ESTATE OF Thеodore THOMPSON, Deceased, Betsy T. Turner, Executrix, Appellant v. COMMISSIONER OF INTERNAL REVENUE.
No. 03-3173.
United States Court of Appeals, Third Circuit.
Argued April 21, 2004. Sept. 1, 2004.
382 F.3d 367
Michael J. Haungs, (Argued), Jonathan S. Cohen, United States Department of Justice, Tax Division, Washington, DC, for Appellee.
Before SCIRICA, Chief Judge, ROSENN and GREENBERG, Circuit Judges.
SCIRICA, Chief Judge.
This case involves the application of
I.
In the early 1990s, decedent Theodore R. Thompson, along with his son Robert Thompson and daughter Betsy Turner, began to investigate estate plans for managing his assets.1 In April 1993, they implemented the Fortress Plan,2 an estate plan offered by the Fortress Financial Group, Inc. that utilized family limited partnerships to protect family assets. A financial advisor to decedent‘s family stated the primary advantages of the Fortress Plan included: (1) lowering the taxable value of the estate, (2) maximizing the preservation of assets, (3) reducing income taxes by having the corporate general partner provide medical, retirement, and ‘income splitting’ benefits for family members, and (4) facilitating family and charitable giving. Thompson, 84 T.C.M. at 376. The advisor also stated that, [a]ll of the benefits above can be achieved while total control of all assets is retained by the directors of the Corporate General Partner. Id. Pursuant to the plan, decedent and his family
A.
On April 21, 1993, decedent, his daughter Betsy and her husband George Turner formed the Turner Partnership and Turner Corporation. Decedent contributed $1,286,000 in securities, along with notes receivable from Betsy Turner‘s children totaling $125,000, in exchange for a 95.4% limited partnership interest in the Turner Partnership. George Turner contributed $1,000 in cash and real property in the state of Vermont valued at $49,000 in exchange for a 3.54% limited partnership interest. Turner Corporation, the sole genеral partner, held the remaining 1.06% interest.3 Shares in Turner Corporation were issued to decedent (490 shares or 49%), Betsy Turner (245 shares or 24.5%), George Turner (245 shares or 24.5%), and National Foundation, Inc. (20 shares or 2%), an unrelated tax-exempt entity. Decedent, Betsy and George Turner served as directors and officers of Turner Corporation.
Decedent and his son Robert Thompson formed the Thompson Partnership on April 30, 1993, and the Thompson Corporation on April 21, 1993. Decedent contributed $1,118,500 in securities, along with notes receivable totaling $293,000, in exchange for a 62.27% limited partnership interest. Robert Thompson contributed mutual funds worth $372,000, and a ranch property in Norwood, Colorado, appraised at $460,000, in exchange for a 36.72% limited partnership interest. Thompson Corporation, as general partner, held the remaining 1.01% interest. Decedent and Robert Thompson each held 490 shares (49%) of Thompson Corporation. Robert H. Thompson, an unrelated third party, held the remaining 2% interest. Robert Thompson, Robert H. Thompson and decedent served as officers and directors of Thompson Corporation.
As of July 1993, decedent, then age ninety-five, had transferred $2.8 million in assets—$2.5 million in the form of marketable securities—to the Turner and Thompson Partnerships. Decedent retained $153,000 in personal аssets, and received an annual income of $14,000 from two annuities and Social Security. At the time of transfer, decedent had annual expenses of $57,202, and an actuarial life expectancy of 4.1 years. Theodore R. Thompson died on May 15, 1995.
B.
1.
The Turner Partnership assets consisted primarily of marketable securities contributed by decedent, which the partnership continued to hold in decedent‘s brokerage account with minimal post-transfer trading. After formation, however, individual partners contributed additional assets to the Turner Partnership. In December 1994, Betsy and George Turner contributed a 22-acre parcel of land adjacent to their private residence, known as the Woodlands Property. Betsy and George Turner also assigned to the Turner Partnership their interests in a real estate partnership, known as Woodside Properties, which held six apartment units. Phoebe and Betsy Turner retained title to the underlying real estate assets after transfer.
