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Strangi v. CIR
PF Shield's comments
This case shows how a ‘good’ asset protection entity (in this case, a limited partnership) can be misused and subsequently fail to protect assets when challenged. Even though an attorney set up the partnership, his lack of expertise in the specialized field of asset protection (which very few attorneys understand!) led him to make two critical mistakes:
IRS Internal Legal Memorandum 199930013.
This IRS Internal Legal Memorandum is mostly good news from the IRS, believe it or not. The Chief of General Litigation of the IRS discusses a court case with an IRS attorney, and tells him that, generally speaking, the IRS cannot seize a single-member LLC’s assets for the tax debt of its owner. (To do so would be reverse-piercing, which is why this ILM is in this section.) The IRS does, however, discuss situations wherein it might be able to convince a judge that reverse-piercing is appropriate. The memo also discusses other alternatives to reverse-piercing, such as obtaining a charging order (which is not very useful, actually), or getting a fraudulent transfer ruling. All in all this is a very informative ILM from an asset protection standpoint.
And now the case...
Strangi vs CIR
Albert Strangi v. Commissioner of Internal Revenue,
417 F.3d 468 (5th Cir. 07/15/2005)
ALBERT STRANGI, Deceased, Rosalie Gulig, Independent Executrix, Petitioner-Appellant, versus COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 03-60992
UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
417 F.3d 468;2005 U.S. App. LEXIS 14497; 2005-2 U.S. Tax Cas. (CCH) P60,506; 96 A.F.T.R.2d (RIA) 5230
July 15, 2005, Filed
SUBSEQUENT HISTORY: As Revised: July 25, 2005.
PRIOR HISTORY: [*1] Appeal from a Decision of the United States Tax Court. Estate of Strangi v. Comm'r, T.C. Memo 2003-145, 2003 Tax Ct. Memo LEXIS 144 (T.C., 2003)
COUNSEL: For ALBERT STRANGI, Deceased, Rosalie Gulig, Independent Executrix, Petitioner- Appellant: George Tomas Rhodus, Norman Arthur Lofgren, Michael C Kelsheimer, Looper Reed & McGraw, Dallas, TX.
For COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee: John A Nolet, Michael J Haungs, US
Department of Justice Tax Division, Washington, DC; Charles
Casazza, Clerk, US Tax Court, Washington, DC; Emily A
Parker, Internal Revenue Service, Washington, DC; Jonathan S
Cohen, US Department of Justice Tax Division Appellate
Section, Washington, DC; Eileen J O'Connor, Assistant
Attorney General, US Department of Justice, Washington, DC.
For AMERICAN COLLEGE OF TRUST AND ESTATE
COUNSEL, Amicus Curiae: Milford B Hatcher, Jr., Jones Day,
Atlanta, GA.
JUDGES: Before REAVLEY, JOLLY, and PRADO,
Circuit Judges.
OPINION BY: E. GRADY JOLLY
OPINION: E. GRADY JOLLY, Circuit Judge:
This case, which comes before us now for a
second time, involves an assessment by the Commissioner of
Internal Revenue of an estate tax deficiency against the
Estate of Albert Strangi. Initially, the Tax Court held for
the Estate. However, we remanded to the Tax Court, [*2]
which reversed its prior holding and decided the case under
I.R.C. § 2036(a). Section 2036(a) provides that transferred
assets of which the decedent retained de facto possession or
control prior to death are included in the taxable estate.
The Tax Court held that Strangi retained enjoyment of the
assets in question, and thus, that the transferred assets
were properly included in the estate. The Estate now appeals
that decision. We find no reversible error, and accordingly
AFFIRM.
I
As failing health began to telegraph that the
inevitable would occur, Albert Strangi transferred
approximately ten million dollars worth of personal assets
into a family limited partnership. Upon his death, Strangi's
Estate filed an estate tax return based on the value of his
interest in that partnership, as opposed to the actual value
of the transferred assets. The Internal Revenue Service
issued a notice of a deficiency of $ 2,545,826 in estate
taxes. Strangi's Estate petitioned the Tax Court for a
redetermination of the deficiency.
After protracted litigation, the Tax Court
found that Strangi had retained an interest in the
transferred assets such that they were properly included
[*3] in the taxable estate under I.R.C. § 2036(a), and
entered an order sustaining the deficiency. Our review of
the Tax Court's decision requires an inquiry into the
structure of the limited partnership established by Strangi
and the extent to which he retained enjoyment of partnership
assets. First, however, some account of antecedents is in
order.
A
Albert Strangi died on October 14, 1994 in
Waco, Texas. He was survived by four children from his first
marriage: Jeanne, Rosalie, Albert Jr., and John
(collectively, the "Strangi children"). Rosalie was married
to Michael J. Gulig, a local attorney. In 1965, after
divorcing his first wife, Strangi married Delores Seymour.
