The opinion
T.C. Memo. 2013-50
UNITED STATES TAX COURT
ESTATE OF DOROTHY BROWN, DECEASED, SUSAN LEWIS, PERSONAL
REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26469-11. Filed February 14, 2013.
Robert Edwin Forrest, for petitioner.
John W. Stevens, for respondent.
MEMORANDUM OPINION
CHIECHI, Judge: This case is before us on petitioner’s motion for summary
judgment.1 We shall deny petitioner’s motion.
1
Petitioner filed a memorandum of law in support of petitioner’s motion for
summary judgment. (We shall refer collectively to petitioner’s motion for summary
judgment and petitioner’s memorandum of law as petitioner’s motion.) Respondent
filed a response to petitioner’s motion, and petitioner filed a reply to that response.
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[*2] Background
The record before us for purposes of petitioner’s motion (record) establishes
and/or the parties do not dispute the following.
Dorothy S. Brown (decedent), who died on December 7, 2007, was a resident
of Florida at the time of her death. Susan Lewis (Ms. Lewis), the personal
representative of decedent’s estate and decedent’s daughter, resided in Michigan at
the time she ratified the petition in this case.2
Decedent had two granddaughters, Elaine Karen Lipschutz (Ms. Lipschutz)
and Julie Ellen Winkelman (Ms. Winkelman). At all relevant times, Ms. Lipschutz
was the beneficiary of a trust known as the Elaine Karen (Lewis) Lipschutz
Irrevocable Living Trust (Lipschutz Trust), and Ms. Winkelman was the beneficiary
of a trust known as the Julie Ellen (Lewis) Winkelman Irrevocable Living Trust
(Winkelman Trust).
On January 1, 2004, decedent, as trustee of a trust known as the Peter D.
Brown Marital Trust (Marital Trust), made the following two transfers (January 1,
2004 transfers): (1) a transfer of a 20-percent income interest in a limited liability
company known as BLW Investment Co., LLC (BLW), to the Lipschutz Trust and
2
Ms. Lewis was not appointed as the personal representative of decedent’s
estate until after the petition was filed. After her appointment, Ms. Lewis ratified
the petition by filing an amendment thereto.
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[*3] (2) a transfer of a 20-percent income interest in BLW to the Winkelman Trust.
In exchange for each of those income interests, decedent, as trustee of the Marital
Trust, received a 10-year promissory note (note or collectively notes) in the face
amount of $1,875,000 from each of the Lipschutz Trust and the Winkelman Trust.3
On or about April 11, 2005, decedent, as trustee of the Marital Trust, filed
Form 1041, U.S. Income Tax Return for Estates and Trusts, for that trust for its
taxable year 2004. Decedent attached to that return Form 6252, Installment Sale
Income (2004 Form 6252), with respect to each of the January 1, 2004 transfers. In
the respective 2004 Forms 6252, decedent reported the January 1, 2004 transfers as
related-party installment sales to the Lipschutz Trust and the Winkelman Trust,
respectively.
On January 4, 2004, decedent, as trustee of a trust known as the Dorothy S.
Brown Living Trust (Living Trust), made the following two transfers (January 4,
2004 transfers): (1) a transfer of a 2.9-percent membership interest in BLW to the
Lipschutz Trust and (2) a transfer of a 2.9-percent membership interest in BLW to
the Winkelman Trust. Decedent, as trustee of the Living Trust, received nothing
3
At a time not established by the record, an appraisal was made of BLW.
Thereafter, the face amount of each of the notes was reduced to $1,586,207.
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[*4] in return for those respective transfers from the Lipschutz Trust and the
Winkelman Trust.
On or about October 17, 2005, decedent filed Form 709, United States Gift
(and Generation-Skipping Transfer) Tax Return (gift tax return), for her taxable year
2004 (2004 gift tax return). In that return, decedent reported only each of the
January 4, 2004 transfers to the Lipschutz Trust and the Winkelman Trust as a gift
of property valued at $230,000.
