Estate of Bigelow v. C.I.R.

• Citation: 503 F.3d 955
• Decision Date: 14 September 2007
• Docket Number: No. 05-75957.,05-75957.
• Parties: ESTATE OF Virginia A. BIGELOW, Deceased, Franklin T. Bigelow, Jr., Executor, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

503 F.3d 955

ESTATE OF Virginia A. BIGELOW, Deceased, Franklin T. Bigelow, Jr., Executor, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 05-75957.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 5, 2007.

Filed September 14, 2007.

Franklin T. Bigelow, Jr., Klicka, Parrish & Bigelow, Pasadena, CA, for appellant Estate of Virginia A. Bigelow.

Jonathon S. Cohen and Michael J. Haungs, United States Department of Justice, Tax Division, Washington DC, for appellee Commissioner of Internal Revenue.

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 4066-02.

Before: SIDNEY R. THOMAS, KIM McLANE WARDLAW, and RONALD M. GOULD, Circuit Judges.

GOULD, Circuit Judge:

The Estate of Virginia A. Bigelow ("the Estate") appeals the decision of the United States Tax Court upholding a deficiency in the Estate's federal estate tax return imposed by appellee Commissioner of Internal Revenue ("the Commissioner"). We consider the applicability of § 2036(a) of the Internal Revenue Code, 26 U.S.C. § 2036(a), which recaptures in a decedent's gross estate the value of certain assets transferred inter vivos. Upon Ms. Bigelow's death, the Estate filed a federal estate tax return that applied a 37% discount for lack of control and marketability to her remaining interest in a family limited partnership that held a residential property Ms. Bigelow had transferred before her death. The Commissioner filed a notice of deficiency and assessed an additional $217,480.05 in federal estate tax, claiming that the residence's fair market value, rather than the value of the partnership shares subject to the discount, should be included in the gross estate. The Tax Court affirmed the deficiency determination, finding that Ms. Bigelow and the Bigelow children had an implied agreement that Ms. Bigelow would retain income and economic enjoyment from the transferred asset, and that the inter vivos transfer was not a bona fide sale for adequate and full consideration under 26 U.S.C. § 2036(a). We have jurisdiction under 26 U.S.C. § 7482(a)(1). We affirm.

I

Virginia A. Bigelow ("decedent") died testate on August 8, 1997, at the age of eighty-eight.¹ She was survived by her son, Franklin T. Bigelow, Jr. ("Bigelow"), who is the executor of the Estate, was attorney in fact pursuant to a durable power of attorney from 1986 until decedent died, and is the attorney of record for this appeal; by her daughter Virginia L. Burke ("Burke"); and by nine grandchildren.

In 1963, decedent and her husband purchased as their principal residence a beachfront house on Sand Point Road in Carpinteria, California ("the Sand Point Road property"). Decedent became the sole owner of that property in 1966 when her husband died, and lived there until 1992. Decedent gave each of her three children — Bigelow, Burke and Katharine B. Fitzgerald ("Fitzgerald") (deceased) — a 1/175th undivided interest in the Sand Point Road property in 1990 or 1991. These gifts were in keeping with decedent's practice of making cash gifts to her children every year around Christmas, each of which fell below the threshold level where gift tax liability would accrue.

A

In 1991, decedent executed a declaration and agreement of trust ("the trust agreement") and a deed transferring her remaining 98.2857% undivided interest in the Sand Point Road property to the trust, over which she and Bigelow acted as co-trustees.

On March 9, 1992, decedent suffered a debilitating stroke. After she was released from the hospital, she moved to an assisted-living facility in Alhambra, California and never again lived at the Sand Point Road property. After the stroke, Bigelow assumed control over decedent's financial concerns and paid her bills. Aside from the principal asset of the Sand Point Road property, decedent had a personal bank account and an account held under a revocable trust left by her late husband, which together totaled about $23,047. In the fall of 1992, the trust listed the Sand Point Road property for sale. In January 1993, the trustees and decedent's children (collectively "the Bigelow children") entered into an exchange and leaseback agreement with Peter and Margaret Seaman ("the Seamans"), who owned a residence on Padaro Lane in Carpinteria, California ("the Padaro Lane property"). Under the exchange agreement, the trust and the Bigelow children agreed to transfer to the Seamans the Sand Point Road property, appraised at $1,325,000, and the Seamans agreed to pay the Bigelows $125,000 and to transfer to the trust the Padaro Lane property valued at $1,200,000. As part of the agreement, the trust agreed to lease the Padaro Lane property to the Seamans, with a monthly rent of $3,500 under an initial term of twelve months, until the Seamans could build a new house on the Sand Point Road property. The Bigelow children also transferred their fractionalized interests to the Seamans and received $68,630 in return.

