2003 Tax Ct. Memo LEXIS 144 | Tax Ct. | 2003
2003 Tax Ct. Memo LEXIS 144">*144 Value of property transferred by decedent Albert Strangi to Strangi Family Limited Partnership and Stranco, Inc. was includable in his gross estate. Valuation of property in dispute was limited by amounts determined in notice of deficiency.
SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: This matter is before the Court on remand from the Court of Appeals for the Fifth Circuit for further consideration consistent with its opinion in
FINDINGS OF FACT
Facts with respect to this case were2003 Tax Ct. Memo LEXIS 144">*145 found in our original opinion in Strangi I and are incorporated by this reference. We summarize for convenience relevant facts from Strangi I and set forth additional findings for purposes of deciding the issue on remand.
General Background
Decedent and his first wife had four children: Jeanne, Rosalie, Albert T., and John Strangi (collectively the Strangi children). After divorcing his first wife in 1965, decedent married Irene Delores Seymour (Mrs. Strangi), who had two daughters, Angela and Lynda Seymour (collectively the Seymour daughters), from a previous marriage. In 1985, Rosalie (hereinafter Mrs. Gulig) married Michael J. Gulig (Mr. Gulig), an attorney with the law firm of Sheehy, Lovelace and Mayfield, P. C., in Waco, Texas. On February 19, 1987, decedent and Mrs. Strangi executed wills that named the Strangi children and the Seymour daughters as residual beneficiaries in the event that either spouse predeceased the other.
During 1987 and 1988, Mrs. Strangi suffered a series of serious medical problems. In 1988, decedent and Mrs. Strangi decided to move from their then home in Fort Walton Beach, Florida, to Waco, Texas. To facilitate this move, decedent on July 19, 1988, executed2003 Tax Ct. Memo LEXIS 144">*146 a power of attorney naming Mr. Gulig as his attorney in fact and thereby authorizing Mr. Gulig, in decedent's "name, place and stead":
To exercise, do, or perform any act, right, power, duty, or
obligation whatsoever that I now have or may acquire * * *
relating to any person, item, thing, transaction, business
property, real or personal, tangible or intangible, or matter
whatsoever;
* * * * * * *
To lease, purchase, exchange and acquire, and to bargain,
contract, and agree for the lease, purchase, exchange, and
acquisition of, and to take, receive and possess any real or
personal property whatsoever, tangible or intangible, or
interest therein, on such terms and conditions, and under such
covenants as the attorney in fact shall deem proper;
To improve, repair, maintain, manage, insure, rent, lease,
sell, release, convey, subject to lien, mortgage, hypothecate,
and in any way or manner deal with all or any part of any real
or personal property whatsoever, intangible, or any2003 Tax Ct. Memo LEXIS 144">*147 interest
therein, which I now own or may hereafter acquire, for me and in
my name, and under such terms and conditions, and under such
covenants as said attorney shall deem proper;
To engage in and transact any and all lawful business of
whatever nature or kind for me and in my name;
To sign, endorse, execute, acknowledge, deliver, receive
and possess such * * * [contracts, agreements, etc.] and such
other instruments in writing of whatever kind and nature as may
be necessary or proper in the exercise of the rights and powers
herein granted.
Thus, among other things, Mr. Gulig was authorized to close the purchase of a residence in Waco. After the move to Waco, Sylvia Stone (Ms. Stone) was hired as decedent's housekeeper and also provided assistance with the care of Mrs. Strangi.
On July 31, 1990, decedent executed a new will, naming the Strangi children as the sole residual beneficiaries if Mrs. Strangi predeceased him. This will also designated Mrs. Gulig and Ameritrust Texas, N. A. (Ameritrust), as coexecutors of decedent's estate. Mrs. Strangi died on December 27, 1990.
2003 Tax Ct. Memo LEXIS 144">*148 During 1993, decedent had surgery to remove a cancerous mass from his back; was diagnosed with supranuclear palsy (a brain disorder that would gradually reduce his ability to speak, walk, and swallow); and had prostate surgery. Mr. Gulig thereafter took over decedent's affairs pursuant to the 1988 power of attorney. Mr. Gulig also developed a close personal relationship with decedent after the death of Mrs. Strangi. Every morning, Mr. Gulig would visit decedent to have coffee and read the newspaper.
