ESTATE OF TURNER v. COMMISSIONER OF INTERNAL REVENUE
T.C. Memo. 2011-209
ESTATE OF CLYDE W. TURNER, SR., DECEASED, W. BARCLAY RUSHTON, EXECUTOR, Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Docket No. 18911-08.
United States Tax Court.
Filed August 30, 2011.
MEMORANDUM FINDINGS OF FACT AND OPINIONMARVEL, Judge.
Respondent determined a Federal estate tax deficiency of $659,912 with respect to the Estate of Clyde W. Turner, Sr. (estate). The primary issue for decision is whether the value of property Clyde W. Turner, Sr. (Clyde Sr.) transferred to Turner & Co., a family limited partnership, is included in his gross estate under section 2035, 2036, or 2038.1 We must also decide whether Clyde Sr. made additional taxable gifts that are included in his gross estate. FINDINGS OF FACTI. Background
Some of the facts have been stipulated. We incorporate the stipulation of facts, the first supplemental stipulation of facts, and the second supplemental stipulation of facts into our findings by this reference.
Clyde Sr. resided in Georgia when he died testate on February 4, 2004. Clyde Sr.'s longtime accountant, W. Barclay Rushton (Mr. Rushton), was appointed executor of the estate. When the petition on behalf of the estate was filed, Mr. Rushton resided in Georgia.
1. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts have been rounded to the nearest dollar.
2. For convenience, we will sometimes refer to Clyde Jr., Betty, Joyce, and Janna collectively as the Turner children.
3. As of the trial date, Travis was the chief executive officer of Mt. Yonah, and Marc had previously worked as an office manager and general manager at Mt. Yonah. Clyde Jr.'s role at Mt. Yonah as of the trial date is not clear from the record.
4. Clyde Sr. did not report the premium payments as gifts on his 2002 or 2003 Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
5. The record is not clear whether the Turner family held any meetings to discuss Turner & Co.'s performance before Clyde Sr.'s death. Although Marc and Betty suggested they did, no objective evidence corroborates their statements.
6. These assets consisted of three annuities, shares of Alabama Power preferred stock, shares of Colonial Capital Trust preferred stock, shares of ING Group preferred stock, and 100 shares of Regions Financial stock.
7. These assets consisted of preferred stock of Duke Energy Corp.
8. These assets consisted of preferred stock of BAC Capital Trust II, class A shares of Ingles Markets, bonds issued by Caterpillar Financial Services Corp., and preferred stock of Duke Energy Corp.
9. These assets consisted of cash, 2,000 shares of Regions Bank stock, bonds issued by Gainesville, Georgia, and bonds issued by Fulton County, Georgia.
10. For example, the partnership agreement provides that one of the goals of the partnership is to consolidate or eliminate fractional interests in realty. However, Clyde Sr. and Jewell did not contribute any interests in real property, fractional or otherwise, to Turner & Co.
11. Notwithstanding sec. 4.6 of the partnership agreement, Clyde Sr. and Jewell chose not to pay Turner & Co. expenses from their personal funds but chose to receive a $2,000-per-month management fee. Turner & Co. treated the monthly management fees as nondeductible distributions rather than deductible expenses.
12. Clyde Sr. became seriously ill and was hospitalized in October 2003, and all of the checks written to Marc and Travis thereafter were signed by Marc, Travis, or Jewell, or some combination thereof.
13. On Sept. 18, 2006, Jewell authorized the establishment of four separate partnerships: One for each of her surviving children and one for Trey and Rory. Turner & Co. was dissolved effective Jan. 8, 2009.
14. The purchase of $5,000 of GMAC Notes resulted in a negative cash balance in the account. The Wachovia Securities account statement reflects receipt of $5,000 on Jan. 3, 2003. On Jan. 9, 2003, Turner & Co. wrote a check to Clyde Sr. for $5,000. The memo line of the check states that it relates to "Wachovia-General Motors".
15. The remaining 1.25-acre lot was sold on May 13, 2005.
16. We infer that the $5,500 paid to Marc and Travis in 2002 was treated as a distribution to Clyde Sr. and Jewell, which would help explain the disparity between the $41,500 paid to Clyde Sr. and Jewell in 2002 and the $47,023 of total distributions reported on Turner & Co.'s 2002 Form 1065, U.S. Return of Partnership Income. The record does not explain the additional $23 disparity.
