Astleford v. Commissioner of Internal Revenue, T.C. Memo. 2008-128 (U.S.T.C. 5/5/2008)
| Decision Date | 05 May 2008 |
| Docket Number | No. 4342-06.,4342-06. |
| Parties | JANE Z. ASTLEFORD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
Sue Ann Nelson and Robert J. Stuart, for petitioner.
Trent D. Usitalo and David Zoss, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies of $127,619 and $3,997,288 in petitioner's 1996 and 1997 respective Federal gift taxes.
After settlement by the parties of the valuation of a number of properties, in order to calculate the fair market value of limited partnership interests petitioner transferred as gifts in 1996 and 1997, we must determine the fair market value of 1,187 acres of Minnesota farmland, whether a particular interest in a general partnership should be valued as a partnership interest or as an assignee interest, and the lack of control and lack of marketability discounts that should apply to the limited and to the general partnership interests.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the 2 years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Many of the facts have been stipulated and are so found.
At the time the petition was filed, petitioner resided in Minnesota.
Petitioner's husband, M.G. Astleford (MG), was a successful real estate businessman who over the course of years acquired individually, jointly with petitioner, and through various trusts and limited and general partnerships significant interests in real estate located primarily in Minnesota. Below, we briefly describe the interests in real estate MG and petitioner owned and that petitioner transferred to a family limited partnership and the gifts of interests in the family limited partnership that petitioner in 1996 and in 1997 made to her children.
In 1970, MG and Richard T. Burger formed Pine Bend Development Co. (Pine Bend) as a Minnesota general partnership. MG and Mr. Burger were each 50-percent general partners in Pine Bend. Under provisions of the Pine Bend general partnership agreement, consent of each partner was required with respect to the management, conduct, and operation of the partnership business in all respects and in all matters. The Pine Bend general partnership agreement did not contain any provisions relating to the transfers of interests in Pine Bend and whether such transferred interests would be general partnership or assignee interests.
In 1970, Pine Bend purchased 3,000 acres of land near St. Paul, Minnesota, of which 1,187 acres consisted of agricultural farmland in Rosemount, Minnesota (the Rosemount property). Pine Bend leased 944 acres of the Rosemount property to farmers and leased out the remaining acreage for use as a commercial paintball field.
The Rosemount property was located near an industrial area and an oil refinery and approximately 6 miles from the nearest residential neighborhood. The Rosemount property was not connected to municipal sewer or water.
On or about February 20, 1992, MG and petitioner each created separate revocable trusts, and they each transferred to their separate trusts various interests in real estate.
On April 1, 1995, MG passed away. As of the date of his death, MG owned directly (or indirectly through various partnerships and his above revocable trust) interests in 41 real properties located in Minnesota and California. All of MG's real estate interests passed under MG's last will and testament to the M.G. Astleford Marital Trust (the marital trust), which on MG's death came into existence under MG's will for the benefit of petitioner.
After MG's death in 1995, petitioner owned (indirectly through the marital trust) all of the interests in the various real properties that MG had acquired over the years, and petitioner continued to own all of the real estate interests she separately had acquired.
On August 1, 1996, petitioner formed the Astleford Family Limited Partnership (AFLP) as a Minnesota limited partnership to facilitate the continued ownership, development, and management of the various real estate investments and partnership interests petitioner then owned and to facilitate the gifts which petitioner intended to give to her three adult children.
Under provisions of the AFLP agreement, AFLP's net cashflow was to be distributed annually among the partners. The limited partners were not entitled to vote on matters relating to management of AFLP, no outside party could become a partner in AFLP without consent of petitioner as general partner, a limited partner could not sell or transfer any part of his or her AFLP limited partnership interest without consent of petitioner, and no real property interest held by AFLP could be partitioned without consent of petitioner.
On August 1, 1996, petitioner funded AFLP by transferring her ownership interest in an elder-care assisted living facility with a stipulated value of $870,904.
Also on August 1, 1996, petitioner gave each of her three children a 30-percent limited partnership interest in AFLP, retaining for herself a 10-percent AFLP general partnership interest.
