Estate of Erickson v. Comm'r , 93 T.C.M. 1175 ( 2007 )

T.C. Memo. 2007-107
UNITED STATES TAX COURT
ESTATE OF HILDE E. ERICKSON, DECEASED, DONOR, KAREN E. LANGE,
PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
ESTATE OF HILDE E. ERICKSON, DECEASED, KAREN E. LANGE, PERSONAL
REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 17982-05, 18003-05. Filed April 30, 2007.
Phillip H. Martin, Nathan Honson, and John Rock, for
petitioner.
Blaine Holiday, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KROUPA, Judge: Respondent determined a $734,599 deficiency
in the Federal gift tax and a $718,320 deficiency in the Federal
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estate tax of the Estate of Hilde E. Erickson (the estate).1
After concessions, we are asked to decide whether property Hilde
E. Erickson (decedent or Mrs. Erickson) transferred to a family
limited partnership shortly before her death is included in her
gross estate under section 2036(a)(1).2 We hold that it is.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated by this reference. Karen E. Lange (Karen),
decedent’s eldest daughter and the personal representative of the
estate, resided in Longboat Key, Florida, when the estate filed
the petition. Mrs. Erickson resided in Minnesota when she died,
and her estate was admitted to probate in the Steele County
District Court in Minnesota.
The Erickson Family
Mrs. Erickson and her husband, Arthur E. Erickson (Mr.
Erickson), met at Marquette University, where Mr. Erickson was
studying dentistry and Mrs. Erickson was studying dental hygiene.
Mr. and Mrs. Erickson worked together before they married and,
after they married, moved to Reedsburg, Wisconsin, where Mr.
1
These cases have been consolidated for purposes of
briefing, trial, and opinion.
2
All section and Code references are to the Internal Revenue
Code, and all Rule references are to the Tax Court Rules of
Practice and Procedure, unless otherwise indicated.
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Erickson began his dental practice. Mrs. Erickson stayed home to
raise the couple’s two daughters.
Once their daughters were grown, Mrs. Erickson returned to
work at Mr. Erickson’s dental practice until they both retired in
1974. Mr. and Mrs. Erickson volunteered in several countries
including Madagascar, India, Guatemala, Honduras, and Haiti after
they retired. Mr. Erickson passed away in May 1984.
Mr. Erickson’s Will and the Credit Trust
Mr. Erickson’s will left most of his assets to Mrs.
Erickson. Mr. Erickson’s will also set up a credit trust for
Mrs. Erickson’s benefit. The credit trust was intended to
provide for Mrs. Erickson’s care in the event she depleted her
own assets. Any remaining funds in the credit trust after Mrs.
Erickson’s death would pass to the Ericksons’ daughters free of
estate tax. Mrs. Erickson and Karen were the initial trustees of
the credit trust, and the Ericksons’ younger daughter, Sigrid
Knuti (Sigrid) became a successor trustee several years later.
The Ericksons’ Daughters
Karen worked as a benefits and insurance manager for the
Owatonna Canning Co., a company her husband’s family owned and
operated. Karen’s husband, Chad Lange (Chad), was in the third
generation of Lange family members to run the canning company,
which was sold to Chiquita in 1997. After the sale to Chiquita,
Chiquita hired Karen to work on international business
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development, which she did until she retired in 2000. Chad and
Karen have two children, a daughter and a son.
Sigrid did nonprofit work and then moved to Moscow in 1998
with her husband, David Knuti (David), an analyst in the Foreign
Commercial Service. David retired in 2004. David and Sigrid
have three daughters.
Mrs. Erickson’s Powers of Attorney
Mrs. Erickson initially granted Karen a durable power of
attorney in 1987. Mrs. Erickson revoked the 1987 power of
attorney and executed a new power of attorney in 1994. The 1994
power of attorney remained in effect as of Mrs. Erickson’s death.
The 1994 power of attorney granted Sigrid a successor power of
attorney and also authorized Karen to make gifts to herself.
Management of Mrs. Erickson’s Affairs and Investments
Karen began handling her mother’s finances in 1998 or 1999
and signed documents on behalf of her mother when Mrs. Erickson
became unable to sign for herself in 1999 or 2000. Karen began
dealing with the credit trust on her mother’s behalf and managing
the credit trust’s investments as well as her mother’s own
investments in securities and real estate. Karen also helped
move her mother’s personal investments in stocks and bonds into
brokerage accounts from Mrs. Erickson’s safe deposit box. Around
the same time, Karen began managing David and Sigrid’s
condominium investment when David and Sigrid moved to Moscow.
