Bongard’s Nontax Motive Test: Not Open and Schutt

Wendy C. Gerzog (University of Baltimore) has posted the abstract of her article “Bongard’s Nontax Motive Test: Not Open and Schutt” on SSRN. The full text may be accessed here. The abstract is as follows:

Under either the Bongard majority’stest or a business or economic analysis test, Bigelow and the two Korbyopinions would likely be decided the same way. They involved clearly testamentarytransfers where the assets of the FLP were intended to be, and were in fact,used for their respective decedents’ lifetime needs.On the other hand, Schutt,which was decided in the taxpayer’s favor under the application of the Bongardmajority’s nontax motive test to unique facts, would likely have been decideddifferently under a business purpose test or economic analysis. DespiteSchutt’s nontax motive of restricting the trusts’ terms, the bottom line isthat in Schutt the taxpayer did what the taxpayer in Turner did. He was notoperating a business and he converted liquid assets into illiquid ones.Objectively, Schutt transferred assets to an FLP for a limited partnershipinterest that was worth less than the value of his transferred assets. Because thetransfers were not in the ordinary course of a business, he should not havebeen able to take advantage of the presumption that the transfer constituted aneconomic equivalence. Section 2036 excepts only a bona fide sale for anadequate and full consideration in money or money’s worth so that thedecedent’s estate is not diminished. Under a traditional economic analysis,therefore, the value of the assets that Schutt transferred to his FLP shouldhave been included in his gross estate under section 2036.