A November 2, 1997, partnership resolution of AFLP referred to an impending transfer to AFLP of petitioner's 50-percent Pine Bend interest as a transfer of petitioner's "entire right and interest" in Pine Bend.
On December 1, 1997, as an additional capital contribution to AFLP, petitioner transferred to AFLP her 50-percent Pine Bend interest and her ownership interest in 14 other real estate properties located in the Minneapolis-St. Paul metropolitan area (the other properties).
As a result of the December 1, 1997, transfer to AFLP of petitioner's 50-percent Pine Bend interest and of the other properties, petitioner's general partnership interest in AFLP increased significantly, and petitioner's children's respective limited partnership interests in AFLP decreased significantly.
However, also on December 1, 1997, and simultaneously with petitioner's above transfer of property to AFLP, petitioner gave each of her three children additional limited partnership interests in AFLP having the effect of reducing petitioner's AFLP general partnership interest back down to approximately 10 percent and increasing petitioner's children's AFLP limited partnership interests back up to approximately 30 percent apiece.
In 1996 and in 1997, petitioner's three children did not make any contributions to the capital of AFLP.
On audit, as compared to the values and discounts used by petitioner in calculating and reporting on her 1996 and 1997 Federal gift tax returns the value of the gifts of AFLP limited partnership interests to her three children, respondent increased the fair market values of a number of the properties that were transferred to AFLP and the fair market value of AFLP's net asset value (NAV). Respondent decreased the lack of control and lack of marketability discounts applicable to the valuation of the gifted AFLP limited partnership interests. The schedule below reflects the total value of petitioner's taxable gifts and gift tax liabilities for 1996 and 1997, as reported on petitioner's Federal gift tax returns and as determined by respondent on audit:
Petitioner's Respondent's Audit
Gift Tax Returns Determinations
Taxable Gift Tax Taxable Gift Tax
Year Gifts Liability Gifts Liability
1996 $ 277,441 $ 79,581 $ 626,898 $ 127,619
1997 3,954,506 2,005,689 10,937,268 3,997,288
OPINION
Under section 2501(a)(1) the transfer of property by gift is subject to Federal gift taxes. The amount of the gift is equal to the fair market value of the gifted property, defined as the price at which, on the date of the gift, the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Sec. 2512(a); sec. 25.2512-1, Gift Tax Regs.; see also Rev. Rul. 59-60, 1959-1 C.B. 237.
A willing buyer and a willing seller are hypothetical persons, rather than specific individuals or entities, and their characteristics are not necessarily the same as those of the donor and the donee of the property in question. Estate of Bright v. United States, 658 F.2d 999, 1006 (5th Cir. 1981); Estate of Newhouse v. Commissioner, 94 T.C. 193, 218 (1990).
The valuation of property is a question of fact, and all relevant facts and circumstances are to be considered. Polack v Commissioner, 366 F.3d 608, 613 (8th Cir. 2004), affg. T.C. Memo. 2002-145.
In deciding valuation issues, courts often receive into evidence and consider the opinions of expert witnesses. Helvering v. Natl. Grocery Co., 304 U.S. 282, 295 (1938). We may largely accept the opinion of one expert over the opinion of another expert, see Buffalo Tool & Die Mfg. Co., Inc. v. Commissioner, 74 T.C. 441, 452 (1980), and we may be selective in determining which portion of an expert's opinion to accept, Parker v. Commissioner, 86 T.C.547, 562 (1986).
The fair market values of the Rosemount property, the 50-percent Pine Bend interest, and the other properties—that petitioner on August 1, 1996, and on December 1, 1997, directly or indirectly transferred as additional capital contributions to AFLP—obviously increased the fair market value of the three AFLP limited partnership interests that petitioner simultaneously transferred to her children. As stated, of these underlying properties transferred to AFLP, the parties herein dispute only the value of the Rosemount property, whether the 50-percent Pine Bend interest should be valued as a general partnership interest or as an assignee interest, and the lack of control and lack of marketability discounts that should apply to the 50-percent Pine Bend interest and to the gifted AFLP limited...
To continue reading
Request your trial