In Estate of Edward Beyer v. Commissioner, the Tax Court held that substantial assets that Edward Beyer had transferred to a family partnership he formed (“EGBLP”) were included in his estate for estate tax purposes pursuant to IRC Section 2036. The decedent, Mr. Beyer, formed EGBLP on October 10, 2003. The partnership was initially formed between two revocable trusts established by Mr. Beyer. His living trust held a 99% interest as a limited partner, and a management trust, of which he was also the grantor, held a 1% interest as the general partner. While a substantial amount of securities was transferred to the partnership, the Exhibit A which was supposed to show the contributions and percentage interests of the partners was never completed.

On December 30, 2005, the living trust sold its 99% interest to an irrevocable trust that Mr. Beyer had also created for a promissory note in the amount of $20,866,725. Mr. Beyer died on May 19, 2007. Upon audit of his estate tax return, the IRS relied on IRC Section 2036 to include the assets of EGBLP in the estate of Mr. Beyer. Section 2036 applies if a decedent had made a transfer of assets unless the transfer was a bona fide sale for full and adequate consideration and also retained i) the right to the possession or enjoyment of, or the right to the income from, the transferred property; or ii) the right to designate the persons who shall possess or enjoy the property or the income therefrom.

The Tax Court first considered whether the transfer of assets by Mr. Beyer to EGBLP constituted a bona fide sale for adequate consideration. Prior cases have established that in the context of a family partnership, the bona fide sale exception applies only if the taxpayer can demonstrate that the partnership was created for a legitimate and significant nontax reason and the taxpayer received a partnership interest proportionate to the value of the property transferred.  The primary nontax reason alleged by Mr. Beyer’s estate was that the partnership was used to keep intact a block of 800,000 shares of Abbott Laboratories, where Mr. Beyer had worked as the chief financial officer. The court did not accept this reason as legitimate because Mr. Beyer’s trust could have provided that the block was to be held intact after his death. Also, nothing in the partnership agreement of EGBLP required the partnership to continue to hold the stock following the death of Mr. Beyer.

The estate also alleged that a key purpose of the partnership was to transition the management of Mr. Beyer’s financial assets to his nephew, Craig Plassmeyer. Mr. Beyer never married and had no children. The court did not accept this reason because, even before the partnership was formed, Mr. Beyer had appointed Mr. Plassmeyer as his attorney-in-fact under a power of attorney to manage many of his financial assets. Mr. Beyer also could have named Mr. Plassmeyer as a co-trustee of his living trust. The court found that the partnership was not necessary.

Having concluded that the bona fide sale exception did not apply, the court next turned to whether any implicit agreement between Mr. Beyer and the partnership continued to allow Mr. Beyer the use or enjoyment of, or income from, the assets transferred to EGBLP. The court found there was such an agreement based on two main incidents. In 2007, after Mr. Beyer’s living trust had sold its interest in EGBLP, it nevertheless received $659,660 from EGBLP which was used to pay Mr. Beyer’s gift tax liability for 2005. After the death of Mr. Beyer, the trust received $9,945,000 from EGBLP to pay Mr. Beyer’s estate tax liability.

As to the second distribution, the estate argued that it was irrelevant because it occurred after the death of Mr. Beyer and Section 2036 requires inclusion only where the right to use the assets or receive the income occurred during the lifetime of the transferor. The court did not accept this argument. It found that Mr. Beyer knew that his transfers to the partnership did not leave his estate with sufficient liquid assets to pay his estate tax when he died. Further, the court noted that the estate made no attempt to borrow against the promissory note it had received from the irrevocable trust for the sale of the 99% interest in EGBLP. These two distributions were considered by the court to establish that Mr. Beyer had an implicit agreement in place to access the assets of the partnership even after he sold his interest.