T.C. Memo. 2005-65
UNITED STATES TAX COURT
ESTATE OF VIRGINIA A. BIGELOW, DECEASED, FRANKLIN T. BIGELOW,
JR., EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4066-02. Filed March 30, 2005.
Joseph F. Moore, for petitioner.
Donna F. Herbert, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined a $217,480.05
deficiency in the Federal estate tax of the Estate of Virginia A.
Bigelow.
Virginia A. Bigelow (decedent) established a trust
(decedent’s trust) and transferred her residence to it in 1991.
The trust exchanged the residence for other real property in
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1993. Decedent’s trust and decedent’s children formed a family
limited partnership in 1994 when decedent was about age 85 and a
few months after she suffered a stroke and began living in an
assisted-living facility. Decedent’s trust transferred the real
property, but not the liability for a loan and a line of credit
totaling $450,000 which were secured by the property, to the
partnership. After the transfer, decedent was left with an
insufficient amount of income to meet her living expenses or to
satisfy her liability for the indebtedness. Decedent’s sole
purposes in establishing the family limited partnership were to
facilitate gift giving and to reduce Federal estate tax.
The issue for decision is whether the real property that
decedent’s trust transferred to the partnership is included in
decedent’s gross estate under section 2036(a)(1). We hold that
it is.1
Unless otherwise specified, section references are to the
Internal Revenue Code in effect for the time of decedent’s death
in 1997, and Rule references are to the Tax Court Rules of
Practice and Procedure.
1
In an amendment to the answer, respondent asserted that
the property is also includable in decedent’s estate under secs.
2036(a)(2) and 2038(a)(1). Because we hold that the property
transferred to the partnership is included in decedent’s estate
under sec. 2036(a)(1), we need not decide whether the property is
included in decedent’s estate under sec. 2036(a)(2) or sec. 2038.
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Decedent, Her Family, and Decedent’s Estate
Decedent died testate on August 8, 1997, at the age of 88.
She resided in Alhambra, California, at that time. Decedent’s
son, Franklin T. Bigelow, Jr. (Mr. Bigelow), is the executor of
decedent’s estate. He was also her attorney in fact pursuant to
a durable power of attorney from 1986 until she died. Mr.
Bigelow resided in Altadena, California, when the petition in
this case was filed.
Decedent was survived by Mr. Bigelow, her daughter Virginia
L. Burke (Mrs. Burke), and nine grandchildren. Decedent’s
husband had died in 1966, and her daughter Katharine B.
Fitzgerald (Mrs. Fitzgerald) had died in 1996.
B. The Sand Point Road Property
In 1963, decedent and her husband purchased as their
principal residence a house on Sand Point Road (then called
Spindrift Lane), in Carpinteria, California (the Sand Point Road
property). Decedent became the sole owner of that property in
1966 when her husband died. She lived there until 1992.
Decedent gave each of her three children a 1/175th undivided
interest in the Sand Point Road property in 1990 or 1991. The
Sand Point Road property was worth $1,750,000 at that time.
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C. Decedent’s Trust
In 1991, decedent executed (1) a declaration and agreement
of trust (the trust agreement), which created decedent’s trust,
and (2) a deed transferring her remaining 98.2857-percent
undivided interest in the Sand Point Road property to herself and
to her son as cotrustees (the trustees) of decedent’s trust.
Decedent had the power to revoke the trust during her
lifetime. The trust agreement required the trustees to
distribute all of the income to or for the benefit of decedent
and allowed the trustees to invade the trust corpus for
decedent’s care, maintenance, or support. The assets remaining
in decedent’s trust when she died were to be distributed in equal
shares to her three children.
Decedent suffered a stroke and was hospitalized on March 9,
1992. After she was released from the hospital, she entered a
rehabilitation center for about 6 weeks. She then moved to an
assisted-living facility in Alhambra, California. On December
30, 1992, decedent withdrew a 1.5-percent interest in the Sand
Point Road property from the trust and gave each of her daughters
a 0.75-percent undivided interest in that property.
D. The Exchange of the Sand Point Road Property for the Padaro
Lane Property
In the fall of 1992, the trustees of decedent’s trust listed
the Sand Point Road property for sale with a real estate broker.
In January 1993, the trustees of decedent’s trust and decedent’s
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children (collectively the Bigelows) entered into an exchange and
leaseback agreement (the exchange agreement) with Peter and
Margaret Seaman (the Seamans). The Seamans owned a residence on
Padaro Lane in Carpinteria (the Padaro Lane property).
