T.C. Memo. 2003-145
UNITED STATES TAX COURT
ESTATE OF ALBERT STRANGI, DECEASED, ROSALIE GULIG, INDEPENDENT
EXECUTRIX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 4102-99. Filed May 20, 2003.
Norman A. Lofgren, G. Tomas Rhodus, and Michael C.
Kelsheimer, for petitioner.
Gerald L. Brantley, Lillian D. Brigman, Janice B. Geier, and
John D. MacEachen, for respondent.
__________________
*
This opinion supplements our previously filed opinion in
Estate of Strangi v. Commissioner, 115 T.C. 478 (2000), affd. in
part and revd. and remanded in part 293 F.3d 279 (5th Cir. 2002).
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SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: This matter is before the Court on remand
from the Court of Appeals for the Fifth Circuit for further
consideration consistent with its opinion in Estate of Strangi v.
Commissioner, 293 F.3d 279 (5th Cir. 2002) (Strangi II), affg. in
part and revg. and remanding in part 115 T.C. 478 (2000)
(Strangi I). The issue for decision on remand is whether the
value of property transferred by Albert Strangi (decedent) to the
Strangi Family Limited Partnership (SFLP) and Stranco, Inc.
(Stranco), is includable in his gross estate pursuant to section
2036(a). Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect as of the date of death,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
FINDINGS OF FACT
Facts with respect to this case were found in our original
opinion in Strangi I and are incorporated by this reference. We
summarize for convenience relevant facts from Strangi I and set
forth additional findings for purposes of deciding the issue on
remand.
General Background
Decedent and his first wife had four children: Jeanne,
Rosalie, Albert T., and John Strangi (collectively the Strangi
children). After divorcing his first wife in 1965, decedent
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married Irene Delores Seymour (Mrs. Strangi), who had two
daughters, Angela and Lynda Seymour (collectively the Seymour
daughters), from a previous marriage. In 1985, Rosalie
(hereinafter Mrs. Gulig) married Michael J. Gulig (Mr. Gulig), an
attorney with the law firm of Sheehy, Lovelace and Mayfield,
P.C., in Waco, Texas. On February 19, 1987, decedent and
Mrs. Strangi executed wills that named the Strangi children and
the Seymour daughters as residual beneficiaries in the event that
either spouse predeceased the other.
During 1987 and 1988, Mrs. Strangi suffered a series of
serious medical problems. In 1988, decedent and Mrs. Strangi
decided to move from their then home in Fort Walton Beach,
Florida, to Waco, Texas. To facilitate this move, decedent on
July 19, 1988, executed a power of attorney naming Mr. Gulig as
his attorney in fact and thereby authorizing Mr. Gulig, in
decedent’s “name, place and stead”:
To exercise, do, or perform any act, right, power,
duty, or obligation whatsoever that I now have or may
acquire * * * relating to any person, item, thing,
transaction, business property, real or personal,
tangible or intangible, or matter whatsoever;
* * * * * * *
To lease, purchase, exchange and acquire, and to
bargain, contract, and agree for the lease, purchase,
exchange, and acquisition of, and to take, receive and
possess any real or personal property whatsoever,
tangible or intangible, or interest therein, on such
terms and conditions, and under such covenants as the
attorney in fact shall deem proper;
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To improve, repair, maintain, manage, insure,
rent, lease, sell, release, convey, subject to lien,
mortgage, hypothecate, and in any way or manner deal
with all or any part of any real or personal property
whatsoever, intangible, or any interest therein, which
I now own or may hereafter acquire, for me and in my
name, and under such terms and conditions, and under
such covenants as said attorney shall deem proper;
To engage in and transact any and all lawful
business of whatever nature or kind for me and in my
name;
To sign, endorse, execute, acknowledge, deliver,
receive and possess such * * * [contracts, agreements,
etc.] and such other instruments in writing of whatever
kind and nature as may be necessary or proper in the
exercise of the rights and powers herein granted.
Thus, among other things, Mr. Gulig was authorized to close the
purchase of a residence in Waco. After the move to Waco, Sylvia
Stone (Ms. Stone) was hired as decedent’s housekeeper and also
provided assistance with the care of Mrs. Strangi.
On July 31, 1990, decedent executed a new will, naming the
Strangi children as the sole residual beneficiaries if
Mrs. Strangi predeceased him. This will also designated
Mrs. Gulig and Ameritrust Texas, N.A. (Ameritrust), as
coexecutors of decedent’s estate. Mrs. Strangi died on
December 27, 1990.
During 1993, decedent had surgery to remove a cancerous mass
from his back; was diagnosed with supranuclear palsy (a brain
disorder that would gradually reduce his ability to speak, walk,
and swallow); and had prostate surgery. Mr. Gulig thereafter
took over decedent’s affairs pursuant to the 1988 power of
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attorney. Mr. Gulig also developed a close personal relationship
with decedent after the death of Mrs. Strangi. Every morning,
Mr. Gulig would visit decedent to have coffee and read the
newspaper.
SFLP and Stranco
On August 11, 1994, Mr. Gulig attended a seminar provided by
Fortress Financial Group, Inc. (Fortress), on the use of family
limited partnerships as a tool for (1) asset preservation,
(2) estate planning, (3) income tax planning, and (4) charitable
giving. The following day, on August 12, 1994, Mr. Gulig, as
decedent’s attorney in fact, formed SFLP, a Texas limited
partnership, and its corporate general partner, Stranco, a Texas
corporation, and filed with the State of Texas the respective
certificate of limited partnership and articles of incorporation.
In August 1994 Mr. Gulig believed decedent had about 12 to 18
months to live. Mrs. Gulig expected decedent to survive about
2 years.
An Agreement of Limited Partnership of Strangi Family
Limited Partnership (SFLP agreement) was prepared by Mr. Gulig
using documents licensed from Fortress and sets forth the
governing provisions for the entity. Stranco is designated
therein as the managing general partner, the authority of which
is broadly described as follows:
Except as otherwise provided in this Agreement, the
Managing General Partner of the Partnership, shall have
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the sole, exclusive and absolute right and authority to
act for and on behalf of the Partnership and all of the
Partners in connection with all aspects of the business
of the Partnership.
More specifically, the SFLP agreement enumerates various rights,
powers, and authorities of the managing general partner,
including without limitation “to acquire, hold, lease, encumber,
pledge, option, sell, exchange, transfer, dispose or otherwise
deal with real or personal property (or rights or interests
therein) of any nature whatsoever as may be necessary or
advisable for the operation of the Partnership”; “to borrow or
lend money for Partnership purposes”; and “to determine the use
of the revenues of the Partnership for Partnership purposes”.
The SFLP agreement obligates the managing general partner to use
its good faith efforts to manage partnership affairs in a prudent
and businesslike manner and to act at all times in the best
interests of the partnership. According to the SFLP agreement,
limited partners are without “any authority or right to take part
in the management of the business or transact any business” for
the entity.
As regards distributions, the SFLP agreement provides that
income from operations and capital transactions, after deduction
for certain listed expenses:
shall be distributed at such times and in such amounts
as the Managing General Partner, in its sole
discretion, shall determine, taking into account the
reasonable business needs of the Partnership (including
plan for expansion of the Partnership’s business). The
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Managing General Partner’s determination regarding
whether or not to make distributions and the amount of
distributions to be made shall be final and binding on
all Partners. Such distributions shall be made to each
Partner in accordance with such Partner’s Interest in
the Partnership.