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The credit trust had over $1 million in assets, consisting
of marketable securities as well as a Florida investment
condominium. Karen managed the condominium investment when she
took over the financial management of the credit trust. This
management duty included tasks such as deciding on renovations,
depositing rental checks, and addressing taxes and association
fee matters.
Mrs. Erickson’s Medical History
Karen first noticed Mrs. Erickson’s confusion on a few
occasions in the late 1990s and became concerned. Nurses and
doctors also noted a gradual decline in Mrs. Erickson’s cognitive
powers at about the same time, particularly as it affected Mrs.
Erickson’s short-term memory. Mrs. Erickson’s doctor confirmed a
diagnosis of Alzheimer’s disease on March 5, 1999, when Mrs.
Erickson was 86 years old. Mrs. Erickson’s Alzheimer’s disease
continued to progress. By May 2000, Mrs. Erickson no longer
drove or cooked.
Mrs. Erickson’s health continued to decline, and the family
decided it was best to help Mrs. Erickson move into a supervised
living facility. Mrs. Erickson was experiencing significant
difficulties recalling family members, and she was disoriented as
to the time, place, and date. Mrs. Erickson moved into one
facility in June 2000 and moved to a different facility in
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September 2000. The second facility was able to provide more
medical care and a more structured environment for Mrs. Erickson.
Mrs. Erickson also experienced other serious physical
problems in 2000 and 2001. She fell and fractured her right hip
on September 7, 2000. She fell several additional times over the
next few months and required surgery to replace her left hip
after a fall in May 2001. Mrs. Erickson’s family expected her to
live another year or two after the hip surgery. Mrs. Erickson
also fractured her collarbone in July 2001. Mrs. Erickson had
significant medical expenses, totaling $25,672 in 2000 and
$41,791 in 2001.
After Mrs. Erickson was diagnosed with Alzheimer’s disease,
Merrill Lynch Financial Foundation prepared a report at the
family’s request regarding Mrs. Erickson’s financial situation
and planning alternatives and recommendations. The report
indicated that Mrs. Erickson desired to maintain a $100,600
annual budget and minimize estate shrinkage. The report
estimated that the estate would owe over $500,000 in Federal
estate taxes and advised that tax and estate professionals be
consulted.
Formation of the Arthur and Hilde Erickson Family LLLP (the
Partnership)
Karen originally considered the possibility of forming a
family limited partnership in a meeting with counsel in March or
April 2001 where Chad and Karen’s own financial affairs were
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being discussed. Karen waited to discuss the family limited
partnership idea in detail with Sigrid because of the expense of
calling Russia to speak with her sister. Instead, Karen
suggested the idea to her sister briefly in an e-mail. When
Sigrid visited her family in Minnesota for Mrs. Erickson’s hip
replacement surgery in 2001, Sigrid and Karen met with counsel
together to talk about a family limited partnership. Karen also
discussed the concept with Mrs. Erickson, but not the financial
aspects of the transaction in any detail.
The parties signed the limited partnership agreement
creating the Partnership in May 2001. Karen acted on behalf of
her mother and herself and as co-trustee of the credit trust in
forming the Partnership. The same law firm represented all of
the parties to the limited partnership agreement although Sigrid
informally mentioned the idea to an attorney friend of hers.
Sigrid admitted that she did not understand the particulars of
the transaction. She was aware, however, that a family limited
partnership would have estate tax advantages due to valuation
discounts that apply to the partnership interests.
The limited partnership agreement provided that Karen and
Sigrid were both general partners and limited partners. Mrs.
Erickson (acting through Karen as her attorney-in-fact), Chad,
and the trustees of the credit trust (Karen and Sigrid) were
limited partners. Karen signed the limited partnership agreement
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in multiple capacities. She signed in her personal capacity as
well as co-trustee of the credit trust and as attorney-in-fact
for Mrs. Erickson.
The limited partnership agreement provided that Mrs.
Erickson would contribute securities plus a Florida condominium
she owned in exchange for an 86.25-percent interest in the
Partnership. The parties stipulated that the fair market value
of these assets Mrs. Erickson contributed was approximately $2.1
million.
The limited partnership agreement also provided that Karen
would contribute two partial interests in a Colorado investment
condominium she and Chad owned in exchange for a general
partnership interest and a limited partnership interest,
representing 1.4 percent of the Partnership in the aggregate.
