Kimbell v. U.S.

• Decision Date: 20 May 2004
• Docket Number: No. 03-10529.,03-10529.
• Citation: 371 F.3d 257
• Parties: David A. KIMBELL, Sr., Independent Executor Under the Will of Ruth A. Kimbell, Deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

371 F.3d 257

David A. KIMBELL, Sr., Independent Executor Under the Will of Ruth A. Kimbell, Deceased, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 03-10529.

United States Court of Appeals, Fifth Circuit.

May 20, 2004.

William Reeder Cousins, III (argued), Robert Don Collier, Michael A. Denham, Meadows, Owens, Collier, Reed, Cousins & Blau, Dallas, TX, Charles R. Watson, Jr., Mullin, Hoard & Brown, Amarillo, TX, for Plaintiff-Appellant.

Louise P. Hytken (argued), U.S. Dept. of Justice, Tax Div., Dallas, TX, Jonathan S. Cohen, U.S. Dept. of Justice, Tax Div., Washington, DC, for Defendant-Appellee.

Milford B. Hatcher, Jr., Jones Day, Atlanta, GA, for American College of Trust and Estate Counsel, Amicus Curiae.

Appeal from the United States District Court for the Northern District of Texas.

Before DAVIS, BARKSDALE and PRADO, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

In this estate tax case, David A. Kimbell, the executor of the estate of his mother Ruth A. Kimbell, appeals the judgment of the district court denying his request for a refund of estate taxes and interest paid by the estate. The district court decided on cross-motions for partial summary judgment that the value of assets the decedent transferred to the R.A. Kimbell Property Co., Ltd. (Partnership) was includible in her gross estate under I.R.C. § 2036 because the transfer was not a bona fide sale for full and adequate consideration. We conclude that the district court erred in finding as a matter of law that (1) family members can not enter into a bona fide transaction, and (2) a transfer of assets in return for a pro rata partnership interest is not a transfer for full and adequate consideration. The district court also erred in failing to consider uncontroverted record evidence to support the taxpayer's position that the transfer was a bona fide sale. We therefore vacate and remand.

I.

Ruth A. Kimbell ("Mrs. Kimbell" or the "Decedent") died testate on March 25, 1998. She was 96 years old. The Plaintiff, David A. Kimbell, is the Decedent's son and the executor of her estate. In the years prior to her death, the Decedent transferred a large portion of her estate in a series of transactions to three entities. In 1991, Mrs. Kimbell created the R.A. Kimbell Living Trust (the "Trust"), which was a revocable living trust administered by Mrs. Kimbell and her son as co-trustees. In January 1998, the Trust, David Kimbell and his wife formed a limited liability company, the R.A. Kimbell Management Co., L.L.C. (the "LLC"). The Trust contributed $20,000 for a 50% interest. David Kimbell and his wife each contributed $10,000 for 25% interests each. David Kimbell was the sole manager of the LLC.

Later in January 1998, the Trust and the LLC formed the R.A. Kimbell Property Co., Ltd., a limited partnership under Texas law (the "Partnership"). The Trust contributed approximately $2.5 million in cash, oil and gas working interests and royalty interests, securities, notes and other assets for a 99% pro-rata limited partner interest. The oil and gas properties were a continuation of an oil and gas business that the Decedent's late husband had founded in the 1920's. The LLC contributed approximately $25,000 in cash for a 1% pro-rata general partner interest. At inception, approximately 15% of the assets of the Partnership were oil and gas working (11%) and royalty (4%) interests. As a result of these transfers, Mrs. Kimbell, through the Trust and the LLC, owned 99.5% of the Partnership. David Kimbell managed Mrs. Kimbell's business interest before and after the creation of the LLC and the Partnership. Not all of Mrs. Kimbell's assets were conveyed to the LLC and the Partnership. She retained over $450,000 in assets outside of the LLC and the Partnership for her personal expenses. The primary focus of this appeal is on this transfer from the LLC and the Trust to the Partnership. Because of Mrs. Kimbell's control of the Trust assets, the transfer by the Trust is viewed as a transfer by Mrs. Kimbell.