The Turner Partnership engaged in several business transactions, although none
In 1993, the Turner Partnership invested $186,000 in a modular home construction project brokered by Phoebe Turner known as the Lewisville Properties. The property was sold in 1995 for a loss of $60,000. Phoebe Turner received a $9,120 commission on the transaction.
The Turner Partnership also made loans to members of the Turner family. Although the partnership formally charged family members interest on these loans, interest payments were often late or not paid at all, and loans were frequently reamortized. But the partnership never pursued enforcement action against any of its debtors nor made loans to anyone outside the Turner family.
2.
Like the Turner Partnership, most of the Thompson Partnership assets consisted of marketable securities contributed by decedent and Robert Thompson. Here again, post-transfer trading in the securities was low. The оnly other operational activities of the Thompson Partnership related to the Norwood, Colorado ranch contributed by Robert Thompson. Robert previously used the ranch as his primary residence, and continued to do so after transfer paying an annual rent of $12,000. Likewise, Robert Thompson continued to raise mules on the property and directly received income from the sale of mules. The record does not demonstrate any other business or commercial activities on the Norwood ranch. Nevertheless, for the years 1993 through 1995, the Thompson Partnership paid the Thompson Corporation an annual management fee for the Norwood ranch in the amounts of $23,625, $45,000, and $47,500, respectively. Thompson Corporation in turn paid Robert Thompson an annual salary of $32,001, and Karen Thompson, Robert‘s wife, a monthly salary of $350. Thompson Corporation also carried insurance on Robert and Karen Thompson, and paid various personal expenses. The Thompson Partnership claimed losses from the operation of the ranch on its tax returns for the years 1993 through 1996.
3.
In addition to the foregoing activities, both the Turner and Thompson Partnerships made distributions of cash and partnership interests to decedent during his lifetime. In 1993, the Turner and Thompson Partnerships made cash distributions of $40,000 each to decedent which he used to provide holiday gifts to family members.
C.
As noted, decedent died testate on May 15, 1995, at age ninety-seven. At the time of his death, decedent held approximately $89,000 in liquid assets, a promissory note in principal amount of approximately $9,000, a majority interest in the Turner and Thompson Partnerships, and shares in their respective corporate general partners. On or about May 27, 1995, the Turner and Thompson Partnerships respectively sold $347,000 and $350,000 in securities to partially fund bequests in decedent‘s will and pay decedent‘s estate taxes.
Decedent‘s executors filed a federal estate tax return, Form 706, with the Internal Revenue Service on February 21, 1996, and filed a supplemental return on December 10, 1996. The estate reported decedent held a 87.65% interest in thе Turner Partnership and a 54.12% interest in the Thompson Partnership valued at $875,811 and $837,691 respectively. The estate reported decedent held 490 shares of Turner Corporation stock and 490 shares of Thompson Corporation stock valued at $5,190 and $7,888 respectively. The estate also reported prior adjusted taxable gifts of $19,324 related to decedent‘s lifetime gifts of partnership interests.6 The estate calculated these values by applying a 40% discount rate to the net asset value of the partnerships and corporations for lack of control and marketability.
In January 1999, the IRS issued a notice of deficiency in the amount of $707,054, adjusting decedent‘s taxable estate from $1,761,219 to $3,203,506. The most significant adjustment involved the reported value of decedent‘s interests in the family limited partnerships. The Commissioner explained the “20 percent minority discount and the 20 percent marketability discount has been disallowed on each of the [Turner and Thompson] partnerships.” As a result, the Commissioner increased the value of decedent‘s interest in the Turner Partnership from $875,811 to $1,717,977, and increased the value of his interest in the Thompson Partnership from $837,691 to $1,396,152. These adjustments increased decedent‘s taxable estate by $1,400,627.7
In its amended answer to the estate‘s petition for redetermination in the Tax Court, the Commissioner asserted the family partnerships and corporations should be disregarded for tax purposes, and therefore decedent‘s gross estate should include the undiscounted value of
II.