To repay the two existing mortgages on the Sand Point Road property, the trust obtained a $350,000 loan from Great Western Savings and Loan ("Great Western"), which was evidenced by a promissory note and secured by a first position deed of trust on the Padaro Lane property in favor of the bank, which included the assignment of rents as additional collateral. Decedent and Bigelow guarantied the performance of the trust under the promissory note. Decedent signed the exchange agreement and the deed transferring the Sand Point Road property to the Seamans. Bigelow signed the other documents, including the loan guaranties, for himself as trustee and for decedent under the power of attorney.

In December 1993, the trust obtained a $100,000 line of credit from Union Bank secured by a second position deed of trust on the Padaro Lane property. Decedent guarantied the performance of the trust under the line of credit. The trust drew down $100,000 on this line of credit between December 1993 and November 1994, in part to make cash gifts to decedent's children and grandchildren.

B

In December 1994, the trust and the Bigelow children executed a limited partnership agreement ("the partnership agreement") that formed Spindrift Associates, Ltd., a California limited partnership ("Spindrift" or "the partnership"),² whose stated purpose was to engage in the business of owning and operating residential real property, i.e., the Padaro Lane property. The partnership agreement prohibited the partnership from engaging in any other principal business. The partnership agreement permitted the partnership to issue share units with different rights and preferences. Each unit represented a contribution of cash or property of $100. "A units" were issued to limited partners for cash, while "B units" were issued to limited partners in exchange for contributions of property.

The trust was both the sole general partner and a limited partner. The Bigelow children were limited partners. In December 1994, the trust contributed $500 to the partnership in exchange for a 1% interest as general partner, and the trust and the Bigelow children each contributed $100 in exchange for one A unit. On December 22, 1994, the trust transferred the Padaro Lane property, then worth $1,450,000, to the partnership in exchange for 14,500 B units. However, the partnership provided that the transferred real property would be encumbered by the Great Western and Union Bank debts for which decedent remained personally liable. Decedent, in her capacity as grantor and beneficiary of the trust, also agreed to hold the partnership harmless for the Great Western loan and the Union Bank line of credit. The partnership agreement required that the trust's capital account be reduced to the extent that partnership funds were used to pay any of the principal on the Great Western loan or the Union Bank line of credit.

As of February 7, 1995, after the Seamans vacated the Padaro Lane property, the partnership leased it at $3,500 per month to Michael Healy and Timothy Walsh under a 24-month lease. In August 1995, decedent's long-term care insurance expired, prompting the Bigelow children to consider the sale of the Padaro Lane property. Up to this point, the rental receipts from the Padaro Lane property were deposited into a partnership bank account, and the expenses for the Padaro Lane property were paid from partnership funds. Despite decedent's personal obligation to make the $2,000 monthly payment on the Great Western loan, the partnership made each payment in her stead, while decedent's trust paid $750 monthly toward the Union Bank debt.

Decedent initially met her financial obligations, but her revenue sources dwindled over time. At first, decedent received income from a trust that she and her late husband had established in 1954 ("the 1954 trust"), the corpus of which was an insurance policy on the life of decedent's husband. When the partnership was formed in 1994, decedent had monthly income of $9,300 from the following sources: (1) residential care insurance policies and a Fireman's Fund/ American Express policy: $2,100; (2) an AARP/Prudential policy: $1,500; (3) rental income from the Padaro Lane property: $3,500; and (4) other income: $2,200. Decedent's monthly expenses were: (1) assisted living: $3,600; (2) health insurance supplement: $150; (3) miscellaneous medical: $100; (4) servicing of Great Western loan: $2,000; (5) servicing of the Union Bank debt: $750; (6) flood and liability insurance: $350; (7) property taxes: $1,000; (8) storage: $150; and (9) phone and miscellaneous costs: $50, all of which totaled $8,350. After the Padaro Lane property was transferred to Spindrift, decedent no longer received the rent from the real property and her income was reduced to $5,800 ($9,300-$3,500). Her expenses were reduced to $7,000 ($8,350-$1,350) by shifting the property taxes and home owner's insurance to Spindrift. The trust's transfer of the Padaro Lane property thus created...