Likewise, “Assets of the Partnership may be distributed in kind
in the sole and absolute discretion of the Managing General
Partner.”
Pursuant to the SFLP agreement, the partnership would be
dissolved and terminated upon: (1) A unanimous vote of the
limited partners and unanimous consent of the general partners;
(2) a decision of the managing general partner after the
disposition of substantially all partnership assets; (3) an entry
of judicial dissolution; (4) the death, insolvency, bankruptcy,
removal, or withdrawal of any general partner, unless the limited
partners within 90 days unanimously elect a new general partner
to continue the business; (5) the involuntary transfer of a
general partnership interest in the event there is only one
general partner, unless the limited partners within 90 days vote
unanimously to continue the partnership; or (6) December 31,
2014.
Upon dissolution and termination, SFLP was to be liquidated.
The managing general partner was designated as liquidator and
instructed to dispose of partnership assets first in payment of
third-party debts, then in repayment of loans from partners, and
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finally in repayment to partners of positive capital account
balances.
By a series of transfer documents, Mr. Gulig assigned to
SFLP property of decedent with a fair market value of $9,876,929,
constituting approximately 98 percent of decedent’s wealth, in
exchange for a 99-percent limited partnership interest. The
contributed property included decedent’s interest in specified
real estate (including the residence occupied by decedent),
securities, accrued interest and dividends, insurance policies,
an annuity, receivables, and partnership interests. About
75 percent of the contributed value was attributable to cash and
securities. The majority of the asset transfer documents were
dated August 12, 1994, while change of ownership forms for the
life insurance policies were executed on August 14 and 15, 1994.
Letters dated August 15, 1994, were also sent to the brokers
holding decedent’s securities accounts, to those administering
the contributed partnership interests, and to the borrowers on
notes payable to decedent advising them regarding transfer of the
underlying assets to SFLP. All of the contributed property was
reflected in decedent’s capital account. Brokerage and bank
accounts were opened in the name of the partnership during the
period from August through October.
Mr. Gulig invited the Strangi children to participate in
SFLP through an interest in Stranco. Decedent purchased
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47 percent of Stranco for $49,350, and Mrs. Gulig purchased the
remaining 53 percent for $55,650 on behalf of herself and her
three siblings (with each thereby acquiring a 13.25-percent
interest). The moneys were deposited into a bank account opened
in August 1994 in Stranco’s name. Stranco contributed a portion
of these funds to SFLP in exchange for a 1-percent general
partnership interest.
Stranco’s articles of incorporation named decedent and the
Strangi children as the initial five directors. On August 17,
1994, the Strangi children and Mr. Gulig met to execute the
Stranco bylaws, a shareholders agreement, and a “Consent of
Directors Authorizing Corporate Action in Lieu of Organizational
Meeting” effective as of August 12, 1994. They also signed a
“Unanimous Consent of Directors in Lieu of Special Meeting” that
authorized the corporate president to execute a management
agreement employing Mr. Gulig.
The Stranco bylaws set forth provisions governing corporate
formalities. As pertains to shareholders, the bylaws state that
a majority of the outstanding shares shall constitute a quorum at
a meeting. Shareholders may also take informal action by means
of a consent in writing signed by all shareholders.
Concerning directors, the bylaws specify that there shall be
five directors, one of whom shall be elected president. At a
meeting of the board, a majority of the directors then serving
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shall constitute a quorum, and the act of a majority of the
directors present at a meeting with a quorum shall be the act of
the board. Directors may also take informal action by a written
consent signed by all directors. The president shall be the
principal executive officer of the corporation and, subject to
the control of the board, shall generally supervise and control
all of the business and affairs of the corporation. Among the
particular powers or duties placed under the board is the payment
of dividends, as follows: “The Board of Directors may declare,
and the corporation may pay, dividends on its outstanding shares
in any manner and upon any terms and conditions not restricted by
the Articles of Incorporation or prohibited by law.”
The management agreement executed by Stranco and Mr. Gulig
described his duties as follows:
Scope of Employment. Employee is hired to manage
the day-to-day business of Employer. Additionally, the
Employee shall manage the day-to-day business of the
Strangi Family Limited Partnership, a Texas limited
partnership (the “Partnership”) in which Employer
serves as the sole general partner and the managing
partner of the Partnership. During the term of this
Agreement, the Employee shall devote such portion of
his time, attention, and energies to the businesses of
the Employer and the Partnership and will diligently
and to the best of his ability perform all duties
incident to his employment hereunder. The duties of
Employee shall include, but not be limited to,
management of the Partnership’s rental properties, cash
and investment management, and the preparation and
filing of all required governmental reports including
tax returns.
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In the shareholders agreement, decedent and the Strangi
children agreed that at each annual meeting they would vote to
reelect themselves (or a nominee) as the five directors. They
further agreed that, if a vacancy occurred on the board by reason
of the death, disability, resignation, retirement, or removal of
a director so elected, they would cause the bylaws to be amended
so as to reduce by one the number of directors.
Thereafter, each of the four Strangi children gave a
.25-percent interest in Stranco to McLennan Community College
Foundation (MCC Foundation), and the charity became a 1-percent
shareholder in the corporation. MCC Foundation accepted the gift
by execution on August 18, 1994, of an agreement to be bound by
the terms of the preexisting shareholders agreement.
Decedent died of cancer on October 14, 1994, at the age of
81. Following decedent’s death, Texas Commerce Bank, N.A. (TCB),
successor in interest to Ameritrust, was asked to decline to
serve as coexecutor of his estate. TCB subsequently did so, and
decedent’s will was admitted to probate on April 12, 1995, with
Mrs. Gulig appointed as the sole executor.
After its formation, various monetary outlays were made from
SFLP. From September 1993 until his death, decedent required
24-hour home health care that was provided by Olsten Healthcare
(Olsten) and supplemented by Ms. Stone. During this time and
while assisting decedent, Ms. Stone injured her back. The
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resultant back surgery was paid for by SFLP. SFLP also paid
nearly $40,000 in 1994 for funeral expenses, estate
administration expenses, and related debts of decedent, including
a $19,810.28 check to Olsten for nursing services. SFLP then
paid more than $65,000 in 1995 and 1996 for estate expenses and a
specific bequest to decedent’s sister. In July 1995, SFLP
distributed $3,187,800 to decedent’s estate for Federal estate
and State inheritance taxes. When such disbursements were made
to or for the benefit of decedent or his estate, Stranco received
corresponding and proportionate sums either in cash or in the
form of adjusting journal entries. For accounting purposes,
certain amounts expended by SFLP were initially recorded on its
books as advances to, and accounts receivable from, partners.
SFLP also accrued rent on the residence occupied by decedent and
reported the rental income on its 1994 income tax return. The
accrued amount was paid in January 1997. Mr. Gulig made all
entries into the books and records of SFLP and Stranco and
prepared all income tax returns for the entities.
Estate Tax Proceedings
On January 17, 1996, a Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return, filed on behalf of
decedent’s estate was received by the Internal Revenue Service.
