T.C. Memo. 1997-242
UNITED STATES TAX COURT
ESTATE OF DOROTHY MORGANSON SCHAUERHAMER, Deceased,
KARL C. DEAN, PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25058-95. Filed May 28, 1997.
Owen G. Fiore and John F. Ramsbacher, for petitioner.
G. Michelle Ferreira and Kimberley J. Peterson, for
respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: By notice of deficiency dated August 31,
1995, respondent determined a $947,049 deficiency in petitioner's
estate tax and a $189,410 accuracy-related penalty for
negligence. Unless otherwise indicated, all section references
- 2 -
are to the Internal Revenue Code in effect as of the date of the
decedent's death, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
After concessions, the issues we must decide are as follows:
1. Whether, pursuant to section 2036(a)(1), the value of
certain assets transferred to family partnerships is includable
in the decedent's gross estate. We hold that it is.
2. Whether petitioner, pursuant to section 6662(a), is
liable for the accuracy-related penalty for negligence. We hold
it is not.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. At
the time of her death, on December 13, 1991, Dorothy Schauerhamer
(decedent) resided in Salt Lake City, Utah. At the time the
petition was filed, petitioner's personal representative had a
mailing address in Salt Lake City, Utah.
Decedent and her husband Willard Schauerhamer had three
adult children, David Schauerhamer, Diane Liddiard, and Sandra
Bradshaw, and jointly managed Economy Builders Supply, Inc., a
closely held corporation engaged in the sale of building
materials. After Willard's death in 1983, decedent took control
of the business. She also managed several rental properties.
In late November of 1990, decedent was diagnosed with colon
cancer. In early December of that year, she retained an
attorney, Travis Bowen, to set her business affairs in order.
- 3 -
Mr. Bowen, in consultation with decedent, prepared an estate
plan.
On December 31, 1990, decedent, along with her three
children and their spouses, met with Mr. Bowen at his office.
Mr. Bowen explained that three family limited partnerships would
be formed and that David, Sandra, and Diane would each become a
general partner in a partnership. He explained that after the
limited partnerships were formed, decedent's business holdings
would be transferred to the partnerships, with each partnership
receiving an undivided one-third interest in the transferred
assets. He further advised that, after the partnerships were
formed and funded, decedent would transfer limited partnership
interests to her children and their family members. On December
31, 1990, three substantially identical limited partnership
agreements were executed. The certificates of limited
partnership were filed with the Utah Department of Commerce on
May 13, 1991.
The partnership agreements set forth numerous terms and
covenants with respect to the partnerships. Pursuant to the
partnership agreements, David and decedent were the general
partners in the "DAVID M. SCHAUERHAMER FAMILY LIMITED
PARTNERSHIP", Diane and decedent were the general partners in the
"DIANE KAY LIDDIARD FAMILY LIMITED PARTNERSHIP", and Sandra and
decedent were the general partners in the "SANDRA GAYLE BRADSHAW
FAMILY LIMITED PARTNERSHIP". Each partnership agreement also
- 4 -
named decedent as the limited partner. In addition, decedent was
named the managing partner of each partnership. The partnership
agreements provided that decedent, in her capacity as managing
partner, had "full power to manage and conduct the Partnership's
business operation in its usual course." From the time the
partnerships were formed until shortly before decedent's death,
she managed the partnership assets.
The partnership agreements included provisions relating to:
(1) Capital contributions; (2) allocation of profits and losses;
(3) partnership records; (4) management responsibilities and
powers; (5) admission of new partners; (6) partnership
dissolution and liquidation; and (7) agency relationships among
partners. The partnership agreements provided that decedent
would contribute $1 for her 1-percent interest as a general
partner and $95 for her 95-percent interest as a limited partner.
Each of decedent's children was required to contribute $4 for a
4-percent general partner interest.