The Tax Court found the family partnerships were validly formed and properly recognized for federal estate tax purposes.8 The court nevertheless sustained application of
In light of decedent‘s personal situation, the fact that the contributed property constituted the majority of decedent‘s assets, including nearly all of his investments, the establishment of the partnerships is far more consistent with an estate plan than with any sort of arm‘s-length joint enterprise between partners. In summary, we are satisfied that the partnerships were created principally as an alternate vehicle through which decedent would provide for his children at his death.
Id.
The court also determined the transfer was not exempt from
Accordingly, the Tax Court applied
III.
A.
The Intеrnal Revenue Code imposes a federal tax on “the taxable estate of every decedent who is a citizen or resident of the United States.”
Transfers with retained life estate.
(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 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 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.
Section 2036 addresses the concern that inter vivos transfers often function as will substitutes, with the transferor continuing to enjoy the benefits of his property during life, and the beneficiary receiving the property only upon the transferor‘s death. See United States v. Grace, 395 U.S. 316, 320, 89 S.Ct. 1730, 23 L.Ed.2d 332 (1969) ([T]he general purpose of the statute was to include in a decedent‘s gross estate transfers that are essentially testamentary.). As such,
B.
Section 2036(a)(1) returns an inter vivos transfer to decedent‘s gross estate if there is an express or implied agreement at the time of transfer that the transferor will retain lifetime possession or enjoyment of, or right to inсome from, the transferred property.
After reviewing the record evidence, we see no clear error in the Tax Court‘s finding of an implied agreement between decedent and his family that decedent would “continue[] to be the principal economic beneficiary of the contributed property” and retain enjoyment of the transferred property sufficient to trigger
Decedent‘s de jure lack of control over the transferred propеrty does not defeat the inference of an implied agreement in these circumstances. See McNichol, 265 F.2d at 673 (Substance and not form is made the touchstone of taxability.). The Tax Court recognized that although “some change ensued in the formal relationship of decedent to the assets he contributed to the partnership, ... [the] practical effect of these changes during decedent‘s life was minimal.” Thompson, 84 T.C.M. at 387. Decedent could not formally withdraw funds from the partnerships without the permission of their respective corporate general partners, in each case, a corporation directed by Betsy Turner or Robert Thompson in which decedent held a 49% interest. But both Bet-
Finally, the general testamentary сharacter of the partnership arrangements supports the inference of an implied agreement. Decedent transferred the vast majority of his investment assets to two family limited partnerships when he was ninety-five years old. The record reveals, with one exception, that neither partnership engaged in business or loan transactions with anyone outside the family.18 Transferring this type and volume of assets to family partnerships under these circumstances is more consistent with an estate plan than an investment in a legitimate business.
In sum, we see no clear error in the Tax Court‘s finding of an implied agreement at the time of transfer that decedent would retain enjoyment and economic benefit of the property transferred to the family limited partnerships, and that decedent, in fact, continued to be the principal economic beneficiary of the transferred property during his lifetime.19
A.
An inter vivos transfer with a retained lifetime interest will not be returned to the gross estate if the transfer constitutes a “bona fide sale for adequate and full consideration.”
The Tax Court first announced the “recycling” of value concept in Estate of Harper v. Commissioner, T.C. Memo 2002-121; 83 T.C.M. (CCH) 1641 (2002), 2002 Tax Ct. Memo LEXIS 127. In Harper, the Tax Court denied the bona fide sale exception to an inter vivos transfer where:
[A]ll decedent did was change the form in which he held his beneficial interest in the contributed property. . . . Essentially, the value of the partnership interest the Trust received derived solely from the assets the Trust had just contributed. Without any change whatsoever in the underlying pool of assets or prospect for profit . . . there exists nothing but a circuitous “recycling” of value. We are satisfied that such instances of pure recycling do not risе to the level of a payment of consideration. To hold otherwise would open section 2036 to a myriad of abuses engendered by unilateral paper transformations.
