Estate of Anna Mirowski v. Comm'r , 95 T.C.M. 1277 ( 2008 )

T.C. Memo. 2008-74
UNITED STATES TAX COURT
ESTATE OF ANNA MIROWSKI, DECEASED, GINAT W. MIROWSKI AND ARIELLA
ROSENGARD, PERSONAL REPRESENTATIVES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15724-05. Filed March 26, 2008.
Albert H. Turkus, Bryon A. Christensen, John P. Marston,
Sidney J. Silver, and Brian L. Alpert, for petitioners.
William J. Gregg, J. Craig Young, and Warren P. Simonsen,
for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined a deficiency of
$14,243,208.37 in Federal estate tax (estate tax) with respect to
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the Estate of Anna Mirowski (decedent’s estate).1
The issues remaining for decision are whether any of the
assets owned by Mirowski Family Ventures, L.L.C. (MFV), are
includible in the gross estate of Anna Mirowski (Ms. Mirowski or
decedent) under section 2036(a),2 2038(a)(1), or 2035(a). We
hold that none of the assets owned by MFV is includible in
decedent’s gross estate under any of those sections.
FINDINGS OF FACT
Many of the facts have been stipulated and are so found.
Ms. Mirowski was a resident of Owings Mills, Maryland, at
the time of her death on September 11, 2001. Ginat W. Mirowski
(Ginat Mirowski) and Ariella Rosengard, the personal representa-
tives of decedent’s estate and two of decedent’s three
daughters,3 resided in Carmel, Indiana, and the United Kingdom,
respectively, at the time they filed the petition in this case.
Ms. Mirowski, who was born on December 22, 1927, was the
youngest of three daughters. Ms. Mirowski’s parents, who were
1
Respondent determined a deficiency of $4,769,233 in dece-
dent’s Federal gift tax (gift tax) for her taxable year 2001.
The parties settled all the gift tax issues in this case.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect on the date of Ms. Mirowski’s
death. All Rule references are to the Tax Court Rules of Prac-
tice and Procedure.
3
Ginat Mirowski is the oldest of decedent’s daughters,
Ariella Rosengard is the next oldest daughter, and Doris Frydman
is the youngest daughter.
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tailors in Lyon, France (Lyon), owned a clothing shop where Ms.
Mirowski worked as a young girl. Eventually, Ms. Mirowski
managed the family business and had responsibility for family
investments until she moved to Israel after she married
Mieczyslaw (Michel) Mirowski (Dr. Mirowski).
When Dr. Mirowski, who was born in Poland, was about 14
years old, Germany invaded Poland. Dr. Mirowski lost his family
in the Holocaust. Thereafter, Dr. Mirowski moved to France,
where he met and married Ms. Mirowski. They enjoyed a long,
happy, and successful marriage.
While Dr. Mirowski was living in France, he attended medical
school. After medical school, Dr. Mirowski moved with Ms.
Mirowski to Israel where he continued his medical training and
specialized in cardiology. While living in Israel, Dr. Mirowski
developed a close relationship with Dr. Harry Heller (Dr.
Heller), who was chief of medicine at the hospital where Dr.
Mirowski trained and who became a father figure to Dr. Mirowski.
Dr. Heller suffered from ventricular fibrillation. At the
time, the only treatment available for that condition was elec-
tric shock administered by a device known as a defibrillator (so-
called external defibrillator), which, because of its large size,
was located in the hospital. Despite his condition, Dr. Heller
refused to stay constantly at the hospital close to a defibril-
lator and passed away from an episode of ventricular fibrillation
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when he was not at the hospital.
Dr. Mirowski was very upset by Dr. Heller’s death. He
determined to develop an implantable defibrillator device in
order to prevent people, like Dr. Heller, who suffered from
ventricular fibrillation from dying because they were not in a
hospital near a defibrillator when they suffered an episode of
that condition or from having to stay continuously in a hospital
in order to be near a defibrillator in the event of such an
episode.
In 1968, in order to obtain funding to develop an im-
plantable defibrillator device, Dr. Mirowski and Ms. Mirowski
emigrated to the United States. Initially, Dr. Mirowski was
ostracized in the medical community for his efforts to develop
such a device. He nonetheless persevered. Over a ten-year
period, Dr. Mirowski and a team of scientists developed an
electronic device known as the automatic implantable cardioverter
defibrillator (ICD) to monitor and correct abnormal heart
rhythms. In 1980, the ICD was successfully implanted for the
first time in a human.4
Dr. Mirowski, who eventually became chief of cardiology at
Sinai Hospital in Baltimore, Maryland (Baltimore), and a profes-
4
At the time of the trial in this case, more than 1.2 mil-
lion patients worldwide had received ICDs. The ICD has been
referred to as the greatest contribution to cardiology in the
last century.
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sor of medicine at Johns Hopkins University School of Medicine in
Baltimore (Johns Hopkins Medical School), held various patents
relating to the ICD (ICD patents). Dr. Mirowski entered into an
exclusive license agreement with respect to the ICD patents (ICD
patents license agreement), under which, inter alia, he had the
right to receive approximately 73 percent of the royalties paid
for the use of those patents.5 During his lifetime, Dr. Mirowski
received modest royalties under the ICD patents license agree-
ment.
Some time after Dr. Mirowski and Ms. Mirowski emigrated to
the United States, they and their family started the general
practice of taking an annual one-week summer vacation in Rehoboth
Beach, Delaware (Rehoboth Beach). That practice continued after
Ms. Mirowski’s daughters married and had families of their own.
When the Mirowski family was vacationing in Rehoboth Beach, they
took the opportunity to have annual meetings (Mirowski family
annual meetings), at which they frequently discussed family
business and investment matters. At times, accountants or
attorneys were invited to attend those meetings.
In 1989, it was determined that Ms. Mirowski had diabetes,
and she became the patient of Dr. Charles Angell, an assistant
professor of medicine at Johns Hopkins Medical School. At a time
5
The coinventor of the ICD had the right under the ICD
patents license agreement to receive approximately 27 percent of
the royalties paid for the use of the ICD patents.
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not disclosed by the record, Ms. Mirowski developed hypertension.
On March 26, 1990, Dr. Mirowski died. At the time of Dr.
Mirowski’s death, Ginat Mirowski was a student at Harvard Univer-
sity in Cambridge, Massachusetts, from which she eventually
obtained dental and medical degrees; Ariella Rosengard was a
physician and a pathology resident at Johns Hopkins University
Hospital in Baltimore (John Hopkins Hospital), was married, and
had a daughter; and Doris Frydman was a medical student at Emory
University in Atlanta, Georgia.
Pursuant to Dr. Mirowski’s will, the ICD patents, his
interest under the ICD patents license agreement, and the remain-
der of his assets, except for $600,000, passed to Ms. Mirowski.
Ms. Mirowski maintained a long and continuous history of
making gifts to family members and friends. Throughout the ten-
year period preceding her death in 2001, Ms. Mirowski continued
to evaluate and make gifts to, or for the benefit of, her three
daughters, her grandchildren,6 and others. Whenever Ms. Mirowski
made gifts to her daughters or to the respective trusts that she
created for them (discussed below), she always paid the related
gift tax.
On February 27, 1992, Ms. Mirowski created an irrevocable,
so-called spendthrift trust for each of her three daughters and
6
At the time of Ms. Mirowski’s death, each of her daughters
had two children.
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their respective issue in order to provide for each daughter
during the daughter’s life and each daughter’s children after the
daughter died. (We shall refer to the respective trusts that Ms.
Mirowski created for Ginat Mirowski, Ariella Rosengard, and Doris
Frydman and their respective issue as the Ginat Trust, the
Ariella Trust, and the Doris Trust. We shall refer collectively
to those trusts as the daughters’ trusts.) Ms. Mirowski named
all three of her daughters as cotrustees of each of the daugh-
ters’ trusts. She did so specifically because she wanted her
daughters to work together and have a close working relationship.
Under the terms of each of the daughters’ trusts, the
trustees (1) had to pay income to the daughter for whom Ms.
Mirowski created the trust and (2) had the discretion to pay
principal to that daughter for her health, maintenance, educa-
tion, and support. Upon the death of a daughter, the corpus of
that daughter’s trust was to continue to be held in trust or to
be paid over to that daughter’s issue, depending on the age of
such issue.
On February 27, 1992, the same date on which Ms. Mirowski
created her daughters’ trusts, she funded the Ginat Trust and the
Ariella Trust by transferring to each of those trusts five
percent of her interest under the ICD patents license agreement.