SFLP and Stranco
On August 11, 1994, Mr. Gulig attended a seminar provided by Fortress Financial Group, Inc. (Fortress), on the use of family limited partnerships as a tool for (1) asset preservation, (2) estate planning, (3) income tax planning, and (4) charitable giving. The following day, on August 12, 1994, Mr. Gulig, as decedent's attorney in fact, formed SFLP, a Texas limited partnership, and its corporate general partner, Stranco, a Texas corporation, and filed with the State of Texas the respective certificate of limited partnership and articles of incorporation. In August 1994 Mr. Gulig believed decedent had about 12 to 18 months to live. Mrs. Gulig expected decedent to survive2003 Tax Ct. Memo LEXIS 144">*149 about 2 years.
An Agreement of Limited Partnership of Strangi Family Limited Partnership (SFLP agreement) was prepared by Mr. Gulig using documents licensed from Fortress and sets forth the governing provisions for the entity. Stranco is designated therein as the managing general partner, the authority of which is broadly described as follows:
Except as otherwise provided in this Agreement, the Managing
General Partner of the Partnership, shall have the sole,
exclusive and absolute right and authority to act for and on
behalf of the Partnership and all of the Partners in connection
with all aspects of the business of the Partnership.
More specifically, the SFLP agreement enumerates various rights, powers, and authorities of the managing general partner, including without limitation "to acquire, hold, lease, encumber, pledge, option, sell, exchange, transfer, dispose or otherwise deal with real or personal property (or rights or interests therein) of any nature whatsoever as may be necessary or advisable for the operation of the Partnership"; "to borrow or lend money for Partnership purposes"; and "to determine the use of the revenues of2003 Tax Ct. Memo LEXIS 144">*150 the Partnership for Partnership purposes". The SFLP agreement obligates the managing general partner to use its good faith efforts to manage partnership affairs in a prudent and businesslike manner and to act at all times in the best interests of the partnership. According to the SFLP agreement, limited partners are without "any authority or right to take part in the management of the business or transact any business" for the entity.
As regards distributions, the SFLP agreement provides that income from operations and capital transactions, after deduction for certain listed expenses:
shall be distributed at such times and in such amounts as the
Managing General Partner, in its sole discretion, shall
determine, taking into account the reasonable business needs of
the Partnership (including plan for expansion of the
Partnership's business). The Managing General Partner's
determination regarding whether or not to make distributions and
the amount of distributions to be made shall be final and
binding on all Partners. Such distributions shall be made to
each Partner in accordance with such Partner's Interest2003 Tax Ct. Memo LEXIS 144">*151 in the
Partnership.
Likewise, "Assets of the Partnership may be distributed in kind in the sole and absolute discretion of the Managing General Partner."
Pursuant to the SFLP agreement, the partnership would be dissolved and terminated upon: (1) A unanimous vote of the limited partners and unanimous consent of the general partners; (2) a decision of the managing general partner after the disposition of substantially all partnership assets; (3) an entry of judicial dissolution; (4) the death, insolvency, bankruptcy, removal, or withdrawal of any general partner, unless the limited partners within 90 days unanimously elect a new general partner to continue the business; (5) the involuntary transfer of a general partnership interest in the event there is only one general partner, unless the limited partners within 90 days vote unanimously to continue the partnership; or (6) December 31, 2014.
Upon dissolution and termination, SFLP was to be liquidated. The managing general partner was designated as liquidator and instructed to dispose of partnership assets first in payment of third-party debts, then in repayment of loans from partners, and finally in repayment to partners of2003 Tax Ct. Memo LEXIS 144">*152 positive capital account balances.
By a series of transfer documents, Mr. Gulig assigned to SFLP property of decedent with a fair market value of $ 9,876,929, constituting approximately 98 percent of decedent's wealth, in exchange for a 99-percent limited partnership interest. The contributed property included decedent's interest in specified real estate (including the residence occupied by decedent), securities, accrued interest and dividends, insurance policies, an annuity, receivables, and partnership interests. About 75 percent of the contributed value was attributable to cash and securities. The majority of the asset transfer documents were dated August 12, 1994, while change of ownership forms for the life insurance policies were executed on August 14 and 15, 1994. Letters dated August 15, 1994, were also sent to the brokers holding decedent's securities accounts, to those administering the contributed partnership interests, and to the borrowers on notes payable to decedent advising them regarding transfer of the underlying assets to SFLP. All of the contributed property was reflected in decedent's capital account. Brokerage and bank accounts were opened in the name of the partnership2003 Tax Ct. Memo LEXIS 144">*153 during the period from August through October.