The value reported on the Form 706 for the gross estate was
$6,823,582, which included $6,560,730 for decedent’s interest in
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SFLP and $24,551 for his stock in Stranco. The total value of
the property held by SFLP as of the date of death was
$11,100,922, to which discounts were applied in calculating the
reported fair market value. The Form 706 also reflected other
assets of $238,301 (including household and personal items,
vehicles, securities, certain receivables, and bank account
balances totaling $762) and claimed deductions of $43,280 for
debts of decedent (including $5,161 for rents to SFLP) and
$107,108 for expenses.
In a statutory notice dated December 1, 1998, respondent
determined a deficiency in Federal estate tax of $2,545,826 and
an alternative deficiency in Federal gift tax of $1,629,947. The
estate tax deficiency resulted in large part from respondent’s
conclusion that decedent’s interest in SFLP should be increased
by $4,386,613 (to $10,947,343) and his interest in Stranco should
be increased by $29,009 (to $53,560).
The proceedings in Strangi I were initiated in response to
the foregoing notice of deficiency. Prior to trial, respondent
attempted by motion to raise section 2036 as an issue. Strangi I
at 486. That motion was denied as untimely. Id. With respect
to the remaining issues, we held in Strangi I at 486-493:
(1) The partnership was valid under State law and would be
recognized for estate tax purposes; (2) section 2703 did not
apply to the partnership agreement; (3) the transfer of assets to
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SFLP was not a taxable gift; and (4) decedent’s interests in SFLP
and Stranco should be valued using the discounts applied by
respondent’s expert.
After entry of decision, respondent appealed to the Court of
Appeals for the Fifth Circuit. The appellate court ruled as
follows:
We REVERSE the Tax Court’s denial of leave to
amend and REMAND with instructions that the court
either (1) set forth its reasons for adhering to its
denial of the Commissioner’s motion for leave to amend,
bearing in mind the mandate of the Federal Rule of
Civil Procedure 15(a), or (2) reverse its denial of the
Commissioner’s motion, permit the amendment, and
consider the Commissioner’s claim under sec. 2036. We
AFFIRM all other conclusions made by the tax court.
[Strangi II at 282.]
Over petitioner’s objection, leave was granted for respondent’s
amendment to answer and a second amendment to answer raising
section 2036.
OPINION
I. Inclusion in the Gross Estate--Section 2036
A. General Rules
As a general rule, the Internal Revenue Code imposes a
Federal tax “on the transfer of the taxable estate of every
decedent who is a citizen or resident of the United States.”
Sec. 2001(a). The taxable estate, in turn, is defined as “the
value of the gross estate”, less applicable deductions. Sec.
2051. Section 2031(a) specifies that the gross estate comprises
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“all property, real or personal, tangible or intangible, wherever
situated”, to the extent provided in sections 2033 through 2045.
Section 2033 broadly states that “The value of the gross
estate shall include the value of all property to the extent of
the interest therein of the decedent at the time of his death.”
Sections 2034 through 2045 then explicitly mandate inclusion of
several more narrowly defined classes of assets. Among these
specific sections is section 2036, which reads in pertinent part
as follows:
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.
Regulations further explain that “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.
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Given the language used in the above-quoted provisions, it
has long been recognized that “The general purpose of this
section is ‘to include in a decedent’s gross estate transfers
that are essentially testamentary’ in nature.” Ray v. United
States, 762 F.2d 1361, 1362 (9th Cir. 1985) (quoting United
States v. Estate of Grace, 395 U.S. 316, 320 (1969)).
Accordingly, courts have emphasized that the statute “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 death.” Guynn v. United States, 437 F.2d
1148, 1150 (4th Cir. 1971).
As used in section 2036(a)(1), the term “enjoyment” has been
described as “synonymous with substantial present economic
benefit.” Estate of McNichol v. Commissioner, 265 F.2d 667, 671
(3d Cir. 1959), affg. 29 T.C. 1179 (1958); see also Estate of
Reichardt v. Commissioner, 114 T.C. 144, 151 (2000). Regulations
additionally provide that use, possession, right to income, or
other enjoyment of transferred property is considered as having
been retained or reserved “to the extent that the use,
possession, right to the income, or other enjoyment is to be
applied toward the discharge of a legal obligation of the
decedent, or otherwise for his pecuniary benefit.” Sec. 20.2036-
1(b)(2), Estate Tax Regs. Moreover, possession or enjoyment of
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transferred property is retained for purposes of section
2036(a)(1) where there is an express or implied understanding to
that effect among the parties at the time of the transfer, even
if the retained interest is not legally enforceable. Estate of
Maxwell v. Commissioner, 3 F.3d 591, 593 (2d Cir. 1993), affg. 98
T.C. 594 (1992); Guynn v. United States, supra at 1150; Estate of
Reichardt v. Commissioner, supra at 151; Estate of Rapelje v.
Commissioner, 73 T.C. 82, 86 (1979). The existence or
nonexistence of such an understanding is determined from all of
the facts and circumstances surrounding both the transfer itself
and the subsequent use of the property. Estate of Reichardt v.
Commissioner, supra at 151; Estate of Rapelje v. Commissioner,
supra at 86.
As used in section 2036(a)(2), the term “right” has been
construed to connote “an ascertainable and legally enforceable
power”. United States v. Byrum, 408 U.S. 125, 136 (1972).
Nonetheless, regulations clarify:
With respect to such a power, it is immaterial
(i) whether the power was exercisable alone or only in
conjunction with another person or persons, whether or
not having an adverse interest; (ii) in what capacity
the power was exercisable by the decedent or by another
person or persons in conjunction with the decedent; and
(iii) whether the exercise of the power was subject to
a contingency beyond the decedent’s control which did
not occur before his death (e.g., the death of another
person during the decedent’s lifetime). The phrase,
however, does not include a power over the transferred
property itself which does not affect the enjoyment of
the income received or earned during the decedent’s
life. * * * Nor does the phrase apply to a power held
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solely by a person other than the decedent. But, for
example, if the decedent reserved the unrestricted
power to remove or discharge a trustee at any time and
appoint himself as trustee, the decedent is considered
as having the powers of the trustee. [Sec. 20.2036-
1(b)(3), Estate Tax Regs.]
Additionally, retention of a right to exercise managerial power
over transferred assets or investments does not of itself result
in inclusion under section 2036(a)(2). United States v. Byrum,
supra at 132-134.
An exception to the treatment mandated by section 2036(a)
exists where the facts establish “a bona fide sale for an
adequate and full consideration in money or money’s worth”.
B. Burden of Proof
Typically, the burden of disproving the existence of an
agreement regarding a retained interest has rested on the estate,
and this burden has often been characterized as particularly
onerous in intrafamily situations. Estate of Maxwell v.
Commissioner, supra at 594; Estate of Reichardt v. Commissioner,
supra at 151-152; Estate of Rapelje v. Commissioner, supra at 86.
In this case, however, the section 2036 issues are new matters
within the meaning of Rule 142(a). Thus, the burden of proof is
on respondent.
C. Existence of a Retained Interest
Respondent contends that the value of the property
transferred to SFLP and Stranco is includable in decedent’s gross
estate under either section 2036(a)(1) or section 2036(a)(2).
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Underlying both of these arguments is the particular structure of
the SFLP/Stranco arrangement, as set forth in the relevant
governing documents.