Sigrid would contribute two partial interests in a Colorado
investment condominium she owned in exchange for a general
partnership interest and a limited partnership interest,
representing 2.8 percent of the Partnership in the aggregate.
Chad would contribute a partial interest in the Colorado
condominium he and Karen owned in exchange for a 1.4-percent
limited partnership interest. The total of Chad and Karen’s
contributions equaled a 100-percent interest in the Colorado
condominium they jointly owned.
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Finally, the limited partnership agreement also provided
that the credit trust would contribute a Florida condominium in
exchange for an 8.2-percent limited partnership interest. The
credit trust did not contribute any of the $1 million in
marketable securities it owned to the Partnership. Both Karen
and Sigrid were aware that there were no estate tax concerns
regarding the assets in the credit trust unlike the estate tax
concerns they had regarding Mrs. Erickson’s personal assets.
Instead, Karen and Sigrid would receive the credit trust assets
free of estate tax after Mrs. Erickson’s death. They thus opted
to leave the credit trust securities outside the Partnership.
Transfer of Assets to the Partnership
Although the limited partnership agreement contemplated that
the partners’ assets would be contributed to the Partnership
concurrently with the signing of the limited partnership
agreement, no transfers to the Partnership occurred upon
execution of the agreement.
Karen took care of some administrative matters first, such
as obtaining a certificate of limited partnership from the State
of Colorado and applying for an employer identification number.
The certificate of limited partnership listed a Snowmass Village,
Colorado, address for service of process, an address that had no
mail delivery.
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No transfer of assets to the Partnership began for about 2
months. Karen instructed Merrill Lynch to transfer all of Mrs.
Erickson’s assets it held, totaling over $1 million in
securities, to the Partnership’s account in July 2001. Karen
also instructed Wells Fargo to transfer over $500,000 of Mrs.
Erickson’s assets it held to the Partnership’s account. No other
transfers occurred before Karen went to visit Sigrid in Moscow in
September 2001, other than the execution of quitclaim deeds
relating to the Colorado investment condominiums.
Mrs. Erickson’s Failing Health and the Remaining Partnership
Transfers
When Karen returned from her Moscow trip, she visited her
mother and noticed that Mrs. Erickson was not feeling well.
Karen took Mrs. Erickson to the hospital on September 27, 2001.
Mrs. Erickson was suffering from a decreased level of
consciousness and pneumonia. The pneumonia did not appear to be
improving, and the family decided to opt for medical care to
simply keep Mrs. Erickson comfortable in accordance with her
wishes.
The following day, September 28, 2001, while Mrs. Erickson’s
health was failing, Karen scrambled to make transfers. Karen,
acting on behalf of Mrs. Erickson, executed a deed transferring
Mrs. Erickson’s Florida condominium unit to the Partnership.
Karen, acting as co-trustee of the credit trust, also signed a
trustee’s deed transferring the Florida condominium unit the
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credit trust owned to the Partnership the same day. Karen, on
behalf of Mrs. Erickson, then finalized gifts to Mrs. Erickson’s
grandchildren by giving limited partnership interests in the
Partnership to three trusts for the grandchildren’s benefit (the
grandchildren’s gifts). These gifts reduced Mrs. Erickson’s
86.25-percent interest in the Partnership to only a 24.18-percent
interest.
Karen called Sigrid in Moscow on September 28 to tell her
that their mother’s health was failing. Sigrid arrived in
Minnesota from Russia on September 29, 2001. Mrs. Erickson died
the following morning.
Shortly before she died, Karen, acting as attorney-in-fact,
transferred over $2 million of Mrs. Erickson’s assets to the
Partnership and then substantially reduced Mrs. Erickson’s
partnership interest by making the grandchildren’s gifts. Most
of the retained personal assets, including the substantially
reduced retained partnership interest, were illiquid.
Operation of the Partnership and Partnership Transactions
The family continued to operate the Partnership after Mrs.
Erickson’s death. The condominiums in Florida and Colorado were
managed by the same onsite management companies both before and
after they were contributed to the Partnership. The management
companies were responsible for the day-to-day work such as
booking reservations, checking in guests, cleaning the units, and
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responding to emergencies. The marketable securities the
Partnership held continued to be managed by investment advisers
at Wells Fargo and Merrill Lynch after they were contributed to
the Partnership.
The Partnership has explored investment opportunities in
real estate and has bought and sold some securities. Over time,
the Partnership has become less invested in bonds and more
heavily invested in real estate.
