Estate of Marie J. Jensen, Petitioner v. Commissioner of Internal Revenue Service, Respondent, T.C. Memo 2010-182, Dated August 10, 2010.

The Facts:                                           

Ms. Jensen was a resident of New York when she passed away on July 31, 2005.  Prior to her death, in February 2003, Ms. Jensen had created the Marie J. Jenson Revocable Trust and had appointed herself trustee.  Upon Ms. Jensen’s death, the trust held 164 shares of common stock in Wa-Klo, which equated to a controlling 82% equity interest in Wa-Klo.  Wa-Klo’s principal asset as of Ms. Jensen’s death was a 94-acre waterfront parcel of real estate which included athletic facilities, horse stables and a girl’s summer camp.  Wa-Klo was a C Corporation created in 1956 in the state of New Hampshire. Read more

Estate of Charlene B. Shurtz vs. Commissioner, T.C. Memo 2010-21, February 3, 2010.

Mrs. Charlene Shurtz was born in 1925 and was one of three children of Charles and Bonnie Barge.  The Barge family owned and managed 45,197 acres of timberland in the state of Mississippi.   Mrs. Shurtz married Reverend Richard Shurtz, and their family, lived and performed missionary work in Mexico and Brazil from 1954 to 1986.  In 1986, they returned to the United States when Reverend Shurtz was offered a position as pastor at a church in Montebello, California.

Over time, Mrs. Shurtz and her two siblings (Richard Barge and Betty Morris) had received via gifts or inheritance interests in the Mississippi timberland.  In 1993, Mrs. Shurtz, her two siblings, their mother Bonnie, and trustees of several trusts for the grandchildren created C.A. Barge Timberlands, L.P. (“Timberlands LP”) to operate and manage the family property.  This was done because by this time, at least 14 family members held separate undivided interests in the Barge timberland which had created difficulties in the operation and management of the business.  Each individual and trust contributed their property interests to the limited partnership in exchange for limited partnership shares.  The general partner was a newly created entity, Barge Timberlands Management, Inc. (“BTM”) that was owned 1/3 each by Mrs. Shurtz, Richard Barge, and Betty Morris.

Although Mrs. Shurtz was wealthy, the Shurtzes lived modestly and by 1996 had a net worth of approximately $7,000,000.  In keeping with their religious philosophy that they were given this wealth to do God’s work, Mrs. Shurtz and her husband used their wealth to contribute to a broad range of charities, including evangelical missions, humanitarian aid groups, church construction and groups that assisted orphans.  Between 1989 and 2001, they donated approximately $972,000 to charity.

Mrs. Shurtz developed Parkinson’s disease in 1986, but was able to manage her condition with medication and her illness did not affect her cognitive abilities.

Due to the litigious nature of the state of Mississippi and their reputation for “jackpot justice” many people chose to create family limited partnerships to reduce their litigation risks in the state.  Reverend and Mrs. Shurtz sought the legal advice of James Dossett, an experienced tax attorney.  Mr. Dossett recommended that each family hold its Timberlands LP interest in a limited partnership as by doing so, the family timber business could be protected since a judgment creditor would not be able to seize the underlying timberland, but only have a right to distributions made by Timberlands LP to its partners.  Mrs. Shurtz also wanted to give her children and grandchildren interests in the 748.2 acres she had acquired from her parents, and did not want to create a large number of undivided interests.  Thus, on November 15, 1996, the Shurtzes’ created Doulos L.P., which was funded with Mrs. Shurtzes’ 16% interest in Timberland LP, her 93.4% ownership in the 748.2 acre parcel of timber, and Reverend Shurtzes’ 6.6% ownership in the 748.2 acre parcel of timber.  Mrs. Shurtz received a 1% general partner and 98% limited partner equity interest in Doulos L.P. and Reverend Shurtz received a 1% general partner equity interest in Doulos L.P.  The Shurtzes’ formed Doulos LP to “reduce their estate, provide asset protection, provide for heirs and provide for the Lord’s work”.

Between 1996 and 2000, Mrs. Shurtz made 26 separate gifts of 0.4% limited partnership equity interests in Doulos L.P. to her children and to trusts for her grandchildren.  Each of these gifts was each valued at less than $19,700 and each qualified for the annual exclusion gifting.

In 1998, Mrs. Shurtz contacted the Dallas Seminary Foundation for assistance with some additional estate planning.  The seminary referred them to attorney Louis Wall who then helped Mrs. Shurtz draft a revocable trust agreement to take effect upon the death of either Mrs. Shurtz or Reverend Shurtz.  The Shurtz Family Trust was intended to achieve the following goals: to (i) assure to the extent possible that there was no Federal tax due at the death of the first spouse; (ii) minimize Federal estate taxes at the surviving spouse’s death through proper use of the available unified credit amount, coupled with use of each of the survivor’s remaining generation-skipping amounts to the extent possible; (iii) assure that the decedent’s interest in Doulos L.P. remained in the family and (iv) provide for the remainder of the estate to pass into a charitable annuity lead trust which would provide for a 12% per year annuity to charity for a term sufficient that the remainder interest to the family members would be valued at zero or as close to zero as possible.

