Estate of Shurtz v. Comm'r

T.C. Memo. 2010-21
UNITED STATES TAX COURT
ESTATE OF CHARLENE B. SHURTZ, DECEASED, BONNIE K. CASE, a.k.a.
BONNIE CATHLEEN CASE, EXECUTRIX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6076-07. Filed February 3, 2010.
Harris H. Barnes III, for petitioner.
Gwendolyn C. Walker, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Respondent determined a deficiency in
Federal estate tax of $4,737,934 and an addition to tax pursuant
to section 6651(a)(1) of $1,184,484 against the Estate of
Charlene B. Shurtz (the estate). The issues for decision are:
(1) Whether the values of assets transferred by Charlene B.
Shurtz (hereinafter referred to as Mrs. Shurtz or decedent) 6
- 2 -
years before her death to her family limited partnership (Doulos
L.P.) are included in the value of her gross estate pursuant to
section 2036(a) and/or 2035(a); (2) if the values of the assets
transferred to Doulos L.P. are includable in the value of
decedent’s gross estate, then (a) the values of the assets
transferred, and (b) whether the values of assets that are
included in the value of decedent’s gross estate under section
2036(a) qualify for the marital deduction under section 2056(a)
as property included in the gross estate, and (3) whether the
estate is liable for an addition to tax under section 6651(a)(1).
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the date of decedent’s
death.
FINDINGS OF FACT
I. Charlene B. Shurtz
Mrs. Shurtz died testate on January 21, 2002, at the age of
76 in California. She was survived by her husband, the Reverend
Richard Shurtz (Reverend Shurtz), and her two adult children,
Bonnie K. Case (Kathy Case), and Richard L. Shurtz (Rick
Shurtz).1 Kathy Case is the executrix of the estate; she resided
in California at all relevant times.
1
Reverend Richard Shurtz died on Sept. 18, 2006.
- 3 -
Decedent was one of three children of Charles A. Barge and
Bonnie Inez Barge (the Barges). The Barges and their descendants
(the Barge family) owned and managed, first directly and then
indirectly through family partnerships, timberland in the State
of Mississippi (the Barge timberland).
Mrs. Shurtz grew up in Mississippi with her two siblings,
Charles Richard Barge (Richard Barge) and Betty Morris. Theirs
was a religious household, and their religious beliefs strongly
influenced how they lived. The Barge family felt that the land
was given to them by providence, and hence they were stewards of
the land and should use its bounty to do God’s work.
From 1954 to 1986 Mrs. Shurtz and her family (the Shurtzes)
lived outside the United States, performing missionary work in
Brazil and Mexico. They returned to the United States when
Reverend Shurtz became the pastor of a church in Montebello,
California.
Although Mrs. Shurtz was wealthy (her wealth coming from
gifts and inheritance from her parents), the Shurtzes lived
modestly. By 1996 the Shurtzes’ net worth was approximately $7
million. In keeping with their philosophy, Mrs. Shurtz and her
husband used their wealth to contribute to a broad range of
charities, including evangelical missions, humanitarian aid
groups, church construction, and groups that assisted orphans.
- 4 -
Between 1989 and 2001, Mrs. Shurtz and Reverend Shurtz donated
approximately $972,000 to charity.
In 1986 Mrs. Shurtz developed Parkinson’s disease. She was
able to manage her condition with medication and her illness did
not affect her cognitive abilities. In 1996, when Doulos L.P.
was established, see infra pp. 6-7, Mrs. Shurtz’s Parkinson’s
disease was under control. She was able to maintain her home in
California, travel to Mississippi every year, and perform
missionary work in several African countries.
II. The Family Business: C.A. Barge Timberlands L.P.
The Barge family increased through the generations, and more
members of the family acquired ownership interests in the Barge
timberland. By 1993 at least 14 family members held separate
undivided interests in the Barge timberland. Walter Gomel, an
attorney, informed the Barge family that having numerous
undivided interests in the Barge timberland could create
difficulties in the operation and management of the business. At
trial, Richard Barge testified that Mr. Gomel told him:
You’re going to have a problem because if you make a timber
sale, you’ve got to have the signatures of all these people,
and he said, your business is not going to function the way
it’s set up. And he suggested a partnership, limited
partnership.
Consequently, on June 25, 1993, C.A. Barge Timberlands, L.P.
(Timberlands L.P.), was established as the entity to operate the
- 5 -
family timber business. All of the persons and trusts having an
interest in the Barge timberland joined Timberlands L.P. At its
inception the ownership of Timberlands L.P. was:
General Partner Capital Account Ownership Percentage
Barge Timberlands
Management, Inc. (BTM) $127,623 2 percent
Limited Partners Capital Account Ownership Percentage
Bonnie Inez Barge $26,717 25 percent
Richard Barge 1,492,207 16 percent
Betty Morris 1,346,115 16 percent
Mrs. Shurtz 979,575 16 percent
Trusts for grandchildren 2,408,979 25 percent
BTM was incorporated to be the general partner of Timberlands
L.P. BTM’s sole asset was a 2-percent general partnership
interest in Timberlands L.P. The shareholders of BTM were Mrs.
Shurtz, Richard Barge, and Betty Morris. Mrs. Shurtz owned one-
third of BTM’s stock at the time of her death; Richard Barge and
Betty Morris each owned a one-third interest as well.
On the date of Mrs. Shurtz’s death, Timberlands L.P.’s
principal asset was 45,197 acres of Mississippi timberland.
The partnership agreement of Timberlands L.P. required the
partnership to distribute not less than 40 percent of its net
income to its partners each year. The reason for this
requirement was to enable the partners to have funds to pay taxes
on their distributive shares of Timberlands L.P.’s profits.
- 6 -
III. The Shurtz Family Limited Partnership--Doulos L.P.
Not long after the establishment of Timberlands L.P., Mrs.
Shurtz, Richard Barge, Betty Morris, and their respective spouses
approached James Dossett, an experienced tax attorney, and one of
his partners, Leonard Martin, to obtain tax and business advice.
They had several concerns, the first of which was the protection
of the family’s interest in the Barge timberland. Specifically,
because of the “jackpot justice” that the Barge family members
and their spouses believed existed in Mississippi, they were
concerned that were they to be sued and a judgment entered
against them, they could lose control of the family business. To
avoid this problem, Mr. Dossett recommended that each family hold
its Timberlands L.P. interest in a limited partnership. Mr.
Dossett informed them that if they followed this recommendation,
the family timber business could be protected since a judgment
creditor would not be able to seize the underlying timberland,
but rather would have only a right to distributions made by
Timberlands L.P. to its partners.
Mrs. Shurtz wanted to give her children and grandchildren
interests in the 748.2 acres of timberland that she had acquired
from her parents. On the basis of her experience with
Timberlands L.P., Mrs. Shurtz had concerns with respect to the
creation of a large number of undivided interests in the
timberland. Further, Mrs. Shurtz and Reverend Shurtz wanted to
- 7 -
minimize (or if possible eliminate) estate taxes with respect to
the value of these assets upon Mrs. Shurtz’s death. Mr. Dossett
informed Mrs. Shurtz that using a family limited partnership
would also mitigate these concerns.
Thus, to alleviate the Shurtzes’ concerns, Mrs. and Reverend
Shurtz formed Doulos L.P. on November 15, 1996.2 A project
planning note drafted by Reverend Shurtz on June 3, 1997, stated
that the purpose of the project was to build Doulos L.P. into a
functioning limited partnership in order to:
1. Reduce the estate;
2. provide asset protection;
3. provide for heirs;
4. provide for the Lord’s work.
The Doulos L.P. partnership agreement contained language to
restrict an outsider from acquiring an interest in the
partnership. To this end, section 11.5, Substituted Limited
Partner, of the partnership agreement provides:
No transferee of the whole or any portion of a Partnership
interest owned as a Limited Partner who is not already a
Partner in the Partnership shall have to right to become a
substituted Limited Partner in place of the assignor unless:
* * * * *
(b) the written consent of the General Partners to such
substitution shall be obtained which consent may be given or
2
Richard Barge and Betty Morris and their families similarly
formed family limited partnerships.
- 8 -
withheld in the sole and absolute discretion of the General
Partners; * * * [3]
Section 11.6, Further Restrictions on Transfers, of the
partnership agreement provides that if any member of Mrs. and
Reverend Shurtz’s immediate family marries and that family member
dies or divorces, then the surviving or divorced spouse of the
immediate family member “shall offer to sell all partnership
interest owned by such surviving or divorced spouse” back to the
Shurtz family. Section 11.6(b) further provides that if there is
a transfer of any partnership interest in any voluntary or
involuntary manner under judicial order, legal process,
execution, attachment, or other legal action, the person who
acquired the interest shall offer to sell the interest to the
Shurtz family.
Because the 748.2 acres of timberland were owned only by
Mrs. Shurtz, in order to create a partnership (i.e., Doulos L.P.)
to hold the property it was necessary for her to transfer an
interest in the 748.2 acres to another person. Consequently, on
December 16, 1996, Mrs. Shurtz transferred a 6.6-percent interest
in the 748.2 acres to Reverend Shurtz.4 On December 17, 1996,
3
Sec. 11.8 of the partnership agreement provides that if a
general partner’s partnership interest is seized by a creditor it
will be automatically converted to a limited partnership
interest.
4
A valuation study conducted by Leonard Martin determined
that the contribution of an undivided 6.6-percent interest in the
(continued...)
- 9 -
Reverend Shurtz contributed his 6.6-percent interest in the 748.2
acres to Doulos L.P. for a 1-percent general partnership
interest. Also, on December 17, 1996, Mrs. Shurtz contributed
her then-undivided 93.4-percent interest in the 748.2 acres, as
well as her 16-percent limited partnership interest in
Timberlands L.P., to Doulos L.P. for a 1-percent general
partnership interest and a 98-percent limited partnership
interest.
Mrs. and Reverend Shurtz used the services of Gordon
Romberger, a certified public accountant, beginning in 1988 or
1989. Mr. Romberger prepared Mrs. and Reverend Shurtz’s Federal
and State tax returns at all times thereafter. Mr. Romberger
drafted a schedule, apparently for purposes of trial, that was
based on Mrs. and Reverend Shurtz’s personal income tax returns
and reflected Mrs. and Reverend Shurtz’s Federal and Mississippi
incomes as reported on their tax returns from 1996 through 2002.
Mrs. and Reverend Shurtz’s Mississippi income (averaging $766,629
per year) was generated from their interests in Doulos L.P. and
from a Mississippi bank account. Mrs. and Reverend Shurtz had
non-Mississippi income that averaged $81,349 per year.5
4
(...continued)
748.2 acres was equivalent to a 1-percent general partnership
interest.
5
Respondent drafted a schedule designed to show Mrs.
Shurtz’s income and expenses after removing Doulos-L.P.-related
(continued...)
- 10 -
Between 1996 and 2000 Mrs. Shurtz made a total of 26 gifts
of .4-percent limited partnership interests in Doulos L.P. to her
children and to trusts for her grandchildren.6 Each of these
gifts was valued at $19,700 or less. At the time Mrs. Shurtz
died in 2002, Mrs. Shurtz and Reverend Shurtz each held a 1-
percent general partnership interest in Doulos L.P. Mrs. Shurtz
also held an 87.6-percent limited partnership interest in Doulos
L.P.; the remaining 10.4 percent was divided among limited
partnership interests held by Mrs. Shurtz’s children and trusts
for her grandchildren.
Doulos L.P. maintained a capital account for each partner
and issued Schedules K-1 (Form 1065), Partner’s Share of Income,
Credits, Deductions, etc. Doulos L.P. filed Form 1065, U.S.
Return of Partnership Income, each year.
Doulos L.P. did not maintain books of account, as required
by section 4.5 of the partnership agreement. Instead, Mr.
Romberger created his own “work papers like a trial balance” in
creating the partnership’s tax returns.
5
(...continued)
income items. However, in contrast to Mr. Romberger’s schedule,
respondent’s schedule did not show how and why adjustments were
made to Mrs. Shurtz’s income. Additionally, while respondent
removed Doulos L.P.’s related income items, respondent’s schedule
included Doulos L.P.’s related expense items.
6
The .4-percent transfers were designed to use the annual
gift tax exemption.
- 11 -
Doulos L.P. was laggard in opening a bank account; it did
not establish one until April 11, 1997, nearly 4 months after the
partnership was established. The Doulos L.P. bank account was
initially a checking account, but on June 17, 1997, it was
changed to a money market account. Inasmuch as only a limited
number of checks each month could be written from the money
market account, Mrs. and Reverend Shurtz paid some of Doulos
L.P.’s disbursements from their personal bank accounts. Doulos
L.P. reimbursed the Shurtzes for some of these payments.
Payments made by Mrs. and Reverend Shurtz that were not
reimbursed were credited to their capital accounts.
Distributions from Doulos L.P. to its partners were not
always proportional. In 1997 Mrs. Shurtz was the only partner to
receive a distribution; in 1999 only Mrs. Shurtz and Reverend
Shurtz received distributions; and in 2000 Mrs. Shurtz received a
distribution greater than her proportionate share of the
partnership’s income. However, the partnership made up the
missed distributions in subsequent years.
IV. The Management of Doulos L.P. and Timberlands L.P.
The entire Barge family was conscientious about managing the
family timber business. The Barge family even had a mission
statement. In order that each adult family member could
participate in the management of the Barge timberland, and then
Timberlands L.P., beginning in the mid-1980s the Barge family
- 12 -
held annual meetings in Mississippi. Topics discussed at the
meetings included the establishment of a saw mill to process the
large trees grown on the Barge timberland, land maintenance
strategies, and harvesting strategies.7 Minutes of these
meetings were kept even though under Mississippi law there was no
requirement to do so.
Mrs. and Reverend Shurtz regularly attended, and actively
participated in, these meetings. Indeed, it was Barge family
policy that everyone be consulted before any major decision was
made.
After Mrs. and Reverend Shurtz established Doulos L.P., they
combined the Doulos L.P. annual meeting with the annual meeting
of Timberlands L.P. The timberland Doulos L.P. owned was once a
part of the Barge timberland. Doulos L.P.’s timberland required
active management similar to that required by the timberland
owned by Timberlands L.P. Specifically, the timberland of both
partnerships required planting, reforestation, and general
maintenance.
7
There is a substantial amount of work involved in keeping
timber healthy. Roads and culverts must be built and maintained
in order to properly support the growth of the timber, the trees
must be thinned so that the growing trees do not interfere with
each other, pests must be controlled, and, sometimes, trees must
be planted because they do not reseed naturally.
- 13 -
V. Mrs. Shurtz’s Estate Planning
In 1998 the Shurtzes decided to review their estate plan.
To that end, they approached the Dallas Seminary Foundation, an
organization affiliated with the Dallas Theological Seminary (the
seminary) that assists individuals in designing estate and
charitable gift plans to maximize their charitable bequests. The
seminary referred them to Lewis Wall, an attorney who focuses on
estate planning. Mr. Wall drafted a revocable trust agreement
(entitled the Shurtz Family Trust Agreement) to take effect upon
the death of either Mrs. Shurtz or Reverend Shurtz. The Shurtz
Family Trust was intended to achieve the following goals:
(1) Assure to the extent possible that there was no Federal
tax payable at the death of the first spouse;
(2) minimize Federal estate taxes at the surviving spouse’s
death through proper use of the available unified credit
(exemption) amount, coupled with use of each of the survivor’s
remaining generation-skipping exemption amounts to the extent
possible;
(3) assure that the decedent’s interest in Doulos L.P.
remained in the family;
(4) provide for the remainder of the estate (upon the death
of the survivor spouse) to pass into a charitable lead annuity
trust which would provide for a 12-percent-per-year annuity to
charity for a term sufficient that the remainder interest to the
- 14 -
family members would be valued at zero or as close to zero as
possible.
Form 706, United States Estate (and Generation-Skipping
Transfer) Tax Return, for the estate was due by April 21, 2003;
however it was not filed until December 2003.
