Jones v. Comm'r of Internal Revenue (In re Estate of Jones)

Decision Date06 March 2001
Docket NumberNo. 13926–98.,13926–98.
PartiesEstate of W.W. JONES II, Deceased, A.C. Jones IV, Independent Executor, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Executor petitioned for redetermination of estate tax deficiency arising from valuation of transferred limited partnership interests. The Tax Court, Cohen, J., held that: (1) transfers of property to partnerships were not taxable gifts; (2) restrictions on partnership liquidation were considered in determining value of partnership interests; (3) valuation of gifts of partnership interests was reduced by discounts; and (4) no discount for built-in capital gains was warranted.

Decision for IRS in part, and for taxpayer in part. D formed a family limited partnership (JBLP) with his son and transferred assets including real property, to JBLP in exchange for a 95.5389–percent limited partnership interest. D also formed a family limited partnership (AVLP) with his four daughters and transferred real property to AVLP in exchange for an 88.178–percent limited partnership interest. D's son contributed real property in exchange for general and limited partnership interests in JBLP, and the daughters contributed real property in exchange for general and limited partnership interests in AVLP. All of the contributions were properly reflected in the capital accounts of the contributing partners. Immediately after formation of the partnerships, D transferred by gift an 83.08–percent limited partnership interest in JBLP to his son and a 16.915–percent limited partnership interest in AVLP to each of his daughters.Held: The transfers of property to the partnerships were not taxable gifts. See Estate of Strangi v. Commissioner, 115 T.C. 478, (2000).Held, further, sec. 2704(b), I.R.C., does not apply to this transaction. See Kerr v. Commissioner, 113 T.C. 449, 1999 WL 1247551 (1999).Held, further, the value of D's gift to his son was 83.08–percent of the value of the underlying assets of JBLP, reduced by a lack-of-marketability (8%) discount. The value of D's gift to each of his daughters was 16.915 percent of the value of the underlying assets of AVLP, reduced by secondary market (40%) and lack-of-marketability (8%) discounts.Held, further, the gifts of limited partnership interests are not subject to additional lack-of-marketability discounts for built-in capital gains. Estate of Davis v. Commissioner, 110 T.C. 530, 1998 WL 345523 (1998), distinguished.William R. Cousins III, Robert Don Collier, Robert M. Bolton, and Todd A. Kraft, for petitioner.

Deborah H. Delgado and Gerald L. Brantley, for respondent.

COHEN, J.

Respondent determined a deficiency of $4,412,527 in the 1995 Federal gift tax of W.W. Jones II. The issues for decision are (alternatively): (1) Whether the transfers of assets on formation of Jones Borregos Limited Partnership (JBLP) and Alta Vista Limited Partnership (AVLP) (collectively, “the partnerships”) were taxable gifts pursuant to section 2512(b); (2) whether the period of limitations for assessment of gift tax deficiency arising from gifts on formation is closed; (3) whether restrictions on liquidation of the partnerships should be disregarded for gift tax valuation purposes pursuant to section 2704(b); and (4) the fair market value of interests in the partnerships transferred by gift after formation. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect on the date of the transfers, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. W.W. Jones II (decedent), resided in Corpus Christi, Texas, at the time the petition in this case was filed. Decedent subsequently died on December 17, 1998, and a motion to substitute the estate of W.W. Jones II, deceased, A.C. Jones IV, independent executor, as petitioner was granted. The place of probate of decedent's estate is Nueces County, Texas. At the time of his appointment as executor, A.C. Jones IV (A.C.Jones), also resided in Nueces County, Texas.

For most of his life, decedent worked as a cattle rancher in southwest Texas. Decedent had one son, A.C. Jones, and four daughters, Elizabeth Jones, Susan Jones Miller, Kathleen Jones Avery, and Lorine Jones Booth.

During his lifetime, decedent acquired, by gift or bequest, the surface rights to several large ranches, including the Jones Borregos Ranch, consisting of 25,669.49 acres, and the Jones Alta Vista Ranch, consisting of 44,586.35 acres. These ranches were originally acquired by decedent's grandfather and have been held by decedent's family for several generations. The land on these ranches is arid natural brushland, and commercial uses include raising cattle and hunting.

