Estate of Jorgensen v. Commissioner of Internal Revenue, T.C. Memo. 2009-66 (U.S.T.C. 3/26/2009)
| Decision Date | 26 March 2009 |
| Docket Number | No. 21936-06.,21936-06. |
| Parties | ESTATE OF ERMA V. JORGENSEN, DECEASED, JERRY LOU DAVIS, EXECUTRIX, AND JERRY LOU DAVIS AND GERALD R. JORGENSEN, CO-TRUSTEES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
John F. Ramsbacher, John W. Prokey, and Dennis I. Leonard, for petitioner.
Matthew A. Mendizabal, Chong S. Hong, and Jeffrey L. Heinkel, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a $796,954 Federal estate tax deficiency against the Estate of Erma V. Jorgensen (the estate). After concessions the issues for decision are (1) Whether the values of the assets Ms. Jorgensen transferred to two family limited partnerships are included in the value of her gross estate under section 2036(a); and (2) whether the estate is entitled to equitable recoupment.1
Many of the facts have been stipulated and are so found. The stipulations of facts and the exhibits attached thereto are incorporated herein by this reference. Ms. Jorgensen was a resident of California when she died testate on April 25, 2002, and her will was probated in that State. The estate acts through its executrix, Jerry Lou Davis (Jerry Lou), and through Jerry Lou and Gerald R. Jorgensen, Jr. (Gerald), as cotrustees of Ms. Jorgensen's trust. Jerry Lou, Ms. Jorgensen's daughter, resided in California when the petition was filed. Gerald, Ms. Jorgensen's son, resided in Nebraska when the petition was filed.
Ms. Jorgensen was born in 1914. She earned a college degree from Luther College, after which she worked as a school teacher for about 10 years. During that time she met, fell in love with, and married Gerald Jorgensen, who later became Colonel Jorgensen of the U.S. Air Force. As a young man Colonel Jorgensen put himself through college and law school at the University of Nebraska. At the onset of World War II he joined the Air Force, where he became a highly decorated bomber pilot seeing active combat in both World War II and the Korean War.
After Colonel Jorgensen returned from the Second World War, he and Ms. Jorgensen started a family. Ms. Jorgensen left her job and became a full-time mother and housewife. Colonel Jorgensen took over responsibility for the family's financial matters. When Colonel Jorgensen stopped flying, he joined the Judge Advocate General's office as an attorney. Later he served with the diplomatic corps of the Air Force in Ethiopia and Yugoslavia. Colonel Jorgensen's 30-year career in the Air Force entitled him to a pension and provided Ms. Jorgensen with survivor's benefits. Upon retiring from the Air Force Colonel Jorgensen served as an aide to U.S. Congressman Charles Thone. This entitled Colonel Jorgensen to a second pension and also provided Ms. Jorgensen with survivor's benefits.
Having come of age during the Great Depression, Colonel and Ms. Jorgensen (sometimes, the Jorgensens) were frugal. They abhorred debt and saved as much as they could. Colonel Jorgensen was a knowledgeable investor, and over the years the couple's portfolio of marketable securities grew to over $2 million. Colonel and Ms. Jorgensen's investments consisted primarily of marketable securities; i.e, stocks and bonds yielding cash dividends and interest. In 1992 Colonel Jorgensen developed a relationship with Barton Green, who became the family's investment adviser. Colonel and Ms. Jorgensen adhered to a "buy and hold" strategy premised on long-term growth and dividend reinvestment. Consequently, there was very little trading activity though Colonel Jorgensen regularly researched investments and checked on his holdings. Ms. Jorgensen was not involved in the couple's financial matters or investment decisions. Before the formation of the partnerships at issue the couple's investments in marketable securities were held in four accounts: Two were Colonel Jorgensen's individual accounts, one belonged to Ms. Jorgensen individually,2 and one was the couple's joint account with right of survivorship.
Peter Arntson was Colonel and Ms. Jorgensen's estate planning attorney. Mr. Arntson prepared Ms. Jorgensen's revocable trust agreement at the direction of Colonel Jorgensen. Ms. Jorgensen first met Mr. Arntson on October 19, 1994, the day she executed her revocable trust agreement titled "Erma Jorgensen's Trust Agreement". On that same day Ms. Jorgensen executed a durable power of attorney naming Colonel Jorgensen, Jerry Lou, and Gerald her attorneys-in-fact. Ms. Jorgensen later amended her revocable trust agreement in January 1997 to name Jerry Lou and Gerald as successor trustees in the event of Ms. Jorgensen's inability to manage her affairs. Ms. Jorgensen was the sole beneficiary of her revocable trust during her lifetime. Under the trust terms, she had access to all trust income and corpus without restriction and the trustees had a duty to administer the trust solely for Ms. Jorgensen's benefit.