Seymour had two daughters, Angela and Lynda, from a prior
marriage (collectively, the "Seymour children"). In 1987,
Strangi and Seymour both executed wills, naming one another
as primary beneficiaries and the Strangi and Seymour
children as residual beneficiaries. That same year, Seymour
began to suffer from a series of medical problems. As a
result, Strangi and Seymour decided to move their residence
from Florida to Waco, Texas. To facilitate the relocation,
Strangi executed a general power of [*4] attorney naming
Gulig as his attorney-in-fact. In July 1990, Strangi
executed a new will, naming the Strangi children as sole
beneficiaries if Seymour predeceased him -- i.e., cutting
out the Seymour children. The new will designated Strangi's
daughter Rosalie and a bank, Ameritrust, as co-executors of
the Estate. Seymour died in December 1990.
In 1993, Strangi began to experience health
problems. He had surgery to remove a cancerous mass from his
back, was diagnosed with a neurological disorder called
supranuclear palsy, and had prostate surgery. At this point,
Gulig took over management of Strangi's daily affairs. Gulig
testified that, on several occasions between 1990 and 1993,
he discussed his concerns regarding Strangi's Estate with
retired Texas probate Judge David Jackson, who was a
personal friend. Gulig said that he felt "confident" that
the Seymour children would either sue Strangi's Estate or
contest the will. He also claimed to have been concerned
about "horrendous executor fees" that he believed Ameritrust
would charge. Further, Gulig said he worried about the
possibility of a tort claim by Strangi's housekeeper for
injuries she sustained in an accident while caring [*5] for
Strangi. He testified that Judge Jackson advised him that
his fears were "very valid" and that he "had to do
something" to protect the Strangi Estate.
B
On August 11, 1994, Gulig attended a seminar
provided by Fortress Financial Group, Inc., explaining the
so-called "Fortress Plan". The Fortress Plan was billed as a
means of using limited partnerships as a tool for (1) asset
preservation, (2) estate planning, (3) income tax planning,
and (4) charitable giving. Fortress marketed the plan as a
means of, among other things, "lowering the taxable value of
your estate" by means of "well established court doctrines
which recognize that the value of a limited partnership
interest is worth less than the value of the assets owned by
the limited partnership". In brief, the plan instructed
parties to "sell" their assets in exchange for an interest
in a newly-created limited partnership. Because a
partnership interest is worth less for tax purposes than a
proportional share of the partnership's assets -- due to
lack of direct control and non-liquidity -- this "exchange"
would reduce the taxable value of the estate. The next day,
Gulig, acting under power of attorney on behalf of Strangi:
[*6] (1) prepared the Agreement of Limited Partnership of
the Strangi Family Limited Partnership ("SFLP"); (2)
prepared and filed the Articles of Incorporation of Stranco,
Inc. ("Stranco"); (3) transferred 98% of Strangi's assets n1
-- valued at $ 9,932,967 -- to SFLP in exchange for a 99%
limited partner interest; (4) transferred $ 49,350 of
Strangi's assets to Stranco in exchange for 47% of Stranco's
common stock; (5) facilitated the purchase of the remaining
53% of Stranco's common stock by the four Strangi children
for $ 55,650; (6) issued a check from Stranco for a 1%
general partner interest in SFLP.
[*7]
The result of Gulig's efforts was a
three-tiered entity, with SFLP -- and the roughly $ 10
million in
assets Strangi had transferred into it -- at the top. The
SFLP partnership agreement provided that
Stranco, which owned a 1% general partnership interest in
SFLP, had sole authority to conduct
SFLP's business affairs. Strangi owned a 99% interest in
SFLP, but was a limited partner, and
thus had no formal control.
Stranco itself was a Texas corporation. Strangi owned 47% of
Stranco's common stock; each of
his four children owned a 13% share. Stranco's articles of
incorporation named Strangi and the
four Strangi children as the initial board of directors. On
August 17, the five met to execute the
corporate bylaws, a shareholder agreement, and an
authorization to employ Gulig as manager of
Stranco.
On August 18, Stranco made a corporate gift of 100 shares --
a 1/4 of one percent stake -- to the
McLennan Community College Foundation. Gulig later testified
that he understood that the gift
would improve the asset protection features of the Stranco/SFLP
structure. The implementation
of the "Fortress Plan" was thus completed.
