Estate of Jorgensen v. Comm'r , 97 T.C.M. 1328 ( 2009 )

T.C. Memo. 2009-66
UNITED STATES TAX COURT
ESTATE OF ERMA V. JORGENSEN, DECEASED, JERRY LOU DAVIS,
EXECUTRIX, AND JERRY LOU DAVIS AND GERALD R. JORGENSEN,
CO-TRUSTEES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21936-06. Filed March 26, 2009.
John F. Ramsbacher, John W. Prokey, and Dennis I. Leonard,
for petitioner.
Matthew A. Mendizabal, Chong S. Hong, and Jeffrey L.
Heinkel, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined a $796,954 Federal
estate tax deficiency against the Estate of Erma V. Jorgensen
(the estate). After concessions the issues for decision are:
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(1) Whether the values of the assets Ms. Jorgensen transferred to
two family limited partnerships are included in the value of her
gross estate under section 2036(a); and (2) whether the estate is
entitled to equitable recoupment.1
FINDINGS OF FACT
Many of the facts have been stipulated and are so found.
The stipulations of facts and the exhibits attached thereto are
incorporated herein by this reference. Ms. Jorgensen was a
resident of California when she died testate on April 25, 2002,
and her will was probated in that State. The estate acts through
its executrix, Jerry Lou Davis (Jerry Lou), and through Jerry Lou
and Gerald R. Jorgensen, Jr. (Gerald), as cotrustees of Ms.
Jorgensen’s trust. Jerry Lou, Ms. Jorgensen’s daughter, resided
in California when the petition was filed. Gerald, Ms.
Jorgensen’s son, resided in Nebraska when the petition was filed.
Ms. Jorgensen was born in 1914. She earned a college degree
from Luther College, after which she worked as a school teacher
for about 10 years. During that time she met, fell in love with,
and married Gerald Jorgensen, who later became Colonel Jorgensen
of the U.S. Air Force. As a young man Colonel Jorgensen put
himself through college and law school at the University of
1
Unless otherwise indicated, section references are to the
Internal Revenue Code (Code), as in effect on the date of Ms.
Jorgensen’s death. Rule references are to the Tax Court Rules of
Practice and Procedure. Amounts are rounded to the nearest
dollar.
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Nebraska. At the onset of World War II he joined the Air Force,
where he became a highly decorated bomber pilot seeing active
combat in both World War II and the Korean War.
After Colonel Jorgensen returned from the Second World War,
he and Ms. Jorgensen started a family. Ms. Jorgensen left her
job and became a full-time mother and housewife. Colonel
Jorgensen took over responsibility for the family’s financial
matters. When Colonel Jorgensen stopped flying, he joined the
Judge Advocate General’s office as an attorney. Later he served
with the diplomatic corps of the Air Force in Ethiopia and
Yugoslavia. Colonel Jorgensen’s 30-year career in the Air Force
entitled him to a pension and provided Ms. Jorgensen with
survivor’s benefits. Upon retiring from the Air Force Colonel
Jorgensen served as an aide to U.S. Congressman Charles Thone.
This entitled Colonel Jorgensen to a second pension and also
provided Ms. Jorgensen with survivor’s benefits.
Having come of age during the Great Depression, Colonel and
Ms. Jorgensen (sometimes, the Jorgensens) were frugal. They
abhorred debt and saved as much as they could. Colonel Jorgensen
was a knowledgeable investor, and over the years the couple’s
portfolio of marketable securities grew to over $2 million.
Colonel and Ms. Jorgensen’s investments consisted primarily of
marketable securities; i.e, stocks and bonds yielding cash
dividends and interest. In 1992 Colonel Jorgensen developed a
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relationship with Barton Green, who became the family’s
investment adviser. Colonel and Ms. Jorgensen adhered to a “buy
and hold” strategy premised on long-term growth and dividend
reinvestment. Consequently, there was very little trading
activity though Colonel Jorgensen regularly researched
investments and checked on his holdings. Ms. Jorgensen was not
involved in the couple’s financial matters or investment
decisions. Before the formation of the partnerships at issue the
couple’s investments in marketable securities were held in four
accounts: Two were Colonel Jorgensen’s individual accounts, one
belonged to Ms. Jorgensen individually,2 and one was the couple’s
joint account with right of survivorship.
Ms. Jorgensen’s Revocable Trust
Peter Arntson was Colonel and Ms. Jorgensen’s estate
planning attorney. Mr. Arntson prepared Ms. Jorgensen’s
revocable trust agreement at the direction of Colonel Jorgensen.
Ms. Jorgensen first met Mr. Arntson on October 19, 1994, the day
she executed her revocable trust agreement titled “Erma
Jorgensen’s Trust Agreement”. On that same day Ms. Jorgensen
executed a durable power of attorney naming Colonel Jorgensen,
Jerry Lou, and Gerald her attorneys-in-fact. Ms. Jorgensen later
amended her revocable trust agreement in January 1997 to name
2
Although Ms. Jorgensen held one account individually, she
was not involved in any decisionmaking with respect to the
investments.
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Jerry Lou and Gerald as successor trustees in the event of Ms.
Jorgensen’s inability to manage her affairs. Ms. Jorgensen was
the sole beneficiary of her revocable trust during her lifetime.
Under the trust terms, she had access to all trust income and
corpus without restriction and the trustees had a duty to
administer the trust solely for Ms. Jorgensen’s benefit.
Formation of Jorgensen Management Association
Colonel Jorgensen, in consultation with Mr. Arntson, decided
that he and his wife would form a family limited partnership.
Mr. Arntson and Colonel Jorgensen met several times to discuss
the structure of the partnership. Neither Ms. Jorgensen nor her
children were involved in any of these discussions. On May 15,
1995, Colonel Jorgensen, Ms. Jorgensen, Jerry Lou, and Gerald
signed the Jorgensen Management Association (JMA-I) partnership
agreement. The JMA-I partnership agreement states that the
parties desired to pool certain assets and capital for the
purpose of investing in securities. On May 19, 1995, a
certificate of limited partnership for JMA-I was filed with the
Commonwealth of Virginia.
On June 30, 1995, Colonel and Ms. Jorgensen each contributed
marketable securities valued at $227,644 to JMA-I in exchange for
50-percent limited partnership interests. Gerald and Jerry Lou,
along with their father, were the general partners. Colonel and
Ms. Jorgensen had six grandchildren; three were Gerald’s and
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three were Jerry Lou’s. Gerald, Jerry Lou, and the six
grandchildren were listed as limited partners and received their
initial interests by gift.3 Neither Gerald, Jerry Lou, nor any
of the grandchildren made a contribution to JMA-I, although each
was listed in the partnership agreement as either a general or a
limited partner. During his lifetime Colonel Jorgensen made all
decisions with respect to JMA-I.
In 1993 Colonel Jorgensen was diagnosed with cancer, and he
passed away on November 12, 1996. Before his death he and Ms.
Jorgensen moved to California, where they lived in the house next
door to Jerry Lou.
On January 29, 1997, Mr. Arntson wrote to Ms. Jorgensen
regarding Colonel Jorgensen’s estate tax return and her own
estate planning. Mr. Arntson recommended that Colonel
Jorgensen’s estate claim a 35-percent discount on his interest in
JMA-I. The estate’s interest in JMA-I passed into Colonel
Jorgensen’s family trust. The family trust was funded with
$600,000 of assets including JMA-I interests valued using
minority interest and lack of marketability discounts. All
amounts over $600,000 went to Ms. Jorgensen. Mr. Arntson also
3
Our use of the term “gift” and other related terms is for
convenience only. We do not intend to imply that Colonel and Ms.
Jorgensen’s transfers of limited partnership interests were
completed gifts for Federal tax purposes.