Id. at 1653. The Tax Court concluded that where a “transaction involves only the gen-
ship and corporate general partner. As a result, the Tax Court found the “governing documents contain no restrictions that would preclude decedent himself, acting through [his attorney-in-fact], from being designated as a recipient of income from [the partnership].” Id. at 1337. Based on the language in the governing documents, the court concluded decedent retained a “right to income” from the partnership assets. Id.; see also Estate of Pardee v. Comm‘r, 49 T.C. 140, 148 (1967) (finding a “right to income” within the meaning of
More recently, the Tax Court affirmed this reasoning in Strangi v. Commissioner, 85 T.C.M. (CCH) 1331 (2003). Similar to the facts at issue here, Strangi involved an inter vivos transfer of assets to a family limited partnership as part of a Fortress estate plan. Decedent transferred 98% of his total assets, including his residence, to a family limited partnership. From the time of its funding until decedent‘s death, the Strangi family limited partnership engaged in no business operations or commercial transactions. The only economic activity conducted by the partnership involved paying for decedent‘s health and nursing expenses, funeral and estate tax costs. As such, the Tax Court concluded decedent‘s inter vivos transfers to the family limited partnership were not transfers for consideration within the meaning of
We see no distinction of consequence between the scenario analyzed in Estate of Harper v. Commissioner, supra, and that of the present case. Decedent contributed more than 99 percent of the total property placed in the [family limited partnership] and received back an interest the value of which derived almost exclusively from the assets he had just assigned. Furthermore, the [family limited partnership] patently fails to qualify as the sort of functioning business enterprise that could potentially inject intangibles that would lift the situation beyond mere recycling.
For essentially the same reasons, we conclude there was no transfer for consideration within the meaning of
In the case of the Thompson Partnership, the only “active operations” claimed by the estate involved leasing the Norwood, Colorado ranch back to its contributing partner and former resident, Robert Thompson, for an annual fee of $12,000. The Norwood ranch was not otherwise operated as an income producing business, either before or after Robert Thompson contributed the property to the partnership. Robert Thompson apparently generated some income from the sale of mules raised on the property, but income from these sales went to Robert directly and not to the partnership. Nevertheless, the Thompson Partnership paid an annual “management fee” ranging between $23,625 and $47,500 to the Thompson Corporation, which in turn paid Robert Thompson an annual salary of $32,001. We see no error in the Tax Court‘s finding this putative business arrangement amounted to no more than a contrivance, and did not constitute the type of legitimate business operations that might provide a substantive non-tax benefit for transferring assets to the Thompson Partnership.
The operations of the Turner Partnership were more extensive, but still fail to provide sufficient objective indicia of a legitimate business operation. Although the Turner Partnership made numerous loans to Betsy Turner‘s children and grandchil-
The Turner Partnership‘s $186,000 investment in the Lewisville Properties gives us some pause, but ultimately does not alter our conclusion. Unlike the other activities of the Turner and Thompson Partnerships, this investment seems to qualify as a legitimate business transaction with a third-party.22 However, based on the record evidence in this casе, we conclude that any legitimizing effect of the Turner Partnership‘s investment in the Lewisville Properties is overwhelmed by the testamentary nature of the transfer and subsequent operation of the partnership.