Following Strangi's death in October 1994, Gulig asked Texas
[*8] Commerce Bank ("TCB", a
successor in interest to Ameritrust) to decline to serve as
executor of the Estate. To that end,
Gulig claims to have issued a "threat that no distributions
would be made from SFLP to pay
executor fees". After receiving indemnification from the
Strangi children, TCB agreed. Strangi's
will was admitted to probate in April 1995 with Rosalie
Gulig as the sole executor.
C
Both prior to and after Strangi's death, SFLP
made various outlays, both monetary and in-kind, to
meet his needs and expenses. In September and October of
1994, SFLP distributed $ 8,000 and
$ 6,000, respectively, to Strangi. On both occasions, SFLP
made proportional distributions -- $
80.81 and $ 60.61, to be precise -- to its general partner,
Stranco. The Commissioner suggests
that these payments to Strangi were necessary because, after
the transfer to SFLP, Strangi
retained possession of only minimal liquid assets -- i.e.,
two bank accounts with funds totaling $
762. The Estate responds by noting that Strangi received a
monthly pension of $ 1,438 and
Social Security payments of $ 1,559, and that he retained
over $ 187,000 in "liquefiable" assets,
which consisted largely of various brokerage [*9] accounts.
SFLP also distributed approximately $ 40,000 in 1994 to pay
for funeral expenses, estate
administration expenses, and various personal debts that
Strangi had incurred. In 1995 and 1996,
SFLP distributed approximately $ 65,000 to pay for Estate
expenses and a specific bequest made
by Strangi. Moreover, in 1995, SFLP distributed $ 3,187,800
to the Estate to pay federal and
state inheritance taxes. The Estate notes that all of these
disbursements were recorded on
SFLP's books and accompanied by pro rata distributions to
Stranco. The Estate further notes that
it repaid SFLP for the $ 65,000 "advance" in January 1997.
In addition, prior to his death, Strangi continued to dwell
in one of the two houses he had
transferred to SFLP. The Estate notes that SFLP charged rent
for the two months that Strangi
remained in the house. Although the accrued rent was
recorded in SFLP's books, it was not
actually paid until January 1997, more than two years after
Strangi's death.
D
In December 1998, the Internal Revenue
Service issued a notice of deficiency to the Estate,
asserting that it owed $ 2,545,826 in federal estate tax or,
in the alternative, $ 1,629,947 in
federal gift tax. The deficiency [*10] was attributable to
the IRS's determination that Strangi's
interest in SFLP was $ 10,947,343 -- i.e., the actual value
of the assets transferred -- rather than
the $ 6,560,730 that the Estate reported. n2
The Estate petitioned the Tax Court for a
redetermination of the deficiencies. In the Tax Court,
the Commissioner of Internal Revenue contended, inter alia,
that (1) SFLP should be disregarded
because it lacked economic substance and business purpose;
(2) the partnership agreement was
a restriction on the sale or use of the underlying [*11]
property that should be disregarded for
valuation purposes; (3) the fair market value of Strangi's
partnership interest was understated;
and (4) if a discount was appropriate, Strangi had made a
taxable gift on formation of SFLP to the
extent the value of the property transferred exceeded the
value of his partnership interest.
Prior to trial, the Commissioner filed a motion for leave to
amend his answer to include the
alternative theory that, under I.R.C. § 2036(a), Strangi's
taxable estate should include the full
value of the assets he transferred to SFLP and Stranco. The
Tax Court denied the motion. After a
two-day trial, the court held for the Estate, rejecting all
of the Commissioner's proffered reasons
for inclusion of the assets. See Estate of Strangi v.
Commissioner, 115 T.C. 478 (2000) ("Strangi")
I
The Commissioner appealed, inter alia, the
denial of the motion to amend his answer. This court
affirmed in part and reversed in part, and remanded the case
to the Tax Court with instructions
that it either "set forth its reasons for ... denial of the
Commissioner's motion for leave to amend"
or "reverse its denial of the Commissioner's [*12] motion,
permit the amendment, and consider
the Commissioner's claim under § 2036". Gulig v. Comm'r, 293
F.3d 279, 282 (5th Cir. 2002).
On remand, the Tax Court opted to permit the amendment. The
parties submitted additional
briefs on the § 2036(a) issue and the Tax Court entered its
opinion in May 2003, finding in favor
of the Commissioner, and upholding the initially-assessed
estate tax deficiency. See Estate of
Strangi v. Commissioner, T.C. Memo 2003-145 (2003) ("Strangi
II"). The Estate now appeals the
decsion of the Tax Court.
II
The Strangi Estate advances two primary
arguments. Both hinge on the application of I.R.C. §
2036(a) to the facts at hand. Section 2036(a) provides:
The value of the gross estate shall include the value of all
property to the extent of any interest
therein 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
money's worth), by trust or otherwise, under which he has
retained for his life or for any period not ascertainable
without reference to his
death or for any period which [*13] does not in fact end
before his death
(1) the possession or enjoyment of, or the right to the
income from, the property, or
(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.