Mrs. Shurtz’s gross estate was valued at $8,768,059.03. The
assets having the greatest values making up the gross estate
were:
1. An 87.6-percent limited partnership interest in Doulos
L.P. valued at $6,116,670;
2. a 1-percent general partnership interest in Doulos L.P
valued at $73,500;8
3. 100 shares of BTM valued at $383,700; and
4. one-third of the residue of the Estate of Bonnie Barge
valued at $1,126,190.
Mrs. Shurtz’s estate plan was designed to minimize or eliminate
the payment of estate tax. To achieve this objective, $345,800
went to a unified credit trust and $7,674,143.03 went to trusts
qualifying for the marital deduction. Deductible expenses of the
estate totaled $93,916. Hence, after giving consideration to the
remaining amount of lifetime unified credit available to Mrs.
Shurtz, the estate’s tax advisers believed that no estate tax was
8
The underlying asset of Doulos L.P. (the 16-percent limited
partnership interest in Timberlands L.P.) was valued by the
estate at $$9,993,280.
- 15 -
due and therefore they were not overly concerned that Form 706
was not timely filed.
OPINION
A Federal estate tax is imposed “on the transfer of the
taxable estate of every decedent who is a citizen or resident of
the United States.” Sec. 2001(a). The estate tax is imposed on
the value of the taxable estate with specified adjustments. Sec.
2001(b). The value of a decedent’s taxable estate is the value
of the decedent’s gross estate less enumerated deductions. Sec.
2051. The value of a gross estate includes the value of all of
the decedent’s property to the extent provided under sections
2031 through 2046.
I. Contentions of the Parties
Respondent contends that the values of the assets
contributed to Doulos L.P. are includable in the value of Mrs.
Shurtz’s gross estate by reason of her retention of the control,
use, and benefit of the transferred assets within the meaning of
sections 2036 and/or 2035(a). On the other hand, respondent
contends that for purposes of section 2056(a), the value of Mrs.
Shurtz’s interest in Doulos L.P. should be used to determine the
amount of the marital deduction.
Petitioner posits that Mrs. Shurtz left no taxable estate
because her entire estate was left first to a unified credit
trust (formed to use the unified (exemption) credit) and then to
- 16 -
various marital trusts. Further, petitioner contends that
section 2036(a) does not apply because Mrs. Shurtz’s transfer of
assets to Doulos L.P. constituted a “bona fide sale for an
adequate and full consideration” within the meaning of that
provision.
II. Property Included in the Gross Estate Pursuant to Section
2036(a)
We first examine whether the values of assets Mrs. Shurtz
transferred to Doulos L.P., i.e., her interest in Timberlands
L.P. and the 748.2 acres of timberland, are included in the value
of Mrs. Shurtz’s gross estate under section 2036(a). If these
asset values are not so includable, there is no estate tax
deficiency.
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.” Strangi v. Commissioner, 417 F.3d 468,
476 (5th Cir. 2005), affg. T.C. Memo. 2003-145, petition for
rehearing granted on other grounds 429 F.3d 1154 (5th Cir. 2005).
Inter vivos transfers that are testamentary in nature, “i.e.,
transfers which leave the transferor a significant interest in or
control over the property transferred during his lifetime”, are
included in the value of the gross estate pursuant to section
2036(a). United States v. Estate of Grace, 395 U.S. 316, 320
(1969). Section 2036 provides in pertinent part:
- 17 -
SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.
(a) General Rule.--The value of the gross estate shall
include the value of all property to the extent of any
interest therein of which the decedent has at any time made
a transfer (except in case of a bona fide sale for an
adequate and full consideration in money or money’s worth),
by trust or otherwise, under which he has retained for his
life or for any period not ascertainable without reference
to his death or for any period which does not in fact end
before his death–-
(1) the possession or enjoyment of, or the right
to the income from, the property, or
(2) the right, either alone or in conjunction with
any person, to designate the persons who shall possess
or enjoy the property or the income therefrom.
See also sec. 20.2036-1(a), Estate Tax Regs.
In sum, 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) in the transferred property.9 See Estate of Bongard v.
