Estate of Abraham v. C.I.R., 04-1886.

• Citation: 408 F.3d 26
• Decision Date: 25 May 2005
• Docket Number: No. 04-1886.,04-1886.
• Parties: ESTATE OF Ida ABRAHAM, Deceased; Donna M. Cawley and Diana A. Slater, Administratrixes, Petitioners, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

408 F.3d 26

ESTATE OF Ida ABRAHAM, Deceased; Donna M. Cawley and Diana A. Slater, Administratrixes, Petitioners, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.

No. 04-1886.

United States Court of Appeals, First Circuit.

Heard April 4, 2005.

Decided May 25, 2005.

Brendan J. Shea, for appellants.

Michael J. Haungs, Tax Division, Department of Justice, with whom Eileen J. O'Connor, Assistant Attorney General, and Jonathan S. Cohen, Tax Division, Department of Justice, were on brief, for appellee.

Before TORRUELLA, LYNCH, and Howard, Circuit Judges.

LYNCH, Circuit Judge.

This is an appeal from a Tax Court determination unfavorable to the estate of Ida Abraham (the Estate), brought by her two daughters as administratrixes. Applying 26 U.S.C. § 2036(a), the Tax Court concluded that the Estate had underreported the taxes due because the decedent had an interest in certain property purportedly transferred to her children by gift and purchase, that the purchase of the decedent's interests by the children were not bona fide sales for adequate and full consideration, and that the decedent retained rights in the income from the total property. Estate of Abraham v. Comm'r, 87 T.C.M. (CCH) 975, 979-82 (2004). As a result, the court rejected the Estate's challenge to the IRS determination of a tax deficiency, which, after a decrease for state tax credits not relevant here, came to $939,195.00.

We affirm the Tax Court. We consider both the specificity required in a notice of deficiency and the various requirements of 26 U.S.C. § 2036(a).

Ida Abraham suffered from Alzheimer's disease and had to be placed under guardianship. In 1995, a Massachusetts probate court entered a stipulated decree requiring the establishment of an estate plan for Mrs. Abraham. That action was taken in order to ensure that Mrs. Abraham's financial needs would be met and to prevent her estate from being drained by the contentious litigation among her children. Mrs. Abraham died on June 9, 1997.

As part of the estate plan, three pieces of commercial property, which were owned by Mrs. Abraham and which generated steady rental income, were transferred to three family limited partnerships (FLPs). Mrs. Abraham and her children were partners in those FLPs. Between 1995, when the FLPs were set up, and 1997, when Mrs. Abraham died, she, through her guardian ad litem, transferred percentage interests of her share in the partnerships to her children and their families. Upon her death, the Estate included in her estate tax return only the percentage interests in the FLPs still held by her at her death and valued these interests by applying minority and lack of marketability discounts. As explained, the IRS assessed a deficiency based on 26 U.S.C. § 2036, and the Tax Court rejected the Estate's challenge.

I. Establishment of the Estate Plan

Ida Abraham and her husband, Nicholas Abraham, had four children: Nicholas A. Abraham, Richard Abraham, Donna Cawley, and Diana Slater. Nicholas, Sr., died on June 5, 1991, and litigation amongst the children over his estate followed.

Among the assets Mrs. Abraham received from her husband were three pieces of commercial real estate located in Tyngsboro and Walpole, Massachusetts, and in Smithfield, Rhode Island. The Walpole property was leased to a lumber yard, and the other properties were skating rinks leased to third parties. The leases on all of these properties were long-term, triple net leases to third parties unrelated to the Abraham family.¹

At some point during this period, Mrs. Abraham developed Alzheimer's disease. A Massachusetts probate court placed her under guardianship on March 10, 1993. The probate court appointed her daughter, Donna, as a permanent guardian of Mrs. Abraham's estate and property. Litigation and discord among the children, mainly between Richard and the two sisters, continued. The feud was apparently over what amount was needed for Mrs. Abraham's protection. The litigation was also draining Mrs. Abraham's assets. In order to end this, on August 1, 1995, Mrs. Abraham's children,² their respective counsel, and Mrs. Abraham's legal guardians signed a stipulated court decree to establish an estate plan for Mrs. Abraham pursuant to an agreement. The decree set forth the expectation for the estate plan and for the responsibilities of the parties. There was a separate estate plan. The Tax Court later considered evidence about the decree on the issue of the understanding of the parties.