First, the Estate contends that the Tax Court erred in
holding that Strangi retained "possession or
enjoyment" of the property he transferred to SFLP or the
right to designate who would possess or
enjoy it. If Strangi did not retain such an interest, §
2036(a) does not apply. Second, the Estate
contends that, even if Strangi retained possession or
enjoyment of the assets, the Tax Court
erred in holding that the transfer did not fall within the
"bona fide sale" exception to § 2036(a).
A
The core of the Estate's argument on appeal
is that the Tax Court erred in concluding that Strangi
retained possession or enjoyment of the assets he
transferred to SFLP. It follows, the Estate
contends, that the Tax Court erred in holding that the
assets were includible in the taxable estate
under § 2036(a).
Section 2036(a) is one of several provisions of the Internal
Revenue Code intended to prevent
[*14] parties from avoiding the estate tax by means of
testamentary substitutes that permit a
transferor to retain lifetime enjoyment of purportedly
transferred property. See Estate of Lumpkin
v. Commissioner, 474 F.2d 1092, 1097 (5th Cir. 1973).
Specifically, § 2036(a) provides that
property transferred by a decedent will be included in the
taxable estate if, after the transfer, the
decedent retains either (1) "possession or enjoyment" of the
transferred property; or (2) "the right
. . . to designate the persons who shall possess or enjoy
the property or the income therefrom". A transferor retains "possession or enjoyment" of property,
within the meaning of § 2036(a)(1), if
he retains a "substantial present economic benefit" from the
property, as opposed to "a
speculative contingent benefit which may or may not be
realized". United States v. Byrum, 408
U.S. 125, 145, 150, 33 L. Ed. 2d 238, 92 S. Ct. 2382 (1972).
IRS regulations further require that
there be an "express or implied" agreement "at the time of
the transfer" that the transferor will
retain possession or enjoyment of the property. 26 C.F.R. §
20.2036-1(a).
In the [*15] case at bar, the benefits retained by Strangi
-- including, for example, periodic
payments made prior to Strangi's death, the continued use of
the transferred house, and the postdeath payment of various
debts and expenses -- were clearly "substantial" and
"present", as
opposed to "speculative" or "contingent". n3 As such, our
inquiry under § 2036(a)(1) turns solely
on whether there was an express or implied agreement that
Strangi would retain de facto control
and/or enjoyment of the transferred assets.
The Commissioner does not suggest that any express agreement
existed. Thus, the precise
question before us is whether the record supports the Tax
Court's conclusion that Strangi and the
other shareholders of Stranco -- that is, the Strangi
children -- [*16] had an implicit agreement by
which Strangi would retain the enjoyment of his property
after the transfer to SFLP. n4
The Tax Court's determination that an implied agreement
existed is a finding of fact and is
reviewed only for clear error. See Maxwell v. Commissioner,
3 F.3d 591, 594 (5th Cir. 1993). A
factual finding is not clearly erroneous if it is plausible
in light of the record read as a whole. See,
e.g.United States v. Villanueva, 408 F.3d 193, 203 (5th Cir.
2005). [*17] As such, we will disturb
the Tax Court's findings of fact only if we are "left with
the definite and firm conviction that a
mistake has been made". Otto Candies, L.L.C. v. Nippon Kaiji
Kyokai Corp., 346 F.3d 530, 533
(5th Cir. 2003) (quoting Allison v. Roberts (In re Allison),
960 F.2d 481, 483 (5th Cir. 1992)).
The Tax Court, in its memorandum opinion, presented a litany
of circumstantial evidence to
support its conclusion. The Estate responds that each of the
factors cited by the court is either
factually erroneous or irrelevant. We consider each of the
evidentiary factors in turn.
First, the Commissioner cites SFLP's various disbursements
of funds to Strangi or his Estate. The
Estate responds that only two of the payments -- those made
in September and October 1994,
totaling $ 14,000 -- should be considered, because the
remaining payments were made after
Strangi's death, and thus "were not as a consequence of
anything Mr. Strangi did".
The Estate's response misses the point. Certainly, part of
the "possession or enjoyment"
of one's assets is the assurance that they will be available
to pay various debts and
expenses upon one's death. n5 And [*18] that assurance is
precisely what Strangi retained
in this case. SFLP distributed over $ 100,000 from 1994 to
1996 to pay for funeral
expenses, estate administration expenses, specific bequests
and various personal debts
that Strangi had incurred. These repeated distributions
provide strong circumstantial
evidence of an understanding between Strangi and his
children that "partnership" assets
would be used to meet Strangi's expenses. n6
[*19]
Second, the Tax Court found "highly probative" Strangi's
"continued physical possession
of his residence after its transfer to SFLP". The Estate
responds by noting that SFLP
charged Strangi rent on the home. As the Tax Court observed,
although the rent charge
was recorded in SFLP's books in 1994, the Estate made no
actual payment until 1997.
