concurring in part1 and dissenting in part: The majority opinion acknowledges that section 2036(a)(1) will not apply unless: (1) Decedent made a transfer; (2) such transfer was not a bona fide sale for an adequate and full consideration in money or money’s worth; and (3) under such transfer decedent retained for his life the possession or enjoyment of, or the right to the income from, the property transferred. The majority opinion holds that decedent’s transfer to the Bongard Family Limited Partnership (BFLP) of his WCB Holdings class B membership units was a transfer which was not a bona fide sale for an adequate and full consideration in money or money’s worth and under which decedent retained for his life the enjoyment of such units.2 Consequently, according to the majority opinion, section 2036(a)(1) requires decedent’s gross estate to include the value of such units owned on the date of decedent’s death by BFLP that is proportionate to the 91.28-percent BFLP limited partnership interest owned on that date by decedent.3 I dissent.4 The majority opinion’s holding that decedent’s transfer to BFLP of his WCB Holdings class B membership units is subject to section 2036(a)(1), which respondent does not even advocate,5 is rejected by the statute and by United States v. Byrum, 408 U.S. 125 (1972), which the majority opinion does not even cite.
At the core of the majority opinion’s holdings under section 2036(a)(1) are its conclusions (1) that “The record does not support that the nontax reasons for bflp’s existence were significant motivating factors”, majority op. p. 126, and (2) that decedent had the ability to cause Empak to redeem the Empak stock owned by WCB Holdings and to cause WCB Holdings to redeem the WCB Holdings class B membership units owned by BFLP.
I have serious reservations about the propriety of the majority opinion’s conclusion that “The record does not support that the nontax reasons for bflp’s existence were significant motivating factors.” Majority op. p. 126. However, for purposes of my dissent, I shall proceed on the assumption that that conclusion is proper.6 Nonetheless, even if, as the majority opinion concludes, the record does not show that “the nontax reasons for bflp’s existence were significant motivating factors”, majority op. p. 126, neither section 2036(a)(1) nor the caselaw under that section supports the majority opinion’s inference that the absence of any significant nontax reason for the formation of BFLP, standing alone, establishes that decedent retained for his life the enjoyment of the WCB Holdings class B membership units that he transferred to BFLP within the meaning of section 2036(a)(1).7
I have serious disagreements with the majority opinion’s conclusions that decedent had the ability to cause Empak to redeem the Empak stock owned by WCB Holdings and to cause WCB Holdings to redeem the WCB Holdings class B membership units owned by BFLP. I shall discuss those disagreements below.
With the foregoing in mind, I shall now address the majority opinion’s holding under section 2036(a)(1) that “an implied agreement existed that allowed decedent to retain the enjoyment of the property held by BFLP.” Majority op. p. 131. In support of that holding, the majority opinion constructs the following rationale (majority opinion’s rationale):
The decedent did not need the membership interest in WCB Holdings class B shares to continue his lifestyle. However, decedent retained ownership of over 91 percent of his BFLP interest and did not make gifts of such interest prior to his death. More importantly, decedent controlled whether BFLP could transform its sole asset, the class B WCB Holdings membership units, into a liquid asset. Decedent as CEO and sole member of Empak’s board of directors determined when Empak redeemed its stock in each of the seven instances of redemptions prior to his death, including the last redemption of about $750,000 worth of Empak stock in 1998 after WCB Holdings was formed. None of the seven redemptions reduced the membership units owned by BFLP. In order for BFLP to be able to diversify or take any steps other than simply holding the class B membership units, decedent would have had to cause the membership units and the underlying Empak stock to be redeemed. He chose not to do this. By not redeeming the WCB membership units held by BFLP, decedent ensured that BFLP would not engage in asset management. Thereby, decedent exercised practical control over BFLP and limited its function to simply holding title to the class B membership units. Whether decedent caused the WCB membership units held by BFLP and the underlying Empak stock to be redeemed or not, his ability to decide whether that event would occur demonstrates the understanding of the parties involved that decedent retained the right to control the units transferred to BFLP.
The estate’s argument that the general partner’s fiduciary duties prevent a finding of an implied agreement is overcome by the lack of activity following BFLP’s formation and BFLP’s failure to perform any meaningful functions as an entity. We conclude that decedent’s transfer to BFLP for a 99-percent ownership interest in the partnership did not alter his control of the WCB Holdings class B membership units transferred to BFLP. See Estate of Thompson v. Commissioner, 382 F.3d at 376-377 (finding “nothing beyond formal title changed in decedent’s relationship to his assets” where the practical effect on his relationship to the transferred assets during decedent’s life was minimal).
[Majority op. pp. 130-131; fn. ref. omitted.]