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recommended that Ms. Jorgensen transfer her brokerage accounts to
JMA-I. He explained:
Hopefully, this will allow your estate to qualify for
the discount available to ownership of interests in
limited partnerships and at the same time, facilitate
your being able to make annual gifts to your children
and grandchildren. This is important if you wish to
reduce the amount of your own estate which will be
subject to estate taxes.
Mr. Arntson also wrote to Ms. Jorgensen on January 30, 1997.
He again recommended that Ms. Jorgensen transfer her and Colonel
Jorgensen’s estate’s brokerage accounts to JMA-I.
The reason for doing this is so that hopefully your
limited partnership interest in JMA partnership will
qualify for the 35% discount. Instead of your estate
having a value in various securities of about
$1,934,213.00 it would be about $1,257,238.00. The
difference of $676,975.00 would result in a potential
savings in estate taxes to the beneficiaries of your
estate of $338,487.50. Obviously, no one can guarantee
that the IRS will agree to a discount of 35%, however,
even if IRS agreed to only a discount of 15%, the
savings to your children would be $145,066.00, and
there can be no discount if the securities owned by you
continue to be held directly by you.
The Formation of JMA-II
Although Mr. Arntson wrote to Ms. Jorgensen, he did not
personally meet with her to discuss additional contributions to
JMA-I. Instead, all planning discussions were among Mr. Arntson,
Jerry Lou, Jerry Lou’s husband, and Gerald. On the basis of
these discussions, they decided to form JMA-II. On May 19, 1997,
Mr. Arntson wrote to Ms. Jorgensen regarding the formation of
JMA-II. He explained:
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To a certain extent we are trying to reorganize your
assets and those of Colonel Jorgensen into two
different groups--one grouping Jorgensen Management
Associates Two (JMA2) will hold basically high basis
assets and the second grouping (JMA) will hold
basically low basis assets. In the future, you would
primarily make gifts to your children and descendants
from JMA2 which will hold high basis assets.
JMA-II was formed on July 1, 1997, when Ms. Jorgensen’s
children filed a certificate of limited partnership interest with
the Commonwealth of Virginia. On July 28, 1997, Ms. Jorgensen
contributed $1,861,116 in marketable securities to JMA-II in
exchange for her initial partnership interest. In August 1997
she contributed $22,019 to JMA-II, consisting of marketable
securities, money market funds, and cash. Also in August 1997,
in her role as executrix of Colonel Jorgensen’s estate, Ms.
Jorgensen contributed $718,530 from his brokerage account,
consisting of marketable securities, money market funds, and
cash. Of the contribution, $190,254 was attributable to Ms.
Jorgensen as it was Ms. Jorgensen’s marital bequest from Colonel
Jorgensen. After these contributions were completed, Ms.
Jorgensen held a 79.6947-percent interest in JMA-II, and Colonel
Jorgensen’s estate held a 20.3053-percent interest. The children
and grandchildren did not contribute to JMA-II. But Gerald and
Jerry Lou were general partners, and Gerald, Jerry Lou, and the
grandchildren were listed as limited partners in JMA-II’s
partnership agreement.
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The children and grandchildren received their interests in
JMA-II from Ms. Jorgensen. The values were determined using the
values of the securities held by JMA-II on November 12, 1996,
although the partnership interests were transferred in the summer
of 1997. On the basis of their values in the summer of 1997, the
partnership interests exceeded the $10,000 gift tax exclusion.
Gift tax returns were therefore required, but none was filed.4
Jerry Lou consulted with Attorney Philip Golden about the
transfer of limited partnership interests in JMA-II during 1999.
Ms. Jorgensen was considering transferring partnership interests
valued at $650,000, the estate and gift tax exemption in 1999.
In October 1998 Mr. Golden wrote Ms. Jorgensen a letter
4
In 1995, 1996, and 1998 Ms. Jorgensen transferred,
respectively, 2-percent, 1.462-percent, and .36522-percent
limited partnership interests in JMA-I to each of her two
children and six grandchildren. In 1997 and 1998 she
transferred, respectively, .4356-percent and .3201-percent
limited partnership interests in JMA-II to each of her children
and grandchildren.
In 1999 and 2000 Ms. Jorgensen transferred, respectively,
6.5888-percent and 1.5020-percent interests in JMA-II to her
children. In 1999 and 2000 she also transferred, respectively,
.5905-percent and .6670-percent interests in JMA-II to each of
her grandchildren. In 2001 and 2002 she transferred,
respectively, .6426-percent and .7352-percent interests in JMA-II
to each of her children and grandchildren.
The 1999, 2000, and 2001 transfers of partnership interests
were valued using a 50-percent discount. Absent the discount,
their values would have exceeded the $10,000 annual gift tax
exclusion. The 2002 transfers were valued using a 42-percent
discount. Gift tax returns were not filed for the transfers made
through 1998 but were filed for 1999 and thereafter.
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explaining the concept of using discounts for lack of
marketability and minority interests. The letter stated that
they needed to hire an expert to value the interests “to have any
chance of justifying the discounted value of a limited
partnership interest if a gift tax or estate tax return is
audited.” On October 21, 1998, Mr. Golden requested an appraisal
of a 1-percent limited partnership interest in JMA-II. The
letter stated that “The partnership’s sole activity is to hold
and invest securities”.
Operation of the Partnerships
Neither JMA-I nor JMA-II operated a business. The
partnerships held passive investments only, primarily marketable
securities. Jerry Lou maintained the checking accounts for the
partnerships, but they went unreconciled, and Gerald never looked
at the check registers. Neither of the partnerships maintained
formal books or records. Jerry Lou and Gerald received monthly
brokerage statements from their broker, and they spoke with their
broker approximately every 3 months.
At one point Gerald called Mr. Golden to ask whether there
was a way “to access some of this money that’s mine.” Mr. Golden
explained that Gerald could take a loan, but Gerald was surprised
that he would have to pay interest. Gerald testified that “it
took a while to get my head around the fact that it wasn’t just
like a bank account you can get money out of.” In July 1999
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Gerald borrowed $125,000 from JMA-II to purchase a home. On July
25, 2001, Gerald made his first interest payment of $7,625. On
August 7, 2002, he made a second and final interest payment of
$7,625. Jerry Lou believed that if Gerald did not repay the
loan, she would take it out of his partnership interest.
However, each of the partnerships required that all distributions
be pro rata.
The Mingling of Partnership and Personal Funds
Although the partnership agreements state that withdrawals
shall only be made by general partners, Ms. Jorgensen was
authorized to write checks on the JMA-II checking account, and
she wrote checks on both the JMA-I and JMA-II accounts. In 1998
she signed several checks on the JMA-I account, including cash
gifts to family members. On October 26, 1998, Ms. Jorgensen
signed checks drawn on JMA-I’s checking account, giving gifts of
$10,000 to three family members. On April 28, 1999, Ms.
Jorgensen deposited $30,000 into the JMA-II account to repay the
$30,000 she had withdrawn from the JMA-I account for gift-giving.
The record does not indicate why the amount was taken from JMA-I
but repaid to JMA-II, nor is there any indication that the error
was corrected.
On December 27, 1998, Jerry Lou’s husband wrote, and Ms.
Jorgensen signed, a $48,500 check drawn on Ms. Jorgensen’s
personal account to purchase a Cadillac for Gerald. The parties
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characterized it as a loan which was forgiven in January 1999.
However, the gift was not reported on a gift tax return in 1998
or 1999. On January 10, 1999, Ms. Jorgensen wrote a $48,500
check, drawn on the JMA-I account, to Jerry Lou because Ms.
