1987 Tax Ct. Memo LEXIS 8 | Tax Ct. | 1987
MEMORANDUM OPINION
SHIELDS,
The facts in this case were fully stipulated. The stipulation of facts and attached exhibits are incorporated herein by reference.
Petitioner is the estate of Daniel J. Harrison, Jr. ("decedent") who died at the age of 60 on January 14, 1980, a resident of Houston, Texas. The independent co-executors of the estate are Daniel J. Harrison III ("Dan") and Bruce F. Harrison ("Bruce"), the sons of decedent.1987 Tax Ct. Memo LEXIS 8" label="1987 Tax Ct. Memo LEXIS 8" no-link"="" number="4" pagescheme="<span class=">1987 Tax Ct. Memo LEXIS 8">*11 They were also residents of Houston, Texas at the time the petition was filed.
On June 10, 1975, decedent, whose health was declining, executed a power of attorney generally authorizing Dan to manage his assets which included extensive ranching properties and other real estate as well as oil and gas interests in both developed and undeveloped properties. Decedent's health continued to decline and Dan continued to manage his father's properties under the power of attorney until August 1, 1979. On that date Bruce and Dan, acting individually and under the power of attorney for the decedent, organized Harrison Interests, Ltd., a Texas limited partnership, with the principal purpose of consolidating and preserving decedent's assets. On the same date, Dan, under the power of attorney for decedent, contributed assets of the decedent to the partnership in return for a 1 percent general partnership interest and a 77.8 percent limited partnership interest. 2 At the same time, Dan and Bruce also contributed assets to the partnership in return for separate 10.6 percent general partnership interests. The assets contributed by each of the partners consisted1987 Tax Ct. Memo LEXIS 8" label="1987 Tax Ct. Memo LEXIS 8" no-link"="" number="5" pagescheme="<span class=">1987 Tax Ct. Memo LEXIS 8">*12 primarily of real estate, oil and gas interests, and marketable securities that the decedent and his sons had accumulated. None of the properties contributed to the partnership by either Dan or Bruce had been given to them by decedent.
The combined value of decedent's general partnership interest and his limited partnership interest at the time of the creation of the partnership was $59,476,523, which was the value of the properties contributed by decedent to the partnership. Dan's general partnership interest1987 Tax Ct. Memo LEXIS 8" label="1987 Tax Ct. Memo LEXIS 8" no-link"="" number="6" pagescheme="<span class=">1987 Tax Ct. Memo LEXIS 8">*13 and Bruce's general partnership interest each had a value at the creation of the partnership of $7,981,351, which was the value of the assets they each contributed to the partnership.
Under the partnership agreement, the general partners had absolute control over the management of the partnership. Each general partner also had the right during life to dissolve the partnership, but neither a limited partner nor a successor to a general partner had such a right. The partnership agreement provided that the partnership was to be automatically dissolved upon the death of a general partner, or upon an election to dissolve by a living general partner, unless within 90 days of such death, or such election, all of the other general partners agreed to continue the partnership. In such case, the partnership was to continue, but the estate of the deceased general partner, or the living general partner electing to dissolve the partnership, was entitled to a payment equal to the amount he would have received had the partnership been dissolved.
Under the partnership agreement, both general partners and limited partners had the right to sell or assign their partnership interests after first giving1987 Tax Ct. Memo LEXIS 8" label="1987 Tax Ct. Memo LEXIS 8" no-link"="" number="7" pagescheme="<span class=">1987 Tax Ct. Memo LEXIS 8">*14 the other general partners an option to buy such interests. Similarly, the agreement also provided that upon the death of a general partner, his legal representative was required to give the remaining general partners an option to buy the deceased partner's general partnership interest.
On January 14, 1980, decedent died of another stroke. On February 4, 1980, Dan and Bruce exercised their option to purchase decedent's general partnership interest for $757,116. This sale was confirmed by a decree of a probate court for Harris County, Texas, on March 12, 1980. Pursuant to the partnership agreement, Dan and Bruce also agreed within ninety days after decedent's death to continue the partnership.
In this case, respondent and petitioner agree that $757,116 is the value of decedent's general partnership interest. they disagree, however, as to the value of his limited partnership interest. Respondent claims that the value of the limited partnership interest is $59,555,020, which is the agreed value of the proportionate share of the partnership assets that decedent would have received for his limited partnership interest if the partnership had been dissolved or if decedent's limited1987 Tax Ct. Memo LEXIS 8" label="1987 Tax Ct. Memo LEXIS 8" no-link"="" number="8" pagescheme="<span class=">1987 Tax Ct. Memo LEXIS 8">*15 partnership interest had been terminated immediately before his death pursuant to the partnership agreement. Petitioner contends that the value of the limited partnership interest is $33,000,000, which we find from the stipulation of the parties was the value of the limited partnership interest the moment after it passed from the decedent to his estate. The difference between the two values is attributable entirely to the right which decedent had as a general partner up until his death to force a dissolution of the partnership. 3 The parties agree that under the partnership agreement and applicable Texas law this right did not pass to the estate.
Respondent relies on
Respondent's reliance upon
The statute applicable here is * * *
Brief as is the instant of death, the court must pinpoint its valuation at this instant -- the moment of truth, when the ownership of the decedent ends and the ownership of the successor begins. It is a fallacy, therefore, to argue value before -- or -- after death on the notion that valuation must be determined by the value either of the interest that ceases or of the interest that begins.