The majority opinion’s rationale is factually, logically, and legally flawed.8
The majority opinion’s rationale is factually flawed for various reasons. One reason is that it concludes that decedent could have caused WCB Holdings to redeem the WCB Holdings class B membership units owned by BFLP. That conclusion is not supported by, and is contrary to, the following findings of fact of the majority opinion regarding the circumstances under which the chief manager of WCB Holdings (chief manager), who was decedent’s son Mark Bongard, was required to obtain the approval of a majority of the WCB Holdings class A governance units before he could take certain actions on behalf of WCB Holdings:
the chief manager needed the approval of the members representing the majority of the class A governance units before he could issue additional membership units, lend, borrow, or commit WCB Holdings’s funds in excess of $25,000, authorize capital expenditures in excess of $10,000, sell any of WCB Holdings’s assets, including its Empak stock, worth over $10,000 in any 12-month period, or vote any securities, including its Empak stock, owned by WCB Holdings. [Majority op. p. 103; emphasis added.]
After decedent funded, by gift, on March 15, 1997, the Children’s Trust, the Grandchildren’s Trust, and the QTIP Trust, each with certain class A governance units and certain class A financial units in WCB Holdings, decedent no longer owned a majority of the class A governance units in WCB Holdings, the only voting units in WCB Holdings. Thus, decedent could not have approved, and certainly could not have required, that the chief manager commit any of WCB Holdings’s funds in excess of $25,000 for the purpose of redeeming the WCB Holdings class B membership interests owned by BFLP. In addition, decedent could not have approved, and certainly could not have required, that the chief manager sell to Empak, through a redemption by Empak, Empak stock owned by WCB Holdings worth over $10,000 in any 12-month period.
Another factual flaw in the majority opinion’s rationale relates to the conclusion that decedent had the ability to cause Empak to redeem the Empak stock owned by WCB Holdings. That conclusion disregards not only the implications of the majority opinion’s finding that decedent and ISA Trust transferred their respective shares of Empak stock to WCB Holdings in order to position Empak for a liquidity event9 but also decedent’s fiduciary duties as Empak’s CEO and the sole member of its board of directors. Depleting Empak’s assets by causing Empak to redeem the Empak stock owned by WCB Holdings in order to be able to diversify bflp’s assets through a redemption by WCB Holdings of the WCB Holdings class B membership units owned by BFLP would not have been consistent with the objective of positioning Empak for a liquidity event. Indeed, given that objective, it would have been, at best, bad business judgment on the part of decedent and a misconception by him of what was involved in positioning Empak for a liquidity event if he had decided to cause Empak to redeem the Empak stock owned by WCB Holdings in order to effect a diversification of bflp’s assets. Moreover, irrespective of the objective to position Empak for a liquidity event, any decision by decedent to deplete Empak’s assets by causing Empak to redeem the Empak stock owned by WCB Holdings in order to effect such a diversification would have been, at worst, a breach by decedent of his fiduciary duties as Empak’s CEO and the sole member of its board of directors. Any such decision by decedent might have been actionable by the stockholders of Empak, which, as of March 7, 1997, were: (1) WCB Holdings, a 90-percent stockholder whose class A governance unitholders, other than decedent,10 owned in the aggregate on and after March 15, 1997, a majority of the voting class A governance membership units in WCB Holdings; (2) Marubeni Corp. (MC), a 6-percent stockholder and a Japanese trading entity which had more than 700 subsidiaries and whose stock was listed on various international stock exchanges; and (3) Marubeni America Corp., a 4-percent stockholder and the U.S. sales and marketing subsidiary of MC. Cf. United States v. Byrum, 408 U.S. at 137-143. Thus, any ability of decedent to cause Empak to redeem the Empak stock owned by WCB Holdings was not unconstrained. Instead, any such ability was subject to the fiduciary duties imposed upon decedent as Empak’s CEO and the sole member of its board of directors and to business and economic realities and variables over which he had little or no control and which he could ignore, but only at his peril. Cf. id.
The majority opinion’s rationale contains other factual flaws. According to that rationale,
decedent controlled whether BFLP could transform its sole asset, the class B WCB Holdings membership units, into a liquid asset. * * * In order for BFLP to be able to diversify or take any steps other than simply holding the class B membership units, decedent would have had to cause the membership units and the underlying Empak stock to be redeemed.[11] He chose not to do this. By not redeeming the WCB membership units held by BFLP, decedent ensured that BFLP would not engage in asset management. Thereby, decedent exercised practical control over BFLP and limited its function to simply holding title to the class B membership units. Whether decedent caused the WCB membership units held by BFLP and the underlying Empak stock to be redeemed or not, his ability to decide whether that event would occur demonstrates the understanding of the parties involved that decedent retained the right to control the units transferred to BFLP.
* * * decedent’s transfer to BFLP for a 99-percent ownership interest in the partnership did not alter his control of the WCB Holdings class B membership units transferred to BFLP. * * *
[Majority op. pp. 130-131; emphasis added.]
