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

• Citation: 124 T.C. 95,124 T.C. No. 8
• Decision Date: 15 March 2005
• Docket Number: No. 6141–03.,6141–03.
• Parties: ESTATE OF Wayne C. BONGARD, Deceased, James A. Bernards, Personal Representative, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

124 T.C. 95
124 T.C. No. 8

ESTATE OF Wayne C. BONGARD, Deceased, James A. Bernards, Personal Representative, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 6141–03.

United States Tax Court.

March 15, 2005.

[124 T.C. 95]

In 1980, D incorporated Empak, Inc. In 1986, D established an irrevocable stock accumulation trust (ISA Trust) and funded it with some of his Empak stock. In the mid–1990s it was determined by Empak's board of directors and advisers that pooling all of D's family's Empak stock in a holding company, WCB Holdings, LLC. (WCB Holdings), would better position Empak for a corporate liquidity event, which was necessary to raise capital and remain competitive. On Dec. 28, 1996, D and ISA Trust capitalized WCB Holdings by transferring to WCB Holdings their respective shares of Empak stock, and in exchange received WCB Holdings class A and class B membership units. Each class of membership units was further divided into governance and financial units, the class A governance units being the only units with voting rights.

On Dec. 29, 1996, D and ISA Trust formed the Bongard Family Limited Partnership (BFLP). To capitalize BFLP, D transferred all of his WCB Holdings class B membership units to BFLP in exchange for a 99–percent limited partnership interest, and ISA Trust transferred a portion of its WCB Holdings class B membership units to BFLP in exchange for a 1–percent general partnership interest. On Dec. 10, 1997, D made a gift of a 7.72–percent partnership interest to his wife. D made no other gifts of his BFLP interest before his death on Nov. 16, 1998.

The IRS issued a notice of deficiency to the estate on Feb. 4, 2003, which, among other things, returned to decedent's gross estate, under secs.2035(a) and 2036(a) and (b), I.R.C., all of the Empak shares decedent had transferred to WCB Holdings.

The estate argues that sec.2036(a), I.R.C., is not applicable to either D's transfer of Empak shares to WCB Holdings or D's transfer of his WCB Holdings class B membership units to BFLP because each transfer was a bona fide sale for adequate and full consideration. The estate argues, in the alternative, that even if the bona fide sale exception was not satisfied by each transfer, D did not retain a sec.2036(a)(1) or (2), I.R.C., interest in the property he transferred in either transaction.

Held: D's transfer of his Empak stock to WCB Holdings satisfied the bona fide sale exception because D possessed a legitimate and significant nontax reason for the transfer.

Held, further, D's transfer of WCB Holdings class B membership units to BFLP did not satisfy the bona fide sale exception.

Held, further, an implied agreement existed whereby D retained a sec.2036(a), I.R.C.,

[124 T.C. 96]

interest in the WCB Holdings class B membership units he transferred to BFLP.

Held, further, WCB Holdings class B membership units allocable to the 7.72–percent partnership interest in BFLP D gave to his wife are included in D's gross estate under sec.2035(a), I.R.C.

John W. Porter and Stephanie Loomis–Price, for petitioner.

Lillian D. Brigman and R. Scott Shieldes, for respondent.

GOEKE, J.

Respondent determined a $52,878,785 Federal estate tax deficiency against the Estate of Wayne C. Bongard (the estate). After concessions and stipulations, two issues remain for decision: First, whether the shares of Empak, Inc. (Empak), decedent transferred to WCB Holdings, LLC. (WCB Holdings), are included in his gross estate pursuant to sections 2035(a) ¹ and 2036(a) and (b); and second, whether the WCB Holdings membership units decedent transferred to the Bongard Family Limited Partnership (BFLP) are included in his gross estate under sections 2035(a) and 2036(a). The resolution of these issues depends on the applicability of section 2036(a) to decedent's respective transfers of Empak stock to WCB Holdings and of WCB Holdings membership units to BFLP.

FINDINGS OF FACT

Many of the facts have been stipulated. The stipulation of facts, stipulation of settled issues, and attached exhibits are incorporated herein by this reference.

Decedent resided in Minnesota on November 16, 1998, the date of his death. On December 9, 1998, the First Judicial District Court, Probate Court Division, Carver County, Minnesota, appointed James A. Bernards (Mr. Bernards) personal representative of decedent's estate. At the time the petition was filed, Mr. Bernards resided in Minnesota. On February 4, 2003, respondent issued a notice of deficiency to the estate with respect to its timely filed Form 706, United States Estate (and Generation–Skipping Transfer) Tax Return.

