T.C. Memo. 2009-119
UNITED STATES TAX COURT
ESTATE OF VALERIA M. MILLER, DECEASED, VIRGIL G. MILLER,
EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5207-07. Filed May 27, 2009.
Miriam R. Price and Adria S. Price, for petitioner.
Mark D. Eblen, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined a deficiency of
$1,019,399 in the Federal estate tax of the Estate of Valeria M.
Miller (the estate). There are two issues for decision.1 First
1
On brief the parties agree that the estate is entitled to
deduct $12 for unpaid income taxes.
(continued...)
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we must decide whether the value of the gross estate includes an
amount for which the estate of Valeria M. Miller’s (decedent’s)
predeceased husband (Mr. Miller) claimed a marital deduction. We
find that those amounts for which Mr. Miller’s estate claimed a
marital deduction are properly included in the value of
decedent’s gross estate. Second, we must determine whether the
estate is required to include in the gross estate the total value
of assets transferred to decedent’s family limited partnership in
April 2002 and May 2003, or if those transfers qualify for a
discount. We find the value of those securities transferred to
decedent’s family limited partnership in April 2002 qualifies for
a discount, while the value of those assets transferred in May
2003 does not qualify for a discount.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the date of decedent’s
death and all Rule references are to the Tax Court Rules of
Practice and Procedure.
1
(...continued)
Further, the estate raised on brief the issue of a deduction
for legal fees incurred after decedent’s estate’s estate tax
return was filed. Respondent in reply conceded that the estate
will be allowed a deduction for legal fees incurred at or after
trial to the extent the estate is able to substantiate those
fees. These issues will be addressed in the parties’ Rule 155
computation.
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FINDINGS OF FACT
1. Introduction
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated herein by this reference. On the date of her death,
May 28, 2003, decedent was a resident of Indiana. Virgil G.
Miller (Virgil G.) was appointed executor of decedent’s estate.
At the time the petition was filed on behalf of the estate,
Virgil G. was a resident of Indiana.
2. Mr. Miller
Decedent married Mr. Miller on February 12, 1938, and they
remained married until Mr. Miller’s death on February 2, 2000.
Decedent and Mr. Miller had four children: Virgil G., born
August 1939; Gordon, born July 1942; Donald, born July 1944; and
Marcia, born December 1946. Virgil G. is a retired architect.
Donald is a retired manager of recreation activities at Fort
Benjamin Harrison. Marcia was married but separated from her
husband in September 2002. They were divorced in January 2003,
and she died in February 2006.
Mr. Miller was an architect until his retirement at age 60.
Decedent served as Mr. Miller’s secretary and helped start his
architecture business. From retirement to his death at age 86 in
2000, Mr. Miller devoted his time to researching and investing in
securities. Mr. Miller spent significant time managing his
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family’s investments and employed a specific investment
methodology--charting stocks. Charting stocks involved the
purchase and sale of securities on the basis of an analysis of
their daily high and low values. Mr. Miller kept handwritten
records of his investment activity.
On October 29, 1991, Mr. Miller established the Virgil J.
Miller Living Trust (the revocable trust). The agreement
establishing the trust also established a life estate marital
trust for decedent (the QTIP trust).
Mr. Miller predeceased decedent. Virgil G. as executor of
the estate timely filed a Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return, with the Internal
Revenue Service (IRS).
On the date of Mr. Miller’s death, his gross estate was
valued at $7,667,939. Of his gross estate, $7,635,755, or 99.6
percent, consisted of securities held by his revocable trust.
Virgil G. made an election pursuant to section 2056(b)(7) to
treat the QTIP trust property as qualified terminable interest
property. Mr. Miller’s estate claimed a marital deduction of
$1,060,000 for assets funding the QTIP trust. The QTIP trust was
made up of five accounts with Merrill Lynch. On October 6, 2000,
securities were transferred from the Virgil J. Miller Living
Trust Merrill Lynch account to Merrill Lynch account No. 634-
37225 (account 7225), in the name of the QTIP trust. The
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securities had a fair market value of $1,113,372 on October 27,
2000. A portion of the securities used to fund account 7225 was
then used to fund four additional Merrill Lynch accounts,
numbered 8135 (account 8135), 8136 (account 8136), 8137 (account
8137), and 8138 (account 8138). The transfers from account 7225
to the additional four accounts were made in June 2001. Each
transfer had a fair market value of about $100,000.
Virgil G. was trustee of the QTIP trust, and the trust
agreement provided that all income of the QTIP trust was to be
distributed to decedent at least annually and that income was not
to accumulate in the QTIP trust. Decedent did not receive any
distributions or income from the QTIP trust. All income from the
QTIP trust was reported on its own Forms 1041, U.S. Income Tax
Return for Estates and Trusts.
On October 9, 2000, the remaining assets in the revocable
trust, then valued at approximately $3.6 million, were
distributed to decedent’s Revocable Living Trust (decedent’s
trust). Decedent’s trust held an account with Merrill Lynch
(decedent’s trust’s Merrill Lynch account) and an additional
account at Fidelity Investments (decedent’s trust’s Fidelity
Investments account).
3. Decedent’s Social Life and Gift Giving
Decedent was involved in numerous community, social, and
religious activities including volunteering at nursing homes,
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joining a singing group, reading at church, and playing cards.
Decedent was never deemed incapacitated or incompetent and was
never under a guardianship.
Decedent made annual gifts to her children, her children’s
spouses, and her grandchildren, beginning by at least 1994 and
continuing every year thereafter until her death. Decedent and
Mr. Miller established trusts for the benefit of decedent’s
grandchildren. Virgil G. was trustee of each irrevocable trust.
Decedent made annual gifts to the irrevocable trusts.
