Estate of Jorgensen v. Comm'r., No. 09-7325 (9th Circuit 5/4/2011)
In Jorgensen, the 9th Circuit upheld the Tax Court's finding that certain transfers decedent made to two family limited partnerships were includible in the decedent's estate under IRC Section 2036(a).
Husband and Wife formed a family limited partnership with their sons. The partnership agreement stated that the parties desired to pool certain assets and capital for the purpose of investing in securities. Husband and Wife each contributed marketable securities valued at $227,000 in exchange for 50% limited partnership interests. During his lifetime, Husband made all decisions with respect to the family limited partnership. Husband died and his estate took a 35% discount on his interest in the family limited partnership which passed into a family trust. The family trust was funded with $600,000 of assets including the family limited partnership interests valued using minority interest and lack of marketability discounts. All other estate assets went to Wife outright.
Following Husband's death, Wife formed another family limited partnership into which she contributed $1.8 million in marketable securities in exchange for her initial limited partnership interest. She then contributed about $700,000 from the estate's brokerage account.
Both partnerships held only passive investments, primarily marketable securities. The assets of the partnerships were commingled and Wife wrote personal checks on the partnerships accounts and ultimately paid her estate tax with funds from the partnerships. Wife died and the IRS determined a federal estate tax deficiency of nearly $800,000. The Tax Court held that the values of the assets Wife transferred to the two partnerships were includible in her estate under IRC Section 2036(a).
On appeal to the 9th Circuit, the Wife's estate did not contest the Tax Court's determination that IRC Section 2036(a) applies. Wife's estate acknowledged that Wife retained some benefits in the transferred property since she wrote checks on partnership accounts to pay personal expenses and make family gifts. Wife's estate argued that these amounts should be considered di minimus or that the application of IRS Section 2036 should be limited to the actual amount accessed by Wife.
These arguments were made for the first time to the 9th Circuit and were rejected by the Court. The Court did not find it de minimus that Wife personally wrote checks over $90,000 and that the partnerships paid over $200,000 of her personal estate taxes from partnership funds. The 9th Circuit found that the Tax Court did not err by concluding that there was an implied agreement that Wife could have accessed any amount of the assets to the extent she desired them. Nor did the Tax Court err by concluding that Wife's transfer was not a bona fide sale for adequate and full consideration. Transfers to family limited partnerships such as these are subject to heightened scrutiny and to be bona fide, must objectively demonstrate a legitimate and significant nontax reason for the transfers.