Even assuming that the belated rent payment was not a post
hoc attempt to recast
Strangi's use of the house, such a deferral, in itself,
provides a substantial economic
benefit. As such, the Tax Court did not err in considering
Strangi's continued occupancy
of his home as evidence of an implied agreement.
Third, both the Commissioner and the Tax Court point to
Strangi's lack of liquid assets
after the transfer to SFLP as evidence that some arrangement
to meet his expenses must
have been made. As noted supra, Strangi transferred over 98%
of his wealth to SFLP and
afterward retained only $762 in truly liquid assets. The
Estate counters that Strangi had
over $ 187,000 in "liquefiable" securities, which could have
been sold to meet expenses
for the remainder of Strangi's life -- that is, for the
twelve to twenty- four months he was
expected to live [*20] after August 1994. Even this limited
assertion seems dubious,
however, when, as the Tax Court noted, Strangi averaged
nearly $ 17,000 in monthly
expenses over the two months between the creation of SFLP
and his death. See Strangi II,
T.C. Memo 2003-145.
In sum, upon creation of SFLP, Strangi retained assets
barely sufficient to meet his own
living expenses for the low end of his life expectancy --
that is, for about one year --
assuming he was never required to pay rent, estate
administration costs, outstanding
personal debts, funeral expenses, or taxes. At the same
time, Strangi began receiving
substantial monthly payments out of SFLP's coffers. Given
these circumstances, we
cannot say that the Tax Court clearly erred in holding that
Strangi and his children had
some implicit understanding by which Strangi would continue
to use his assets as
needed, and therefore retain "possession or enjoyment"
within the meaning of §
2036(a)(1). n7
[*21]
B
The Estate next contends that, even if the
assets transferred to SFLP do fall within the ambit of §
2036(a)(1), they should nonetheless be excluded from the
taxable estate, based on the "bona
fide sale" exception contained in § 2036(a). For the reasons
set forth below, we disagree.
Section 2036(a) provides an exception for any transfer of
property that is a "bona fide sale for an
adequate and full consideration in money or money's worth".
The exception contains two discrete
requirements: (1) a "bona fide sale", and (2) "adequate and
full consideration". See Estate of
Harper v. Commissioner, T.C. Memo 2002-121. Both must be
satisfied for the exception to apply
1
We turn briefly to the "adequate and full
consideration" requirement. This requirement is met only
where any reduction in the estate's value is "joined with a
transfer that augments the estate by a
commensurate . . . amount". Kimbell, 371 F.3d 257, 262.
Where assets are transferred into a
partnership in exchange for a proportional interest therein,
the "adequate and full consideration"
requirement will generally be satisfied, so long as the
formalities of the partnership entity are
respected. [*22] n8 The Commissioner concedes that such has
been the case here. As such, the
adequate and full consideration prong of the exception is
satisfied and the sole question before
us is whether the transfer was a "bona fide sale".
2
Thus, we turn our attention to the bona fide
sale requirement. The term "bona fide", taken literally,
means "in good faith" [*23] or "without fraud or deceit".
See BLACK'S LAW DICTIONARY, 186
(8th ed. 2004). As we have previously observed, use of a
"bona fide" standard often requires the
courts to assess both the subjective intent of a party and
the objective results of his actions. See,
e.g. United States v. Adams, 174 F.3d 571, 576-77 (5th Cir.
1999).
As we noted in Wheeler v. United States,
however, Congress in 1976 removed a provision from
the Internal Revenue Code that included within the taxable
estate transfers "intended to take
effect in possession or enjoyment" after the decedent's
death. 116 F.3d 749, 765 (5th Cir. 1997).
We observed that Congress's apparent purpose was to
"eliminate factbound determinations
hinging on subjective motive". Id. (quoting Estate of Ekins
v. Commissioner, 797 F.2d 481, 486
(7th Cir. 1986)). As such, since Wheeler, we have held that
whether a transfer of assets is a bona
fide sale under § 2036(a) is a purely objective inquiry. See
Kimbell, 371 F.3d at 263-64.