On the same date, Ms. Mirowski funded the Doris Trust by trans-
ferring to that trust ten percent of her interest under that
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agreement. On June 30, 1993, Ms. Mirowski provided additional
funding to the Ginat Trust and the Ariella Trust by transferring
to each of those trusts 6.25 percent of her remaining interest
under the ICD patents license agreement. After the above-de-
scribed funding of the daughters’ trusts, Ms. Mirowski held a
51.09-percent interest in the royalties under that agreement, and
each of those trusts held a 7.2616-percent interest in those
royalties.7
In addition to a long and continuous history of making gifts
to family members and friends, Ms. Mirowski maintained a long and
continuous history of making philanthropic and charitable gifts.
After Dr. Mirowski died, Ms. Mirowski centered her charitable
endeavors on keeping her husband’s memory alive and furthering
research in cardiology. To those ends, Ms. Mirowski made dona-
tions to (1) Hadassah Hospital in Israel, (2) Johns Hopkins
Hospital where she created a professorship, a fellowship in
cardiology, and a lectureship, (3) the University of Rochester in
Rochester, New York, and (4) Sinai Hospital in Baltimore. In
addition, in 1997 Ms. Mirowski created a charitable foundation
known as Mirowski Family Foundation, Inc. (Foundation), through
which she conducted various charitable endeavors.
7
Dr. Mirowski’s coinventor of the ICD continued to hold
approximately a 27-percent interest in the royalties under the
ICD patents license agreement.
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For various reasons, sales of ICDs increased significantly
after Dr. Mirowski died in 1990. As a result, the royalties
received under the ICD patents license agreement by Ms. Mirowski
and her daughters’ trusts increased dramatically from thousands
of dollars a year to millions of dollars a year. At the time of
Ms. Mirowski’s death, the royalties payable under that agreement
to which MFV was entitled totaled millions of dollars a year.
Before Dr. Mirowski died, he was primarily responsible for
managing the financial affairs of Ms. Mirowski and himself.
After Dr. Mirowski’s death, Ms. Mirowski, who did not remarry,
became primarily responsible for managing her own financial
affairs. When Ms. Mirowski first started investing, she was a
highly conservative investor.
In order to assist Ms. Mirowski in managing her financial
affairs after Dr. Mirowski died, Ariella Rosengard began to act
as a bookkeeper for her. Thereafter, Ginat Mirowski, who fre-
quently discussed her own investments with Ms. Mirowski, also
acted as a bookkeeper for Ms. Mirowski and provided advice and
suggestions to her regarding her investments. At no time did
Ariella Rosengard or Ginat Mirowski make financial decisions for
Ms. Mirowski.8
8
Before Ms. Mirowski’s death, Doris Frydman was not involved
in Ms. Mirowski’s financial affairs.
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During the period in which Ariella Rosengard was performing
bookkeeping functions for Ms. Mirowski, Ms. Mirowski’s invest-
ments consisted primarily of securities issued by the United
States Treasury Department (U.S. Treasury securities). Ms.
Mirowski received directly the checks for any interest payments
on those securities and deposited those checks into one of her
various bank accounts. During that period, Ms. Mirowski pre-
ferred to have her investments and financial accounts tracked on
a large spreadsheet, which permitted her to monitor them.
By 1998, after royalties from the ICD patents had increased
dramatically, it became quite burdensome to use a large spread-
sheet in order to track and manage Ms. Mirowski’s investments and
financial accounts. That was in large part because, even though
Ms. Mirowski’s investments were primarily of the same type (i.e.,
U.S. Treasury securities), she had over 84 accounts in ten
different institutions.
In February 1998, at the suggestion of Ginat Mirowski, Ms.
Mirowski met with William Lewin (Mr. Lewin) of Goldman, Sachs,
& Co. (Goldman Sachs) regarding the establishment of an invest-
ment account with that firm. Ginat Mirowski made that suggestion
to Ms. Mirowski because in 1992 she and her husband had met with
Mr. Lewin and thereafter established an account at Goldman Sachs
that Mr. Lewin managed. Over time, Ginat Mirowski concluded that
the Goldman Sachs account that she and her husband maintained was
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significantly outperforming investments that she and her husband
managed on their own. As a result of the investment experience
and success of the Goldman Sachs account of Ginat Mirowski and
her husband, about which Ginat Mirowski told her mother, Ms.
Mirowski began to realize that her investment portfolio could
perform better if she were to diversify that portfolio and
consolidate her investments at one investment firm.
Ms. Mirowski was a careful, deliberate, and thoughtful
decisionmaker, especially with respect to financial matters. It
was not until December 26, 1998, approximately 10 months after
Ms. Mirowski first met with Mr. Lewin in February of that year,
that she opened an account with Goldman Sachs (Ms. Mirowski’s
Goldman Sachs account). For an initial period after she opened
that account, Ms. Mirowski continued to maintain investment
accounts with other investment and financial institutions.
Beginning in January 1999, Ms. Mirowski deposited certain
cash and securities into Ms. Mirowski’s Goldman Sachs account.
Initially, the securities that Ms. Mirowski deposited into Ms.
Mirowski’s Goldman Sachs account consisted of U.S. Treasury
securities. Shortly after Ms. Mirowski opened Ms. Mirowski’s
Goldman Sachs account, at her direction, Goldman Sachs purchased
municipal bonds for that account. Thereafter, at Ms. Mirowski’s
direction, Goldman Sachs purchased equities for Ms. Mirowski’s
Goldman Sachs account. All of those purchases were part of Ms.
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Mirowski’s plan to diversify her portfolio with the help of
Goldman Sachs.
On May 11, 2000, representatives from Goldman Sachs made a
presentation to Ms. Mirowski. During that presentation, those
representatives described various strategies and considerations
relating to investment management, including an overview of asset
allocation and its importance in various portfolio allocation
scenarios. Ms. Mirowski met or spoke with representatives from
Goldman Sachs approximately three to five times a month in order
to obtain an update on her investment portfolio and the moneys
(e.g., interest payments) deposited into Ms. Mirowski’s Goldman
Sachs account. From time to time after Ms. Mirowski opened Ms.
Mirowski’s Goldman Sachs account, representatives of that firm
advised her regarding particular investments or investment
strategies. At times she accepted the suggestions of those
representatives, and at other times she rejected them. Ms.
Mirowski was a decisive investor and actively made every decision
regarding the purchase of securities by Goldman Sachs for Ms.
Mirowski’s Goldman Sachs account. In early 2001, after Ms.
Mirowski came to trust the Goldman Sachs representatives with
whom she was dealing, she decided to consolidate all of her
investments into the one account with Goldman Sachs that she had
established (i.e., Ms. Mirowski’s Goldman Sachs account).
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In 1999, Ms. Mirowski’s daughter Doris Frydman had neuro-
logic surgery at Yale University Hospital to treat her chronic
condition of epilepsy. At least as early as late 1999 or early
2000, in large part because of her daughter Doris Frydman’s
condition, Ms. Mirowski began to think about ways, in addition to
her daughters’ trusts, to provide for her daughters and her
grandchildren on an equal basis. Moreover, at least as early as
around that time, Ms. Mirowski started thinking about ways, in
addition to her daughters’ working together as trustees of each
of the daughters’ trusts, to allow them to work together and have
a close working relationship.
In May 2000, Ms. Mirowski met with representatives of U.S.
Trust (May 2000 meeting with U.S. Trust) at the home of Ariella
Rosengard in Philadelphia. At that time, representatives of U.S.
Trust introduced Ms. Mirowski to the concept of a limited liabil-
ity company (LLC).
After Ms. Mirowski’s May 2000 meeting with U.S. Trust, she
began discussing with her attorney Sidney J. Silver (Mr. Silver)
the possibility of forming an LLC. Thereafter, on August 31,
2000, Mr. Silver sent a letter (Mr. Silver’s August 31, 2000
letter) to Ms. Mirowski and enclosed with that letter draft
articles of organization and a draft operating agreement for an
LLC to be named Mirowski Family Ventures, L.L.C. Mr. Silver sent
copies of that letter and those enclosures to Ms. Mirowski’s
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daughters. Mr. Silver’s August 31, 2000 letter stated in perti-
nent part:
Re: Financial and Tax Planning
Dear Anna:
In accordance with my recent telephone discussion
with your daughter Ginat and my earlier discussion with
your daughter Ariella, we have prepared drafts of two
documents for your review and consideration in connec-
tion with financial and tax planning on behalf of you
and your family as follows:
1. Articles of Organization of Mirowski
Family Ventures, L.L.C.
2. Operating Agreement of Mirowski Family
Ventures, L.L.C.
By copy of this letter we are forwarding copies of
these documents to each of your daughters for their
review. After such documents have been reviewed we
will be pleased to answer any questions or make such
modifications you may request thereto.
