Bongard s Nontax Motive Test: Not Open and Schutt

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1 Bongard s Nontax Motive Test: Not Open and Schutt On March 15, 2005, in Bongard, 1 the majority of the Tax Court 2 adopted a two-part motive test for determining whether a decedent s transfer of assets to a family limited partnership (FLP) in exchange for a partnership interest falls under the bona fide sale for adequate and full consideration exception under section If an FLP so qualifies, the estate will not have to include the fair market value of the assets the decedent transferred to the FLP but will be able to value her partnership interest with discounts inherent in holding those assets in limited partnership form. The Bongard test requires the existence of a legitimate and significant nontax reason for creating the family limited partnership, and [that] the transferors received partnership interests proportionate to the value of the property transferred. 4 The nontax reason must be a significant factor that motivated the partnership s creation 5 and it must be an actual motivation, not a theoretical justification. 6 The court listed factors that would show the lack of a nontax purpose: (1) the 1 Estate of Bongard v. Commissioner 124 T.C. No. 8, Doc , 2005 TNT (2005). 2 The majority opinion in Bongard was written by Judge Goeke, therein he was joined by Judges Gerber, Swift, Colvin, Vasquez, Thornton, Haines, Wherry, Kroupa, and Holmes. Judge Gale joined this majority in the result only. 3 Also, in Bongard, to conform to the legislative intent of section 2036 for transfers of property over which the decedent has retained a lifetime enjoyment, the majority interpreted the term transfer in the statute broadly to include any voluntary inter vivos act to transfer property. 4 Bongard at Id. 6 Id. by Wendy C. Gerzog Wendy C. Gerzog is a professor at the University of Baltimore School of Law. This article is the fifth installment of a Tax Notes column in which Prof. Gerzog will discuss current estate and gift tax issues. Copyright 2005 Wendy C. Gerzog. All rights reserved. taxpayer stands on both sides of the transaction; (2) the taxpayer needs partnership distributions for his maintenance and support; (3) the partners commingle partnership assets with their own; and (4) the taxpayer does not transfer the property to the FLP. 7 Judges Laro and Halpern, in their separate opinions, 8 rejected the majority s test. Judge Laro s test initially would require either an equal exchange in monetary terms or a showing that the transfer is a commercial one, in which case, an equal exchange would be assumed. 9 In his concurrence, Judge Laro maintained that the court should continue to apply the Gregory 10 business purpose test, cited recently by the Third Circuit in Turner. 11 Judge Halpern also criticized the majority s new test in Bongard: I believe that the majority has strayed from the traditional interpretation of the bona fide sale exception by incorporating into the exception an inappropriate motive test ( a legitimate and significant nontax reason ), and by concluding that a partnership interest proportionate to the value of the property transferred constitutes adequate and full consideration in money or money s worth. 12 Judge Halpern referred to the exception in the regulations 13 applying a presumption of equal consideration for property transfers that are made in the 7 Bongard at J. Laro concurred in the result in Bongard. Bongard at 78; J. Halpern concurred in part and dissented in part. Bongard at Bongard, at 79 (J. Laro, concurring). 10 Gregory v. Helvering, 293 U.S. 465 (1935). 11 Turner v. Commissioner, 382 F.3d 367, 383, Doc , 2004 TNT (3d Cir. 2004). While Bongard is appealable to the Eighth Circuit (Bongard at 91), Schutt is appealable to the Third Circuit. Estate of Schutt v. Commissioner, T.C. Memo , Doc , 2005 TNT , at Bongard at 95 (J. Halpern concurring in part and dissenting in part). Regarding Judge Halpern s criticism of the second part of the Bongard majority s test, he stated: I also disagree with the implication of the majority opinion that, in the context of a transfer to an entity (here, transfers to both a limited liability company and a family limited partnership), the full consideration requirement can be met by a showing that the transferor received an entity interest (e.g., a limited partnership interest) proportionate to the value of the property contributed to the entity. While an inquiry as to proportionality may have some bearing on whether the transfer was in the ordinary course of business, within the meaning of section , Gift Tax Regs. (e.g., was at arm s length n5), I fail to see how proportionality aids the inquiry as to whether the value of the property transferred exceeded the cash value of the consideration received in exchange. See id. Bongard at Reg. section TAX NOTES, June 27,