On May 1, 1994, decedent established the Valeria M. Miller
Irrevocable Trust, of which Virgil G. was trustee. Decedent made
annual gifts to the Valeria M. Miller Irrevocable Trust which
were used by Virgil G. as trustee to pay life insurance premiums
for life insurance policies on decedent. The trust owned two
life insurance policies which were sold on August 3, 2002, for a
total of $962,500. The proceeds were kept in the trust. The
life insurance policies eventually paid benefits of $2,750,000 to
the purchaser upon decedent’s death.
On June 22, 1999, decedent signed a gift annuity agreement
with the National Heritage Foundation, a charitable organization
which paid her $4,390 per month for the rest of her life. At
decedent’s death the remainder was distributed to the National
Heritage Foundation.
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4. The Miller Family Limited Partnership
Mr. Miller and decedent received estate planning advice from
David Price (Mr. Price) of Price & Collins, L.L.P. (Price &
Collins). After Mr. Miller died, decedent sought further estate
planning advice from Mr. Price. On the basis of Mr. Price’s
advice, decedent decided to form a family limited partnership.
On November 21, 2001, the Indiana secretary of state issued a
certificate of limited partnership of the V/V Miller Family
Limited Partnership (MFLP). Decedent was 86 when MFLP was
formed. The MFLP agreement was prepared by Mr. Price and was
signed by Virgil G. as general partner, by decedent as trustee of
her trust, and by Donald, Marcia, and Gordon as limited partners.
Virgil G.’s address was used as MFLP’s business address.
On December 13, 2001, MFLP applied for an Employer
Identification Number, which it later received from the IRS.
Although MFLP held no assets as of December 31, 2001, the fair
market value per unit of a limited partnership interest in MFLP
was appraised as of that date for gift tax purposes (the December
31, 2001, valuation). Because MFLP had not yet been funded,
Virgil G. provided statements to the appraiser detailing the
assets that were going to be used to fund MFLP.
The December 31, 2001, valuation indicates that MFLP had
marketable equity securities as of that date of $4,336,380, a
margin account payable of $499,573, and a net asset value of
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$3,836,807. The December 31, 2001, valuation applied a 35-
percent lack of marketability discount to the purported net asset
value of MFLP and concluded that as of that date MFLP had a fair
market value per unit of $2,264.73.
The MFLP agreement had not been signed as of February 8,
2002. On February 8, 2002, Mr. Price sent Virgil G. a letter
along with a partnership agreement and signature pages for
decedent and her children. On February 26, 2002, Virgil G.
mailed the partners’ individual signed signature pages back to
Mr. Price. On March 6, 2002, a paralegal at Price & Collins sent
Virgil G. the MFLP agreement along with certificates of
partnership interest for him to sign. Virgil G. signed the
certificates and dated them November 27, 2001.
On March 28, 2002, a paralegal at Price & Collins sent
Virgil G. revised MFLP certificates and a revised MFLP agreement.
Each of the intended partners of MFLP signed the partnership
agreement and was issued a certificate representing his or her
interests in the partnership. The MFLP issued 1,000 units;
decedent’s trust owned 920 units and continued to own that number
on the date of her death. Decedent’s children received their
partnership units as gifts from decedent. Virgil G. received 10
general partner units and 10 limited partner units. Donald,
Gordon, and Marcia each received 20 limited partner units.
Decedent’s children continued to own those units on the date of
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decedent’s death. The MFLP agreement provided for centralized
asset management by vesting management and control exclusively in
the general partner, Virgil G.
The MFLP agreement provided:
The purpose of * * * [MFLP] shall be to buy, sell, and trade
in securities of any nature, including short sales, on
margin, and for such purposes may maintain and operate
margin account with brokers, and to pledge any securities
held or purchased by them with such brokers as security for
loans and advances made to the Trustees; buy, sell and trade
in commodities, commodity futures contracts and options on
commodity futures contracts; and buy, sell, trade or deal in
precious metals of any kind. Additionally, to maintain a
margin account with a stock brokerage firm, to execute all
documents necessary for the opening and maintenance thereof,
to borrow money from a brokerage firm, to pledge securities
owned by the Trust as collateral and to grant a security
interest therein, and to permit the stock brokerage firm to
relend these securities in the ordinary course of its
business. Additionally * * * [MFLP] may acquire such assets
and engage in investments of all types and any and all other
lawful purposes that may be conducted by a limited
partnership as deemed appropriate by the General Partner.
The MFLP agreement also included a right of first refusal
should a limited partner wish to dispose of his or her interest
in MFLP and a clause requiring the partners to submit any dispute
among themselves to arbitration. Further, Virgil G., as general
partner, was required to act in furtherance of MFLP’s interests
and had fiduciary obligations to the partnership and the limited
partners.
MFLP established accounts at Fidelity Investments and
Merrill Lynch. MFLP held one account at Fidelity (MFLP Fidelity
account) and three accounts at Merrill Lynch, account Nos. 7B10,
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7B12, and 7B13. Decedent made her first contribution to MFLP in
April 2002.
a. Merrill Lynch Account Transfers
On March 28, 2002, MFLP’s Merrill Lynch account No. 7B10 had
a zero balance. On April 10, 2002, decedent’s trust contributed
equity securities from decedent’s trust’s Merrill Lynch account
to MFLP’s Merrill Lynch account No. 7B10. The securities had a
value of $2,766,004 After this transfer was complete, funds
were transferred from account No. 7B10 to account Nos. 7B12 and
7B13.