In addition to the lack of legitimate business operations, the form of the transferred assets—predominately marketable securities—is significant to our assessment of the potential non-tax benefits available to decedent as a result of the transfer. Other than favorable estate tax treatment resulting from the change in form, it is difficult to see what benefit could be derived from holding an untraded portfolio of securities in this family limited partnership with no ongoing business operations. Compare Church v. United States, No. SA-97-CA-0774-OG, 2000 WL 206374, 2000 U.S. Dist. LEXIS 714 (W.D. Tex. Jan 18, 2000), aff‘d without published opinion, 268 F.3d 1063 (5th Cir. 2001) (applying
The estate claims decedent‘s transfer of liquid, marketable securities and other assets to the family limited partnerships reduced the value of those assets by 40% because of the resulting lack of control and marketability. Indeed, as the Tax Court found, decedent‘s financial advisors presented this reduction in value for estate tax purposes as one of the primary advantages of using the Fortress Plan. In one sense, claiming an estate tax discount on assets received in exchange for an inter vivos transfer should defeat the
That said, the Tax Court has held that the dissipation of value resulting from the transfer of marketablе assets to a closely-held entity will not automatically constitute inadequate consideration for purposes of
Nonetheless, we believe this sort of dissipation of value in the estate tax context should trigger heightened scrutiny into the actual substance of the transaction. Where, as here, the transferee partnership does not operate a legitimate business, and the record demonstrates the valuation discount provides the sole benefit for converting liquid, marketable assets into illiquid partnership interests, there is no transfer for consideration within the meaning of
B.
We also conclude decedent‘s transfers to the family limited partnership do not constitute “bona fide sales” within the meaning of
That said, however, neither the Internal Revenue Code nor the governing Treasury Regulations define “bona fide sale” tо include an “arm‘s length transaction.” Treasury Regulation 20.2036-1(a) defines “bona fide sale for an adequate and full consideration” as a transfer made “in good faith” and for a price that is “adequate and full equivalent reducible to a money value.”
[J]ust because a transaction takes place between family members does not impose an additional requirement not set forth in the statute to establish that it is bona fide. A transaction that is a bona fide sale between strangers must also be bona fide between members of the same family. In addition, the absence of negotiations between family members over price or terms is not a compelling factor in the determination ... particularly when the exchange value is set by objective factors.
Id. at 263 (discussing Wheeler, 116 F.3d 749) (internal citations omitted).
We similarly believe a “bona fide sale” does not necessarily require an “arm‘s length transaction” between the transferor and an unrelated third-party. Of course, evidence of an “arm‘s length transaction” or “bargained-for exchange” is highly probative to the
We are mindful of the mischief that may arise in the family estate planning context. As the Supreme Court observed, “the family relationship often makes it possible for one to shift tax incidence by surface changes of ownership without disturbing in the least his dominion and control over the subject of the gift or the purposes for which the income from the property is used.” Comm‘r v. Culbertson, 337 U.S. 733, 746, 69 S.Ct. 1210, 93 L.Ed. 1659 (1949). But such mischief can be adequately monitored by heightened scrutiny of intra-family transfers, and does not require a uniform prohibition on transfers to family limited partnerships. See id. (“[The] existence of the family relationship does not create a status which itself determines tax questions, but is simply a warning that things may not be what they seem.“); Kimbell, 371 F.3d at 265 (“[W]hen the transaction is between family members, it is subject to heightened scrutiny.“).
However, while a “bona fide sale” does not necessarily require an “arm‘s length transaction,” it still must be made in good faith. See
After a thorough review of the record, we agree with the Tax Court that decedent‘s inter vivos transfers do not qualify for the
V.
For the foregoing reasons, we will affirm the decision of the Tax Court.
GREENBERG, Circuit Judge, concurring.