The SFLP agreement provides that distributions of proceeds
and assets from the entity shall be made in the sole discretion
of the managing general partner. The SFLP agreement also
designates Stranco as the managing general partner. Stranco, in
turn, executed the management agreement employing Mr. Gulig to
manage the day-to-day business of SFLP, as well as of Stranco
itself. Yet Mr. Gulig was already decedent’s attorney in fact
pursuant to the 1988 general power of attorney. Under this
instrument, Mr. Gulig was granted full and durable authority to
act for decedent in his “name, place and stead”. Mr. Gulig set
up the SFLP/Stranco arrangement to facilitate decedent’s estate
planning goals and capitalized the partnership primarily with
decedent’s property.
When distilled to their most essential terms, the governing
documents gave Mr. Gulig authority to specify distributions from
SFLP, which is entirely consistent with his authority under the
1988 power of attorney. Although the estate protests that
Mr. Gulig’s authority under the management agreement was limited
to managing “the day-to-day business” of the partnership and did
not extend to making distributions or loans, the pertinent
instruments provide no basis for concluding that making
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distributions would be outside the day-to-day business of a
partnership capitalized nearly exclusively with investment
assets. As a practical matter, actual disbursement of funds
occurred when checks were issued by Mr. and Mrs. Gulig in their
various related capacities, pursuant to rights granted to them by
decedent, acting through Mr. Gulig.
Hence, to summarize, the SFLP agreement named Stranco
managing general partner with the sole discretion to determine
distributions. The Stranco shareholders, including decedent
(through Mr. Gulig), then acted together to delegate such
authority to Mr. Gulig under the management agreement.
Decedent’s attorney in fact thereby stood in a position to make
distribution decisions. Mrs. Gulig effectuated these decisions
by signing checks to the recipients so designated.
1. Section 2036(a)(1)
Section 2036(a)(1) provides for inclusion of transferred
property with respect to which the decedent retained, by express
or implied agreement, possession, enjoyment, or the right to
income. Enjoyment in this context is equated with present
economic benefit.
a. Right to income
As a threshold matter, we observe that our analysis above of
the express documents suggests inclusion of the contributed
property under section 2036(a)(1) based on the “right to the
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income” criterion, without need further to probe for an implied
agreement regarding other benefits such as possession or
enjoyment. The governing documents contain no restrictions that
would preclude decedent himself, acting through Mr. Gulig, from
being designated as a recipient of income from SFLP and Stranco.
Such scenario is consistent with the reach of the right to income
phrase as we described it in Estate of Pardee v. Commissioner, 49
T.C. 140, 148 (1967):
section 2036(a)(1) refers not only to the possession or
enjoyment of property but also to “right to the income”
from property. The section does not require that the
transferor pull the “string” or even intend to pull the
string on the transferred property; it only requires
that the string exist. See McNichol’s Estate v.
Commissioner, 265 F.2d 667, 671 (C.A. 3, 1959),
affirming 29 T.C. 1179 (1958) * * *
b. Possession or enjoyment
The facts of this case support the finding of an implied
agreement for retained possession or enjoyment. We have
previously considered implicit retention of these benefits under
section 2036(a)(1) in situations involving family limited
partnerships in Estate of Reichardt v. Commissioner, 114 T.C. 144
(2000); Estate of Thompson v. Commissioner, T.C. Memo. 2002-246;
Estate of Harper v. Commissioner, T.C. Memo. 2002-121; and Estate
of Schauerhamer v. Commissioner, T.C. Memo. 1997-242. Although
the instant case is based on limited post-transfer history, due
in part to decedent’s death only 2 months after creation of the
partnership, we conclude that the reasoning underlying those
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opinions directs a like result here. Fundamentally, the
preponderance of the evidence shows that decedent as a practical
matter retained the same relationship to his assets that he had
before formation of SFLP and Stranco.
Circumstances that have been found probative of an
implicitly retained interest under section 2036(a)(1) include
transfer of the majority of the decedent’s assets, continued
occupation of transferred property, commingling of personal and
entity assets, disproportionate distributions, use of entity
funds for personal expenses, and testamentary characteristics of
the arrangement. Guynn v. United States, 437 F.2d at 1150;
Estate of Reichardt v. Commissioner, supra at 152-154; Estate of
Thompson v. Commissioner, supra; Estate of Harper v.
Commissioner, supra; Estate of Trotter v. Commissioner, T.C.
Memo. 2001-250; Estate of Schauerhamer v. Commissioner, supra.
At the outset, we acknowledge that, in contrast to certain
of the prior cases, the participants involved in the SFLP/Stranco
arrangement generally proceeded such that “the proverbial ‘i’s
were dotted’ and ‘t’s were crossed’.” Strangi I at 486. Steps
were taken to abide by the formal terms of the structure created.
Such measures may give SFLP and Stranco sufficient substance to
be recognized as legal entities in the context of valuation,
which requires assumption of a hypothetical buyer and seller.
They do not preclude implicit retention by decedent of economic
- 23 -
benefit from the transferred property for purposes of section
2036(a)(1).
First, we cannot lose sight of the fact that decedent
contributed approximately 98 percent of his wealth, including his
residence, to the SFLP/Stranco arrangement. Respondent alleges
that the transfer left decedent with inadequate assets and cash
flow to meet his living expenses, to which the estate takes
objection. The estate goes to great lengths to counter
respondent’s assertion, claiming that decedent at his death
possessed liquefiable assets of at least $172,000 and received on
a monthly basis a pension of $1,438.18 and Social Security of
$1,559. The estate also stresses that respondent has not
established the amount of decedent’s living expenses and
maintains that, even if the $33,323.22 in checks paid from
decedent’s account in August and September were used as an
estimate, the purported liquefiable assets would have covered
decedent’s needs for his concededly short life expectancy of 12
to 24 months. However, the relative dearth of liquefied
(decedent’s Form 706 showed two bank accounts with funds totaling
$762), as opposed to “liquefiable”, assets persuades us that
decedent and his children and Mr. Gulig all expected that SFLP
and Stranco would be a primary source of decedent’s liquidity.
It is unreasonable to expect that decedent would be forced to
rely on sale of assets to meet his basic costs of living.
- 24 -
A second feature highly probative under section 2036(a)(1)
is decedent’s continued physical possession of his residence
after its transfer to SFLP. The estate maintains that any
otherwise negative implications of this circumstance are
neutralized by the fact that SFLP “charged Mr. Strangi rent” on
occupancy of the home and reported rental income on its 1994 tax
return. Decedent likewise reported a rent obligation on his
estate tax return. For accounting purposes, the accrued rent was
recorded by SFLP on its books. Yet the accrued amount was not
paid until January 1997. A residential lessor dealing at arm’s
length would hardly be content merely to accrue a rental
obligation for eventual payment more than 2 years later. As we
have remarked, accounting entries alone are of small moment in
belying the existence of an agreement for retained possession and
enjoyment. Estate of Reichardt v. Commissioner, 114 T.C. at 154-
155; Estate of Harper v. Commissioner, T.C. Memo. 2002-121.
Concerning factors that relate to use of entity funds, the
estate emphasizes that each disbursement for decedent or his
estate was accompanied by a pro rata allotment to Stranco.
