                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


9-1-2004

Turner v. Commissioner IRS
Precedential or Non-Precedential: Precedential

Docket No. 03-3173




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                        PRECEDENTIAL       Michael J. Haungs, Esquire (Argued)
                                           Jonathan S. Cohen, Esquire
        UNITED STATES                      United States Department of Justice
       COURT OF APPEALS                    Tax Division
     FOR THE THIRD CIRCUIT                 P.O. Box 502
                                           Washington, D.C. 20044
                                                 Attorneys for Appellee
             No. 03-3173

                                                  OPINION OF THE COURT
        BETSY T. TURNER,
       Executrix of the Estate of
    Theodore Thompson, Deceased,           SCIRICA, Chief Judge.
                               Appellant
                                                   This case involves the application
                                           of § 2036(a) of the Internal Revenue Code,
                   v.
                                           26 U.S.C. § 2036(a), to assets transferred
                                           inter vivos to family limited partnerships.
        COMMISSIONER OF
                                           Theodore R. Thompson transferred $2.8
       INTERNAL REVENUE
                                           million in securities and other assets to two
                                           family limited partnerships in exchange for
                                           pro-rata partnership interests. Upon his
         On Appeal from the
                                           death, Thompson’s estate filed a federal
       United States Tax Court
                                           estate tax return which applied a forty
    Tax Court Docket No. 7578-99
                                           percent discount to the value of decedent’s
     (Honorable Julian I. Jacobs)
                                           partnership interests for lack of control and
                                           marketability.     The Commissioner of
                                           Internal Revenue filed a notice of estate
        Argued April 21, 2004
                                           tax deficiency in the amount of $707,054,
                                           applying § 2036(a) to return to the gross
    Before: SCIRICA, Chief Judge,
                                           estate the full date of death value of the
     ROSENN and GREENBERG,
                                           transferred assets.       The Tax Court
            Circuit Judges
                                           sustained application of § 2036(a) after
                                           finding decedent retained lifetime control
      (Filed: September 1, 2004)
                                           and enjoyment of the transferred assets,
                                           and concluding the transfer of assets was
Victor F. Keen, Esquire (Argued)
                                           not a bona fide sale for adequate and full
Thomas W. Ostrander, Esquire
                                           consideration. Estate of Theodore R.
Duane Morris LLP
                                           Thompson v. Comm’r, T.C. Memo 2002-
One Liberty Place, 37th Floor
                                           246; 2002 Tax Ct. Memo LEXIS 254; 84
1650 Market Street
                                           T.C.M. (CCH) 374 (2002). The estate
Philadelphia, Pennsylvania 19103-7396
                                           appeals. We will affirm.
       Attorneys for Appellant
                    I.                            the preservation of assets, (3) reducing
                                                  income taxes by having the corporate
       In the early 1990s, decedent
                                                  general partner provide medical,
Theodore R. Thompson, along with his
                                                  retirement, and ‘income splitting’ benefits
son Robert Thompson and daughter Betsy
                                                  for family members, and (4) facilitating
Turner, began to investigate estate plans
                                                  family and charitable giving.” Thompson,
for managing his assets.1 In April 1993,
                                                  84 T.C.M. at 376. The advisor also stated
they implemented the Fortress Plan,2 an
                                                  that, “[a]ll of the benefits above can be
estate plan offered by the Fortress
                                                  achieved while total control of all assets is
Financial Group, Inc. that utilized family
                                                  retained by the directors of the Corporate
limited partnerships to protect family
                                                  General Partner.” Id. Pursuant to the plan,
assets. A financial advisor to decedent’s
                                                  decedent and his family formed two
family stated the primary advantages of the
                                                  limited partnerships and two corporations
Fortress Plan included: “(1) lowering the
                                                  to serve as general partners.
taxable value of the estate, (2) maximizing
                                                                       A.

        1
                                                         On April 21, 1993, decedent, his
      In 1979, decedent executed a will,          daughter Betsy and her husband George
subsequently amended by four codicils,            Turner formed the Turner Partnership and
which provided specific gifts to Robert           Turner Corporation. Decedent contributed
Thompson, Betsy Turner, and decedent’s            $1,286,000 in securities, along with notes
grandchildren and great-grandchildren.            receivable from Betsy Turner’s children
The residue of decedent’s estate went to a        totaling $125,000, in exchange for a 95.4%
revocable trust, established on January 16,       limited partnership interest in the Turner
1969. Decedent amended the trust on               Partnership. George Turner contributed
March 17, 1993, to create a new revocable         $1,000 in cash and real property in the
trust funded with the assets of the 1969          state of Vermont valued at $49,000 in
trust, which then totaled approximately           exchange for a 3.54% limited partnership
$1.5 million.                                     interest. Turner Corporation, the sole
    2                                             general partner, held the remaining 1.06%
       The Tax Court previously examined
                                                  interest. 3 Shares in Turner Corporation
inter vivos transfers to family limited
                                                  were issued to decedent (490 shares or
partnerships created under the “Fortress
                                                  49%), Betsy Turner (245 shares or 24.5%),
P l a n ” i n Esta te of S trang i v .
Commissioner, T.C. Memo 2003-145;
2003 Tax Ct. Memo LEXIS 144; 85
                                                     3
T.C.M. (CCH) 1331 (2003). In that case,               Turner Corporation did not pay for its
the Tax Court applied § 2036 to return to         partnership interest directly, but rather
decedent’s gross estate the value of              issued decedent a non-interest bearing
property transferred to a family limited          promissory note in the amount of $15,000
partnership pursuant to the Fortress Plan.        for its 1.06% interest.

                                              2
George Turner (245 shares or 24.5%), and           expectancy of 4.1 years. Theodore R.
National Foundation, Inc. (20 shares or            Thompson died on May 15, 1995.
2%), an unrelated tax-exempt entity.
                                                                        B.
Decedent, Betsy and George Turner served
as directors and officers of Turner                                     1.
Corporation.
                                                           The Turner Partnership assets
       Decedent and his son Robert                 consisted primarily of marketable
Thompson formed the Thom pson                      securities contributed by decedent, which
Partnership on April 30, 1993, and the             the partnership continued to hold in
Thompson Corporation on April 21, 1993.            decedent’s brokerage account with
Decedent contributed $1,118,500 in                 minimal post-transfer trading.           After
securities, along with notes receivable            formation, however, individual partners
totaling $293,000, in exchange for a               contributed additional assets to the Turner
62.27% limited partnership interest.               Partnership. In December 1994, Betsy and
Robert Thompson contributed mutual                 George Turner contributed a 22-acre
funds worth $372,000, and a ranch                  parcel of land adjacent to their private
property in Norwood, Colorado, appraised           residence, known as the Woodlands
at $460,000, in exchange for a 36.72%              Property. Betsy and George Turner also
limited partnership interest. Thompson             assigned to the Turner Partnership their
Corporation, as general partner, held the          interests in a real estate partnership, known
remaining 1.01% interest. Decedent and             as Woodside Properties, which held six
Robert Thompson each held 490 shares               apartment units. Phoebe and Betsy Turner
(49%) of Thompson Corporation. Robert              retained title to the underlying real estate
H. Thompson, an unrelated third party,             assets after transfer.
held the remaining 2% interest. Robert
                                                           The Turner Partnership engaged in
Thompson, Robert H. Thompson and
                                                   several business transactions, although
decedent served as officers and directors
                                                   none produced economic gains for the
of Thompson Corporation.
                                                   partnership. The structure of the Turner
       As of July 1993, decedent, then age         Partnership facilitated this result. The
ninety-five, had transferred $2.8 million in       partners amended the Turner Partnership
assets— $2.5 million in the form of                agreement in 1994, retroactively effective
marketable securities—to the Turner and            to April 23, 1993, to allocate all gains and
Thompson Partnerships.            Decedent         losses from, and distribution of, real estate
retained $153,000 in personal assets, and          contributed to the partnership to the
received an annual income of $14,000               individual contributing partners. As a
from two annuities and Social Security. At         result, income from the sale of timber from
the time of transfer, decedent had annual          the Vermont property went directly to the
expenses of $57,202, and an actuarial life         contributing partner, George Turner, and
                                                   not to the partnership as a whole.