Jorgensen wished to make an equalizing gift but did not have
sufficient funds in her personal checking account. The gift to
Jerry Lou was not reported on a gift tax return. On April 28,
1999, Ms. Jorgensen deposited $48,500 into the JMA-II account to
repay the $48,500 she had withdrawn from the JMA-I account. The
record does not indicate why the amount was taken from JMA-I but
repaid to JMA-II, nor is there any indication that the error was
corrected.
Ms. Jorgensen also used the JMA-I account to pay her 1998
quarterly estimated Federal taxes of $6,900 and her California
State taxes of $2,290. The record does not indicate that these
amounts were returned to the partnership, although the estate
contends that JMA-I’s Federal tax return shows the amounts as due
from Ms. Jorgensen.5
Ms. Jorgensen also paid $6,447 of Colonel Jorgensen’s
estate’s administration expenses using JMA-II’s checking account.
The record does not indicate that Colonel Jorgensen’s estate or
5
The return reports that $27,833 was due from Ms. Jorgensen.
This includes three $10,000 checks written to family members,
less partnership expenses paid by Ms. Jorgensen. It is unclear
whether the amount due from Ms. Jorgensen includes the amounts
paid for taxes.
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Ms. Jorgensen repaid the $6,447 to JMA-II. JMA-II also paid
Colonel Jorgensen’s estate’s Federal income tax and legal
services related to the filing of his estate’s Federal estate tax
return. The record does not indicate that these amounts were
repaid to JMA-II. JMA-II also paid expenses related to Ms.
Jorgensen’s 1999 and 2002 gift tax returns. The record does not
indicate that these amounts were repaid to JMA-II.
In 1998 and 1999 Ms. Jorgensen paid both partnerships’
accounting fees, registered agent’s fees, and annual registration
fees with the Commonwealth of Virginia. In 1999 she paid
attorney’s fees to Mr. Golden that related to his conversations
with an appraiser regarding the partnerships’ structure as well
as the preparation of a promissory note related to JMA-II’s
$125,000 loan to Gerald. Mr. Golden did not issue separate bills
for his work with respect to the partnerships and with respect to
Ms. Jorgensen.
After Ms. Jorgensen’s Death
Ms. Jorgensen died on April 25, 2002. On August 30, 2002,
Jerry Lou and her husband sent Gerald a letter informing him of
the various issues related to the administration of the estate.
The letter stated in part:
Phil Golden highly recommends that you pay back
Jorgensen Management II Partnership the $125,000 you
borrowed. You paid the interest in July for $7,625.00
so you are just about square. He says it will clean up
the Partnership and things will look much better should
we get (and we probably will) audited in the upcoming
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months. * * * Guess we have to be real straight on who
borrowed what etc. so the partnership looks very legit.
The letter also stated that Gerald had received or was about to
receive $286,637, which we presume was related to the settlement
of the estate. The $125,000 loan was repaid on January 24,
2003.6
Also on January 24, 2003, JMA-II paid Ms. Jorgensen’s
$179,000 Federal estate tax liability and $32,000 California
estate tax liability (as calculated by the estate).
In 2003 through 2006 JMA-I and JMA-II sold certain assets,
including stock in Payless Shoesource, Inc., and May Department
Stores Co., which Ms. Jorgensen had contributed to the
partnerships during her lifetime. In computing the gain on the
sale of those assets, the partnerships used Ms. Jorgensen’s
original cost basis in the assets, as opposed to a step-up in
basis equal to the fair market value of the assets on Ms.
Jorgensen’s date of death under section 1014(a). The JMA-I and
JMA-II partners reported the gains on their respective Forms
1040, U.S. Individual Income Tax Return, and paid the income
taxes due. Between April 6 and 9, 2008, the JMA-I and JMA-II
partners submitted to respondent untimely protective claims for
6
The $125,000 loan was not reflected as an asset in the
valuation of JMA-II and was not reported on Ms. Jorgensen’s
Federal estate tax return. The estate conceded this was an
error.
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refund of 2003 income taxes paid on the sale of the assets Ms.
Jorgensen contributed to the partnerships.
OPINION
I. Burden of Proof
Generally the taxpayer bears the burden of proving the
Commissioner’s determinations are erroneous. Rule 142(a).
However, with respect to a factual issue relevant to the
liability of a taxpayer for tax, the burden of proof may shift to
the Commissioner if the taxpayer has produced credible evidence
relating to the issue, met substantiation requirements,
maintained records, and cooperated with the Secretary’s
reasonable requests for documents, witnesses, and meetings. Sec.
7491(a). A showing by the taxpayer that the Commissioner’s
determinations in the notice of deficiency are arbitrary,
excessive, or without foundation also shifts the burden of proof
to the Commissioner. Palmer v. United States, 116 F.3d 1309,
1312 (9th Cir. 1997).
The estate argues that the burden of proof shifts to
respondent under both these theories. Our resolution of the
issues is based on the preponderance of the evidence rather than
the allocation of the burden of proof; therefore, we need not
address the estate’s arguments with respect to the burden of
proof. See Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th
Cir. 2005), affg. T.C. Memo. 2003-212; Polack v. Commissioner,
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366 F.3d 608, 613 (8th Cir. 2004), affg. T.C. Memo. 2002-145;
Knudsen v. Commissioner, 131 T.C. ___ (2008).
II. Section 2036(a)
“‘Section 2036(a) is * * * intended to prevent parties from
avoiding the estate tax by means of testamentary substitutes that
permit a transferor to retain lifetime enjoyment of purportedly
transferred property.’” Estate of Bigelow v. Commissioner, 503
F.3d 955, 963 (9th Cir. 2007) (quoting Strangi v. Commissioner,
417 F.3d 468, 476 (5th Cir. 2005), affg. T.C. Memo. 2003-145),
affg. T.C. Memo. 2005-65. Section 2036(a) is applicable when
three conditions are met: (1) The decedent made an inter vivos
transfer of property; (2) the decedent’s transfer was not a bona
fide sale for adequate and full consideration; and (3) 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. If these
conditions are met, the full value of the transferred property
will be included in the value of the decedent’s gross estate.
Estate of Bongard v. Commissioner, 124 T.C. 95, 112 (2005).
A. Whether There Was a Section 2036(a) Transfer
The estate argues that Ms. Jorgensen’s transfers of
securities to the partnerships were not “transfers” within the
meaning of section 2036(a). The term “transfer” as used in
section 2036(a) is broadly defined, reflecting the purpose of
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section 2036(a), which is to include in the value of a decedent’s
gross estate the values of all property she transferred but
retained an interest in during her lifetime. Estate of Bongard
v. Commissioner, supra at 113. A section 2036(a) transfer
includes any inter vivos voluntary act of transferring property.
Id. Ms. Jorgensen’s contributions to the partnerships were
voluntary inter vivos transfers of property and thus are
“transfers” within the meaning of section 2036(a).
B. Whether the Transfers Were Bona Fide Sales for Adequate
and Full Consideration
Section 2036(a) excepts from its application any transfer of
property otherwise subject to that section which is a “bona fide
sale for an adequate and full consideration in money or money’s
worth”. The exception is limited to a transfer of property where
the transferor “has received benefit in full consideration in a
genuine arm’s length transaction”. Estate of Goetchius v.
Commissioner, 17 T.C. 495, 503 (1951). The exception is
satisfied in the context of a family limited partnership
where the record establishes the existence of a
legitimate and significant nontax reason for creating
the family limited partnership, and 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.
By contrast, the bona fide sale exception is not
applicable where the facts fail to establish that the
transaction was motivated by a legitimate and
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significant nontax purpose. A list of factors that
support such a finding includes the taxpayer 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 the property to the partnership.
Estate of Bongard v. Commissioner, supra at 118 (citations
omitted).
We separate the bona fide sale exception into two prongs:
(1) Whether the transaction qualifies as a bona fide sale; and
(2) whether the decedent received adequate and full
consideration. Id. at 119, 122-125.