Under the exchange agreement, the Bigelows agreed to
transfer to the Seamans the Sand Point Road property which was
worth $1,325,000, and the Seamans agreed to pay the Bigelows
$125,000 and to transfer to decedent’s trust the Padaro Lane
property which was worth $1,200,000. The Seamans wanted to build
a new house on the Sand Point Road property. As part of the
agreement, the Bigelows agreed to lease the Padaro Lane property
to the Seamans until the new house was completed.
Decedent’s trust obtained a $350,000 loan from the Great
Western Bank evidenced by a promissory note and secured by a
first position deed of trust on the Padaro Lane property in favor
of the bank. Decedent and Mr. Bigelow personally guaranteed the
performance of decedent’s trust under the purchase money
promissory note. Decedent’s trust used the proceeds from the
Great Western Bank loan to repay two Citibank loans secured by
the Sand Point Road property.
Decedent signed the exchange agreement and the deed
transferring the Sand Point Road property to the Seamans. Mr.
Bigelow signed the other documents, including the loan
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guaranties, for himself and for decedent under the power of
attorney.
The Bigelows received $68,630 from the transaction after
payment of closing costs. As consideration for the sale or
exchange of their interests in the Sand Point Road property,
decedent’s daughters each received $17,508.82, Mr. Bigelow
received $7,571.32, and decedent’s trust received $25,833 and the
Padaro Lane property subject to the Great Western Bank mortgage.
The Bigelows executed deeds transferring the Sand Point Road
property to the Seamans. The trustees of decedent’s trust leased
the Padaro Lane property back to the Seamans. The lease provided
for an initial term of 12 months and for rent of $3,500 per
month.
E. The Union Bank Line of Credit
In December 1993, decedent’s trust obtained a $100,000 line
of credit from Union Bank secured by a second position deed of
trust on the Padaro Lane property. Decedent guaranteed the
performance of decedent’s trust under the line of credit.
Decedent’s trust drew down $100,000 on the Union Bank line
of credit between December 1993 and November 1994. Decedent’s
children and grandchildren received gifts of money from the
proceeds of the line of credit in amounts not specified in the
record. The amount owed on the Union Bank line of credit was
$100,130.50 in November 1994.
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F. Spindrift Associates, Ltd. (Decedent’s Family Limited
Partnership)
In December 1994, the trustees of decedent’s trust and
decedent’s three children executed a limited partnership
agreement (the partnership agreement) which formed Spindrift
Associates, Ltd., a California limited partnership (Spindrift or
the partnership). The partnership agreement stated that the
purpose of the partnership was to engage in the business of
owning and operating residential real property, initially the
Padaro Lane property, and it prohibited the partnership from
engaging in any other principal business. The partnership
agreement permitted the partnership to issue units with different
rights and preferences. Each unit represented a contribution of
cash or property of $100. “A units” were issued to limited
partners in exchange for cash or checks. “B units” were issued
to limited partners in exchange for contributions of property.
Decedent’s trust was both the sole general partner and a
limited partner. Decedent’s three children were limited
partners. In December 1994, decedent’s trust contributed $500 to
the partnership in exchange for a 1-percent interest as general
partner, and decedent’s trust and decedent’s three children each
contributed $100 in exchange for one A unit.
On December 22, 1994, decedent’s trust transferred the
Padaro Lane property, then worth $1,450,000, but not the debt
secured by the property, to the partnership in exchange for
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14,500 B units. Decedent, in her capacity as grantor and
beneficiary of decedent’s trust, agreed to hold the partnership
harmless for the Great Western Bank loan and the Union Bank line
of credit. The partnership agreement required the capital
account of decedent’s trust to be reduced to the extent that
partnership funds were used to pay any of the principal on the
Great Western Bank loan or the Union Bank line of credit.
The partnership agreement allocated 1 percent of the net
operating profits and losses of the partnership to the general
partner and 99 percent to the limited partners. Each of the
14,504 limited partnership units was allocated an equal share (1
÷ 14,504) of the allocation made to the limited partners.
On December 30, 1994, a certificate of limited partnership
for Spindrift was filed with the California secretary of state.
Around February 2, 1995, decedent’s trust, as the general partner
of the partnership, opened a bank account for the partnership at
the Union Bank of California.