* * *
Underlying the determination in these instances that the valuation of property passing at death reflects the changes wrought by death is a basic economic fact: value looks ahead.
When the foregoing reasoning is applied to this case, it is apparent that the property transferred at the moment of decedent's death was the limited partnership interest that passed to decedent's estate, which did not include the right to dissolve the partnership. Nevertheless, respondent claims that when decedent's right to dissolve the partnership terminated at his death something of value passed to Dan and Bruce. However, we are unable to agree because this contention is contrary to respondent's stipulation that the value of the interests of Dan and Bruce were the same at the moment before decedent's death, at the moment of decedent's death, and at the moment after decedent's death.
Respondent also contends that we should ignore the effect the partnership agreement has upon decedent's limited partnership interest because the partnership agreement was an attempt to artificially depress the value of decedent's property for estate tax purposes. Such an agreement will be ignored only if there is no business purpose for the1987 Tax Ct. Memo LEXIS 8" label="1987 Tax Ct. Memo LEXIS 8" no-link"="" number="13" pagescheme="<span class=">1987 Tax Ct. Memo LEXIS 8">*20 creation of the partnership or if the agreement is merely a substitute for testamentary disposition. See
With respect to business purpose, petitioner presented convincing proof that the partnership was created as a means of providing necessary and proper management of decedent's properties and that the partnership was advantageous to and in the best interests of decedent.Respondent presented no proof to rebut petitioner's showing.
With respect to the issue of whether the agreement was a substitute for testamentary disposition, we find in petitioner's favor for three reasons. First, the agreement applied to all the partners, and no partner's assignee or estate could liquidate the partnership without the remaining partners' consent. See
Having determined that the property interest to be valued is that which passed to the decedent's estate, we must now decide how to value it. As stated in
Respondent next contends that under
Respondent also contends that under
We are also unable to agree with respondent's contention that the decedent's estate includes the right to liquidate the partnership under
In conclusion, given the facts stipulated to by respondent and the absence of any proof putting into question the purpose of the partnership, we hold that for estate tax purposes the value of the decedent's limited partnership interest was $33,000,000.
In the estate tax return, petitioner elected under section 6166 to pay the estate tax in ten equal annual installments. Respondent approved the election. Petitioner also1987 Tax Ct. Memo LEXIS 8" label="1987 Tax Ct. Memo LEXIS 8" no-link"="" number="18" pagescheme="<span class=">1987 Tax Ct. Memo LEXIS 8">*25 deferred payment of a portion of the inheritance tax due the State of Texas.
At the date of trial, petitioner had paid interest of $4,782,324 to respondent on the estate tax. Petitioner also had paid interest on the inheritance tax in the amount of $624,137. Respondent agrees that these amounts plus any such interest which is paid by petitioner prior to the decision being entered in this case qualify for deduction from the gross estate under
Respondent, however, does not agree that petitioner is entitled to deduct interest not paid as of the date of this decision but estimated to be paid by the date of the last installment of the estate and inheritance taxes. Petitioner has estimated, using a 12 percent interest rate, that interest yet to be paid on the estate tax is $5,244,715, and interest yet to be paid on the inheritance tax is $49,114.
In
Petitioner concedes that
On December 19, 1979, the decedent, through a power of attorney, executed a promissory note payable on December 19, 1980 in the amount of $1.5 million dollars to Texas Commerce Bank. The estate paid the note at maturity, without renewing or extending it. The payment included interest in the amount of $118,134.67, which had accrued subsequent to the decedent's death.
1987 Tax Ct. Memo LEXIS 8" label="1987 Tax Ct. Memo LEXIS 8" no-link"="" number="20" pagescheme="<span class=">1987 Tax Ct. Memo LEXIS 8">*27 Post-death interest paid on a debt incurred by a decedent during his life and not renewed by his estate is deductible under
With respect to the first condition, it is stipulated that the interest expense was actually incurred by petitioner, and under our reasoning in
We addressed the second condition in
1987 Tax Ct. Memo LEXIS 8" label="1987 Tax Ct. Memo LEXIS 8" no-link"="" number="21" pagescheme="<span class=">1987 Tax Ct. Memo LEXIS 8">*28 Personal representatives of estates shall also be entitled to all necessary and reasonable expenses incurred by them in the preservation, safe-keeping, and management of the estate, and in collecting or attempting to collect claims or debts, and in recovering or attempting to recover property to which the estate has a title or claim, and all reasonable attorney's fees, necessarily incurred in connection with the proceedings and management of such estate, on satisfactory proof to the court. * * *
Footnotes
1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. All rule references are to the Tax Court Rules of Practice and Procedure unless otherwise provided.↩
2. Dan's acts with respect to the creation of the partnership and the contribution of decedent's assets thereto under the power of attorney were reviewed in detail and approved by the District Court of Fort Bend County, Texas in September 1979 in an adversarial proceeding brought by decedent's next friend who alleged, and the court found, that on August 12, 1979, decedent had suffered a stroke and had fallen and broken both shoulders. The Court further found that the partnership constituted "a means for the proper and necessary management of the properties of [decedent]" and that the partnership agreement was "advantageous to and in the best interests of [decedent]."↩
3. In other words, decedent's right, as a general partner, to dissolve and liquidate the partnership increased the value of the limited partnership interest by the difference of $26,555,020.↩