Where, as here, the only interest in the partnership other than
that held by the decedent is de minimis, a pro rata payment is
hardly more than a token in nature. In these circumstances, pro
rata disbursements are insufficient to negate the probability
that the decedent retained economic enjoyment of his or her
- 25 -
assets. After all, distributing 1 percent to Stranco would not
in any substantial way operate to curb decedent’s ability to
benefit from SFLP property. Accordingly, we direct our attention
to the purpose, as opposed to the mechanics, of partnership
distributions and expenditures.
The record reveals several instances where SFLP expended
funds in response to a need of decedent or his estate. SFLP paid
for Ms. Stone’s back surgery to alleviate an injury she sustained
in caring for decedent prior to the formation of SFLP. In 1994,
SFLP expended nearly $40,000 for funeral expenses, estate
administration, and related debts, including a $19,810.28 check
to Olsten to pay for nursing services rendered to decedent before
his death. These sums were followed in 1995 and 1996 by further
payment of over $65,000 for estate expenses and a specific
bequest. SFLP also disbursed approximately $3 million directed
toward decedent’s estate and inheritance taxes.
The estate seeks to justify these payments primarily by
emphasizing that they were accounted for on SFLP’s books as
advances to partners and later closed as distributions, with pro
rata amounts either advanced or distributed to Stranco. The
evidence also indicates that the $65,000-plus amount was repaid
in January 1997. The estate further explains that certain of
these payments from SFLP were necessitated by the delay in
- 26 -
probate of decedent’s estate engendered by the process of getting
TCB to decline executorship.
To the extent that the estate’s arguments focus on
accounting manipulations, they are unavailing. As demonstrated
in Estate of Reichardt v. Commissioner, supra at 154-155, and
Estate of Harper v. Commissioner, supra, accounting adjustments
do not preclude a conclusion that those involved understood that
the decedent’s assets would be made available as needs
materialized. Belated repayment of certain amounts likewise does
not refute the inference of an implicit agreement for retained
enjoyment that arises from the demonstrated and contemporaneous
availability of large sums. Furthermore, to the extent that the
estate’s explanations focus on a delay in probate, they lack
specificity. The more salient feature would appear to be the
insufficiency of the assets not contributed to SFLP and Stranco
to cover the significant expenses reasonably to be expected to
ensue in connection with decedent’s poor health and death. That,
in turn, speaks to retained enjoyment.
Regarding testamentary characteristics, the SFLP/Stranco
arrangement also bears greater resemblance to one man’s estate
plan than to any sort of arm’s-length, joint enterprise. As in
Estate of Harper v. Commissioner, supra, “the largely unilateral
nature of the formation, the extent and type of the assets
contributed thereto, and decedent’s personal situation are
- 27 -
indicative.” Mr. Gulig established the entities using Fortress
documents with little, if any, input from other family members.
The contributed property included the majority of decedent’s
assets in general and his investments, a prime concern of estate
planning, in particular. Decedent was advanced in age and
suffering from serious health conditions. Furthermore, as
discussed in Strangi I at 485-486, the purpose of the partnership
arrangement was not to provide a joint investment vehicle for the
management of decedent’s assets, but was consistent with
testamentary intent.
Moreover, the crucial characteristic is that virtually
nothing beyond formal title changed in decedent’s relationship to
his assets. Mr. Gulig managed decedent’s affairs both before and
after the transfer. Decedent’s children did not obtain a
meaningful economic stake in the property during decedent’s life.
They raised no objections or concerns when large sums were
advanced for expenditures of decedent or his estate, thus
implying an understanding that decedent’s access thereto would
not be restricted.
In face of the foregoing realities, the estate argues that
whatever possession or enjoyment of the contributed property
decedent may have experienced was neither “retained” by means of
a contemporaneous agreement nor “with respect to the transferred
property”. As regards the first point, the estate contends that
- 28 -
respondent has offered no evidence to prove a contemporaneous
agreement requiring the distributions made, as opposed to an
independent subsequent decision by Stranco to make the same
outlay. According to the estate:
Even if decisions to make distributions were made based
on “sympathy for poor old dad,” i.e., “Oops,
Mr. Strangi imprudently put too much money into SFLP
and we need to give some back” that would not meet the
criteria set by judicial precedent for determining the
existence of a retained expectation of possession of
[sic] enjoyment: which is that there must have been an
implied agreement that was contemporaneous with the
transfer of the property at issue, not a subsequent
agreement or act. * * * [Fn. ref. omitted.]
We are persuaded that the evidence and circumstances detailed
above render such a contemporaneous agreement more likely than
not.
The second point mentioned stems from the estate’s view that
pro rata distributions were made not with respect to the
transferred property, in which decedent possessed no legal
interest under the Texas Revised Limited Partnership Act (TRLPA),
Tex. Rev. Civ. Stat. Ann. art. 6132a-1, sec. 7.01 (Vernon Supp.
2003), but with respect to his partnership interest. Yet this
argument relies on paper title to the exclusion of the
practicalities that are the focus of section 2036(a)(1). The
property contributed by decedent was the source of the payments
made. Furthermore, the record suggests that the impetus
underlying a number of significant SFLP disbursements was needs
- 29 -
of decedent or his estate, rather than exigencies pertaining to
Stranco or the partnership itself.
Hence, the preponderance of the evidence establishes that
decedent retained possession of, enjoyment of, or the right to
income from the property transferred within the meaning of
section 2036(a)(1).
2. Section 2036(a)(2)
Although we have held supra that section 2036(a)(1) requires
the estate to include the value of the transferred assets in the
gross estate for Federal estate tax purposes, the parties have
argued extensively over the issue of whether section 2036(a)(2)
applies. Consequently, we address the applicability of section
2036(a)(2) to the instant case. As stated above, section
2036(a)(2) mandates inclusion in the gross estate of transferred
property with respect to which the decedent retained the right to
designate the persons who shall possess or enjoy the property or
its income. This provision was interpreted by the Supreme Court
in United States v. Byrum, 408 U.S. 125 (1972), and both parties
devote a significant portion of their respective arguments to the
implications of that decision. We address these arguments as an
alternative to our conclusions concerning section 2036(a)(1) and
with particular consideration of the facts of this case.
In United States v. Byrum, supra at 126, the decedent,
Mr. Byrum, created an irrevocable trust for the benefit of his
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children. He funded the trust with shares of three closely held
corporations but retained the right to vote the shares and to
veto any sale or transfer of the stock. Id. at 126-127. As a
result, Mr. Byrum at his death continued to have the right to
vote not less than 71 percent of the common stock in each of the
three corporations. Id. at 128-129. The three corporations were
involved in lithography-related businesses and had a substantial
number of minority shareholders unrelated to Mr. Byrum. Id. at
130 & n.2, 142 & n.20. (The Supreme Court noted that 11 of 12, 5
of 8, and 11 of 14 stockholders, respectively, in the three
corporations appeared to be unrelated to Mr. Byrum. Id. at 142
n.20.) The trust instrument specified that there be, and
Mr. Byrum named, an independent corporate trustee. Id. at 126.
The trustee was authorized in its “absolute and sole discretion”
to pay income and principal to or for the benefit of the
beneficiaries. Id. at 127.