The Partnership has made three loans, two of which were to
its partners. The Partnership lent $140,000 to Sigrid to enable
her to purchase a Florida condominium in her individual capacity.
The Partnership did not take a security interest in the
condominium but accepted Sigrid’s partnership interest as
collateral. When Sigrid learned that she could receive a more
favorable interest rate from a different lender, she brought this
to the Partnership’s attention, and the Partnership agreed to
reduce the interest rate on Sigrid’s loan. Sigrid, acting as
general partner of the Partnership, approved both the original
loan to herself and the subsequent rate reduction. The
Partnership also lent Chad $70,000. Sigrid and Chad each repaid
the loans timely.
Administration of the Estate and Payment of Estate Tax
Liabilities
Karen was appointed the personal representative of the
estate pursuant to Mrs. Erickson’s will. The estate was unable
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to meet its liabilities for estate and gift taxes. To obtain the
funds necessary to meet the estate’s obligations, Karen engaged
in two transactions. First, she sold Mrs. Erickson’s home to the
Partnership for $123,500. Second, the Partnership gave Mrs.
Erickson’s estate cash totaling $104,000. The parties
characterized the $104,000 disbursement as a redemption of some
of Mrs. Erickson’s partnership interests.
Respondent’s Examination and Tax Court Proceedings
Respondent examined the estate’s gift tax and estate tax
returns and issued deficiency notices. The estate timely filed
petitions, and the cases were consolidated. The parties have
stipulated the fair market values of the assets Mrs. Erickson
contributed to the Partnership and have stipulated the fair
market values of the partnership interest Mrs. Erickson retained
after making the grandchildren’s gifts of partnership interests.
OPINION
We are asked to decide whether the assets Mrs. Erickson
transferred to the Partnership shortly before she died are
included in her gross estate under section 2036.3 Respondent
3
Respondent argues in the alternative that the gross estate
includes the property transferred to the Partnership pursuant to
sec. 2038. We find for respondent under sec. 2036 and therefore
need not address respondent’s argument under sec. 2038.
Respondent also makes two additional arguments in his opening
brief, neither of which the estate addressed on brief. First,
respondent argues that the gross estate includes the partnership
interests that Karen, acting on behalf of Mrs. Erickson,
(continued...)
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argues that Mrs. Erickson retained the possession or enjoyment
of, or the right to the income from, the transferred assets.
Respondent argues, further, that the assets were not transferred
in a bona fide sale for adequate and full consideration. The
estate counters that Mrs. Erickson retained no rights to the
assets once she transferred them to the Partnership and,
alternatively, that the assets were transferred in a bona fide
sale for adequate and full consideration. We shall consider the
parties’ arguments after first addressing the burden of proof.
I. Burden of Proof
The estate orally moved at trial to shift the burden of
proof under section 7491. We took the oral motion under
advisement and now conclude, after carefully reviewing the
record, that we must deny the estate’s motion to shift the burden
of proof.
3
(...continued)
transferred to the trusts for Mrs. Erickson’s grandchildren (the
grandchildren’s gifts) under sec. 2035(a) to the extent that the
grandchildren’s gifts severed the interests Mrs. Erickson
retained in her property under sec. 2036. Second, respondent
argues that the gross estate includes the gift tax on the
grandchildren’s gifts pursuant to sec. 2035(b). The estate did
not address either of these issues at trial or on brief, and we
shall treat the estate as having conceded them. See Rybak v.
Commissioner, 91 T.C. 524, 566 (1988). Finally, the parties do
not dispute that the generation-skipping transfer tax under sec.
2601 applies and the amount of this tax will be calculated
pursuant to our decision.
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The Commissioner’s determinations are generally presumed
correct, and the taxpayer bears the burden of proving that the
Commissioner’s determinations are in error. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 7491(a)
shifts the burden of proof to the Commissioner, however, with
respect to a factual issue relevant to a taxpayer’s liability for
tax under certain circumstances. The burden shifts to the
Commissioner if the taxpayer introduces credible evidence with
respect to the issue and meets the other requirements of section
7491(a). Sec. 7491(a)(2)(A) and (B).4
Credible evidence is defined as the quality of evidence
which, after critical analysis, we would find sufficient upon
which to base our decision. Higbee v. Commissioner, 116 T.C.