G. The Partnership’s Leasing and Sale of the Padaro Lane
Property
The partnership made repairs to the Padaro Lane property
after the Seamans moved out. On February 7, 1995, the
partnership entered into a 24-month lease with Michael H. Healy
and Tim F. Walsh (the Healy-Walsh lease) for the occupancy of the
Padaro Lane property. In June 1996, the partnership engaged real
estate brokers to sell the Padaro Lane property for $1,585,000.
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On September 3, 1997, the partnership agreed to sell the
Padaro Lane property for $1,475,000. The partnership received
$949,490.33 from the sale on November 21, 1997. The partnership
began distributing the proceeds to the partners, including
decedent’s trust, by December 1997.
H. The Partnership’s Financial Activity
All of the rental receipts from the Padaro Lane property
were deposited into partnership bank accounts, and the expenses
for the Padaro Lane property were paid from those accounts.
Although decedent was obligated to make the monthly payments on
the Great Western Bank loan, the partnership made those payments.
The partnership, however, did not adjust the capital account of
decedent’s trust for payment of principal as required by the
partnership agreement. Decedent’s trust made the monthly
payments on the Union Bank line of credit.
From April 6, 1995, to August 8, 1997 (when decedent died),
Mr. Bigelow transferred funds between the partnership and
decedent’s trust 40 times. When decedent died, decedent’s trust
owed Spindrift $3,500. Mr. Bigelow transferred funds from
decedent’s trust to the partnership soon after it was formed to
pay the property taxes on the Padaro Lane property. He
transferred funds from the partnership to decedent’s trust to
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repay the earlier advances and later to pay decedent’s expenses.
I. Decedent’s Gifts of Partnership Interests
In December 1994, shortly after the partnership was formed,
Mr. Bigelow, under decedent’s power of attorney, withdrew 5,400 B
units from decedent’s trust and assigned 800 units to himself and
2,300 units to each of decedent’s daughters, and withdrew from
decedent’s trust the income rights associated with 600 B units
and assigned the income rights associated with 75 B units to each
of decedent’s grandchildren except Eliza K. Bigelow.
In December 1995, Mr. Bigelow, under decedent’s power of
attorney, withdrew 600 B units from decedent’s trust and assigned
200 of those units to each of decedent’s children, and withdrew
the income rights associated with 210 B units and assigned the
income rights associated with 90 B units to Eliza K. Bigelow and
the income rights associated with 15 B units to each of
decedent’s other grandchildren.
In December 1996, Mr. Bigelow, under decedent’s power of
attorney, withdrew 150 B units from decedent’s trust and assigned
50 B units to himself and 100 B units to Mrs. Burke, and withdrew
income rights associated with 450 B units and assigned the income
rights with respect to 50 B units to each of decedent’s
grandchildren.
On July 18, 1997, Mr. Bigelow, under decedent’s power of
attorney, withdrew 100 B units from decedent’s trust and assigned
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those units to Mrs. Burke. He also withdrew the income rights
associated with 540 B units from decedent’s trust and assigned
the income rights associated with 60 B units to each of
decedent’s grandchildren.
Mr. Bigelow, for himself and under decedent’s power of
attorney, acting as trustee of decedent’s trust, signed a
statement of ownership in which he certified that the ownership
of Spindrift limited partnership units as of July 18, 1997, was:
Partner A Units B Units
Decedent’s trust 1 8,250
Estate of Mrs. Fitzgerald, deceased 1 2,500
Mrs. Burke 1 2,700
Mr. Bigelow 1 1,050
Total 4 14,500
He also certified that decedent’s grandchildren owned the income
rights associated with 1,800 B units (200 units each) owned by
the general partner. The grandchildren were not substituted as
limited partners as a result of the gifts of income rights.
Disregarding the limited partnership interests associated
with the income rights transferred to decedent’s grandchildren,
decedent’s trust owned a 1-percent general partnership interest
and a 45-percent ((8,250 - 1,800) ÷ 14,500) limited partnership
interest in the partnership when decedent died on August 8, 1997.
J. Termination of the Partnership
The partnership did not make any distributions to its
partners with respect to their interests in the partnership
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before decedent died. After decedent died, decedent’s trust
continued to act as the general partner of the partnership until
the partnership was terminated. By December 31, 1998: (1) The
partnership was terminated; (2) final distributions were made to
the partners (including decedent’s trust); and (3) the
partnership’s dissolution documents were recorded in the office
of the California secretary of state.