Mr. Gulig invited the Strangi children to participate in SFLP through an interest in Stranco. Decedent purchased 47 percent of Stranco for $ 49,350, and Mrs. Gulig purchased the remaining 53 percent for $ 55,650 on behalf of herself and her three siblings (with each thereby acquiring a 13.25-percent interest). The moneys were deposited into a bank account opened in August 1994 in Stranco's name. Stranco contributed a portion of these funds to SFLP in exchange for a 1-percent general partnership interest.
Stranco's articles of incorporation named decedent and the Strangi children as the initial five directors. On August 17, 1994, the Strangi children and Mr. Gulig met to execute the Stranco bylaws, a shareholders agreement, and a "Consent of Directors Authorizing Corporate Action in Lieu of Organizational Meeting" effective as of August 12, 1994. They also signed a "Unanimous Consent of Directors in Lieu of Special Meeting" that authorized the corporate president to execute a management agreement employing Mr. Gulig.
The Stranco bylaws set forth provisions governing corporate formalities. As pertains to shareholders, the bylaws state2003 Tax Ct. Memo LEXIS 144">*154 that a majority of the outstanding shares shall constitute a quorum at a meeting. Shareholders may also take informal action by means of a consent in writing signed by all shareholders.
Concerning directors, the bylaws specify that there shall be five directors, one of whom shall be elected president. At a meeting of the board, a majority of the directors then serving shall constitute a quorum, and the act of a majority of the directors present at a meeting with a quorum shall be the act of the board. Directors may also take informal action by a written consent signed by all directors. The president shall be the principal executive officer of the corporation and, subject to the control of the board, shall generally supervise and control all of the business and affairs of the corporation. Among the particular powers or duties placed under the board is the payment of dividends, as follows: "The Board of Directors may declare, and the corporation may pay, dividends on its outstanding shares in any manner and upon any terms and conditions not restricted by the Articles of Incorporation or prohibited by law."
The management agreement executed by Stranco and Mr. Gulig described his duties2003 Tax Ct. Memo LEXIS 144">*155 as follows:
Scope of Employment. Employee is hired to manage the
day-to-day business of Employer. Additionally, the Employee
shall manage the day-to-day business of the Strangi Family
Limited Partnership, a Texas limited partnership (the
"Partnership") in which Employer serves as the sole
general partner and the managing partner of the Partnership.
During the term of this Agreement, the Employee shall devote
such portion of his time, attention, and energies to the
businesses of the Employer and the Partnership and will
diligently and to the best of his ability perform all duties
incident to his employment hereunder. The duties of Employee
shall include, but not be limited to, management of the
Partnership's rental properties, cash and investment management,
and the preparation and filing of all required governmental
reports including tax returns.
In the shareholders agreement, decedent and the Strangi children agreed that at each annual meeting they would vote to reelect themselves (or a nominee) as the five directors. They further agreed that, if a vacancy2003 Tax Ct. Memo LEXIS 144">*156 occurred on the board by reason of the death, disability, resignation, retirement, or removal of a director so elected, they would cause the bylaws to be amended so as to reduce by one the number of directors.
Thereafter, each of the four Strangi children gave a .25- percent interest in Stranco to McLennan Community College Foundation (MCC Foundation), and the charity became a 1-percent shareholder in the corporation. MCC Foundation accepted the gift by execution on August 18, 1994, of an agreement to be bound by the terms of the preexisting shareholders agreement.
Decedent died of cancer on October 14, 1994, at the age of 81. Following decedent's death, Texas Commerce Bank, N. A. (TCB), successor in interest to Ameritrust, was asked to decline to serve as coexecutor of his estate. TCB subsequently did so, and decedent's will was admitted to probate on April 12, 1995, with Mrs. Gulig appointed as the sole executor.
After its formation, various monetary outlays were made from SFLP. From September 1993 until his death, decedent required 24- hour home health care that was provided by Olsten Healthcare (Olsten) and supplemented by Ms. Stone. During this time and while assisting decedent,2003 Tax Ct. Memo LEXIS 144">*157 Ms. Stone injured her back. The resultant back surgery was paid for by SFLP. SFLP also paid nearly $ 40,000 in 1994 for funeral expenses, estate administration expenses, and related debts of decedent, including a $ 19,810.28 check to Olsten for nursing services. SFLP then paid more than $ 65,000 in 1995 and 1996 for estate expenses and a specific bequest to decedent's sister. In July 1995, SFLP distributed $ 3,187,800 to decedent's estate for Federal estate and State inheritance taxes. When such disbursements were made to or for the benefit of decedent or his estate, Stranco received corresponding and proportionate sums either in cash or in the form of adjusting journal entries. For accounting purposes, certain amounts expended by SFLP were initially recorded on its books as advances to, and accounts receivable from, partners. SFLP also accrued rent on the residence occupied by decedent and reported the rental income on its 1994 income tax return. The accrued amount was paid in January 1997. Mr. Gulig made all entries into the books and records of SFLP and Stranco and prepared all income tax returns for the entities.
Estate Tax Proceedings
On January 17, 1996, a Form 706, United2003 Tax Ct. Memo LEXIS 144">*158 States Estate (and Generation-Skipping Transfer) Tax Return, filed on behalf of decedent's estate was received by the Internal Revenue Service. The value reported on the Form 706 for the gross estate was $ 6,823,582, which included $ 6,560,730 for decedent's interest in SFLP and $ 24,551 for his stock in Stranco. The total value of the property held by SFLP as of the date of death was $ 11,100,922, to which discounts were applied in calculating the reported fair market value. The Form 706 also reflected other assets of $ 238,301 (including household and personal items, vehicles, securities, certain receivables, and bank account balances totaling $ 762) and claimed deductions of $ 43,280 for debts of decedent (including $ 5,161 for rents to SFLP) and $ 107,108 for expenses.
In a statutory notice dated December 1, 1998, respondent determined a deficiency in Federal estate tax of $ 2,545,826 and an alternative deficiency in Federal gift tax of $ 1,629,947. The estate tax deficiency resulted in large part from respondent's conclusion that decedent's interest in SFLP should be increased by $ 4,386,613 (to $ 10,947,343) and his interest in Stranco should be increased by $ 29,009 (to $ 53,560).
2003 Tax Ct. Memo LEXIS 144">*159 The proceedings in Strangi I were initiated in response to the foregoing notice of deficiency. Prior to trial, respondent attempted by motion to raise
After entry of decision, respondent appealed to the Court of Appeals for the Fifth Circuit. The appellate court ruled as follows:
We REVERSE the Tax Court's denial of leave to amend and
REMAND with instructions that the court either (1) set forth its
reasons for adhering to its denial of the Commissioner's motion
for leave to amend, bearing in mind the mandate of the
Commissioner's motion, permit the amendment, and consider2003 Tax Ct. Memo LEXIS 144">*160 the
Commissioner's claim under
conclusions made by the tax court. [
Over petitioner's objection, leave was granted for respondent's amendment to answer and a
OPINION
I. Inclusion in the Gross Estate --
As a general rule, the Internal Revenue Code imposes a Federal tax "on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States."
(a) General Rule. -- The value of the gross estate shall
include the value of all property to the extent of any interest
therein of which the decedent has at any time made a transfer
(except in 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 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.
Regulations further explain that "An interest or right is treated as having been retained or reserved if at the time of the transfer there was an understanding, 2003 Tax Ct. Memo LEXIS 144">*162 express, or implied, that the interest or right would later be conferred."
Given the language used in the above-quoted provisions, it has long been recognized that "The general purpose of this section is 'to include in a decedent's gross estate transfers that are essentially testamentary' in nature."
As used in
As used in
With respect to such a power, it is immaterial (i) whether the
power was exercisable alone or only in conjunction with another
person or persons, whether or not having an adverse interest;
(ii) in what capacity the power was exercisable by the decedent
or by another person or persons in conjunction with the
decedent; and (iii) whether the exercise of the power was
subject to a contingency beyond the decedent's control which did
not occur before his death (e. g., the death of another person
during the decedent's lifetime). The phrase, however, does not
include a power over the transferred property itself which does
not affect the enjoyment of the income received or earned during
the decedent's life. * * * Nor does the phrase apply to a power
held solely by a person other than the decedent. But, 2003 Tax Ct. Memo LEXIS 144">*165 for
example, if the decedent reserved the unrestricted power to
remove or discharge a trustee at any time and appoint himself as
trustee, the decedent is considered as having the powers of the
trustee.
Additionally, retention of a right to exercise managerial power over transferred assets or investments does not of itself result in inclusion under
An exception to the treatment mandated by
Typically, the burden of disproving the existence of an agreement regarding a retained interest has rested on the estate, and this burden has often been characterized as particularly onerous in intrafamily situations.
Respondent contends that the value of the property transferred to SFLP and Stranco is includable in decedent's gross estate under either
The SFLP agreement provides that distributions of proceeds and assets from the entity shall be made in the sole discretion of the managing general partner. The SFLP agreement also designates Stranco as the managing general partner. Stranco, in turn, executed the management agreement employing Mr. Gulig to manage the day-to-day business of SFLP, as well as of Stranco itself. Yet Mr. Gulig was already decedent's attorney in fact pursuant to the 1988 general power of attorney. Under this instrument, Mr. Gulig was granted full and durable authority to act for decedent in his "name, place and stead". Mr. Gulig set up the SFLP/Stranco arrangement to facilitate decedent's estate planning goals and capitalized the partnership primarily with decedent's property.