Mrs. Shurtz passed away on January 1, 2002, leaving an estate valued at approximately $8.8 million.  Mrs. Shurtzes’ estate filed Form 706 claiming no tax due.  The IRS contested the estate and issued a deficiency of over $4.7 million.

The Arguments and Findings:

The IRS claimed that Doulos L.P. was not a valid family limited partnership (claiming that Mrs. Shurtz retained control, use and benefit of the transferred assets) and therefore the assets of Mrs. Shurtzes’ estate should be valued at full fair market value rather than discounted family limited partnership value under Sections 2036 and/or 2035(a).

The Estate claimed that there was no taxable estate because her entire estate was left first to a unified credit trust and then to various marital trusts.  Furthermore, the Estate claimed that Section 2036(a) did not apply because Mrs. Shurtz’s transfer of assets to Doulos L.P. constituted a “bona fide sale for adequate and full consideration”.

The Court reviewed the requirements for a bona-fide sale and concluded that in general there must be a legitimate non-tax purpose for forming an FLP.  The Court determined that in the case of property held in Mississippi, the litigious nature of the state provided a legitimate non-tax reason for attempting to protect the family’s assets.  In addition, the Court found that preserving the family business was also a legitimate non-tax reason for forming an FLP.  In reviewing the “full and adequate consideration” the court reviewed the following factors: (i) the contributors received interests in the family limited partnership in proportion to their capital contributed; (ii) the respective assets contributed were properly credited to each respective partner’s capital account; (iii) distributions from Doulos, L.P. required a negative adjustment in the distribute partner’s capital account.  The Court found that there were sufficient “legitimate and significant non-tax business reasons” for creating the FLP.  Thus, the Court ruled that the bona-fide sale exception applied and the fair market value of Mrs. Shurtz’s partnership interest in Doulos L.P. (and not the fair market value of the contributed property) was includable in her gross estate.  Thus, the Court ruled that there was no estate tax deficiency and no tax was due from the Estate.

Parting Thoughts:

This was a nice victory for the taxpayer and an excellent “example” of a successful family limited partnership.  The partnership had a valid business purpose, contributions were properly documented and capital accounts were appropriately maintained, the partnership had annual meetings and there was correct accounting of all distributions.  I was hoping there was further discussion regarding the lack of control and lack of marketability discounts applied in determining the value of Mrs. Shurtz’s annual exclusion gifting each year, but there was no mention of the magnitude of either discount.

John G. Mack, ASA, CBA – Nationwide Valuations –  (303) 496.0643 (direct)  (303) 586.4554 (fax)

john@nationwidevaluations.com – www.nationwidevaluations.com

Estate of Samuel P. Black, Jr. vs. Commissioner, 133 T.C, No. 15, December 14, 2009.

 The Facts:                                             

Mr. Samuel Black (“Mr. Black”) was employed by Erie Indemnity Company (“Erie”) in various ways (employee, officer and director) from 1927 until he retired from the board of directors in 1997 (at the age of 95).  Mr. Black was a major contributor to Erie’s success and had accumulated stock in Erie steadily throughout his entire lifetime.

In 1988, Mr. Black gave gifts of Erie stock to his son (“Samuel III”) and two grandsons.  Mr. Black became concerned, for various reasons, the stock would be sold by both his son and grandsons.  Accordingly, in March of 1993, Mr. Black, his son and grandsons, after consulting with financial advisors, contributed their Erie stock to Black LP in exchange for partnership interests proportionate to the fair market value of the stock contributed.  At the date of contribution in 1993, Mr. Black owned approximately $68 million of Erie stock and Samuel III and his two sons owned approximately $12 million of Erie stock.  Black LP managed the Erie stock holdings from 1993 to 2001, and oversaw its growth from $80 million to over $315 million.

In 1998, Mr. Black had transferred his 1% General Partnership interest to his son, and upon his death, at the age of 99 in 2001, Mr. Black owned an approximate 77% limited partner equity interest in Black LP.  Mr. Black’s estate plan established a marital trust for Mrs. Black and had a $20 million bequest to a university endowment.  Mr. Black passed away in December of 2001, and Mrs. Black died approximately five months later (but before there was time to fund the marital trust – which was intended to be funded with a significant portion of Mr. Black’s interest in Black LP).

