Estate of Henry L. Nielson v. Commissioner of Revenue (February 15, 2001)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


ESTATE OF HENRY L. NIELSEN	v.	COMMISSIONER OF REVENUE
	
Docket No. F232365				Promulgated:
							February 15, 2001


	This an appeal under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the Commissioner of Revenue to abate an estate tax assessed under G.L. c. 65C, § 4.
	Former Commissioner Lomans heard the appeal.  Chairman Burns and Commissioners Gorton, Egan and Rose joined in the decision for the appellee.
	These findings of fact and report are made pursuant to a request by both parties under G.L. c. 58A, § 13 and 831 CMR 1.32.

	Leo B. Lind, Esq., for the appellant.
	John J. Connors, Jr., Esq., for the appellee.

FINDINGS OF FACT AND REPORT
	The threshold issue in the present appeal is whether the decedent's interest in the Walnut Street Trust ("the Trust"), the assets of which consisted primarily of Massachusetts real estate, was an intangible or was in fact Massachusetts real property for Massachusetts estate tax purposes.  If the decedent's interest in the Trust was properly characterized as real estate for Massachusetts estate tax purposes, it would be taxable under G.L. c. 65C, § 4(a), its value would be includible in the numerator of the fraction used to compute the Massachusetts nonresident estate tax pursuant to § 4(b), and the assessment at issue would be valid.  If, however, the interest in the Trust is intangible personal property, the interest would not be taxable under § 4(a), its value would not be includible in the numerator of the § 4(b) fraction, and the appellant would be entitled to an abatement in the full amount of the subject assessment. On the basis of an agreed statement of facts and exhibits offered into evidence, the Appellate Tax Board ("Board") made the following findings of fact.
	At the time of his death, July 14, 1992, Henry L. Nielsen ("the decedent") was a legal resident of Jaffrey, New Hampshire.  In 1967, the decedent obtained a 25% beneficial interest in the Walnut Street Trust.  A little less than a month before his death, June 19, 1992, the decedent transferred his 25% interest in the Trust to the Henry L. Nielsen Family Trust.  
On April 14, 1997, the Estate of Henry L. Nielsen ("Estate") filed a Massachusetts Estate Tax Return showing no tax due.  In computing the tax owed to the Commonwealth, the Estate reported that the decedent directly owned no real or tangible personal property having an actual situs in the Commonwealth.  
Schedule G, Transfers During Decedent's Life, of the estate tax return included the decedent's 25% interest in the Trust and listed it as such.  Similarly, the supporting attachment which provided the "Valuation of Interest in Trust, Walnut Street Trust" listed the Decedent's interest as an interest in a trust.  Such treatment contrasted with the Estate's reporting of the decedent's interest in the Cordingly Associates joint venture, which was expressly listed as an interest in a partnership on both Schedule G and the supporting valuation attachment.
Notwithstanding the Estate's characterizations of the  decedent's Walnut Street interest as an interest in a "trust" on Schedule G and supporting attachments, the Estate excluded the value of the interest in the Trust from the numerator of the fraction used to calculate the Massachusetts nonresident estate tax on the theory that it was an intangible "partnership" interest.  On July 14, 1993, the Commissioner of Revenue ("Commissioner") issued a Notice of Intention to Assess ("NIA") estate taxes in the amount of $138,906.57, plus interest of $3,841.82, for a total of $142,748.39.  The Commissioner based his determination on a reclassification of the decedent's Trust interest from an intangible partnership interest, as claimed by the Estate, to an interest in real property subject to the nonresident estate tax under G.L. c. 65C, § 4(a).  More specifically, in calculating the estate tax owed by decedent's estate under G.L. c. 65, § 4(b), the Commissioner included in the numerator of the allocation fraction, the value of the decedent's interest in the Trust. 
On August 10, 1993, the Estate made full payment on the Commissioner's NIA.  Subsequently, on August 20, 1993, the Commissioner assessed the tax as proposed and issued an Estate Tax Closing Letter - Notice of Assessment, which showed the assessment and the Estate's payment in the same amount.  
On September 20, 1993, the Estate seasonably filed an Application for Abatement that was denied by the Commissioner on November 22, 1995.  The estate timely filed its appeal with this Board on January 19, 1996.  On the basis of the foregoing, the Board found that it had jurisdiction to hear this appeal.