                                               3
Likewise, when Betsy and George Turner                                 2.
sold the Woodlands Property along with
                                                         Like the Turner Partnership, most
their residence for $550,000, the Turner
                                                  of the Thompson Partnership assets
Partnership received $12,351 of the
                                                  consisted of m arketa ble sec urities
proceeds, an amount equal to its basis 4 in
                                                  contributed by decedent and Robert
the property.
                                                  Thompson. Here again, post-transfer
       In 1993, the Turner Partnership            trading in the securities was low. The only
invested $186,000 in a modular home               other operational activities of the
construction project brokered by Phoebe           Thompson Partnership related to the
Turner known as the Lewisville Properties.        Norwood, Colorado ranch contributed by
The property was sold in 1995 for a loss of       Robert Thompson. Robert previously used
$60,000. Phoebe Turner received a $9,120          the ranch as his primary residence, and
commission on the transaction.                    continued to do so after transfer paying an
                                                  annual rent of $12,000. Likewise, Robert
       The Turner Partnership also made
                                                  Thompson continued to raise mules on the
loans to members of the Turner family.
                                                  property and directly received income
Although the partnership formally charged
                                                  from the sale of mules. The record does
family members interest on these loans,
                                                  not demonstrate any other business or
interest payments were often late or not
                                                  commercial activities on the Norwood
paid at all, and loans were frequently
                                                  ranch. Nevertheless, for the years 1993
reamortized. But the partnership never
                                                  through 1995, the Thompson Partnership
pursued enforcement action against any of
                                                  paid the Thompson Corporation an annual
its debtors nor made loans to anyone
                                                  management fee for the Norwood ranch in
outside the Turner family.
                                                  the amounts of $23,625, $45,000, and
                                                  $47,500, respectively.           Thompson
                                                  Corporation in turn paid Robert Thompson
                                                  an annual salary of $32,001, and Karen
                                                  Thompson, Robert’s wife, a monthly
   4
     See Black’s Law Dictionary 145 (7th          salary of $350. Thompson Corporation
ed. 1999) (defining “basis” as the “value         also carried insurance on Robert and
assigned to a taxpayer’s investment in            Karen Thompson, and paid various
property and used primarily for computing         personal expenses.         The Thompson
gain or loss from a transfer of the               Partnership claimed losses from the
property”); Eitan A. Avneyon, Dictionary          operation of the ranch on its tax returns for
of Finance 53 (1987) (defining “basis” as         the years 1993 through 1996.
“the cost of an asset, or the asset’s value
                                                                       3.
(in the case of an asset obtained by some
means other than purchase) used to                        In addition to the foregoing
calculate depreciation, profits and capital       activities, both the Turner and Thompson
gains.”).

                                              4
Partnerships made distributions of cash                   and $350,000 in securities to partially fund
and partnership interests to decedent                     bequests in decedent’s will and pay
during his lifetime. In 1993, the Turner                  decedent’s estate taxes.
and Thompson Partnerships made cash
                                                                  Decedent’s executors filed a federal
distributions of $40,000 each to decedent
                                                          estate tax return, Form 706, with the
which he used to provide holiday gifts to
                                                          Internal Revenue Service on February 21,
family members. Again in 1995, the
                                                          1996, and filed a supplemental return on
Thompson and Turner Partnerships made
                                                          December 10, 1996. The estate reported
cash distributions to decedent of $45,500
                                                          decedent held a 87.65% interest in the
and $45,220 respectively. During the
                                                          Turner Partnership and a 54.12% interest
same time period, decedent made gifts of
                                                          in the Thompson Partnership valued at
interests in both partnerships to individual
                                                          $875,811 and $837,691 respectively. The
family members. In March 1995, the
                                                          estate reported decedent held 490 shares of
Thompson Partnership distributed $12,500
                                                          Turner Corporation stock and 490 shares
to decedent to pay for certain personal
                                                          of Thompson Corporation stock valued at
expenses.5 All of these distributions were
                                                          $5,190 and $7,888 respectively. The estate
reflected on decedent’s Schedule K-1 and
                                                          also reported prior adjusted taxable gifts of
recorded as reductions in his partnership
                                                          $19,324 related to decedent’s lifetime gifts
capital accounts.
                                                          of partnership interests.       The estate
                        C.                                calculated these values by applying a 40%
                                                          discount rate to the net asset value of the
        As noted, decedent died testate on
                                                          partnerships and corporations for lack of
May 15, 1995, at age ninety-seven. At the
                                                          control and marketability.
time of his death, decedent held
approximately $89,000 in liquid assets, a                         In January 1999, the IRS issued a
promissory note in principal amount of                    notice of deficiency in the amount of
approximately $9,000, a majority interest                 $707,054, adjusting decedent’s taxable
in the Turner and Thompson Partnerships,                  estate from $1,761,219 to $3,203,506. The
and shares in their respective corporate                  most significant adjustment involved the
general partners. On or about May 27,                     reported value of decedent’s interests in
1995, the Turner and Th ompson                            the family limited partnerships.6 The
Partnerships respectively sold $347,000                   Commissioner explained the “20 percent


   5                                                         6
      The Tax Court found that prior to this                  The Commissioner also increased the
distribution, Betsy Turner wrote a letter to              taxable estate by $4,993 for adjustments to
Robert Thompson detailing decedent’s                      decedent’s reported interest in Thompson
1994 expenses of $57,202.40 and stating                   Corporation and Turner Corporation, and
d e c e d e n t n e e d e d a n “ i n f u si o n .”       increased the reported taxable gifts from
Thompson, 84 T.C.M . at 380.                              $19,324 to $166,167.

                                                      5
minority discount and the 20 percent                                     II.
marketability discount has been disallowed
                                                          The Tax Court found the family
on each of the [Turner and Thompson]
                                                   partnerships were validly formed and
partnership s.”     As a result, the
                                                   properly recognized for federal estate tax
Commissioner increased the value of
                                                   purposes.8     The court nevertheless
decede nt’s interest in the Turner
                                                   sustained application of § 2036(a)(1)9 to
Partnership from $875,811 to $1,717,977,
and increased the value of his interest in
the Thompson Partnership from $837,691                       8
                                                            The Tax Court concluded the
to $1,396,152.        These adjustments            Commissioner had the burden of proof on
increased decedent’s taxable estate by             whether the partnerships were validly
$1,400,627.7                                       formed for tax purposes, and whether the
       In its amended answer to the                transferred assets should be returned to the
estate’s petition for redetermination in the       estate under § 2036 because those
Tax Court, the Commissioner asserted the           arguments were not presented in the notice
family partnerships and corporations               of deficiency. See Wayne Bolt & Nut Co.
should be disregarded for tax purposes,            v. Comm’r, 93 T.C.M. 500, 507 (1989)
and therefore decedent’s gross estate              (when a new theory on which the
should include the undiscounted value of           Commissioner relies is not stated or
his pro-rata share of the underlying assets.       described in the notice of deficiency, the
In the alternative, the Commissioner               Commissioner bears the burden of proof
contended the full fair market value of the        on that issue).
assets transferred by the decedent to the             9
                                                          Section 2036(a) provides, in part:
Turner and Thompson Partnerships should
be returned to decedent’s gross estate                Transfers with retained life estate.
under § 2036(a) of the Internal Revenue               (a) General Rule. The value of the
Code because decedent retained control                gross estate shall include the value
and enjoyment over the transferred assets             of all property to the extent of any
during his lifetime.                                  interest therein of which the
                                                      decedent has at any time made a
                                                      transfer (except in the case of a
                                                      bona fide sale for an adequate and
                                                      full consideration in money or
    7
     Form 3228 of the statutory notice of             money’s worth), by trust or
deficiency reflected an adjustment of                 otherwise, under which he has
$1,406,933 to the gross estate. The                   retained for his life or for any
additional adjustment resulted from the               period not ascertainable without
inclusion of Delaware state tax refunds for           reference to his death or for any
the years 1994 and 1995 in the amounts of             period which does not in fact end
$1,459 and $4,847.                                    before his death–

