ESTATE OF CLYDE W. TURNER, SR., DECEASED, W. BARCLAY RUSHTON, EXECUTOR v. COMMISSIONER OF INTERNAL REVENUE
Docket No. 18911-08
United States Tax Court
Filed March 29, 2012
138 T.C. 306
MARVEL, Judge
* This Oрinion supplements our previously filed opinion Estate of Turner v. Commissioner, T.C. Memo. 2011-209.
We shall grant respondent‘s motion to dismiss for lack of jurisdiction insofar as review of the collection actions in the notice of determination is concerned. Accordingly, the collection actions at issue may proceed. We shall deny respondent‘s motion insofar as the petition seeks our determination of the appropriate relief available under section 6015 and our review of the determination not to abate interest. Further proceedings are necessary to decide whether we have jurisdiction under section 6015(e)(1)(A), whether petitioner may maintain an action under section 6404,9 and, if so, whether the determination not to abate was an abuse of discretion. To reflect the foregoing,
An appropriate order will be issued.
Caroline R. Krivacka and Beth A. Nunnink, for respondent.
SUPPLEMENTAL OPINION
MARVEL, Judge: In a timely filed motion for reconsideration (motion) pursuant to
In Estate of Turner I we held, among other things, that Clyde Sr.‘s inter vivos transfer of property to Turner & Co. was subject to section 2036 and that the values of those transferred assets are included in the value of his gross estate. The estate requests that we reconsider and/or supplement our findings and opinion in connection with thе application of section 2036. The estate also contends that the Court did not consider, and should decide, its alternative position—that even if section 2036 applies, the estate has no estate tax deficiency because it is entitled to an increased marital deduction equal to the increased value of the gross estate.2 Respondent has filed an objection to the estate‘s motion.
Generally, reconsideration under
I. Application of Section 2036
We adopt the findings of fact in Estate of Turner I. For convenience and clarity, we repeat the necessary facts below.
Clyde Sr. resided in Georgia when he died testate on February 4, 2004. Estate of Turner I, slip op. at 2. W. Barclay Rushton is the executor of the estate. Id. Mr. Rushton resided in Georgia when the petition on behalf of the estate was filed. Id.
In early 2002 Clyde Sr., his wife Jewell H. Turner (Jewell), and their two grandsons Marc and Travis Turner met with attorneys from the law firm of Stewart, Melvin & Frost. Id. at 7-8. On April 15, 2002, Clyde Sr. and Jewell еstablished Turner & Co., a Georgia limited liability partnership. Id. at 8. The assets they contributed to the partnership consisted of cash, shares of common stock of Regions Bank, shares of other banks, certificates of deposit, and assets held in securities accounts, such as preferred stock and bonds. Id. at 9-10. The partnership agreement listed several purposes for creating Turner & Co., but the agreement was modeled on a standard form that Stewart, Melvin & Frost used when drafting partnership agreements. Id. at 11-12.
In 2002-04 Turner & Co. maintained investment accounts at the GMS Group, Morgan Keegan, and Wachovia Securities and a checking account at United Community Bank. The GMS and Wachovia account statements reflect no change in the securities held between December 2002 and Clyde Sr.‘s death in February 2004. Id. at 19-20. The Morgan Keegan account statements reflect a handful of asset purchases and sales. Id. Turner & Co. made no trades in any of its investment accounts between October 2003, when Clyde Sr. became seriously ill, and his death. Id. at 20.
The estate contended that the Turners created Turner & Co. for at least one of the following legitimate and significant nontax reasons: (1) to consolidate their assets for management purposes and allow someone other than themselves or their children to maintain and manage the family‘s assets for future growth pursuant to a more active and formal investment management strategy, (2) tо facilitate resolution of
The estate requests that we reconsider several findings of fact and our conclusion with respect to the application of section 2036. In the estate‘s view, once we do so, it becomes clear that the estate provided credible evidence to shift the burden of proof to respondent under section 7491(a) on the issue of whether Clyde Sr. had a legitimate and significant nontax purpose for the formation of Turner & Co. However, as we stated in Estate of Turner I, slip op. at 30, and as we observed in Knudsen v. Commissioner, 131 T.C. 185, 189 (2008), in a case where the standard of proof is the prеponderance of the evidence and the preponderance of the evidence favors one party, we may decide the case on the weight of the evidence and not on an allocation of the burden of proof. We shall not reconsider our conclusion regarding the application of
We now turn to the estate‘s contentions regarding the application of section 2036. First, the estate contends that our statement that “[w]e are particularly struck by the implausibility of petitioner‘s assertion that tax savings resulting from the family limited partnership were never discussed during a meeting” is an errоneous and unfair characterization of the estate‘s position and is contrary to stipulated facts. The estate relies on the testimony of Mr. Coyle, the Turners’ attorney, who testified that the law firm presented the Turners with a tax planning option with allegedly superior tax benefits. However, the Turners’ rejection of
The estate also mistakenly contends that respondent‘s lack of objection to certain of its proposed findings of fact creates binding stipulations that the Court must find as relevant facts. Although we have on occasion deemed the lack of objection to a proposed finding of fact to be a concession that it is correct except to the extent that it is clearly inconsistent with the opposing party‘s brief, see Fankhanel v. Commissioner, T.C. Memo. 1998-403, aff‘d without published opinion, 205 F.3d 1333 (4th Cir. 2000); Estate of Freeman v. Commissioner, T.C. Memo. 1996-372, we find facts on the basis of the record as a whole, and we are not obligated to find facts that we do not consider relevant or necessary to our holdings. The estate has pointed to no instance where we found or failed to find facts inappropriately or erroneously.