On April 18 and 22, 2002, MFLP transferred securities from
MFLP’s Merrill Lynch account No. 7B10 to MFLP’s Merrill Lynch
account No. 7B12. The transferred securities had a value on
April 30, 2002, of $92,246. On April 18 and 22, 2002, MFLP
transferred securities from MFLP’s Merrill Lynch account No. 7B10
to MFLP’s Merrill Lynch account No. 7B13. The securities had a
value on April 30, 2002, of $95,957.
b. Fidelity Investments Account Transfers
On March 31, 2002, decedent’s trust’s Fidelity Investments
account had a net value of $2,152,625. On that same date MFLP’s
Fidelity Investments Account had a zero balance.
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On April 10, 2002, decedent transferred $1,197,668 of
securities from decedent’s trust’s Fidelity Investments account
to MFLP’s Fidelity Investments account.2
The April 2002 transfers constituted about 77 percent of
decedent’s net assets.
c. Margin Accounts
Decedent’s trust’s Merrill Lynch and Fidelity Investments
accounts often made purchases on margin. When an investor
purchases a security on margin, he or she buys the security on
credit. A margin balance is the total balance in a margin
account. If the balance is negative, then the amount shown is
owed to a brokerage firm. If the balance is positive, then that
balance is available to earn interest.
Decedent’s trust’s Merrill Lynch and Fidelity Investments
accounts both had negative margin balances after the transfers of
securities described above, even though the securities purchased
on margin were no longer in the trust’s accounts. In order to
pay off the margin accounts, MFLP sold some of the securities
2
The estate argues that respondent incorrectly valued this
transfer because respondent used a monthly statement ending Apr.
30, 2002, as the source for pricing information. However, the
Fidelity Investments account statements show, in addition to
beginning and ending account values, values per transaction.
Respondent’s valuation of the securities transferred mirrors the
Fidelity account statement’s valuations of the securities
transfer.
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purchased on margin and transferred to MFLP and transferred the
proceeds back to decedent’s trust’s accounts.
On March 28, 2002, decedent’s Trust’s Merrill Lynch account
had a debit balance of $276,926. On April 10, 2002, MFLP’s
Merrill Lynch account No. 7B10 transferred $277,400 to decedent’s
trust’s Merrill Lynch account. Another transfer of $39.42 was
made on April 10, 2002.
On April 17, 2002, MFLP sold, through MFLP’s Merrill Lynch
account No. 7B10, 13,600 shares of AOL Time Warner, Inc. and 680
shares of Cisco Systems, Inc. stock for $272,685 and $10,576
respectively (totaling $283,261).
On April 30, 2002, decedent’s trust’s Merrill Lynch account
had a debit balance of $1,896, and MFLP’s Merrill Lynch account
No. 7B10 had a debit balance of $320.
On April 19, 2002, MFLP sold $147,249 in securities from
MFLP’s Fidelity Investments account. On April 15, 2002, MFLP
transferred $51,801 in cash from MFLP’s Fidelity Investments
account to decedent’s trust’s Fidelity Investments account.
5. MFLP Management
Virgil G. owned VGM Enterprises. MFLP paid VGM Enterprises
a monthly fee to manage the partnership’s securities. Virgil G.
was the only employee of VGM Enterprises and worked about 40
hours per week managing MFLP’s assets. Mr. Miller had taught
Virgil G. how to chart stocks, and Virgil G. managed MFLP’s
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assets according to this philosophy. Virgil G. began managing
the securities shortly after decedent’s first transfers to MFLP
in April 2002. Virgil G. subscribed to trade publications and
purchased computer software to assist him in researching
securities and carrying out MFLP’s securities trading.
6. Contributions to MFLP in 2003
Decedent made additional contributions to MFLP in 2003.
Although decedent had been suffering from certain chronic
conditions associated with old age, her day-to-day health was
strong.
On April 25, 2003, decedent suffered a fall at her residence
and broke her hip. The next day, while she was awaiting surgery,
doctors discovered that decedent was having sinus pauses, which
indicated that her heart was stopping longer than normal.
Decedent underwent pacemaker implantation surgery on April 28,
2003, and orthopedic surgery to repair her broken hip on April
30, 2003. The pacemaker implantation surgery was performed
before the orthopedic surgery to ensure that decedent’s heart was
beating regularly and strongly when the hip surgery was
performed, in order to increase decedent’s chances of both
surviving and recovering.
On May 8, 2003, decedent was discharged from the hospital
and transferred to a continuing care facility for rehabilitation.
Decedent was to undergo rehabilitation and physical therapy so
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she would be able to return home. On May 12, 2003, decedent was
brought back to the hospital from the continuing care facility
because she was retaining fluid and was short of breath. Upon
returning to the hospital decedent was diagnosed with congestive
heart failure.
Hospital policy at that time was for all patients regardless
of age to fill out code status forms and orders upon admission to
the hospital. These documents would inform the doctors caring
for a patient of the patient’s wishes and the type of action to
be taken in the event of a medical episode. On May 12, 2003,
decedent’s code status was Level I, Full Code, which indicated
that if decedent was to experience any sort of acute medical
episode, all measures possible would be undertaken to return
decedent to consciousness and health.
On May 19, 2003, a bruise was discovered on decedent’s scalp
while her daughter and daughter-in-law were fixing her hair. A
CT scan performed that same day revealed a moderately enlarged
subacute subdural hematoma, a type of traumatic brain injury.
On May 20, 2003, decedent’s doctor discussed with her and
her family surgical options versus comfort care only. On that
same day decedent’s code order was changed to Level IV, No Code,
Comfort Measures Only. Decedent died on May 28, 2003. Her death
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certificate stated the cause of death as “Coroner-Respiratory
Arrest; Subdural Hematoma; Fall”.3
a. Fidelity Investments Accounts
After decedent broke her hip but before her bruise was
discovered, she signed a letter dated May 9, 2003, addressed to
Fidelity Investments requesting that Fidelity Investments
transfer all of her assets, except for cash in her Fidelity
Investments money market account, over and into MFLP’s Fidelity
Investments account. Virgil G. wrote the letter and cosigned as
trustee of decedent’s trust. On May 17, 2003, Virgil G. wrote a
check from decedent’s trust’s Fidelity Investments account in the
amount of $105,000 as an additional capital contribution to MFLP.