17. The listed payments do not include $363,188 Turner & Co. paid to Clyde Sr. on Feb. 6, 2003, to reimburse him for the
18. On their 2002 Federal income tax return, Clyde Sr. and Jewell reported total income from Turner & Co. of $91,477.
19. In the reply brief petitioner does not object to respondent's proposed finding of fact regarding Turner & Co.'s net asset value as of Feb. 4, 2004.
20. An arm's-length transaction is not limited to a transaction between unrelated parties. See Estate of Bongard v. Commissioner, 124 T.C. 95, 122-123 (2005). However, where the parties are related we subject the transaction to a higher level of scrutiny, and we analyze whether the terms and conditions of the transaction were the same as if the transaction had been between unrelated parties. See id. at 123.
21. For example, the partnership agreement states that one of the purposes of Turner & Co. was to consolidate or eliminate fractional interests in realty and other family assets. In fact, Clyde Sr. and Jewell did not contribute any real property to Turner & Co., and all of the contributed property was easily divisible.
22. Although Clyde Sr. and Jewell contributed more than 150,000 shares of Regions Bank stock to Turner & Co., the transferred shares represented less than one-tenth of 1 percent of Regions Bank's total outstanding shares.
23. Around the time of the transfer the value of the annuities totaled $407,375.
24. Petitioner attempts to analogize the Turner family to the family in Estate of Stone v. Commissioner, T.C. Memo. 2003-309, in which we held that transfers of assets into five family limited partnerships were bona fide sales for adequate and full consideration, where the partnerships were created in part to resolve a dispute among the decedent's adult children. However, Estate of Stone is distinguishable in several respects.
In Estate of Stone the decedent's adult children were involved in bitter litigation that threatened the family's closely held business, the litigation centered on the children's respective shares of their parents' assets, which required active management, and the family limited partnerships actually resolved the family dispute by identifying the child who would manage each asset both during their parents' lives and after their parents' deaths. By contrast, the rancor among the Turner children had not resulted in litigation, or even the threat of litigation; did not threaten a family business; and did not involve assets requiring active management. Moreover, unlike the adult children in Estate of Stone, there is no evidence that the Turner children took any particular interest in their parents' assets or were concerned about how their parents managed their investments. On the contrary, Betty testified that she did not inquire, and did not believe it was her business to inquire, about her parents' finances.
25. Petitioner argues that it took longer than expected for Clyde Sr. and Jewell to transfer their assets to Turner & Co. because of poor recordkeeping on their part. However, at the time Turner & Co. was formed Marc had been assisting Clyde Sr. and Jewell with their recordkeeping for approximately 8 years (since 1994 according to Marc's testimony). Thus, any delays in transferring assets to Turner & Co. cannot be blamed on Clyde Sr.'s and Jewell's poor recordkeeping.
26. Clyde Sr.'s willingness to pay more than $500,000 on behalf of Turner & Co. without any documentation whatsoever strongly indicates, at best, a disregard for partnership formalities and, at worst, a failure to distinguish personal from partnership funds.
27. Ms. Walden-Crowe testified that all payments to Clyde Sr. or Jewell were intended for both since, as husband and wife, they could make unlimited gifts to one another.
28. Even if we were to treat Jewell as a coequal general partner of Turner & Co. we would reach the same conclusion because sec. 2036(a)(2) applies where the transferor's right to designate who shall possess or enjoy property and the income therefrom is held "alone or in conjunction with any person".
29. Because we conclude that the assets Clyde Sr. transferred to Turner & Co. are included in his gross estate under sec. 2036(a)(1) and (2), we need not consider respondent's alternative argument that the assets are included under secs. 2038 and/or 2035.
30. The annual exclusion amount is subject to a cost-of-living adjustment. See sec. 2503(b)(2).
31. Respondent appears to recognize this principle: in the notice of deficiency, respondent increased Clyde Sr.'s taxable estate by the net asset value of the property transferred to Turner & Co. but made a corresponding reduction to the adjusted taxable gifts.
1. All percentage figures have been rounded to the nearest one-tenth of 1 percent.