We have yet to definitively state, however, precisely what
this "objective" inquiry entails. Relying
on language from [*24] Wheeler, the Estate contends that the
"objective" bona fide sale inquiry
requires only that the transfer be for adequate and full
consideration. n9 The exception to §
2036(a), however, already expressly requires that transfers
be for "adequate and full
consideration". As such, the Estate's interpretation of the
exception would render the term "bona
fide" superfluous, and must therefore be rejected. n10
We think that the proper approach was set
forth in Kimbell, in which we held that a sale is bona
fide if, as an objective matter, it serves a "substantial
business [or] other non-tax" purpose. Id. at
267. As noted supra, Congress has foreclosed the possibility
of determining the purpose of a
given transaction based on findings as to the subjective
motive of the transferor. Instead, the
proper inquiry is whether the transfer in question was
objectively likely to serve a substantial nontax
purpose. n11 Thus, the finder of fact is charged with making
an objective determination as to
what, if any, non-tax business purposes the transfer was
reasonably likely to serve at its
inception. We review such a determination only for clear
error. See [*26] Walker Intern. Holdings
Ltd. v. Republic of Congo, 395 F.3d 229, 233 (5th Cir.
2004).
The Estate proffered five discrete non-tax
rationales for Strangi's transfer of assets to SFLP. They
are: (1) deterring potential tort litigation by Strangi's
former housekeeper; (2) deterring a potential
will contest by the Seymour children; (3) persuading a
corporate executor to decline to serve; (4)
creating a joint investment vehicle for the partners; and
(5) permitting centralized, active
management of working interests owned by Strangi. The Tax
Court rejected each of the
rationales as factually implausible. In reviewing for clear
error, we ask only whether the Tax
Court's findings are supported by evidence [*27] in the
record as a whole, not whether we would
necessarily reach the same conclusions.
First, the Estate contends that Strangi transferred his
assets to SFLP partly out of concern that
his former housekeeper, Stone, might bring a tort claim
against the Estate for injuries sustained
on the job. The Tax Court, however, heard admissions by
Gulig that Strangi had paid all of the
medical expenses stemming from Stone's injury and had
continued to pay her salary during her
absence from work.
Still, the Estate contends, had Stone sued, she might have
recovered a substantial amount for
her pain and suffering. Although this possibility cannot be
ruled out entirely, the evidence before
the Tax Court suggests otherwise. Gulig testified, for
example, that Stone and Strangi were "very
close" and admitted that he had never inquired as to whether
there was any evidence that Strangi
actually caused Stone's injury. Further, there is no
evidence that Stone ever threatened to take
any action. As such, the district court did not clearly err
in finding that the transfer of assets into
SFLP did not operate to deter Stone from bringing a tort
claim against the Estate.
Second, the Estate contends that [*28] SFLP served to deter
a will contest by the Seymour
children. The Tax Court concluded that "the Seymour claims
were stale when the partnership was
formed, and they never materialized". Strangi I, 115 T.C. at
485. Further, although the Seymour
children did retain counsel, Gulig admitted that prior to
the creation of SFLP neither they nor their
attorney ever contacted him in regard to Strangi's will, and
that no claim was ever made against
the Estate. Although reasonable minds might differ on this
point, the Tax Court's factual
conclusion -- i.e., that the Seymour children either would
not or could not have mounted a
successful challenge to the will -- is not clearly
erroneous.
Third, the Estate argues that SFLP deterred TCB, the
corporate co-executor of Strangi's will, from
serving, thus saving the Estate a substantial amount in
executor's fees. The Estate presented
Gulig's testimony regarding a meeting with TCB and TCB's
subsequent declining to serve.
Nonetheless, the Tax Court was unpersuaded, noting that it
was "skeptical of the estate's claims
of business purposes related to executor and attorney's
fees". See id.
The Estate concedes that "the reason for [*29] which the
corporate co-executor declined to
serve[] is not reflected in the record". Thus, although a
finder of fact might infer a causal
relationship between the existence of SFLP and TCB's
withdrawal, there is nothing clearly
erroneous in the Tax Court's refusal to do so.
Fourth, the Estate contends that SFLP functioned as a joint
investment vehicle for its
partners. The Tax Court rejected this contention, noting
that the contribution of the Strangi
children, which totaled $ 55,650, was de minimis and thus
properly ignored for purposes
of the bona fide sale requirement. The Tax Court further
concluded that, even if the
contributions of the children were properly considered, SFLP
never made any investments
or conducted any active business following its formation.
See Strangi I, 115 T.C. at 486.
The Estate responds that ignoring a shareholder's
contribution as de minimis runs
contrary to Kimbell, in which we noted that there exists "no
principle of partnership law
that would require the minority partner to own a minimum
percentage interest in the
partnership for . . . transfers to be bona fide". 371 F.3d
at 268. It is certainly true that [*30]
the de minimis contribution of a minority partner is not, in
itself, sufficient grounds for
finding that a transfer of assets to a partnership is not
bona fide. However, where a
partnership has made no actual investments, the existence of
minimal minority
contributions may well be insufficient to overcome an
inference by the finder of fact that
joint investment was objectively unlikely. Such appears to
have been the case here. Thus,
it was not clear error for the Tax Court to reject the
Estate's "joint investment" rationale.