1. Ms. Jorgensens’s Nontax Reasons for Forming the
Partnerships
Whether a sale is bona fide is a question of motive. We
must determine whether Ms. Jorgensen had a legitimate and
significant nontax reason, established by the record, for
transferring her property. The estate argues that Ms. Jorgensen
had several nontax reasons for transferring her property to JMA-I
and JMA-II. Respondent disputes the significance and legitimacy
of those reasons and offers several factors to support his
argument that tax savings were the primary reason Ms. Jorgensen
transferred her brokerage accounts to the partnerships.
a. Management Succession
Ms. Jorgensen was not involved in investment decisions
during Colonel Jorgensen’s lifetime, and she made it known that
she did not want the responsibility. If he predeceased his wife,
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as ultimately occurred, Colonel Jorgensen wanted Gerald and Jerry
Lou to manage his wife’s investments for her.
The estate points to several cases in support of its
argument that providing for management succession is a legitimate
and significant reason for the transfer of assets to a limited
partnership.7 The U.S. Court of Appeals for the Fifth Circuit
has held that transfers to a family partnership were bona fide
sales where the purpose was to maintain control and authority to
manage working oil and gas interests. Kimbell v. United States,
371 F.3d 257, 267 (5th Cir. 2004). More recently, we held that
transfers to a family partnership were bona fide sales where the
purposes included requiring the decedent’s children to maintain
joint management of business matters related to patents and
patent licensing agreements, including related litigation.
Estate of Mirowski v. Commissioner, T.C. Memo. 2008-74 n.44.
7
The estate also directs us to two additional cases that do
not involve transfers to family limited partnerships. In Estate
of Bischoff v. Commissioner, 69 T.C. 32, 39-41 (1977), we held
that maintaining control of a majority of shares of a pork
processing business was a legitimate business purpose for
entering into buy-sell agreements at the partnership level, and
thus limiting the amount includable in the decedent’s gross
estate to the amount paid under the agreement. In Estate of
Reynolds v. Commissioner, 55 T.C. 172, 194 (1970), we held that a
voting trust agreement factored into the valuation of a
decedent’s estate when the principal purpose of the agreement was
to assure the continuity of a life insurance company’s management
and policies. These cases both involve the management of an
active business, not a portfolio of untraded securities, and
therefore are distinguishable from this case.
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We are mindful that the U.S. Court of Appeals for the Ninth
Circuit, to which an appeal in this case would ordinarily lie,
has stated that “efficient management” may count as a credible
nontax purpose, but only if the business of the family
partnership required some kind of active management as in Kimbell
v. United States, supra.8 Estate of Bigelow v. Commissioner, 503
F.3d at 972; see also Strangi v. Commissioner, 417 F.3d at 481
(transfer of assets had no legitimate nontax rationale where the
partnership “never made any investments or conducted any active
business following its formation”).
In both Kimbell and Estate of Mirowski, the assets
transferred to the partnership required active management. The
estate argues that Colonel Jorgensen, and later Gerald and Jerry
Lou, engaged in “some kind of active management” with respect to
the partnerships. The estate further argues that because the
partnerships invested in specific companies rather than mutual
funds, active management was required. Colonel Jorgensen was a
8
The estate argues that the “efficient management” argument
in Estate of Bigelow v. Commissioner, 503 F.3d 955 (9th Cir.
2007), affg. T.C. Memo. 2005-65, is different from its argument
with respect to “management succession”, and therefore we should
disregard Estate of Bigelow on this issue. We disagree. The
U.S. Court of Appeals for the Ninth Circuit cites Kimbell v.
United States, 371 F.3d 257, 267 (5th Cir. 2004), which relates
to management of oil and gas interests after the transferor’s
death. We therefore conclude that for management succession to
be a legitimate nontax purpose under Estate of Bigelow v.
Commissioner, supra at 972, there must be at least “some kind of
active management”.
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well-read, self-taught, knowledgeable investor. He researched
stocks, tracked his investments, and kept notes and a journal
with respect to his investments. Nevertheless, he made very few
trades. After his death, Gerald and Jerry Lou were responsible
for investment decisions. They were not nearly as knowledgeable
or as interested in investing as their father was. They did not
research investments or keep records as their father had, and
they did not consult with their investment adviser often.
Consequently, there was very little trading in the partnerships’
accounts.9
JMA-I and JMA-II were passive investment vehicles. The
general partners’ activities with respect to the management of
the partnerships did not rise to the level of active management.
As the U.S. Court of Appeals for the Third Circuit has suggested,
the mere holding of an untraded portfolio of marketable
securities weighs against the finding of a nontax benefit for a
transfer of that portfolio to a family entity. See Estate of
Thompson v. Commissioner, 382 F.3d 367, 380 (3d Cir. 2004), affg.
T.C. Memo. 2002-246.
9
In 2005 a new adviser took over their account. The new
adviser contacted Jerry Lou approximately every 2 weeks to
suggest investment options. However, Jerry Lou indicated that
even this limited contact was more than she wanted. She
testified that “often I just tell him no, we’re happy with things
the way they are.”
-22-
Furthermore, the partnerships were not needed to help Ms.
Jorgensen manage her assets because her revocable trust, which
had her children as trustees, already served that function.
Colonel Jorgensen had a similar plan in the trust he established
at the same time as Ms. Jorgensen’s. Ms. Jorgensen’s trust was
authorized to hold substantially all her assets and provided her
with centralized management and control. Furthermore, Gerald and
Jerry Lou were also her attorneys-in-fact and thus authorized to
manage her assets under a durable power of attorney. The estate
has not shown how the limited partnerships accomplished the goal
of managing Ms. Jorgensen’s assets in a way that the trustees of
her revocable trust or her attorneys-in-fact could not. See
Estate of Bigelow v. Commissioner, supra at 972 (court rejected
estate’s argument that management of decedent’s assets
transferred to partnership was a legitimate nontax reason for
transfer where general partner was also trustee of decedent’s
trust); Estate of Erickson v. Commissioner, T.C. Memo. 2007-107
(centralized management of taxpayer’s assets was not a legitimate
nontax reason for transferring assets to a family partnership,
where general partner was also decedent’s attorney-in-fact).
In sum, the general partners’ management of JMA-I’s and JMA-
II’s portfolios of marketable securities was not active.
Therefore, management succession was not a legitimate reason for
-23-
Ms. Jorgensen’s transferring the bulk of her assets to the
partnerships.
b. Financial Education of Family Members and
Promotion of Family Unity
The estate argues that Colonel Jorgensen intended to use
JMA-I as a financial education tool to teach his children about
investing. The estate also argues that he hoped that the
partnership would promote family unity by requiring the children
to work together.
The record does not indicate that Colonel Jorgensen actually
taught his children much about investing. Although they were
general partners in JMA-I, they did not participate in its
activities. Colonel Jorgensen made all decisions. In fact, the
children testified that after their father died they faced a
steep learning curve in operating the partnerships. They further
testified that after their father’s death they did not make any
trades and their investment adviser left them alone.
The estate argues that Colonel Jorgensen hoped JMA-I would
promote family unity. However, considering Colonel Jorgensen’s
failure to involve his children in decisionmaking with respect to
JMA-I, we are unconvinced that this was anything more than a
theoretical purpose. When JMA-II was formed and funded, JMA-I
already ostensibly served to promote family unity. We do not see
how JMA-II advanced the goal of family unity. Furthermore,
because the partnerships required pro rata distributions, Gerald
-24-
and Jerry Lou’s differing spending habits (Gerald was a
spendthrift; Jerry Lou was frugal), combined with their roles as
general partners, seem as likely to cause family disunity as
unity.
c. Perpetuation of the Jorgensens’ Investment
Philosophy and Motivating Participation in
the Partnerships
The estate argues that the partnerships were formed to
perpetuate Colonel Jorgensen’s investment philosophy premised on
buying and holding individual stocks with an eye toward long-term
growth and capital preservation. Gerald testified that he wants
the partnerships to operate indefinitely so that his parents’
philosophy can be instilled in successive generations.