There appear to have been a number of transfers between
decedent’s trust’s Fidelity Investments account and MFLP’s
Fidelity Investments account in May 2003. However, the amounts
and dates of these transfers are recorded differently on the May
and June 2003 account statements issued to MFLP.
The May 2003 statement shows a transfer of securities worth
approximately $79,690 from decedent’s trust’s Fidelity
Investments account to MFLP’s Fidelity Investments account on May
15, 2003. This transfer was made up of decedent’s holdings in
three corporations.
3
The death certificates listed the causes of death
backwards--i.e., a fall caused a subdural hematoma, which caused
respiratory arrest.
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The May 2003 statement also shows a transfer of securities
worth approximately $930,751 from decedent’s trust’s Fidelity
Investments account to MFLP’s Fidelity Investments account on May
20, 2003. This transfer was substantially all of decedent’s
holdings in her trust’s Fidelity Investments account and appeared
to include the securities that had already been transferred to
MFLP on May 15, 2003.
Lastly, the May 2003 Fidelity Investments account statement
shows a transfer of securities worth approximately $950,286 from
MFLP’s Fidelity Investments account back to decedent’s trust’s
Fidelity Investments account.
Thus, according to the May 2003 MFLP Fidelity Investments
account statement, the net amount of distributions from
decedent’s trust’s Fidelity Investments account to MFLP’s
Fidelity Investments account was $60,155. Decedent’s trust’s
Fidelity Investments account would have had a balance of $889,898
on May 31, 2003.
The June 2003 statement for decedent’s trust’s Fidelity
Investments account, however, shows only one transfer: a
transfer of assets worth approximately $878,069 from decedent’s
trust’s Fidelity Investments account to MFLP’s Fidelity
Investments account on May 15, 2003. The May and June 2003
statements do not explain why the transfers are recorded
differently on the respective statements. According to the June
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2003 statement, decedent’s trust’s Fidelity Investments account
had a balance of $49,180 on June 30, 2003. Virgil G. explained
that the discrepancy resulted from errors made by Fidelity and
that he never authorized the transfer of any securities from MFLP
back to decedent’s trust.
b. Merrill Lynch Accounts
On April 30, 2003, decedent’s trust’s Merrill Lynch account
had a balance of $184,819. On May 19, 2003, decedent’s trust’s
Merrill Lynch account transferred all of its marketable
securities and $14,650 to MFLP’s Merrill Lynch account No. 7B10.
On May 30, 2003, decedent’s trust’s Merrill Lynch account had a
balance of $7.
The MFLP is still in existence, and Virgil G. continues to
serve as general partner. MFLP made no distributions to Virgil
G., Gordon, Donald, or Marcia in 2002 and 2003.
Decedent’s will devises the remainder of her estate, after
payment of administration expenses, to decedent’s living trust.
Decedent’s living trust agreement provides that upon decedent’s
death the assets in her trust are divided into a portion A trust
and a portion B trust. The portion A trust was to be a
generation-skipping transfer tax exempt trust. The portion B
trust would be funded with the remainder of decedent’s estate
after the portion A trust was funded. The portion B trust was
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divided into four subtrusts for the benefit of each of decedent’s
four children.
On January 29, 2004, MFLP made a pro rata cash distribution
to its partners. MFLP disbursed $23,913 from its Fidelity
Investments account to each of Virgil G., Gordon, Marcia, and
Donald and disbursed $1.1 million to decedent’s trust. A portion
of the $1.1 million was used to pay decedent’s estate’s Federal
and State estate tax liabilities.
7. MFLP Trading Activity
As discussed above, Mr. Miller spent his retirement charting
stocks and managing the family’s investments. Decedent wanted
the family assets to be managed in accordance with Mr. Miller’s
investment strategy after her death. MFLP actively managed the
cash and securities decedent transferred in April 2002 and March
2003. Before making contributions to MFLP decedent’s trust’s
accounts made very few trades, but trading activity increased
after the securities were transferred to MFLP. The overall value
of the transactions varied month to month. However, MFLP’s
Merrill Lynch account Nos. 7B12 and 7B13 showed sales and
purchases of about $3,000 to $4,000 per month during 2002 and
2003. Virgil G., as general partner, also kept his siblings
informed about MFLP’s status and provided financial advice to
them.
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A Form 706 was filed on behalf of the Estate of Valeria M.
Miller on February 22, 2004. The Form 706 showed a gross estate
of $2,637,024, and tax due of $994,299. The gross estate
included 920 MFLP units valued at $2,589,118. The Form 706 did
not include the values of the securities used to fund the QTIP
trust in the value of the gross estate. Decedent’s Form 706
indicated that decedent was the beneficiary of a trust for which
a deduction was claimed by the estate of a predeceased spouse
under section 2056(b)(7) and which was not reported on decedent’s
Form 706.
On November 30, 2006, respondent issued a notice of
deficiency (the notice) that, in part, increased the value of
decedent’s gross estate by $546,702, the purported fair market
value of the securities in the QTIP trust, and by the amount of
decedent’s transfers to MFLP. A timely petition for
redetermination was filed with the Court on March 5, 2007.
OPINION
A Federal estate tax is imposed “on the transfer of the
taxable estate of every decedent who is a citizen or resident of
the United States.” Sec. 2001(a). The estate tax is imposed on
the value of the taxable estate with specified adjustments made.
Sec. 2001(b). The value of a decedent’s taxable estate is the
value of the gross estate less enumerated deductions. Sec. 2051.