Mr. Black’s estate paid the estate tax owed on Mr. Black’s estate, but considered the marital trust to be funded as of the date of death of Mrs. Black.  Thus, Mrs. Black’s estate tax and other liabilities owed was significant and her estate lacked sufficient liquid assets to discharge the tax and other liabilities.  In order to help with the liquidity problem, Samuel III (the general partner) agreed to have BLP sell some of its stock in Erie in a secondary offering.  This sale raised $98 million, of which $71 million was lent to Mrs. Black’s estate by BLP.  The interest expense on the loan was payable in a lump sum on the purported due date (more than 4 years from the date of the loan), and was deducted in full on Mrs. Black’s estate tax return.  Mrs. Black’s estate used the funds to discharge its Federal and State tax liabilities, pay the $20 million bequest to the university endowment, reimburse Erie’s costs of approximately $981,000 in connection with the secondary offering and pay $1,155,000 each to Samuel III (as executor fees) and to a law firm (as legal fees associated with the Estate).

The IRS argued that: (1) the value of the Erie stock apportionable to Mr. Black’s partnership interest in Black LP at his death is includable in his gross estate under Section 2035(a) or 2036(a)(1); (2) the marital deduction to which Mr. Black’s estate is entitled is limited to the value of the partnership interest in Black LP that actually passed to the marital trust; (3) the deemed funding date of the marital trust and the size of the Black LP interest includable in Mrs. Black’s estate should be determined by reference to the value of Black LP on the date of Mr. Black’s death and not Mrs. Black’s death when the value was higher and it would require a smaller interest in Black LP to fund the trust; (4) the interest payable on the Black LP loan to Mrs. Black’s estate is not a deductible administration expense; and (5) Mrs. Black’s estate is not entitled to deduct the $981,000 of Erie’s secondary offering costs and is only entitled to deduct $500,000 of the son’s executor fees and $500,000 of the legal fees.  Thus, the IRS assessed deficiencies on both estates of over $200 million.

 The Arguments and Findings:

The Court was asked to determine if there was a bona fide sale of Erie stock upon the funding of Black LP in 1993.  The Court determined that there was in deed a bona fide sale of stock for full and adequate consideration to Black LP and that its seven year existence and operating history was enough to provide a “legitimate and significant non-tax purpose” for the partnership’s existence.  In addition, the Court noted that Mr. and Mrs. Black had retained approximately $4 million of assets, outside the trust with an average income of $600,000 per year and therefore did not utilize any trust principal for their daily living expenses.

In regard to the marital trust, it was deemed to have been funded from the estate of Mr. Black.  Because the funding of the marital trust would have occurred in due course after the death of Mr. Black, the valuation of the trust was determined as of the date of death of Mrs. Black.  The loan of $71 million from Black LP to the estate was determined to be completely within the control of Samuel III, as executor of the estate, and owner of the controlling interest in Black LP.  The loan was deemed not “necessarily incurred” within the meaning of Section 20.2053-3(a) and therefore, the interest expense was deemed not a deductible administration expense.

Furthermore, the Court determined that Mrs. Black’s estate was entitled to deduct: (1) $481,000 of the $981,000 of secondary offering costs reimbursed to Erie, (2) half of the son’s executor fees and (3) half of the legal fees (as the Court determined that ½ of those amounts represented expenditures or effort on behalf of Mrs. Black’s estate as opposed to both Mr. and Mrs. Black’s estates).

Parting Thoughts:

 This case provided a rather detailed look into what represents a “bona fide sale” and what is deemed to be “full and adequate consideration”.  I found it interesting in that there was no discussion as to valuation discounts (e.g. minority interest discount and lack of marketability discount) that were applied in determining the fair market value of the limited partner equity interest in Black LP.

John G. Mack, ASA, CBA – Nationwide Valuations –  (303) 496.0643 (direct)  (303) 586.4554 (fax)

john@nationwidevaluations.com – www.nationwidevaluations.com

David E. Heckerman et ux. V. United States; No. 2:08-cv-00211, July 27, 2009

The Facts:                                             

During the fall of 2001, David Heckerman and his wife (“Mr. and Mrs. Heckerman” or “the Heckerman’s”) sought advice regarding setting up a plan to pass along property to their two minor children that would make the children both “work for their money” and “not trigger a gift tax”.  The Heckerman’s spoke with several legal and financial advisors and eventually drew up a plan that involved creating LLC entities, transferring property and cash into these LLC entities, and then transferring minority shares to trusts established for the children. Read more

Estate of Valeria M. Miller, Deceased, Virgil G. Miller, Executor, Petitioner vs. Commissioner of Internal Revenue, Respondent, T. C. Memo 2009-119, May 27, 2009.

 The Facts:                                             

Valeria M. Miller married her husband Mr. Miller in 1938 and they remained married until his death on February 2, 2000.  Mr. and Mrs. Miller had four children; Virgil G., Gordon, Donald and Marcia.  Mr. Miller had worked as an architect until the time he retired in 1974 at the age of 60.  After his retirement, Mr. Miller spent a significant amount of time managing his family’s investments using his own personally developed method for charting stocks.  Mr. Miller kept handwritten records of all of his investment activity over the course of 26 years until his death at the age of 86. Read more