess or enjoy the assets

transferred to Oak Capital or the income from those assets.

      Respondent, however, argues that decedent did retain possession of the

property transferred to Oak Capital and that she retained a right to income from

that property. Respondent asserts that section 5 of Oak Capital’s limited

partnership agreement evidences decedent’s right to income from the assets
                                       - 10 -

[*10] transferred to Oak Capital. Respondent also argues that there was an

implied agreement that decedent could access the income from the assets

transferred to Oak Capital if necessary.

      Section 5 of Oak Capital’s limited partnership agreement provides that “[t]o

the extent that the General Partner determines that the Partnership has sufficient

funds in excess of its current operating needs to make distributions to the Partners,

periodic distributions of Distributable Cash shall be made to the Partners on a

regular basis according to their respective Partnership Interests.” When asked at

trial what he believed the term “operating needs” meant, Mr. Holliday testified:

“[I]t seemed to me when I reviewed this document, when it was signed, that it was

created, that this seemed to come from some sort of boilerplate for Tennessee

limited partnerships, this sort of gave you broad powers to do anything you needed

to do, including make distributions. But that wasn’t necessary. No one needed a

distribution.”

      Section 5 of Oak Capital’s limited partnership agreement unconditionally

provides that decedent was entitled to receive distributions from Oak Capital in

certain circumstances. Further, Mr. Holliday’s testimony makes it clear that had

decedent required a distribution, one would have been made. On the basis of the

facts and circumstances surrounding the transfer of assets to Oak Capital, we
                                       - 11 -

[*11] believe that there was an implied agreement that decedent retained the right

to “the possession or enjoyment of, or the right to the income from, the property”

she transferred to Oak Capital. See sec. 2036(a)(1). Accordingly, the second

condition necessary for section 2036(a) to apply has been met.

II. Whether There Was a Bona Fide Sale for Adequate and Full Consideration

      If decedent’s transfer of the assets to Oak Capital was a bona fide sale for

adequate and full consideration, section 2036(a) does not apply. In the context of

a family limited partnership, the record must establish

      a legitimate and significant nontax reason for creating the family
      limited partnership, and [that] the transferors received partnership
      interests proportionate to the value of the property transferred. The
      objective evidence must indicate that the nontax reason was a
      significant factor that motivated the partnership’s creation. A
      significant purpose must be an actual motivation, not a theoretical
      justification.

Estate of Bongard v. Commissioner, 124 T.C. 118 (citations omitted). Section

2036(a) permits intrafamily transfers, but they are subject to heightened scrutiny.

Estate of Bigelow v. Commissioner, 503 F.3d 955, 969 (9th Cir. 2007), aff’g T.C.

Memo. 2005-65; Kimbell v. United States, 371 F.3d 257, 263 (5th Cir. 2004);

Estate of Jorgensen v. Commissioner, T.C. Memo. 2009-66. We will first address

whether there was a bona fide sale and then, if necessary, we will address whether

there was adequate and full consideration.
                                        - 12 -

[*12] A. Whether the Transfer to Oak Capital Was a Bona Fide Sale

      We must determine whether decedent had a legitimate and significant

nontax reason for creating Oak Capital. The estate argues that three significant

nontax business purposes prompted its creation: first, to protect the assets from

“trial attorney extortion”; second, to protect the assets from the “undue influence

of caregivers”; and third, to preserve the assets for the benefit of decedent’s heirs.

Respondent, however, contends that facts surrounding the creation of Oak Capital

show that there was no significant nontax reason for its creation. Respondent

emphasized that the transfer was not the result of arm’s-length bargaining, that

Oak Capital held only cash and marketable securities, and that the terms of Oak

Capital’s limited partnership agreement were not followed.

             1. Protection From Trial Attorney Extortion

      The estate asserts that Oak Capital was created to protect decedent’s assets

from litigators’ claims. Mr. Holliday contended at trial that “a personal injury

lawyer might try to come after her”, for example, if a roofer fell off of her roof.