The value of the gross estate includes the values of all of
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decedent’s property to the extent provided under sections 2033
through 2045. Sec. 2033.
I. Burden of Proof
Generally the taxpayer bears the burden of proving the
Commissioner’s determinations are erroneous. Rule 142(a).
However, with respect to a factual issue relevant to the
liability of a taxpayer for tax, the burden may shift to the
Commissioner if the taxpayer has produced credible evidence
relating to the issue, met substantiation requirements,
maintained records, and cooperated with the Secretary’s
reasonable requests for documents, witnesses, and meetings. Sec.
7491(a). Neither party addressed the burden of proof. Our
resolution of the issues is based on the preponderance of the
evidence rather than the allocation of the burden of proof.
II. Mr. Miller’s Estate’s Marital Deduction
We first determine whether decedent is required to include
in her estate the securities used to fund the QTIP trust. As
discussed above, Mr. Miller’s estate claimed a marital deduction
in the amount of the fair market value of those securities.
Section 2056(a) grants a deduction for the value of any
interest in property passing to a surviving spouse which is
included in determining the value of the gross estate. Pursuant
to section 2056(b)(1), a marital deduction cannot ordinarily be
claimed for property passing to a surviving spouse where the
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interest of a surviving spouse may eventually terminate or fail.
However, section 2056(b)(7) allows a marital deduction for
qualified terminable interest property (QTIP). QTIP is defined
in section 2056(b)(7)(B)(i) as property which passes from a
decedent, in which the surviving spouse has a qualified income
interest for life, and to which an election applies.
Section 2056(b)(7)(B)(ii) provides that the surviving spouse
has a qualifying income interest for life if the surviving spouse
is entitled to all the income from the property, payable annually
or at more frequent intervals, and no person has a power to
appoint any part of the property to any person other than the
surviving spouse. Under section 2056(b)(7)(A), QTIP is treated
for purposes of section 2056(a) as passing to the surviving
spouse and for purposes of section 2056(b)(1)(A) as not passing
to any person other than the surviving spouse. Pursuant to
section 2056(b)(7)(B)(v), a QTIP election with respect to any
property shall be made by the executor on the Federal estate tax
return and once made is irrevocable.
Section 2044 sets forth the tax treatment of QTIP in the
estate of the surviving spouse. Under section 2044(a), the value
of the gross estate includes the value of any property to which
this section applies in which the decedent had a qualifying
income interest for life. Section 2044(b)(1)(A) applies section
2044(a) to any property if a deduction was allowed with respect
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to the transfer of such property to the decedent under section
2056(b)(7). See Estate of Cavenaugh v. Commissioner, 100 T.C.
407, 417 (1993), affd. in part on this issue and revd. in part 51
F.3d 597, 599-601 (5th Cir. 1995).
Under section 2056(b)(7)(B)(ii), the relevant questions are
whether decedent was entitled to all the income from the
property, payable at least annually, and whether any person had a
power to appoint any part of the property to any other person.
See Estate of Soberdash v. Commissioner, T.C. Memo. 1997-362.
Respondent argues that the estate is required to include the
value of the assets in the QTIP trust on decedent’s date of death
in the value of decedent’s gross estate because a QTIP deduction
under section 2056(b)(7) was allowed for assets funding a QTIP
trust, a QTIP election was made, decedent had the right to
receive income from the trust annually, and decedent did not
dispose of her income interest in the trust before she died.
The estate argues that the value of the assets funding the
QTIP trust should not be included in the value of decedent’s
gross estate because decedent did not receive an interest in the
trust or retain it at her death. The estate argues that decedent
never received income or distributions from the trust, was never
considered to have an interest in the trust, and to the extent
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she had an interest in the trust, effectively refuted it before
her death.4
Respondent disputes the estate’s contention, arguing that
there is no evidence that decedent refuted or disposed of her
interest in the trust. Respondent also points to testimony by
Mr. Price, decedent’s lawyer, who testified that decedent never
disposed of her interest in the QTIP trust.
We agree with respondent. The fair market value of the
securities in the QTIP trust must be included in the value of
decedent’s gross estate. The trust agreement provided that all
income of the trust was to be distributed to decedent at least
annually and that income was not to accumulate in the trust. Mr.
Miller’s estate made a valid QTIP election, and Mr. Miller’s
estate’s Form 706 claimed a $1,060,000 marital deduction under
section 2056(b)(7).
Decedent’s Form 706 indicated that decedent had been the
beneficiary of a distribution for which a section 2056(b)(7)
election had been made but did not include the value of the
assets funding the QTIP trust. Decedent did not dispose of her
income interest in the trust before she died.
4
The estate argues that should we find that decedent was
required to include the QTIP in her estate and did not dispose of
her income interest, we should take the fair market value of
those securities into account in the context of sec. 2036 when
evaluating whether decedent retained sufficient funds after
funding MFLP.
- 24 -
Although the estate argues that the amounts should not be
included in the estate because decedent never needed the income,
the relevant questions under section 2056(b)(7)(B)(ii) are
whether decedent was entitled to all of the income from the
property, payable at least annually, and whether any person had a
power to appoint any part of the property to any other person.
See Estate of Soberdash v. Commissioner, supra. These
requirements were met. The need of the surviving spouse has no
bearing on the eligibility for a deduction under section
2056(b)(7) or the subsequent inclusion in the surviving spouse’s
gross estate under section 2044. Id.
As discussed above, the QTIP trust assets comprised five
Merrill Lynch bank accounts. The parties dispute the fair market
value of the securities that must be included in the value of
decedent’s gross estate. The notice valued the securities on the
date of decedent’s death at $546,702. Respondent argues that
this is the amount that must be included under section 2044.
Respondent does not point to any other evidence in the record
supporting this calculation.