                                               6
return decedent’s transferred assets back to              that the contributed property
the estate. The Tax Court found an                        constituted the majority of
implied agreement existed at the time of                  decedent’s assets, including
transfer that decedent would retain lifetime              nearly all of his investments,
enjoyment and economic benefit of the                     the establishment of the
transferred assets. In support of this                    partnerships is far more
finding, the court noted both Betsy and                   consistent with an estate
George Turner sought assurances from                      plan than with any sort of
financial advisors that decedent would be                 arm’s-length joint enterprise
able to withdraw assets from the                          between partners.          In
partnerships to make gifts to family                      summary, we are satisfied
members, and that the partnerships in fact                that the partnerships were
made such distributions to decedent. The                  created principally as an
court further noted decedent “parted with                 alternate vehicle through
almost all of his wealth” and found this                  wh ich decedent would
“outright transfer of the vast bulk of                    provide for his children at
[decedent’s] assets . . . can only be                     his death.
explained if decedent had at least an
                                                   Id.
implied understanding that his children
would agree to his requests for money                      The court also determined the
from the assets he contributed to the              transfer was not exempt from § 2036(a) as
partnerships, and that they would do so for        a “bona fide sale for adequate and full
as long as he lived.” Thompson, 84                 consideration.” The Tax Court explained
T.C.M. at 386-87. While acknowledging              that “[w]hen a family partnership is only a
the transfers altered the “formal                  vehicle for changing the form in which the
relationship” between decedent and his             decedent held his property—a mere
assets, the court concluded, as a practical        ‘recycling of value’— the decedent’s
matter, that “nothing but legal title              receipt of a partnership interest in
changed.”       Id. at 387.     The court          exchange for his testamentary assets is not
summarized:                                        full and adequate consideration within the
                                                   meaning of section 2036.” Id. at 388. The
       In light of decedent’s
                                                   Tax Court found neither partnership
       personal situation, the fact
                                                   conducted a legitimate business enterprise,
                                                   and the individual partners did not pool
                                                   their assets in the partnerships.
       (1) the possession or                       Furthermore, the court found neither
       enjoyment of, or the right to               partne rship e nga ge d in busin e ss
       the income from , the                       transactions with anyone outside the
       property . . .                              family, and the partnership loans to family
                                                   members were “testamentary in nature.”
26 U.S.C. § 2036(a).

                                               7
Id. at 389. As a result, the court concluded       valued at $166,167. As a result of these
there was no transfer for “adequate and            adjustments, the Tax Court reduced the
full consideration” within the meaning of          Commissioner’s notice of deficiency from
§ 2036(a).                                         $3,335,177 to $2,939,836.11
       Accordingly, the Tax Court applied                 The estate filed a timely notice of
§ 2036(a)(1) to return to the gross estate         appeal.12
the date of death value of decedent’s
                                                                       III.
transferred assets as well as new
partnership assets derived from the assets                              A.
contributed by decedent. 10 The Tax Court
                                                          The Internal Revenue Code
also found decedent’s stock in Turner
                                                   imposes a federal tax on “the taxable estate
Corporation and Thompson Corporation
                                                   of every decedent who is a citizen or
had no v alue a part fro m th ose
                                                   resident of the United States.” 26 U.S.C.
corporations’ interests in the family
                                                   § 2001(a). A “taxable estate” is defined as
partnerships, and thus attributed no
                                                   “the value of the gross estate,” less
additional value from this stock to
                                                   applicable deductions, id. § 2051, where
decedent’s gross estate. Likewise, the Tax
                                                   the value of the “gross estate” includes
Court did not include in decedent’s gross
                                                   “the value of all property to the extent of
estate a separate value attributable to
decedent’s lifetime transfers of partnership
interests, which the Commissioner had                      11
                                                           The Commissioner subsequently
                                                   agreed the estate was entitled to a
                                                   deduction of $474,195 for attorneys fees as
  10
    The Tax Court found decedent’s gross           an expense of estate administration, and a
estate included secu rities totalin g              deduction of $184,674 for interest incurred
$1,232,076 transferred to the Turner               and paid on the estate tax deficiency. The
Partnership, plus $257,015 in new                  Tax Court entered a final deficiency for
partnership assets derived from those              the reduced amount of $240,769.
securities.    The Tax Court therefore
                                                      12
returned $1,489,091 to decedent’s gross                We have jurisdiction under 26 U.S.C.
estate on account of assets transferred to         § 7482(a)(1). We exercise plenary review
the Turner Partnership. The court also             over the Tax Court’s conclusions of law,
returned $1,450,745 to decedent’s estate           including its construction and application
for assets transferred to the Thompson             of the Internal Revenue Code. PNC
Partnership. The Tax Court did not                 Bancorp. v. Comm’r, 212 F.3d 822, 827
include in decedent’s gross estate                 (3d Cir. 2000). We review the Tax
$221,850 in new, post-formation                    Court’s factual findings for clear error. Id.
Thompson Partnership assets because it             Because the estate’s executor resides in
did not find these new assets were derived         Pennsylvania, venue is proper under 26
from decedent’s contributed assets.                U.S.C. § 7482(b)(1).

                                               8
the interest therein of the decedent at the                Section 2036 addresses the concern
time of his death.” Id. § 2033. In                 that inter vivos transfers often function as
addition, § 2036 returns to decedent’s             will substitutes, with the transferor
gross estate any property transferred inter        continuing to enjoy the benefits of his
vivos over which the decedent retains              property during life, and the beneficiary
enjoyment, possession or right to income           receiving the property only upon the
during his lifetime. See generally Richard         transferor’s death. See United States v.
B. Stephens, et al., Federal Estate and Gift       Grace, 395 U.S. 316, 320 (1969) (“[T]he
Taxation ¶ 4.08 (8th ed. 2002). As noted,          general purpose of the statute was to
§ 2036(a) provides, in part:                       include in a decedent’s gross estate
                                                   transfers that are essen tially
   Transfers with retained life estate.
                                                   testamentary.”). As such, § 2036(a)(1)
   (a) General Rule. The value of the
                                                   returns property transferred inter vivos to
   gross estate shall include the value
                                                   the gross estate if the decedent retains
   of all property to the extent of any
                                                   possession, enjoyment, or the right to
   interest therein of which the
                                                   income from the property during his
   decedent has at any time made a
                                                   lifetime.13    Estate of D’Ambrosio v.
   transfer (except in the case of a
                                                   Comm’r, 101 F.3d 309, 312 (3d Cir. 1996)
   bona fide sale for an adequate and
                                                   (“Section 2036(a) effectively discourages
   full consideration in money or
                                                   manipulative transfers of remainder
   money’s worth), by trust or
                                                   interests which are really testamentary in
   otherwise, under which he has
   retained for his life or for any
   period not ascertainable without
                                                     13
   reference to his death or for any                   The statute also discourages situations
   period which does not in fact end               where the decedent retains the right to
   before his death--                              determine who, other than himself, will
                                                   possess or enjoy the transferred property.
       (1) the possession or
                                                   See 26 U.S.C. § 2036(a)(2). In its reply
       enjoyment of, or the right to
                                                   brief, the Commissioner argues in the
       the income from, the
                                                   alternative the transferred property should
       property, or
                                                   be included in the gross estate under §
       (2) the right, either alone or              2036(a)(2) because decedent retained the
       in conjunction with any                     right to designate persons to possess or
       person, to designate the                    enjoy the property or income from the
       persons who shall possess or                property. The parties did not raise this
       enjoy the property or the                   argument before the Tax Court. Because
       income therefrom.                           we affirm the Tax Court’s decision with
                                                   respect to § 2036(a)(1), we do not reach
26 U.S.C. § 2036(a); see also 26 C.F.R. §
                                                   the question of whether § 2036(a)(2)
20.2036-1(a).
                                                   applies in this case.