As is evident from the foregoing, the majority opinion establishes a “control” standard in applying section 2036(a)(1). However, the majority opinion never actually tells us what it means when it uses the terms “control” or “controlled” four times in the above-quoted excerpt.12 Nonetheless, under any commonly accepted meaning of those terms, it is factually incorrect for the majority opinion to conclude that “decedent controlled whether BFLP could transform its * * * class B WCB Holdings membership units * * * into a liquid asset ***[,] exercised practical control over BFLP and * * * retained the right to control the units transferred to BFLP” and that “decedent’s transfer to BFLP * * * did not alter his control of the WCB Holdings class B membership units transferred to BFLP.” Majority op. pp. 130-131. After decedent and ISA Trust capitalized BFLP, which the majority opinion acknowledges was a validly created and existing partnership under Minnesota law, neither decedent nor ISA Trust had the same relationship to the respective WCB Holdings class B membership units that they transferred to BFLP. Decedent owned a limited partnership interest, and ISA Trust owned a general partnership interest, in BFLP. BFLP, in turn, owned such units transferred to it. Decedent, as a limited partner of BFLP, did not have, and did not exercise, control over BFLP, its assets, its activities, or its general partner, ISA Trust.
In addition to the factual flaws in the majority opinion’s rationale, that rationale is logically flawed. It is a non sequi-tur for the majority opinion to conclude that, because of decedent’s alleged ability to cause Empak to redeem the Empak stock owned by WCB Holdings and to cause WCB Holdings to redeem the WCB Holdings class B membership units owned by BFLP, “decedent controlled whether BFLP could transform its * * * class B WCB Holdings membership units * * * into a liquid asset * * * [and] exercised practical control over bflp”. Majority op. p. 130. It also is a non sequitur for the majority opinion to conclude that any such alleged ability “demonstrates the understanding of the parties involved that decedent retained the right to control the units transferred to BFLP” and that his transfer to BFLP of his WCB Holdings class B membership units “did not alter his control” of such units. Majority op. p. 130. The alleged ability of decedent to cause Empak to redeem the Empak stock owned by WCB Holdings and to cause WCB Holdings to redeem the WCB Holdings class B membership units owned by BFLP does not logically lead to any of the foregoing conclusions. Nor does any such alleged ability logically lead to the majority opinion’s holding that “an implied agreement existed that allowed decedent to retain the enjoyment of the property held by BFLP.” Majority op. p. 131.
The majority opinion’s rationale is also legally flawed. The language of section 2036(a)(1)13 “plainly contemplates retention of an attribute of the property transferred — such as a right to income, use of the property itself, or a power of appointment with respect either to income or principal.” United States v. Byrum, 408 U.S. at 149. Moreover, the term “enjoyment” used in section 2036(a)(1) is not a term of art; it “[connotes] substantial present economic benefit”. Id. at 145. Decedent did not retain any attribute of the WCB Holdings class B membership units that he transferred to BFLP. Nor was decedent’s alleged ability to cause Empak to redeem the Empak stock owned by WCB Holdings and to cause WCB Holdings to redeem the WCB Holdings class B membership units owned by bflp a substantial present economic benefit of such units. Any such alleged ability was not a present benefit at all; it was “a speculative and contingent benefit which may or may not * * * [have been] realized.”14 Id. at 150. There simply are no circumstances surrounding decedent’s transfer of his WCB Holdings class B membership units to BFLP and no subsequent use of such units by decedent from which an implied agreement may be inferred that decedent retained the enjoyment of such units. See Estate of Reichardt v. Commissioner, 114 T.C. 144, 151 (2000). Section 2036(a)(1) rejects the majority opinion’s holding that decedent retained the enjoyment of the WCB Holdings class B membership units that he transferred to BFLP.
The legal flaws in the majority opinion’s rationale are not limited to its disregard of section 2036(a)(1), which, as indicated above, the Supreme Court construed according to its plain language. See United States v. Byrum, supra at 145, 149. That rationale also ignores the principles under section 2036(a) that the Supreme Court established in Byrum and that this Court has applied in other cases. See, e.g., Estate of Cohen v. Commissioner, 79 T.C. 1015 (1982); Estate of Gilman v. Commissioner, 65 T.C. 296 (1975), affd. per curiam 547 F.2d 32 (2d Cir. 1976). In Byrum, the decedent Milliken C. Byrum (Mr. Byrum) transferred to an irrevocable trust that he created shares of stock in each of three closely held corporations. Prior to the transfer, Mr. Byrum owned at least 71 percent of the outstanding stock of each corporation. The beneficiaries of the trust that Mr. Byrum created were his children or, in the event of their death before termination of the trust, their surviving children. The trust instrument specified that there was to be a corporate trustee, and Mr. Byrum designated an independent corporation as sole trustee. The trust instrument vested in the trustee broad and detailed powers with respect to the control and management of the trust property. Such powers of the trustee were exercisable in the trustee’s sole discretion, subject to the following rights reserved by Mr. Byrum: (1) To vote the shares of unlisted stock held in the trust; (2) to disapprove the sale or transfer of any trust assets, including the shares transferred to the trust; (3) to approve investments and reinvestments; and (4) to remove the trustee and to designate another corporate trustee to serve as successor trustee. United States v. Byrum, supra at 126-127.