2 COMMENTARY / ESTATE AND GIFT RAP ordinary course of business. 14 By applying the majority s motive test, he asserted, the majority is incorporating an additional requirement not anticipated by the regulations. By the explicit terms of section , Gift Tax Regs., the resulting inquiry is limited to an economic calculus, and there is no room for any inquiry as to the transferor s (decedent s) state of mind. 15 Since the Bongard published opinion, the Tax Court has decided four memorandum opinions: Bigelow, 16 Korby (Edna), 17 Korby (Austin), 18 and Schutt. 19 While it is likely that the first three memorandum opinions would have been decided the same way under either test, it is arguable that Schutt would have been decided differently under a more traditional business purpose test or economic analysis. If the government appeals the Schutt decision, it is interesting to consider whether the Third Circuit will adopt the Tax Court s new test or, after considering its own analysis under Turner, will reject the Tax Court s Bongard test. The Bongard Majority Before enunciating its test, the majority reviewed some of its precedent: four cases 20 in which the government won on the bona fide sale exception issue and two cases 21 in which the taxpayer prevailed. In Harper, the decedent disregarded the partnership form for three months after creating his FLP during which time partnership income was commingled with funds in the trust s account. In Harper, the court found that there was only a recycling of value and not a transfer for consideration. In Bongard, the Tax Court explained what Harper lacked: consultations with the decedent s children about the partnership form or operations, new investment strategies after the FLP formation, working assets, and clearly identified property transferred by the decedent s children to him in exchange for their partnership interests Bongard at 99 (J. Halpern concurring in part and dissenting in part). ( A presumption of full consideration arises... inthe case of a transfer of property made in the ordinary course of business; i.e., a transfer that is bona fide, at arm s length, and free from any donative intent. Id.). 15 Bongard at 102 (J. Halpern concurring in part and dissenting in part). 16 Estate of Bigelow v. Commissioner, T.C. Memo , Doc , 2005 TNT Estate of Korby v. Commissioner, T.C. Memo , Doc , 2005 TNT Estate of Korby v. Commissioner, T.C. Memo , Doc , 2005 TNT Estate of Schutt v. Commissioner, supra note Estate of Harper v. Commissioner, T.C. Memo , Doc , 2002 TNT 95-11; Estate of Thompson v. Commissioner, T.C. Memo , Doc , 2002 TNT 188-7, aff d sub nom. Turner v. Commissioner 382 F.3d 367 (3d Cir. 2004); Estate of Strangi v. Commissioner, T.C. Memo , Doc , 2003 TNT 98-16; Estate of Hillgren v. Commissioner, T.C. Memo , Doc , 2004 TNT Estate of Harrison v. Commissioner, T.C. Memo ; Estate of Stone v. Commissioner, T.C. Memo , Doc , 2003 TNT Bongard at In Turner, similarly, after the partnership s formation, there was a minimal practical change in the decedent s relationship to the assets he contributed to his FLP. As the majority in Bongard explained, there was a prior agreement that the decedent would be provided for financially from the partnership assets and that the decedent would be able to use partnership funds to continue to make family gifts. Turner provided neither a pooling of assets, a change in investment strategy, nor a business reason for the transfer. Likewise, in Strangi, the court had found that the decedent retained the same relationship to the transferred assets before and after the creation of his FLP. He transferred almost all of his wealth, including his residence which he continued to inhabit essentially rentfree, 23 to the FLP. The court distinguished Byrum, 24 wherein the decedent s retained rights were joined with constraints, 25 because in Strangi the decedent s attorney could determine distributions, the decedent with other shareholders could determine who would enjoy the property, and the decedent could revoke the FLP arrangement, thereby hastening current enjoyment. In Byrum, the Supreme Court emphasized that the fiduciary constraints were those of an operating business, which gave substance to those duties; by contrast, in Strangi, the intrafamily fiduciary duties within an investment vehicle were not comparable to the substantial and substantive obligations in the business framework of Byrum. In Bongard, the majority underlined the facts in Strangi that revealed that Mr. Gulig, the decedent s attorneyin-fact, stood on both sides of the FLP creation and operations, that Gulig recycled most of the decedent s assets, and that none of the assets was a working business. 26 Finally, in Hillgren, the court found that the FLP was created as part of an estate plan, not as a premarital asset preservation device, 27 and that the decedent and her brother continually ignored the partnership agreement The court held that the accounting entry of an accrued rental obligation was insufficient to negate a finding of retained enjoyment of the property. Similarly, when the partnership interest held by another was de minimis, pro rata payments would not contravene a finding of retained enjoyment of the transferred property. 24 United States v. Byrum, 408 U.S. 125 (1972). 25 That is, the Supreme Court in Byrum emphasized that it was the independent corporate trustee that controlled whether to pay out or accumulate income from the trust. ( Even had Byrum managed to flood the trust with income, he had no way of compelling the trustee to pay it out rather than to accumulate it. Byrum, at 143.) 26 Bongard at The record did not even indicate whether decedent s fiancé knew about the partnership agreement and all assets remained titled in her name. Hillgren at After the decedent s death, the estate totally disregarded the formalities of financial statements. Decedent s brother did not file a certificate of limited partnership until after the government began investigating the estate s return. Hillgren at 37, TAX NOTES, June 27, 2005