Circumstances of the Trust
	The Trust was created on May 31, 1967, by Edward S. Stimpson, III and G. Arnold Haynes, also the listed Trustees.  No certificates or shares of beneficial interest were issued.  Instead, the beneficiaries' interests were listed and filed with the Trustees.  The interests were as follows:
G. Arnold Haynes			25%
Edward S. Stimpson, III		20%
Luther A. Breck, Jr.		30%
Henry L. Nielson			25%

	On June 1, 1967, the Trustees purchased, on behalf of the Trust, its first piece of real estate located on Walnut Street, in Wellesley, Massachusetts.  Over the years, the Trustees continued to purchase properties located on Walnut Street, which were used to generate income for the Trust.  
Two years after the Trust's creation, September 26, 1969, Luther A. Breck, Jr. and the decedent were added as Trustees.  
Pursuant to the Trust Declaration, the Trustees were granted "absolute control of the Trust estate."  The Trustees were given the power to: develop and improve the land owned by the Trust; dispose of the Trust property, not without consideration; enter into contracts on behalf of the Trust; receive all items of value owed the Trust; borrow and lend money; determine the value of the Trust; and, to make distributions to the Beneficiaries.  
The Trustees were also granted the "power and authority . . . to do all acts and things . . . which in their judgment will promote or advance the interests of the Trust."  In addition, Paragraph IV of the Trust provided:
[t]his Declaration of Trust may be amended from time to time by an instrument in writing signed by the then Trustees hereunder and by all of the Beneficiaries and acknowledged by one or more of them, provided in each case that the instrument of amendment or a certificate by any Trustee setting forth the terms of such amendment shall be so registered or recorded.

Furthermore, a majority of the Beneficiaries or Trustees could terminate the Trust "at any time" so long as it was done in writing and was properly recorded.  Absent such an action, the trust was not to terminate until twenty years after the death of the last survivor of the Beneficiaries.  If such a termination were to occur, the Trustees were directed to "transfer and convey the entire Trust estate . . . to the Beneficiaries, their heirs, devisees or designees, as tenants in common in proportion to their respective interests."
The closing paragraph of the Trust declaration stated:  
[i]t is hereby expressly declared that a trust and not a partnership is hereby created; the Beneficiaries have no interest in the trust estate or rights or obligations as to each other, as to the Trustees, as to the Trust or its agents or as to third persons . . . All persons dealing with the Trust shall look solely to the trust estate for satisfaction of their claims . . . and no Trustee, Beneficiary or Agent of the Trust shall be held to any personal liability whatsoever except for his own willful default or breach of fiduciary duty or for otherwise unauthorized acts.  (Emphasis added.)  