The estate argues that respondent’s calculation is incorrect
and values the securities at $526,758. The estate contends that
respondent overstates the value of the securities because
respondent counts certain securities in one of the QTIP trust’s
accounts twice.
- 25 -
There is no evidence in the record concerning the fair
market value of the securities on May 28, 2003, the date of
decedent’s death. However, the record does contain account
statements for the five Merrill Lynch accounts for the period
ending May 30, 2003. The May 2003 account statements for the
accounts at issue, stipulated by the parties, do not indicate
that any securities were counted more than once in determining
the value of the account.
The statement for account No. 7225 is incomplete. However,
the account statement for account No. 8135 includes values for
both account Nos. 8135 and 7225. The account statement for
account No. 8135 values account No. 7225 at $202,8505 and account
No. 8135 at $102,051, for a total of $304,902.6 The account
statement for account No. 8136 values that account at $69,151.
The account statement for account No. 8137 values that account at
$88,192. Lastly the account statement for account No. 8138
values that account at $70,980. These statements value the five
accounts at $533,225. Accordingly, decedent’s gross estate is
increased by $533,225 pursuant to section 2044.
5
The value of account No. 7225 ($202,850) in the account
statement for account No. 8135 matches a summary contained in the
aforementioned incomplete account statement for account No. 7225.
6
The $1 difference is due to rounding.
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III. Decedent’s Contributions to MFLP
Lastly we determine whether the cash and securities decedent
transferred to MFLP in April 2002 and May 2003 must be included
in the value of decedent’s gross estate under section 2036 at
their fair market value or are entitled to a discount.
Decedent’s gross estate included 920 partnership units in MFLP.
The 920 partnership units were valued at $2,589,118 after
application of a 35-percent discount. Respondent does not
contest the amount of the discount that the estate claimed on
decedent’s estate’s Form 706. Rather, respondent argues that the
estate is not entitled to any discount and must include the full
value of the transferred assets in the value of the gross estate.
The purpose of section 2036 is to include in a deceased
taxpayer’s gross estate inter vivos transfers that were
testamentary. United States v. Estate of Grace, 395 U.S. 316
(1969). Section 2036(a) generally provides that if a decedent
made an inter vivos transfer of property, other than a bona fide
sale for adequate and full consideration, and retained certain
enumerated rights or interests in the property which were not
relinquished until death, the full value of the transferred
property will be included in the value of the decedent’s gross
estate. Section 2036(a) is applicable when three conditions are
met: (1) The decedent made an inter vivos transfer of property;
(2) the decedent’s transfer was not a bona fide sale for adequate
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and full consideration; and (3) the decedent retained an interest
or right enumerated in section 2036(a)(1) or (2) or (b) in the
transferred property which she did not relinquish before her
death. Estate of Bongard v. Commissioner, 124 T.C. 95, 112
(2005).
The bona fide sale for adequate and full consideration
exception is limited to a transfer of property where the
transferor “has received benefit in full consideration in a
genuine arm’s length transaction”. Estate of Goetchius v.
Commissioner, 17 T.C. 495, 503 (1951). In Estate of Bongard v.
Commissioner, supra at 118, we held that the exception for a bona
fide sale for an adequate and full consideration in money or
money’s worth is satisfied in the context of a family limited
partnership--
where the record establishes the existence of a legitimate
and significant nontax reason for creating the family
limited partnership, and the transferors received
partnership interests proportionate to the value of the
property transferred. See, e.g. Estate of Stone v.
Commissioner, * * * [T.C. Memo. 2003-309]. The objective
evidence must indicate that the nontax reason was a
significant factor that motivated the partnership’s
creation. * * * A significant purpose must be an actual
motivation, not a theoretical justification.
The bona fide sale exception is not applicable “where the
facts fail to establish that the transaction was motivated by a
legitimate and significant nontax purpose.” Id. In Estate of
Bongard v. Commissioner, supra at 118-119, we listed a number of
factors that support such a finding, including
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the taxpayer’s standing on both sides of the transaction,
* * * the taxpayer’s financial dependence on distributions
from the partnership, * * * the partners’ commingling of
partnership funds with their own, * * * and the taxpayer’s
actual failure to transfer the property to the partnership.
* * *
Respondent argues that decedent’s transfer of assets to MFLP
is not exempt from the application of section 2036(a) because the
transfer did not constitute a bona fide sale for adequate and
full consideration. Respondent points to the following factors
as evidence that the transfer was not bona fide: (1) MFLP’s lack
of a functioning business operation; (2) the delay in making
contributions to MFLP after MFLP was formed and the partnership
agreement was signed; (3) the type of assets transferred; (4)
decedent’s age; (5) that decedent stood on both sides of the
transaction; (6) decedent’s failure to retain sufficient assets
outside of MFLP; and (7) the stated reason for MFLP’s formation.
The estate argues that decedent’s transfers to MFLP were
bona fide sales for adequate and full consideration. The estate
contends that there were legitimate and substantial nontax
business reasons for the creation of MFLP, including asset
protection, succession of management, centralized management, and
continuation of the family’s investment strategy. The estate
points out that the securities were actually transferred to MFLP
and never commingled with decedent’s personal assets, and
partnership formalities were satisfied. We will analyze each
contribution separately.
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A. April 2002 Contributions
We agree with the estate that decedent’s April 2002
transfers to MFLP satisfy the bona fide sale for adequate and
full consideration exception and are not governed by section
2036. Decedent had legitimate and substantial nontax business
reasons for forming MFLP and for contributing securities in April
2002. See Estate of Mirowski v. Commissioner, T.C. Memo. 2008-
74; Estate of Schutt v. Commissioner, T.C. Memo. 2005-126.
Decedent established and funded MFLP to ensure that her assets
continued to be managed according to Mr. Miller’s investment
philosophy.
