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IS THE TAX LAW IS HARD? $52 MILLION SAYS 'YES'

March 15, 2005

Wayne Bongard slipped his mortal coils in his 59th year on a hunting trip to Germany. He left behind a wife, five children, a great deal of wealth, and an estate plan featuring a family limited partnership.

Today the Tax Court tried to sort out the tax consequences of his estate plan. In a 116 page opinion, ten judges signed on to a majority opinion, two judges signed another opinion agreeing with the result but disagreeing with its rationale, one judge agreed with the result but didn't sign on to any opinions, and four judges dissented in two separate opinions.

Their conclusion? Mr. Bongard's estate owes $52 million in additional estate tax, if the Tax Court is upheld on appeal. Our conclusion? This stuff ain't easy.

It's tax season, and given our time and wisdom constraints we won't try to read the case carefully, let alone analyze it in depth; anyway, this case that will generate reams of law review analysis by lawyers who can charge a lot more per hour than we can. But for $52 million, we'll try to hit the high points.

WHAT IS "CONTROL?" WHAT IS "MONEY OR MONEY'S WORTH?"

The tax law (Section 2036(a)) says that gifted property can be pulled back into a donor's estate if there are too many strings attached - if the donor retained up until death:

(1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

But -- if the property had been sold or traded to the family partnership in "a bona fide sale for an adequate and full consideration in money or money's worth" -- the property does not get subjected to estate tax.

The Tax Court majority said that $101 million in value had to be included in Mr. Bongard's estate because he hadn't transferred property to his family partnership "in a bona fide sale for an adequate consideration" and had retained "implied" control.

The dissenting judges said that the majority failed to properly apply the Supreme Court case that has controlled this part of the tax law.

This will send estate planners scurrying back to their documents to try to ensure that there is no "implied" control of family partnership assets. It will also send the Bongard Estate's attorney's scurrying to file appeal papers with the Eighth Circuit Court of Appeals.

There is a good chance that this will end up in the Supreme Court in a year or two. The Third and Fifth Circuits have ruled in cases with similar issues, and the results are confusing.

Code Section 2036(a) is reproduced in the extended entry below.

We will keep an eye on this case. Much more thoughtful commentary than this will come out on Bongard, and we will link to it as we come across it.

Cite: Estate of Wayne C. Bongard v. Commissioner, 124 T.C. No. 8

SECTION 2036. TRANSFERS WITH RETAINED LIFE ESTATE

(a) GENERAL RULE

The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death--

(1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

Other links:

United States V. Byrum (408 U.S. 125), 1972, represents the last word from the Supreme Court on Sec. 2036(a).

Estate of Kimbell, a taxpayer-friendly reading of 2036(a)by the 5th Circuit.

Estate of Thompson, an IRS victory under Sec. 2036(a).

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