The Commissioner argued that, by retaining voting control
over the corporations, Mr. Byrum was in a position to select the
corporate directors and thereby to control corporate dividend
policy. Id. at 131-132. According to the Commissioner, the
scenario in dispute gave Mr. Byrum the ability to regulate the
flow of income to the trust, which ability was characterized as
tantamount to a grantor-trustee’s power to accumulate trust
income for remaindermen or to distribute to present
- 31 -
beneficiaries. Id. at 132. The Court had previously ruled that
the latter power to accumulate rather than disburse constituted a
right to designate under section 2036(a)(2). Id. at 135-136;
United States v. O’Malley, 383 U.S. 627, 631 (1966).
Given the above facts, the Supreme Court held “that Byrum
did not have an unconstrained de facto power to regulate the flow
of dividends to the trust, much less the ‘right’ to designate who
was to enjoy the income from trust property.” United States v.
Byrum, 408 U.S. at 143. The Court rejected the Commissioner’s
“control rationale” as it “would create a standard--not specified
in the statute--so vague and amorphous as to be impossible of
ascertainment in many instances.” Id. at 137 n.10. In reaching
its conclusion, the Court relied on a series of “economic and
legal constraints” to which any power that Mr. Byrum might have
had was subject and which prevented such power from being
equivalent to a right to designate persons to enjoy trust income.
Id. at 144.
The Court emphasized that the independent corporate trustee
alone had the right under the trust instrument to pay out or
withhold income. Id. at 137. Even if Mr. Byrum had managed to
flood the trust with dividends, he had no way of compelling the
trustee to pay out or accumulate that income. Id. at 143. The
Court also noted that the power to elect directors conferred no
legal right to command them to pay or not pay dividends. Id. at
- 32 -
137. Moreover, the flow of dividends from the corporations would
be subject to economic vicissitudes, retained earnings policies,
and business needs. Id. at 139-140. In this regard, the Court
explained:
There is no reason to suppose that the three
corporations controlled by Byrum were other than
typical small businesses. The customary vicissitudes
of such enterprises--bad years; product obsolescence;
new competition; disastrous litigation; new, inhibiting
Government regulations; even bankruptcy--prevent any
certainty or predictability as to earnings or
dividends. There is no assurance that a small
corporation will have a flow of net earnings or that
income earned will in fact be available for dividends.
Thus, Byrum’s alleged de facto “power to control the
flow of dividends” to the trust was subject to business
and economic variables over which he had little or no
control. [Id. at 249.]
Furthermore, the Supreme Court stressed that “A majority
shareholder has a fiduciary duty not to misuse his power by
promoting his personal interests at the expense of corporate
interests” and the directors of a corporation “have a fiduciary
duty to promote the interests of the corporation.” Id. at 137-
138. Such duties were legally enforceable by means of, for
example, a derivative suit. Id. at 141-142.
With respect to the case at bar, the estate asserts that
decedent retained no legally enforceable rights of the genre
required by United States v. Byrum, supra. The estate emphasizes
that management powers are insufficient to warrant inclusion and
points out that, under the SFLP agreement, the limited partner
was without even the right to exercise any managerial authority.
- 33 -
The estate likewise reiterates that “right” as used in section
2036(a)(2) is not to be construed as control and notes that,
under the TRLPA, Tex. Rev. Civ. Stat. Ann. art. 6132a-1, sec.
3.03 (Vernon Supp. 2003), a limited partner expressly does not
participate in control of the business of a partnership by virtue
of acting as an officer, director, or stockholder of a corporate
general partner. In this connection, the estate also remarks
that, as a minority shareholder of Stranco, decedent was without
the ability to elect a majority of directors, thus retaining even
less control than was present in United States v. Byrum, supra.
Moreover, the estate repeatedly invokes the concept that
“any power which Mr. Strangi or Stranco might have would be
subject to state law fiduciary duties. Such fiduciary duties
effectively render Section 2036(a)(2) inapplicable under the
teaching of Byrum.”
Conversely, it is respondent’s position that United States
v. Byrum, supra, fails to shield the assets placed in SFLP and
Stranco from the reach of section 2036. Respondent avers that
decedent had legally enforceable rights based on the relevant
written agreements, not mere de facto control or influence.
Respondent argues that decedent’s rights go beyond the management
powers and influence at issue in United States v. Byrum, supra,
and extend to designation of persons who shall enjoy entity
property and income. Respondent sets forth several ways in which
- 34 -
decedent’s authority can be derived from the provisions of the
governing documents and the roles played by the family members
involved. Furthermore, respondent maintains that no impediments
comparable to those in United States v. Byrum, supra, existed to
constrain decedent’s powers and that the Supreme Court’s
reasoning is therefore inapplicable here. In the particular
circumstances of this case, we agree with respondent.
a. Legally enforceable rights
On these facts, decedent can properly be described as
retaining a right to designate who shall enjoy property and
income from SFLP and Stranco within the meaning of section
2036(a)(2). In this regard, it is immaterial whether we
characterize the pertinent documents and relationships as
creating rights exercisable by decedent alone, in conjunction
with other Stranco shareholders, or in conjunction with Stranco’s
president. See sec. 20.2036-1(b)(3), Estate Tax Regs.
With respect to SFLP income and as previously recounted in
greater detail, the SFLP agreement named Stranco managing general
partner and conferred on the managing general partner sole
discretion to determine distributions. The Stranco shareholders,
including decedent (through Mr. Gulig), then acted together to
delegate this authority to Mr. Gulig through the management
agreement. The effect of these actions placed decedent’s
attorney in fact in a position to make distribution decisions.
- 35 -
Mrs. Gulig effectuated such decisions by executing checks to the
recipients so designated.
In addition to the rights described above related to income,
decedent also retained the right, acting in conjunction with
other Stranco shareholders, to designate who shall enjoy the
transferred SFLP property itself. The Supreme Court indicated in
United States v. Byrum, 408 U.S. at 143 n.23 (citing Commissioner
v. Estate of Holmes, 326 U.S. 480 (1946)), that a “power to
terminate the trust and thereby designate the beneficiaries at a
time selected by the settlor” would implicate section 2036(a)(2).
Pursuant to the SFLP agreement, the partnership would be
dissolved and terminated upon a unanimous vote of the limited
partners and the unanimous consent of the general partner. The
shareholders agreement likewise specifies that dissolution of
SFLP requires the affirmative vote of all Stranco shareholders.
Once dissolution and termination occur, liquidation is
accomplished as set forth in the SFLP agreement. The managing
general partner is named as the liquidator, which in turn
disburses partnership assets first in payment of debts and then
in repayment of partners’ capital account balances. Authority is
expressly granted for distributions in kind. Accordingly,
decedent can act together with other Stranco shareholders
essentially to revoke the SFLP arrangement and thereby to bring
about or accelerate present enjoyment of partnership assets.
- 36 -
Furthermore, it is noteworthy that such action would likely
revest in decedent himself, as the 99-percent limited partner,
the majority of the contributed property.
As regards property transferred to Stranco and income
therefrom, decedent held the right, in conjunction with one or
more other Stranco directors, to declare dividends. The
corporation’s bylaws authorize the board of directors to declare
dividends from the entity. For the board to take such action, a
majority vote of the directors at a meeting with a quorum present
is sufficient. Under the bylaws, a majority of the directors
then serving constitutes a quorum. Because Stranco had five
directors, a quorum would consist of three, so two directors
(e.g., decedent through Mr. Gulig and one other) could
potentially act together to declare a dividend. The Stranco
shareholders agreement further provided that each of the initial
five directors would be reelected annually, thus effectively
ensuring decedent’s position on the board.