Ms. Mirowski often waited until her family was together in
order to have family discussions regarding any important deci-
sions. The next time the family planned to be together after
having received Mr. Silver’s August 31, 2000 letter and the draft
articles of organization and the draft operating agreement for an
LLC was in August 2001. The family planned a meeting with Mr.
Silver at that time, at which he was to explain Ms. Mirowski’s
plans.
In January 2001, Ms. Mirowski took a trip to France to visit
her sister who had been hit by an automobile. During that trip,
Ms. Mirowski wore tight shoes that caused a blister on her foot.
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As a result of that blister and her diabetes, Ms. Mirowski
developed a foot ulcer. In January 2001, after Ms. Mirowski
returned to the United States from France, she began medical
treatment for her foot ulcer. Although such an ulcer requires
care and treatment, with proper treatment, a patient with a foot
ulcer resulting from diabetes is expected to recover from such a
condition.
On March 3, 2001, Ms. Mirowski signed an agreement for
occupancy/residency rights in an apartment at a retirement
community known as North Oaks (North Oaks retirement community),
which is located near where Ms. Mirowski and her friends resided
in Baltimore County, Maryland.
Ten days later, on March 13, 2001, when she was 73 years
old, Ms. Mirowski underwent a surgical procedure at Johns Hopkins
Hospital to treat her foot ulcer.
On July 22, 2001, Ms. Mirowski signed an agreement for
occupancy/residency rights in an apartment at a retirement
community known as Waverly Heights, Ltd. (Waverly Heights contin-
uing care retirement community), which is located in Gladwne,
Pennsylvania, near where Ariella Rosengard and Doris Frydman were
living when Ms. Mirowski signed that agreement. On August 15,
2001, Waverly Heights accepted that agreement. Ms. Mirowski
committed well over $500,000 for the occupancy/residency rights
at the North Oaks retirement community and the Waverly Heights
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continuing care retirement community for which she had contracted
in 2001.
Ms. Mirowski planned to live primarily in the residence at
the North Oaks retirement community. After Ms. Mirowski con-
tracted in early March 2001 to buy that residence, she spent
considerable resources, and she and her daughters spent consider-
able effort, in renovating it. Although Ms. Mirowski purchased a
small studio apartment at the Waverly Heights continuing care
retirement community, she did so only because a larger unit that
she intended to acquire was not available; buying a smaller unit
enabled her to obtain a preference on the Waverly Heights contin-
uing care retirement community’s waiting list for larger units.
Between March and August 2001, Ms. Mirowski received treat-
ment for her foot ulcer from nurses who visited her at home and
from her physician when she made intermittent visits to Johns
Hopkins Hospital. Throughout the course of Ms. Mirowski’s
treatment for her foot ulcer, her physician talked to her family,
in particular Ariella Rosengard, on numerous occasions about Ms.
Mirowski’s condition and treatment. Throughout that time, Ms.
Mirowski’s physician presented Ms. Mirowski and her family with a
wide variety of appropriate medical treatment alternatives,
including the possibility of amputation. From March 2001 until
the time of her death, Ms. Mirowski consistently indicated that
she was not comfortable with amputation because of its debilitat-
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ing effects.
In mid-August 2001, Ms. Mirowski’s daughters and their
families took their annual vacation in Rehoboth Beach. During
that vacation, on August 14, 2001, they held their previously
planned Mirowski family annual meeting (August 14, 2001 Mirowski
family annual meeting), to which they had invited Mr. Silver.
Ms. Mirowski was not present at that meeting. At the August 14,
2001 Mirowski family annual meeting, Ms. Mirowski’s daughters
discussed with Mr. Silver the following: (1) Ms. Mirowski’s
plans to form MFV, (2) Ms. Mirowski’s plans to make respective
gifts of interests in MFV to her daughters’ trusts, (3) the
manner in which MFV was to function, and (4) the responsibilities
of her daughters with respect to MFV.
At the time of the August 14, 2001 Mirowski family annual
meeting, and thereafter until September 10, 2001, Ms. Mirowski’s
health was not rapidly deteriorating. In fact, on August 15,
2001, Ms. Mirowski visited her physician at Johns Hopkins Hospi-
tal for a preoperative evaluation with respect to the cataract
surgery that she planned to have at that hospital. Ms. Mirowski
planned to undergo cataract surgery in order to enhance her
vision so that she could continue with her normal activities and
improve her quality of life.
After the August 14, 2001 Mirowski family annual meeting,
Mr. Silver finalized the documents required for Ms. Mirowski to
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form MFV. Although Ms. Mirowski understood that certain tax
benefits could result from forming MFV, those potential tax
benefits were not the most significant factor in her decision to
form MFV. To the contrary, Ms. Mirowski had the following
legitimate and significant nontax purposes for forming, and
transferring the bulk of her assets to, MFV: (1) Joint manage-
ment of the family’s assets by her daughters and eventually her
grandchildren; (2) maintenance of the bulk of the family’s assets
in a single pool of assets in order to allow for investment
opportunities that would not be available if Ms. Mirowski were to
make a separate gift of a portion of her assets to each of her
daughters or to each of her daughters’ trusts; and (3) providing
for each of her daughters and eventually each of her grandchil-
dren on an equal basis.
With respect to Ms. Mirowski’s purpose in forming MFV of
having her daughters, and eventually her grandchildren, jointly
manage the family’s assets, that purpose was rooted in Ms.
Mirowski’s formative years in Lyon, where her family worked
together in the family business.9 Ms. Mirowski valued the family
cohesiveness that joint management of a family business can
foster. Although Ms. Mirowski was aware that her daughter
9
After Ms. Mirowski left France and moved to Israel and
ultimately to the United States with Dr. Mirowski and their
daughters, Ms. Mirowski was unable to continue working together
with her family in the family business in France, which she
regretted very much.
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Ariella Rosengard would probably move to England with her husband
and children, Ms. Mirowski wanted her daughters, and eventually
her grandchildren, to work together, remain closely knit, and be
jointly involved in managing (1) the investments derived from the
royalties received from Dr. Mirowski’s invention of the ICD and
(2) the business matters relating to the ICD patents and the ICD
patents license agreement, including the litigation arising with
respect to those patents and that license agreement.
With respect to Ms. Mirowski’s purpose in forming MFV of
maintaining in a single pool the bulk of the family’s assets in
order to allow for investment opportunities that would otherwise
be unavailable, certain investment opportunities at Goldman Sachs
would not have been available if Ms. Mirowski had separated her
assets among her daughters or her daughters’ trusts by giving a
portion of those assets to each daughter or each trust.
With respect to Ms. Mirowski’s purpose in forming MFV of
providing for each of her daughters and eventually each of her
grandchildren on an equal basis, the formation of MFV and the
transfer by Ms. Mirowski of an equal interest in it to each of
her daughters’ trusts enabled Ms. Mirowski to ensure that her
daughters, and eventually her grandchildren, would continue to
hold respective interests of equal worth in the bulk of the
family’s assets.
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In addition to the above-described legitimate and signifi-
cant nontax purposes, another legitimate, but not significant,
nontax reason Ms. Mirowski formed, and transferred the bulk of
her assets to, MFV was that she wanted to provide additional
protection from potential creditors for the interests in the
family’s assets that she intended to provide to her daughters and
eventually her grandchildren. Although Ms. Mirowski was aware
that her daughters’ trusts included provisions providing spend-
thrift protection from creditors, she desired the additional
creditor protection provided by an LLC, in particular the protec-
tion that an LLC would provide in the event of any negative
developments in the respective marriages of her daughters.10
On August 22, 2001, Mr. Silver sent a letter (Mr. Silver’s
August 22, 2001 letter) to Ms. Mirowski and enclosed with that
letter final versions of the articles of organization and the
operating agreement for MFV that he had prepared. Mr. Silver
sent copies of that letter and enclosures to Ms. Mirowski’s three
daughters. Mr. Silver’s August 22, 2001 letter stated in perti-
nent part:
10
At the time of the trial in this case, none of Ms.
Mirowski’s daughters had been married more than once. Nor had
any of them ever been separated from her spouse because of
marital problems.
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Re: Business, Financial & Estate Planning Matters
Dear Anna:
Reference is made to my correspondence to you of
August 9, 2001 and my subsequent telephone discussions
with you relative to the meeting that was held with
your daughters Ginat Mirowski, Ariella Rosengard, Doris
Frydman and their respective spouses on August 14,
2001. We are beginning the process of implementing the
Estate Plan which I recently discussed with you.