I join in Chief Judge Scirica‘s opinion in this case without reservation but want to add a few thoughts with respect to the issue of whether we are dealing with transfers for “adequate and full consideration in money or money‘s worth.” Preliminarily on this point I think that Chief Judge Scirica gets to the heart of the matter by noting that “[i]n one sense, claiming an estate tax discount on assets received in exchange for an inter vivos transfer should defeat the
This conclusion is consistent with Estate of D‘Ambrosio v. Commissioner, 101 F.3d 309, 312 (3d Cir. 1996) (quoting Estate of Frothingham v. Commissioner, 60 T.C. 211, 215 (1973)), in which we indicated that a transfer is for adequate and full consideration when “the transferred property is replaced by other property of equal value received in exchange.” Our conclusion in D‘Ambrosio was unassailable inasmuch as section 2036(a) sets the standard for “adequate and full consideration” in the unmistakable term of “money or money‘s worth” and thus does not permit the use of intangible nonmonetary considerations in determining value. Therefore, a transfer of $1,000,000 in assets will be for an adequate and full consideration if it is for $1,000,000 in money. If a transfer is for property then the “money‘s worth” of the property should be of the same value as money received for the transferred property would have had to have been, i.e., $1,000,000.23
In this case, inasmuch as the transfers were not for money the exception can apply only if the transfers were for property that can be regarded as being for “money‘s worth.” Yet one of the motivations for the transfers was that there would be a substantial discount, claimed by the estate to be 40%, when the assets transferred instead of being valued directly were valued indirectly as the direct valuation for estate tax purposes was of the estate‘s interests in the partnerships and corporations holding the assets. To me nothing could be clearer than a conclusion that if the discount was justified (even if in a lesser percentage than the estate claimed) in a valuation sense then the decedent could not have received an adequate and full consideration for his transfers in terms of “money‘s worth.” Thus, I think it clear that the Fortress Plan as applied in a case in which the decedent retained for his life the enjoyment from the transferred рroperty should be completely ineffective to create a tax benefit by reducing the value of the decedent‘s estate as the transferred property must be recaptured by the estate for estate tax purposes. Accordingly, in joining in Chief Judge Scirica‘s opinion I agree with it on the consideration issue.
I, however, wish to make three additional points. The first point relates to the estate‘s vigorous argument, which Chief Judge Scirica does not address, that the decedent did not make a gift for gift tax purposes upon the formation of the partnerships and therefore there must have been an adequate and full consideration for his transfers. The estate explains its argument as follows:
Here, the IRS has not contended nor did the Tax Court find that there was a gift on formation of the Partnerships and no such gift was made. No gratuitous transfer occurred upon the formation of the Partnerships because each participant‘s interest in the Partnerships was proportional to the capital contributed. The partners received a pro-rata interest in each Partnership equal to their pro-rata contribution. [The decedent‘s] contribution did not enhance any other partner‘s interests. None of the partners received any proрerty from [the decedent] directly or indirectly when the Partnerships were formed. Therefore, no gratuitous transfer oc-
curred upon the formation of the Partnerships and section 2036(a)(1) is inapplicable.
Appellant‘s br. at 24 (footnote omitted). The estate‘s predicate for the argument is that the gift tax and estate tax are in pari materia so that a transfer made for an adequate and full consideration for gift tax purposes also is made for an adequate and full consideration under section 2036(a). The Commissioner answers that “[t]here were no gifts on formation [of the partnerships] not because there was full consideration, but because there were no gifts at all. Decedent‘s retention of control over the assets is inconsistent with a donative transfer.” Appellee‘s br. at 47 n.12.
The Commissioner is not being inconsistent in contending that there was not an adequate and full consideration for the transfers under section 2036(a) while acknowledging that the decedent did not make taxable gifts upon the creation of the partnerships. Even if the estate‘s claim that the discount is justified would be well-founded were it not for section 2036(a), that assumption does not mean that the value decedent lost upon the creation of the partnerships went to someonе else. Rather, the recycling of the assets so that they were valued indirectly rather than directly simply caused them to lose value. Therefore, precisely as the Commissioner contends, there were no gifts at all when the partnerships were formed. Indeed, as the estate‘s brief plainly reveals, the estate, perhaps not recognizing the significance of its concession, acknowledges that none of the partners received any property from the decedent “directly or indirectly” when the partnerships were formed. Thus, there were no gifts and the estate‘s observation that the gift tax and estate tax are in pari materia is immaterial as this relationship does not change the fact that the decedent enjoyed the property he transferred until his death and did not receive adequate and full consideration for it in money‘s worth.