In response to various of the above concepts pertaining to
joint action, particularly by stockowners, the estate suggests:
“If the mere fact that a shareholder could band together with all
of the other shareholders of a corporation and such banding
together would be sufficient to cause inclusion under Section
2036, then it would have been impossible for the United States
Supreme Court to reach the decision that it did in Byrum.” The
- 37 -
estate’s observation ignores the existence in United States v.
Byrum, supra, of the independent trustee who alone had the
ability to determine distributions from the disputed trust,
notwithstanding any prior action by corporate owners or
directors. It also ignores the identity of the shareholders in
this case and the dual roles played by Mr. Gulig.
To summarize, review of the documentary evidence discussed
above reveals that decedent here retained rights of a far
different genre from those at issue in United States v. Byrum,
supra. Rather than mere “control”, management, or influence,
there are traceable to decedent through the explicit provisions
of the governing instruments ascertainable and legally
enforceable rights to designate persons who shall enjoy the
transferred property and its income. The estate’s reliance on a
limited partner’s lack under the TRLPA of participation in
control and under the SFLP agreement of management authority is
thus misplaced. The alleged absence of such powers cannot negate
the dispositive rights granted in the instant case. The
SFLP/Stranco arrangement placed decedent in a position to act,
alone or in conjunction with others, through his attorney in
fact, to cause distributions of property previously transferred
to the entities or of income therefrom. Decedent’s powers,
absent sufficient limitation as discussed infra, therefore fall
within the purview of section 2036(a)(2).
- 38 -
b. Constraints upon rights to designate
The Supreme Court in United States v. Byrum, supra, relied
upon several impediments to the exercise of powers held by
Mr. Byrum in concluding that such powers did not warrant
inclusion under section 2036(a)(2). Here, the rights held by
decedent are of a different nature and were not accompanied by
comparable constraints. In our view, the constraints alleged by
the estate are illusory.
One circumstance highlighted by the Supreme Court was the
existence of an independent trustee with the sole authority
ultimately to pay or withhold income from the trust. Here, in
contrast, no similar layer of independence was interposed.
Rather, decisions with respect to distributions were placed in
Stranco, of which decedent owned 47 percent and was the largest
shareholder. All decisions ultimately were made by Mr. Gulig,
who continued to act as decedent’s attorney in fact.
Another element stressed by the Supreme Court was the manner
in which the flow of funds allegedly under Mr. Byrum’s control
would be subject to economic and business realities consequent
upon the status of the relevant corporations as typical small
operating enterprises. Earnings and dividends of a small
operating company could be affected by, inter alia, changes in
products, in competition, or in industry regulation and outlook;
use of funds for replacement of plant and equipment or for growth
- 39 -
and expansion; and the need to retain sufficient earnings for
working capital. These complexities do not apply to SFLP or
Stranco, which held only monetary or investment assets.
Yet another constraining factor cited by the Supreme Court
was the presence of fiduciary duties held by directors and
shareholders, and it is upon this aspect of the Supreme Court’s
opinion that the estate focuses. The Supreme Court emphasized
that corporate directors and shareholders have a fiduciary duty
to promote the best interests of the entity, as opposed to their
personal interests. The Supreme Court further pointed to a
substantial number of unrelated minority shareholders who could
enforce these duties by suit.
The fiduciary duties present in United States v. Byrum, 408
U.S. 125 (1972), ran to a significant number of unrelated parties
and had their genesis in operating businesses that would lend
meaning to the standard of acting in the best interests of the
entity. As a result, there existed both a realistic possibility
for enforcement and an objective business environment against
which to judge potential dereliction. Given the emphasis that
the Supreme Court laid on these factual realities, Byrum simply
does not require blind application of its holding to scenarios
where the purported fiduciary duties have no comparable
substance. We therefore analyze the situation before us to
- 40 -
determine whether the fiduciary duties relied upon by the estate
would genuinely circumscribe use of powers to designate.
The estate summarizes its contentions regarding fiduciary
duties as follows:
Just like Mr. Byrum, Mr. Strangi’s “rights” (whatever
those rights appear to be) were severely limited by the
fiduciary duties of other people who (according to
Byrum) presumably could be counted on the [sic] observe
those restraints against whatever desires they might
otherwise have had to run pell-mell to do the bidding
of the Decedent: (1) Mr. Gulig, who (separate and
apart from his role as attorney-in-fact for
Mr. Strangi) had fiduciary duties to Stranco, whom he
served as manager; (2) the directors of Stranco, who
had fiduciary duties to both Stranco and to SFLP as a
whole; and (3) McLennan County Community College
(“MCCC”), which had rights as a minority shareholder of
Stranco and a fiduciary obligation to enforce such
rights for the benefit of its own beneficiaries as well
as the people of the State of Texas (with the Attorney
General of Texas having the ability to step in to
enforce such rights if MCCC failed in its duties).
* * *
None of the foregoing obligations cited by the estate is
sufficiently on par with those detailed in United States v.
Byrum, supra, to bring the present case within the Supreme
Court’s rationale.
Concerning Mr. Gulig, any fiduciary duties that Mr. Gulig
might have had in his role as manager of Stranco (and thereby of
SFLP) are entitled to comparatively little weight on these facts.
Prior to his instigation of the SFLP/Stranco arrangement, Mr.
Gulig stood in a confidential relationship, and owed fiduciary
duties, to decedent personally as his attorney in fact. Thus, to
- 41 -
the extent that Stranco or SFLP’s interests might diverge from
those of decedent, we do not believe that Mr. Gulig would
disregard his preexisting obligation to decedent.
As regards fiduciary obligations of Stranco and its
directors, these duties, too, have little significance in the
present context. Although Stranco would owe a fiduciary duty to
SFLP and to the limited partners, decedent owned the sole,
99-percent limited partnership interest. The rights to designate
traceable to decedent through Stranco cannot be characterized as
limited in any meaningful way by duties owed essentially to
himself. Nor do the obligations of Stranco directors to the
corporation itself warrant any different conclusion. Decedent
held 47 percent of Stranco, and his own children held 52 of the
remaining 53 percent. Intrafamily fiduciary duties within an
investment vehicle simply are not equivalent in nature to the
obligations created by the United States v. Byrum, supra,
scenario.
With respect to the role of MCC Foundation, United States v.
Byrum, supra, affords no basis for permitting outcomes under
section 2036(a)(2) to turn on factors amounting to no more than
window dressing. A charity given a gratuitous 1-percent interest
would not realistically exercise any meaningful oversight.
Lastly, we are unpersuaded that any different result should
obtain on account of the Commissioner’s having taken a contrary
- 42 -
position in certain previous administrative rulings. As the
estate repeatedly brings to our attention, the Commissioner has
cited United States v. Byrum, supra, in such rulings for the
principle that fiduciary constraints counsel against inclusion of
family limited partnership assets under section 2036(a)(2). See,
e.g., Priv. Ltr. Rul. 94-15-007 (Apr. 15, 1994); Priv. Ltr. Rul.