When distilled to their most2003 Tax Ct. Memo LEXIS 144">*167 essential terms, the governing documents gave Mr. Gulig authority to specify distributions from SFLP, which is entirely consistent with his authority under the 1988 power of attorney. Although the estate protests that Mr. Gulig's authority under the management agreement was limited to managing "the day-to-day business" of the partnership and did not extend to making distributions or loans, the pertinent instruments provide no basis for concluding that making distributions would be outside the day-to-day business of a partnership capitalized nearly exclusively with investment assets. As a practical matter, actual disbursement of funds occurred when checks were issued by Mr. and Mrs. Gulig in their various related capacities, pursuant to rights granted to them by decedent, acting through Mr. Gulig.
Hence, to summarize, the SFLP agreement named Stranco managing general partner with the sole discretion to determine distributions. The Stranco shareholders, including decedent (through Mr. Gulig), then acted together to delegate such authority to Mr. Gulig under the management agreement. Decedent's attorney in fact thereby stood in a position to make distribution decisions. Mrs. Gulig effectuated2003 Tax Ct. Memo LEXIS 144">*168 these decisions by signing checks to the recipients so designated.
1.
a. Right to income
As a threshold matter, we observe that our analysis above of the express documents suggests inclusion of the contributed property under
enjoyment of property but also to "right to the income"
from property. The section2003 Tax Ct. Memo LEXIS 144">*169 does not require that the transferor
pull the "string" or even intend to pull the string on
the transferred property; it only requires that the string
exist. See
b. Possession or enjoyment
The facts of this case support the finding of an implied agreement for retained possession or enjoyment. We have previously considered implicit retention of these benefits under
Circumstances that have been found probative of an implicitly retained interest under
At the outset, we acknowledge that, in contrast to certain of the prior cases, the participants involved in the SFLP/Stranco arrangement generally proceeded such that "the proverbial 'i's were dotted' and 't's were crossed'."
First, we cannot lose sight of the fact that decedent contributed approximately 98 percent of his wealth, including his residence, to the SFLP/Stranco arrangement. Respondent alleges that the transfer left decedent with inadequate assets and cash flow to meet his living expenses, to which the estate takes objection. The estate goes to great lengths to counter respondent's assertion, claiming that decedent at his death possessed liquefiable assets of at least $ 172,000 and received on a monthly basis a pension of $ 1,438.18 and Social Security of $ 1,559. The estate also stresses that respondent has not established the amount of decedent's living expenses and maintains that, even if the $ 33,323.22 in checks paid from decedent's account in August and September were used as an estimate, the purported liquefiable assets would have covered decedent's needs for his concededly short life expectancy of 12 to 24 months. 2003 Tax Ct. Memo LEXIS 144">*172 However, the relative dearth of liquefied (decedent's Form 706 showed two bank accounts with funds totaling $ 762), as opposed to "liquefiable", assets persuades us that decedent and his children and Mr. Gulig all expected that SFLP and Stranco would be a primary source of decedent's liquidity. It is unreasonable to expect that decedent would be forced to rely on sale of assets to meet his basic costs of living.
A second feature highly probative under
Concerning factors that relate to use of entity funds, the estate emphasizes that each disbursement for decedent or his estate was accompanied by a pro rata allotment to Stranco. Where, as here, the only interest in the partnership other than that held by the decedent is de minimis, a pro rata payment is hardly more than a token in nature. In these circumstances, pro rata disbursements are insufficient to negate the probability that the decedent retained economic enjoyment of his or her assets. After all, distributing 1 percent to Stranco would not in any substantial way operate to curb decedent's ability to benefit from SFLP property. Accordingly, we direct our attention to the purpose, as opposed to the mechanics, of partnership distributions and expenditures.
The record reveals several instances where SFLP expended funds in response to a need of decedent or his estate. SFLP paid for Ms. Stone's back surgery to alleviate an injury she sustained in caring for2003 Tax Ct. Memo LEXIS 144">*174 decedent prior to the formation of SFLP. In 1994, SFLP expended nearly $ 40,000 for funeral expenses, estate administration, and related debts, including a $ 19,810.28 check to Olsten to pay for nursing services rendered to decedent before his death. These sums were followed in 1995 and 1996 by further payment of over $ 65,000 for estate expenses and a specific bequest. SFLP also disbursed approximately $ 3 million directed toward decedent's estate and inheritance taxes.
