Gulig v. Comm'r of Internal Revenue (In re Estate of Strangi), 4102–99.

• Decision Date: 30 November 2000
• Docket Number: No. 4102–99.,4102–99.
• Citation: 115 T.C. No. 35,115 T.C. 478
• Parties: Estate of Albert STRANGI, Deceased, Rosalie Gulig, Independent Executrix, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

115 T.C. 478

115 T.C. No. 35

Estate of Albert STRANGI, Deceased, Rosalie Gulig, Independent Executrix, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 4102–99.

United States Tax Court.

Nov. 30, 2000.

Executrix petitioned for redetermination of estate tax deficiency arising from disregarded family limited partnership (FLP). The Tax Court, Cohen, J., held that: (1) FLP was valid and would be recognized for estate tax purposes; (2) Code section disregarding restrictions on right to sell or use property in determining its value did not apply to disregard FLP; (3) transfer of assets to FLP was not taxable gift; and (4) minority and lack of marketability discounts were applied to value interests held by decedent at death.

Decision for IRS.

Well, C.J., concurred in written opinion in which Foley, J., joined.

Parr, J., dissented in written opinion in which Beghe and Marvel, JJ., joined.

Ruwe, J., dissented in written opinion in which Parr, Beghe, Gale, and Marvel, JJ., joined.

Beghe, J., dissented in written opinion in which Parr, J., joined.

Judgment affirmed in part and reversed in part, 293 F.3d 279. D formed a family limited partnership (SFLP) and transferred assets, including securities, real estate, insurance policies, annuities, and partnership interests, to SFLP in return for a 99–percent limited partnership interest. Held: (1) The partnership was valid under State law and will be recognized for estate tax purposes. (2) Sec. 2703(a), I.R.C., does not apply to the partnership agreement. (3) The transfer of assets to SFLP was not a taxable gift. (4) R's expert's opinion as to valuation discounts is accepted.Norman A. Lofgren and G. Tomas Rhodus, for petitioner.

Deborah H. Delgado, Gerald L. Brantley, Sheila R. Pattison, and William C. Sabin, Jr., for respondent.

COHEN, J.

On December 1, 1998, respondent determined a $2,545,826 deficiency in the Federal estate tax of the estate of Albert Strangi, Rosalie Gulig, independent executrix. In the alternative, respondent determined a Federal gift tax deficiency of $1,629,947.

After concessions by the parties, the issues for decision are (alternatively): (1) Whether the Strangi Family Limited Partnership (SFLP) should be disregarded for Federal tax purposes because it lacks business purpose and economic substance; (2) whether the SFLP is a restriction on the sale or use of property that should be disregarded pursuant to section 2703(a)(2); (3) whether the transfer of assets to SFLP was a taxable gift; and (4) if SFLP is not disregarded, the fair market value of decedent's interest in SFLP at the date of death.

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect as of the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Albert Strangi (decedent) was domiciled in Waco, Texas, at the time of his death, and his estate was administered there. Rosalie Strangi Gulig (Mrs. Gulig) resided in Waco, Texas, when the petition in this case was filed.

Decedent was a self-made multimillionaire. He married Genevieve Crowley Strangi (Genevieve Strangi) in the late 1930's and had four children—Jeanne Strangi, Albert T. Strangi, John Strangi, and Mrs. Gulig, collectively referred to herein as the Strangi children. In 1965, the marriage between decedent and Genevieve Strangi was terminated by divorce, and decedent remarried Irene Delores Seymour (Mrs. Strangi). Mrs. Strangi had two daughters from a previous marriage, Angela Seymour and Lynda Seymour.

In 1975, decedent sold his company, Mangum Manufacturing, in exchange for Allen Group stock, and he and Mrs. Strangi moved to Fort Walton Beach, Florida. Mrs. Gulig married Michael J. Gulig (Mr. Gulig) in 1985. Mr. Gulig was an attorney in Waco, Texas, with the law firm of Sheehy, Lovelace and Mayfield, P.C. Mr. Gulig has done a substantial amount of estate planning and is proficient in that field.

On February 19, 1987, decedent and Mrs. Strangi executed wills that named the Strangi children, Angela Seymour, and Lynda Seymour as residual beneficiaries in the event that either decedent or Mrs. Strangi predeceased the other. These wills were prepared by the law offices of Tobolowsky, Prager & Schlinger in Dallas, Texas. Mrs. Strangi also executed the Irene Delores Strangi Irrevocable Trust (the Trust). Decedent was designated as the executor of Mrs. Strangi's will and as the trustee of the Trust.