                                               9
character by ‘pulling back’ the full, fee             with his death.”). An implied agreement
simple value of the transferred property              may be inferred from the circumstances
into the gross estate.”). Section 2036                surrounding both the transfer and
provides an exception for any inter vivos             subsequent use of the property. Estate of
transfer that is a “bona fide sale for an             Reichardt v. Comm’r, 114 T.C. 144, 151
adequate and full consideration in money              (2000). Whether an implied agreement
or money’s worth.” 26 U.S.C. § 2036(a).               existed between decedent and his family at
                                                      the time of the transfer is a question of
                     B.
                                                      fact, which we review for clear error. See
        Section 2036(a)(1) returns an inter           Estate of Maxwell v. Comm’r, 3 F.3d 591,
vivos transfer to decedent’s gross estate if          594 (2d Cir. 1993).
there is an express or implied agreement at
                                                             After reviewing the record
the time of transfer that the transferor will
                                                      evidence, we see no clear error in the Tax
retain lifetime possession or enjoyment of,
                                                      Court’s finding of an implied agreement
or right to income from, the transferred
                                                      between decedent and his family that
property. 26 C.F.R. § 20.2036-1(a) (“An
                                                      decedent would “continue[] to be the
interest or right is treated as having been
                                                      principal economic beneficiary of the
retained or reserved if at the time of
                                                      contributed property” and retain enjoyment
transfer there was an understanding,
                                                      of the transferred property sufficient to
express or implied, that the interest or right
                                                      trigger § 2036(a)(1).      Thompson, 84
would later be conferred.”); see also Estate
                                                      T.C.M. at 387. Decedent transferred 95%
of McNichol v. Comm’r, 265 F.2d 667, 671
                                                      of his assets to the family partnerships
(3d Cir. 1959). The existence of formal
                                                      when he was ninety-five years old. As the
legal structures which prevent de jure
                                                      Tax Court correctly found, decedent did
retention of benefits of the transferred
                                                      not retain sufficient assets to support
property does not preclude an implicit
                                                      himself for the remainder of his life, as
retention of such benefits. Strangi, 85
                                                      calculated at the time of transfer.14 This
T.C.M. at 1338 (“[A lthough] the
                                                      fact supports the inference that decedent
proverbial ‘i’s were dotted’ and ‘t’s were
                                                      had “an implied understanding that his
crossed’. . . [t]hey do not preclude implicit
retention by decedent of economic benefit
from the transferred property.”) (internal               14
                                                          Decedent retained assets of $153,000
citation omitted); McNichol, 265 F.2d at
                                                      and had an annual income of $14,000.
673 (“Substance and not form is made the
                                                      These assets were sufficient to cover
touchstone of taxability . . . [T]echnical
                                                      decedent’s fixed annual expenses of
concepts pertaining to the law of
                                                      $57,202 for approximately three and half
conveyancing cannot be used as a shield
                                                      years.     That is: $153,000/($57,202 -
against the impact of death taxes when in
                                                      $14,000) = 3.54.        Decedent had an
fact possession of enjoyment of the
                                                      actuarial life expectancy of 4.1 years at the
property by the transferor . . . ceases only
                                                      time of transfer.

                                                 10
children would agree to his requests for           assets he contributed to the partnership, . .
money from the assets he contributed to            . [the] practical effect of these changes
the partnerships, and that they would do so        during decedent’s life was minimal.”
for as long as he lived.” Id. at 387. The          Thompson, 84 T.C.M. at 387. Decedent
record reflects Betsy and George Turner            could not formally withdraw funds from
anticipated and prepared for this                  the partnerships without the permission of
eventuality by seeking assurances from             their respective corporate general partners,
financial advisors that decedent would be          in each case, a corporation directed by
able to withdraw assets from the                   Betsy Turner or Robert Thompson in
partnerships to make cash gifts to the             which decedent held a 49% interest. But
family. 15 Moreover, when decedent’s               both Betsy Turner and Robert Thompson
remaining assets eventually ran low, Betsy         testified, and the estate concedes, they
Turner secured approval from the limited           would not have refused decedent’s request
partnership to provide decedent with an            for such distributions. As such, it is clear
“infusion” to cover his expenses.                  from the operation of the partnerships
                                                   during decedent’s lifetime that “nothing
        Decedent’s de jure lack of control
                                                   beyond formal title changed in decedent’s
over the transferred property does not
                                                   relationship to his assets.” Strangi, 85
defeat the inference of an implied
                                                   T.C.M. at 1339.16 The fact that the other
agreement in these circumstances. See
McNichol, 265 F.2d at 673 (“Substance
and not form is made the touchstone of
                                                         16
taxability.”). The Tax Court recognized                       The estate argues the partnership
that although “some change ensued in the           d i s tr i b u ti o n s t o d e c e d e n t w e r e
formal relationship of decedent to the             accompanied by reductions in decedent’s
                                                   partnership interests, and were credited to
                                                   his partnership capital accounts. The
   15
    In a letter dated April 4, 2003, Betsy         estate avers the distributions to decedent’s
Turner asked a financial advisor whether           partnership capital accounts (totaling
decedent would be able to withdraw                 $183,220) do not constitute “enjoyment”
money from the Dean W itter securities             of the property, but merely involve a
account in order to make $10,000 gifts to          partial sale of decedent’s partnership
his children, grandchildren and great-             interests. Here again, “substance and not
grandchildren. Likewise, in a letter dated         form” guides our analysis. Under these
November 28, 1993, George Turner wrote             circumstances, the fact that decedent
to a different financial advisor asking:           complied with the formalities of
“How does Betsy’s father get $40,000 to            partnership distribution does not defeat an
give away as Christmas presents (with              inference that he retained control over the
checks dated January 1994)? (Bob                   assets after transfer. See Strangi, 85
Thompson has a similar question.).”                T.C.M. at 1339 (“[A]ccounting entries
Thompson, 84 T.C.M . at 379.                       alone are of small moment in belying the

                                              11
partners similarly retained de facto control         volume of assets to family partnerships
over assets contributed to the partnerships          under these circumstances is more
further supports this inference.17 Where a           consistent with an estate plan than an
decedent’s relationship to the transferred           investment in a legitimate business.
assets remains the same both before and
                                                            In sum, we see no clear error in the
after transfer, § 2036(a)(1) returns those
                                                     Tax Court’s finding of an implied
assets to the gross estate. Guynn v. United
                                                     agreement at the time of transfer that
States, 437 F.2d 1148, 1150 (4th Cir.
                                                     decedent would retain enjoyment and
1971).
                                                     economic benefit of the property
       Finally, the general testamentary             transferred to the f amily limited
character of the partnership arrangements            partnerships, and that decedent, in fact,
supports the inference of an implied                 continued to be the principal economic
agreement. Decedent transferred the vast             beneficiary of the transferred property
majority of his investment assets to two             during his lifetime.19
family limited partnerships when he was
ninety-five years old. The record reveals,
with one exce ption, th at neither                   and a third-party brokered by Phoebe
partnership engaged in business or loan              Turner.
transactions with anyone outside of the
                                                             19
family. 18   Transferring this type and                         The Commissioner argues §
                                                     2036(a)(1) applies for the additional
                                                     reason that decedent expressly retained a
                                                     “right to income” from the transferred
                                                     property as a limited partner in the family
existence of an agreement for retained
                                                     partnerships.       The estate contends
possession and enjoyment.”).
                                                     decedent retained a legal right to income
      17
        For example, Betsy and Phoebe                from the property only in his capacity as
Turner each contributed partnership                  partner, and that this interest alone is
interests in a real estate partnership to the        insufficient to trigger § 2036(a)(1).
Turner Partnership, but retained title to the                We are not convinced decedent
underlying real estate assets. Likewise,             expressly retained a “right to income”
George Turner retained the right to income           from the transferred property. The cases
from timber produced on the Vermont                  relied upon by the Commissioner involved
property he contributed to the Turner                an explicit reservation of rights in the
Partnership.                                         governing partnership or trust documents
                                                     not present in this case. For example, in
      18
        The exception is the Lewisville              Strangi v. Commissioner, 85 T.C.M.
Properties purchased by the Turner                   (CCH) 1331, the Tax Court found
Partnership.    Apparently, this was a               decedent retained a right to income from a
transaction between the Turner Partnership           family limited partnership established, as