The estate’s argument is unconvincing. Under these
circumstances perpetuation of a “buy and hold” strategy for
marketable securities is not a legitimate or significant nontax
reason for transferring the bulk of one’s assets to a
partnership.10 Nor is capital preservation. There are no
special skills to be taught when adhering to a “buy and hold”
10
In the unique circumstances of Estate of Schutt v.
Commissioner, T.C. Memo. 2005-126, we held that a “buy and hold”
strategy with respect to Exxon and Dupont stock was a legitimate
and significant motive for transferring assets to two business
trusts. The decedent’s wife was the daughter of Eugene E.
duPont, and the decedent hoped to maintain ownership of the stock
traditionally held by the family including stock held by certain
trusts created for the benefit of his children and grandchildren
in the event those trusts terminated. Similar factors are not
present in this case.
-25-
strategy, especially when one pays an investment adviser to
recommend what to buy and when to sell. This is not a situation
where future generations are taught how to manage an ongoing
business.
The estate also argues that transferring interests in the
partnerships to their children motivated them to actively
participate in the partnerships. We also find this argument
unconvincing. As previously discussed, Colonel Jorgensen did not
include Gerald and Jerry Lou in the decisionmaking process, and
the grandchildren received limited partnership interests. The
partnership agreements precluded the limited partners from
participating in the decisionmaking process. The estate
recognizes that simplifying gift-giving is not a legitimate and
significant nontax purpose. See Estate of Bigelow v.
Commissioner, 503 F.3d at 972. However, the estate argues that
gift-giving was the means to the end; i.e., participation in the
partnerships. We are not persuaded that the transfers of limited
partnership interests led to any meaningful participation in the
partnerships. Perhaps the annual receipt of Schedules K-1,
Partner’s Share of Income, Credits, Deductions, etc., reflecting
the income of the partnerships would cause the grandchildren to
become interested in investing, but this is merely a theoretical
purpose.
-26-
d. Pooling of Assets
The estate argues that the partnerships were created in part
to pool assets. JMA-I was funded equally by Colonel and Ms.
Jorgensen through their transfer of marketable securities to the
partnership. Colonel Jorgensen managed those assets before and
after their transfer. Ms. Jorgensen had no involvement in
managing the assets or in the decision to transfer them to JMA-I.
Under these circumstances the pooling of assets was not a
significant purpose for the formation of JMA-I.
JMA-II was funded by Ms. Jorgensen acting through her
revocable trust and as executor of Colonel Jorgensen’s estate.
There is no credible evidence that Ms. Jorgensen wished to pool
assets.
The estate argues that because Colonel and Ms. Jorgensen
intended to give gifts to their children and grandchildren, doing
so through the partnerships allowed for the pooling of those
assets, achieving economies of scale resulting in lower operating
costs, less need for administrative compliance, and better
attention from service providers. However, there is little
evidence to support this argument. The Jorgensens’ investment
adviser testified that if the gifts given to the children and
grandchildren had been securities, rather than limited
partnership interests, and they had held their own investment
accounts, those accounts would have received less attention.
-27-
However, he further testified that family members would have
received the same attention simply by linking the accounts
together. We also doubt that giving securities to each of the
children and grandchildren would have been less costly or
complicated than creating two limited partnerships, each
registered with the Commonwealth, requiring registered agents,
annual reports to the Commonwealth, and the filing of annual
Federal income tax returns and Schedules K-1.
e. Spendthrift Concerns
The estate argues that Colonel and Ms. Jorgensen transferred
their assets to the partnerships because they intended to make
gifts to their children and grandchildren and they had
spendthrift concerns. Specifically, they were worried about
divorces affecting family members, and they did not want to give
assets to minors who might spend the windfall unwisely. They
were also concerned because Gerald was a free spender who had
“never saved a dime.” Therefore, the estate argues they sought a
management succession vehicle which would incorporate purposeful
illiquidity and transfer restrictions.
Gerald may have been a spendthrift, but he was also a
general partner in both partnerships. Although the general
partners had to agree on distributions, he was in a position to
exert influence. Jerry Lou, the other general partner, was
frugal, and thus likely to resist large distributions. The
-28-
estate argues these opposing views were likely to curb Gerald’s
spending. Indeed since the creation of the partnerships, Gerald
has become more conservative with his money. However, if
Gerald’s money-management habits had been a significant concern,
it is unlikely Colonel Jorgensen would have decided to make him a
general partner.
Gerald, despite being a general partner in both
partnerships, believed until 1999 that the partnerships were like
bank accounts and he could access money whenever he wanted. Yet
he made no attempt to access the money until 1999, when he was
told he could take a loan. He subsequently borrowed $125,000 to
purchase a home. No payments were made on the loan for 2 years,
and at that time, only interest was paid. The loan was finally
repaid when Jerry Lou and her husband suggested that it be repaid
to make the partnership “look very legit.” At that point Gerald
had received or was about to receive $286,637 which we presume
was related to the settlement of his mother’s estate, more than
enough to satisfy the $125,000 loan. Gerald’s ability to access
funds in the form of a loan without making payment on the loan
for 2 years suggests that curbing his spending was not a
significant reason for the formation of the partnerships.
The estate also argues that the partnerships protected the
family’s assets from creditors. There is no evidence that Ms.
Jorgensen or any other partner was likely to be liable in
-29-
contract or tort for any reason. The only colorable concern is
that Gerald could have overextended himself financially, causing
problems with creditors. However, this is a purely theoretical
concern. Cf. Kimbell v. United States, 371 F.3d at 268
(acknowledging legitimate risk of personal liability where
decedent transferred working interests in oil and gas properties
into a family partnership and, absent partnership formation,
family members as individuals would have faced exposure for
environmental torts arising on those properties).
f. Providing for Children and Grandchildren
Equally
The estate argues that Ms. Jorgensen’s desire to provide for
her children and grandchildren equally was a significant
motivating factor in forming the partnerships. Ms. Jorgensen did
provide for her children and grandchildren equally by giving them
limited partnership interests. However, she could have provided
for them equally well by giving securities directly. The only
assistance the partnerships provided was to facilitate and
simplify gift-giving equal to the annual gift tax exclusion,
which is not a significant and legitimate nontax reason for
transferring one’s assets to a limited partnership.11 See Estate
11
This Court has held that providing for children equally
was a significant and legitimate nontax reason for transferring
assets to a family limited partnership. Estate of Mirowski v.
Commissioner, T.C. Memo. 2008-74. However, that case involved
the management of patents, patent licensing agreements, and
(continued...)
-30-
of Bigelow v. Commissioner, 503 F.3d at 972; Estate of Bongard v.
Commissioner, 124 T.C. 126-127.
2. Factors Indicating the Transfers Were Not Bona
Fide Sales
a. Valuation Discounts
The estate argues that tax savings could not have been the
primary factor in forming the partnerships because discounts were
not used in valuing Colonel and Ms. Jorgensen’s gifts of
partnership interests in 1995 through 1998. However, discounts
were taken in valuing Colonel Jorgensen’s estate after his death
in 1996.
Around that same time Ms. Jorgensen’s estate planner
recommended that she transfer her remaining brokerage accounts to
JMA-I. He wrote: “The reason for doing this is so that
hopefully your limited partnership interest in JMA partnership
will qualify for the 35% discount.” Ms. Jorgensen did not
transfer her remaining assets to JMA-I. Instead she created JMA-
II and transferred her brokerage accounts to that partnership.