K. Decedent’s Assets and Sources of Income
After her husband died, decedent received income from a
trust that she and her husband had established in 1954 (the 1954
trust). A California trust company served as the corporate
trustee of the 1954 trust. Initially, the corpus of the 1954
trust was an insurance policy on the life of decedent’s husband.
When the partnership was formed in 1994, decedent had
monthly income of $9,300 from the following sources:
Source Amount
Residential care insurance policies
Fireman’s Fund/American Express $2,100
AARP/Prudential 1,500
Total $3,600
Rental income--Padaro Lane property 3,500
Other income1 2,200
Total income 9,300
1
Veterans’ Administration benefits, Social Security, U.S.
Army retirement, distributions from the 1954 trust, and payments
from the sale of her husband’s business.
When the partnership was formed in 1994, decedent’s monthly
expenses were:
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Expense Amount
Assisted living $3,600
Health insurance supplement 150
Pharmacy 200
Miscellaneous medical 100
Great Western loan 2,000
Union Bank line of credit 750
Flood and liability insurance 350
Property taxes 1,000
Storage 150
Phone and miscellaneous 50
Total 8,350
After Spindrift was formed and the Padaro Lane property was
transferred to the partnership, decedent no longer received the
rent from the property and her income was reduced to $5,800
($9,300 - $3,500). Her expenses were reduced by the property
taxes and insurance to $7,000 ($8,350 - $1,350), creating a
shortfall of $1,200 ($5,800 - $7,000).
After the Padaro Lane property was transferred to the
partnership, the partnership paid the $2,000 monthly payment on
the Great Western Bank loan.
The $1,500 monthly benefit under decedent’s AARP/Prudential
residential care insurance policy expired in August 1995, and
decedent’s income was reduced to $4,300 ($5,800 - $1,500),
creating a shortfall of $2,700 ($4,300 - $7,000). The $2,100
monthly benefit under the Fireman’s Fund/American Express policy
expired in August 1996, and decedent’s income was reduced to
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$2,200 ($4,300 - $2,100), creating a shortfall of $4,800 ($2,200
- $7,000).
After the benefits under decedent’s residential care
insurance policies had expired, Mr. Bigelow told the trustee of
the 1954 trust that decedent did not have enough income to pay
her expenses. As a result, by April 1997, the trustee had
distributed a total of $68,214 to decedent and terminated the
1954 trust. Mr. Bigelow and his wife received $22,000 from the
funds distributed from the 1954 trust before decedent died in
August 1997.
Decedent’s trust had accounts at Citizens Bank. When
Spindrift was formed, the total amount in those accounts was
about $23,500. Decedent’s trust received more than $68,000 early
in 1997. When decedent died, the combined balance was about
$5,500. All of the checks drawn on the Citizens Bank accounts
were signed by Mr. Bigelow as trustee of decedent’s trust.
L. Tax Returns
1. Decedent’s Income Tax Returns for 1993-97
On decedent’s 1993 Form 1040, U.S. Individual Income Tax
Return (decedent’s 1993 return), decedent reported adjusted gross
income of $50,037. On Form 8824, Like-Kind Exchanges, decedent
reported $25,833 as boot from the exchange of the Sand Point Road
property for the Padaro Lane property. On Schedule E,
Supplemental Income and Loss, decedent reported $43,750 of rental
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income and $40,578 of expenses for the Padaro Lane property
during that year.
On her 1994 return, decedent reported adjusted gross income
of $10,284. On Schedule E, decedent reported $42,000 of rental
income and $38,193 of expenses for the Padaro Lane property.
On her 1995-97 returns, decedent reported adjusted gross
income of $14,918 in 1995, $38,880 in 1996, and $469 in 1997.
Decedent reported her shares of partnership income or loss on
those returns.
2. Partnership Returns for 1994-97
The partnership reported no income or expenses for the
Padaro Lane property on its 1994 Form 1065, U.S. Partnership
Return of Income (the partnership’s 1994 return). The
partnership’s balance sheets included in the 1995-97 returns
reported the Great Western Bank loan as a liability. None of the
partners’ Schedules K-1, Partner’s Share of Income, Credits,
Deductions, Etc., accurately reflect the partners’ capital
accounts; e.g., decedent’s capital account as reported on the
Schedules K-1 never shows that decedent’s trust contributed the
Padaro Lane property. The partnership reported income or loss
and decedent’s distributive shares of income and losses on its
returns for 1995-97 as follows:
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Item 1995 1996 1997
Partnership
Rent $60,500 $54,000 $40,500
Expenses and depreciation (59,040) (48,015) (49,234)
Net income (loss) 1,460 5,985 (8,734)
Decedent’s distributive share 525 2,960 (2,896)
3. The Estate and Gift Tax Returns
On November 9, 1998, Mr. Bigelow, as executor of decedent’s
estate, signed gift tax returns for 1994-97 and decedent’s estate
tax return. The gift tax returns were filed with the estate tax
return. The Internal Revenue Service received decedent’s estate
and gift tax returns on November 12, 1998.