The second point I make is that the logic of the court in this case should not be applied too broadly and I see no reason why it will be. In this regard I acknowledge that there surely are numerous partnerships in which a partner dies after contributing assets to the partnership and therefore has made a transfer that arguably could be said to be within section 2036(a). Certainly the court is not holding that in all such circumstanсes section 2036(a) could be applicable requiring that the valuation of the decedent‘s interest at death be made by looking through his interest in the partnership directly to its assets, thus disregarding the partnership‘s existence for purposes of estate tax valuation.
Here, however, we have a narrow situation in which the partnerships were created in furtherance of what the estate calls an “estate plan” with “[t]he primary purposes ... to provide a vehicle for gift giving, to preserve assets and ultimately to transfer the partnership interests ... in an orderly and efficient fashion.” Appellant‘s br. at 5. In addition, as the Tax Court pointed out, the parties intended that implementation of the plan save taxes by lowering the taxable value of the estate. Furthermore, as the estate acknowledges, “the primary objective of the partners in forming the Partnerships was not to engage in or acquire active trades and businesses, [though] the Partnerships were involved in various investments and activities.” Id. at 29. In fact, the Commissioner emphasizes that the “estate concedes that the partnerships never intended to carry on any sort of active trade or business,” and he points out that “the partnerships [did not] carry on any sort of common investment activity of any
I make this second point as I do not want it thought that the court‘s reasoning here should be applied in routine commercial circumstances and in this regard I note that Chief Judge Scirica observes that the partnerships do not operate legitimate businesses. Accordingly, I believe that the court‘s opinion here should not discourage transfers in ordinary commercial transactions, even within families. Cf. Estate of Strangi, 115 T.C. 478, 484 (2000) (“Family partnerships have long been recognized where there is a bona fide business carried on after the partnership is formed.“), aff‘d in part, rev‘d in part on other grounds, 293 F.3d 279 (5th Cir. 2002). Rather, we are addressing a situation in which the family partnerships obviously were used as tax dodges in circumstances that section 2036(a) was intended to thwart. Therefore, the result the court reaches on the adequate and full consideration issue readily accommodates the estate‘s observation that “[a]n interest received in a closely held business entity typically has a value less than a pro rata part of the contributed assets for reasons relating to lack of marketability, minority interest and the like.” Appellant‘s reply br. at 14.
This second point is important because courts shоuld not apply section 2036(a) in a way that will impede the socially important goal of encouraging accumulation of capital for commercial enterprises. Therefore in an ordinary commercial context there should not be a recapture under section 2036(a) and thus the value of the estate‘s interest in the entity, though less than the value of a pro rata portion of the entity‘s assets, will be determinative for estate tax purposes. This case simply does not come within that category.
My third point relates to Estate of Stone v. Commissioner, 86 T.C.M. (CCH) 551, 581 (2003), in which, in language similar to that of the estate that I quoted above, the court indicated:
[The Commissioner] nonetheless argues that, because Mr. Stone and Ms. Stone received respective partnership interests in each of the Five Partnerships the value of which, taking into account appropriate discounts, was less than the value of the respective assets that they transferred to each such partnership, they did not receive adequate and full consideration for the assets transferred. [The Commissioner‘s] argument in effect reads out of section 2036(a) the exception for ‘a bona fide sale for an adequate and full consideration in money or money‘s worth’ in any case where there is a bona fide, arm‘s-length transfer of property to a business entity (e.g., a partnership or a corporation) for which the transferor receives an interest in such entity (e.g., a partnership interest or stock) that is proportionate to the fair market value of the property transferred to such entity and the determination of the value of such an interest takes into account appropriate discounts. We reject such an argument by [the Commissioner] that reads out of section 2036(a) the exception that Congress expressly prescribed when it enacted that statute.
The Commissioner correctly recognizes that Stone is inconsistent with his position here and the estate understandably relies on Stone. I reject Stone on the quoted point as the Commissioner‘s position in no way reads the exception out of section 2036(a) and the Tax Court does not explain
Judge Rosenn joins in this concurring opinion.