I am enclosing herewith bond copies of the follow-
ing documents, the drafts of which were enclosed in my
correspondence to you of August 9, 2001:
1. Articles of Organization of Mirowski
Family Ventures, L.L.C. * * *
2. Operating Agreement of Mirowski Family
Ventures, L.L.C. * * *
Please sign the Articles of Organization at the
two places designated for your signature by an arrow.
Please sign both copies of the Operating Agreement at
the place designated for your signature on page 24
thereof, leave the date blank for the time being. Upon
full execution of both documents please return all
copies to me in the enclosed Federal Express envelope.
Please do not hesitate to contact me if you have any
questions with respect to the foregoing.
On August 27, 2001, Ms. Mirowski executed the articles of
organization (MFV’s articles of organization) to create Mirowski
Family Ventures, L.L.C. On the same date, she executed the
operating agreement for MFV (MFV’s operating agreement).11
Except for MFV’s operating agreement, at no time was there any
11
MFV’s articles of organization and MFV’s operating agree-
ment listed MFV’s principal office as the address of Ms.
Mirowski’s residence in Owings Mills, Md.
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express or unwritten agreement or understanding among Ms.
Mirowski and her daughters regarding how MFV would be operated.
On August 30, 2001, the department of assessments and taxation of
the State of Maryland (Maryland department of assessments and
taxation) accepted MFV’s articles of organization for filing.12
On August 31, 2001, Ms. Mirowski was admitted to Johns
Hopkins Hospital for further treatment of her foot ulcer.
On September 1, 2001, Ms. Mirowski made a bona fide, arm’s-
length transfer (Ms. Mirowski’s September 1, 2001 transfer) to
MFV of certain property, including the ICD patents and Ms.
Mirowski’s 51.09-percent interest under the ICD patents license
agreement,13 and received in exchange for that property a 100-
percent interest in MFV. After Ms. Mirowski’s September 1, 2001
transfer, Ms. Mirowski was the only member of MFV. Since MFV was
formed, no person other than Ms. Mirowski made any transfers of
property to MFV.
On September 5, 2001, Ms. Mirowski’s physician noted an
intention to discuss with Ms. Mirowski’s daughters the need to
plan for her long-term care when she returned home after her
discharge from the hospital.
12
MFV requested expedited processing by the Maryland depart-
ment of assessments and taxation for which it paid an additional
$90 fee.
13
Ms. Mirowski transferred her 51.09-percent interest under
the ICD patents license agreement pursuant to a document entitled
“ASSIGNMENT OF ALL RIGHT, TITLE & INTEREST”.
- 23 -
On September 5, 2001, Ms. Mirowski made another bona fide,
arm’s-length transfer (Ms. Mirowski’s September 5, 2001 transfer)
to MFV of certain property consisting of securities with an
aggregate value of $60,578,298.08 that she held in Ms. Mirowski’s
Goldman Sachs account.14 Ms. Mirowski authorized Goldman Sachs
to effect Ms. Mirowski’s September 5, 2001 transfer by transfer-
ring securities valued at $60,578,298.08 from Ms. Mirowski’s
Goldman Sachs account to another account established at Goldman
Sachs in the name of MFV (MFV’s Goldman Sachs account). After
Ms. Mirowski’s September 5, 2001 transfer, Ms. Mirowski continued
to hold a 100-percent interest in MFV.
On September 6 and 7, 2001, Ms. Mirowski made additional
bona fide, arm’s-length transfers (Ms. Mirowski’s September 6 and
7, 2001 transfers) to MFV of certain property consisting of
securities and cash with an aggregate value of $1,525,008.80 that
she held in Ms. Mirowski’s Goldman Sachs account. Ms. Mirowski’s
September 6 and 7, 2001 transfers were effected by Goldman Sachs
in the same manner in which that firm effected Ms. Mirowski’s
September 5, 2001 transfer. After Ms. Mirowski’s September 6 and
7 transfers, Ms. Mirowski continued to hold a 100-percent inter-
est in MFV. (We shall refer collectively to Ms. Mirowski’s
September 1, 2001 transfer, Ms. Mirowski’s September 5, 2001
14
As of Sept. 1, 2001, Ms. Mirowski’s Goldman Sachs account
had a total value of $72,965,935.71.
- 24 -
transfer, and Ms. Mirowski’s September 6 and 7, 2001 transfer to
MFV as Ms. Mirowski’s transfers to MFV.)
At no time did Ms. Mirowski contemplate forming MFV without
making a gift of an interest in MFV to each of her daughters’
trusts. Thus, on September 7, 2001, Ms. Mirowski made a gift of
a 16-percent interest in MFV to each of those trusts.15 Those
gifts were an integral part of Ms. Mirowski’s plan in forming and
transferring the bulk of her assets to MFV. (We shall sometimes
refer collectively to Ms. Mirowski’s respective gifts of 16-
percent interests in MFV to her daughters’ trusts as Ms.
Mirowski’s gifts.)
Ms. Mirowski understood that, based upon the value of the
assets that she transferred to MFV in exchange for a 100-percent
interest in MFV, her respective gifts of 16-percent interests in
MFV to her daughters’ trusts would result in a substantial gift
tax for 2001. Ms. Mirowski’s daughters were not aware of specif-
ically how Ms. Mirowski planned to pay the substantial gift tax
on those gifts. However, they were aware that Ms. Mirowski had
retained substantial personal assets that she did not transfer to
MFV, including over $3 million in cash and cash equivalents. Ms.
Mirowski’s daughters also knew that Ms. Mirowski anticipated
15
Except for the respective gifts to her daughters’ trusts
that Ms. Mirowski made in 1992 and 1993, Ms. Mirowski made no
gifts to those trusts before her respective gifts on Sept. 7,
2001, of 16-percent interests in MFV.
- 25 -
receiving as an interest holder in MFV future income of millions
of dollars a year attributable to royalty payments under the ICD
patents license agreement. In addition, Ms. Mirowski’s daughters
believed that Ms. Mirowski could have borrowed against her
interest in MFV in order to pay the substantial gift tax liabil-
ity attributable to her respective gifts to her daughters’ trusts
of 16-percent interests in MFV. At no time before Ms. Mirowski’s
death did the members of MFV have any express or unwritten
agreement or understanding to distribute assets of MFV in order
to pay that gift tax liability.
After the respective gifts to her daughters’ trusts of 16-
percent interests in MFV, Ms. Mirowski held a 52-percent inter-
est, and each of those trusts held a 16-percent interest, in MFV.
As discussed above, MFV held a 51.09-percent interest under the
ICD patents license agreement after Ms. Mirowski’s September 1,
2001 transfer to MFV. Each of the daughters’ trusts continued to
hold a 7.2616-percent interest under the ICD patents license
agreement after Ms. Mirowski made a gift of a 16-percent interest
in MFV to each of those trusts.
After Ms. Mirowski’s transfers to MFV, she retained in her
individual name the following assets (personal assets) valued at
approximately $7,598,000: Ms. Mirowski’s home valued at
- 26 -
$799,000; cash16 and cash equivalents of approximately
$3,308,000; personal property consisting primarily of fine art
valued at approximately $1,892,000; a loan of $305,640 due from
North Oaks retirement community pursuant to the North Oaks
residency agreement and loan agreement that Ms. Mirowski signed
on March 3, 2001; a right to receive a refund of $203,301 that
she paid as an occupancy rights fee pursuant to the Waverly
Heights residence and care agreement dated August 14, 2001; a
promissory note of Ginat Mirowski and her husband that had an
outstanding balance of $136,499.99, plus accrued interest of
$205.96; a promissory note of Ariella Rosengard and her husband
that had an outstanding balance of $460,110.73, plus accrued
interest of $922.26; and a promissory note of Doris Frydman and
her husband that had an outstanding balance of $500,000, plus
accrued interest of $915.67.17 In addition, Ms. Mirowski was the
beneficiary of a trust established under Dr. Mirowski’s will that
had a value of $620,000. At no time before Ms. Mirowski died
16
At the end of 2000, Ms. Mirowski’s cash holdings consisted
of approximately $160,000 in accounts with certain banks.
17
Article SECOND, paragraph (b), of the last will and testa-
ment of Ms. Mirowski provided that all indebtedness owed to her
at the time of her death by any of her daughters was to be
canceled. Article SECOND, paragraph (c), of that last will and
testament directed Ms. Mirowski’s personal representative to use
a formula specified therein in order to equalize the aggregate
benefits to be received by each of her daughters from her estate.
That formula was dependent upon the amount of indebtedness owed
to Ms. Mirowski by each of her daughters at the time of her
death.