Before the transfer (described below) to Woodland Ridge MHC (Woodland
Ridge), a partnership that held a mobile home park, the following persons held the
interests in Woodland Ridge shown below:
Capital Interest Profits Interest
Person (percent) (percent)
Lipschutz Trust 49 37.5
Winkelman Trust 49 37.5
A. Bart Lewis1 --- 23
Revocable Living Trust
The Lenox Group2 2 2
1
A. Bart Lewis (Mr. Lewis) is the husband of Ms. Lewis and the father of
Ms. Lipschutz and Ms. Winkelman. (We shall sometimes refer collectively to Mr.
Lewis, Ms. Lewis, Ms. Lipschutz, and Ms. Winkelman as the Lewis family.)
2
The Lenox Group is a limited liability company that is wholly owned by Ken
Thompson (Mr. Thompson). Mr. Thompson is not related to decedent or to the
Lewis family.
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[*5] On or about December 1, 2006, decedent, as trustee of the Living Trust,
made a transfer (December 1, 2006 transfer) of $2,500,000 to Woodland Ridge. In
exchange for that transfer, decedent, as trustee of the Living Trust, received a 25-
percent capital interest and a 25-percent profits interest in Woodland Ridge.
Decedent did not file a gift tax return for her taxable year 2006.
At a time not established by the record after decedent’s death, Form 706,
United States Estate (and Generation-Skipping Transfer) Tax Return, was filed on
behalf of decedent’s estate. The 25-percent capital interest and the 25-percent
profits interest in Woodland Ridge that decedent, as trustee of the Living Trust, had
received in exchange for the December 1, 2006 transfer were reported in that return
as having had no value on the date of decedent’s death.
On or about October 10, 2008, a gift tax return was filed on behalf of
decedent for her taxable year 2007. Taxable gifts totaling $30,000 were reported,
and a Federal gift tax (gift tax) liability of $7,380 was shown, in that return.
On August 25, 2011, respondent issued a notice of deficiency (notice) with
respect to decedent’s taxable years 2004, 2006, and 2007. In that notice,
respondent determined deficiencies of $758,448, $1,150,000, and $720 in
decedent’s gift tax for her taxable years 2004, 2006, and 2007, respectively.
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[*6] In support of the gift tax deficiency for decedent’s taxable year 2004 that
respondent determined in the notice, respondent made the following determinations
with respect to the January 1, 2004 transfers:
It is determined that the taxpayer made additional unreported
taxable gifts during the 2004 taxable year by selling her QTIP
qualifying income interest [i.e., the respective 20-percent income
interests in BLW that decedent transferred to the Lipschutz Trust and
the Winkelman Trust] for less than full and adequate consideration.
The [total] value of the QTIP interest is determined to be $4,459,224.
The [total] consideration [i.e., the notes] received * * * [in exchange
for that interest] is determined to be $3,172,414. The amount of each
gift equals the value of the property transferred less the consideration
received. Accordingly, taxable gifts are increased $1,286,810.
In support of the gift tax deficiency for decedent’s taxable year 2006 that
respondent determined in the notice, respondent made the following determinations
with respect to the December 1, 2006 transfer:
It is determined that under IRC Section 2511 donor’s [i.e.,
decedent’s] transfer of cash to the Woodland Ridge Limited
Partnership on December 1, 2006, followed by the transfer of 25% of
the partnership interests to the donor, is in substance an indirect gift of
the assets transferred by the donor to the Woodland Ridge Limited
Partnership to the other partners[4] to the extent of the proportionate
interests in the Woodland Ridge Limited Partnership. Accordingly,
taxable gifts are increased $2,500,000.00
4
As discussed above, the other partners of Woodland Ridge were the
Lipschutz Trust, the Winkelman Trust, the A. Bart Lewis Revocable Living Trust,
and the Lenox Group.