                                                12
                                                                       IV.
                                                                        A.
here, pursuant to the Fortress Plan. The
                                                           An inter vivos transfer with a
partnership agreement in Strangi permitted
                                                    retained lifetime interest will not be
distributions of partnership proceeds at the
                                                    returned to the gross estate if the transfer
sole discretion of the managing corporate
                                                    constitutes a “bona fide sale for adequate
general partner. The corporate general
                                                    and full consideration.” 26 U.S.C. §
partner appointed decedent’s attorney-in-
                                                    2036(a). The Tax Court concluded there
fact to manage the day-to-day operation of
                                                    were no transfers for consideration in this
both the partnership and corporate general
                                                    case because the transactions “were not
partner. As a result, the Tax Court found
                                                    motivated by . . . legitimate business
the “governing documents contain no
                                                    concerns.” Thompson, 84 T.C.M. at 388.
restrictions that would preclude decedent
                                                    It found none of the individual partners
himself, acting through [his attorney-in-
                                                    conducted an active business in the
fact], from being designated as a recipient
                                                    partnerships or pooled their assets with the
of income from [the partnership].” Id. at
                                                    assets contributed by the decedent. Each
1337. Based on the language in the
                                                    contributing partner directly received any
governing documents, the court concluded
                                                    income derived from the assets he or she
decedent retained a “right to income” from
                                                    contributed to the partnerships.20 The
the partnership assets. Id.; see also Estate
                                                    partnerships held the securities transferred
of Pardee v. Comm’r, 49 T.C. 140, 148
                                                    by the decedent without any substantial
(1967) (finding a “right to income” within
the meaning of § 2036(a)(1) where trust
indenture expressly enabled decedent as             transfer that decedent would retain the
trustee to pay out corpus and income for            enjoyment and economic benefit of the
the “education, maintenance, medical                transferred property, and that decedent
expenses, or other needs of the                     continued to be the principal economic
Beneficiaries occasioned by emergency”).            beneficiary of the transferred property
        Here, by contrast, neither the              during his lifetime.
partnership nor corporate documents
                                                            20
expressly provide decedent a legal right to                    For example, by an undated
receive income distributions from the               amendment to the Turner Partnership
partnerships.     Such distributions still          agreement, retroactive to April 23, 1993,
required the approval of the corporate              the partners allocated all gains and losses
general partner, even though such approval          from, and distribution of real estate
was all but guaranteed as a practical               contributed to, the partnership to the
matter. Nevertheless, we do not rely on             contributing partner. Similarly, income
this ground as a basis for applying §               from the sale of mules raised on the
2036(a)(1), given the Tax Court found that          Norwood, Colorado ranch was paid
an implied agreement existed at the time of         directly to Robert Thompson.

                                               13
change in investment strategy, and did not               section 2036 to a myriad of
engage in business transactions with                     abuses engendered by
anyone outside of the family. As such, the               unilateral         paper
Tax Court found the family limited                       transformations.
partnerships served as “a vehicle for
                                                  Id. at 1653. The Tax Court concluded that
changing the form in which the decedent
                                                  where a “transaction involves only the
held his property— a mere ‘recycling of
                                                  genre of value ‘recycling’ . . . and does not
value,’” and therefore concluded there was
                                                  appear to be motivated primarily by
no transfer for consideration within the
                                                  legitimate business concerns, no transfer
meaning of § 2036(a). Id.
                                                  within the meaning of section 2036(a) has
       The Tax Court first announced the          taken place.” Id. at 1654.
“recycling” of value concept in Estate of
                                                         More recently, the Tax Court
Harper v. Commissioner, T.C. Memo
                                                  affirmed this reasoning in Strangi v.
2002-121; 2002 Tax Ct. Memo LEXIS
                                                  Commissioner, 85 T.C.M. (CCH) 1331
127; 83 T.C.M . (CCH) 1641 (2002). In
                                                  (2003). Similar to the facts at issue here,
Harper, the Tax Court denied the bona
                                                  Strangi involved an inter vivos transfer of
fide sale exception to an inter vivos
                                                  assets to a family limited partnership as
transfer where:
                                                  part of a Fortress estate plan. Decedent
       [A]ll decedent did was                     transferred 98% of his total assets,
       change the form in which he                including his residence, to a family limited
       held his beneficial interest               partnership. From the time of its funding
       in the contributed property .              until decedent’s death, the Strangi family
       . . . Essentially, the value of            limited partnership engaged in no business
       the partnership interest the               operations or commercial transactions.
       Trust received derived                     The only economic activity conducted by
       solely from the assets the                 the partnership involved paying for
       Trust had just contributed.                decedent’s health and nursing expenses,
       W i t h o u t a n y c h an g e             funeral and estate tax costs. As such, the
       whatsoever in the                          Tax Court concluded decedent’s inter
       underlying pool of assets or               vivos transfers to the family limited
       prospect for profit . . . there            partnership were not transfers for
       exists noth ing b ut a                     consideration within the meaning of §
       circuitous “recycling” of                  2036(a):
       value. We are satisfied that
                                                         We see no distinction of
       such instances of pure
                                                         consequence between the
       recycling do not rise to the
                                                         scenario analyzed in Estate
       level of a payment of
                                                         of Harper v. Commissioner,
       consideration.       To hold
                                                         supra, and that of the
       oth erwise would open

                                             14
       present case.             Decedent           $12,000. The Norwood ranch was not
       contributed more than 99                     otherwise operated as an income
       percent of the total property                producing business, either before or after
       placed in the [family limited                Robert Thompson contributed the property
       partnership] and received                    to the partnership. Robert Thompson
       back an interest the value of                apparently generated some income from
       w h ich derived almost                       the sale of mules raised on the property,
       exclusively from the assets                  but income from these sales went to
       he had just assigned.                        Robert directly and not to the partnership.
       Furthermore, the [family                     Nevertheless, the Thompson Partnership
       limited partnership] patently                paid an annual “management fee” ranging
       fails to qualify as the sort of              between $23,625 and $47,500 to the
       f u n c t io n i n g busin ess               Thompson Corporation, which in turn paid
       e n t e r p ri s e t h a t co u l d          Robert Thompson an annual salary of
       potentially inject intangibles               $32,001. We see no error in the Tax
       that would lift the situation                Court’s finding this putative business
       beyond mere recycling.                       arrangement amounted to no more than a
                                                    contrivance, and did not constitute the type
Strangi, 85 T.C.M . at 1344.
                                                    of legitimate business operations that
        For essentially the same reasons, we        might provide a substantive non-tax
conclude there was no transfer for                  benefit for transferring assets to the
consideration within the meaning of §               Thompson Partnership.
2036(a). The record demonstrates that
                                                            The operations of the Turner
neither the Turner Partnership nor the
                                                    Partnership were more extensive, but still
Thompson Partnership engaged in any
                                                    fail to provide sufficient objective indicia
valid, functioning business enterprise. As
                                                    of a legitimate business operation.
the estate concedes “the primary objective
                                                    Although the Turner Partnership made
of the partners in forming the Partnerships
                                                    numerous loans to Betsy Turner’s children
was not to engage in or acquire active
                                                    and grandchildren, this lending activity
trades or business.”          Although the
                                                    appears largely testamentary in practice.
partnerships did conduct some economic
                                                    Loans were not made to anyone outside
activity, these transactions did not rise to
                                                    the extended Turner family, interest
the level of legitimate business operations.
                                                    payments were often late or never paid,
       In the case of the Thompson                  and the partnership took no enforcement
Partnership, the only “active operations”           action against delinquent debtors. We
claimed by the estate involved leasing the          agree with the Tax Court that these lending
Norwood, Colorado ranch back to its                 activities “lacked any semblance of
contributing partner and former resident,           business transactions,” and were
Robert Thompson, for an annual fee of               “testamentary in nature, using decedent’s


