A Good-Facts Case Helps Deliver a Taxpayer Victory

The Tax Court case of Estate of Shurtz v. Commissioner provides an example of a good facts case that resulted in a taxpayer victory

For nearly 30 years, Charlene Shurtz and her husband, a minister, served as missionaries overseas. When they returned to the U.S. in 1996, they continued to do church work and donate substantial sums to charity from Mrs. Shurtz’s independent wealth (she owned a 16% limited partnership interest in her family’s timber company as well as 780 acres of prime Mississippi timberland).

To plan and preserve their estate, the Shurtzes formed a family limited partnership (FLP). Because she owned the timber outright, Mrs. Shurtz transferred a 6.6% interest to her husband, who exchanged this for a 1% general partnership interest in the FLP.

At the same time, Mrs. Shurtz donated all the remaining timber to the FLP plus her 16% interest in the operating company, for which she also received a 1% general partnership interest and 98% limited partnership interest in the FLP. From 1996 until 2002, Mrs. Shurtz gifted numerous interests to her children and grandchildren, reducing her LP interest to 87.6%.

Lynton Kotzin

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The partnership maintained capital accounts and issued appropriate disclosures. It did not keep formal books, although the family’s CPA created schedules to track balances and prepare taxes. The FLP had a money market account but relied on the Shurtzes to pay some disbursements from their personal accounts, ultimately reimbursing them or crediting their capital accounts. Partner distributions were not always proportionate, but the FLP made up any discrepancies over time. The FLP held regular meetings in conjunction with the family timber business; its timber holdings required active management, including annual planting, reforestation and maintenance.

When Mrs. Shurtz died in 2002, her 87.6% limited partnerships interest was valued at just over $6.1 million and her general partnership interest at $73,500. Because her estate plan disbursed nearly its total value – over $8.7 million – to qualified marital and other trusts, her estate claimed that no estate taxes were due.

The IRS disagreed. Pursuant to IRC Sec. 2036(a), it taxed the full value of the FLP’s underlying assets. The estate claimed that the Sec. 2036(a)(1) exception applied (i.e., the FLP transfers constituted a bona fide sale for adequate consideration). To resolve the issue, the Tax Court looked to the following factors in support of the FLP’s bona fide, non-tax business purpose:

  • The Shurtzes had a legitimate concern to protect their family’s assets from creditors. Mississippi is particularly known for its “jackpot justice,” the court said, and FLPs are a “customary response” to guard against potential lawsuits.

  • The FLP facilitated the management of the timberland, which comprised less than 16% of the FLP’s total assets, but was sufficient to support the stated business purpose. By giving away 6.6% of her acres to her husband, Mrs. Shurtz also helped establish a bona fide transfer.

  • The partnership conducted regular business with respect to the timberland, including an annual amortization of expenses and a realized gain from a 1997 harvest.

  • The partners received interests in the FLP proportionate to their ownership contributions, and their accounts were properly adjusted for any contributions and distributions.

In conclusion, the court found that the FLP “was carried out in the way that ordinary parties to a business transaction would do business with each other.” Thus, the transfers fell within the Sec. 2036 exception, and the fair market value of Mrs. Shurtz’s FLP interest, rather than the fair market value of the contributed property, was includable in her gross estate, with no additional estate taxes due.