There is little contemporaneous documentary evidence with
respect to the purpose for forming JMA-I. This is most likely
because the purposes were discussed between Colonel Jorgensen and
his attorney. Because JMA-II was formed with little direct input
11
(...continued)
related litigation which could not be readily divided into equal
shares, as opposed to a portfolio of marketable securities which
could. See id.
-31-
from Ms. Jorgensen, her attorney wrote her letters discussing the
reasons for transferring her remaining brokerage assets to a
limited partnership. Those letters show that reducing the value
of Ms. Jorgensen’s taxable estate, and thus tax savings, was the
primary reason for the formation and funding of JMA-II.
The only documentary evidence showing a different reason for
the formation and funding of the partnerships is a letter from
Mr. Golden to Ms. Jorgensen in October 1998. It discusses her
giving an additional $650,000 of limited partnership interests
valued using significant discounts for lack of marketability and
minority interests. It further discusses the potential for an
Internal Revenue Service audit of the gift because JMA-II held
only passive investments. It cites Estate of Schauerhamer v.
Commissioner, T.C. Memo. 1997-242, and discusses the
Commissioner’s arguments and the reasons the Court determined
that the taxpayer’s family partnership should not be respected.
The letter states that Ms. Jorgensen had several nontax reasons
for creating JMA-II, including: The ability to transfer assets
without disrupting the recipient’s initiative, cost savings from
the pooling of assets, simplification of gift-giving, protection
against creditors, protection in the case of divorce, and the
education of younger family members.12 The letter was written
12
We have previously observed that taxpayers often disguise
tax-avoidance motives with a rote recitation of nontax purposes.
(continued...)
-32-
well after the formation and funding of the partnerships by an
attorney preparing for potential litigation with respect to the
gift. Thus, we give it little weight.
b. Disregard of Partnership Formalities
Neither partnership maintained books and records other than
a checkbook that went unreconciled and monthly brokerage
statements. The partnerships’ return preparer used the
partnerships’ brokerage statements to prepare the partnership
returns. There were no formal meetings between the partners, and
no minutes were ever kept.
Ms. Jorgensen and her children often failed to treat the
partnerships as separate entities. Ms. Jorgensen used
partnership assets to pay personal expenses, and she paid
partnership expenses with her personal assets. For example, Ms.
Jorgensen used partnership assets to give $78,500 of cash gifts
to family members. The mingling of personal funds with
partnership funds suggests that the transfer of property to a
family limited partnership was not motivated by a legitimate and
significant nontax reason. Estate of Reichardt v. Commissioner,
114 T.C. 144, 152 (2000).
Although Ms. Jorgensen was not financially dependent on
distributions from the partnerships for her day-to-day expenses,
12
(...continued)
Estate of Hurford v. Commissioner, T.C. Memo. 2008-278; see
Estate of Bongard v. Commissioner, 124 T.C. 95, 118 (2005).
-33-
she was dependent on the partnerships when her personal funds
became insufficient to satisfy her gift-giving program. A
taxpayer’s financial dependence on distributions from the
partnership suggests that the transfer of property to a family
limited partnership was not motivated by a legitimate and
significant nontax reason. Estate of Thompson v. Commissioner,
T.C. Memo. 2002-246; Estate of Harper v. Commissioner, T.C. Memo.
2002-121.
JMA-II also made significant loans to its partners. Gerald
borrowed $125,000 for the purchase of a home after he was told
that he could not withdraw money outright. Although he borrowed
the money in July 1999, he did not make any payments on the loan
until July 2001. If Gerald had not repaid the loan, Jerry Lou
believed she would have taken it out of his partnership interest,
although doing so would have violated the partnership’s
requirement that distributions be pro rata.
c. Whether the Transfers to JMA-I and JMA-II
Were at Arm’s Length
Where a taxpayer stands on both sides of a transaction, we
have concluded that there is no arm’s-length bargaining and thus
the bona fide transfer exception does not apply. E.g., Estate of
Strangi v. Commissioner, T.C. Memo. 2003-145; Estate of Harper v.
Commissioner, supra. On the other hand, we have found an arm’s-
length bargain in the intrafamily context when the interests of
the family members were sufficiently divergent. E.g., Stone v.
-34-
Commissioner, T.C. Memo. 2003-309. Although intrafamily
transfers are permitted under section 2036(a), they are subject
to heightened scrutiny. Estate of Bigelow v. Commissioner, 503
F.3d at 969; Kimbell v. United States, 371 F.3d at 263.
Colonel Jorgensen decided to form and fund JMA-I. Although
he and Ms. Jorgensen contributed equal amounts to the
partnership, Ms. Jorgensen had no involvement in the decision or
the transfer. Colonel Jorgensen’s attorney believed that Colonel
Jorgensen represented Ms. Jorgensen during their meetings.
Neither Ms. Jorgensen nor any of their children or grandchildren
were consulted. Under these circumstances, we conclude that the
transfer of assets to JMA-I was not at arm’s length.
Ms. Jorgensen formed and funded JMA-II through her revocable
trust and in her role as executrix of her husband’s estate.
Although she formed and funded JMA-II, the decision to do so was
largely made by her children in consultation with the family’s
attorney. Considering that Ms. Jorgensen stood on both sides of
the transaction, although in different roles, we conclude that
the transfer of assets to JMA-II was not at arm’s length.
3. Conclusion With Respect to Whether the
Transactions Were a Bona Fide Sale
Taking into account the totality of the facts and
circumstances surrounding the formation and funding of the
partnerships, on the preponderance of the evidence we conclude
that Ms. Jorgensen did not have a legitimate and significant
-35-
nontax reason for transferring her assets to JMA-I and JMA-II,
and therefore these were not bona fide sales. We find especially
significant that the transactions were not at arm’s length and
that the partnerships held a largely untraded portfolio of
marketable securities. See Estate of Thompson v. Commissioner,
382 F.3d at 380 (holding of an untraded portfolio of marketable
securities weighs against finding of a nontax reason for transfer
of portfolio to a family limited partnership). Although the
estate recites a number of purported nontax reasons for the
formation and funding of the partnerships, none of those alleged
reasons are mentioned in contemporaneous documentation, and the
estate has failed to establish that any of the reasons was
significant and legitimate.
4. Whether the Transactions Were for Full and
Adequate Consideration
The general test for deciding whether transfers to a
partnership are made for adequate and full consideration is to
measure the value received in the form of a partnership interest
to see whether it is approximately equal to the property given
up. Kimbell v. United States, 371 F.3d at 262; Estate of Bongard
v. Commissioner, 124 T.C. 118. Under Kimbell v. United
States, supra at 266, we focus on three things:
(1) whether the interests credited to each of the
partners was proportionate to the fair market
value of the assets each partner contributed to
the partnership, (2) whether the assets
contributed by each partner to the partnership
-36-
were properly credited to the respective capital
accounts of the partners, and (3) whether on
termination or dissolution of the partnership the
partners were entitled to distributions from the
partnership in amounts equal to their respective
capital accounts. * * *
Respondent does not dispute that the transfers were made for
full and adequate consideration.
C. Whether Ms. Jorgensen Retained the Possession or
Enjoyment of, or the Right to the Income From, the
Property She Transferred to JMA-I and JMA-II
“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(a), Estate Tax Regs.
“The existence of formal legal structures which prevent de jure
retention of benefits of the transferred property does not
preclude an implicit retention of such benefits.” Estate of
Thompson v. Commissioner, 382 F.3d at 375; Estate of McNichol v.
Commissioner, 265 F.2d 667, 671 (3d Cir. 1959), affg. 29 T.C.
1179 (1958); Estate of Bongard v. Commissioner, supra at 129.