Under the stated terms of the Partnership Agreement, the purposes of the Partnership were to "increase Family wealth; establish a method by which annual gifts can be made without fractionalizing Family Assets; continue the ownership and collective operation of Family Assets and restrict the right of non-Family members to acquire interests in Family Assets; provide protection to Family Assets from claims of future creditors against Family members; prevent transfer of a Family member's interest in the Partnership as a result of a failed marriage; provide flexibility and continuity in business planning for the Family not available through trusts, corporations or other business entities; facilitate the administration and reduce the cost associated with the disability or probate of the estate of Family members; promote the Family's knowledge of and communication about Family Assets; provide resolution of any disputes which may arise among the Family in order to preserve Family harmony and avoid the expense and problems of litigation; and consolidate fractional interests in Family Assets." (Paragraph numbers omitted.) These purposes were supported by the deposition testimony of David Kimbell and Micheal Elyea, Mrs. Kimbell's business advisor. The term of the Partnership was 40 years.

The LLC, as general partner, managed the Partnership and had exclusive authority to make distributions. The Partnership Agreement provided that the general partner owed no fiduciary duty to the Partnership or to any Partner but owed a duty of loyalty and a duty of care to the Partnership. The Trust, as limited partner, had no right to withdraw from the Partnership or receive a return of contributions until the Partnership was terminated, which could occur only by unanimous consent of the partners. The Partnership Agreement provided that 70% in interest of the limited partners had the right to remove the general partner. A majority in interest of the limited partners had the right to elect a new general partner.

The estate filed its federal estate tax return in December 1998. At the time of Mrs. Kimbell's death, the value of the Partnership assets was approximately $2.4 million. On the return, the estate claimed a 49% discount on the value of Mrs. Kimbell's interest in the Partnership and her interest in the LLC for lack of control and lack of marketability of the partnership interest. It reported her 99% interest in the Partnership as having a fair market value of approximately $1.2 million and her 50% interest in the LLC as having a fair market value of approximately $17,000.

The IRS audited the estate. It found that the value of the assets transferred to the Partnership and the LLC, rather than Mrs. Kimbell's interest in these entities, was includible in the gross estate under § 2036(a) of the Internal Revenue Code and increased the tax due accordingly. The estate paid the additional tax and then filed for a refund, claiming that the IRS overvalued Mrs. Kimbell's interests in the Partnership and the LLC.

On cross-motions for summary judgment, the district court found that the government had demonstrated, as a matter of law, that Mrs. Kimbell's transfers of assets to the Partnership and the LLC were subject to I.R.C. § 2036(a), which recaptures certain assets transferred prior to death in the gross estate. Therefore, the district court found that the IRS correctly included the value of the assets Mrs. Kimbell transferred to the Partnership and the LLC in the estate and granted partial summary judgment to the government. The estate appeals.

II.

This court reviews a grant of summary judgment de novo. Browning v. Odessa, 990 F.2d 842, 844 (5th Cir.1993).

III.

Whether the assets Mrs. Kimbell transferred to the Partnership must be recaptured into her estate for estate tax purposes depends on the application of Internal Revenue Code section 2036(a). Internal Revenue Code section 2036(a) provides:

(a) General rule. The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death —

(1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

26 U.S.C. § 2036(a).

The statute recognizes that some assets transferred prior to death must be recaptured into the estate. By recapturing these transfers into the estate, this section of the code prevents the circumvention of federal estate tax by the use of inter vivos transactions which do not remove the lifetime enjoyment of property purportedly transferred by a decedent. Estate of Wyly v. Commissioner, 610 F.2d 1282, 1290 (5th Cir.1980). Regarding this provision, this court has stated:

[Section 2036 is] part of a Congressional scheme to tax the value of property transferred at death, whether the defendant accomplishes the transfer by will, by intestacy, or by allowing his substantial control over the property to remain unexercised until death so that the shifting of its economic benefits to the beneficiary only then becomes complete.

Estate of Lumpkin v. Commissioner, 474 F.2d 1092, 1097 (5th Cir.1973).

The statute provides two exceptions that will allow a transfer to escape the operation of § 2036(a). First, if the transfer is a bona fide sale for full and adequate consideration, then § 2036(a) does not apply. See Treas. Reg. §§ 20.2036-1(a), 20.2043-1(1)(as amended in 1960). If the transfer is not a bona fide sale for full and adequate...