- 27 -
were the assets of MFV commingled with her personal assets. At
no time was there any express or unwritten agreement or under-
standing among Ms. Mirowski and her daughters that Ms. Mirowski
would distribute assets from MFV in order to pay any unexpected
financial obligations of Ms. Mirowski.
After Ms. Mirowski’s transfers to MFV, Ms. Mirowski retained
more than enough personal assets to meet her living expenses.
However, Ms. Mirowski did not retain enough personal assets in
order to pay from those assets the substantial gift tax for which
she would be liable with respect to her contemplated respective
gifts of 16-percent interests in MFV to her daughters’ trusts.
Nonetheless, in order to pay that anticipated gift tax liability
and any unexpected financial obligations, Ms. Mirowski could have
(1) used a portion of the over $7.5 million of personal assets
that she retained and did not transfer to MFV, including cash and
cash equivalents of over $3.3 million, (2) used a portion or all
of the distributions that she expected to receive as an interest
holder in MFV of the millions of dollars of royalty payments
under the ICD patents license agreement that she expected MFV to
receive, and (3) borrowed against (a) the personal assets that
she retained and did not transfer to MFV and (b) her 52-percent
interest in MFV.
At the time of and after Ms. Mirowski’s respective gifts of
16-percent interests in MFV to her daughters’ trusts, there was
- 28 -
no express or unwritten agreement or understanding among the
members of MFV that Ms. Mirowski, at her own discretion, could
have access to any of the assets that she transferred to MFV for
her own possession or enjoyment, the right to income from those
assets, or the right to determine who could possess or enjoy
those assets. Nor was there any express or unwritten agreement
or understanding among the members of MFV that Ms. Mirowski
(1) would retain during her life the economic use and benefits of
the assets that she transferred to MFV and (2) would provide for
her daughters and her grandchildren only upon her death.
Pursuant to section I18 and section 3.6 of MFV’s operating
agreement, the capital account of Ms. Mirowski was to be credited
with the respective contributions of property that she made to
MFV on September 1, 5, 6, and 7, 2001, and her capital account
was to be properly maintained thereafter.
Pursuant to section I of MFV’s operating agreement, as a
result of Ms. Mirowski’s gift of a 16-percent interest in MFV to
each of her daughters’ trusts, each of those trusts succeeded to
the capital account of Ms. Mirowski to the extent the capital
account was attributable to the 16-percent interest in MFV that
Ms. Mirowski gave to each trust.
18
Section I of MFV’s operating agreement is titled “DEFINED
TERMS”. Pertinent portions of that operating agreement are
quoted in the appendix hereto.
- 29 -
Pursuant to section 3.4 of MFV’s operating agreement,19 no
interest holder,20 including Ms. Mirowski, was to have the right
to receive the return of any capital contribution except as
otherwise provided in that agreement. The only provision in
MFV’s operating agreement for the return of a capital contribu-
tion to an interest holder was in the event of the liquidation
and dissolution of MFV.21 Pursuant to section 4.4.1 of MFV’s
19
Section III of MFV’s operating agreement is titled “Mem-
bers; Capital; Capital Accounts”.
20
Section I of MFV’s operating agreement defined the term
“Interest Holder” to mean “any Person who holds a Membership
Interest, whether as a Member or as unadmitted assignee of a
Member.” Section I of MFV’s operating agreement defined the term
“Member” to mean “each Person signing this Agreement and any
Person who subsequently is admitted as a member of the Company.”
21
Section VII of MFV’s operating agreement, titled “Dissolu-
tions, Liquidation and Termination of the Company”, addressed,
inter alia, the distribution of MFV’s assets upon its liquidation
and dissolution. Section 7.2 of MFV’s operating agreement
provided:
7.2. Procedure for Winding Up and Dissolution.
If the Company is dissolved, the General Manager shall
wind up its affairs. On winding up of the Company, the
assets of the Company shall be distributed,
(i) to creditors of the Company, including
Interest Holders who are creditors, in satisfaction of
the liabilities of the Company;
(ii) to Interest Holders and former Interest
Holders in satisfaction of unpaid distributions;
(iii) to Interest Holders for the return of
Capital Contributions; and
(continued...)
- 30 -
operating agreement,22 if MFV were to be liquidated, its assets
were required to be distributed to the interest holders in MFV in
accordance with the balances in their respective capital ac-
counts. Pursuant to MFV’s operating agreement, during the normal
course of MFV’s operations, Ms. Mirowski was not entitled to the
return of the assets that she transferred to MFV.
Pursuant to section 5.1.1 of MFV’s operating agreement,23
MFV was to be managed by a general manager who could be, but did
not have to be, a member of MFV. That section of MFV’s operating
agreement designated Ms. Mirowski to serve as the initial general
manager of MFV. All of Ms. Mirowski’s powers as MFV’s initial
general manager were subject to other provisions of MFV’s operat-
ing agreement and the requirements of applicable law, including
the applicable law of the State of Maryland (Maryland law), which
imposed on her a fiduciary duty to the other members of MFV.24
21
(...continued)
(iv) to Interest Holders in proportion to
their respective Capital Accounts and then to the
Interest Holders in accordance with Section 4.4 [relat-
ing to the distribution of MFV’s assets upon its liqui-
dation and dissolution].
22
Section 4.4 of MFV’s operating agreement is titled “Liqui-
dation and Dissolution.”
23
Section V of MFV’s operating agreement is titled “Manage-
ment: Rights, Powers and Duties”.
24
Section 5.1.2 of MFV’s operating agreement described the
general powers of MFV’s general manager in pertinent part as
follows:
(continued...)
- 31 -
Although Ms. Mirowski held a 52-percent interest in MFV and
was its general manager, pursuant to section 5.1.2.3, 5.1.3.1,
and 5.1.3.2 of MFV’s operating agreement, she could not sell or
otherwise dispose of any of the assets of MFV, other than in the
ordinary course of MFV’s operations, without the approval of all
the members of MFV.25 Pursuant to section 7.1.1 of MFV’s operat-
ing agreement, Ms. Mirowski could not liquidate and dissolve MFV
without the approval of all the members of MFV. Pursuant to
section 5.1.3.1 and 5.1.3.4 of that operating agreement, Ms.
Mirowski could not admit additional members to MFV without the
24
(...continued)
5.1.2. General Powers. The General Manager shall
have full, exclusive, and complete discretion, power,
and authority, subject in all cases to the other provi-
sions of this Agreement and the requirements of appli-
cable law, to manage, control, administer, and operate
the business and affairs of the Company for the pur-
poses herein stated, and to make all decisions affect-
ing such business and affairs * * *
25
In other words, pursuant to section 5.1.3.1 and 5.1.3.2 of
MFV’s operating agreement, Ms. Mirowski could not undertake any
“Capital Transaction” without the approval of all MFV’s members.
The term “Capital Transaction” is defined in section I of MFV’s
operating agreement to mean:
any transaction not in the ordinary course of business
which results in the Company’s receipt of cash or other
consideration other than Capital Contributions, includ-
ing, without limitation, proceeds of sales or exchanges
or other dispositions of property not in the ordinary
course of business, financings, refinancings, condemna-
tions, recoveries of damage awards, and insurance
proceeds.
As used hereinafter, the term “capital transaction” shall have
the meaning set forth in section I of MFV’s operating agreement.
- 32 -
approval of all the members of MFV.
Pursuant to section 4.1.1 of MFV’s operating agreement,26
profit or loss (other than profit or loss derived from a capital
transaction) for any taxable year was to be allocated to MFV’s
interest holders in proportion to their respective percentage
interests in MFV.
Pursuant to section 4.1.2 of MFV’s operating agreement, MFV
was required to make within 75 days after the end of each taxable
year distributions to MFV’s interest holders of MFV’s cash flow27
for the taxable year in proportion to such members’ respective
percentage interests in MFV.
Pursuant to section 4.2.1 and section 4.2.2 of MFV’s operat-
ing agreement,28 profit or loss from a capital transaction was to
26
Section 4.1 of MFV’s operating agreement is titled “Dis-
tributions of Cash Flow and Allocations of Profit or Loss Other
than Capital Transactions.”
27
The term “Cash Flow” is defined in section I of MFV’s
operating agreement to mean:
all cash funds derived from operations of the Company
(including interest received on reserves), without
reduction for any non-cash charges, but less cash funds
used to pay current operating expenses and to pay or
establish reasonable reserves for future expenses, debt
payments, capital improvements or replacements as
determined in the sole discretion of the General Man-
ager. Cash Flow shall not include Capital Proceeds but
shall be increased by the reduction of any reserve
previously established.
28
Section 4.2 of MFV’s operating agreement is titled “Dis-
tribution of Capital Proceeds and Allocation of Profit or Loss
(continued...)