a. The Gift Tax Returns
On the gift tax returns, Mr. Bigelow reported that decedent
had made taxable gifts of $463,960 in 1994, $10,785 in 1995, zero
in 1996, and $2,000 in 1997. Mr. Bigelow reported that decedent
had given limited partnership interests in Spindrift to her
children and grandchildren valued at $61.85 per unit in 1994 and
1995, $67.79 per unit in 1996, and $61.90 per unit in 1997.
The valuation of the limited partnership units reported on
the gift tax returns was made on the basis of a market approach
using the appraised value of the Padaro Lane property. Ninety-
nine percent of that value was assigned to the limited
partnership interests. The value of each unit of limited
partnership interest was calculated by dividing 99 percent of the
value of the Padaro Lane property by the number of limited
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partnership units (14,504) and applying a 31-percent discount for
lack of marketability. No distinction was made in the appraisals
or on those returns between the limited partnership units given
to decedent’s children and the income rights given to decedent’s
grandchildren in the units retained by decedent’s trust.
Mr. Bigelow reported on the 1994 gift tax return that
decedent had made cash gifts of $10,000 to Mr. Bigelow and
$10,000 to his wife, forgiven Mr. Bigelow $150,000 of
indebtedness evidenced by a promissory note, and assigned
interests in a promissory note payable to decedent by Mr. Bigelow
to Franklin T. Bigelow III and Anna D. Bigelow, $5,000 each. He
also reported on the 1995-97 gift tax returns combined cash gifts
to Mr. Bigelow and his wife of $7,350 in 1995, $7,500 in 1996,
and $22,000 in 1997.
b. The Estate Tax Return
On the estate tax return, Mr. Bigelow reported a gross
estate of $175,957.57 and taxable gifts of $463,070.
The amount reported as the gross estate included $10,000 of
personal property, the refund of a $2,460 deposit owed to
decedent by the assisted-living facility, and $163,497.57 of
transfers during decedent’s life. The amount reported as
transfers during decedent’s life included $135,079.88 for
decedent’s limited partnership in Spindrift; $19,912.50 for her
general partnership interest in Spindrift; $5,416.83 held by
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decedent’s trust ($8,492.30 in a Merrill Lynch cash account
offset by an overdraft of $3,075.47 in the checking account); a
$169.38 cash payment due from Boston Co; and $2,918.98 in a
savings account.
On the estate tax return, Mr. Bigelow reported that
decedent’s limited partnership interest in the partnership was
worth $135,079.88. In computing that value, decedent’s estate:
(1) Computed 44 percent of $1,475,000 (the value of the Padaro
Lane property); i.e., $649,480.85, (2) subtracted $435,069.75;
i.e., the amount of the Great Western Bank loan and the Union
Bank line of credit secured by the property, and (3) applied to
the remainder a 37-percent discount for lack of marketability.
Attached to the estate tax return was a document signed by
Mr. Bigelow called “Statement As to Status of Ownership of Units”
(the statement of status), in which he certified that the
ownership of the issued and outstanding Spindrift limited
partnership units as of July 18, 1997, was as follows:
Partner A Units B Units
Decedent’s trust 1 6,450
Estate of Mrs. Fitzgerald, deceased 1 2,500
Mrs. Burke 1 2,700
Mr. Bigelow 1 1,050
Total 4 12,700
The statement of status also states that, on the valuation date,
decedent’s nine grandchildren owned the income rights associated
with 1,800 B units (200 units each) owned by the general partner.
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Mr. Bigelow reported that the value of decedent’s general
partnership interest was $19,912.50, computed by taking 1 percent
of the value of the Padaro Lane property and applying a 35-
percent control premium.
