Court Opinion

ID: 28447
Source: CourtListenerOpinion
Date Created: 2010-04-25 09:23:51+00
Date Added: 2024-06-11T14:55:33.556807
License: Public Domain

REVISED AUGUST 20, 2002

                   IN THE UNITED STATES COURT OF APPEALS
                           FOR THE FIFTH CIRCUIT

                            __________________________

                                   No. 01-60538
                            __________________________

ROSALIE GULIG, Independent Executrix, on behalf of
               the Estate of Albert Strangi, Deceased,
                                             Petitioner-Appellee,

versus

COMMISSIONER OF INTERNAL REVENUE,
                                                         Respondent-Appellant.

          __________________________________________________

                        Appeal from a Decision of
                       the United States Tax Court
          ___________________________________________________
                              June 17, 2002

Before DUHÉ, DeMOSS, and CLEMENT, Circuit Judges.

CLEMENT, Circuit Judge:

                            I. FACTS AND PROCEEDINGS

      In August 1994, Michael Gulig, as decedent Albert Strangi’s

attorney    in     fact,1    formed   Strangi   Family    Limited   Partnership

(“SFLP”)     and    its     corporate   general    partner,    Stranco,    Inc.

(“Stranco”), under Texas law.             Strangi purchased 47 percent of

      1
On July 19, 1988, decedent executed a power of attorney, naming Michael Gulig his
attorney in fact. Michael Gulig is petitioner’s husband and decedent’s son-in-
law.

                                         1
Stranco for $49,350 and his four children purchased the remaining

53 percent for $55,650.2        Stranco transferred $100,333 to SFLP in

return for a 1 percent general partnership interest.                    Strangi

transferred property with a fair market value of $9,876,929,

approximately 75 percent of which was cash and securities, to SFLP

for a 99 percent limited partnership interest.

      Decedent and his four children sat on Stranco’s initial board

of   directors,    with   Rosalie    Gulig   serving    as   president.      The

partnership agreement provided that Stranco had sole authority over

SFLP’s business affairs; limited partners needed Stranco’s consent

to act on SFLP’s behalf.       Stranco employed Michael Gulig to manage

the day-to-day affairs of SFLP and Stranco.               SFLP’s partnership

agreement allowed it to lend money to partners, affiliates, or

other persons or entities.           Decedent’s estate and the Strangi

children have received various distributions from SFLP.              On August

18, 1994, a charitable gift of 100 Stranco shares was given to

McLennan Community College Foundation in decedent’s memory.

      Domiciled in Waco, Texas, Strangi died of cancer at the age of

81 on October 14, 1994.          When decedent’s will was admitted to

probate on     April   12,   1995,   Rosalie    Gulig   was   appointed     sole

executor of the estate.          No claim against the estate or will

contest was filed.

      2
Rosalie Gulig loaned her siblings the money needed to purchase the Stranco
shares. Jeanne, John, and Albert T. Strangi each executed unsecured notes to
Rosalie Gulig, with face amounts of $13,912.50 and an interest rate of 8 percent.

                                       2
     Strangi’s estate reported Strangi’s interest in SFLP as having

a date-of-death value of $6,560,730, approximately $3 million lower

than the value the assets had at the time of transfer from Strangi

to the partnership.        At the date of death, the property held by

SFLP had increased in value to $11,100,922 due to the appreciation

of securities.     The valuation report applied a combined 33 percent

minority interest discount for lack of marketability and lack of

control.

     On December 1, 1998, the Internal Revenue Service (“IRS”)

issued a notice of deficiency for $2,545,826 in federal estate

taxes or, alternatively, $1,629,947 in federal gift taxes. Rosalie

Gulig petitioned     the    tax   court      for   a   redetermination   of   the

deficiencies. The tax court, sitting in review, considered whether

SFLP should be disregarded for tax purposes under the business

purpose and economic substance doctrine or alternatively as a

restriction   on   the     sale   or   use    of   property   under   I.R.C.   §

2703(a)(2). Determining (with a 9-5 decision) that the partnership

had economic substance and that § 2703 did not apply, the court

proceeded to consider whether a taxable gift occurred to the extent

that the value of assets Strangi transferred exceeded the value of

his partnership interest and also determined the fair market value

of decedent’s interest at the date of death.              Finding that Strangi

retained enough control over the assets transferred to compensate

for the disparity between value given and value received, the court

                                        3
did not find a taxable gift.           The court accepted the 31 percent

combined discount reached by the IRS’s expert.           Though ruling for

the estate on all claims except valuation, the tax court suggested

that if the Commissioner had timely filed his notice to amend to

add an I.R.C. § 2036 claim, it might have used that section to

include in the estate the assets Strangi transferred to SFLP.