Section 671 of the Internal Revenue Code ("I.R.C.") provides that when an individual is treated as "the owner of any portion of a trust," that individual is to include, in computing his gross income, his share of the Trust income and deductions.  I.R.C. § 671.  The Code further provides that an individual is to be "treated as owner of any portion of a trust" if he has the power to control beneficial enjoyment, the power to amend or revoke the trust or holds certain administrative powers.  I.R.C. §§ 674-676.  For income tax purposes, Massachusetts followed the I.R.C. in effect on January 1, 1988 during all times material to this appeal.
The trust was therefore properly characterized as a "grantor trust" for federal and Massachusetts income tax purposes.  Accordingly, the decedent was "treated as an owner" of a portion of the trust for income tax purposes.  See generally I.R.C. §§ 671-677  In accordance with the Code and Massachusetts law, at least for the years 1989 through 1992, income and expenses attributable to the rental of the Walnut Street properties were reported on the Massachusetts Fiduciary Income Tax Return, Form 2, as indicated on the cover sheet for the Grantor's or Other Owner's Share of Income, Deductions, Credits, Etc. of a Grantor-type Trust, Form 2G and the U.S. Fiduciary Income Tax Return, Form 1041.
	The Estate maintained that all of the Trust's income was reported on a pass-through basis and that the decedent paid the Massachusetts income tax on his proportionate share of the profits, despite the fact that lesser amounts were actually distributed to him.  Although this argument was advanced in support of the Estate's position that a partnership, and not a trust, was created, the decedent's payment of income tax on his proportionate share of the profits is also consistent with the treatment of income payable to a beneficiary of a grantor trust.  See, I.R.C. § 671.  Further, the Estate did not offer copies of the decedent's personal income tax returns in support of its position and there was no evidence, and the Board cannot find, that the trustees at any time filed partnership returns at either the federal or state level. 
In support of its claim that the decedent's interest was a partnership, the estate also offered the testimony of the decedent's fiduciary who claimed that during the decedent's life the decedent had consistently referred to his interest as a partnership interest.  The Board found this self-serving statement to be of little probative value.  The estate also submitted a one-page, type-written document purportedly prepared as part of the decedent's estate planning in 1991, which listed the interest as a partnership interest.  The Estate offered no evidence as to the authenticity of this document.  Accordingly, the Board found this document to be self-serving and unreliable.
	Lastly, the estate offered into evidence the Trust's 1995 and 1998 financial statements prepared by the Trust's property management company.  The estate relied on the "compilation" page contained in the reports which listed the Beneficiaries and labeled them "owners."  The Estate suggested that these documents supported its claim that the decedent was a partner in a partnership.  The Board noted several discrepancies.  First, both documents were prepared after the decedent's date of death.  Second, there is no mention of a partnership in existence, and third, the 1998 document was prepared after the Trust had become a Limited Liability Company.  Finally, the term "owners" is also consistent with the fact that the beneficiaries were treated as owners of the property for income tax purposes because it was a grantor trust.  Accordingly, the Board found that the estate's reliance on these documents to show that the Trust was really a partnership was misplaced.
	Based on the evidence, the Board found that the Trust was, both in form and substance, a trust and not a partnership.  Further, the same broad powers retained by the decedent which made him a "deemed owner" of his share of the trust assets for income tax purposes would have made his interest in the trust includible in his Massachusetts gross estate under I.R.C. §§ 2036-38 and G.L. c. 65C, § 1(f).  His transfer of his interest in the Trust and the relinquishment of his powers less than one month prior to his death results in the includibility of the interest in the Massachusetts gross estate under G.L. c. 65C, § 1(d) and (f) and reportable on Schedule G of the estate tax return, as was done by the Estate.  The Commissioner properly treated the interest in the Trust as real property.  Therefore, he properly included the decedent's 25 percent interest in the Trust in the numerator of the allocation fraction used to compute the nonresident estate tax owed to the Commonwealth under G.L. c. 65C, § 4(b).  Accordingly, the Board issued a decision for the appellee.

OPINION
	There are two issues in the present appeal.  The first issue is whether the decedent's interest in the Trust was an interest in a trust or an intangible interest in a partnership.  If the interest is an intangible partnership interest, such interest was properly excluded from the numerator of the fraction in computing the Massachusetts non-resident estate tax under G.L. c. 65C, § 4.  See Page v. Commissioner of Revenue, 389 Mass. 388, 393 (1983)(Intangible personal property may be taxed in state of decedent's domicile).  Accord Cohen v. Commissioner of Revenue, 18 Mass. App. Tax Bd. Rep. 28, 37 (1995).  If, however, the interest is an interest in a trust, the issue becomes whether the interest was properly includible in the numerator of the allocation fraction in computing the estate tax owed to the Commonwealth.