                                               15
money as a source of financing for the                with a third-party. 22 However, based on
needs of individual family members, not               the record evidence in this case, we
for business purposes.” Thompson, 84                  conclude that any legitimizing effect of the
T.C.M. at 388. Furthermore, the partners              Turner Partnership’s investment in the
a m e n d e d the T urner P artner ship               Lewisville Properties is overwhelmed by
agreement, retroactive to April 23, 1993,             the testamentary nature of the transfer and
to allocate all gains and losses from, and            subsequent operation of the partnership.
distribution of real estate contributed to the
                                                                 In addition to the lack of legitimate
partnership, to the individual contributing
                                                      business operations, the form of the
partner. Aside from decedent’s securities,
                                                      t r a n sf e r r e d a s s e ts — p r e d o m i n a t e ly
the Turner Partnership consisted primarily
                                                      marketable securities—is significant to our
of real estate assets. Directing all income
                                                      assessment of the potential non-tax
derived from the partnership’s real estate
                                                      benefits available to decedent as a result of
assets          to the contributing
                                                      the transfer. Other than favorable estate
p artn er— including any appreciation
                                                      tax treatment resulting from the change in
r e a l i z e d i n t h e sa l e o f s u ch
                                                      form, it is difficult to see what benefit
assets 21 —denied decedent any non-tax
                                                      could be derived from holding an untraded
benefit potentially derived from the assets
                                                      portfolio of securities in this family limited
collected in the partnership.
                                                      partnership with no ongoing business
        The Turner Partnership’s $186,000             operations. Compare Church v. United
investment in the Lewisville Properties               States, No. SA-97-CA-0774-OG, 2000 U.S.
gives us some pause, but ultimately does              Dist. LEXIS 714 (W.D. Tex. Jan 18,
not alter our conclusion. Unlike the other            2000), aff’d without published opinion,
activities of the Turner and Thompson                 268 F.3d 1063 (5th Cir. 2001) (applying §
Partnerships, this investment seems to                2036(a) exception to assets transferred to
qualify as a legitimate business transaction          a limited partnership that consolidated
                                                      undivided ownership interests and
                                                      administration of a family ranching
     21
       This is evident in the sale of the             business); Estate of Stone v. Comm’r, T.C.
Woodlands Property. When Betsy and                    Memo 2003-309; 2003 Tax Ct. Memo
George Turner sold the 22-acre                        LEXIS 312; 86 T.C.M. (CCH) 551 (2003)
Woodlands Property parcel along with                  (applying § 2036(a) exception to assets
their Woodside Farm residence, they                   transferred to family partnerships operated
allocated to the Turner Partnership an
amount of the Woodside Farm/Woodland
                                                         22
Property sale proceeds exactly equal to the               With respect to the Turner Partnership
Turner Partnership’s basis in the                     therefore, the Tax Court erred in finding
Woodlands Property. This effectively                  the “partnerships did not engage in
eliminated any gain or loss in the sale               transactions with anyone outside the
price.                                                family.” Thompson, 84 T.C.M . at 388.

                                                 16
as going concern businesses in order to               consideration’ for the purposes of either
transfer management of businesses to                  the estate or gift tax.”).
children); Kimbell v. United States, 371
                                                              That said, the Tax Court has held
F.3d 257, 267-68 (5th Cir. 2004) (applying
                                                      that the dissipation of value resulting from
§ 2036(a) exception to working oil and gas
                                                      the transfer of marketable assets to a
interests transferred to a family partnership
                                                      closely-held entity will not automatically
to provide, among other things, centralized
                                                      constitute inadequate consideration for
management and protection from personal
                                                      purposes of § 2036(a). See Harper, 83
environmental liabilities). The form of
                                                      T.C.M. at 1654 (noting partnership
assets transferred supports our conclusion
                                                      interests may constitute “adequate and full
there was no transfer for consideration
                                                      consideration” if there is also a “potential
within the meaning of § 2036(a).
                                                      [for] intangibles stemming from pooling
        The estate claims decedent’s                  for joint enterprise”); Stone, 86 T.C.M. at
transfer of liquid, marketable securities             581 (concluding the lack of marketability
and other assets to the family limited                discount applied to limited partnership
partnerships reduced the value of those               interests does not, on its own, result in
assets by 40% because of the resulting lack           inadequate consideration for purposes of §
of control and marketability. Indeed, as              2036).
the Tax Court found, decedent’s financial
                                                              Nonetheless, we believe this sort of
advisors presented this reduction in value
                                                      dissipation of value in the estate tax
for estate tax purposes as one of the
                                                      context should trigger heightened scrutiny
primary advantages of using the Fortress
                                                      into the actual substance of the transaction.
Plan. In one sense, claiming an estate tax
                                                      Where, as here, the transferee partnership
discount on assets received in exchange
                                                      does not operate a legitimate business, and
for an inter vivos transfer should defeat the
                                                      the record demonstrates the valuation
§ 2036(a) exception outright. If assets are
                                                      discount provides the sole benefit for
transferred inter vivos in exchange for
                                                      converting liquid, marketable assets into
other assets of lesser value, it seems
                                                      illiquid partnership interests, there is no
reasonable to conclude there is no transfer
                                                      transfer for consideration within the
for “adequate and full consideration”
                                                      meaning of § 2036(a).
because the decedent has not replenished
the estate with other assets of equal value.                               B.
See Wheeler v. United States, 116 F.3d
                                                             We also conclude decedent’s
749, 762 (5th Cir. 1997) (“[U]nless a
                                                      transfers to the family limited partnership
transfer that depletes the transferor’s estate
                                                      do not constitute “bona fide sales” within
is joined with a transfer that augments the
                                                      the meaning of § 2036(a), although for
estate by a commensurate (monetary)
                                                      somewhat different reasons than the
amount, there is no ‘adequate and full
                                                      C o m m i s s i o n e r s u g g e s ts . The
                                                      Commissioner argues there was no “bona

                                                 17
fide sale” in this case because decedent                   That said, however, neither the
“stood on both sides of the transaction” as        Internal Revenue Code nor the governing
transferor and a limited partner of the            Treasury Regulations define “bona fide
family partnerships. The Commissioner’s            sale” to include an “arm’s length
position is supported by several cases             transaction.”       Treasury Regulation
which have concluded that a “bona fide             20.2036-1(a) defines “bona fide sale for an
sale” requires an arm’s length bargain.            adequate and full consideration” as a
See, e.g., Bank of New York v. United              transfer made “in good faith” and for a
States, 526 F.2d 1012, 1016 (3d Cir. 1975)         price that is “adequate and full equivalent
(“[T]he value of the claim settled by the          reducible to a money value.” 26 C.F.R. §
estate may not be deducted if the                  20.2036-1(a) (referring to 26 C.F.R. §
agreement on which the claim was based             20.2043-1(a)).      Based in part on an
was not bargained at arm’s length.”);              interpretation of this regulation, the Court
Harper, 83 T.C.M. at 1653 (denying the §           of Appeals for the Fifth Circuit concluded
2036 exception, in part, where there was           a “bona fide sale” only requires “a sale in
no “arm’s length bargaining” because               which the decedent/transferor actually
decedent “stood on both sides of the               parted with her interest in the assets
transaction”); Strangi, 85 T.C.M. at 1343          transferred and the partnership/transferee
(finding no bona fide sale where “decedent         actually parted with the partnership
essentially stood on both sides of the             interest issued in exchange.” See Kimbell,
transaction”). As a practical matter, an           371 F.3d at 265. The court reasoned:
“arm’s length” transaction provides good
                                                          [J]ust because a transaction
evidence of a “bona fide sale,” especially
                                                          takes place between family
with intra-family transactions. But some
                                                          members does not impose
courts have also found a bargained-for
                                                          an additional requirement
exchange in the family context when the
                                                          not set forth in the statute to
interests of individual family members
                                                          establish that it is bona fide.
were sufficiently divergent. See, e.g.,
                                                          A transaction that is a bona
Bank of New York, 526 F.2d at 1017
                                                          fide sale between strangers
(“Even a family agreement, although
                                                          must also be bona fide
achieved without apparent bitterness, has
                                                          between members of the
been regarded as bargained for when
                                                          same family. In addition,
members of the family had interests
                                                          the absence of negotiations
contrary to those of other family
                                                          between family members
members.”); Stone, 86 T.C.M. at 579
                                                          over price or terms is not a
(finding an arm’s length bargain in intra-
                                                          compelling factor in the
family transaction where each family
                                                          determ ination . . .
member retained independent counsel).
                                                          particularly when the