Motivated by his desire to keep the ranches in the family, decedent became involved in estate planning matters beginning in 1987. In 1994, decedent's certified public accountant suggested that decedent use partnerships as estate and business planning tools. Following up on this suggestion, A.C. Jones prepared various projections for decedent concerning a hypothetical transfer of the ranches to partnerships and the discounted values that would attach to the partnership interests for gift tax purposes.

A.C. Jones, Elizabeth Jones, Susan Jones Miller, Kathleen Jones Avery, and Lorine Jones Booth each owned a one-fifth interest in the surface rights of the Jones El Norte Ranch. They acquired this ranch by bequest from decedent's aunt in 1979. The Jones El Norte Ranch was also originally owned by decedent's grandfather and has also been owned by decedent's extended family for several generations.

Effective January 1, 1995, decedent and A.C Jones formed JBLP under Texas law. Decedent contributed the surface estate of the Jones Borregos Ranch, livestock, and certain personal property in exchange for a 95.5389–percent limited partnership interest. The entire contribution was reflected in the capital account of decedent. A.C. Jones contributed his one-fifth interest in the Jones El Norte Ranch in exchange for a 1–percent general partnership interest and a 3.4611–percent limited partnership interest.

On January 1, 1995, the same day that the partnership was effectively formed, decedent gave to A.C. Jones an 83.08–percent interest in JBLP, leaving decedent with a 12.4589–percent limited partnership interest. Decedent used a document entitled “Gift Assignment of Limited Partnership Interest” to carry out the transfer. The document stated that decedent intends that A.C. Jones receive the gift as a limited partnership interest.

Federal income tax returns for 1995, 1996, 1997, and 1998 were filed for JBLP and signed by A.C. Jones as tax matters partner. Attached to each return were separate Schedules K–1 for each general partnership interest and each limited partnership interest. The Schedules K–1 for the limited partnership interest of A.C. Jones included the interest in partnership received by gift from decedent.

Also effective January 1, 1995, decedent and his four daughters formed AVLP under Texas law. Decedent contributed the surface estate of the Jones Alta Vista Ranch in exchange for an 88.178–percent limited partnership interest. The contribution was reflected in decedent's capital account. Susan Jones Miller and Elizabeth Jones each contributed their one-fifth interests in the Jones El Norte Ranch in exchange for 1–percent general partnership interests and 1.9555–percent limited partnership interests, and Kathleen Jones Avery and Lorine Jones Booth each contributed their one-fifth interest in the Jones El Norte Ranch in exchange for 2.9555–percent limited partnership interests. The following chart summarizes the ownership structure of AVLP immediately after formation:

+----------------------------------------+
                ¦Partner             ¦Percentage¦Interest¦
                +----------------------------------------¦
                ¦                                        ¦
                +----------------------------------------¦
                ¦Elizabeth Jones     ¦1.0       ¦General ¦
                +--------------------+----------+--------¦
                ¦                    ¦1.9555    ¦Limited ¦
                +--------------------+----------+--------¦
                ¦Susan Jones Miller  ¦1.0       ¦General ¦
                +--------------------+----------+--------¦
                ¦                    ¦1.9555    ¦Limited ¦
                +--------------------+----------+--------¦
                ¦Kathleen Jones Avery¦2.9555    ¦Limited ¦
                +--------------------+----------+--------¦
                ¦Lorine Jones Booth  ¦2.9555    ¦Limited ¦
                +--------------------+----------+--------¦
                ¦Decedent            ¦88.178    ¦Limited ¦
                +----------------------------------------+
                

On January 1, 1995, the same day that the partnership was effectively formed, decedent gave to each of his four daughters a 16 .915–percent interest in AVLP, leaving decedent with a 20.518–percent limited partnership interest. Decedent used four separate documents, one for each daughter, entitled “Gift Assignment of Limited Partnership Interest” to carry out the transfers. Each document stated that decedent intended for his daughters to receive the gifts as limited partnership interests.

Federal income tax returns for 1995, 1996, 1997, and 1998 were filed for AVLP and signed by Elizabeth Jones as tax matters partner. Attached to each return were separate Schedules K–1 for each general partnership interest and each limited partnership interest. The Schedules K–1 for each daughter's limited partnership interest included the partnership interest received by gift from decedent.

Decedent's attorney drafted the partnership agreements of both JBLP and AVLP with the intention of creating substantial discounts for the partnership interests that were transferred by gift. Both partnership agreements set forth conditions for when an interest that is transferred by gift or by other methods may convert to a limited partnership interest. Section 8.3 of the JBLP...

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