3 The decedent and her brother had joint legal representation and her brother stood on every side of the transaction. Nothing changed as a result of the FLP: Management and title remained the same and there was a commingling of funds. In the five months preceding her death, the decedent received all of the income from the partnership and she was dependent on those funds to pay her living expenses. In Bongard, the court emphasized the fact that the transfer in Hillgren was not a bona fide sale, but a paper transaction. The estate failed to show a believable nontax reason for the creation of the FLP and to show an alteration in the decedent s relationship to the transferred properties before and after the FLP was established. Besides highlighting what those decedents did wrong, the Bongard majority distinguished those cases from Harrison and Stone. The Bongard majority explained that the estate in Harrison showed that the decedent created an FLP for the business purpose of providing the necessary and proper management of the decedent s properties. 29 Likewise the Bongard majority underlined that the family in Stone had successfully operated a family business for years and had created five FLPs. Bongard listed the following legitimate business concerns that motivated the formation of the FLPs: prior litigation among the children concerning the assets transferred to the FLP and the succession of the family business. Bongard also underlined the children s active management of the FLP assets after the FLP s creation, the parents good health during FLP negotiations, the independent counsel obtained by each of the children, each partner s receipt of a proportionate interest in the FLP relative to his contribution, the respect of legal formalities, and the decedents retention of sufficient assets to maintain their lifestyle. 30 Besides its own precedent, the Tax Court reviewed the two recent circuit court opinions: Kimbell 31 and Turner. 32 The Bongard majority emphasized that in Kimbell, The nontax business reasons included, among others, the protection of the taxpayer from personal liability with regard to the oil and gas properties contributed, the pooling of all of the decedent s assets to provide greater financial growth than splitting the assets up, and the establishment of a centralized management structure. 33 By contrast, the Bongard majority underscored that in Turner the appellate court could not identify a legitimate and significant nontax reason for the transfer. 34 The Bongard majority concluded that the decedent s transfer of Empak Stock to WCB Holdings fell under the bona fide sales exception to section 2036, but the decedent s transfer of WCB Holdings class B membership 29 Bongard at Bongard at Kimbell v. United States, 371 F.3d 257, Doc , 2004 TNT (5th Cir. 2004), vacating and remanding 244 F. Supp.2d 700, Doc , 2003 TNT (N.D. Texas). 32 Turner v. Commissioner, 382 F.3d 367 (3d Cir. 2004), aff g Estate of Thompson v. Commissioner, T.C. Memo Bongard at 52. In Kimbell, the oil and gas assets made up 11 percent of the FLP s assets. Id. at Bongard at 53-54, citing Turner at 380. units to the decedent s FLP did not. On one hand, the majority found that WCB Holdings was founded to pool the family s Empak stock within one entity, which was part of a much grander plan, to attract potential investors or to stimulate a corporate liquidity event to facilitate Empak s growth. 35 Also, the transactions regarding WCB Holdings between the decedent and irrevocable stock accumulation (ISA) trust, which held Empak stock as its only asset, were similar to those that would be expected from similar dealings between unrelated parties and the decedent and ISA trust received WCB Holdings interests proportionate to their stock transfers. On the other hand, regarding the decedent s establishment of his FLP, the court was unable to discern a nontax motive, but only a testamentary one. There was no investment plan that differed from the strategy before the formation of the FLP and the facts belied the estate s contentions of other nontax purposes. 36 Thus, the majority in Bongard held that the decedent s estate included, under section 2036(a)(1), the value of the WCB Holdings class B units, representing the decedent s percent FLP interest, at the decedent s date of death. 37 Bigelow COMMENTARY / ESTATE AND GIFT RAP The first memorandum opinion to follow Bongard was Bigelow. 