Mr. Price, Virgil G., and Donald all testified credibly
about Mr. Miller’s investment strategy. Mr. Price specifically
testified that Mr. Miller had been charting stocks by hand since
the beginning of their business relationship and would often
bring detailed records with him when the two met. We find
credible the witnesses’ testimony that the driving force behind
decedent’s desire to form MFLP was to continue the management of
family assets in accordance with Mr. Miller’s investment
strategy.
MFLP did not hold investments passively, collecting
dividends and interest. See Estate of Gore v. Commissioner, T.C.
Memo. 2007-169; Estate of Rosen v. Commissioner, T.C. Memo. 2006-
115. Virgil G. testified that he spent about 40 hours per week
- 30 -
managing MFLP’s assets, and we find his testimony credible.
Before contribution, the assets in decedent’s trust accounts were
not regularly traded. However, Virgil G. began monitoring and
trading the assets regularly once they were contributed to MFLP.
Although MFLP earned income monthly from these sources, Virgil G.
also evaluated stocks daily. See Estate of Schutt v.
Commissioner, supra (family limited partnership had a significant
nontax purpose of facilitating the decedent’s buy and hold
investment strategy and assuaging his worry that his heirs would
sell his investments after his death); cf. Estate of Jorgensen v.
Commissioner, T.C. Memo. 2009-66 (“There are no special skills *
* * when adhering to a ‘buy and hold’ strategy, especially when
one pays an investment adviser to recommend what to buy and when
to sell.”).
Virgil G. subscribed to a number of trade publications and
purchased computer software to assist in his securities trading,
and VGM was compensated by MFLP for management services. MFLP
involved an active securities trading operation closely aligned
with Mr. Miller’s investment strategy. Decedent wanted her
assets to be traded according to her husband’s investment
philosophy and set up MFLP to do just that. Virgil G. was the
only family member versed in Mr. Miller’s trading philosophy, and
he was given authority to trade securities on behalf of MFLP.
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Virgil G. also discussed MFLP with his siblings and provided
financial advice.
Respondent contends that the trades MFLP actually made were
not sufficient to qualify MFLP as a legitimate operation.
Respondent relies on Estate of Thompson v. Commissioner, 382 F.3d
367 (3d Cir. 2004), affg. T.C. Memo. 2002-246, in support of this
argument and also argues that MFLP lacked employees, kept no
books or records, and had no bank accounts in its name.
Respondent further contends that the types of assets transferred
weigh against a finding of a valid nontax business purpose for
the transfers. Respondent again points to Estate of Thompson v.
Commissioner, supra, and Estate of Rosen v. Commissioner, supra,
in support of his contention that there was no benefit to be
derived from transfer of the assets to MFLP other than favorable
estate tax treatment.
MFLP’s activities need not rise to the level of a “business”
under the Federal income tax laws in order for the exception
under section 2036(a) to apply. See Estate of Mirowski v.
Commissioner, supra; Estate of Stone v. Commissioner, T.C. Memo.
2003-309. Respondent’s argument concerning the types of assets
transferred fails for the same reason. The nontax purpose behind
formation of MFLP was to continue Mr. Miller’s investment
philosophy and to apply it to family assets. This goal could not
have been met had decedent not transferred securities to MFLP.
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Respondent’s reliance on Estate of Thompson and Estate of
Rosen is misplaced. In those cases decedents transferred
property that was not actively managed by family limited
partnerships. See Estate of Thompson v. Commissioner, supra at
379 (“The record demonstrates that neither the Turner Partnership
nor the Thompson Partnership engaged in any valid, functioning
business enterprise.”); Estate of Rosen v. Commissioner, supra
(“For the most part, the assets of the LRFLP appear not to have
been traded by the LRFLP, which, in part, explains the minimal
capital gain income and loss reported by the LRFLP.”). As stated
above, MFLP was not a passive holder of securities.
Respondent’s contentions concerning decedent’s age are
likewise misplaced. Respondent contends that the transfers were
made because decedent and Virgil G. recognized that decedent’s
health was failing. Respondent argues that decedent and Virgil
G. made these transfers in view of her failing health in order to
reduce the value of her taxable estate. We do not agree. At the
time of the April 2002 transfers, decedent, although dealing with
some chronic conditions, was generally in good health. Neither
decedent nor her family expected any significant decline in
decedent’s health in the near future.
As stated above, decedent’s desire to continue her deceased
husband’s investment philosophy is a significant nontax business
purpose. Although intrafamily transfers are subject to
- 33 -
heightened scrutiny, they are not barred. See Estate of Bongard
v. Commissioner, 124 T.C. at 123. Decedent was able to ensure
that her assets would be managed and invested in a manner that
decedent both desired and trusted: her deceased husband’s
investment strategy.
Decedent also retained sufficient assets outside of MFLP
after the April 2002 contributions such that she did not need to
rely on distributions from MFLP to pay for day-to-day living
expenses. Respondent’s argument that decedent did not retain
sufficient assets after making the transfers fails; decedent
retained almost $1 million in securities in decedent’s trust’s
Merrill Lynch and Fidelity Investments accounts and also had
access to the securities in the QTIP trust after the April 2002
transfers. Nor do we believe the use of MFLP funds to pay
decedent’s trust’s margin accounts taints decedent’s transfers.
This is not an example of partnership funds being used to pay
personal expenses of the decedent. Decedent’s trust purchased
stock on margin; those stocks were later sold to pay the
corresponding margin account.
Decedent’s transfers to MFLP in April 2002 satisfy the bona
fide sale exception and are therefore entitled to the claimed
discount in valuing decedent’s gross estate. See Estate of
Mirowski v. Commissioner, T.C. Memo. 2008-74. We next analyze
the May 2003 contributions.