On December 31, 1990, and on November 5, 1991, decedent
transferred some of her business assets, in undivided one-third
shares, to the partnerships. The assets included real estate,
partnership interests, and notes receivable. The assets
transferred and their values (as of the date of decedent's death)
were as follows:
Assets Transferred 12/31/90 Value
1. Ho Ho Gourmet Restaurant building $176,000
- 5 -
2. Southwick Motor Company building 155,000
3. Economy Builders Supply building 265,300
4. Cambridge South Subdivision 220,000
5. Lot 21, Alpine, Utah 38,000
6. Lot 22, Kern County, California 4,000
7. 398 East 3300 South property 73,000
8. 5-percent interest in Economy Land &
Rentals Partnership 25,000
9. 15-percent interest in Redwood Village
Apartments Partnership 147,821
10. 5-percent interest in Schauerhamer
Family Limited Partnership 85,700
11. Note receivable from David Schauerhamer
and Warren Bradshaw 64,000
12. Notes receivable from Economy Builders
Supply, Inc. 385,000
Assets Transferred 11/5/91 Value
1. Airport System Refunding Revenue Bond $289,000
2. 40 Intermountain Power Agency Supply
Revenue Bonds 206,000
Also on December 31, 1990, decedent executed 33 documents
(i.e., 11 relating to each of the three partnerships) entitled
"ASSIGNMENT OF INTEREST IN LIMITED PARTNERSHIP". Each assignment
stated that a $10,000 interest in the partnership was being
assigned. On January 1, 1991, decedent executed an additional 33
assignments of partnership interests (i.e., 11 relating to each
of the three partnerships) in the amount of $10,000 each. All 66
assignments were made to family members.
The partnership agreements each required that all income
from the partnership be deposited into a partnership account.
Shortly after the partnerships were formed, each partnership's
initial capital was deposited into partnership bank accounts.
Decedent deposited, into an account jointly held by her and
- 6 -
David, all partnership income and income from other sources. She
did not maintain any records to account separately for
partnership and nonpartnership funds. Decedent utilized the
account as her personal checking account, and from this account
she paid personal and partnership expenses.
Decedent's executor filed Form 706 (United States Estate
(and Generation-Skipping Transfer) Tax Return) dated September
14, 1992. On that return, the estate did not include in the
gross estate the value of the 66 $10,000 limited partnership
interests decedent had assigned to family members. The estate
did, however, include the value of the remaining partnership
interests. The amounts included were based on advice from
competent tax professionals and a property appraisal company.
In the notice of deficiency issued to petitioner, respondent
determined a $947,049 deficiency and a $189,410 accuracy-related
penalty for negligence. The deficiency was based on respondent's
determination that the value of the assets contributed to the
partnerships was includable in decedent's gross estate. The
deficiency was also based on a determination that petitioner had
undervalued certain assets. The petition in this case was filed
on November 30, 1995.
OPINION
As a preliminary matter, the parties disagree as to whether
decedent owned, at the time the partnerships were funded, a
- 7 -
property located at 398 East 3300 South with a stipulated date-
of-death value of $73,000. Respondent determined that decedent
owned the property, and petitioner therefore bears the burden of
proving otherwise. Rule 142(a). The documentation petitioner
has presented is inadequate to satisfy petitioner's burden of
proof. As a result, we conclude that decedent owned the 398 East
3300 South property at the time the partnerships were funded.
Respondent contends that the value of the assets transferred
to the purported partnerships is includable in decedent's gross
estate pursuant to section 2033, 2036(a)(1), or 2038. We
conclude that the value of the assets is includable pursuant to
section 2036(a)(1). As a result, we do not address sections 2033
and 2038.
Section 2036(a)(1) provides that a decedent's gross estate
includes the value of all property interests transferred (other
than for full and adequate consideration in money or money's
worth) by a decedent during her life where she has retained for
life the possession or enjoyment of the property, or the right to
the income from the property. The term "enjoyment" refers to the
economic benefits from the property. Estate of Gilman v.
Commissioner, 65 T.C. 296, 307 (1975), affd. 547 F.2d 32 (2d Cir.
1976). Thus, "Enjoyment as used in the death tax statute is not
a term of art, but is synonymous with substantial present
economic benefit." McNichol's Estate v. Commissioner, 265 F.2d
667, 671 (3d Cir. 1959), affg. 29 T.C. 1179 (1958).
- 8 -
Retained enjoyment may exist where there is an express or
implied understanding at the time of the transfer that the
transferror will retain the economic benefits of the property.