The Government’s principal argument in Byrum was that, by retaining voting control over the corporations whose stock he transferred to the trust, which the Government maintained gave him, inter alia, control over the dividend policy of such corporations, Mr. Byrum retained the right under section 2036(a)(2) to designate the persons who were to enjoy the income from the transferred property. Id. at 131-132. The Government’s alternative argument was that, by retaining voting control over the corporations whose stock he transferred to the trust, which gave him, inter alia, the power to determine whether and when such corporations would be liquidated or merged, Mr. Byrum retained under section 2036(a)(1) the enjoyment of the transferred property. Id. at 145.
The Supreme Court rejected the Government’s principal argument under section 2036(a)(2) and its alternative argument under section 2036(a)(1), both of which were based on a “control” standard advanced by the Government. In rejecting the Government’s arguments, the Supreme Court expressly rejected the use of a “control” standard as “the basis per se” in applying section 2036(a). The Supreme Court concluded:
The “control” rationale, urged by the Government * * *, would create a standard — not specified in the statute — so vague and amorphous as to be impossible of ascertainment in many instances. * * *
The Government uses the terms “control” and “controlling stockholder” as if they were words of art with a fixed and ascertainable meaning. In fact, the concept of “control” is a nebulous one. Although in this case Byrum possessed “voting control” of the three corporations (in view of his being able to vote more than 50% of the stock in each), the concept is too variable and imprecise to constitute the basis per se for imposing tax liability under § 2036(a). * * *
[Id. at 137 n.10 and 138 n.13.]
The majority opinion’s reliance on a “control” standard in applying section 2036(a)(1) flies in the face of the Supreme Court’s rejection of such a standard.15 Id. The “control” standard in the majority opinion’s rationale, like the Government’s “control” standard in Byrum, is “too variable and imprecise to constitute the basis per se”, id. at 138 n.13, in applying section 2036(a)(1).16
Not only does the majority opinion’s rationale fly in the face of the Supreme Court’s rejection in United States v. Byrum, 408 U.S. 125, of a “control” standard under section 2036(a), that rationale also flies in the face of other principles under section 2036(a) that the Supreme Court established in Byrum, including those set forth in the following excerpt from the Supreme Court’s rejection of the Government’s arguments in that case:
At the outset we observe that this Court has never held that trust property must be included in a settlor’s gross estate solely because the settlor retained the power to manage trust assets. * * *
* * * The term “right,” certainly when used in a tax statute, must be given its normal and customary meaning. It connotes an ascertainable and legally enforceable power * * *. Here, the right ascribed to Byrum was the power to use his majority position and influence over the corporate directors to “regulate the flow of dividends” to the trust. That “right” was neither ascertainable nor legally enforceable and hence was not a right in any normal sense of that term.
Byrum did retain the legal right to vote shares held by the trust and to veto investments and reinvestments. But the corporate trustee alone, not Byrum, had the right to pay out or withhold income and thereby to designate who among the beneficiaries enjoyed such income. Whatever power Byrum may have possessed with respect to the flow of income into the trust was derived not from an enforceable legal right specified in the trust instrument, but from the fact that he could elect a majority of the directors of the three corporations. The power to elect the directors conferred no legal right to command them to pay or not to pay dividends. A majority shareholder has a fiduciary duty not to misuse his power by promoting his personal interests at the expense of corporate interests. Moreover, the directors also have a fiduciary duty to promote the interests of the corporation. * * * their [the corporate directors’] responsibilities were to all stockholders and were enforceable according to legal standards entirely unrelated to the needs of the trust or to Byrum’s desires with respect thereto.
The Government seeks to equate the de facto position of a controlling stockholder with the legally enforceable “right” specified by the statute. Retention of corporate control (through the right to vote the shares) is said to be “tantamount to the power to accumulate income” in the trust * * *. The Government goes on to assert that “[t]hrough exercise of that retained power, [Byrum] could increase or decrease corporate dividends * * * and thereby shift or defer the beneficial enjoyment of trust income.” This approach seems to us not only to depart from the specific statutory language, but also to misconceive the realities of corporate life.