OPINION
The value of an interest in property is included in a
decedent’s gross estate if: (1) The decedent made an inter vivos
transfer of the property;2 (2) the transfer was for less than
adequate and full consideration; and (3) the decedent retained
the possession or enjoyment of, or the right to the income from,
the transferred property. Sec. 2036(a)(1).3 However, a
decedent’s gross estate does not include property transferred
2
The estate does not contend that the transfer of the
Padaro Lane property by decedent’s trust to Spindrift was not an
inter vivos transfer by decedent for purposes of sec. 2036(a),
and we conclude that it was.
3
Sec. 2036(a)(1) provides in pertinent part:
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, * * *
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pursuant to a bona fide sale for adequate and full consideration.
Sec. 2036(a).
The estate contends that the Padaro Lane property that
decedent’s trust conveyed to Spindrift is not includable in
decedent’s estate by section 2036(a)(1) because: (1) Decedent
did not retain enjoyment of, or the right to the income from, the
Padaro Lane property; and (2) the transfer of the property was a
bona fide sale for adequate and full consideration.4 We disagree
for reasons discussed next.
A. Whether Decedent Retained Possession or Enjoyment of, or the
Right to the Income From, the Padaro Lane Property During
Her Lifetime
Section 2036(a)(1) does not apply unless the decedent
retains the possession or enjoyment of, or the right to the
income from, the transferred property. That requirement is met
if there is an implied agreement among the parties to the
transaction at the time of transfer that the transferor may
retain the possession or enjoyment of, or the right to the income
from, the transferred property. Estate of Thompson v.
Commissioner, 382 F.3d 367, 376 (3d Cir. 2004), affg. T.C. Memo.
2002-246; Estate of Maxwell v. Commissioner, 3 F.3d 591, 594 (2d
Cir. 1993), affg. 98 T.C. 594 (1992); Estate of Reichardt v.
Commissioner, 114 T.C. 144, 151-152 (2000). The estate contends
4
The burden of proof shifts to the Commissioner in
specified circumstances. Sec. 7491(a). However, our findings
are not affected by the burden of proof.
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that decedent did not retain or have an implied or express
agreement to retain the possession, enjoyment, or right to the
income from the Padaro Lane property after it was transferred to
Spindrift.
1. Whether There Was an Implied Agreement That Decedent
Would Retain the Right to the Income From the Padaro
Lane Property During Her Lifetime
The estate contends that there was no implied agreement for
decedent to retain the right to income from the Padaro Lane
property. We disagree. The Padaro Lane property was generating
monthly rent of $3,500. The taxes and insurance on the property
totaled $1,350. After the partnership was formed, decedent used
$2,000 of the $2,150 net income from the rental of the Padaro
Lane property to make monthly payments on the Great Western loan.
After the AARP/Prudential residential care insurance policy
expired in August 1995, decedent’s expenses exceeded her income
by $2,700. The partnership continued to make the $2,000 payments
on the Great Western loan, and Mr. Bigelow transferred
partnership funds to decedent’s trust to support decedent. No
distributions were made to any other partner before decedent’s
death. Section 2036 applies if a decedent retains the right to
income from the property or if there was an implied agreement to
that effect. Estate of Reichardt v. Commissioner, supra at 153;
Estate of Hillgren v. Commissioner, T.C. Memo. 2004-46; see
Estate of Thompson v. Commissioner, supra at 375. Decedent’s use
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of partnership income to replace the income lost because of the
transfer of the Padaro Lane property to the partnership shows
that there was an implied agreement between decedent and her
children that she would retain the right to the income from the
Padaro Lane property.
2. Whether There Was an Implied Agreement That Decedent
Would Retain the Enjoyment of the Padaro Lane Property
During Her Lifetime
The estate contends that there was no express or implied
agreement for decedent to retain the enjoyment of the Padaro Lane
property. We disagree. Enjoyment includes present economic
benefits. Guynn v. United States, 437 F.2d 1148, 1150 (4th Cir.
1971); Estate of Reichardt v. Commissioner, supra at 151. After
the transfer of the Padaro Lane property to Spindrift, the
property continued to secure decedent’s legal obligation to pay
the $350,000 Great Western Bank loan and the $100,000 Union Bank
line of credit. Thus, decedent retained the economic benefit of
ownership of the Padaro Lane property after it was transferred to
the partnership.
We conclude that there was an implied agreement between
decedent and her children that she would retain for her life the
present economic benefit of the Padaro Lane property.
