Authored by Fawnel Romero
and
Chris D. Treharne, ASA, MCBA
of Gibraltar Business Appraisals, Inc., a member firm of the Financial
Consulting Group
CITATION:
Miller v.
Commissioner, T.C. Memo. 2009-119, May 27, 2009
The Tax Court determined whether a discount was appropriate to apply to
cash and securities transferred to a family limited partnership.
COMMENTS:
In an unrelated recent case ( Estate of
Jorgensen v. Commissioner T.C. Memo 2009-66, March 26, 2009), the Tax Court
found that transfers made by Mrs. Jorgensen to FLPs were not bona fide sales
for full and adequate consideration. The court ruled that the partnership
assets were co-mingled with personal funds and there were no non-tax
purposes for the formation of the partnerships.
However, in the
Estate of Miller v. Commissioner, the court found that the Miller FLP’s
assets were not co-mingled with personal funds, there were valid reasons for
the formation of the partnership, and the partnership was formed for
legitimate, non-tax purposes.
Unlike Miller, family members in the
Jorgensen case did not treat the FLPs as independent partnership entities.
Accordingly, the court ruled in favor of the IRS and did not allow the
discounts for the Jorgensen FLPs.
THE FACTS:
Valeria M. Miller’s (“Decedent”) husband, Mr. Miller, spent a
significant amount of his time during retirement charting and managing his
family’s investment securities. He kept handwritten records of his
investment activity.
Mr. Miller passed away during 2000. After his
death, the family formed V/V Miller Family Limited Partnership (“MFLP”)
during 2001. Later in 2002, a portion of the family’s investments was
transferred to the Partnership. The Decedent was 86 years old upon the
formation of MFLP and owned 920 of the 1,000 partnership units issued.
The Decedent’s son, Virgil, managed the assets of the partnership based
on his father’s investment strategy of charting stocks. He also subscribed
to several trade publications and purchased computer software for trading
purposes.
The Decedent was diagnosed with congestive heart failure
and suffered a traumatic brain injury during May 2003. During the same
month, several transfers were made from her trust’s investment account to
MFLP. Mrs. Miller died on May 28, 2003.
Securities Transferred During 2002
The IRS
The IRS argued that MFLP did not function as a business operation and a
valid reason for the formation of the partnership did not exist. Further,
the IRS argued that the Decedent stood on both sides of the transaction and
retained rights in the property that were not relinquished until death.
Additionally, the commissioner asserted Virgil’s desire to reduce estate tax
liability seemed to be the driving force for the 2002 transfer.
The Estate
The estate argued that there were legitimate and non-tax purposes for the
formation MFLP. Supporting its arguments, the estate indicated that the
partnership was formed to continue Mr. Miller’s investment philosophy, and
its assets were actively managed by Virgil. The Estate also pointed out that
the Decedent seemed to be in relatively good health during the 2002 transfer
and did retain sufficient funds for living expenses outside of the
partnership.
Court Analysis
The court agreed that the partnership was formed for legitimate non-tax
purposes and the 2002 transfer constituted a bona fide sale for
adequate consideration.
Securities Transferred During 2003
The IRS
The IRS argued that the Decedent stood on both sides of the 2003 transfer
and did not retain sufficient assets outside of the partnership for living
expenses. Also, the IRS argued that if it were the Decedent’s desire to have
the assets managed in accordance with Mr. Miller’s investment methodology,
she would not have waited until the last weeks of her life to make the
transfer. The decline in Mrs. Miller’s health and the attempt to reduce
estate tax liability seemed to be the reasons for the 2003 transfer.
The Estate
The estate indicated that the Decedent transferred her remaining assets
during 2003 because she wanted them to be managed in accordance with her
husband’s investment methodology.
Court Analysis
The court agreed with the IRS finding that the Decedent did not have
legitimate non-tax purposes for the 2003 transfer of her remaining assets to
MFLP.
CONCLUSION:
The court allowed the application of a discount to
the assets transferred during 2002, i.e., before the Decedent knew she had
major medical problems. However, the Court did not allow the discount to the
assets transferred shortly prior to the Decedent’s passing because it found
no non-tax reason for the transfer. Additionally, in the first transfer, the
Decedent retained sufficient assets outside of the partnership to pay for
living expenses but failed to do so in the second transfer.
EHTC offers expert business
valuation and litigation support services. Contact Diane L. Friar,
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(dianef@ehtc.com)
for more information.
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