Second, the estate asks us to take into account various other facts regarding the nontax purposes for the formation of Turner & Co., including the facts regarding Marc‘s role in handling his grandparents’ finances and bookkeeping, the Turners’ concern regarding management of their assets, disputes among family members, and the timing of the transfer of assets to Turner & Co. The estate has failed to demonstrate any unusual circumstances or substantial errors of fact or law that would justify reconsideration of our opinion and the findings of fact contained therein.
Third, the estate asks us to reconsider the holding that consolidated asset management generally is not a significant nontax purpose for forming a limited partnership except for assets requiring active management or special protection. As we discussed in Estate of Turner I, we previously have held that consolidated asset management may be a legitimate and significant nontax purpose. Estate of Schutt v. Commissioner, T.C. Memo. 2005-126; see also Estate of Black v. Commissioner, 133 T.C. 340, 371 (2009). However, consolidated asset management generally is not a significant nontax purpose where a family limited partnership is “‘just a vehicle for changing the form of the investment in the assets, a mere asset container.‘” Estate of Turner I, slip op. at 36 (quoting Estate of Erickson v. Commissioner, T.C. Memo. 2007-107). As we concluded in Estate of Turner I, there was no signifi-
Fourth, the estate asks us to reconsider our statement that the Turners’ concern regarding assеt management “could have been readily addressed without transferring the assets to a family limited partnership.” Estate of Turner I, slip op. at 41. The estate points out that “[t]o the extent some other potential alternative exists, taxpayers are free to choose between alternative structures as they see fit and not in a way that maximizes tax revenue.” However, a taxpayer‘s freedom of choice is subject to various statutory and judicial limitations. For example, in the context of the bona fide sale exception to section 2036, one limitation is the existence of a legitimate and significant nontax reason for the crеation of the partnership. As we held in Estate of Turner I, we are not persuaded on the basis of the record as a whole that such a purpose existed when Turner & Co. was formed.
We also reject the estate‘s invitation to reconsider our conclusion regarding the role that Turner & Co. allegedly had in protecting Rory from himself and Jewell from Rory. We fail to see how transferring assets to a limited partnership and then granting a portion of the limited partnership interest to a trust for the benefit of Rory provided any meaningful additional protection of family assets because Rory had no ownership interest in any of the assets before the creаtion of the partnership structure.
In Estate of Turner I we considered and addressed the estate‘s arguments, witnesses’ testimony, and documentary evidence. The estate has not demonstrated any manifest error of fact. We will therefore deny the motion regarding the application of section 2036.
II. The Marital Deduction Issue
The estate contends that even if section 2036 applies, the estate has no estate tax deficiency because Clyde Sr.‘s will allows the estate to claim an increased marital deduction. We disagree.
The facts pertinent to our consideration of this issue are as follows. In 2002, upon the formation of Turner & Co., Clyde Sr. and Jewell еach contributed assets with a fair market value of $4,333,671 (total value of $8,667,342) to Turner &
The estate reported that an 18.8525% limited partnership interest was allocated to the surviving spouse and an 8.9029% interest was allocated to a bypass trust.4 Clyde Sr.‘s estate claimed a marital deduction of $1,820,435, of which $1,072,000 pertained to the 18.8525% interest in Turner & Co. that passed to Jewell.
In Estate of Turner I we held that under section 2036 the assets that Clyde Sr. transferred to Turner & Co. must be included in his gross estate. Estate of Turner I, slip op. at 52-53. The estate contends that under Clyde Sr.‘s will, the surviving spouse‘s right to the pecuniary marital bequest requires that the surviving spouse receive assets equal to the amount necessary to reduce estate taxes to zero. The marital deduction formula provision of Clyde Sr.‘s will reads as fоllows:
If Jewell survives me and if there is a federal estate tax in effect at the time of my death, I give, devise and bequeath to her cash, securities or other property of my estate (undiminished by any estate, inheritance, succession, death or similar taxes) having a value equal to the maximum marital deduction as finally determined in my federal estate tax proceedings, less the aggregate amount of marital deductions, if any, allowed for such tax purposes by reason of property or interests in property passing or which have passed to my said wife otherwise than pursuant to the provisions of this Item; provided, however, the amount of this bequest shall be reduced by the amount, if any, needed to increase my taxable
estate (for federal estate tax purposes) to the largest amount that, after allowing for the unified credit against the federal estate tax, and the state death tax credit against such tax * * *, will result in the smallest, if any, federal estate tax being imposed on my estate. The term “maximum marital deduction” shall not be construed as a direction by me to exercise any election respecting the deduction of estate administration expenses, the determination of the estate tax valuation date, or any other tax election which may be available under any tax laws, only in such manner as will result in a larger allowable estate tax marital deduction than if the contrary election had been made. My Executor shall have the sole discretion to select the assets which shall constitute this bequest. In no event, however, shall there be included in this bequest any asset or the proceeds of any asset which will not qualify for the federal estate tax marital deduction, and this bequest shall be reduced to the extent that it cannot be created with such qualifying assets. My Executor shall value any asset selected by my Executor for distribution in kind as a pаrt of this bequest at the value of such asset at the date of distribution of such asset.