                                              18
       exchange value is set by                      partnerships. See id. (“[The] existence of
       objective factors.                            the family relationship does not create a
                                                     status which itself determines tax
Id. at 263 (discussing Wheeler, 116 F.3d
                                                     questions, but is simply a warning that
749) (internal citations omitted).
                                                     things may not be what they seem.”);
        We similarly believe a “bona fide            Kimbell, 371 F.3d at 265 (“[W]hen the
sale” does not necessarily require an                transaction is between family members, it
“arm’s length transaction” between the               is subject to heightened scrutiny.”).
transferor and an unrelated third-party. Of
                                                             Moreover, the facts here are
course, evidence of an “arm’s length
                                                     distinguishable from those Tax Court cases
transaction” or “bargained-for exchange”
                                                     which have denied the “bona fide sale”
is highly probative to the § 2036 inquiry.
                                                     exception after finding decedent “stood on
But we see no statutory basis for adopting
                                                     both sides of the transaction.”         For
an interpretation of “bona fide sale” that
                                                     example, in Harper, the Tax Court was
would automatically defeat the § 2036
                                                     “unable to find any other independent
exception for all intra-family transfers.
                                                     party involved in the creation” of the
Wheeler, 116 F.3d at 766 (“Unless and
                                                     family partnerships. 83 T.C.M. at 1653.
until the Congress declares that intrafamily
                                                     The Tax Court found that “[d]ecedent,
transfers are to be treated differently . . .
                                                     independently of any other anticipated
we must rely on the objective criteria set
                                                     interest-holder, determined how the
forth in the statute and Treasury
                                                     [partnership] was to be structured and
Regulations to determine whether a sale
                                                     operated, decided what property would be
comes within the ambit of the exception to
                                                     contributed to capitalize the entity, and
section 2036(a).”).
                                                     declared what interest the Trust would
       We are mindful of the mischief that           receive therein.” Id. Likewise in Strangi,
may arise in the family estate planning              decedent’s attorney-in-fact prepared the
context. As the Supreme Court observed,              family partnership structure, including the
“the family relationship often makes it              assets c o ntr ib ute d , w i t h o u t a n y
possible for one to shift tax incidence by           participation from the contributing family
surface changes of ownership without                 members. 85 T.C.M. at 1344. In both
disturbing in the least his dominion and             cases, the decedent contributed over 99%
control over the subject of the gift or the          of the total partnership assets. See id.;
purposes for which the income from the               Harper, 83 T.C.M. at 1653. Here, by
property is used.” Comm’r v. Culbertson,             contrast, both the formation and funding of
337 U.S. 733, 746 (1949). But such                   the Turner and Thompson Partnerships
mischief can be adequately monitored by              involved substantial participation by
heightened scrutiny of intra-family                  decedent’s family members and their
transfers, and does not require a uniform            respective spouses.
prohibition on transfers to family limited


                                                19
        However, while a “bona fide sale”             because neither the Thompson Partnership
does not necessarily require an “arm’s                nor Turner Partnership conducted any
length transaction,” it still must be made in         legitimate business operations, nor
good faith. See 26 C.F.R. § 20.2043-1(a).             provided decedent with any potential non-
A “good faith” transfer to a family limited           tax benefit from the transfers.
partnership must provide the transferor
                                                                         V.
some potential for benefit other than the
potential estate tax advantages that might                   For the foregoing reasons, we will
result from holding assets in the                     affirm the decision of the Tax Court.
partnership form. Even when all the “i’s
are dotted and t’s are crossed,” a
transaction motivated solely by tax
planning and with “no business or
corporate purpose . . . is nothing more than
a contrivance.” Gregory v. Helvring, 293
U.S. 465, 469 (1935). “To hold otherwise
would be to exalt artifice above reality and
to deprive the statutory provision in
question of all serious purpose.” Id. As
discussed in the context of “adequate and
full consideration,” objective indicia that
the partnership operates a legitimate
business may provide a sufficient factual
basis for finding a good faith transfer. But
if there is no discernable purpose or
benefit for the transfer other than estate tax
savings, the sale is not “bona fide” within
the meaning of § 2036. See, e.g., id.
(ignoring a transaction for estate tax
purposes after finding “no business or
corporate purpose” for the transaction);
compare Kimbell, 371 F.3d at 267 (finding
a “bona fide sale” where the transaction
was entered into for “substantial business
and other non-tax reasons”).
       After a thorough review of the
record, we agree with the Tax Court that
decedent’s inter vivos transfers do not
qualify for the § 2036(a) exception


                                                 20
                                                     unassailable inasmuch as section 2036(a)
                                                     sets the standard for “adequate and full
Turner v. Commissioner of Internal
                                                     consideration” in the unmistakable term of
Revenue, No. 03-3173
                                                     “money or money’s worth” and thus does
                                                     not permit the use of intangible
                                                     n o n m o n e t a r y c o n s i d e r a t i o n s in
GREENBERG, Circuit Judge, concurring.
                                                     determining value. Therefore, a transfer of
                                                     $1,000,000 in assets will be for an
                                                     adequate and full consideration if it is for
           I join in Chief Judge Scirica’s
                                                     $1,000,000 in money. If a transfer is for
opinion in this case without reservation but
                                                     property then the “money’s worth” of the
want to add a few thoughts with respect to
                                                     property should be of the same value as
the issue of whether we are dealing with
                                                     money received for the transferred
transfers for “adequate and full
                                                     property would have had to have been, i.e.,
consideration in money or money’s
                                                     $1,000,000.23
worth.” Preliminarily on this point I think
that Chief Judge Scirica gets to the heart of
                                                               In this case, inasmuch as the
the matter by noting that “[i]n one sense,
                                                     transfers were not for money the exception
claiming an estate tax discount on assets
                                                     can apply only if the transfers were for
received in exchange for an inter vivos
                                                     property that can be regarded as being for
transfer should defeat the § 2036(a)
                                                     “money’s worth.”           Yet one of the
exception outright [for] [i]f assets are
                                                     motivations for the transfers was that there
transferred inter vivos in exchange for
                                                     would be a substantial discount, claimed
other assets of lesser value, it seems
                                                     by the estate to be 40%, when the assets
reasonable to conclude that there is no
                                                     transferred instead of being valued directly
t r a n sf e r for ‘adequate and f ull
                                                     were valued indirectly as the direct
consideration’ because the decedent has
                                                     valuation for estate tax purposes was of
not replenished the estate with other assets
                                                     the estate’s interests in the partnerships
of equal value.” Maj. opinion at 17.
                                                     and corporations holding the assets. To
                                                     me nothing could be clearer than a
       This conclusion is consistent with
                                                     conclusion that if the discount was
Estate of D’Ambrosio v. Commissioner,
                                                     justified (even if in a lesser percentage
101 F.3d 309, 312 (3d Cir. 1996) (quoting
                                                     than the estate claimed) in a valuation
Estate of Frothingham v. Commissioner,
                                                     sense then the decedent could not have
60 T.C. 211, 215 (1973)), in which we
                                                     r e c e iv e d a n a d e q u a t e a n d f u ll
indicated that a transfer is for adequate and
                                                     consideration for his transfers in terms of
full consideration when “the transferred
property is replaced by other property of
equal value received in exchange.” Our
                                                        23
conc lusion in D’A mb rosio w as                         I do not suggest that absolute parity is
                                                     required.

                                                21
“money’s worth.” Thus, I think it clear                     [The       decedent’s]
that the Fortress Plan as applied in a case                 contribution did not enhance
in which the decedent retained for his life                 any other partner’s interests.
the enjoyment from the transferred                          None of the partners
property should be completely ineffective                   received any property from
to create a tax benefit by reducing the                     [the decedent] directly or
value of the decedent’s estate as the                       indirectly when the
transferred property must be recaptured by                  Partnerships were formed.
the estate for estate tax purposes.                         Therefore, no gratuitous
Accordingly, in joining in Chief Judge                      transfer occurred upon the
Scirica’s opinion I agree with it on the                    formation         of     the
consideration issue.                                        Partnerships and section
                                                            2036(a)(1) is inapplicable.
       I, however, wish to make three
additional points. The first point relates to        Appellant’s br. at 24 (footnote omitted).
the estate’s vigorous argument, which                The estate’s predicate for the argument is
Chief Judge Scirica does not address, that           that the gift tax and estate tax are in pari
the decedent did not make a gift for gift            materia so that a transfer made for an
tax purposes upon the formation of the               adequate and full consideration for gift tax
partnerships and therefore there must have           purposes also is made for an adequate and
been an adequate and full consideration for          full consideration under section 2036(a).
his transfers. The estate explains its               The Commissioner answers that “[t]here
argument as follows:                                 were no gifts on formation [of the
                                                     partnerships] not because there was full
              Here, the IRS has not                  consideration, but because there were no
       contended nor did the Tax                     gifts at all. Decedent’s retention of control
       Court find that there was a                   over the assets is inconsistent with a
       gift on formation of the                      donative transfer.” Appellee’s br. at 47
       Partnerships and no such                      n.12.
       gift was m ade .          No
       gratuitous transfer occurred                          The Commissioner is not being
       upon the formation of the                     inconsistent in contending that there was
       Partnerships because each                     not an adequate and full consideration for
       participant’s interest in the                 the transfers under section 2036(a) while
       Partnerships            was                   acknowledging that the decedent did not
       proportional to the capital                   make taxable gifts upon the creation of the
       contributed. The partners                     partnerships. Even if the estate’s claim
       received a pro-rata interest                  that the discount is justified would be well
       in each Partnership equal to                  founded were it not for section 2036(a),
       their pro-rata contribution.                  that assumption does not mean that the