The decree provided for the placing of the three pieces of income-producing commercial real estate in FLPs and then apportioning out percentage interests in the FLPs to the children in order to reduce the Estate's tax liability upon Mrs. Abraham's death. But the family also understood that the FLPs were a means to protect Mrs. Abraham financially. As Donna testified at trial:

[T]he partnerships assured ... that [Mrs. Abraham] would be constantly protected. She would never want for anything. There would always be money there. And if there wasn't money in her partnership fund, it had to come out of my partnership shares or my brother's, but the protection was there for her as a guarantee that she would live status quo.

The decree provided that attorney David Goldman would be named as a limited guardian ad litem with respect to Mrs. Abraham's interests in the FLPs and would:

have the right to meet with the guardians of the person and the estate of Ida Abraham in order to ascertain her needs to determine any and all shortfall as between the funds generated by Ida Abraham's segregated property and the income required [for] her from each of the separate limited partnerships.

For each FLP, Mrs. Abraham would be made a general and limited partner, while the three children, Richard, Donna, and Diana, would also receive limited partnership interests in their respective FLPs. The decree provided that each child, as a limited partner, would:

receive income from said family limited partnership ... either as the management fee and/or gifts from Ida Abraham after deducting from the gross income of the partnership all fees, taxes, partnership administration expenses, reserve for expenses and monies needed in the discretion of the limited Guardian ad litem for Ida Abraham's support.

(emphasis added). Under the decree, although the later FLP agreements are silent on the point, support for Mrs. Abraham came from the income of the overall partnerships. The three partnerships under the decree "share equally ... the support of Ida Abraham insofar as the funds generated by Ida Abraham's properties maintained by her do not provide sufficient funds for her adequate health, safety, welfare and comfort as determined by the limited Guardian ad litem ....

There were two mechanisms by which the children would increase their ownership share in the FLPs, thus ostensibly reducing Mrs. Abraham's estate: by gift or by purchase. The decree provided that annual gifts consisting of limited partnership interests in the three FLPs would be made "in amounts not to exceed the then available annual gift tax exclusion for federal gift tax purposes" to the three children and their families. The three children would also have the right to purchase from Mrs. Abraham additional limited partnership interests in their respective FLPs, with the proceeds from the sales "held in a revocable trust for the benefit of Ida Abraham during her lifetime and ... utilized for her needs (only if her other assets are insufficient to do so) and then held for such child and his or her family upon the death of Ida Abraham."

Finally, the decree provided that:

Ida Abraham's living arrangements shall remain in accordance with the present arrangement and every effort will be made to maintain her in "status quo." Her segregated assets shall be maintained at a level established by the limited Guardian ad litem in his sole discretion.

The decree thus gave the guardian ad litem power not to make gifts from Mrs. Abraham's share if that would contravene maintaining the status quo as to Mrs. Abraham's living conditions.

Creation of the FLPs and the Transfers of the Underlying Real Estate

The estate plan that was established essentially followed the plan agreed to by the parties in the decree, though there were some differences in the details. We omit discussion of details not pertinent to the appeal here.

In October 1995, three separate FLPs, one for each of the three children embroiled in the litigation, were created: (1) The RMA Smithfield/Walpole Family Limited Partnership for Richard (RMA FLP), (2) The DAS Tyngsboro Family Limited Partnership for Diana (DAS FLP), and (3) The DAC Tyngsboro Family Limited Partnership for Donna (DAC FLP). The commercial real estate properties were placed in the FLPs.³ Instead of having Mrs. Abraham as the general partner, each FLP had, as its respective general partner, a separate management company formed for this purpose. Each management company, as corporate general partner, had only a 1% interest in the respective FLPs, but each also had "the exclusive right to manage the business of the Partnership," including the authorization "to dispose of all or substantially all of the assets of the Partnership without the consent of the Limited Partners." Attorney Goldman was the sole corporate officer of the general partner management companies for the DAC and DAS FLPs. Because Richard refused to indemnify Goldman, Harold Rubin, Richard's accountant, was put in charge of the general partner management company of the RMA FLP. Rubin was also named Mrs. Abraham's guardian ad litem with respect to Richard's interests in the partnership, but had to defer to Goldman as Mrs. Abraham's guardian ad litem, and Rubin had "no control whatsoever over [Mrs. Abraham]."

The partnership agreements did not specifically mention any obligation for Mrs. Abraham's support as specified in the decree. The agreements provided that if...