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B. Whether the Transfer of the Padaro Lane Property by
Decedent’s Trust for 14,500 B Units in Spindrift Was a Bona
Fide Sale for Adequate and Full Consideration
Section 2036(a)(1) does not apply if the transfer of
property was part of a bona fide sale for adequate and full
consideration. The estate contends that the transfer by
decedent’s trust of the fee simple interest in the Padaro Lane
property to the partnership was a bona fide and genuine transfer
for which decedent’s trust received adequate and full
consideration; i.e., 14,500 of the 14,504 limited partnership
units (99.97242 percent).
To constitute a bona fide sale for adequate and full
consideration, the transfer of the property must be made in good
faith. Estate of Thompson v. Commissioner, supra at 383; sec.
20.2043-1(a), Estate Tax Regs. Such a sale requires that the
transfer be made for a legitimate nontax purpose. Estate of
Bongard v. Commissioner, 124 T.C. ___, ___ (2005) (slip op. at
39). Transactions between family members are subject to
heightened scrutiny to ensure that the transaction is not a
disguised gift. See Harwood v. Commissioner, 82 T.C. 239, 258
(1984), affd. without published opinion 786 F.2d 1174 (9th Cir.
1986); Estate of Stone v. Commissioner, T.C. Memo. 2003-309; cf.
Estate of Reichardt v. Commissioner, supra. As discussed next,
the transfer of the Padaro Lane property to Spindrift was not
made in good faith.
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1. Impoverishment of Decedent
The estate contends that the transfer of the Padaro Lane
property had no adverse financial effect on decedent because she
received partnership interests in the partnership that held the
Padaro Lane property which were, when she received them, equal in
value to the transferred property. The estate contends that
decedent’s financial situation worsened only when her residential
care insurance policies expired in 1995 and 1996.
We disagree. Before the Padaro Lane property was
transferred to the partnership, decedent met her financial
obligations.5 After the transfer, decedent no longer received
rent from the property, but she remained liable for both the
Great Western Bank loan and the Union Bank line of credit. The
transfer of the Padaro Lane property to the partnership left
decedent unable to meet her financial obligations because her
reduced income of $5,800 was insufficient to pay her reduced
expenses of $7,000.
After decedent’s residential care insurance benefits expired
in August 1996, Mr. Bigelow informed the trustee of the 1954
5
When decedent formed the partnership in 1994, she had
monthly income of $9,300 ($3,600 from two residential care
insurance policies, $3,500 from rent paid on the Padaro Lane
property, and $2,200 from other sources). At that time, her
monthly expenses averaged $8,350 ($3,600 for assisted living
expenses, $2,750 for the Great Western Bank loan and Union Bank
line of credit, $1,350 for property taxes and insurance, and $650
for other expenses).
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trust that decedent did not have enough income to pay her
expenses. By April 1997, the trustee of the 1954 trust had
distributed $68,214 to decedent and terminated the trust.
Although decedent’s financial needs prompted the distribution of
the funds from the 1954 trust, decedent gave $22,000 to Mr.
Bigelow and his wife in 1997. When she died, decedent had only
$8,505 of liquid assets left to supplement her inadequate monthly
income; i.e., $5,417 of assets held in decedent’s trust, $169 due
from Boston Co., and $2,919 in a savings account.
2. Failure To Respect Partnership Formalities
The parties’ failure to respect the provisions of the
agreement governing their transaction tends to show that the
transaction was not entered into in good faith. See Estate of
Harper v. Commissioner, T.C. Memo. 2002-121; Riverpoint Lace
Works, Inc. v. Commissioner, T.C. Memo. 1954-39.
The estate points out that formalities to establish the
partnership were met and contends that any lapses in complying
with partnership formalities after formation were unimportant.
We disagree. Spindrift did not properly maintain records of
partnership capital or the partners’ capital accounts. The
balance sheets included in the 1995-97 returns incorrectly show
the Great Western Bank loan as a liability of the partnership.
None of the partners’ Schedules K-1 accurately reflect the
partners’ capital accounts; e.g., decedent’s capital account
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reported on the Schedules K-1 never reflects decedent’s trust’s
contribution of the Padaro Lane property. The Bigelows did not
comply with all of the terms of the partnership agreement. These
facts suggest that the sale was not in good faith.