38 In Bigelow, the decedent was 85 and had just suffered a stroke; her trust, which contained certain real property, and her children created an FLP. After the formation of the FLP, the decedent was left with insufficient means to support herself or to pay her liabilities associated with the real property that her trust transferred to the FLP. The court held that the sole motivation for the creation of the FLP was to facilitate donative transfers and to decrease the value of the decedent s estate. Moreover, the court found that the partners did not respect the formalities of a limited partnership, did not provide additional insulation from creditors, did not change the continuity of property management, and had no potential nontax benefit for the decedent. The court 35 Bongard at Bongard at ( At trial, Mr. Fullmer testified that BFLP was established to provide another layer of credit protection for decedent. Additionally, the estate asserts that BFLP facilitated decedent s and Cynthia Bongard s postmarital agreement. Messrs. Bernards and Fullmer both also testified that BFLP was established, in part, to make gifts. On December 10, 1997, decedent made a gift of a 7.72 percent ownership interest in BFLP to Cynthia Bongard. This gift was the sole transfer of a BFLP partnership interest by decedent during his life. BFLP also never diversified its assets during decedent s life, never had an investment plan, and never functioned as a business enterprise or otherwise engaged in any meaningful economic activity. Id.) 37 Moreover, the majority held that, under section 2035(a), the 7.72 percent limited partnership interest that decedent transferred to his wife within three years of his death was includible in his estate. 38 Estate of Bigelow v. Commissioner, supra note 16. Released on March 30, 2005, it succeeded Bongard by about two weeks. TAX NOTES, June 27,

4 COMMENTARY / ESTATE AND GIFT RAP distinguished Kimbell 39 and concluded that the value of the property transferred to the FLP was includible in her estate under section The Korbys On May 11, 2005, the Tax Court decided two Korby cases. 40 Edna died on July 3, 1998, and her husband, Austin, died five months later. Once again, as in Bigelow, the decedents transferred their assets to an FLP, retained insufficient income to cover their living expenses, including large medical bills, and the FLP paid management fees to the Korbys living trust. From those facts, the court inferred that Austin, on his own behalf and on his wife s, 41 and their sons had an implied agreement to use the FLP income to cover those personal expenses. The court rejected the characterization of the payments to or on behalf of the decedents as management fees because Dennis, one of their sons, who was entitled to one-half of those fees, never received any payments, even when he took over most of the management duties; with only six sales in three years, there was very little to manage and Austin allotted little time and effort to manage the partnership s assets. Dennis testified that he did not feel free to deny any of his father s requests for money from the FLP. In the Korby cases, the Tax Court reiterated the two criteria required to satisfy the bona fide sales exception in section 2036 according to the Bongard majority: (1) the existence of a legitimate and significant nontax reason for the transfer and (2) the transferors received partnership interests proportionate to the value of the property 39 Bigelow at ( The estate s reliance on Kimbell is misplaced because the facts in that case differ substantially from those here. First, decedent s trust did not part with all of its interest in the Padaro Lane property as shown by the fact that the property continued to secure the obligations of decedent and the trust to repay the Great Western Bank loan and the Union Bank line of credit. Second, because there was no potential benefit for decedent or her trust stemming from the transfer of the Padaro Lane property to Spindrift, the partnership interest received by decedent s trust was not equivalent to the Padaro Lane property. Third, the general partner of the Kimbell partnership was a limited liability company, not Mrs. Kimbell s trust. When Mrs. Kimbell s trust transferred property to the partnership, the trust shielded itself from liability. In contrast, decedent s trust was the sole general partner of Spindrift. The transfer of the Padaro Lane property from decedent s trust to Spindrift did not shield the trust from its liability as an owner of the property because decedent s trust was Spindrift s general partner. Id.). 40 Estate of Korby v. Commissioner, supra note 17 (Edna Korby); Estate of Korby v. Commissioner, supra note 18 (Austin Korby). The cases are virtually identical regarding the FLP/section 2036 issue. (They are also alike on the annuity issue not pertinent to this article.) 41 In 1993 Edna was diagnosed with Alzheimer s disease, suffered from severe dementia, and lived in a nursing home. That same year, Austin had a stroke and was diagnosed with diabetes, hypertension, and cardiac arrhythmias. In 1993 the Korbys formed a living trust with Austin and Dennis, one of their sons, as trustees. In 1994 the Korbys, together with their sons, created an FLP, which was funded in The living trust was the FLP s sole general partner. transferred. The court found two of the four factors they listed in Bongard that would deny the application of the exception. 42 It found that Austin was on both sides of the transaction as he formed, and made all the decisions about, the FLP without any of his four sons participation. Also, the Korbys used income from the FLP to finance their own living expenses. Moreover, the court rejected the estate s argument that the FLP was formed because of nontax motives. While the estate contended that it created the limited partnership to protect the family from commercial and personal injury liability resulting from their bridge-building business, as well as liability arising from divorce, 43 the court held that the estate had not proved that the partnership agreement would protect partners from creditors. Rather, the court found that the purpose for creating the FLP was to obtain valuation discounts to reduce estate taxes while retaining the decedents use of the assets in the FLP during their lives. Schutt On May 26, 2005, the Tax Court decided Schutt. 