                               II. ANALYSIS

               A. Leave to amend to add a § 2036 claim

     Fifty-two days before trial, the Commissioner filed a motion

to amend to add a claim that under § 2036 the estate should include

the value of SFLP’s assets transferred from the decedent.           The tax

court denied the motion to amend, apparently because it considered

the motion untimely.       We review the tax court’s decision to deny

leave to amend for abuse of discretion.               Halbert v. City of

Sherman, Tex., 33 F.3d 526, 529 (5th Cir. 1994).            “A decision to

grant leave is within the discretion of the court, although if the

court lacks a substantial reason to deny leave, its discretion is

not broad enough to permit denial.”          State of Louisiana v. Litton

Mortgage Co., 50 F.3d 1298, 1302-03 (5th Cir. 1995) (internal

citations and quotes omitted).         “In the absence of any apparent or

declared reason--such as undue delay, bad faith or dilatory motive

on the part of the movant, repeated failure to cure deficiencies by

amendments previously allowed, undue prejudice to the opposing

party   by   virtue   of   allowance    of   the   amendment,   futility   of

                                       4
amendment, etc.--the leave sought should, as the rules require, be

‘freely give.’” Foman v. Davis, 371 U.S. 178, 182 (1962).

     The only insight we have into the tax court’s reasoning for

the denial is its statement that, even though § 2036 might apply on

the facts, it was “not an issue in this case, however, because

respondent asserted it only in a proposed amendment to answer

tendered shortly before trial.    Respondent’s motion to amend the

answer was denied because it was untimely.”     However, the motion

was made nearly two months, not “shortly,” before trial and was

unlikely to cause delay or prejudice.      If the tax court’s true

reasoning was that the Commissioner could have sought to assert the

applicability of § 2036 earlier in the proceedings, it did not

assert such and did not discuss any evidence of bad faith or

dilatory motive.   We cannot assume bad faith on the record here.

The record does not present an obvious reason for denial of leave

to amend.   See Ashe v. Corley, 992 F.2d 540, 542-43 (5th Cir. 1993)

(“Where reasons for denying leave to amend are ‘ample and obvious,’

the district court's failure to articulate specific reasons does

not indicate an abuse of discretion.” ).

       B. Business purpose and economic substance doctrine

     We review the question of whether SFLP has a business purpose

and economic substance, such that it should not be disregarded for

tax purposes, for clear error.    See Merryman v. Commissioner, 873
F.2d 879, 881 (5th Cir. 1989); ACM Partnership v. Commissioner, 157

                                  5
F.3d, 231, 245 (3rd Cir. 1998).             Under this standard of review, we

agree with the tax court that the partnership has enough economic

substance   for    SFLP     to    be   recognized       for    federal      estate     tax

purposes.

      As the tax court noted, “[m]ere suspicion and speculation

about a decedent’s estate planning and testamentary objectives are

not   sufficient      to   disregard     an      agreement     in    the    absence    of

persuasive evidence that the agreement is not susceptible of

enforcement or would not be enforced by parties to the agreement.”

See Hall v. Commissioner of Internal Revenue, 92 T.C. 312, 335

(1989).       SFLP’s       partnership          agreement      changed      the   legal

relationships      between       decedent       and   his    heirs    and   creditors.

Potential purchasers of decedent’s assets would not disregard the

partnership.      As the tax court stated, “[r]egardless of subjective

intentions,     the    partnership       had      sufficient        substance     to    be

recognized for tax purposes.”

                           C. The remaining claims

      Having carefully reviewed the record and read the briefs, we

affirm the tax court’s conclusions regarding § 2703 for essentially

the reasons stated in that court’s opinion.                   Section 2703 does not

alter the determination that the estate included the decendent’s

interests in SFLP and Stranco and the tax court did not have to

consider the applicability of the safe harbor provisions of section

2703(b) to the partnership agreement.                       We also affirm the tax

                                            6
court’s conclusion that decedent’s transfer of property to the

partnership was not a taxable gift for essentially the reasons

stated in that court’s opinion.   Finally, we adopt the tax court’s

ruling concerning the discounts and the fair market value of

decedent’s interest in SFLP at the date of death.   However, the tax

court may revisit this topic if it considers the § 2036 claim.

                         III. CONCLUSION

     We REVERSE the Tax Court’s denial of leave to amend and REMAND

with instructions that the court either (1) set forth its reasons

for adhering to its denial of the Commissioner’s motion for leave

to amend, bearing in mind the mandate of the Federal Rule of Civil

Procedure 15(a), or (2) reverse its denial of the Commissioner’s

motion, permit the amendment, and consider the Commissioner’s claim

under § 2036.   We AFFIRM all other conclusions made by the tax

court.

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