Commissioner, 124 T.C. 95, 112 (2005). Courts have emphasized
that section 2036(a) “describes a broad scheme of inclusion in
the gross estate, not limited by the form of the transaction, but
concerned with all inter vivos transfers where outright
disposition of the property is delayed until the transferor’s
9
Sec. 2036(b), regarding the retention of voting rights with
respect to shares of controlled corporations, is not herein
applicable.
- 18 -
death.” Guynn v. United States, 437 F.2d 1148, 1150 (4th Cir.
1971). Courts apply a higher level of scrutiny to intrafamily
transactions. Estate of Bigelow v. Commissioner, 503 F.3d 955,
969 (9th Cir. 2007), affg. T.C. Memo. 2005-65; Kimbell v. United
States, 371 F.3d 257, 263 (5th Cir. 2004); Estate of Bongard v.
Commissioner, supra at 123.
A. Whether There Was a Transfer of Property by the
Decedent
Petitioner concedes that an inter vivos transfer was made.
B. Whether the Transfer Was a Bona Fide Sale for an
Adequate and Full Consideration in Money or Money’s
Worth
Section 2036(a) excepts a “bona fide sale for an adequate
and full consideration in money or money’s worth” from its scope.
Section 20.2036-1(a), Estate Tax Regs., refers to the section
20.2043-1, Estate Tax Regs., definition of “a bona fide sale for
an adequate and full consideration in money or money’s worth”.
Section 20.2043-1(a), Estate Tax Regs., provides in pertinent
part: “To constitute a bona fide sale for an adequate and full
consideration in money or money’s worth, the transfer must have
been made in good faith, and the price must have been an adequate
and full equivalent reducible to a money value.” The Court of
Appeals for the Ninth Circuit, the court to which an appeal of
this case lies, has held that “In this context, we consider the
‘bona fide sale’ and ‘adequate and full consideration’ elements
- 19 -
as interrelated criteria.” Estate of Bigelow v. Commissioner,
supra at 969.
With respect to the contribution of property to a family
limited partnership, we have stated:
In the context of family limited partnerships, the bona fide
sale for adequate and full consideration exception is met
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.
Estate of Bongard v. Commissioner, supra at 118 (citations
omitted); see Estate of Bigelow v. Commissioner, supra at 969;
Estate of Korby v. Commissioner, 471 F.3d 848, 854 (8th Cir.
2006), affg. T.C. Memo. 2005-102 and T.C. Memo. 2005-103.
Further, we have held that “the bona fide sale exception in
section 2036(a) is applicable only where there was an arm’s-
length transaction.” Estate of Bongard v. Commissioner, supra at
122. The Court of Appeals for the Ninth Circuit has
adopted this position. See Estate of Bigelow v. Commissioner,
supra at 969.
In defining “arm’s-length transaction”, we have said:
“The test to determine whether a transaction is a bona fide
transaction [for Federal income tax purposes] is described
by the term ‘arm’s length’, or, in other words, Was the
transaction carried out in the way that the ordinary parties
to a business transaction would deal with each other?”
- 20 -
Estate of Bongard v. Commissioner, supra at 123 (quoting Dauth v.
Commissioner, 42 B.T.A. 1181, 1189 (1940)).
A finding that the transferor sought to save estate taxes
does not preclude a finding of a bona fide sale so long as saving
estate taxes is not the predominant motive. Accord Estate of
Mirowski v. Commissioner, T.C. Memo. 2008-74; see Estate of
Schutt v. Commissioner, T.C. Memo. 2005-126 (“Thus, the proffered
evidence is insufficient to establish that estate tax savings
were decedent’s predominant reason for forming Schutt I and II
and to contradict the estate’s contention that a true and
significant motive for decedent’s creation of the entities was to
perpetuate his buy and hold investment philosophy.”).
1. Bona Fide Sale
The record shows that decedent had several nontax reasons
for establishing Doulos L.P. In 1996, when Mrs. Shurtz was in
good health, and with her Parkinson’s disease under control, she,
her siblings (Richard Barge and Betty Morris), and their
respective spouses determined to take action to protect
Timberlands L.P. from the litigious environment they believed
Mississippi to be.