438, 442 (2001); H. Conf. Rept. 105-599, at 240-241 (1998), 1998-
3 C.B. 747, 994-995. Evidence will not meet this standard if we
are unconvinced it is worthy of belief. H. Conf. Rept. 105-599,
supra at 241, 1998-3 C.B. at 995. Moreover, we are not compelled
to believe evidence that seems improbable or to accept as true
uncorroborated, although uncontradicted, evidence by interested
witnesses. Blodgett v. Commissioner, 394 F.3d 1030, 1036 (8th
Cir. 2005) (quoting Marcella v. Commissioner, 222 F.2d 878, 883
4
Sec. 7491 is effective with respect to court proceedings
arising in connection with examinations by the Commissioner
commencing after July 22, 1998, the date of enactment of the
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(a), 112 Stat. 726.
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(8th Cir. 1955), affg. in part and vacating in part a Memorandum
Opinion of this Court), affg. T.C. Memo. 2003-212.
We have carefully reviewed the testimony and exhibits the
estate offered. The two witnesses the estate called were Mrs.
Erickson’s daughters. Both were partners in the Partnership, and
one was on all sides of the formation transaction. Karen signed
the limited partnership agreement several times in her multiple
capacities. While we acknowledge much of the daughters’
testimony was uncontradicted, we find their testimony,
particularly regarding the rationale for the Partnership and the
timelines of the transfers, to be self-serving and, more
importantly, not credible. Neither are we required to nor do we
accept self-serving testimony we find to be not credible. We
find the daughters’ testimony represents an after-the-fact
rationalization rather than a candid recollection of the facts
and circumstances surrounding the transactions at issue. We
therefore find that the evidence the estate introduced is not
credible.
Accordingly, we conclude that the estate has not met the
requirements of section 7491 because the estate has not
introduced credible evidence. We therefore shall deny the
estate’s oral motion to shift the burden of proof under section
7491.
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II. Inclusion of Transferred Assets With Retained Interests in
Gross Estate Under Section 2036(a)(1)
We now focus on whether the transferred assets are
includable in the gross estate and begin by outlining a few
general principles. The Code generally imposes tax on the
transfer of the taxable estate of any decedent who is a United
States citizen or resident. Sec. 2001(a). The determination of
the taxable estate begins with the value of the gross estate,
which includes the fair market value of all property to the
extent provided in sections 2031 through 2046. Secs. 2031, 2051.
If a decedent makes an inter vivos transfer of property
(other than a bona fide sale for adequate and full consideration)
and retains certain specific rights or interests in the property
that are not relinquished until death, the full value of the
transferred property will generally be included in the decedent’s
gross estate. Sec. 2036(a). The purpose of section 2036(a) is
to include in the gross estate those transfers made during a
decedent’s life that are essentially testamentary in nature.
United States v. Estate of Grace, 395 U.S. 316, 320 (1969).
There are three requirements for the property to be included in a
decedent’s gross estate under section 2036(a). First, the
decedent must have made an inter vivos transfer of property.
Second, the decedent must have retained an interest or a right
specified in section 2036(a)(1) or (2) or (b) in the transferred
property that he or she did not relinquish until death. Finally,
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the transfer must not have been a bona fide sale for adequate and
full consideration. Estate of Bongard v. Commissioner, 124 T.C.
95, 112 (2005).
The parties agree that Mrs. Erickson made an inter vivos
transfer of assets to the Partnership. We therefore consider
whether Mrs. Erickson retained rights or interests in the
property she transferred. If she did, we then must consider
whether Mrs. Erickson’s transfer meets the exception for bona
fide sales for adequate and full consideration.
A. Whether Mrs. Erickson Retained Possession or Enjoyment
of the Transferred Property
Property is included in a decedent’s gross estate if the
decedent retained, by express or implied agreement, possession,
enjoyment, or the right to income. Sec. 2036(a). The term
“enjoyment” in section 2036(a) is synonymous with substantial
present economic benefit, not speculative and contingent benefit.
Estate of Abraham v. Commissioner, 408 F.3d 26, 39 (1st Cir.
2005), affg. T.C. Memo. 2004-39; Estate of McNichol v.
Commissioner, 265 F.2d 667, 671 (3d Cir. 1959), affg. 29 T.C.
1179 (1958); Estate of Reichardt v. Commissioner, 114 T.C. 144,
151 (2000). Part of the possession and enjoyment of one’s assets
is the assurance that these assets will be available to pay debts
and expenses after death. Strangi v. Commissioner, 417 F.3d 468,
477 (5th Cir. 2005), affg. T.C. Memo. 2003-145.
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A decedent retains possession or enjoyment of transferred
property under section 2036 where there is an express or implied
understanding to that effect among the parties, even if the
retained interest is not legally enforceable. Estate of Maxwell
v. Commissioner, 3 F.3d 591, 593 (2d Cir. 1993), affg. 98 T.C.