- 33 -
be allocated to MFV’s interest holders in proportion to their
respective capital accounts.
Pursuant to section 4.2.3 of MFV’s operating agreement,
“Capital Proceeds [i.e., gross receipts from a capital transac-
tion] shall be distributed” in proportion to the respective
capital accounts of MFV’s interest holders after the payment of
all expenses incident to the capital transaction, the payment of
debts and liabilities due and outstanding, and the establishment
of any reserves that MFV’s general manager deemed necessary for
MFV’s liabilities or obligations.
Pursuant to section 4.5.1 of MFV’s operating agreement,29
except as otherwise provided in that agreement, “the timing and
the amount of all distributions shall be determined by the
Members holding a majority of the Percentages then outstanding.”
Pursuant to section 7.1.2 of MFV’s operating agreement, the
occurrence of a so-called involuntary withdrawal of a member,
which included the death of a member, was to cause MFV to be
dissolved unless the remaining members of MFV unanimously were to
elect to continue MFV’s business pursuant to the terms of MFV’s
operating agreement.
28
(...continued)
from Capital Transactions.”
29
Section 4.5 of MFV’s operating agreement is titled
“General.”
- 34 -
From August 31, 2001, when Ms. Mirowski was admitted to
Johns Hopkins Hospital for further treatment of her foot ulcer,
until her condition unexpectedly deteriorated significantly on
September 10, 2001, the expectation of the members of the medical
staff at Johns Hopkins Hospital who were responsible for treating
Ms. Mirowski was that the treatment of her foot ulcer would allow
her to recover and return to her home. At no time before Septem-
ber 10, 2001, did Ms. Mirowski, her family, or her physicians
expect her to die. Consequently, at no time did Ms. Mirowski and
her daughters discuss or anticipate the estate tax and similar
transfer taxes and the other estate obligations that would arise
only as a result of Ms. Mirowski’s death.
Ms. Mirowski’s daughters spoke with their mother frequently,
sometimes multiple times a day and at other times several times a
week. During the period Ms. Mirowski was being treated for her
foot ulcer, Ariella Rosengard spoke to Ms. Mirowski’s physicians
on a regular basis. As both a daughter and a physician herself,
Ariella Rosengard was highly familiar with her mother’s medical
condition. Moreover, during that same period, Ariella Rosengard
not only spoke with Ms. Mirowski several times a day but also
visited her almost every weekend and sometimes during the middle
of the week. Sometime in early September 2001, Ariella Rosengard
and Ms. Mirowski discussed Ms. Mirowski’s intention to travel to
Philadelphia to attend Ariella Rosengard’s annual open house for
- 35 -
Rosh Hashanah that was to take place on September 18, 2001. Ms.
Mirowski told Ariella Rosengard that she intended to bring
various desserts for that open house, as she had done in past
years.
On September 3, 2001, Ginat Mirowski, her husband, and her
two children visited Ms. Mirowski at Johns Hopkins Hospital. At
that time, Ginat Mirowski and her family expected Ms. Mirowski to
return home after she received antibiotics and surgical treatment
for her foot ulcer. Between that time and September 10, 2001,
the day before Ms. Mirowski died, Ginat Mirowski and her family
communicated multiple times with Ms. Mirowski. At those times,
Ms. Mirowski sounded quite upbeat and spoke of feeling well.
On September 6, 2001, Ariella Rosengard left the United
States in order to attend a medical conference in Strasbourg,
France (Strasbourg). While in France, Ariella Rosengard spoke to
Ms. Mirowski on each of the days September 7, 8, and 9, 2001, and
believed that her mother’s life was not in jeopardy on any of
those days. At that time, Ariella Rosengard (1) understood that
her mother was receiving, as she had in the past, intravenous and
surgical treatment for her foot ulcer and (2) expected her mother
to return home at the conclusion of that treatment. If Ariella
Rosengard had believed that her mother’s health was rapidly
declining on September 6, 2001, such that her mother’s life was
in jeopardy, she would not have left the United States to attend
- 36 -
the medical conference in Strasbourg. Moreover, if Ms. Mirowski
believed that her health was rapidly declining on September 6,
2001, she would have wanted Ariella Rosengard to remain in the
United States to be close to her sisters.
On September 10, 2001, Ginat Mirowski called her mother at
Johns Hopkins Hospital and noticed that she did not sound like
herself. Later that day, Ginat Mirowski canceled her clinic
appointments for the week and traveled to Johns Hopkins Hospital
to visit her mother.
Unexpectedly, on September 10, 2001, Ms. Mirowski’s condi-
tion deteriorated significantly. At that point, amputation was
recommended by her physician as a means of avoiding further
complications, including possible life-threatening infections.
Ms. Mirowski declined amputation. On September 10, 2001, Ms.
Mirowski began to suffer from multiple system failure and refused
all additional medical treatment. As a result of the signif-
icantly worsening condition of Ms. Mirowski’s foot ulcer and her
decision not to have the infected limb amputated, she developed
sepsis, a severe and often life-threatening illness caused by an
overwhelming infection of the blood stream by toxin-producing
bacteria.
On September 11, 2001, at 8:55 a.m. approximately one day
after the onset of Ms. Mirowski’s development of sepsis, she
died.
- 37 -
Shortly after Ms. Mirowski died, on September 16, 2001,
decedent’s estate, through its personal representatives, and the
remaining members of MFV (i.e., the daughters’ trusts), through
their respective trustees (i.e., Ms. Mirowski’s daughters),
executed a memorandum regarding MFV’s operating agreement. In
that memorandum, inter alia, each of those trusts, through its
trustees, acknowledged receipt of an interest and membership in
MFV.30
On September 16, 2001, the remaining members of MFV (i.e.,
the daughters’ trusts), through their respective trustees, also
held a special meeting (September 16, 2001 special meeting). At
that meeting, those members elected the following officers in
order to continue MFV’s business: Ginat Mirowski as its general
manager and president, Doris Frydman as its vice president, and
Ariella Rosengard as its secretary/treasurer. At the September
16, 2001 special meeting, the remaining members of MFV (i.e., the
daughters’ trusts) also discussed, through their respective
trustees, MFV’s Goldman Sachs account that MFV had recently
opened, and they passed a resolution authorizing and ratifying
the establishment and maintenance of that account.
30
An exhibit attached to the memorandum regarding MFV’s
operating agreement reflected the Sept. 7, 2001 respective
membership interests in MFV of decedent and the daughters’ trusts
after Ms. Mirowski’s respective gifts of 16-percent interests in
MFV to those trusts, as well as the amount of decedent’s basis in
the 16-percent interest that she gave to each of those trusts,
which carried over to each trust.
- 38 -
Pursuant to Ms. Mirowski’s will, the daughters’ trusts
inherited, in equal shares, Ms. Mirowski’s 52-percent interest in
MFV. As a result, after the probate of decedent’s will is
closed, those trusts will own collectively 100 percent of MFV in
three equal shares.
Ms. Mirowski died on the day on which there were terrorist
attacks in the United States. Those terrorist attacks created
market conditions that were particularly advantageous to diversi-
fying MFV’s investment holdings, and MFV’s investment holdings
were further diversified shortly after Ms. Mirowski died.
Although the precise timing of the diversification of MFV’s
investment holdings following Ms. Mirowski’s death was attribut-
able to the terrorist attacks on the date of her death, that
diversification was in accordance with the intentions of Ms.
Mirowski before she died.
Since Ms. Mirowski’s death, the daughters’ trusts, as the
remaining members of MFV, have chosen not to receive distribu-
tions of all of MFV’s annual cash flow, as defined in MFV’s
operating agreement. Instead, they decided that MFV will rein-
vest all of that cash flow beyond that required for payment of
taxes and expenses by the members. MFV’s members feel strongly
that the benefits of reinvesting MFV’s annual cash flow far
outweigh any benefits that could be derived from distributing it.
- 39 -
At all relevant times, including after Ms. Mirowski’s death,
MFV has been a valid functioning investment operation and has
been managing business matters relating to the ICD patents and
the ICD patents license agreement, including related litigation.
As Ms. Mirowski had hoped, her daughters, in their capacities as
officers of MFV and as trustees of MFV’s members, have actively
worked together to manage MFV’s assets. Ms. Mirowski’s daughters
have held meetings with representatives of Goldman Sachs approxi-
mately three to four times a year in order to review MFV’s
Goldman Sachs’ account performance and asset allocation and to
determine what, if any, changes should be made in the future.
For at least one of those meetings each year, all of Ms.
Mirowski’s daughters have been present in person. For the
several other meetings each year, the daughters have met together
in person or have participated in a meeting by teleconference.