3. No Potential for Nontax Benefit to Decedent
The transfer did not provide and had no potential to provide
any nontax benefit to decedent because management of the assets
did not change as a result of the transfer and there was no
pooling of assets. A transfer of assets is not a bona fide sale
for estate tax purposes unless the transfer provides the
transferor some benefit other than estate tax savings. See
Estate of Thompson v. Commissioner, 382 F.3d 367 (3d Cir. 2004);
Estate of Harper v. Commissioner, supra.
The estate contends that transferring the Padaro Lane
property to the limited partnership had three nontax purposes.
First, the estate contends that one of those purposes was to
provide legal protection from creditors. We disagree.
Transferring the Padaro Lane property to Spindrift did not give
decedent’s trust any additional protection from creditors because
decedent’s trust was the sole general partner. As a general
partner, decedent’s trust was not protected from liability
arising from the ownership of the property. Limiting the
liability of decedent’s trust was not a purpose for forming the
partnership and transferring the Padaro Lane property to it.
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Second, the estate contends that the partnership provided
continuity of management for the Padaro Lane property. We
disagree. There was no change in the continuity of management of
the Padaro Lane property after decedent’s trust transferred it to
Spindrift. Under the partnership agreement, the partnership
terminated if the general partner terminated unless the remaining
partners agreed to continue the partnership. The partnership
would terminate when decedent’s trust terminated because
decedent’s trust was the general partner. Transferring the
Padaro Lane property to Spindrift did not provide any additional
continuity of management of the property; the sole source of
management was the trust.
Third, the estate contends that it was more efficient for
decedent to give her children and grandchildren interests in the
partnership than to withdraw small undivided interests in the
Padaro Lane property from decedent’s trust and give them to her
children and grandchildren by deed. A transfer made solely to
reduce taxes and to facilitate gift giving is not considered in
this context to be made in good faith or for a bona fide purpose.
See Estate of Thompson v. Commissioner, supra at 369, 373-374,
379.
4. Comparison With the Kimbell Case
The estate asserts that the transfer by decedent’s trust of
the Padaro Lane property to Spindrift was a bona fide sale for
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adequate and full consideration under Kimbell v. United States,
371 F.3d 257, 265 (5th Cir. 2004), where the court stated:
In summary, what is required for the transfer by
Mrs. Kimbell to the Partnership to qualify as a bona
fide sale is that it be a sale in which the decedent/
transferor actually parted with her interest in the
assets transferred and the partnership/transferee
actually parted with the partnership interest issued in
exchange. In order for the sale to be for adequate and
full consideration, the exchange of assets for
partnership interests must be roughly equivalent so the
transfer does not deplete the estate. * * *
The estate’s reliance on Kimbell is misplaced because the
facts in that case differ substantially from those here. First,
decedent’s trust did not part with all of its interest in the
Padaro Lane property as shown by the fact that the property
continued to secure the obligations of decedent and the trust to
repay the Great Western Bank loan and the Union Bank line of
credit.
Second, because there was no potential benefit for decedent
or her trust stemming from the transfer of the Padaro Lane
property to Spindrift, the partnership interest received by
decedent’s trust was not equivalent to the Padaro Lane property.
Third, the general partner of the Kimbell partnership was a
limited liability company, not Mrs. Kimbell’s trust. When Mrs.
Kimbell’s trust transferred property to the partnership, the
trust shielded itself from liability. In contrast, decedent’s
trust was the sole general partner of Spindrift. The transfer of
the Padaro Lane property from decedent’s trust to Spindrift did
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not shield the trust from its liability as an owner of the
property because decedent’s trust was Spindrift’s general
partner.
Fourth, Mrs. Kimbell retained more than $450,000 in assets
outside of the partnership for her support. In contrast,
decedent did not retain enough assets to support herself.
Finally, Mrs. Kimbell did not make continuous transfers
between her personal assets and the Kimbell partnership’s assets.
Mr. Bigelow transferred funds between decedent’s trust and
Spindrift 40 times from April 1995 to August 1997. Decedent’s
trust used partnership funds and the partnership used trust
funds. The facts supporting a finding of a bona fide sale for
adequate and full consideration in Kimbell are not present here.
C. Conclusion
We conclude that decedent and her children had an implied
agreement that decedent could continue during her lifetime to
enjoy the economic benefits of, and retain the right to the
income from, the Padaro Lane property after she conveyed the
property to the partnership, and that the transfer was not a bona
fide sale for adequate and full consideration. Thus, the value
of the Padaro Lane property is included in decedent’s gross
estate. See sec. 2036(a)(1).
Decision will be
entered for respondent.