We conclude that Byrum did not have an unconstrained de facto power to regulate the flow of dividends to the trust, much less the “right” to designate who was to enjoy the income from trust property. His ability to affect, but not control, trust income, was a qualitatively different power from that of the settlor in [United States v.] O'Malley [383 U.S. 627 (1966)], who had a specific and enforceable right [set forth in the controlling trust instrument] to control the income paid to the beneficiaries. Even had Byrum managed to flood the trust with income, he had no way of compelling the trustee to pay it out rather than accumulate it. Nor could he prevent the trustee from making payments from other trust assets
It is well settled that the terms “enjoy” and “enjoyment,” as used in various estate tax statutes, “are not terms of art, but connote substantial present economic benefit rather than technical vesting of title or estates.” * * *
* * * The statutory language [of section 2036(a)(1)] plainly contemplates retention of an attribute of the property transferred — such as a right to income, use of the property itself, or a power of appointment with respect either to income or principal.
Even if Byrum had transferred a majority of the stock, but had retained voting control, he would not have retained “substantial present economic benefit,” * * *. The Government points to the retention of two “benefits.” The first of these, the power to liquidate or merge, is not a present benefit; rather, it is a speculative and contingent benefit which may or may not be realized. * * *
[United States v. Byrum, 408 U.S. at 132-133, 136-139, 143, 145, 149-150; fn. refs. omitted.]
The Supreme Court teaches us in United States v. Byrum, 408 U.S. 125 (1972), that section 2036(a)(1) (and section 2036(a)(2)) does not apply to a transfer by an individual to an irrevocable trust of shares of stock in certain corporations in which the transferor owned stock,17 where such ownership gave the transferor the ability, inter alia, to liquidate or merge such corporations and where the powers of the independent trustee of such trust were subject to the following rights expressly reserved by the transferor: (1) To vote the shares of unlisted stock held in the trust; (2) to disapprove the sale or transfer of any trust assets, including the shares transferred to the trust; (3) to approve investments and reinvestments; and (4) to remove the trustee and to designate another corporate trustee to serve as successor trustee. Id. at 126-127.
A fortiori, under the principles that the Supreme Court established in United States v. Byrum, supra, even if in the instant case decedent had the ability to cause Empak to redeem the Empak stock owned by WCB Holdings and to cause WCB Holdings to redeem the WCB Holdings class B membership units owned by BFLP, any such ability does not demonstrate, and did not result in, decedent’s retention of the enjoyment of the WCB Holdings class B membership units that he transferred to BFLP within the meaning of section 2036(a)(1).18 In reaching a contrary holding, the majority opinion loses sight of, or chooses to disregard, the fact that any such ability is qualitatively different from the retention of the enjoyment (i.e., substantial present economic benefit, id. at 145) of the WCB Holdings class B units that he transferred to BFLP. See id. at 143, 145. In this connection, assuming arguendo the propriety of the majority opinion’s conclusions that decedent had the ability to cause Empak to redeem the Empak stock owned by WCB Holdings and to cause WCB Holdings to redeem the WCB Holdings class B membership units owned by BFLP, any such ability does not demonstrate, and did not result in, the retention by decedent of the right to compel BFLP or ISA Trust, the general partner of bflp, to distribute such units to or on behalf of decedent or otherwise to permit decedent to have substantial present economic benefit of such units.
The majority opinion not only fails to apply section 2036(a)(1) and principles under section 2036(a) that the Supreme Count established in United States v. Byrum, supra; it also fails to apply principles established by Minnesota law regarding the fiduciary duties of the partners of partnerships and the trustees of trusts, which the majority opinion acknowledges exist.19 This is evidenced by the following passage from the majority opinion’s rationale:
The estate’s argument that the general partner’s fiduciary duties prevent a finding of an implied agreement is overcome by the lack of activity following BFLP’s formation and BFLP’s failure to perform any meaningful function as an entity. We conclude that decedent’s transfer to BFLP for a 99-percent ownership interest in the partnership did not alter his control of the WCB Holdings class B membership units transferred to BFLP. * * * [Majority op. pp. 130-131; fn. ref. omitted.]
The majority opinion cites nothing in Minnesota law that supports the above-quoted conclusions. Irrespective of any “lack of activity” following BFLP’s formation and any “failure [by BFLP] to perform any meaningful functions”, majority op. p. 130, ISA Trust, as the general partner of bflp, owed fiduciary duties to decedent, and decedent, as a limited partner of bflp, owed fiduciary duties, to ISA Trust. Majority op. p. 130 note 12. ISA Trust, as the general partner of BFLP, and decedent, as a limited partner of bflp, also owed fiduciary duties to BFLP. Margeson v. Margeson, 376 N.W.2d 269, 272 (Minn. Ct. App. 1985). In addition, the trustees of ISA Trust owed fiduciary duties to the beneficiaries of that trust. Majority op. p. 130 note 12. The majority opinion points to nothing in Minnesota law that relieved decedent, ISA Trust, and its trustees of their respective fiduciary duties because of BFLP’s “lack of activity” or “failure to perform any meaningful functions” during decedent’s lifetime. Majority op. p. 130. ISA Trust and decedent would be breaching their respective fiduciary duties to each other and to BFLP, and the trustees of ISA Trust would be breaching their fiduciary duties to the beneficiaries of that trust, if they were to allow decedent to retain, as the majority opinion concludes he did, “control over bflp” and “control [over] the units transferred to bflp”, majority op. p. 130, and if, as the majority opinion also concludes, decedent’s transfer to bflp for a 99-percent ownership interest in that partnership “did not alter his control of * * * [such] units”, majority op. pp. 130-131.