All of Ms. Mirowski’s daughters jointly have made investment
decisions for MFV and plan to have each of their respective
children also become involved in such decisionmaking when they
reach the appropriate age. In addition, Ms. Mirowski’s daughters
have worked together on matters concerning the business of
managing the ICD patents, the ICD patents license agreement, and
related litigation. At the time of the trial in this case, there
was substantial ongoing litigation relating to those patents and
that license agreement with respect to which Ms. Mirowski’s
- 40 -
daughters communicated several times a week with MFV’s attorney
Mr. Silver.
As Ms. Mirowski also had hoped, MFV’s members have benefited
from having MFV’s assets held in a single pool, rather than held
separately by Ms. Mirowski’s daughters or the daughters’ trusts.
For example, Goldman Sachs charges lower fees for larger ac-
counts. In addition, MFV has had the opportunity to participate
in certain investments that would not have been available on an
individual basis to Ms. Mirowski’s daughters or her daughters’
trusts if, instead of creating MFV, transferring the bulk of her
assets to it, and giving certain interests in MFV to those
trusts, Ms. Mirowski had made a separate gift of her assets to
each of her daughters or each of those trusts.
During 2002, MFV, which had made no distributions during
2001, made distributions totaling $36,415,810 to decedent’s
estate in order for decedent’s estate to pay Federal and State
transfer taxes, legal fees, and other obligations of decedent’s
estate.31 At the time in 2002 when MFV made distributions to
decedent’s estate, MFV’s members (i.e., the daughters’ trusts),
through their respective trustees (i.e., Ms. Mirowski’s daugh-
ters), agreed and decided that MFV should not make distributions
31
The Federal and State transfer taxes paid with funds that
MFV distributed to decedent’s estate during 2002 totaled
$30,911,301.77, of which $11,750,623 was Ms. Mirowski’s estimated
gift tax for 2001 that, as discussed below, decedent’s estate
paid in April 2002.
- 41 -
to themselves.32 In making that decision, MFV’s members had in
mind that those members will own collectively 100 percent of MFV,
in three equal shares, after decedent’s estate is closed.
For each of the years 1991 through 2001, Ms. Mirowski filed
Form 709, United States Gift (and Generation-Skipping Transfer)
Tax Return (Form 709), to reflect the substantial gifts that she
made during each of those years to, or for the benefit of, her
daughters, her grandchildren, and certain others.33 The aggre-
gate value of the gifts that Ms. Mirowski made during the years
1991 through 2001 was $24,715,921.34
On April 14, 2002, decedent’s estate paid estimated gift tax
of $11,750,623 with funds that MFV distributed to it. Thereaf-
ter, on or about July 20, 2002, decedent’s personal representa-
tives timely filed Form 709 for 2001 on behalf of decedent (2001
Form 709).35 Those representatives reported in that form Ms.
32
In other words, MFV’s members agreed and decided that
during 2002 MFV should not make pro rata distributions to all of
the interest holders of MFV. Form 1065, U.S. Return of Partner-
ship Income (Form 1065), for MFV’s taxable year 2002 erroneously
reported for reasons not disclosed by the record that the distri-
butions that MFV made during that year were charged against the
respective capital accounts of MFV’s interest holders on virtu-
ally a pro rata basis.
33
Ms. Mirowski also filed amended Form 709 for each of the
years 1992 and 1993.
34
From 1991 through 2000, Ms. Mirowski made charitable gifts
totaling in excess of $12,500,000.
35
The 2001 Form 709 erroneously reported for reasons not
(continued...)
- 42 -
Mirowski’s gift on September 7, 2001, to each of her daughters’
trusts of a 16-percent interest in MFV and valued each of those
gifts at $5,700,000.36 In the 2001 Form 709, decedent’s personal
representatives reported gift tax for 2001 of $9,729,280, which
resulted in a credit to decedent’s estate of $2,021,343.37
Decedent’s estate timely filed Form 706, United States
Estate (and Generation-Skipping Transfer) Tax Return. Form 706
showed estate tax of $14,119,863.13, which decedent’s estate paid
on June 10, 2002, with funds that MFV distributed to it.38
Respondent issued to decedent’s estate a notice of defi-
ciency, in which respondent determined an estate tax deficiency
of $14,243,208.37. In support of that deficiency determination,
respondent determined, inter alia, to increase decedent’s gross
35
(...continued)
disclosed by the record that Ms. Mirowski made gifts of furniture
on Sept. 10, 2001, to Ariella Rosengard valued at $25,500 and
gifts of jewelry on the same date to Doris Frydman valued at
$45,295. Ms. Mirowski did not in fact make those gifts on Sept.
10, 2001, as reported in the 2001 Form 709. When Ms. Mirowski
purchased the items of furniture and jewelry in question, she had
her daughters Ariella Rosengard and Doris Frydman in mind and
intended to make those respective gifts to them during her life.
36
In the parties’ stipulation of settled issues, the parties
agreed that the value of the 16-percent interest in MFV that Ms.
Mirowski gave to each of her daughters’ trusts is $6,810,350.
See supra note 1.
37
See supra notes 1 and 36.
38
The liability shown in the Maryland estate tax return that
decedent’s estate filed was $5,040,815.64, which decedent’s
estate paid on June 10, 2002, with funds that MFV distributed to
it. See supra note 31.
- 43 -
estate by $43,385,000 (i.e., from $27,768,000 to $71,153,000)
with respect to decedent’s interest in MFV. Respondent did so
because respondent determined that the total of the respective
date-of-death fair market values of all of the assets that
decedent transferred to MFV is includible in her gross estate
under section 2036(a).
On October 7, 2003, more than two years after Ms. Mirowski
died, MFV unintentionally forfeited its charter under Maryland
law because it failed to file required personal property tax
returns.39 It was one of respondent’s employees who brought that
forfeiture to the attention of MFV. Immediately thereafter,
steps were taken to reinstate the charter under Maryland law,
which included filing a personal property tax return on behalf of
MFV with the State of Maryland for each of the years 2002 through
2004. On February 9, 2004, the department of assessments and
taxation of Maryland issued a certificate of good standing to
transact business to MFV, thereby reinstating its charter. Under
Maryland law, the reinstatement of a forfeited charter is retro-
active to the date of forfeiture. As a result, a company subject
to Maryland law is treated as if the forfeiture never occurred.
Since MFV’s charter was reinstated in February 2004, MFV has
remained in good standing under Maryland law and has filed
39
Since its formation in 2001, MFV did not hold any personal
property within the State of Maryland.
- 44 -
personal property returns required by the State of Maryland.
OPINION
The issues remaining for decision are whether any of the
assets owned by MFV are includible in decedent’s gross estate
under section 2036(a), 2038(a)(1), or 2035(a).
Respondent does not address the burden of proof in this
case.40 According to decedent’s estate,
Generally, for issues or theories put forth by Respon-
dent in the notice of deficiency, the taxpayer bears
the burden of proof, and for Respondent’s issues or
theories not included in the notice of deficiency,
Respondent bears the burden of proof. * * * Because
Respondent did not raise IRC sections 2038 and 2035 in
its notice of deficiency in this case, Respondent bears
the burden with respect to its theories under those
sections; however, in any case the evidence will not
support a decision in Respondent’s favor.
Neither party addresses section 7491(a). We conclude that
resolution of the issues presented under sections 2036(a),
2038(a)(1), and 2035(a) does not depend on who has the burden of
proof.
40
With respect to sec. 2036(a), respondent asserts on brief:
The burden of disproving the existence of an
agreement regarding retained economic enjoyment of the
transferred property rests on the estate, and this
burden has been characterized as particularly onerous
in intrafamily situations. * * * [Citations omitted.]
- 45 -
Section 2036(a)
In order to resolve the parties’ dispute under section
2036(a),41 we must consider the following factual issues (1) with
respect to Ms. Mirowski’s transfers to MFV and (2) with respect
to her respective gifts of 16-percent interests in MFV to her
daughters’ trusts:
(1) Was there a transfer of property by Ms. Mirowski?
(2) If there was a transfer of property by Ms. Mirowski, was
such a transfer not a bona fide sale for an adequate and full
consideration in money or money’s worth?
(3) If there was a transfer of property by Ms. Mirowski that
was not a bona fide sale for an adequate and full consideration
in money or money’s worth, (a) did Ms. Mirowski retain the
41
Sec. 2036(a) provides:
SEC. 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 ascer-
tainable 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.
- 46 -
possession or the enjoyment of, or the right to the income from,
the property transferred within the meaning of section 2036(a)(1)
or (b) did she retain, either alone or in conjunction with any
person, the right to designate the persons who shall possess or
enjoy the property transferred or the income therefrom within the
meaning of section 2036(a)(2)?