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[*7] In computing the donor’s gift tax liability for the calendar year
2006, it is determined that the total amount of the donor’s taxable gifts
for preceding periods is $2,838,962. Accordingly, the gift tax liability
for the year 2006 is increased $1,150,000.
In support of the gift tax deficiency for decedent’s taxable year 2007 that
respondent determined in the notice, respondent made the following determination
with respect to decedent’s taxable year 2007: “In computing the donor’s [i.e.,
decedent’s] gift tax liability for the calendar year 2007, it is determined that the total
amount of the donor’s taxable gifts for preceding periods is $5,338,962.
Accordingly, the gift tax liability for the year 2007 is increased $720.”
Discussion
We may grant summary judgment where there is no genuine dispute as to
any material fact and a decision may be rendered as a matter of law. Rule 121(b);5
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965
(7th Cir. 1994). The moving party bears the burden of proving that there is no
genuine dispute of material fact, and factual inferences are viewed in the light
most favorable to the nonmoving party. Sundstrand Corp. v. Commissioner, 98
T.C. at 520. However, the party opposing summary judgment must set forth
5
All Rule references are to the Tax Court Rules of Practice and Procedure.
Unless otherwise indicated, all section references are to the Internal Revenue Code
(Code) in effect for the years at issue.
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[*8] specific facts that show a genuine dispute of material fact exists and may not
rely merely on allegations or denials in the pleadings. Rule 121(d).
In petitioner’s motion, petitioner asks us to grant summary judgment in
petitioner’s favor with respect to the following issues: (1) Is respondent barred by
the applicable statute of limitations from assessing and collecting any gift tax of
decedent that is attributable to the January 1, 2004 transfers and the December 1,
2006 transfer (statute of limitations issue)?6 (2) Did decedent make any taxable
gifts during her taxable year 2004 (other than the gifts that she reported in the 2004
gift tax return that she filed) and her taxable year 2006 (gift tax issue)? Petitioner
maintains that there is no genuine dispute of material fact in resolving those issues
and that petitioner is entitled as a matter of law to summary adjudication on those
issues. Respondent disagrees.
We turn first to the statute of limitations issue that petitioner raises in
petitioner’s motion. As pertinent here, section 6501(a) prescribes a period of three
years after a gift tax return7 is filed within which the Commissioner of Internal
6
The parties do not dispute that the gift tax deficiency that respondent
determined in the notice with respect to decedent’s taxable year 2007 resulted from
a computational adjustment attributable to the determinations that respondent made
in the notice with respect to decedent’s taxable years 2004 and 2006.
7
For purposes of sec. 6501, as pertinent here, the term “return” means the gift
tax return required to be filed by the taxpayer. Sec. 6501(a).
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[*9] Revenue (Commissioner) generally may assess any gift tax imposed by the
Code. In the case of failure to file a gift tax return, the Commissioner may assess at
any time any gift tax imposed by the Code. Sec. 6501(c)(3). The Commissioner
generally may also assess at any time any gift tax imposed by the Code on any gift
of property the value of which is required to be shown in a gift tax return and which
is not shown in such a return. Sec. 6501(c)(9). The general rule of section
6501(c)(9) “shall not apply to any item which is disclosed in such [gift tax] return,
or in a statement attached to the [gift tax] return, in a manner adequate to apprise the
Secretary of the nature of such item.”8 Id.
In order to resolve the statute of limitations issue raised in petitioner’s
motion, we must determine, inter alia, (1) whether the January 1, 2004 transfers
resulted in gifts upon which the Code imposes gift tax, thereby requiring decedent
8
As pertinent here, sec. 301.6501(c)-1(f)(4), Proced. & Admin. Regs.,
provides the following two rules for determining whether an item is “disclosed in
such [gift tax] return, or in a statement attached to the [gift tax] return, in a manner
adequate to apprise the Secretary of the nature of such item” within the meaning of
sec. 6501(c)(9): (1) “Completed transfers to members of the transferor’s family
* * * that are made in the ordinary course of operating a business are deemed to be
adequately disclosed * * *, even if the transfer is not reported on a gift tax return,
provided the transfer is properly reported by all parties for income tax purposes.”