The estate seeks to justify these payments primarily by emphasizing that they were accounted for on SFLP's books as advances to partners and later closed as distributions, with pro rata amounts either advanced or distributed to Stranco. The evidence also indicates that the $ 65,000-plus amount was repaid in January 1997. The estate further explains that certain of these payments from SFLP were necessitated by the delay in probate of decedent's estate engendered by the process of getting TCB to decline executorship.
To the extent that the estate's arguments focus on accounting manipulations, they are unavailing. As demonstrated in
Regarding testamentary characteristics, the SFLP/Stranco arrangement also bears greater resemblance to one man's estate plan than to any sort of arm's-length, joint enterprise.
Moreover, the crucial characteristic is that virtually nothing beyond formal title changed in decedent's relationship to his assets. Mr. Gulig managed decedent's affairs both before and after the transfer. Decedent's children did not obtain a meaningful economic stake in the property during decedent's life. They raised no objections or concerns when large sums were advanced for expenditures of decedent or his estate, thus implying an understanding that decedent's access thereto would not be restricted.
In face of the foregoing realities, the estate argues that whatever possession or enjoyment of the contributed property decedent may have experienced was neither "retained" by means of2003 Tax Ct. Memo LEXIS 144">*177 a contemporaneous agreement nor "with respect to the transferred property". As regards the first point, the estate contends that respondent has offered no evidence to prove a contemporaneous agreement requiring the distributions made, as opposed to an independent subsequent decision by Stranco to make the same outlay. According to the estate:
Even if decisions to make distributions were made based on
"sympathy for poor old dad," i. e., "Oops, Mr.
Strangi imprudently put too much money into SFLP and we need to
give some back" that would not meet the criteria set by
judicial precedent for determining the existence of a retained
expectation of possession of [sic] enjoyment: which is that
there must have been an implied agreement that was
contemporaneous with the transfer of the property at
issue, not a subsequent agreement or act. * * * [Fn. ref.
omitted.]
We are persuaded that the evidence and circumstances detailed above render such a contemporaneous agreement more likely than not.
The second point mentioned stems from the estate's view that pro rata distributions were made not with respect to2003 Tax Ct. Memo LEXIS 144">*178 the transferred property, in which decedent possessed no legal interest under the Texas Revised Limited Partnership Act (TRLPA),
Hence, the preponderance of the evidence establishes that decedent retained possession of, enjoyment of, or the right to income from the property transferred within the meaning of
2.
Although we have held supra that
In
The Commissioner argued that, by retaining voting control over the corporations, Mr. Byrum was in a position to select the corporate directors and thereby to control corporate dividend policy.
Given the above facts, the Supreme Court held "that Byrum did not have an unconstrained de facto power to regulate the flow of dividends to the trust, much less the 'right' to designate who was to enjoy the income from trust property."
The Court emphasized that the independent corporate trustee alone had the right under the trust instrument to pay out or withhold income.
There is no reason to suppose that the three corporations
controlled by Byrum were other than typical small businesses.
The customary vicissitudes of such enterprises -- bad years;
product obsolescence; new competition; disastrous litigation;
new, inhibiting Government regulations; even bankruptcy --
prevent any certainty or predictability as to earnings or
dividends. There is no assurance that a small corporation will
have a flow of net earnings or that income earned will in fact
be available for dividends. Thus, Byrum's alleged de facto
"power to control the flow of dividends" to the trust
was subject to business2003 Tax Ct. Memo LEXIS 144">*183 and economic variables over which he had
little or no control. [
Furthermore, the Supreme Court stressed that "A majority shareholder has a fiduciary duty not to misuse his power by promoting his personal interests at the expense of corporate interests" and the directors of a corporation "have a fiduciary duty to promote the interests of the corporation."
With respect to the case at bar, the estate asserts that decedent retained no legally enforceable rights of the genre required by
Moreover, the estate repeatedly invokes the concept that "any power which Mr. Strangi or Stranco might have would be subject to state law fiduciary duties. Such fiduciary duties effectively render
Conversely, it is respondent's position that
a. Legally enforceable rights
On these facts, decedent can properly be described as retaining a right to designate who shall enjoy property and income from SFLP and Stranco within the meaning of
With respect to SFLP income and as previously recounted in greater detail, the SFLP agreement named Stranco managing general partner and conferred on the managing general partner sole discretion to determine distributions. The Stranco shareholders, including decedent (through Mr. 2003 Tax Ct. Memo LEXIS 144">*186 Gulig), then acted together to delegate this authority to Mr. Gulig through the management agreement. The effect of these actions placed decedent's attorney in fact in a position to make distribution decisions. Mrs. Gulig effectuated such decisions by executing checks to the recipients so designated.