Mrs. Strangi's will provided that her personal effects were to be left to decedent and that life insurance proceeds, employee benefits, and the residuary of her estate should be distributed to the Trust. The first codicil to Mrs. Strangi's will provided that property she owned in Dallas, Texas, should be distributed to the Jeanne Strangi Brown Trust. The Trust provided that lifetime distributions would be made to Mrs. Strangi and that, upon her death, (1) her property in Florida should be distributed to Angela Seymour and Lynda Seymour, (2) $50,000 should be distributed to Mrs. Strangi's sister, and (3) the residuary should be distributed to decedent provided that he survived her.

In 1987 and 1988, Mrs. Strangi suffered a series of serious medical problems. In 1988, decedent and Mrs. Strangi moved to Waco, Texas. Sylvia Stone (Stone) was hired as decedent's housekeeper. She also provided assistance with the care of Mrs. Strangi. On July 19, 1988, decedent executed a power of attorney, naming Mr. Gulig as his attorney in fact.

On July 31, 1990, decedent executed a new will, naming his children as the sole residual beneficiaries if Mrs. Strangi predeceased him. This will also named Mrs. Gulig and Ameritrust Texas, N.A. (Ameritrust), as coexecutors of decedent's estate. On December 27, 1990, Mrs. Strangi died in Waco, Texas. Her will was admitted to probate in Texas and was not contested.

In May 1993, decedent had surgery that removed a cancerous mass from his back. That summer, Mr. Gulig took decedent to Dallas to be examined by a physician in the neurology department of Southwest Medical School. Decedent was then diagnosed with supranuclear palsy, a brain disorder that would gradually reduce his ability to speak, walk, and swallow. In September 1993, decedent had prostate surgery.

Formation of Limited Partnership

After decedent's prostate surgery, Mr. Gulig took over the affairs of decedent pursuant to the 1988 power of attorney. Mr. Gulig consulted a probate judge regarding concerns he had about decedent's affairs. On August 11, 1994, Mr. Gulig attended a seminar in Dallas, Texas, provided by Fortress Financial Group, Inc. (Fortress). Fortress trains and educates professionals on the use of family limited partnerships as a tool to (1) reduce income tax, (2) reduce the reported value of property in an estate, (3) preserve assets, and (4) facilitate charitable giving. The Fortress Plan recommends contributing assets to a family limited partnership with a corporate general partner being created for control purposes. The Fortress Plan also suggests that shares of stock of the corporate general partner or an interest in the family limited partnership be donated to a charity. To facilitate the plan, Fortress licenses the use of copyrighted limited partnership agreements and shareholders' agreements.

Following the Fortress seminar, on August 12, 1994, Mr. Gulig, as decedent's attorney in fact, formed SFLP, a Texas limited partnership, and its corporate general partner, Stranco, Inc. (Stranco), a Texas corporation. Mr. Gulig handled all of the details of the formation, executing the limited partnership agreement and shareholders' agreement using Fortress documents, as well as drafting articles of incorporation and bylaws for Stranco.

The partnership agreement provided that Stranco had the sole authority to conduct the business affairs of SFLP without the concurrence of any limited partner or other general partner. Thus, limited partners could not act on SFLP's behalf without the consent of Stranco. The partnership agreement also allowed SFLP to lend money to partners, affiliates, or other persons or entities.

Mr. Gulig filed the SFLP certificate of limited partnership and the Stranco articles of incorporation with the State of Texas. He also drafted asset transfer documents, dated August 12, 1994, assigning decedent's interest in specified real estate, securities, accrued interest and dividends, insurance policies, annuities, receivables, and partnership interests (referred to collectively herein as the contributed property) to SFLP for a 99–percent limited partnership interest in SFLP. All of the contributed property was reflected in decedent's capital account. The fair market value of the contributed property was $9,876,929. Approximately 75 percent of that value was attributable to cash and securities.

Mr. Gulig invited decedent's children to participate in SFLP through an interest in Stranco, the corporate general partner of SFLP. Decedent purchased 47 percent of Stranco for $49,350, and Mrs. Gulig purchased the remaining 53 percent of Stranco for $55,650 on behalf of Jeanne Strangi, John Strangi, Albert T. Strangi, and herself. To purchase the Stranco shares, Jeanne Strangi, John Strangi, and Albert T. Strangi each executed unsecured notes dated August 12, 1994, to Mrs. Gulig, with a face amount of $13,912.50 and interest at 8 percent. Stranco contributed $100,333 to SFLP in exchange for a 1–percent general partnership interest. Subsequently, as a result of the downward adjustment of the value of decedent's contributed property, Stranco's capital contribution was reduced on its books by $1,000 to $99,333, and a receivable was recorded indicating $1,000 due from SFLP.

Decedent and the Strangi children made up the initial board of directors of Stranco, and Mrs. Gulig served as president. On ...