Respondent disagrees that the will provision allows the estate to claim an increased marital deduction.
Generally, applying section 2036 in the context of a family limited partnership raises a twofold problem for the marital deduction calculation. The first problem (which is not at issue in this case) arises because appraisals of partnership interests use various discounts, such as discounts for lack of marketability and lack of control. When section 2036 applies, it pulls undiscounted assets that the decedent transferred to thе partnership into the gross estate. The estate, however, claims on the return the marital deduction using a discounted value of the partnership interest pertaining to those assets, to the extent the partnership interest passes to the surviving spouse. In some cases the Internal Revenue Service has taken the position that even when
The second type of problem caused by the application of section 2036 arises when a decedent transfers a pоrtion of the partnership interest during his lifetime as a gift to someone other than the spouse. On the estate tax return the estate claims a marital deduction for the partnership interest that passes to the surviving spouse, but section 2036 pulls assets underlying the partnership interest into the gross estate, including assets pertaining to the transferred partnership interest. Although under section 2036 assets underlying the partnership interest transferred as a gift are included in the gross estate, neither those assets nor the corresponding partnership interest passes to the surviving spouse.
This type of mismatch is at issue in this case. In Estate of Turner I we concluded that section 2036 applied to the transfer of assets to the limited partnership, and section 2036 caused the inclusion of the assets transferred to the partnership in Clyde Sr.‘s gross estate. A portion of those assets includes assets underlying the 21.7446% partnership interest that Clyde Sr. transferred as a gift. Because Clyde Sr. no longer owned the 21.7446% limited partnership interest at his death, our holding that section 2036 requires the inclusion of the underlying assets in his estate means that the gross estate includes assets that Clyde Sr. had
The estate, however, contends that under the formula marital deduction clause of the will quoted above, see supra pp. 312-313, the estate may recalculate the marital deduction and claim the marital deduction for the assets underlying the 21.7446% partnership interest. The estate argues that even if section 2036 applies, the will requires the estate to increase the value of the marital gift. In the estate‘s view, section 2036 applies a legal fiction for purposes of calculating the gross еstate, and, for consistency, the marital deduction can also be increased to reflect that fiction. The estate argues that it would be inconsistent to conclude that Clyde Sr. retained a right to possess or enjoy assets he contributed to the partnership and at the same time ignore the values of those assets included in the gross estate under section 2036 in calculating the marital deduction.7
Respondent disagrees that the Code allows the estate to increase the marital deduction in that manner. He determined that “[t]he taxable items are the portion of Turner & Co., LP which was gifted, as it does not go to the sрouse“. Respondent contends that Clyde Sr. no longer owned the assets underlying the transferred partnership interest or the partnership interest itself and therefore he could not pass either to Jewell. Respondent contends that although section 2036 pulls the assets into the estate, the assets do not qualify for the marital deduction. We must decide whether the estate may apply the marital deduction formula provision to increase the amount of the marital deduction for the
We turn to the relevant Code sections. Generally, an estate may deduct from the value of the gross estate the value of property “which passes or has passed from the decedent to his surviving spouse“. See
The statutory definition of the term “passing” is found in
The structure of the applicable regulations, see
In reaching our conclusion, we also take into account the place of the marital deduction in the overall structure of the wealth transfer system. Generally,
As follows from the foregoing, allowing a marital deduction with respect to an asset to the estate of the first spouse to
The rationality of the estate and gift tax regimes regarding the marital deduction is also illustrated in sections 2056(b)(7), 2044, and 2519.
After the death of the surviving spouse,
If we were to accept the estate‘s position, Jewell‘s estate would not be required to include in the gross estate the values of assets that Jewell did not actually own but with respect to which а marital deduction was allowed to Clyde Sr.‘s estate. There is no Code provision similar to
Because we did not address the marital deduction issue in Estate of Turner I, we supplement Estate of Turner I consistent with the foregoing. We have considered the remaining arguments of both parties for results contrary to those expressed herein and, to the extent not discussed above, find those arguments to be irrelevant, moot, or without merit.
For the above reasons,
An appropriate order will be issued.