Finally, the Estate contends that SFLP permitted active
management of Strangi's "working
assets". As a preliminary matter, it is undisputed that the
overwhelming majority of the
assets transferred to SFLP did not require active
management. Some seventy percent of
the transfer, for example, consisted of various brokerage
accounts. As the Estate points
out, however, this is not unlike the situation in Kimbell,
where we reversed summary
judgment for the Commissioner based in part on the
transferor's contribution of $ 438,000 In working oil and gas properties, which comprised
approximately 11% of the overall
transfer. See id. at 267. [*31]
The Estate asserts that working assets -- including real
property and interests in real estate
partnerships -- comprise an approximately equal proportion
of the transfer in this case, as in
Kimbell. Assuming this to be an accurate characterization of
Strangi's contribution, this analogy
misses the point. In Kimbell, we reviewed cross motions for
summary judgment on the "bona fide
sale" issue. In reversing the Tax Court, we noted that the
Commissioner "raised no issues of
material fact in its motion for summary judgment and
challenged none of the taxpayer's facts". Id.
at 268-69. Among the unchallenged facts was the taxpayer's
assertion that there had been
significant active management of the transferred oil and gas
properties. Id. at 267-68.
By contrast, this case comes to us after a full trial on the
merits. The Tax Court heard
uncontested evidence that "no active business was conducted
by SFLP following its
formation". Strangi I, 115 T.C. at 486. In short, although
Strangi may have transferred a
substantial percentage of assets that might have been
actively managed under SFLP, the
Tax Court concluded, [*32] based on substantial evidence,
that no such management ever
took place. From this, the Tax Court fairly inferred that
active management was objectively
unlikely as of the date of SFLP's creation. As such, we
cannot say that the Tax Court
clearly erred in rejecting the Estate's "active management"
rationale.
In sum, we hold that the Tax Court did not clearly err in
finding that Strangi's transfer of
assets to SFLP lacked a substantial non-tax purpose.
Accordingly, the "bona fide sale"
exception to § 2036(a) is not triggered, and the transferred
assets are properly included
within the taxable estate. We therefore affirm the estate
tax deficiency assessed against
the Estate.
C
The Estate raises one final matter for our
consideration. It contends that, even if the Tax Court did
not err in holding the transferred assets includible under §
2036(a), it nonetheless abused its
discretion in denying the Estate leave to amend its petition
to include a computational offset,
based on a time-barred income tax refund, under the doctrine
of equitable recoupment. As such,
the Estate requests that we remand the case to the Tax Court
with instructions that it offset the
assessed estate tax deficiency [*33] by $ 304,402 already
paid in income taxes.
The doctrine of equitable recoupment applies where the
Commissioner brings a timely suit for
payment of taxes owed and the taxpayer seeks to offset that
amount by seeking a refund of an
erroneously imposed tax, but the taxpayer's claim is
time-barred. Equitable recoupment allows
the taxpayer to raise the time barred refund claim "in order
to reduce or eliminate the money
owed on the [Commissioner's] timely claim". Estate of
Branson v. Commissioner, 264 F.3d 904,
909 (9th Cir. 2001).
The problem in this case, as the Tax Court points out, is
that the Estate has adopted two
inconsistent positions with respect to its equitable
recoupment argument. To sustain a claim for
equitable recoupment, the taxpayer must show, inter alia,
that the refund sought is, in fact, timebarred.
See Estate of Branson, 264 F.3d at 910 (citing Stone v.
White, 301 U.S. 532, 538, 81 L.Ed. 1265, 57 S. Ct. 851, 1937-1 C.B. 224 (1937)). The
Estate, however, currently has a separate
action pending in the Western District of Texas, in which it
contends that the disputed refund is
not time-barred.
Given this inconsistency, [*34] the Tax Court held that the
Estate failed to show that the refund
was time-barred, and denied its motion to amend. On appeal,
the Estate argues only that this
result is inequitable. Unfortunately, in so doing, it
neglects to address the controlling legal issue
here -- i.e., whether the Tax Court erred in concluding that
the refund was not time-barred, and
thus not subject to equitable recoupment. In sum, because
the Estate has failed to brief us on the
underlying merits of the Tax Court's ruling, it has likewise
failed to show that the Tax Court
abused its discretion in denying the motion to amend.
III
For the foregoing reasons, the decision of
the Tax Court is
AFFIRMED.