Respondent points out that decedent had never been sued and that because she

lived in a nursing home her risk of being vulnerable to trial attorney extortion was

minimal. Respondent asserts that this was a merely theoretical justification.
                                        - 13 -

[*13] We are unconvinced that this was an initial motivation for Oak Capital’s

formation. Decedent had never been sued, and, more importantly, she continued

to hold significant assets that were not transferred to Oak Capital which would

have been equally enticing for a person attempting to extort something from a

wealthy elderly woman. As we have in other cases where a similar purpose was

asserted, we agree with respondent that this was simply a theoretical justification

and was not a legitimate and significant nontax reason for Oak Capital’s

formation. See Estate of Liljestrand v. Commissioner, T.C. Memo. 2011-259, slip

op. at 27 (“The estate simply argued, without much explanation, that holding the

property in trust would jeopardize the real estate, as a creditor of a child could

conceivably bring an action against one of the children and claim partial

ownership of the real estate.”); Estate of Jorgensen v. Commissioner, T.C. Memo.

2009-66, slip op. at 28-29 (despite taxpayers’ argument that “partnerships

protected the family’s assets from creditors”, finding no evidence that decedent

“or any other partner was likely to be liable in contract or tort for any reason” and

concluding that this was “purely a theoretical concern”).

             2. Undue Influence of Caregivers

      The estate also asserts that the assets transferred to Oak Capital were

selected because there was concern decedent would fall victim to the undue
                                         - 14 -

[*14] influence of her caregivers. Respondent argues that there was no evidence

of undue influence by decedent’s caregivers and that because she was living in a

nursing home the risk of such undue influence was minimal.

      At trial Mr. Holliday testified about experiences decedent’s cousin-in-law,

Sally Jones, had had with her caregiver. Mrs. Jones lived in New York City for a

little less than half of the year and in Florida the rest of the time and had no

immediate family other than a grandson who was in college in Colorado. Mrs.

Jones had a caregiver that walked out on her one day and would not agree to return

to work until Mrs. Jones paid her $10,000. Mrs. Jones’ caregiver also convinced

her to hire the caregiver’s family members to assist her, requested that they fly on

a private medical jet when they traveled to Mrs. Jones’ second home in Florida,

and threatened not to accompany Mrs. Jones to Florida unless she purchased a

property further inland that would be safe in the event of a hurricane. Mrs. Jones

left $50,000 to the caregiver in her will.

      Mrs. Jones’ experiences with her caregiver were not the only negative

experiences that the Holliday family had had with caregivers. After Mr. Holliday

and Dr. Holliday’s grandfather passed away, they discovered that the caregiver

had stolen the family’s heirloom silverware. Additionally, one of decedent’s own

caregivers had failed to show up to work but had continued to bill Dr. Holliday.
                                        - 15 -

[*15] The woman was eventually caught when she failed to sign into Richland

Place. Though Mr. Holliday cited these examples as reasons he was afraid

decedent would fall victim to a caregiver’s undue influence, he testified that he did

not discuss this reason for transferring selected assets to Oak Capital with

decedent.

      Although it is possible for the elderly to be wrongfully targeted, the

circumstances of this case do not persuade us that this was a legitimate and

significant nontax reason for decedent’s transfer of assets to Oak Capital. We

cannot accept that experiences with Mrs. Jones’ caregiver were a motivation in

this case for the transfer of selected assets to Oak Capital. Decedent and Mrs.

Jones were not similarly situated. Other than a grandson that lived over 1,000

miles away, Mrs. Jones had no immediate family. Decedent had two adult

children who were both involved in managing her affairs, and Dr. Holliday visited

her at least once a week. Mr. Holliday’s testimony about how his grandfather’s

caregiver and his mother’s caregiver had stolen from their family is also

unconvincing. Theft is distinct from undue influence, and simply changing the

titleholder of assets will not necessarily protect them from theft.

      More importantly, Mr. Holliday testified that he did not discuss with his

mother that she “might be taken advantage of” as a reason for transferring selected
                                           - 16 -

[*16] assets to Oak Capital. Accordingly, there is no evidence that decedent’s

transfer of assets to Oak Capital was motivated by her own concern that she would

become subject to the undue influence of a caregiver. We find that this was a

theoretical justification for the transfer, not a legitimate and significant nontax

reason.