594 (1992); Guynn v. United States, 437 F.2d 1148, 1150 (4th Cir.
1971); Estate of Reichardt v. Commissioner, supra at 151; see
also sec. 20.2036-1(a), Estate Tax Regs. The accounting
treatment of the transactions is also not controlling. Estate of
Strangi v. Commissioner, T.C. Memo. 2003-145.
Whether the parties had an understanding amongst themselves
is determined from the facts and circumstances surrounding the
transfer and the subsequent use of the property. Estate of
Abraham v. Commissioner, supra at 39; Estate of Reichardt v.
Commissioner, supra at 151. No one fact is determinative. We
must carefully scrutinize the facts and circumstances here
because intrafamily transactions are involved. See Estate of
Maxwell v. Commissioner, 98 T.C. 602. We examine whether the
terms and conditions of the transfer of assets to the family
limited partnership are the same as if unrelated parties had
engaged in the same transaction. See Estate of Rosen v.
Commissioner, T.C. Memo. 2006-115 (citing Estate of Bongard v.
Commissioner, supra at 123).
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Some factors we have previously considered important in
assessing whether a decedent impliedly retained the right to
possession and enjoyment of the transferred assets include
commingling of funds, a history of disproportionate
distributions, testamentary characteristics of the arrangement,
the extent to which the decedent transferred nearly all of his or
her assets, the unilateral formation of the partnership, the type
of assets transferred, and the personal situation of the
decedent. Estate of Rosen v. Commissioner, supra; Estate of
Harper v. Commissioner, T.C. Memo. 2002-121. The likelihood that
an implied agreement will permit the individual to keep using
contributed assets is the greatest when the individual conveys
nearly all of his or her assets. Estate of Reichardt v.
Commissioner, supra; Estate of Rosen v. Commissioner, supra.
Respondent argues that the facts and circumstances indicate
Mrs. Erickson retained the right to possess or enjoy the assets
transferred to the Partnership pursuant to an implied
understanding or agreement among the parties to the transactions.
We agree.
We are troubled by the delay in transferring the assets to
the Partnership. The delay suggests that the parties did not
respect the formalities of the Partnership. Specifically, the
partnership agreement provided that the partners would contribute
assets concurrently with the execution of the partnership
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agreement, yet no assets were transferred then; many transfers
occurred only 2 days before Mrs. Erickson died. Although the
Partnership had separate accounts from its partners, the record
reflects that the partners were in no hurry to alter their
relationship to their assets until decedent’s death was imminent.
The Partnership also had to provide the estate with funds to
meet its liabilities. This fact is telling in two respects.
First, disbursing funds to the estate is tantamount to making
funds available to Mrs. Erickson (or the estate) if needed.
Second, although the estate designated the funds disbursed to the
estate as a purchase of Mrs. Erickson’s home and a redemption of
units rather than a distribution, the estate received
disbursements at a time that no other partners did. These
disbursements provide strong support that Mrs. Erickson (or the
estate) could use the assets if needed.
Finally, the Partnership had little practical effect during
Mrs. Erickson’s life, particularly because the Partnership was
not fully funded until days before she died. Indeed, the
Partnership was mainly an alternate method through which Mrs.
Erickson could provide for her heirs. Karen, acting on behalf of
Mrs. Erickson, transferred substantial amounts of her partnership
interests in making the grandchildren’s gifts 2 days before she
died. Moreover, Mrs. Erickson had been in declining health for
some time. She was diagnosed with Alzheimer’s disease in March
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1999 and died at age 88 after a period of declining health and
physical problems.
Although no one factor is determinative, these facts and
circumstances, when taken together, show that an implied
agreement existed among the parties that Mrs. Erickson retained
the right to possess or enjoy the assets she transferred to the
Partnership. The transaction represents decedent’s daughters’
last-minute efforts to reduce their mother’s estate’s tax
liability while retaining for decedent the ability to use the
assets if she needed them.
B. Bona Fide Sale for Adequate and Full Consideration
Having concluded that Mrs. Erickson implicitly retained the
enjoyment of the assets she transferred to the Partnership, we
must now determine whether the bona fide sale exception of
section 2036 applies. Under the bona fide sale exception,
transfers a decedent makes before death are not included in the
decedent’s gross estate if the transfers are bona fide sales for
adequate and full consideration in money or money’s worth. Sec.