In conclusion, the majority opinion is wrong in holding, and section 2036(a)(1) and United States v. Byrum, 408 U.S. 125 (1972), reject the majority opinion’s holdings, that “an implied agreement existed that allowed decedent to retain enjoyment of the property held by bflp”, majority op. p. 131, within the meaning of section 2036(a)(1) and that that section applies to decedent’s transfer to BFLP of his WCB Holdings class B membership units.
Wells and Foley, JJ., agree with this concurring in part and dissenting in part opinion.I concur in the holdings of the majority opinion that decedent made a transfer to WCB Holdings of his Empak stock that was a bona fide sale for an adequate and full consideration in money or money’s worth within the meaning of sec. 2036(a) and that consequently sec. 2036(a) does not apply with respect to that transfer. I also concur in the holdings of the majority opinion that, as a result of the foregoing holdings under sec. 2036(a), sec. 2035(a) does not apply with respect to decedent’s respective gifts of certain class A membership units in WCB Holdings to the Wayne C. Bongard Children’s Trust (Children’s Trust), the Wayne C. Bongard Grandchildren’s Trust (Grandchildren’s Trust), and the Cynthia F. Bongard Qualified Terminal Interest Property Trust (QTIP Trust).
The majority opinion does not hold that decedent retained for his life the possession of, or the right to the income from, the WCB Holdings class B membership units that he transferred to BFLP. Thus, the focus herein is on whether decedent retained for his life the enjoyment of such units within the meaning of sec. 2036(a)(1).
Because the majority opinion holds that decedent’s transfer to BFLP of his WCB Holdings class B membership units satisfies sec. 2036(a)(1), the majority opinion indicates that it need not address whether such transfer satisfies sec. 2036(a)(2), on which respondent relies. See infra note 5.
I also dissent from the majority opinion’s holding that sec. 2035(a) requires decedent’s gross estate to include the value as of the date of decedent’s death of the WCB Holdings class B membership units owned on that date by BFLP that is proportionate to the 7.72-percent BFLP limited partnership interest owned on that date by his wife Cynthia Bongard, which she received from decedent as a gift on Dec. 10, 1997, less than a year before he died. That erroneous holding flows from the majority opinion’s erroneous holding under sec. 2036(a)(1).
Respondent relies only on sec. 2036(a)(2), and not on sec. 2036(a)(1), with respect to decedent’s transfer to BFLP of his WCB Holdings class B membership units. Respondent argues with respect to that transfer that, under the partnership agreement governing BFLP, decedent had the right, in conjunction with the Wayne C. Bongard Irrevocable Stock Accumulation Trust (ISA Trust), the general partner of BFLP, to liquidate BFLP and to amend that agreement. Consequently, according to respondent, decedent retained the right under sec. 2036(a)(2), either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property that he transferred to BFLP or the income therefrom, and sec. 2036(a)(2) requires decedent’s gross estate to include the value of certain WCB Holdings class B membership units owned by BFLP on the date of decedent’s death. See supra note 3.
Since I shall proceed herein on that assumption, I shall not address the majority opinion’s holding that decedent made a transfer to BFLP of his WCB Holdings class B membership units that was not a bona fide sale for an adequate and full consideration in money or money’s worth within the meaning of sec. 2036(a).
The absence of a nontax reason for the creation of an entity, standing alone, might permit disregarding that entity for Federal tax purposes under, for example, a sham analysis. However, the majority opinion does not rely on a sham analysis, or any other analysis, that would result in disregarding BFLP for Federal tax purposes. See, e.g., secs. 761(a), 7701(a)(2); cf. Moline Props., Inc. v. Commissioner, 319 U.S. 436 (1943). That is because, according to the majority opinion, “Respondent has not challenged whether BFLP is a partnership that should be recognized for tax purposes”. Majority op. p. 126 note 11. As discussed supra note 5, respondent does not argue that sec. 2036(a)(1) applies to decedent’s transfer to BFLP of his WCB Holdings class B membership units; respondent argues only that sec. 2036(a)(2) applies to that transfer. Nonetheless, the majority opinion applies sec. 2036(a)(1) in reaching its holdings with respect to the transfer at issue to BFLP. In reaching those holdings, not only does the majority opinion rely on a section of the Internal Revenue Code on which respondent does not rely, it constructs a rationale under that section which respondent does not advance and to which the Estate of Wayne C. Bongard (estate) did not have the opportunity to respond.