I.	Trust Interest v. Partnership Interest
	The existence of a partnership is a mixed question of fact and law.  Maker v. Bermingham, 32 Mass. App. Ct. 971, 973 (1992), citing Seemann v. Eneix, 272 Mass. 189, 191 (1930).  Pursuant to G.L. c. 108A, § 6, a partnership is an "association between two or more persons to carry on as co-owners a business for profit."  Generally, "the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner."  G.L. c. 108A, § 7(4).
	In the present appeal, the decedent and three other individuals joined together for the purpose of purchasing and leasing out real estate.  Pursuant to the Trust instrument, all income derived from this venture was to be disbursed to the Beneficiaries based on their proportionate interests.  However, this arrangement was not enough to conclude that a partnership existed.
	Numerous inconsistencies between the Declaration of Trust, which the Estate alleged was a "partnership agreement," and partnership law undermined the Estate's position.  First, the existence of a partnership depends on the intent of the parties to associate as such.  See, e.g., Cardullo v. Landau, 329 Mass. 5, 8 (1952); Shain Investment Co., Inc. v. Cohen, 15 Mass.App.Ct. 4, 7 (1982).  The Declaration of Trust, however, explicitly provides in Paragraph VII that "[i]t is expressly declared that a trust and not a partnership is hereby created."  
	Second, pursuant to G.L. c. 108A, § 15(1), "all partners are liable [] jointly and severally for everything chargeable to the partnership."  Paragraph VII of the Trust instrument, by contrast, makes clear the parties' intention that "no Trustee, Beneficiary or Agent of the Trust shall be held to any personal liability whatsoever except for his own willful default or breach of fiduciary duty or for otherwise unauthorized acts."  Although "a partner in a registered limited liability partnership shall not be personally liable" for the debts and obligations of the partnership (G.L. c. 108A, § 15), the Board found that the Estate provided no evidence that the association between the decedent and the others qualified as a "registered limited liability partnership.  See generally G.L. c. 108A, §§ 45-46. 
	Third, dissolution of a partnership generally occurs when there is a "change in the relation of the partners caused by any partner ceasing to be associated in the carrying on" of the business.  G.L. c. 108A, § 29.  More specifically, the death of a general partner will cause dissolution of the partnership.  G.L. c. 108A, § 31(4).  Again, the terms of the Trust agreement are contrary to the partnership statute and common law principles of partnership law.  Pursuant to Paragraph IV, any Trustee may resign, succeeding or additional Trustees may be appointed, and Trustees may be removed.  
	These differences demonstrate that the parties did not intend to create a partnership but to instead establish a trust.  Furthermore, at all times the Trustees had the power to amend or revoke the Trust and to establish a true partnership, a power they chose not to exercise.
		The estate urged the Board to disregard the trust form of the entity and determine that in substance it was a partnership.  Generally, the Courts and this Board will disregard the form of a transaction when it is shown to be a sham or a mere conduit in an effort to avoid taxation.  See generally Higgins v. Smith, 308 U.S. 473, 476-77 (1939); Syms, Inc. v. Commissioner of Revenue, 2000 ATB Adv. Sh. 711, 749 (Docket Nos. F215484 and F228324, September 14, 2000).  
	A taxpayer is bound, however, to the form in which he has factually cast a transaction.  Maletis v. United States, 200 F.2d 97, 98 (1952), cert. denied 345 U.S. 924 (1953). "While a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not, [citations omitted] and may not enjoy the benefit of some other route he might have chosen to follow but did not." Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1973).  "To permit a taxpayer at will to challenge his own forms in favor of what he subsequently asserts to be true 'substance' would encourage post-transactional tax-planning and unwarranted litigation."  In Re Steen v. United States, 509 F.2d 1398, 1402-03, n. 4 (1975).    
	In the present appeal, the decedent and his associates established the trust more than thirty years prior to the decedent's death.  They knowingly chose the form of their association and expressly declared that it was not a partnership.  Not until after the decedent's death did the remaining Trustees/Beneficiaries elect to alter the form of the entity. Accordingly, the Board declined to recognize the Estate's recharacterization of the entity as a partnership and the Board found that the entity was a trust.
II. Trust Interest: Intangible or Tangible Property