44 Because section 2036 was not raised as an issue in the estate s deficiency notice, the government had the burden of proving that this statute required the inclusion of the FLP assets, rather than the decedent s discounted FLP interest, in his estate. 45 The estate asserted that the nontax motive for forming Schutt I and II was to create an entity to buy and hold investments, according to the decedent s investment philosophy, with respect to DuPont and Exxon stock owned by both the decedent and the WTC trusts. The FLPs purpose was to supply centralized management, and to avoid unwise sales, of the decedent s family s stock holdings in those companies, especially because the trusts were due, at various times, to terminate, with a resulting distribution of trust assets. In practice, the FLPs in fact served those aims and both the documentary and testimonial evidence evinced the decedent s concern over investment control. During the negotiations, there was little indication of tax and estate planning motivation. The court therefore held that the government had not sustained its burden of proof that estate tax savings were the dominant reason for creating the FLPs or that the estate s assertion of a nontax motive was disingenuous. The court in Schutt then considered whether the nontax motive of maintaining a buy and hold investment strategy constitutes a legitimate and significant nontax reason under the criteria of Bongard. The court acknowledged that in Turner, the Third Circuit, the circuit to which this case is appealable, found that when an FLP was established for the sole purpose of holding marketable securities, it is unlikely that the court would find a significant nontax motivation in that practice. However, the court in Schutt underlined the uniqueness of the facts as providing an unusual scenario, in which the FLP 42 See Bongard at Korby, supra note 17 at 26; Korby, supra note 18 at Estate of Schutt v. Commissioner, supra note Schutt at TAX NOTES, June 27, 2005

5 provided the limitations not currently available because of the terms of the trusts. The court then enumerated some of the factors showing a nontax motive: There was an actual transfer of the property to the FLPs, there was no commingling of assets, the decedent had retained sufficient assets for his support and the maintenance of his lifestyle, and the decedent was not on both sides of the transaction. Regarding that last point, the Schutt court explained that there was sufficient evidence of give-andtake and the trust s representatives were very involved in the process. Such a scenario bears the earmarks of considered negotiations, not blind accommodation. There is no prerequisite that arm s-length bargaining be strictly adversarial or acrimonious. 46 Citing Bongard, the Schutt court held that the four factors 47 were met in the exceptional circumstances of the case. Again, the court recognized that the Third Circuit might disagree with its conclusion because the partnership did not operate a business and the decedent converted liquid assets into illiquid ones. 48 However, it underlined that in Schutt, in which others contributed most of the property and the decedent wanted to create an entity primarily to restrict the sales of certain assets, there was not merely a recycling of the decedent s holdings. 49 Nontax Motive vs. a Legitimate Business The majority opinion in Bongard adopted a test that requires the existence of a legitimate and significant nontax reason for creating the family limited partnership, and [that] the transferors received partnership interests proportionate to the value of the property transferred. 50 Judge Laro, in his concurring in result opinion, 51 disagreed with the majority s adoption of a new legitimate and significant nontax reason test. He stated: I believe that a transferor satisfies the adequate and full consideration exception in the context of a transfer to a partnership only when: (1) The record establishes either that (i) in return for the transfer, the transferor received a partnership interest and any other consideration with an aggregate fair market value equal to the fair market value of the transferor s transferred property, or (ii) the transfer was an ordinary commercial transaction (in which case, the transferred property and the consideration 46 Schutt at (1)The interests received by the participants in the entity at issue were proportionate to the value of the property each contributed to the entity; (2) the respective assets contributed were properly credited to the capital accounts of the transferors; (3) distributions from the entity required a negative adjustment in the distributee s capital account; and (4) there existed a legitimate and significant nontax reason for engaging in the transaction. Given these circumstances, we concluded that the resultant discounted value attributable to entity interest valuation principles was not per se to be equated with inadequate consideration. Schutt at 80, citing Bongard at Schutt at 81, citing Thompson at Schutt at Bongard at Judge Marvel agreed with Judge Laro s concurring in result opinion. COMMENTARY / ESTATE AND GIFT RAP received in return are considered to have the same fair market values), and (2) the transfer was made with a business purpose or, in other words, a useful nontax purpose that is plausible in light of the taxpayer s [transferor s] conduct and useful in light of the taxpayer s economic situation and intentions. 