The majority opinion’s reliance on Estate of Thompson v. Commissioner, 382 F.3d 367 (3d Cir. 2004), affg. T.C. Memo. 2002-246, is misplaced, as is its reliance on certain other cases, principally Estate of Strangi v. Commissioner, T.C. Memo. 2003-145, and Estate of Harper v. Commissioner, T.C. Memo. 2002-121, in support of its holdings under sec. 2036(a)(1). Each of those cases found the existence of an agreement under which the decedent involved retained for life the possession or enjoyment of, or the right to the income from, the property that such decedent transferred within the meaning of sec. 2036(a)(1). Each of those cases is materially distinguishable from, and is not controlling in, the instant case. For example, unlike cases cited by the majority opinion, decedent here did not transfer to BFLP assets needed to maintain his lifestyle; in the instant case, decedent had millions of dollars of assets that remained outside of BFLP (and outside of WCB Holdings) and that were more than adequate to maintain decedent’s lifestyle during his lifetime. In addition, in the instant case, during decedent’s lifetime there were no distributions to or on behalf of decedent from BFLP and no commingling of BFLP’s assets with decedent’s assets, as was done in cases on which the majority opinion relies.
That finding was critical to the majority opinion’s holding that decedent’s transfer to WCB Holdings of his Empak stock was a bona fide sale for an adequate and full consideration in money or money’s worth within the meaning of sec. 2036(a).
On and after Mar. 15, 1997, the class A governance unitholders of WCB Holdings, other than decedent, were the ISA Trust, the Children’s Trust, the Grandchildren’s Trust, and the QTIP Trust.
In making that assertion, the majority opinion ignores that, upon the occurrence of a liquidity event with respect to Empak (Empak liquidity event), BFLP, like WCB Holdings, would be in a position to acquire liquid assets with which to engage in economic activity, such as diversifying investments. Until an Empak liquidity event occurred, WCB Holdings owned no assets other than the respective shares of Empak stock transferred to it by decedent and ISA Trust and thus owned no liquid assets with which to engage in any economic activity. Similarly, until an Empak liquidity event occurred, BFLP, whose only asset was WCB Holdings class B membership units, had no liquid assets with which to engage in economic activity, such as diversifying its investments. The reason that during decedent’s lifetime BFLP, like WCB Holdings, owned no liquid assets with which to engage in any economic activity is that decedent died unexpectedly on Nov. 16, 1998, before an Empak liquidity event occurred. However, an Empak liquidity event did occur about 19 months after decedent’s death. Moreover, as the majority opinion acknowledges with respect to WCB Holdings, many of the steps necessary to position Empak for a liquidity event, and thus necessary to position both WCB Holdings and BFLP to acquire liquid assets as a result of such a liquidity event, were completed before decedent’s death. Other such steps were completed after decedent died. Thus, in June 1999, Empak was consolidated with Fluoroware, which resulted in a combined company named Entegris, Inc. (Entegris), and Empak stockholders, including WCB Holdings which owned 90 percent of the outstanding Empak stock, received a 40-percent ownership interest in Entegris. In July 2000, Entegris stock split 2 for 1, and it completed an initial public offering of its stock. As part of that initial public offering, WCB Holdings sold 1,925,000 shares of the approximately 22,000,000 shares of Entegris stock that it owned. Thereafter, WCB Holdings distributed the proceeds of such sales on a pro rata basis to all of the owners of its membership units, including to BFLP.
It is not even clear whether in each of the four instances the majority opinion intends the same, or a different, meaning of the terms “control” or “controlled”.
In order for sec. 2036(a)(1) to apply, decedent must have, inter alia, made a transfer of property under which he “retained for his life * * * (1) the possession or enjoyment of, or the right to the income from, the property”.
It is noteworthy that any speculative and contingent future benefit (i.e., diversification of BFLP’s assets) that decedent might have received from his alleged ability to cause Empak to redeem the Empak stock owned by WCB Holdings and to cause WCB Holdings to redeem the WCB Holdings class B membership units owned by BFLP was substantially more tenuous than the contingent and speculative future benefits that Mr. Byrum might have received from his power to liquidate or merge the corporations involved in United States v. Byrum, 408 U.S. 125 (1972).