Guynn v. United States, 437 F.2d 1148, 1150 (4th Cir. 1971);
Estate of Rapelje v. Commissioner, 73 T.C. 82, 86 (1979). The
understanding need not be legally enforceable to trigger section
2036(a)(1). Estate of Rapelje v. Commissioner, supra. The
retention of a property's income stream after the property has
been transferred is "very clear evidence that the decedent did
indeed retain 'possession or enjoyment.'" Estate of Hendry v.
Commissioner, 62 T.C. 861, 873 (1974). Whether there was an
implied agreement is a question of fact to be determined with
reference to the facts and circumstances of the transfer and the
subsequent use of the property. Id. at 872.
The facts of this case establish that an implied agreement
existed among the partners. Decedent owned the assets
subsequently transferred to the partnerships and collected the
income these assets generated. On December 31, 1990, decedent
formed the partnerships and contributed some of her business
holdings. The partnership agreements required that each
partnership maintain a bank account, and that all income from the
partnerships be deposited into these accounts. After the
formation of the partnerships, a partnership bank account was
opened in the name of each partnership, and each partnership's
$100 of initial capital was deposited into the account. As the
- 9 -
partnerships earned income, however, decedent, in violation of
the partnership agreements, did not deposit the income into the
partnership accounts. Instead, she deposited the income into the
account she utilized as her personal checking account, where it
was commingled with income from other sources. Such deposits of
income from transferred property into a personal account are
highly indicative of "possession or enjoyment". Id.
Sharlet Schauerhamer (David's wife), Diane, and Sandra
testified at trial that they were aware that decedent was
depositing the funds into her personal, rather than a
partnership, account. Moreover, they acknowledged that the
formation of the partnerships was merely a way to enable decedent
to assign interests in the partnership assets to members of her
family. The assets and income would be managed by decedent
exactly as they had been managed in the past. Where a decedent's
relationship to transferred assets remains the same after as it
was before the transfer, section 2036(a)(1) requires that the
value of the assets be included in the decedent's gross estate.
Guynn v. United States, supra; Estate of Hendry v. Commissioner,
supra at 874.
Petitioner contends that decedent did not spend any of the
partnership funds for her personal benefit. Petitioner bases
this contention on bank statements relating to the account and
the testimony of Richard Haynie, decedent's accountant. Neither
- 10 -
is adequate to support petitioner's contention. The bank
statements indicate that, on the date of decedent's death, the
balance in the account exceeded the partnership income that she
had deposited. There is no evidence, however, to establish that
she did not spend the partnership income and later deposit income
from other sources. In addition, Mr. Haynie testified that
decedent did not spend partnership funds for her personal
benefit. His testimony, which was apparently based on his review
of the bank statements and not any personal, independent
knowledge, fails to establish petitioner's contention.
As a result, the value of the partnership assets is
includable in decedent's gross estate pursuant to section
2036(a)(1).
Section 6662(a) imposes an accuracy-related penalty in an
amount equal to 20 percent of the portion of any underpayment to
which the section applies. The section applies to, among other
items, the portion of an underpayment attributable to negligence
or disregard of rules or regulations. Sec. 6662(b)(1).
Negligence has been defined as the lack of due care or failure to
do what a reasonable and ordinarily prudent person would do under
the circumstances. Neely v. Commissioner, 85 T.C. 934, 947
(1985). It includes the failure to make a reasonable attempt to
comply with the Internal Revenue Code. Sec. 6662(c).
Respondent contends that petitioner understated the value of
decedent's gross estate. Petitioner contends that it relied on
- 11 -
professional accountants, attorneys, and appraisers in preparing
the returns. In essence, petitioner contends that any
understatements of tax were in good faith and due to reasonable
cause. See sec. 6664(c).
The regulations state that whether an underpayment of tax is
made in good faith and due to reasonable cause will depend upon
the facts and circumstances of each case. Sec. 1.6664-4(b),
Income Tax Regs. Reliance on the advice of a professional will
constitute good faith and reasonable cause only where such
reliance was reasonable. Id. We conclude that petitioner acted
reasonably and in good faith in relying on the advice of tax
professionals and property appraisers. As a result, petitioner
is not liable for the accuracy-related penalty for negligence.
We have considered all other arguments made by the parties
and found them to be either irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.