The existence of an implied agreement is a question of fact
that can be inferred from the circumstances surrounding a
transfer of property and the subsequent use of the transferred
property. Estate of Bongard v. Commissioner, supra at 129. We
have found implied agreements where: (1) The decedent used
partnership assets to pay personal expenses, e.g., Estate of
-37-
Rosen v. Commissioner, T.C. Memo. 2006-115; (2) the decedent
transferred nearly all of his assets to the partnership, e.g.,
Estate of Reichardt v. Commissioner, 114 T.C. 144 (2000); and (3)
the decedent’s relationship to the assets remained the same
before and after the transfer, e.g., id.; Estate of Rosen v.
Commissioner, supra.
Although Ms. Jorgensen retained sufficient assets outside
the partnership for her day-to-day expenses, she lacked the funds
to satisfy her desire to make cash gifts. Thus, Ms. Jorgensen
used partnership assets to make significant cash gifts to her
family members.
After Ms. Jorgensen’s death, JMA-II made principal
distributions of $179,000 and $32,000 which the estate used to
pay transfer taxes, legal fees, and other estate obligations.
The use of a significant portion of partnership assets to
discharge obligations of a taxpayer’s estate is evidence of a
retained interest in the assets transferred to the partnership.
See Estate of Rosen v. Commissioner, supra; Estate of Korby v.
Commissioner, T.C. Memo. 2005-103; Estate of Thompson v.
Commissioner, T.C. Memo. 2002-246. “[P]art of the ‘possession or
enjoyment’ of one’s assets is the assurance that they will be
available to pay various debts and expenses upon one’s death.”
Strangi v. Commissioner, 217 F.3d at 477.
-38-
The estate denies the existence of any agreement or
understanding that Ms. Jorgensen would retain economic use and
benefit of the assets transferred to the partnerships. However,
the actual use of a substantial amount of partnership assets to
pay Ms. Jorgensen’s predeath and postdeath obligations undermines
the claim. This is true regardless of whether the distributions
were charged against her percentage ownership in the
partnerships, and especially relevant considering that under the
terms of the partnership agreements all distributions were to be
pro rata. Under these circumstances, we conclude that there was
an implied agreement at the time of the transfer of Ms.
Jorgensen’s assets to the partnerships that she would retain the
economic benefits of the property even if the retained rights
were not legally enforceable.
Respondent makes an alternative argument related to the
legal effect of Gerald’s and Jerry Lou’s dual roles as general
partners of the partnerships and cotrustees of Ms. Jorgensen’s
revocable trust. Ms. Jorgensen was the sole beneficiary of her
revocable trust during her lifetime. Under the trust terms she
had access to all trust income and corpus without restriction.
Jerry Lou and Gerald, as cotrustees, had the duty to administer
the trust solely for their mother’s benefit. Ms. Jorgensen,
through her revocable trust, owned significant interests in JMA-I
and JMA-II, whose general partners were Gerald and Jerry Lou.
-39-
Gerald and Jerry Lou were under a fiduciary obligation to
administer the trust assets, including the JMA-I and JMA-II
partnership interests, solely for Ms. Jorgensen’s benefit; and as
general partners of JMA-I and JMA-II, they had express authority
to administer the partnership assets at their discretion. Under
these circumstances, we also conclude that Ms. Jorgensen retained
the use, benefit, and enjoyment of the assets she transferred to
the partnerships.
D. Conclusion With Respect to Whether the Values of the
Assets Transferred to JMA-I and JMA-II Are Includable
in the Value of the Gross Estate
We conclude that section 2036(a)(1) includes in the value of
the gross estate the values of the assets Ms. Jorgensen
transferred to JMA-I and JMA-II. Respondent argues in the
alternative that section 2038 requires inclusion in the value of
the gross estate of the values of the assets transferred into the
partnerships. Because the asset values are included under
section 2036(a)(1), we need not address respondent’s alternative
argument.13
13
With respect to JMA-I, the parties stipulated that if we
find that sec. 2036 applies, giving no consideration to Ms.
Jorgensen’s transfers of JMA-I interests made during her
lifetime, the value of a 63.146-percent interest in JMA-I is
includable in the value of her gross estate. The parties did not
stipulate the includable percentage interest in JMA-II. However,
we find that, giving no consideration to Ms. Jorgensen’s
transfers of JMA-II interests during her lifetime, the value of a
79.6947-percent interest in JMA-II is includable in the value of
her gross estate.
(continued...)
-40-
III. Equitable Recoupment
In 2006 Congress amended section 6214(b) to provide that we
“may apply the doctrine of equitable recoupment to the same
extent that it is available in civil tax cases before the
district courts of the United States and the United States Court
of Federal Claims.” Pension Protection Act of 2006, Pub. L. 109-
280, sec. 858(a), 120 Stat. 1020; Menard, Inc. v. Commissioner,
13
(...continued)
The estate asserts, although only in objecting to one of
respondent’s proposed finding of facts, that if sec. 2036
applies, it applies only to the assets Ms. Jorgensen held on the
date of her death plus those transfers she made within 3 years of
her death which would be included in the gross estate under sec.
2035(a). We assume the estate is referring to the possibility
that Ms. Jorgensen sufficiently severed her ties to a portion of
the retained assets so that sec. 2036 would not include those
assets in her gross estate.
The estate’s failure to argue the issue beyond a vague
assertion within an objection to a proposed finding of fact leads
us to conclude that the issue has been waived or abandoned. See
Rule 151(e)(3), (5); Bradley v. Commissioner, 100 T.C. 367, 370
(1993); Money v. Commissioner, 89 T.C. 46, 48 (1987); Stringer v.
Commissioner, 84 T.C. 693, 706 (1985), affd. without published
opinion 789 F.2d 917 (4th Cir. 1986).
Nevertheless, were the issue not waived or conceded, on the
record before us we would not find that Ms. Jorgensen terminated
a portion of her interest in the partnership assets. The record
indicates that Ms. Jorgensen retained the use, benefit, and
enjoyment of the assets she transferred to the partnerships. See
supra pp. 36-39.
-41-
130 T.C. 54, 64 (2008).14 We recently described the doctrine as
follows:
The doctrine of equitable recoupment is a
judicially created doctrine that, under certain
circumstances, allows a litigant to avoid the bar of an
expired statutory limitation period. The doctrine
prevents an inequitable windfall to a taxpayer or to
the Government that would otherwise result from the
inconsistent tax treatment of a single transaction,
item, or event affecting the same taxpayer or a
sufficiently related taxpayer. Equitable recoupment
operates as a defense that may be asserted by a
taxpayer to reduce the Commissioner’s timely claim of a
deficiency, or by the Commissioner to reduce the
taxpayer’s timely claim for a refund. When applied for
the benefit of a taxpayer, the equitable recoupment
doctrine allows a taxpayer to recoup the amount of a
time-barred tax overpayment by allowing the overpayment
to be applied as an offset against a deficiency if
certain requirements are met.
As a general rule, the party claiming the benefit
of an equitable recoupment defense must establish that
it applies. In order to establish that equitable
recoupment applies, a party must prove the following
elements: (1) The overpayment or deficiency for which
recoupment is sought by way of offset is barred by an
expired period of limitation; (2) the time-barred
overpayment or deficiency arose out of the same
transaction, item, or taxable event as the overpayment
or deficiency before the Court; (3) the transaction,
item, or taxable event has been inconsistently
subjected to two taxes; and (4) if the transaction,
item, or taxable event involves two or more taxpayers,
there is sufficient identity of interest between the
taxpayers subject to the two taxes that the taxpayers
should be treated as one.
14
Before the amendment to sec. 6214(b), the Courts of
Appeals that considered whether we may entertain an equitable
recoupment claim split on the question. Compare Estate of
Mueller v. Commissioner, 153 F.3d 302 (6th Cir. 1998), affg. on
other grounds 107 T.C. 189 (1996), with Estate of Branson v.