2036(a). We have recently stated that the bona fide sale
exception applies if the record shows that a family limited
partnership was formed for a legitimate and significant nontax
reason and that each transferor received a partnership interest
proportionate to the fair market value of the property
transferred. Estate of Bongard v. Commissioner, 124 T.C. 118.
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We begin by examining whether the estate has proven that the
Partnership was formed for a legitimate and significant nontax
purpose. The nontax reason for forming the partnership must have
been a significant factor and must be established by objective
evidence. Id. The purpose must be the actual motivation, not
simply a theoretical justification. Id.
We have identified several factors indicating that a
transaction was not motivated by a legitimate and significant
nontax purpose. Id. These factors include the taxpayer’s
standing on both sides of the transaction, the taxpayer’s
financial dependence on distributions from the partnership, the
partners’ commingling of partnership funds with their own, and
the taxpayer’s actual failure to transfer money to the
partnership. Id. at 118-119.
We have found a significant nontax purpose where the
justification for the transaction was the decedent’s personal
views and concerns regarding the operation of an income-producing
activity and not a business exigency. See Estate of Schutt v.
Commissioner, T.C. Memo. 2005-126 (family limited partnership had
a significant nontax purpose of facilitating the decedent’s buy
and hold investment strategy and assuaging the decedent’s worry
that his heirs would sell his investments after his death).
There is no significant nontax purpose, however, where a family
limited partnership is just a vehicle for changing the form of
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the investment in the assets, a mere asset container. Estate of
Rosen v. Commissioner, T.C. Memo. 2006-115; Estate of Harper v.
Commissioner, T.C. Memo. 2002-121.
We now examine both the estate’s asserted nontax purposes
for forming the Partnership and the objective facts. While
Sigrid admitted at trial that the estate tax advantage of
obtaining a decreased fair market value of Mrs. Erickson’s assets
was certainly a motivating factor, the estate asserts several
possible nontax reasons for forming the Partnership.
First, the estate argues that forming the Partnership
allowed the family to centralize the management of the family
assets and give the management responsibilities to Karen. We
note, however, that Karen already had significant management
responsibilities with respect to family assets before the
Partnership was formed. In fact, Karen had held Mrs. Erickson’s
power of attorney since 1987. It is not clear from the record
what advantage the family members believed they would receive
through another layer of “centralized management” of these
assets.5 Second, the estate argues that the Partnership afforded
greater creditor protection. A creditor who sought funds from
5
The estate does not argue, and we do not find, that the
family members decided to form the Partnership to manage Mrs.
Erickson’s assets after her diagnosis of Alzheimer’s disease.
Karen had already managed Mrs. Erickson’s financial affairs for
many years before the diagnosis by serving as attorney-in-fact
under a durable power of attorney.
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the Partnership, however, would have a significant asset base
from which to recover from the Partnership, over $2 million.
Finally, the estate argues that the Partnership facilitated Mrs.
Erickson’s gift-giving plan. Facilitating a gift-giving plan is
not a significant nontax purpose. See Estate of Rosen v.
Commissioner, supra. We find none of the estate’s asserted
nontax purposes for forming the Partnership compelling.
Moreover, the facts and circumstances surrounding the
transaction also fail to show any nontax purpose for the
Partnership. The Partnership was mainly a collection of passive
assets, primarily marketable securities and rental properties
that remained in the same state as when they were contributed.
In addition, the same investment advisers and property managers
managed the assets both before and after the transfers to the
Partnership. The estate highlights the slight shift in the
Partnership’s investment allocation from bonds to real estate as
proof that the partners made deliberate, businesslike investment
decisions. We cannot discern, however, any business goals or any
particular reasons for the Partnership to invest in certain
assets. We note also that the Partnership made loans to family
members and, indeed, in at least one instance, even lowered an
interest rate that a partner had previously agreed to pay. We
find that the Partnership was a mere collection of mostly passive
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assets intended to assist Mrs. Erickson’s tax planning and
benefit the family.
While Karen and Sigrid discussed the Partnership before it
was formed, the circumstances suggest that the Partnership was
essentially formed unilaterally, with Karen controlling the
transaction. Sigrid admitted at trial that she did not
understand the particulars of the transaction, nor is there any
credible evidence that Mrs. Erickson understood the transaction.
Karen was on every side of the transaction. She acted as
attorney-in-fact for her mother, she was the personal
representative of her mother’s estate, she was both a general
partner and a limited partner in the Partnership in her
individual capacity, and she was a co-trustee of the credit
trust, which was also a partner in the Partnership. Moreover,
the same law firm represented all parties to the transaction.