Mr. Dossett, the attorney who advised the family about
establishing their family limited partnerships, credibly
testified that he regularly advised his clients about the use of
limited partnerships to protect family assets from the risks
- 21 -
imposed by Mississippi’s litigious atmosphere. After their
meetings with Mr. Dossett, Mrs. Shurtz and her siblings
concurrently established family limited partnerships as part of a
coordinated plan.
On the totality of the evidence, we are satisfied that the
Barge family (including the Shurtzes) had a legitimate concern
about preserving the family business and that they established
family limited partnerships to address their concerns.
Preservation of the family business is a legitimate reason
for establishing a family limited partnership. In Kimbell v.
United States, supra at 264, the Court of Appeals for the Fifth
Circuit examined the bona fide sale exception to section 2036 in
the context of a family limited partnership. Citing its previous
holding in Church v. United States, 2000-1 USTC par. 60,369, at
84,778, 85 AFTR 2d 2000-804, at 2000-807 (W.D. Tex. 2000), affd.
without published opinion 268 F.3d 1063 (5th Cir. 2001) (per
curiam), the court stated that “‘[P]reserving the
family ranching business for themselves and their descendants’
was a valid motivating reason to form the partnership.”
We are mindful that the threat to the business must be more
than merely speculative. See Estate of Bigelow v. Commissioner,
supra at 972. As noted supra pp. 20-21, we are satisfied that
decedent and her family were actually motivated by a legitimate
concern regarding the threat of litigation that went beyond mere
- 22 -
speculation, that the establishment of family limited
partnerships was a customary response in Mississippi to possible
lawsuits, and that the Doulos L.P. partnership agreement was
designed to limit the exposure of the ownership interests of the
partnership (e.g., protection of limited partnership interests
from seizure and the automatic conversion of general partnership
interests to limited partnership interests).
Moreover, the record shows that the establishment of Doulos
L.P. facilitated the management of the timberland decedent and
her husband contributed to the partnership. The undisputed
testimony of Richard Barge demonstrates that having multiple
undivided ownership interests impeded the management of the Barge
timberland. This problem also existed with respect to the 748.2
acres of timberland directly held by decedent.
We are satisfied that decedent and her husband were aware
that the establishment of Timberlands L.P. eased the management
of the Barge timberland; hence, we believe it reasonable for them
to form Doulos L.P. to hold ownership of their timberland.
Courts have found management efficiency to be a legitimate
and significant nontax reason for establishing a family limited
partnership in cases where the property required active
management. Estate of Bigelow v. Commissioner, 503 F.3d at 972
(“efficient management might count as a credible non-tax business
purpose, but only if the business of the FLP required some kind
- 23 -
of active management as in Kimbell”); Kimbell v. United States,
371 F.3d at 268 (property contributed included working oil and
gas properties). In contrast, courts have found that management
efficiency is not a legitimate and significant nontax reason for
establishing a family limited partnership where the property did
not require active management. Estate of Bigelow v.
Commissioner, supra at 972 (property contributed consisted of a
house that was rented to a tenant); see Estate of Rosen v.
Commissioner, T.C. Memo. 2006-115 (assets contributed consisted
primarily of stocks, bonds, and cash, conducted no business
activity and had no business purpose for its existence).
We recognize that only a portion of the property contributed
to Doulos L.P. required active management. However, courts have
found this to be sufficient. In Kimbell v. United States, supra
at 259, the oil and gas properties contributed amounted to only
11 percent of the total assets contributed to the family limited
partnership. In the instant case, the value of the 748.2 acres
contributed to Doulos L.P. (which required active management) was
at least 15.8 percent of the total value of the assets
contributed to Doulos L.P.10 Although decedent did not manage
10
We determined this percentage by creating a ratio the
numerator of which is the stipulated value of the timberland
contributed by decedent of $2,496,500, and the denominator of
which is respondent’s calculation of the value of the Timberlands
L.P. interest contributed of $13,310,094 plus the above-mentioned
$2,496,500.
- 24 -
the day-to-day operations of the Doulos L.P. timberland, no major
decision was made without her approval.