As an alternative argument, the Estate maintained that even if the Commissioner properly characterized the decedent's interest as an interest in a trust and not a partnership, the Commissioner still was precluded from taxing it under G.L. c. 65C, § 4(a).  More specifically, the Estate argued that the Commissioner was precluded from including the decedent's interest in the numerator of the fraction used to calculate the nonresident estate tax under G.L. c. 65C, § 4(b) because the interest in the trust was not itself Massachusetts real property.  The Board disagreed. 
Massachusetts imposes an estate tax "on the transfer of a nonresident decedent's real or tangible personal property having an actual situs in Massachusetts, if such property would have been included in the Massachusetts gross estate had the decedent been a resident."  G.L. c. 65C, § 4(a).  The tax imposed:
shall be an amount which bears the same ratio to the tax that would be due if the decedent had been a resident as (i) the value of all real and tangible personal property, diminished by any mortgage or lien thereon, having an actual situs in Massachusetts . . . bears to (ii) the value of the decedent's Massachusetts gross estate . . . determined as if he had been a resident.

G.L. c. 65C, § 4(b).

	In the present appeal, the Estate excluded from the numerator of the fraction, the value of the decedent's interest in the Trust on the ground that it was intangible personal property.  The Commissioner argued, and this Board held, that the decedent's interest in the Trust, the underlying assets of which were Massachusetts real estate, qualified as an interest in Massachusetts real estate and, therefore, was taxable under G.L. c. 65C, § 4(a) and includible in the numerator of the fraction in calculating the nonresident estate tax owed to the Commonwealth under § 4(b). As was explained in State Tax Commission v. Colbert, 344 Mass. 494, 497 (1962), the taxpayer, a beneficial owner of a trust, "held an equitable interest in the real property held by the trust. . . . It was a beneficial interest in the real estate itself, and not, as in the case of a corporation, an interest distinct from corporate assets."  See Kirby v. Board of Assessors of Medford, 350 Mass. 386, 389 (1966)("Yet the power of amendment and revocation makes the beneficial ownership of the trust property, as a practical matter for many purposes, including some tax purposes, essentially equivalent to outright ownership by the settlor.").  Since the decedent, like the taxpayer in Kirby, retained significant powers over the Trust, including the power to amend and revoke the Trust, the decedent's interest in the Trust was equivalent to an interest in the assets of the Trust.
	With the nature of the Estate's interest in the Trust thus clarified, the determination of decedent's "Massachusetts gross estate" has as its starting point the "federal gross estate," as defined under the Code in effect on January 1, 1975, with certain adjustments.  See G.L. c. 65C, § 1(d) and (f).  Had the decedent died possessing this interest in the Trust, the interest would have been includible in his Estate pursuant to I.R.C. §§ 2036-38 and G.L. c. 65C, § 1 (d) and (f).  However, the decedent transferred his interest in the Trust and relinquished his powers less than one month before his death.  In this circumstance, subsection (d) of § 1 of c. 65C sweeps into the Massachusetts gross estate "the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer, relinquished a power, or exercised or released a general power  . . ., by trust or otherwise, during the three year period ending with the date of decedent's death . . . ."
This provision captures in decedent's Massachusetts gross estate his 25 percent interest in the Trust, disposed of slightly less than a month before his death.  The corresponding amount of value is properly included in the numerator of the fraction constructed in accordance with G.L. c. 65C, § 4(b) because the decedent transferred within three years of his death his interest in the Trust which, because of the powers he retained, was "essentially equivalent to outright ownership" of the Massachusetts real estate held by the Trust.  Kirby, 350 Mass. at 389.
On this basis, the Board issued a decision for the appellee.

						APPELLATE TAX BOARD



						By:						
						    Donald E. Gorton, Member




A true copy,


Attest:					
    Clerk of the Board

 At the time of the decedent's death, the Trust assets consisted of cash in the amount of $607,694.00 and Massachusetts real estate in the net amount of $7,090,137.00.
 Under G.L. c. 65C, § 4(b) there are two steps involved in calculating a non-resident decedent's estate tax owed the Commonwealth.  First, the estate must compute the tax owed as if the decedent had been a Massachusetts resident at the time of his death. This number is then multiplied by a fraction.  The numerator of the fraction is the value of real and tangible personal property having an actual situs in the Commonwealth, and the denominator is the value of the decedent's Massachusetts gross estate determined as if he had been a resident.
 At the time the Application for Abatement was filed, the estate's representative consented to the Commissioner's acting on the request beyond the six-month deadline.

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