93-10-039 (Mar. 12, 1993); Tech. Adv. Mem. 91-31-006 (Aug. 2,
1991). These written determinations are expressly declared by
statute to be without precedential force. Sec. 6110(k)(3).
Thus, any claimed reliance on them is unavailing. In any event,
cursory exposition in limited factual circumstances does not
preclude our analysis of statutory provisions and regulations in
the context of this case.
In sum, the estate’s averment that decedent’s “‘rights’
* * * were severely limited by the fiduciary duties of other
people who (according to Byrum) presumably could be counted on
* * * [to] observe those restraints” rests on a faulty legal
premise and ignores factual realities. First, the Supreme
Court’s opinion in United States v. Byrum, supra, provides no
basis for “presuming” that fiduciary obligations will be enforced
in circumstances divorced from the safeguards of business
operations and meaningful independent interests or oversight.
Second, the facts of this case belie the existence of any genuine
fiduciary impediments to decedent’s rights. We conclude that the
- 43 -
value of assets transferred to SFLP and Stranco is includable in
decedent’s gross estate under section 2036(a)(2).
D. Existence of Consideration
Having decided that decedent retained an interest in the
assets transferred to SFLP and Stranco for purposes of section
2036(a), we evaluate whether the statute’s application may
nonetheless be avoided on the basis of the parenthetical
exception for “a bona fide sale for an adequate and full
consideration in money or money’s worth”. Availability of the
exception rests on two requirements: (1) A bona fide sale,
meaning an arm’s-length transaction, and (2) adequate and full
consideration. See Estate of Harper v. Commissioner, T.C. Memo.
2002-121. The situation before us meets neither of these
criteria.
First, no bona fide sale, in the sense of an arm’s-length
transaction, occurred in connection with decedent’s transfer of
property to SFLP and Stranco. Mr. Gulig, as decedent’s attorney
in fact, prepared the arrangement using Fortress materials in
absence of any meaningful negotiation or bargaining with other
anticipated interest-holders. He determined how the entities
would be structured and operated, what property would be
contributed, and what interests various parties would obtain
therein. Hence, decedent essentially stood on both sides of the
transaction, a fact unchanged by the manner in which the Strangi
- 44 -
children opted to join after the substantive decisions had been
made.
Second, full and adequate consideration does not exist
where, as here, there has been merely a “recycling” of value
through partnership or corporate solution. See Estate of
Thompson v. Commissioner, T.C. Memo. 2002-246; Estate of Harper
v. Commissioner, supra; Kimbell v. United States, 244 F. Supp. 2d
700 (N.D. Tex. 2003). As we recently explained in Estate of
Harper v. Commissioner, supra:
to call what occurred here a transfer for consideration
within the meaning of section 2036(a), much less a
transfer for an adequate and full consideration, would
stretch the exception far beyond its intended scope.
In actuality, all decedent did was to change the form
in which he held his beneficial interest in the
contributed property. * * * Without any change
whatsoever in the underlying pool of assets or prospect
for profit, as, for example, where others make
contributions of property or services in the interest
of true joint ownership or enterprise, there exists
nothing but a circuitous “recycling” of value. We are
satisfied that such instances of pure recycling do not
rise to the level of a payment of consideration. To
hold otherwise would open section 2036 to a myriad of
abuses engendered by unilateral paper transformations.
We see no distinction of consequence between the scenario
analyzed in Estate of Harper v. Commissioner, supra, and that of
the present case. Decedent contributed more than 99 percent of
the total property placed in the SFLP/Stranco arrangement and
received back an interest the value of which derived almost
exclusively from the assets he had just assigned. Furthermore,
the SFLP/Stranco arrangement patently fails to qualify as the
- 45 -
sort of functioning business enterprise that could potentially
inject intangibles that would lift the situation beyond mere
recycling. Cf. Estate of Harrison v. Commissioner, T.C. Memo.
1987-8; Church v. United States, 85 AFTR 2d 2000-804, 2000-1 USTC
par. 60,369 (W.D. Tex. 2000), affd. without published opinion 268
F.3d 1063 (5th Cir. 2001) (both involving contributions by other
participants not de minimis in nature, for a genuine pooling of
interests). We therefore hold that decedent did not engage in
any transfer for consideration upon the creation and funding of
SFLP and Stranco. Accordingly, the estate is entitled to no
exception to the treatment mandated by section 2036(a).
II. Amount Includable
With respect to the amount includable in decedent’s gross
estate on account of a retained interest, the estate makes the
following assertion:
I.R.C. sec. 2036(a) only requires inclusion of property
in a decedent’s estate to the extent that the decedent
retained an interest in the transferred property.
Assuming arguendo that Decedent did retain an interest
in some of the property transferred to SFLP, I.R.C.
sec. 2036 does not automatically require inclusion of
all of the property transferred by Decedent to SFLP and
Respondent has not sustained his burden of proof of
establishing the extent, if any, of any retained
interest.
The foregoing premise, however, rests on a faulty understanding
of the statute’s operation. As we recently explained in Estate
of Thompson v. Commissioner, supra:
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Section 2036(a) effectively includes in the gross
estate the full fair market value, at the date of
death, of all property transferred in which the
decedent had retained an interest, rather than the
value of only the retained interest. Fidelity-
Philadelphia Trust Co. v. Rothensies, 324 U.S. 108
(1945). This furthers the legislative policy to
“include in a decedent’s gross estate transfers that
are essentially testamentary--i.e., transfers which
leave the transferor a significant interest in or
control over the property transferred during his
lifetime.” United States v. Estate of Grace, 395 U.S.
316, 320 (1969). Thus, an asset transferred by a
decedent while he was alive cannot be excluded from his
gross estate unless he “absolutely, unequivocally,
irrevocably, and without possible reservations, parts
with all of his title and all of his possession and all
of his enjoyment of the transferred property.”
Commissioner v. Estate of Church, 335 U.S. 632, 645
(1949). * * * [Emphasis added.]
Regulations further detail that “If the decedent retained or
reserved an interest or right with respect to a part only of the
property transferred by him, the amount to be included in his
gross estate under section 2036 is only a corresponding
proportion”. Sec. 20.2036-1(a), Estate Tax Regs. Accordingly,
caselaw and regulatory authority converge to indicate that the
full value of transferred property is includable unless there
existed some specific portion of the contributed assets that the
retained interest or rights could not reach.
Here, the record reveals that no part of the transferred
property was exempt from the rights or enjoyment retained by
decedent. The relevant documents make no distinction among the
various assets contributed, nor does the evidence reflect that
Mr. Gulig looked to particular assets in determining whether
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amounts should be distributed. The preponderance of the evidence
therefore establishes that the full value of the transferred
assets is includable under section 2036(a).
Pursuant to section 2036(a), 99 percent of the net asset
value of SFLP and 47 percent of the value of assets held by
Stranco should be included in decedent’s gross estate.
Nonetheless, because respondent never asserted an increased
deficiency in connection with the section 2036 issue, valuation
of the property in dispute, i.e., interests in SFLP and Stranco,
will be limited by the amounts determined in the notice of
deficiency. The decision to be entered, however, will take into
account any additional deductions to which the estate is entitled
for costs and expenses incurred subsequent to the initial trial
of this case.
To reflect the foregoing,
Decision will be entered
under Rule 155.