52 [citations omitted] Citing Thompson and Gregory, Judge Laro reiterated that a transaction motivated solely by tax planning and with no business or corporate purpose...is nothing more than a contrivance. 53 He expressed concerns that the majority s test included the ambiguous terms legitimate and significant, which would likely result in inconsistent court interpretations. 54 Rather, he wanted the court to analyze the business purpose of the partnership transfers and not merely the legitimacy of a partnership. 55 Likewise, Judge Halpern, who concurred in part and dissented in part, disagreed with the majority s test. He asserted, I believe that the majority has strayed from the traditional interpretation of the bona fide sale exception by incorporating into the exception an inappropriate motive test ( a legitimate and significant nontax reason ), and by concluding that a partnership interest proportionate to the value of the property transferred constitutes adequate and full consideration in money or money s worth. 56 Judge Halpern closed his opinion by offering the following appropriate analytical steps: In determining whether the bona fide sale exception applies, I would first determine whether the transfer was made in the ordinary course of business, as that term is used in section , Gift Tax Regs. If not, I would determine whether the transfer was made for full value (i.e., whether the value of the transferred property at most equaled the cash value of the consideration received therefor). If not, then I would find that the value of the transferred property was included in the value of the gross estate pursuant to section Motive would only play the limited role I have outlined above (i.e., determining donative intent for purposes of the ordinary-course-of-business test). 57 Conclusion Under either the Bongard majority s test or a business or economic analysis test, Bigelow and the two Korby opinions would likely be decided the same way. They involved clearly testamentary transfers where the assets 52 Bongard at (J. Laro, concurring). 53 Bongard at 91, citing Thompson at 383 and Gregory at 469 (J. Laro, concurring). 54 Bongard at 92 (J. Laro, concurring). 55 Bongard at 93 (J. Laro, concurring). 56 Bongard at 95 (J. Halpern, concurring in part and dissenting in part). 57 Bongard at 108 (J. Halpern, concurring in part and dissenting in part). TAX NOTES, June 27,

6 COMMENTARY / ESTATE AND GIFT RAP 58 Thus, those cases are like Schauerhamer v. Commissioner, T.C. Memo , Doc , 97 TNT 103-7, and Estate of Reichardt v. Commissioner, 114 T.C. 144, Doc , 2000 TNT (2000), and many others including Harper, Thompson, Strangi, and Hillgren, wherein decedent and family members were found to have had an implied agreement to allow the decedent the continued enjoyment of the transferred property and there was a commingling of funds. Tax Notes has a voracious appetite when it comes to high-quality analysis, commentary, and practice articles. We publish more and better articles than anyone else, and we are always looking for more. Do you have some thoughts on the American Jobs Creation Act? Tax reform? Tax shelters? Federal budget woes? Recent IRS guidance? Important court decisions? Maybe you ve read a revenue ruling that has flown TAX NOTES WANTS YOU! of the FLP were intended to be, and were in fact, used for their respective decedents lifetime needs. 58 On the other hand, Schutt, which was decided in the taxpayer s favor under the application of the Bongard majority s nontax motive test to unique facts, would likely have been decided differently under a business purpose test or economic analysis. Despite Schutt s nontax motive of restricting the trusts terms, the bottom line is that in Schutt the taxpayer did what the taxpayer in Turner did. He was not operating a business and he converted liquid assets into illiquid ones. Objectively, Schutt transferred assets to an FLP for a limited partnership interest that was worth less than the value of his transferred assets. Because the transfers were not in the ordinary course of a business, he should not have been able to take advantage of the presumption that the transfer constituted an economic equivalence. Section 2036 excepts only a bona fide sale for an adequate and full consideration in money or money s worth so that the decedent s estate is not diminished. Under a traditional economic analysis, therefore, the value of the assets that Schutt transferred to his FLP should have been included in his gross estate under section under the radar screen but is full of traps for the unwary. If you think what you have to say about any federal tax matter might be of interest to the nation s tax policymakers, academics, and leading practitioners, please send your pieces to us at taxnotes@tax.org. Remember, people pay attention to what appears in Tax Notes TAX NOTES, June 27, 2005