In addition to the rights described above related to income, decedent also retained the right, acting in conjunction with other Stranco shareholders, to designate who shall enjoy the transferred SFLP property itself. The Supreme Court indicated in
As regards property transferred to Stranco and income therefrom, decedent held the right, in conjunction with one or more other Stranco directors, to declare dividends. The corporation's bylaws authorize the board of directors to declare dividends from the entity. For the board to take such action, a majority vote of the directors at a meeting with a quorum present is sufficient. Under the bylaws, a majority of the directors then serving constitutes a quorum. Because Stranco had five directors, a quorum would consist of three, so two directors (e. g. 2003 Tax Ct. Memo LEXIS 144">*188 , decedent through Mr. Gulig and one other) could potentially act together to declare a dividend. The Stranco shareholders agreement further provided that each of the initial five directors would be reelected annually, thus effectively ensuring decedent's position on the board.
In response to various of the above concepts pertaining to joint action, particularly by stockowners, the estate suggests: "If the mere fact that a shareholder could band together with all of the other shareholders of a corporation and such banding together would be sufficient to cause inclusion under
To summarize, review of the documentary evidence discussed above reveals that decedent here retained rights of a far different2003 Tax Ct. Memo LEXIS 144">*189 genre from those at issue in
b. Constraints upon rights to designate
One circumstance highlighted by the Supreme Court was the existence of an independent trustee with the sole authority ultimately to pay or withhold income from the trust. Here, in contrast, no similar layer of independence was interposed. Rather, decisions with respect to distributions were placed in Stranco, of which decedent owned 47 percent and was the largest shareholder. All decisions ultimately were made by Mr. Gulig, who continued to act as decedent's attorney in fact.
Another element stressed by the Supreme Court was the manner in which the flow of funds allegedly under Mr. Byrum's control would be subject to economic and business realities consequent upon the status of the relevant corporations as typical small operating enterprises. Earnings and dividends of a small operating company could be affected by, inter alia, changes in products, in competition, or in industry regulation and outlook; use of funds for replacement of plant and equipment or for growth and expansion; 2003 Tax Ct. Memo LEXIS 144">*191 and the need to retain sufficient earnings for working capital. These complexities do not apply to SFLP or Stranco, which held only monetary or investment assets.
Yet another constraining factor cited by the Supreme Court was the presence of fiduciary duties held by directors and shareholders, and it is upon this aspect of the Supreme Court's opinion that the estate focuses. The Supreme Court emphasized that corporate directors and shareholders have a fiduciary duty to promote the best interests of the entity, as opposed to their personal interests. The Supreme Court further pointed to a substantial number of unrelated minority shareholders who could enforce these duties by suit.
The fiduciary duties present in
The estate summarizes its contentions regarding fiduciary duties as follows:
Just like Mr. Byrum, Mr. Strangi's "rights" (whatever
those rights appear to be) were severely limited by the
fiduciary duties of other people who (according to Byrum)
presumably could be counted on the [sic] observe those
restraints against whatever desires they might otherwise have
had to run pell-mell to do the bidding of the Decedent: (1) Mr.
Gulig, who (separate and apart from his role as attorney-in-fact
for Mr. Strangi) had fiduciary duties to Stranco, whom he served
as manager; (2) the directors of Stranco, who had fiduciary
duties to both Stranco and to SFLP as a whole; and (3) McLennan
County Community College ("MCCC"), which had rights as
a minority shareholder of Stranco and a fiduciary obligation2003 Tax Ct. Memo LEXIS 144">*193 to
enforce such rights for the benefit of its own beneficiaries as
well as the people of the State of Texas (with the Attorney
General of Texas having the ability to step in to enforce such
rights if MCCC failed in its duties). * * *
None of the foregoing obligations cited by the estate is sufficiently on par with those detailed in
Concerning Mr. Gulig, any fiduciary duties that Mr. Gulig might have had in his role as manager of Stranco (and thereby of SFLP) are entitled to comparatively little weight on these facts. Prior to his instigation of the SFLP/Stranco arrangement, Mr. Gulig stood in a confidential relationship, and owed fiduciary duties, to decedent personally as his attorney in fact. Thus, to the extent that Stranco or SFLP's interests might diverge from those of decedent, we do not believe that Mr. Gulig would disregard his preexisting obligation to decedent.