(2) “[A]ny other completed transfer that is reported, in its entirety, as not
constituting a transfer by gift will be considered adequately disclosed” only if
certain specified information is provided in, or attached to, a gift tax return filed for
the period in which the transfer occurred.
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[*10] to have reported those gifts in her 2004 gift tax return; and (2) whether the
December 1, 2006 transfer resulted in gifts upon which the Code imposes gift tax,
thereby requiring decedent to have filed a gift tax return for her taxable year 2006 in
which she reported those gifts. To resolve those questions relating to the statute of
limitations issue, we necessarily must address the gift tax issue that petitioner raises
in petitioner’s motion. That is because (1) if the January 1, 2004 transfers did not
result in gifts which were required to be reported in decedent’s 2004 gift tax return
and on which the Code imposes gift tax for decedent’s taxable year 2004, and (2) if
the December 1, 2006 transfer did not result in gifts which were required to be
reported in a gift tax return for decedent’s taxable year 2006 and on which the Code
imposes gift tax for decedent’s taxable year 2006, decedent would have no gift tax
deficiencies for her taxable years 2004 and 2006.9 As a result, the statute of
limitations issue would be moot with respect to those years.10
9
If decedent were to have no gift tax deficiencies for her taxable years 2004
and 2006, she would have no gift tax deficiency for her taxable year 2007. See
supra note 6.
10
If the statute of limitations issue were moot with respect to decedent’s
taxable years 2004 and 2006, it would be moot with respect to decedent’s taxable
year 2007. See supra note 6.
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[*11] It is petitioner’s position that the January 1, 2004 transfers11 and the
December 1, 2006 transfer did not result in gifts during decedent’s taxable years
2004 and 2006, respectively, which decedent was required to report in gift tax
returns, and on which the Code imposes gift tax, for those respective taxable
years.12 Respondent disagrees.
Whether a transfer results in a gift upon which the Code imposes gift tax13 is
generally determined by comparing the fair market value of what is transferred to
11
In addition to determining that the January 1, 2004 transfers resulted in a
gift to each of the Lipschutz Trust and the Winkelman Trust because in each of
those transfers a 20-percent income interest in BLW was exchanged for a note that
was valued at less than the fair market value of that income interest, respondent also
determined (below-market-loan gift determination) that each of the notes bore a
below-market interest rate and therefore constituted a below-market loan under sec.
7872. Petitioner claims that the notes did not constitute below-market loans
because those notes “used the December 2003 short-term federal rate of 1.68% per
annum”. There is no evidence in the record that establishes the rate at which each
of the notes bore interest. In addition, petitioner fails to present any argument as to
why 1.68 percent per annum is the appropriate measure of a market rate of interest
for purposes of determining whether each of the notes constituted a below-market
loan within the meaning of sec. 7872. On the record, we conclude that petitioner is
not entitled to summary judgment with respect to the below-market-loan gift
determination.
12
See supra note 9.
13
Sec. 2501(a) generally imposes gift tax for each calendar year on the
transfer of property by gift during such year by an individual. Sec. 2512(b)
provides: “Where property is transferred for less than an adequate and full
consideration in money or money’s worth, then the amount by which the value of
the property exceeded the value of the consideration shall be deemed a gift”.
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[*12] the fair market value of what is received in exchange therefor.14 See sec.
2512(b); CTUW Georgia Ketteman Hollingsworth v. Commissioner, 86 T.C. 91,
96-98 (1986). “[A] transfer to a partnership for less than full and adequate
consideration may represent an indirect gift to the other partners.” Shepherd v.