Under the majority opinion’s “control” standard, because of decedent’s alleged ability to cause Empak to redeem the Empak stock owned by WCB Holdings and to cause WCB Holdings to redeem the WCB Holdings class B membership units owned by BFLP, “decedent controlled whether BFLP could transform its * * * class B WCB Holdings membership units * * * into a liquid asset * * *[,] exercised practical control over BFLP and * * * retained the right to control the units transferred to BFLP”, and his transfer to BFLP of his WCB Holdings class B membership units “did not alter his control” of such units. Majority op. p. 130. Consequently, according to the majority opinion, “an implied agreement existed that allowed decedent to retain the enjoyment of the property held by BFLP.” Majority op. p. 130.
As discussed above, we do not even know, because the majority opinion never tells us, what it intends by the terms “control” and “controlled” that appear in the majority opinion’s rationale.
After the Supreme Court decided United States v. Byrum, 408 U.S. 125 (1972), Congress enacted sec. 2036(b), which is applicable to transfers made after June 22, 1976. Sec. 2036(b) expands the meaning of the phrase “retained * * * enjoyment of” the transferred property for purposes of sec. 2036(a)(1). However, sec. 2036(b) is expressly limited to the retained right to vote shares of stock of a controlled corporation, as defined in sec. 2036(b)(2), and has no application to decedent’s transfer to BFLP of his nonvoting WCB Holdings class B membership units. Thus, the effect of Byrum on the instant case is unchanged by the enactment of sec. 2036(b). See Rev. Rul. 81-15, 1981-1 C.B. 457, 458, where the Internal Revenue Service, in reliance on the legislative history of sec. 2036(b), acknowledged that “the effect of Byrum * * * is not changed by the enactment of section 2036(b)” in the case of a transfer of nonvoting stock.
Although there are factual differences between United States v. Byrum, supra, and the instant case, those differences have no significance for purposes of determining whether sec. 2036(a)(1) applies to decedent’s transfer to BFLP of his WCB Holdings class B membership units. In fact, many of those differences strengthen the estate’s position in the instant case. For example, in Byrum, Mr. Byrum expressly reserved the rights, inter alia, to disapprove the sale or transfer of any trust assets including the shares transferred to the trust, to approve investments and reinvestments of the trust, and to remove the trustee and designate another corporate trustee to serve as successor trustee. Id. at 127. In contrast, decedent in the instant case reserved no such rights, or any other rights, with respect to BFLP, BFLP’s assets, or ISA Trust, BFLP’s general partner.
Moreover, any suggestion that the principles announced by the Supreme Court in United States v. Byrum, supra, are limited to trusts, and do not apply to other types of entities such as limited partnerships like BFLP, is unfounded and disregards the respective fiduciary duties of the partners of a partnership to each other and to the partnership (discussed below). In fact, respondent has acknowledged in, inter alia, certain private letter rulings that those principles apply to limited partnerships. See, e.g., Priv. Ltr. Rul. 95-46-006 (Aug. 14, 1995); Priv. Ltr. Rul. 94-15-007 (Jan. 12, 1994); Priv. Ltr. Rul. 93-10-039 (Dec. 16, 1992). Although private letter rulings have no precedential effect, see sec. 6110(k)(3), they “are an instructive tool”, Thom v. United States, 283 F.3d 939, 943 n.6 (8th Cir. 2002), and “do reveal the interpretation put upon the statute by the agency charged with the responsibility of administering the revenue laws”, Hanover Bank v. Commissioner, 369 U.S. 672, 686 (1962); see also Wells Fargo & Co. & Subs. v. Commissioner, 224 F.3d 874, 886 (8th Cir. 2000), affg. in part and revg. in part Norwest Corp. v. Commissioner, 112 T.C. 89 (1999).
The majority opinion acknowledges:
Under Minnesota law, the relationship of partners is fiduciary in character, and each partner owes the other partners the highest degree of integrity, loyalty, and good faith. Prince v. Sonnesyn, 222 Minn. 528, 535 (1946); Margeson v. Margeson, 376 N.W.2d 269 (Minn. Ct. App. 1985). In a limited partnership, a general partner can be liable to the limited partners for breach of fiduciary duty. Minn. Stat. Ann. sec. 322A.33 (West 2004); see also Minn. Stat. Ann. sec. 323.20 (West 1995), repealed by Laws 1997, ch. 174, art. 12, sec. 68, effective Jan. 1, 2002, but replaced by Minn. Stat. Ann. secs. 323A.4-04 and 323A.4-05, effective Jan. 1, 1999 (West 2004). In addition, the ISA Trust trustees owed fiduciary duties to its beneficiaries. See Minn. Stat. Ann. sec. 501B.10 (West. Supp. 1990), repealed by Laws 1996, ch. 314, sec. 8, eff. Jan. 1, 1997, replaced by Minn. Stat. Ann. sec. 501B.151, effective Jan. 1, 1997 (West 2002 & Supp. 2004); Minn. Stat. Ann. sec. 501B.60 (West 1990). [Majority op. p. 130 note 12.]