As regards fiduciary obligations of Stranco and its directors, these duties, too, have little significance in the present context. Although Stranco would owe a fiduciary duty2003 Tax Ct. Memo LEXIS 144">*194 to SFLP and to the limited partners, decedent owned the sole, 99-percent limited partnership interest. The rights to designate traceable to decedent through Stranco cannot be characterized as limited in any meaningful way by duties owed essentially to himself. Nor do the obligations of Stranco directors to the corporation itself warrant any different conclusion. Decedent held 47 percent of Stranco, and his own children held 52 of the remaining 53 percent. Intrafamily fiduciary duties within an investment vehicle simply are not equivalent in nature to the obligations created by the
With respect to the role of
Lastly, we are unpersuaded that any different result should obtain on account of the Commissioner's having taken a contrary position in certain previous administrative rulings. As the estate repeatedly brings to our attention, the Commissioner has2003 Tax Ct. Memo LEXIS 144">*195 cited
In sum, the estate's averment that decedent's "'rights' * * * were severely limited by the fiduciary duties of other people who (according to Byrum) presumably could be counted on * * * [to] observe those restraints" rests on a faulty legal premise and ignores factual realities. First, the Supreme Court's opinion in
Having decided that decedent retained an interest in the assets transferred to SFLP and Stranco for purposes of
First, no bona fide sale, in the sense of an arm's-length transaction, occurred in connection with decedent's transfer of property to SFLP and Stranco. Mr. Gulig, as decedent's attorney in fact, prepared the arrangement using Fortress materials in absence of any meaningful negotiation2003 Tax Ct. Memo LEXIS 144">*197 or bargaining with other anticipated interest-holders. He determined how the entities would be structured and operated, what property would be contributed, and what interests various parties would obtain therein. Hence, decedent essentially stood on both sides of the transaction, a fact unchanged by the manner in which the Strangi children opted to join after the substantive decisions had been made.
Second, full and adequate consideration does not exist where, as here, there has been merely a "recycling" of value through partnership or corporate solution. See
to call what occurred here a transfer for consideration within
the meaning of
adequate and full consideration, would stretch the exception far
beyond its intended scope. In actuality, all decedent did was to
change the form in which he held his beneficial interest2003 Tax Ct. Memo LEXIS 144">*198 in the
contributed property. * * * Without any change whatsoever in the
underlying pool of assets or prospect for profit, as, for
example, where others make contributions of property or services
in the interest of true joint ownership or enterprise, there
exists nothing but a circuitous "recycling" of value. We
are satisfied that such instances of pure recycling do not rise
to the level of a payment of consideration. To hold otherwise
would open
unilateral paper transformations.
We see no distinction of consequence between the scenario analyzed in
With respect to the amount includable in decedent's gross estate on account of a retained interest, the estate makes the following assertion:
decedent's estate to the extent that the decedent
retained an interest in the transferred property. Assuming
arguendo that Decedent did retain an interest in some of the
property transferred to SFLP,
automatically require inclusion of all of the property
transferred by Decedent to SFLP and Respondent has not sustained
2003 Tax Ct. Memo LEXIS 144">*200 his burden of proof of establishing the extent, if any, of any
retained interest.
The foregoing premise, however, rests on a faulty understanding of the statute's operation. As we recently explained in
the full fair market value, at the date of death, of all
property transferred in which the decedent had retained an
interest, rather than the value of only the retained
interest.
legislative policy to "include in a decedent's gross estate
transfers that are essentially testamentary -- i.e., transfers
which leave the transferor a significant interest in or control
over the property transferred during his lifetime."
(1969). Thus, an asset transferred by a decedent while he was
alive cannot be excluded from his gross estate unless he
"absolutely, unequivocally, irrevocably, and without
2003 Tax Ct. Memo LEXIS 144">*201 possible reservations, parts with all of his title and all of
his possession and all of his enjoyment of the transferred
property."
Regulations further detail that "If the decedent retained or reserved an interest or right with respect to a part only of the property transferred by him, the amount to be included in his gross estate under
Here, the record reveals that no part of the transferred property was exempt from the rights or enjoyment retained by decedent. The relevant documents make no distinction among the various assets contributed, nor does the evidence reflect that Mr. Gulig looked to particular assets in determining whether amounts should be distributed. The preponderance of the evidence therefore establishes that the full value*202 of the transferred assets is includable under
Pursuant to
To reflect the foregoing,
Decision will be entered under