Further, Reverend Shurtz, who also was consulted before any
major decision was made, acquired an ownership interest in the
timber business. In Kimbell, the court found that giving the
decedent’s son, who had managed the business for some time, an
ownership interest was a factor in finding that a bona fide sale
occurred. See id. at 268.
Finally, business activities occurred with respect to the
timberland. In this regard, we are mindful that Doulos L.P.
annually amortized timber expenses, and in 1997 it realized gain
from the sale of timber cut from its land.11
In conclusion, although we recognize that reducing estate
tax was a motivating factor in establishing Doulos L.P., decedent
had valid and significant nontax reasons for establishing the
partnership. These reasons were “actual motivation” and not
merely a “theoretical justification.” See Estate of Bongard v.
Commissioner, 124 T.C. 118. Hence, we find that the transfer
of property to Doulos L.P. constituted a bona fide sale.
11
We note that a family limited partnership may still be
valid even if it does not conduct an active trade or business.
See Estate of Thompson v. Commissioner, 382 F.3d 367, 383 (3d
Cir. 2004), affg. T.C. Memo. 2002-246; Estate of Black v.
Commissioner, 133 T.C. __, __ (2009) (slip op. at 52); Estate of
Bongard v. Commissioner, 124 T.C. 95, 124-125 (2005).
- 25 -
2. Full and Adequate Consideration
The record shows that each partner received an interest in
Doulos L.P. that represented adequate and full consideration
reducible to money value. In Estate of Bongard v. Commissioner,
supra at 124, we set out a list of factors by which we determined
whether full and adequate consideration was received. Here, all
of these factors have been met.
First, the contributors received interests in the family
limited partnership proportionate to the ownership interest each
contributed. Decedent and her husband engaged an accountant to
calculate the value of a 1-percent general partnership interest
in Doulos L.P. based on the value of the total property being
contributed. Reverend Shurtz contributed property equal to the
value of a 1-percent general partnership interest, and Mrs.
Shurtz contributed property equal to the value of the remaining
1-percent general partnership interest and the 98-percent limited
partnership interest.
Second, the respective assets contributed were properly
credited to each partner’s respective capital account. Third,
distributions from Doulos L.P. required a negative adjustment in
the distributee partner’s capital account. Fourth, and most
importantly we have found the presence of a legitimate and
significant nontax business reason for the establishment of
Doulos L.P. by Mrs. and Reverend Shurtz.
- 26 -
In sum, we are satisfied on the record before us that the
transaction being questioned (i.e., the formation of Doulos L.P.
and the contribution of property thereto) was carried out in the
way that ordinary parties to a business transaction would do
business with each other. Consequently, we hold that the
transfer of property to Doulos L.P. was made for adequate and
full consideration.
C. Whether Decedent Retained an Interest or Right
Enumerated in Section 2036(a)(1) or (2) in the
Transferred Property
Because we conclude that a bona fide sale for an adequate
and full consideration in money or money’s worth occurred, the
fair market value of the contributed property is not includable
in the value of decedent’s gross estate. Consequently, we need
not address whether decedent retained an interest or right
enumerated in section 2036(a)(1) or (2) in the transferred
property.
In sum, the fair market value of decedent’s partnership
interest in Doulos L.P., rather than the fair market value of the
contributed property, is includable in the value of her gross
estate. See Estate of Black v. Commissioner, 133 T.C. ___, ___
(2009) (slip op. at 54).
III. Section 2056(a) Marital Deduction
Because we have decided that the fair market value of Mrs.
Shurtz’s partnership interest in Doulos L.P., and not the fair
- 27 -
market value of the contributed property, is includable in the
fair market value of the gross estate, the marital deduction to
which the estate is entitled under section 2056 is to be computed
according to the value of the partnership interest that actually
passed to Reverend Shurtz. See Estate of Black v. Commissioner,
supra at ___ (slip op. at 54).
IV. Conclusion
Because the values of the assets transferred to Doulos L.P.
are not includable in the value of Mrs. Shurtz’s gross estate,
there is no estate tax deficiency and no tax due from the estate.
Consequently, the estate is not liable for an addition to tax
pursuant to section 6651(a)(1).
To reflect the foregoing,
Decision will be entered
for petitioner.