Colonel Jorgensen, in consultation with Mr. Arntson, decided that he and his wife would form a family limited partnership. Mr. Arntson and Colonel Jorgensen met several times to discuss the structure of the partnership. Neither Ms. Jorgensen nor her children were involved in any of these discussions. On May 15, 1995, Colonel Jorgensen, Ms. Jorgensen, Jerry Lou, and Gerald signed the Jorgensen Management Association (JMA-I) partnership agreement. The JMA-I partnership agreement states that the parties desired to pool certain assets and capital for the purpose of investing in securities. On May 19, 1995, a certificate of limited partnership for JMA-I was filed with the Commonwealth of Virginia.
On June 30, 1995, Colonel and Ms. Jorgensen each contributed marketable securities valued at $227,644 to JMA-I in exchange for 50-percent limited partnership interests. Gerald and Jerry Lou, along with their father, were the general partners. Colonel and Ms. Jorgensen had six grandchildren; three were Gerald's and three were Jerry Lou's. Gerald, Jerry Lou, and the six grandchildren were listed as limited partners and received their initial interests by gift.3 Neither Gerald, Jerry Lou, nor any of the grandchildren made a contribution to JMA-I, although each was listed in the partnership agreement as either a general or a limited partner. During his lifetime Colonel Jorgensen made all decisions with respect to JMA-I.
In 1993 Colonel Jorgensen was diagnosed with cancer, and he passed away on November 12, 1996. Before his death he and Ms. Jorgensen moved to California, where they lived in the house next door to Jerry Lou.
On January 29, 1997, Mr. Arntson wrote to Ms. Jorgensen regarding Colonel Jorgensen's estate tax return and her own estate planning. Mr. Arntson recommended that Colonel Jorgensen's estate claim a 35-percent discount on his interest in JMA-I. The estate's interest in JMA-I passed into Colonel Jorgensen's family trust. The family trust was funded with $600,000 of assets including JMA-I interests valued using minority interest and lack of marketability discounts. All amounts over $600,000 went to Ms. Jorgensen. Mr. Arntson also recommended that Ms. Jorgensen transfer her brokerage accounts to JMA-I. He explained:
Hopefully, this will allow your estate to qualify for the discount available to ownership of interests in limited partnerships and at the same time, facilitate your being able to make annual gifts to your children and grandchildren. This is important if you wish to reduce the amount of your own estate which will be subject to estate taxes.
Mr. Arntson also wrote to Ms. Jorgensen on January 30, 1997. He again recommended that Ms. Jorgensen transfer her and Colonel Jorgensen's estate's brokerage accounts to JMA-I.
The reason for doing this is so that hopefully your limited partnership interest in JMA partnership will qualify for the 35% discount. Instead of your estate having a value in various securities of about $1,934,213.00 it would be about $1,257,238.00. The difference of $676,975.00 would result in a potential savings in estate taxes to the beneficiaries of your estate of $338,487.50. Obviously, no one can guarantee that the IRS will agree to a discount of 35%, however, even if IRS agreed to only a discount of 15%, the savings to your children would be $145,066.00, and there can be no discount if the securities owned by you continue to be held directly by you.
Although Mr. Arntson wrote to Ms. Jorgensen, he did not personally meet with her to discuss additional contributions to JMA-I. Instead, all planning discussions were among Mr. Arntson, Jerry Lou, Jerry Lou's husband, and Gerald. On the basis of these discussions, they decided to form JMA-II. On May 19, 1997, Mr. Arntson wrote to Ms. Jorgensen regarding the formation of JMA-II. He explained:
To a certain extent we are trying to reorganize your assets and those of Colonel Jorgensen into two different groups—one grouping Jorgensen Management Associates Two (JMA2) will hold basically high basis assets and the second grouping (JMA) will hold basically low basis assets. In the future, you would primarily make gifts to your children and descendants from JMA2 which will hold high basis assets.
JMA-II was formed on July 1, 1997, when Ms. Jorgensen's children filed a certificate of limited partnership interest with the Commonwealth of Virginia. On July 28, 1997, Ms. Jorgensen contributed $1,861,116 in marketable securities to JMA-II in exchange for her initial partnership interest. In August 1997 she contributed $22,019 to JMA-II, consisting of marketable securities, money market funds, and cash. Also in August 1997, in her role as executrix of Colonel Jorgensen's estate, Ms. Jorgensen contributed $718,530 from his brokerage account, consisting of marketable securities, money market funds, and cash. Of the contribution, $190,254 was attributable to Ms....
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