In Uncategorized on 02/23/2012 at 08:52

Or, Sly and the Family Stone  Do It Right

That’s the lesson Judge Goeke has for us in Estate of Joanne Harrison Stone, Deceased, Cosby A. Stone and Michael D. Stone, Personal Representatives, 2012 T.C. Mem. 48, filed 2/22/12.

The late Jo was a Sunday school teacher for 60 plus years, up to the Sunday before she died, at the age of 81. In her spare time, she and husband Roy produced six children, and the six produced a platoon of grands.

When not spreading the good news, Jo worked with Roy and some of their kids in the family publishing business, while acquiring 740 acres of Cumberland County, Tennessee. To create a lake next to the property of son Steve, and to protect and preserve (and maybe develop), along with kids and grandkids, the woodland parcels next the lake site, Jo and Roy set up the Stone Family Limited Partnership (FLP), under the guidance of local attorney Harry Sabine (and I mention his name because he got it right, and saved his client’s estate $2.5 million in estate tax).

They had the land appraised (and this appraisal was apparently so good IRS didn’t attack it),  gifted limited partnership interests to kids, kids’ spouses and grandkids (inartfully, but well enough to survive), and paid gift tax based upon the appraisal (with no blockage or fractional interest discount).

The issue here is the Section 2036(a) landmine. Did Jo still have enough hold on the partnership assets so that they belong in her estate?

Judge Goeke unpacks the Section 2036(a) landmine thus: “Section 2036(a) generally provides that if a decedent makes an inter vivos transfer of property other than a bona fide sale for adequate and full consideration and retains certain enumerated rights or interests in the property which are not relinquished until death, the full value of the transferred property will be included in the decedent’s gross estate. Section 2036(a) is applicable when three conditions are met: (1) the decedent made an inter vivos transfer of property; (2) the decedent’s transfer was not a bona fide sale for adequate and full consideration; and (3) the decedent retained an interest or right enumerated in section 2036(a)(1) or (2) or (b) in the transferred property which he or she did not relinquish before death.” 2012 T.C. Mem. 48, at pp. 10-11.

Most important in establishing adequate and full consideration, there was a bona fide non-tax purpose in the FLP. “Testimony at trial established that a significant purpose of decedent’s transfer of the woodland parcels to SFLP was to create a family asset managed by decedent’s family. Decedent and Mr. Stone desired that their children, their children’s spouses, and their grandchildren work together to develop and sell homes near the lake. We have previously found that a desire by a decedent to have assets jointly managed by family members, even standing alone, is a sufficient nontax motive for purposes of section 2036(a).” Estate of Mirowski v. Commissioner, T.C. Memo. 2008-74.” 2012 T.C. Mem 48, at p. 14.

When two of their kids divorced, and the outgoing spouses deeded back their interests in the land (but not in the FLP),  and Jo and Roy paid the nominal real estate taxes from their own funds and not FLP funds, IRS attempted to blow up the FLP because partnership formalities weren’t followed. But Judge Goeke didn’t buy it.

“We agree with respondent that the partners of SFLP failed to respect some partnership formalities.

“Other factors, however, support the estate’s argument that a bona fide sale occurred. First,  decedent and Mr. Stone did not depend on distributions from SFLP as no distributions were ever made. Second, decedent and Mr. Stone actually did transfer the woodland parcels to SFLP. Third, there was no commingling of partners’ personal and partnership funds, as SFLP had no partnership funds. Fourth, no discounting of SFLP interests for gift tax purposes occurred; decedent and Mr. Stone had the woodland parcels appraised and valued the SFLP interests so that that the total value of SFLP interests was equal to the appraised value of the woodland parcels. Finally, the evidence presented tended to show that decedent (and Mr. Stone) were in good health at the time the transfer of the woodland parcels was made to SFLP. Although decedent was over age 70 at the time of transfer in 1997, she lived until 2005 and was healthy enough to continue teaching Sunday school up to and including the last Sunday before she passed away. Although Mr. Stone was over age 80 at the time of transfer, he was still alive at the time of trial in June 2011.” 2012 T.C. Mem. 48, at pp. 16-17.

Thereby the late Jo’s estate avoids the Section 2036(a) landmine. Good job, Harry.

Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: