The Tax Court showed no Valentine’s Day mercy for the petitioner in Estate of Dorothy Brown, T.C. Memo. 2013-50 (Feb. 14, 2013), when it found a genuine dispute of material fact relating to a gift tax issue and denied the estate’s motion for summary judgment.
Dorothy Brown died in December 2007. Almost four years earlier on Jan. 1, 2004, Dorothy, as trustee of the Peter D. Brown Marital Trust (Marital Trust), made two transfers: 1) she transferred a 20 percent income interest in a limited liability company (LLC) to the Lipschutz Trust—an irrevocable trust in which Dorothy’s granddaughter Elaine was the beneficiary; and 2) she transferred a 20 percent income interest in the LLC to the Winkelman Trust—an irrevocable trust in which Dorothy’s granddaughter Julie was the beneficiary. In return, Dorothy received a 10-year promissory note for $1.875 million from each trust. Three days later (on Jan. 4), Dorothy, as trustee of the Dorothy S. Brown Living Trust (Living Trust) transferred a 2.9 percent membership interest in the LLC to the Lipschutz Trust and a 2.9 percent membership interest in the LLC to the Winkelman Trust. Dorothy received nothing in exchange for these two transfers.
In April 2005, Dorothy, as trustee of the Marital Trust, filed Form 1041 (income tax return for estates and trusts) for the Marital Trust’s 2004 taxable year. She reported the Jan. 1, 2004 transfers as related-party installment sales to the Lipschutz Trust and the Winkelman Trust.
In October 2005, Dorothy filed Form 709 (a gift tax return), reporting only the Jan. 4, 2004 transfers to the Lipschutz Trust and the Winkelman Trust as a gift of property worth $230,000.
Both the Lipschutz Trust and the Winkelman Trust had each held a 49 percent capital interest and 37.5 percent profits interest in Woodland Ridge MHC (Woodland Ridge), a partnership that held a mobile home park. In December 2006, Dorothy, as trustee of the living trust, transferred $2.5 million to Woodland Ridge in exchange for a 25 percent capital interest and a 25 percent profits interest. She didn’t file a gift tax return in 2006.
In 2008 (Dorothy had passed away a year earlier), the estate filed a gift tax return for taxable year 2007. It reported taxable gifts totaling $30,000, with a gift tax liability of $7,380.
Both Parties Weigh In
In 2011, the Internal Revenue Service issued a notice of deficiency with respect to Dorothy’s taxable years 2004 (deficiency of $758,448); 2006 (deficiency of $1.150 million); and 2007 (deficiency of $720).
Dorothy’s estate moved for summary judgment on the grounds that the IRS was barred by the applicable statute of limitations to collect gift tax attributable to the Jan. 1, 2004 and December 2006 transfers.
To File or Not To File
The Tax Court applied Internal Revenue Code Section 6501(a), which sets forth a three-year period after a gift tax return is filed within which the IRS may assess any gift tax. In the case of a failure to file a gift tax return, or in a case in which the value of a gift is required to be shown on a gift tax return but isn’t, the IRS may assess a gift tax at any time. The court thus had to determine: 1) whether the Jan. 1, 2004 transfers resulted in gifts that required Dorothy to have reported them in her 2004 gift tax return; and 2) whether the December 2006 transfer was a gift, thus requiring Dorothy to have filed a gift tax return in 2006. A finding that either transfer didn’t result in a gift would make the statute of limitations moot with respect to the year of that particular transfer.
Dorothy’s estate argued that both the Jan. 1, 2004 transfer and the December 2006 transfer weren’t gifts. Whether a transfer is a gift depends on the fair market value (FMV) of what’s transferred, compared with what’s received in exchange. A transfer for less than full and adequate consideration may constitute an indirect gift. In this instance, both Dorothy’s estate and the IRS disputed the FMV of the 20 percent income interest transferred to the Lipshutz Trust and the Winkelman Trust on Jan. 1, 2004; the court was thus unable to determine whether the FMV of the income interests Dorothy transferred equaled the FMV of the notes Dorothy received. Similarly, the parties disputed whether Dorothy received full and adequate consideration in exchange for the December 2006 transfer. Dorothy’s estate further argued that regardless of FMV, a transfer of property isn’t a taxable gift if it’s made in the ordinary course of business, even if it’s for less than adequate and full consideration. However, the record didn’t establish that any of the transfers were made in the ordinary course of business.
All in all, the Tax Court found that there were genuine disputes of material fact in deciding the gift tax issues raised in estate’s motion. The court, therefore, was unable to settle the issue of whether the statute of limitations barred the imposition of the gift tax. Accordingly, the estate’s motion for summary judgment was denied. A happy Valentine’s Day for Dorothy’s estate? We think not.