Originally Published on forbes.com on February 26th, 2012
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Joanne Harrison Stone’s parents founded TAP Publishing in 1937. The company had its roots in a single publication called Trade-A-Plane, which her father, who owned the only plane in Cumberland County Tennessee, saw a need for when he could not find a good source for parts for his damaged plane. Her husband, Roy Stone expanded the company into other areas including heavy equipment. In 2005 the Tennessee legislature passed a resolution recognizing Mrs. Stone for having been named Woman of the Year by the Fair Park Senior Center. Not the least of her accomplishments was teaching Sunday school for sixty years up to and including the last Sunday before she passed away in July 2005 at the age of 81. That did not stop the IRS from trying to pull a substantial amount of real estate into her estate. This time the Tax Court went with the Sunday schoolteacher.
She and Mr. Stone had owned several woodland parcels that they hoped would be managed as a family asset. They transferred the 9 parcels totalling 740 acres into the Stone Family Limited Partnership of Cumberland County (SFLP):
The SFLP agreement provided that SFLP’s purpose was to hold and manage property for the family members. The agreement provided that “The family members desire to provide for the health, education, maintenance and welfare of each other and their children.” The agreement listed various ways in which SFLP may be terminated, including by written agreement of partners owning 67% of SFLP or upon sale of all SFLP property and distribution of proceeds. The agreement placed various restrictions on a partner’s ability to transfer their partnership interest and allowed SFLP to purchase the interest of any partner upon his or her death.
The Stones began a program of making annual gifts of partnership interests to children and grandchildren. The gifts were valued based on the fair market value of the real estate with no discounts. The partnership did not seem to be plagued by many of the execution issues that are common in this field, but there were some mistakes, two related to divorces:
In exchange for the four acres of lake property, on December 9, 1999, Mr. Ironside quitclaimed to Margaret Stone Ironside his interest in the woodland parcels still held by SFLP. No mention was made of the SFLP limited partnership interest then owned by Mr. Ironside in the quitclaim deed although it was mentioned that the parcels involved were the same ones conveyed to SFLP by decedent and Mr. Stone.
Patricia Connelly Stone and Michael Stone began divorce proceedings in 2000. As part of a financial settlement between them, Patricia Connelly Stone quitclaimed to Michael Stone her interest in the woodland parcels still held by SFLP on October 18, 2000. In exchange for the quitclaimed interest, Michael Stone gave up valuable consideration in the financial settlement. Again, no mention was made of the SFLP limited partnership interest then owned by Patricia Connelly Stone in the quitclaim deed, but it was mentioned that the parcels involved were the same ones conveyed to SFLP by decedent and Mr. Stone.
Most likely this was due to poor or no communication among the various attorneys. Presumably the divorce attorneys did just not “get” that it was a partnership interest not a direct interest in real estate that was involved.
One other poor execution issue that is probably understandable:
SFLP has yet to develop or otherwise improve the woodland parcels. SFLP initially had a bank account in its name but closed the account because SFLP earned no income, either from the property it held or otherwise. SFLP’s only expenses were property taxes of approximately $700 per year due on the real property it held. Decedent and Mr. Stone paid these property taxes from their personal funds.
Presumably it would have been pretty inconvenient to have the grandkids contributing $50 each or whatever it was to pay the taxes each year. I would have recommended it though. Althought the Court acknowledged that there were failures to follow formalities, they were not fatal.
We find that decedent’s desire to have the woodland parcels held and managed as a family asset constituted a legitimate nontax motive for her transfer of the woodland parcels to SFLP. Although this transfer to SFLP was also made with testamentary purposes in mind, we have previously noted that “Legitimate nontax purposes are often inextricably interwoven with testamentary objectives.”
We find that decedent’s desire to have the woodland parcels held and managed as a family asset constituted a legitimate nontax motive for her transfer of the woodland parcels to SFLP. Although this transfer to SFLP was also made with testamentary purposes in mind, we have previously noted that “Legitimate nontax purposes are often inextricably interwoven with testamentary objectives.”
Other factors, however, support the estate’s argument that a bona fide sale occurred. First, decedent and Mr. Stone did not depend on distributions from SFLP as no distributions were ever made. Second, decedent and Mr. Stone actually did transfer the woodland parcels to SFLP. Third, there was no commingling of partners’ personal and partnership funds, as SFLP had no partnership funds. Fourth, no discounting of SFLP interests for gift tax purposes occurred; decedent and Mr. Stone had the woodland parcels appraised and valued the SFLP interests so that the total value of SFLP interests was equal to the appraised value of the woodland parcels. Finally, the evidence presented tended to show that decedent (and Mr. Stone) were in good health at the time the transfer of the woodland parcels was made to SFLP. Although decedent was over age 70 at the time of transfer in 1997, she lived until 2005 and was healthy enough to continue teaching Sunday school up to and including the last Sunday before she passed away. Although Mr. Stone was over age 80 at the time of transfer, he was still alive at the time of trial in June 2011.
One commentator observed that it would have been better to have unloaded the general partner interest. Lew Tasihoff gives Mrs. Stone’s team high marks for winning this case. I can’t argue with the ultimate result, but it would have been better to have won at the agent level or in appeals, which might have been the case without the execution errors that were noted. It is interesting that not taking discounts on the gifts was a point in their favor. It is worth comparing to the Fisher case, where discounts were disallowed on a family real estate holding partnership. Given the number of donees they had to work with – 21 in the years before the divorce – the discounts were not really necessary to move the partnership interests in just a few years using present interest exclusions.
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