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B. May 2003 Contributions
We agree with respondent that decedent did not have
legitimate and substantial nontax business reasons for the May
2003 transfers. The record indicates that the driving force
behind the May 2003 transfers was the precipitous decline in
decedent’s health in the weeks before the transfers. The
decision to make additional contributions to MFLP in May 2003 was
made shortly after decedent broke her hip. See Estate of
Erickson v. Commissioner, T.C. Memo. 2007-107. Although decedent
was generally in good health before the April 2002 transfers,
this was not the case in May 2003. In addition to breaking her
hip, decedent had just undergone pacemaker implantation surgery.
Further, decedent’s rehabilitation was not progressing, and she
was forced to return to the hospital with congestive heart
failure.
The witnesses’ testimony that decedent’s family hoped for
her recovery is credible, but her health was in decline. Given
the lapse in time between the April 2002 contributions and the
May 2003 contributions, the decline in her health and the
decision to reduce her taxable estate were clearly the driving
forces behind Virgil G.’s decision to make additional
contributions to MFLP.
The estate’s argument that decedent contributed the
remainder of her assets to MFLP in May 2003 so that they were
- 35 -
managed in accordance with Mr. Miller’s investment strategy is
undercut by the fact that decedent had the option of contributing
these securities to MFLP 1 year earlier. Had decedent wanted all
of her assets managed by Virgil G. in accordance with Mr.
Miller’s investment strategy, there would have been no need to
wait until the last weeks of her life to make additional
transfers to MFLP. The May 2003 contributions were driven by
Virgil G.’s desire to reduce the value of decedent’s taxable
estate. Accordingly, there was no significant nontax reason for
the transfer, and the transfer does not qualify as a bona fide
sale for adequate and full consideration. See Estate of Erickson
v. Commissioner, supra (“It was only after Mrs. Erickson had been
admitted to the hospital with pneumonia, two days before she
died, that the partners finally completed their transfers.”);
Estate of Rosen v. Commissioner, T.C. Memo. 2006-115 (“The fact
that decedent was 88 years old and in failing health strongly
supports our finding that the transfer of the assets was purely
for the purpose of avoiding Federal estate and gift taxes.”).
Because we find that decedent did not have a significant
nontax purpose in making the May 2003 transfers, we must
determine whether decedent retained the possession or enjoyment
of, or the right to the income from, the property transferred to
MFLP in May 2003. Sec. 2036(a).
- 36 -
It is clear that when the decision was made to further fund
MFLP in May 2003, Virgil G., as trustee of decedent’s trust and
as general partner of MFLP, knew that MFLP funds would be needed
to pay decedent’s estate tax liabilities. See Estate of Rector
v. Commissioner, T.C. Memo. 2007-367. The May 2003 transfers
were driven by Virgil G.’s desire to decrease the value of
decedent’s taxable estate. After this contribution, decedent did
not retain sufficient assets to satisfy her estate tax
liabilities. See Estate of Erickson v. Commissioner, supra;
Estate of Rosen v. Commissioner, supra.
Although the estate argues that the distribution to
decedent’s trust in 2004 was simply a pro rata distribution to
MFLP’s partners, the funds were used to satisfy decedent’s
estate’s tax liability. “[P]art of the ‘possession or enjoyment’
of one’s assets is the assurance that they will be available to
pay various debts and expenses upon one’s death.” Strangi v.
Commissioner, 417 F.3d 468, 477 (5th Cir. 2005), affg. T.C. Memo.
2003-145. That the remaining partners of MFLP received de
minimis amounts as part of the 2004 distribution serves to
highlight the fact that a large amount of MFLP funds was needed
to satisfy decedent’s liabilities. “Where an individual conveys
all or nearly all of his or her assets to a trust or
partnership,” Estate of Rosen v. Commissioner, supra, the
likelihood that the individual will have access to the assets is
- 37 -
the greatest, id. Virgil G.’s use of funds distributed by MFLP
to pay decedent’s estate tax liability shows that the final
contributions to MFLP completely depleted decedent’s resources.
See Strangi v. Commissioner, supra at 478; Estate of Rector v.
Commissioner, supra; Estate of Rosen v. Commissioner, supra.
The estate’s contention that Virgil G. would not distribute
funds to decedent because to do so would violate his fiduciary
duties and would be at odds with the stated goals of MFLP is not
credible. It is inconceivable that had decedent recovered and
faced, for example, increased day-to-day living expenses or
catastrophic medical costs, Virgil G., as general partner of
MFLP, would not have provided her with access to the securities
used to fund MFLP.
We conclude that at the time of the May 2003 transfer to
MFLP decedent retained the economic benefit of the securities
transferred. See Estate of Jorgensen v. Commissioner, T.C. Memo.
2009-66; Estate of Rector v. Commissioner, supra. Accordingly,
the securities transferred are not entitled to the claimed
discount and must be included in the value of decedent’s gross
estate at their fair market value.7
7
For purposes of valuing the securities transferred from
decedent’s trust’s Fidelity Investments account to MFLP’s
Fidelity Investments account in May 2003, we find Virgil G.’s
explanation for the discrepancy between the May and June 2003
account statements credible. Accordingly, those transfers will
be valued according to the June 2003 statement which shows the
(continued...)
- 38 -
IV. Conclusion
Decedent’s estate is increased by the amounts used to fund
the QTIP trust. Decedent’s estate is entitled to the claimed
discount for the securities transferred to MFLP in April 2002.
Decedent’s estate is not entitled to the claimed discount for the
securities transferred to MFLP in May 2003. The parties’
agreement as to taxes and any deduction for legal fees will be
dealt with in the Rule 155 computation.
Accordingly,
Decision will be entered
under Rule 155.
7
(...continued)
transfers being made as of May 15, 2003.