             3. Preservation of Assets

      The final proposed justification for the creation of Oak Capital was to

preserve the transferred assets for the benefit of decedent’s heirs. Oak Capital’s

limited partnership agreement explains Oak Capital’s purpose in extremely broad

terms, but it also states that Oak Capital was “formed for the purposes of

providing a means for members of the Holliday family to acquire interests in the

Partnership business and property, and to ensure that the Partnership’s business

and property is continued by and closely-held by members of the Holliday family.”

Mr. Holliday also testified that decedent wanted to make sure that her assets were

preserved for the benefit of the family.

      On the basis of the facts and circumstances we are unconvinced that the

formation of Oak Capital was for a legitimate and significant nontax reason.

Apparently, other structures were considered but were “quickly dismissed”

because they would have been difficult to manage and use to “do certain things”.
                                         - 17 -

[*17] We find these reasons unconvincing, particularly in the light of the fact that

Joseph H. Holliday, Jr.’s assets were held in trusts and there were no issues with

the management of these assets. Further, decedent was not involved in selecting

the structure used to preserve her assets. Dr. Holliday testified at trial that

decedent was “fine” with whatever he, his brother, and the attorney decided on.

             4. Additional Factors Indicating the Transfer Was Not a Bona Fide
                Sale

      As respondent points out, decedent stood on both sides of the transaction.

She made the only contribution of capital to Oak Capital and held, directly or

indirectly, a 100% interest in the partnership immediately after its formation.

Subsequently, on the same day decedent assigned her interest in OVL Capital to

her sons in exchange for its fair market value. There was no meaningful

negotiation or bargaining associated with the formation of the partnership. In fact,

Dr. Holliday testified that during conversations about forming the partnership

decedent would agree to whatever he, his brother, and their attorney decided to do.

See Estate of Turner v. Commissioner, T.C. Memo. 2011-209; Estate of Jorgensen

v. Commissioner, T.C. Memo. 2009-66; Estate of Harper v. Commissioner, T.C.

Memo. 2002-121. This was not an arm’s-length transaction.
                                       - 18 -

[*18] Oak Capital also failed to maintain books and records other than brokerage

statements and ledgers maintained by Mr. Holliday. The partners did not hold

formal meetings, and no minutes were kept. See Estate of Jorgensen v.

Commissioner, T.C. Memo. 2009-66. As discussed above, despite the provisions

of section 5 of Oak Capital’s limited partnership agreement, Oak Capital made

only one distribution before decedent’s death. This was not the only portion of

Oak Capital’s limited partnership agreement that was ignored. Section 9 of Oak

Capital’s limited partnership agreement provides that “[e]xcept as otherwise

provided in this Agreement or a separate written document executed by all of the

Partners, the General Partner, or any one (1) of them shall receive reasonable

compensation for managing the affairs of the Partnership.” A separate written

document was not introduced as evidence or discussed at trial, and no payments

were ever made to OVL Capital.

      Taking all of the facts and circumstances surrounding Oak Capital’s

formation into account, we find that decedent did not have a legitimate and

significant nontax reason for transferring assets to Oak Capital. We also observe

that Oak Capital held marketable securities that were not actively managed and

were traded only on limited occasions. See Estate of Thompson v. Commissioner,

382 F.3d 367, 380 (3d Cir. 2004), aff’g T.C. Memo. 2002-246; Estate of Jorgensen
                                         - 19 -

[*19] v. Commissioner, T.C. Memo. 2009-66. Despite the purported nontax

reasons for Oak Capital’s formation, on the record before the Court, the estate has

failed to show that there were significant legitimate reasons.

      Because we have found and hold that there was not a bona fide sale, there

remains no reason to address whether decedent received adequate compensation.

      On the basis of the foregoing, we hold that the value of the assets decedent

transferred to Oak Capital should be included in the value of decedent’s gross

estate pursuant to section 2036(a)(1). In reaching this conclusion, we have

considered the parties’ remaining arguments, and to the extent not discussed

above, conclude those arguments are irrelevant, moot, or without merit. Because

we have held that the value of the assets is includible in the value of the gross

estate, there is no need to consider or decide the amount of any discount

attributable to the limited partnership interest.

      To reflect the foregoing and to account for agreements of the parties,

                                                  Decision will be entered

                                        under Rule 155.