[124 T.C. 97]

I. General Background and Time Line

Decedent was a skilled and experienced businessman. In 1966, decedent was a founding employee of Fluoroware, Inc. (Fluoroware), a Minnesota corporation that produced packaging materials for the semiconductor, data storage, and microelectronic industries. In 1980, decedent left Fluoroware to start his own corporation, Empak.

On November 9, 1984, decedent married Cynthia Bongard. Decedent entered into this marriage with four children from a prior marriage: Beth Akerberg, Mark Bongard, Rhonda Notermann, and Lynn Zupan. Cynthia Bongard also entered the marriage with a child from a previous marriage, Terra Saxe.² Decedent and Cynthia Bongard never had any children together, nor did decedent adopt Terra Saxe.

On May 23, 1986, decedent formed the Wayne C. Bongard Irrevocable Stock Accumulation Trust (ISA Trust) for the benefit of his children and Terra Saxe, and funded it with shares of Empak stock. ISA Trust is described in further detail infra pp. 17–19.

On January 17, 1991, Empak incorporated Empak International, Inc. (Empak International), as a wholly owned subsidiary. Pursuant to a joint venture agreement, Empak sold an interest in Empak International to an unrelated foreign corporation. See infra p. 8 for greater details of this joint venture.

Between April 22, 1991, and December 30, 1994, ISA Trust made six distributions of shares of Empak stock to specific beneficiaries. After each distribution, Empak redeemed the shares from the distributee for cash. See infra pp. 18–19 for specific details of these distributions/redemptions.

On January 30, 1996, WCB Holdings, LLC. (WCB Holdings) was established, but was not capitalized until December 28, 1996. Before WCB Holdings was capitalized, two significant events occurred. First, on April 18, 1996, Empak had a stock split of 223 to 1, significantly increasing the number of shares decedent and ISA Trust owned. See infra pp. 10–11 and p. 19. for details regarding the stock split and its effect it on the Empak shareholders. Second, in February 1996, Empak incorporated Emplast, Inc. (Emplast), and capitalized

[124 T.C. 98]

it with some of Empak's noncore assets. On July 31, 1996, Empak distributed its Emplast shares to decedent in exchange for some of his Empak shares, which were canceled. This transaction and its effects are discussed further infra pp. 10–11 and p. 19.

On December 28, 1996, decedent and ISA Trust transferred their respective shares of Empak stock to WCB Holdings in exchange for WCB Holdings membership units, which were divided into class A governance, class A financial, class B governance, and class B financial units. For a greater discussion of this transaction, see infra pp. 11–14.

On December 29, 1996, decedent and ISA Trust created the Bongard Family Limited Partnership (BFLP). Decedent transferred all of his WCB Holdings class B membership units to BFLP in exchange for a 99–percent limited partnership interest, and ISA Trust transferred a portion of its WCB Holdings class B membership units to BFLP in exchange for a 1–percent general partnership interest. BFLP is discussed in further detail infra pp. 19–21.

On March 7, 1997, Empak International merged into Empak, which resulted in the foreign corporation's receiving an ownership interest in Empak and the cancellation of Empak's shares in Empak International. Facts regarding this transaction are set forth infra pp. 14–15.

On March 15, 1997, decedent transferred WCB Holdings class A membership units to three trusts that he had previously established. Each of these trusts was established to benefit different members of his family. See infra pp. 21–23 for further details regarding these trusts. On December 10, 1997, decedent gave Cynthia Bongard a 7.72–percent limited partnership interest in BFLP. That same day, Cynthia Bongard and decedent entered into a postmarital agreement. See infra pp. 23–24 for details of the postmarital agreement.

Decedent died unexpectedly on November 16, 1998, while on a business/hunting trip in Austria. Decedent was 58 years of age and appeared to be in good health before his death.

II. Decedent's Business InterestsA. Empak

On July 14, 1980, decedent founded Empak as a Minnesota corporation. Decedent was assisted by Mr. Bernards, who

[124 T.C. 99]

was one of Fluoroware's outside accounting consultants, in incorporating Empak. Empak is an acronym for “ electronic materials packaging”. Empak engaged in the design, development, manufacture, and marketing of plastic products used in the semiconductor and data storage industries. Some of Empak's and Fluoroware's businesses directly competed with each other.

Decedent was Empak's sole shareholder upon incorporation. Empak had only one class of stock, common voting stock. When decedent funded the ISA Trust with shares of Empak stock in 1986, decedent's ownership percentage decreased to 85 percent. Decedent was also one of three directors on Empak's board of directors. In the mid–1980s, decedent became the sole member of Empak's board of directors and remained in that position until his death, except for a 28–day period from December 30, 1996, to January 24, 1997.

Empak grew into a successful business through decedent's leadership. Empak's growth was attributable to selling a greater number and variety of products, expanding its markets, reinvesting its earnings, and...