                                                22
value decedent lost upon the creation of                       Here, however, we have a narrow
the partnerships went to someone else.                 situation in which the partnerships were
Rather, the recycling of the assets so that            created in furtherance of what the estate
they were valued indirectly rather than                calls an “estate plan” with “[t]he primary
directly simply caused them to lose value.             purposes . . . to provide a vehicle for gift
Therefore, precisely as the Commissioner               giving, to preserve assets and ultimately to
contends, there were no gifts at all when              transfer the partnership interests . . . in an
the partnerships were formed. Indeed, as               orderly and efficient fashion.” Appellant’s
the estate’s brief plainly reveals, the estate,        br. at 5. In addition, as the Tax Court
perhaps not recognizing the significance of            pointed out, the parties intended that
its concession, acknowledges that none of              implementation of the plan save taxes by
the partners received any property from the            lowering the taxable value of the estate.
decedent “directly or indirectly” when the             Furthermore, as the estate acknowledges,
partnerships were formed. Thus, there                  “the primary objective of the partners in
were no gifts and the estate’s observation             forming the Partnerships was not to
that the gift tax and estate tax are in pari           engage in or acquire active trades and
materia is immaterial as this relationship             businesses, [though] the Partnerships were
does not change the fact that the decedent             involved in various investments and
enjoyed the property he transferred until              activities.”    Id. at 29.    In fact, the
his death and did not receive adequate and             Commissioner emphasizes that the “estate
full consideration for it in money’s worth.            concedes that the partnerships never
                                                       intended to carry on any sort of active
       The second point I make is that the             trade or business,” and he points out that
logic of the court in this case should not be          “the partnerships [did not] carry on any
applied too broadly and I see no reason                sort of common investment activity of any
why it will be.           In this regard I             significance.” Appellee’s br. at 45-46. It
acknowledge that there surely are                      therefore appears that the Commissioner
numerous partnerships in which a partner               implicitly recognizes that there are
dies after contributing assets to the                  limitations on his argument.
partnership and therefore has made a
transfer that arguably could be said to be                       I make this second point as I do not
within section 2036(a). Certainly the court            want it thought that the court’s reasoning
is not holding that in all such                        here should be applied in routine
circumstances section 2036(a) could be                 commercial circumstances and in this
applicable requiring that the valuation of             regard I note that Chief Judge Scirica
the decedent’s interest at death be made by            observes that the partnerships do not
looking through his interest in the                    o p e r a t e l e g i ti m a t e b u s in e s s e s.
partnership directly to its assets, thus               Accordingly, I believe that the court’s
disregarding the partnership’s existence               opinion here should not discourage
for purposes of estate tax valuation.                  transfers in ord inary com merc ial

                                                  23
transactions, even within families. Cf.             similar to that of the estate that I quoted
Estate of Strangi, 115 T.C. 478, 484                above, the court indicated:
(2000) (“Family partnerships have long
been recognized where there is a bona fide                         [The Commissioner]
business carried on after the partnership is               nonetheless argues that,
formed.”), aff’d in part, rev’d in part on                 because Mr. Stone and M s.
other grounds, 293 F.3d 279 (5th Cir.                      Stone received respective
2002).     Rather, we are addressing a                     partnership interests in each
situation in which the family partnerships                 of the Five Partnerships the
obviously were used as tax dodges in                       value of which, taking into
circumstances that section 2036(a) was                     account approp riate
intended to thwart. Therefore, the result                  discounts, was less than the
the court reaches on the adequate and full                 value of the respective
consideration issue readily accommodates                   assets that they transferred
the estate’s observation that “[a]n interest               to each such partnership,
received in a closely held business entity                 the y did not receiv e
typically has a value less than a pro rata                 adequate         and full
part of the contributed assets for reasons                 consideration for the assets
relating to lack of marketability, minority                transferred.             [The
interest and the like.” Appellant’s reply                  Commissioner’s] argument
br. at 14.                                                 in effect reads out of section
                                                           2036(a) the exception for ‘a
        This second point is important                     bona fide sale for an
because courts should not apply section                    adequate and full
2036(a) in a way that will impede the                      consideration in money or
socially important goal of encouraging                     money’s worth’ in any case
accumulation of capital for commercial                     where there is a bona fide,
enterprises. Therefore in an ordinary                      arm’s-length transfer of
commercial context there should not be a                   property to a business entity
recapture under section 2036(a) and thus                   (e.g., a partnership or a
the value of the estate’s interest in the                  corporation) for which the
entity, though less than the value of a pro                transferor rece ives an
rata portion of the entity’s assets, will be               interest in such entity (e.g., a
determinative for estate tax purposes. This                partnership interest or stock)
case simply does not come within that                      that is proportionate to the
category.                                                  fair market value of the
                                                           property transferred to such
       My third point relates to Estate of                 entity and the determination
Stone v. Commissioner, 86 T.C.M. (CCH)                     of the value of such an
551, 581 (2003), in which, in language                     interest takes into account

                                               24
                 a p p r o p r i a t e
                 discounts. We reject
                 such an argument by
                                                      adequate and full
                 [the Commissioner]
                                                      consideration under §
                 that reads out of
                                                      2036(a). This conflation
                 section 2036(a) the
                                                      misses the mark:              The
                 e x c e p t io n th at
                                                      b u s i n e s s d e c i s io n t o
                 Congress expressly
                                                      exchange cash or other
                 prescribed when it
                                                      assets for a transfer-
                 enacted that statute.
                                                      restricted, non-managerial
                                                      interest in a limite d
The Commissioner correctly recognizes
                                                      partnersh ip involves
that Stone is inconsistent with his position
                                                      financial considerations
here and the estate understandably relies
                                                      other than the purchaser’s
on Stone. I reject Stone on the quoted
                                                      ability to turn right around
point as the Commissioner’s position in no
                                                      and sell the newly acquired
way reads the exception out of section
                                                      limited partnership interest
2036(a) and the Tax Court does not
                                                      for 100 cents on the dollar.
explain why it does.24         Rather, the
                                                      Investors who acquire such
                                                      interests do so with the
                                                      expectation of realizing
   24
      In Kimbell v. United States, 371 F.3d           benefits           such        as
257, 265-66 (5th Cir. 2004), the court                m a n a ge me nt expe rtis e ,
quoted the above language from Stone                  security and preservation of
with approval and went on to point out                assets, capital appreciation
that:                                                 and avoidance of personal
                                                      liability.      Thus there is
                   We would only add                  nothing inconsiste nt in
        to the Tax Court’s rejection                  acknowledging, on the one
        of the government’s                           hand, that the investor’s
        inconsistency argument that                   dollars have acquired a
        it is a classic mixing of                     limited partnership interest
        apples and oranges: The                       at arm’s length for adequate
        government is attempting to                   and full consideration and,
        e q u a te t h e v e n e ra b le              on the other hand, that the
        ‘ w i l li n g b u y e r - wil l i n g        asset thus acquired has a
        seller’ test of fair market                   present fair market value,
        value (which applies when                     i . e . , i m m ed i a t e s a l e
        calculating gift or estate tax)               potential, of substantially
        with the proper test for                      less than the dollars just

                                                 25
Commissioner seeks to apply the exception
precisely as written as his position should
not be applied in ordinary commercial
circumstances even though the decedent
may be said to have enjoyed the property
until his death.

      Judge Rosenn         joins   in   this
concurring opinion.




              paid--a classic
              informed trade-off.

       I believe, however, that Kimbell
does not take into account that to avoid the
recapture provision of section 2036(a) the
property transferred must be “replaced by
property of equal value that could be
exposed to inclusion in the decedent’s
gross estate” D’Ambrosio, 101 F.3d at
313 (quoting Frothingham, 60 T.C. at 216
(omitting emphasis)), on a “money or
money’s worth” basis.

                                               26