Commissioner, 264 F.3d 904 (9th Cir. 2001), affg. 113 T.C. 6, 15
(1999).
-42-
Menard, Inc. v. Commissioner, supra at 62-63 (citations omitted).
The estate contends that it is entitled to equitable
recoupment for income taxes paid by Ms. Jorgensen’s children and
grandchildren (JMA-I and JMA-II partners) on sales of stock that
occurred in 2003 through 2006 the values of which we have held
are properly included in the value of Ms. Jorgensen’s gross
estate under section 2036.
A. Whether a Refund Is Barred by an Expired Period of
Limitations
The children and grandchildren filed their 2003 income tax
returns on or about April 15, 2004. They filed protective claims
for refund for the years 2003 through 2006. Respondent rejected
the 2003 claims as untimely. The claims for 2004 through 2006
have not been ruled on, but they appear timely.15 Therefore, the
first element of the equitable recoupment claim is met only with
respect to income taxes overpaid in 2003.
B. Whether the Overpayment Arose out of a Single
Transaction, Item, or Event
A claim of equitable recoupment will lie only where the
Government has taxed a single transaction, item, or taxable event
under two inconsistent theories. Estate of Branson v.
15
The parties stipulated that the 2003 claims for refund
were submitted between Apr. 6 and 9, 2008. We presume that the
2004 claims were submitted at the same time. Claims for refund
with respect to the 2004 tax year would have to have been filed
on or before Apr. 15, 2008, assuming the returns were timely
filed. See secs. 6511(a), 6513(a).
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Commissioner, 113 T.C. 6, 15 (1999), affd. 264 F.3d 904 (9th Cir.
2001). In Estate of Branson, the decedent’s estate included
stock in two closely held corporations. To pay applicable estate
taxes, the estate sold a portion of the stock. The stock was
sold for considerably more than its value reported on the estate
tax return. Under section 1014(a)(1),16 the value of the stock
as declared on the estate tax return was used as its basis for
determining gain from the sale. The estate did not pay the tax
on the sale but distributed the gain to the estate’s residuary
beneficiary, who paid the tax due. The Commissioner determined a
deficiency in estate tax on the ground that the closely held
corporation stock was worth substantially more than declared. In
Estate of Branson v. Commissioner, T.C. Memo. 1999-231, we agreed
with the Commissioner. Our revaluation of the stock resulted in
an estate tax deficiency. Since pursuant to section 1014(a) the
same valuation was used to determine the residuary beneficiary’s
gain on the sale of the stock, it followed that the residuary
beneficiary had overpaid her income tax. Estate of Branson v.
Commissioner, 264 F.3d at 907.
We have held that the values of the assets Ms. Jorgensen
transferred to JMA-I and JMA-II are included in the value of her
16
Sec. 1014 generally provides a basis for property acquired
from a decedent that is equal to the value placed upon the
property for purposes of the Federal estate tax. See Estate of
Branson v. Commissioner, 113 T.C. 34-35; sec. 1.1014-1(a),
Income Tax Regs.
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gross estate. JMA-I and JMA-II sold some of those assets during
2003, and the partners paid capital gains tax on the proceeds.
The estate argues that the single item in question is the stock
contributed by Ms. Jorgensen to the partnerships and sold by the
partnerships during 2003. In Estate of Branson, closely held
corporation stock included in the decedent’s gross estate and
then sold by the estate satisfied the single item requirement.
In this case, stock included in Ms. Jorgensen’s gross estate and
sold by the partnerships in 2003 is a single item. Thus, the
second element of the equitable recoupment claim is met.
C. Whether the Single Item Would Be Subjected to Two Taxes
Inconsistently
The value of stock contributed by Ms. Jorgensen and sold by
the partnerships in 2003 was included in both the value of Ms.
Jorgensen’s gross estate and her children’s and grandchildren’s
taxable income (to the extent of the gain resulting from the
stock sale). The inclusion of the item in the gross estate
results in an increase in the stock’s basis in the hands of the
partnership pursuant to section 1014(a). Increased basis in the
assets results in a decrease of the gain and resulting income tax
on the sale of those assets. However, the partners’ 2003 claims
for income tax refunds are barred under section 6511(a).
Therefore, the estate tax and income tax have been imposed on the
same item inconsistently. See Estate of Branson v. Commissioner,
264 F.3d at 917 (“the ‘single transaction’ prerequisite to
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equitable recoupment is satisfied where the same item * * * is
taxed as both the corpus of the estate and income to the
beneficiary”).
D. Sufficient Identity of Interest
The final element of an equitable recoupment claim is that
the taxpayers involved (the estate and the JMA-I and JMA-II
partners) have a sufficient identity of interest so that they
should be treated as a single taxpayer in equity. Stone v.
White, 301 U.S. 532, 537-538 (1937); Parker v. United States, 110
F.3d 678, 683 (9th Cir. 1997).
Both Estate of Branson and this case involve the judicial
determination of an estate tax deficiency resulting from the
increased values of securities held by the decedent on the date
of death. Pursuant to section 1014(a)(1), the value of the
securities used in calculating the estate’s Federal estate tax as
determined by this Court became the basis of those assets after
Ms. Jorgensen’s death. During 2003 JMA-I and JMA-II sold assets
Ms. Jorgensen had contributed and calculated the gain on sale
with respect to the bases of the assets in Ms. Jorgensen’s hands
at the time they were contributed. As a result of our
determination, the bases of the assets were increased and it
follows that JMA-I’s and JMA-II’s partners overpaid their income
tax.
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Respondent argues that if we determine the estate is
entitled to equitable recoupment, we should limit the recoupment
to the income taxes paid by Jerry Lou and Gerald, who, pursuant
to Ms. Jorgensen’s will and revocable trust, are ultimately
responsible for the estate tax liability. The grandchildren are
not liable for the estate tax deficiency. In Estate of Branson,
the residuary beneficiary, like Gerald and Jerry Lou, was
responsible for the estate tax liability and was the one who
overpaid income tax, thus entitling the estate to equitable
recoupment. However, the relevant caselaw does not indicate that
the taxpayer who overpaid tax must be the one responsible for the
related deficiency for equitable recoupment to apply.
We have found that there was an implied agreement that Ms.
Jorgensen would retain control of the assets she contributed to
the partnerships even though she purported to give partnership
interests to her children and grandchildren. The partnerships
paid her expenses including her Federal and California estate tax
liabilities (as calculated on the estate tax returns). The
assets were included in her gross estate as if they had not been
transferred to the partnerships. The goal of Ms. Jorgensen’s
gift program was to reduce the value of her estate; i.e., a
testamentary goal. Because of the program, the objects of her
bounty, her children and grandchildren, paid income taxes on
assets that were later determined to be properly included in
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valuing her gross estate, thus subjecting those assets to
improper double taxation. Under these circumstances, we find
that there is sufficient identity of interest between Ms.
Jorgensen’s estate and her children and grandchildren.
It would be inequitable for the assets to be included in the
value of Ms. Jorgensen’s gross estate under section 2036 on the
one hand, and on the other hand for the estate not to recoup the
income taxes her children and grandchildren overpaid on their
sale of those very same assets but are unable to recover in a
refund suit. Accordingly, the estate is entitled to equitable
recoupment of the 2003 income taxes overpaid by Ms. Jorgensen’s
children and grandchildren as a result of our determination that
the values of the assets Ms. Jorgensen transferred to the
partnerships are included in the value of her gross estate under
section 2036.
To reflect the foregoing and the concessions of the parties,
An appropriate order will
be issued denying petitioner’s
motions to shift the burden of
proof, and decision will be
entered under Rule 155.