Commissioner, 115 T.C. 376, 389 (2000), aff’d, 283 F.3d 1258 (11th Cir. 2002).
The parties dispute, and the record does not establish, the respective fair
market values of the respective 20-percent income interests in BLW that decedent
transferred to the Lipschutz Trust and the Winkelman Trust on January 1, 2004. As
a result, the parties dispute, and the record does not establish, whether the fair
market value of each of the notes that decedent received in the January 1, 2004
transfers equaled the fair market value of each of the income interests that she
transferred. The parties also dispute, and the record also does not establish,
whether decedent received full and adequate consideration in exchange for the
December 1, 2006 transfer.
14
The fair market value of property is defined as the price at which that
property would change hands between a willing buyer and a willing seller, neither
being under any compulsion to buy or sell and both having reasonable knowledge of
the relevant facts. United States v. Cartwright, 411 U.S. 546, 551 (1973); sec.
25.2512-1, Gift Tax Regs. The determination of fair market value is a question of
fact. See CTUW Georgia Ketteman Hollingsworth v. Commissioner, 86 T.C. 91,
98 (1986).
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[*13] Petitioner appears to argue that summary judgment should be granted in
petitioner’s favor with respect to the gift tax issue regardless (1) whether the fair
market value of each of the notes that decedent received in the January 1, 2004
transfers equaled the fair market value of each of the income interests that she
transferred and (2) whether decedent received in the December 1, 2006 transfer full
and adequate consideration for the $2,500,000 that she transferred. According to
petitioner:
Regardless of value, a transfer of property is not
considered a taxable gift if the transfer is made in the ordinary
course of business, even if the transfer is for less than adequate
and full consideration. Treas. Reg. § 25.2512-8[15] * * *
Accordingly, an arm’s-length transaction that proves to be
a bad bargain * * * is not a gift. Indeed the “ordinary course of
business” exception is not limited to regularly recurring business
transaction with customers. * * * The term includes all business-
related transfers that are: (1) bona fide, (2) at arm’s length, and
(3) free from donative intent.
15
Sec. 25.2512-8, Gift Tax Regs., provides that if a transfer of property
occurs in the ordinary course of business, i.e., as part of a transaction which is bona
fide, at arm’s length, and free from any donative intent, it is deemed to have been
made for an adequate and full consideration in money or money’s worth. The
determination of whether a transfer occurred in the ordinary course of business
within the meaning of sec. 25.2512-8, Gift Tax Regs., is a question of fact.
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[*14] The parties dispute, and the record does not establish, that the January 1,
2004 transfers and the December 1, 2006 transfer were made in the ordinary course
of business within the meaning of section 25.2512-8, Gift Tax Regs.
On the record, we find that there are genuine disputes of material fact in
resolving the gift tax issue presented in petitioner’s motion. We are thus unable to
resolve that issue or the statute of limitations issue presented in petitioner’s motion.
We have considered all of the contentions and arguments of the parties that
are not discussed herein, and we find them to be without merit, irrelevant, and/or
moot.16
On the record before us, we shall deny petitioner’s motion.17
16
Among the contentions and arguments of the parties that we have
considered is petitioner’s argument under sec. 6501(c)(9) and sec. 301.6501(c)-
1(f)(4), Proced. & Admin. Regs., with respect to the statute of limitations issue. On
the record, we find that there are genuine disputes of material fact in determining
whether to accept or to reject that argument. See infra note 17.
17
If the record and the law had allowed us to resolve the gift tax issue in
petitioner’s favor, the statute of limitations issue would have been moot. If the
record and the law had allowed us to resolve the gift tax issue in respondent’s favor,
the statute of limitations issue would not have been moot. However, in that event,
there would have been genuine disputes of material fact in resolving that issue in
petitioner’s favor. See supra note 16.
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[*15] To reflect the foregoing,
An order denying petitioner’s motion
will be issued.