While retaining counsel to assist in an important transaction is
entirely appropriate, the fact that no family member was
represented by different counsel also suggests a unilateral
approach to the transaction.6
Another key fact indicating that no significant nontax
purpose existed was the delay in contributing assets to the
6
Sigrid’s informal mention of the arrangement to an attorney
friend is not probative. Sigrid admitted that their discussion
was informal and that she never signed an engagement letter.
Sigrid’s own testimony indicates that Sigrid’s friend was not
acting as Sigrid’s attorney in the formation of the Partnership.
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Partnership. The need to manage Mrs. Erickson’s assets existed
early. Karen had been assisting her mother for years with her
financial affairs. Despite the need to assist Mrs. Erickson, the
partners did not immediately fund the Partnership when they
executed the partnership agreement. Meanwhile, Mrs. Erickson’s
health continued to decline. It was only after Mrs. Erickson had
been admitted to the hospital with pneumonia, two days before she
died, that the partners finally completed their transfers. While
we acknowledge that a few months’ delay is not a long time in
absolute terms, the months’ delay here was significant as it came
as Mrs. Erickson’s health was declining and ultimately resulted
in the family members’ finalizing the transfers to the
Partnership while Mrs. Erickson was dying in the hospital. The
haste with which they were able to transfer the assets shortly
before Mrs. Erickson died belies the estate’s argument that the
parties needed time to transfer their assets and the delay was
out of the partners’ control. Despite Mrs. Erickson being an
octogenarian in declining medical health, the parties waited
until the prospect of her death loomed to finish the transaction
and make sure the partnership affairs were in order.
The estate was financially dependent on the Partnership and
needed approximately $200,000 to help pay its liabilities. We
are unpersuaded by the estate’s arguments that Mrs. Erickson’s
death was unforeseen and a decline in the stock market caused her
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assets to decrease in value. The record reflects that
insufficient assets were left to allow the estate to pay its
debts. We acknowledge that the Partnership characterized the
disbursements of funds to the estate as a purchase of Mrs.
Erickson’s home and redemption of some of the estate’s
partnership interests. The form of the transaction, however, is
not controlling. Moreover, the record does not reflect that the
Partnership and the estate would have engaged in these
transactions absent the estate’s need for funds.
Mrs. Erickson’s age and health at the time of the
transaction strongly indicate that the transfers were made to
avoid estate tax. Mrs. Erickson was 88 years old when the
parties formed the Partnership in 2001 and had been suffering
from Alzheimer’s disease for several years. Mrs. Erickson was by
then unable to handle her own financial affairs, was no longer
cooking for herself or driving, had difficulties recalling family
members, and was disoriented regarding the date, time, or place.
Mrs. Erickson’s age and declining health weigh against a finding
that the parties formed the Partnership for any reason other than
to help reduce Mrs. Erickson’s estate tax liability.
Finally, while it is undisputed that each partner
contributed assets of value to the partnership in exchange for
his or her partnership interest, the existence of these
legitimate transfers of value does not mandate a conclusion that
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the bona fide sale exception is met. The transaction must have a
legitimate and significant nontax purpose as well as adequate and
full consideration. See Estate of Bongard v. Commissioner, 124
T.C. 118.
We conclude, considering the totality of the facts and
circumstances and bearing in mind that no one factor is
necessarily determinative, that the estate has failed to show a
legitimate and significant nontax purpose for the Partnership,
and, therefore, Mrs. Erickson’s transfer of assets to the
Partnership was not a bona fide sale. The estate failed to
identify any legitimate nontax purpose, and the objective facts
indicate that no such legitimate nontax purpose existed. Because
we have found that Mrs. Erickson’s transfer was not a bona fide
sale, we need not examine whether adequate and full consideration
existed for the transfer. The exception to section 2036 for bona
fide sales for adequate and full consideration does not apply.
III. Conclusion
We have found that an implied agreement existed under which
Mrs. Erickson retained possession and enjoyment of the assets she
transferred. We have also found that the property Mrs. Erickson
contributed to the Partnership was not transferred in a bona fide
sale. Accordingly, section 2036(a)(1) applies, and the property
Mrs. Erickson transferred to the Partnership is included in her
gross estate.
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To reflect the foregoing and the concessions of the parties,
An appropriate order will
be issued denying petitioner’s
oral motion to shift the
burden of proof, and decisions
will be entered under Rule
155.