Footnotes
n1 The assets that Strangi transferred to
SFLP included, inter alia, (1) brokerage accounts at
Smith Barney and Merrill-Lynch valued at $ 7.4 million; (2)
an annuity valued at $ 276,000; (3)
two life insurance policies valued at a total of $ 70,000;
(4) two houses in Waco; (5) a
condominium in Dallas; (6) a commercial warehouse in Dallas;
and (7) several limited partnership
interests, valued at approximately $ 400,000.
n2 The basis for the discrepancy in this case
-- and the primary rationale for the use of family
limited partnerships generally -- is the IRS's practice of
permitting discounts in the taxable value
of an estate based on a lack of marketability or control of
estate property. See 26 C.F.R. §
20.2031-1(b) ("The value of every item of property
includible in a decedent's gross estate . . . is
its fair market value at the time of the decedent's death .
. .").
n3 See Byrum, 408 U.S. at 146-47 (A
substantial present interest exists in "situations in which
the
owner of property divested himself of title but retained an
income interest or, in the case of real
property, the lifetime use of the property".).
n4 As the Tax Court explained, § 2036(a)
includes within the taxable estate any asset that is not transferred "absolutely, unequivocally, irrevocably, and
without possible reservations". Strangi II,
T.C. Memo 2003-145 (quoting Commissioner v. Estate of
Church, 335 U.S. 632, 645, 93 L. Ed.
288, 69 S. Ct. 322, 69 S. Ct. 337, 1949-1 C.B. 212 (1945)).
The controlling question for present
purposes, then, is not whether Strangi actually kept any
particular asset in his possession, but
whether he received a general assurance that his assets
would be available to meet his personal
needs.
n5 See 26 C.F.R. § 20.2036-1 ("The 'use,
possession . . . or other enjoyment of the transferred
property' is considered as having been retained by ... the
decedent to the extent that the use,
possession . . . or other enjoyment is to be applied toward
the discharge of a legal obligation of
the decedent . . . ."); see also Ray v. United States, 762
F.2d 1361, 1363 (9th Cir.
1985)(considering use of transferred assets to pay
transferor's funeral expenses as supportive of
finding that transferor retained possession or enjoyment
under § 2036).
n6 The Estate further contends that all of
the above payments were "pro rata partnership
distributions", meaning that Stranco received cash
disbursements in proportion to its 1% general
partner interest in SFLP. The Tax Court characterized these
payments as "de minimis", insofar as
they did not "in any substantial way operate to curb
decedent's ability to benefit from SFLP
property".
Strangi II, T.C. Memo 2003-145. In short,
although the importance of the pro rata
distributions to the "implied agreement" inquiry is perhaps
debatable, there is nothing clearly
erroneous about the decision to assign them minimal weight.
n7 Because we hold that the transferred
assets were properly included in the taxable estate
under § 2036(a)(1), we do not reach the Commissioner's
alternative contention that Strangi
retained the "right . . . to designate the persons who shall
possess or enjoy the property", thus
triggering inclusion under § 2036(a)(2).
n8 As we observed in Kimbell, 371 F.3d at
266:
The proper focus therefore on whether a transfer to a
partnership is for adequate and full
consideration is: (1) whether the interest credited to each
of the partners was proportionate to the
fair market value of the assets each partner contributed to
the partnership, (2) whether the assets
contributed by each partner to the partnership were properly
credited to the respective capital
accounts of the partners, and (3) whether on termination or
dissolution of the partnership the
partners were entitled to distributions from the partnership
in amounts equal to their respective
capital accounts.
n9 In support of its contention, the Estate
cites Wheeler for the proposition that "the only possible
grounds for challenging the legitimacy of a transaction
[under § 2036(a)] are whether the
transferor actually parted with the [transferred property]
and the transferee actually parted with
the requisite adequate and full consideration". 116 F.3d at
764. Our holding in Wheeler, however,
was expressly limited to the narrow factual circumstances of
an intra-family sale of a remainder
interest in real property. See id. at 756. Although adequate
consideration may suffice to show the
absence of fraud or deceit where a real property interest
is, in fact, transferred from one party to
another, such is not the case where, as here, the purported
transfer arguably deprives the
transferor of literally nothing. [*25]
n10 We recognize that the Estate's proposed interpretation
of § 2036(a) would yield a more
uniform and predictable rule than the one set forth in
Kimbell and here. Although we acknowledge
the importance of predictability in the law governing
estates and estate planning, it cannot be had
at the expense of the plain language of the statute.
n11 Accord Merryman v. Commissioner, 873 F.2d 879, 881 (5th Cir. 1989) ("To determine whether economic substance is present, courts view the objective realities of the transaction or, in other words, whether what was actually done is what the parties to the transaction purported to do.").
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