Ms. Mirowski’s Transfers to MFV
Transfer of Property by Ms. Mirowski
Decedent’s estate acknowledges that Ms. Mirowski made
transfers of property to MFV on September 1, 5, 6, and 7, 2001.
In light of that acknowledgment by decedent’s estate, we find
that Ms. Mirowski’s transfers to MFV were transfers of property
under section 2036(a).
Transfer Other Than a Bona Fide Sale for an Adequate
and Full Consideration in Money or Money’s Worth
Section 2036(a) excepts from its application any transfer of
property otherwise subject to that section which is a “bona fide
sale for an adequate and full consideration in money or money’s
worth”. The foregoing exception is limited to a transfer of
property where the transferor “has received benefit in full
consideration in a genuine arm’s length transaction”. Estate of
Goetchius v. Commissioner, 17 T.C. 495, 503 (1951). More re-
cently, we held that the exception in section 2036(a) for a bona
fide sale for an adequate and full consideration in money or
money’s worth is satisfied in the context of a family limited
- 47 -
partnership
where the record establishes the existence of a legiti-
mate and significant nontax reason for creating the
family limited partnership, and the transferors re-
ceived partnership interests proportionate to the value
of the property transferred. See, e.g., Estate of
Stone v. Commissioner, * * * [T.C. Memo. 2003-309].
The objective evidence must indicate that the nontax
reason was a significant factor that motivated the
partnership’s creation. A significant purpose must be
an actual motivation, not a theoretical justification.
[Certain citations omitted.]
Estate of Bongard v. Commissioner, 124 T.C. 95, 118 (2005).
It is the position of decedent’s estate that Ms. Mirowski’s
transfers to MFV were bona fide sales for adequate and full
consideration in money or money’s worth under section 2036(a).
In support of that position, decedent’s estate contends that Ms.
Mirowski had legitimate and substantial nontax purposes for
forming, and transferring assets to, MFV, that Ms. Mirowski
received an interest in MFV proportionate to the value of the
assets that she transferred to it, that Ms. Mirowski’s capital
account was properly credited with those assets, and that, in the
event of a liquidation and dissolution of MFV, Ms. Mirowski had
the right to a distribution of property from MFV in accordance
with her capital account.
Respondent counters that the exception under section 2036(a)
for a bona fide sale for an adequate and full consideration in
money or money’s worth does not apply to Ms. Mirowski’s transfers
to MFV. In support of that position, respondent contends that
- 48 -
there was no legitimate, significant nontax reason for Ms.
Mirowski’s forming, and transferring assets to, MFV. In advanc-
ing that contention, respondent asks the Court to disregard the
respective testimonies of Ginat Mirowski and Ariella Rosengard,
two of decedent’s three daughters and the personal representa-
tives of decedent’s estate, regarding the nontax reasons Ms.
Mirowski decided to form and fund MFV. According to respondent,
the relationship of those witnesses to decedent and to decedent’s
estate colored their respective testimonies.42 As the trier of
42
In support of respondent’s argument that the Court should
disregard the respective testimonies of Ginat Mirowski and
Ariella Rosengard regarding the nontax reasons Ms. Mirowski
formed and funded MFV, respondent also maintains (1) that those
reasons “are unsupported by any contemporaneous corroborating
evidence” and (2) that the “only contemporaneous” evidence in the
record regarding the reasons Ms. Mirowski formed and funded MFV
is Mr. Silver’s August 22, 2001 letter to Ms. Mirowski, which
contradicts the respective testimonies of Ginat Mirowski and
Ariella Rosengard and supports respondent’s position that Ms.
Mirowski did so for estate tax reasons.
With respect to respondent’s assertion that there is no
“contemporaneous corroborating evidence” supporting the nontax
reasons for forming and funding MFV about which Ginat Mirowski
and Ariella Rosengard testified, as discussed below, we found
Ginat Mirowski and Ariella Rosengard to be completely candid,
sincere, and credible and accorded controlling weight to their
respective testimonies.
With respect to respondent’s assertion that the “only
contemporaneous” evidence in the record regarding the reasons Ms.
Mirowski formed and funded MFV is Mr. Silver’s August 22, 2001
letter to Ms. Mirowski, which contradicts the respective testimo-
nies of Ginat Mirowski and Ariella Rosengard and supports respon-
dent’s position that Ms. Mirowski did so for estate tax reasons,
respondent quotes the following sentence from Mr. Silver’s August
22, 2001 letter: “‘We are beginning the process of implementing
(continued...)
- 49 -
fact, we disagree.
We evaluated the respective testimonies of Ginat Mirowski
and Ariella Rosengard by observing each of those witnesses’
candor, sincerity, and demeanor. We also evaluated the reason-
ableness of the respective testimonies of those witnesses. We
found Ginat Mirowski and Ariella Rosengard to be completely
candid, sincere, and credible and their respective testimonies to
be reasonable. We accorded controlling weight to the respective
testimonies of Ginat Mirowski and Ariella Rosengard, which we
concluded was appropriate on the record before us. We relied on
those testimonies in making our findings of fact, including our
findings that Ms. Mirowski had the following legitimate and
significant nontax reasons for forming, and transferring certain
42
(...continued)
the Estate Plan which I recently discussed with you’ (emphasis
added).” What respondent ignores is that Mr. Silver’s August 22,
2001 letter enclosing final articles of organization and a final
operating agreement for MFV describes the matters discussed in
that letter as “Business, Financial & Estate Planning Matters”.
Respondent also ignores that Mr. Silver’s August 31, 2000 letter
to Ms. Mirowski enclosing draft articles of organization and a
draft operating agreement for MFV, which were virtually identical
to the final versions of those documents, states that those
drafts were undertaken “in connection with financial and tax
planning on behalf of” Ms. Mirowski and her family. Decedent’s
estate does not deny, and we have found on the record before us,
that Ms. Mirowski understood that certain tax benefits could
result from forming MFV. However, decedent’s estate maintains,
and we have found on that record, that potential tax benefits
were not the most significant factor in her decision to do so.
- 50 -
assets to, MFV:43 (1) Joint management of the family’s assets by
her daughters and eventually her grandchildren;44 (2) maintenance
of the bulk of the family’s assets in a single pool of assets in
order to allow for investment opportunities that would not be
43
We also found on the basis of the respective testimonies
of Ginat Mirowski and Ariella Rosengard that another legitimate
nontax reason Ms. Mirowski formed and funded MFV was that she
wanted to provide protection from potential creditors for the
interests in the family’s assets that she intended to provide to
her daughters and her grandchildren in addition to the creditor
protection provided by her daughters’ trusts that, as so-called
spendthrift trusts, were penetrable by creditors for purposes of
alimony or child support. See Zouck v. Zouck, 104 A.2d 573, 575,
578-580 (Md. 1954); Safe Deposit & Trust Co. v. Robertson, 65
A.2d 292 (Md. 1949). We found that Ms. Mirowski’s desire for
additional creditor protection was not a significant reason in
her decision to form and fund MFV.
44
On the record before us, we find that Ms. Mirowski’s
significant and legitimate nontax purpose in forming and funding
MFV of ensuring joint management of the family’s assets by her
daughters and eventually her grandchildren, standing alone, is
sufficient to satisfy the requirement that, in order to qualify
for the exception in sec. 2036(a) for a bona fide sale for an
adequate and full consideration in money or money’s worth, there
must be a legitimate and significant nontax reason for creating
the entity in question. Ms. Mirowski’s nontax reason in forming
and funding MFV of ensuring joint management of the family’s
assets by her daughters and eventually her grandchildren was
rooted in Ms. Mirowski’s formative years in Lyon where she and
her family worked together in the family business. Ms. Mirowski
valued the family cohesiveness that joint management of a family
business can foster. Although Ms. Mirowski was aware that her
daughter Ariella Rosengard would probably move to England with
her husband and children, Ms. Mirowski wanted her daughters, and
eventually her grandchildren, to work together, remain closely
knit, and be jointly involved in managing (1) the investments
derived from the royalties received from Dr. Mirowski’s invention
of the ICD and (2) the business matters relating to the ICD
patents and the ICD patents license agreement, including the
litigation arising with respect to those patents and that license
agreement. Her daughters have done so.
- 51 -
available if Ms. Mirowski were to make a separate gift of a
portion of her assets to each of her daughters or to each of her
daughters’ trusts; and (3) providing for each of her daughters
and eventually each of her grandchildren on an equal basis.45
In support of respondent’s position that the exception under
section 2036(a) for a bona fide sale for an adequate and full
consideration in money or money’s worth does not apply to Ms.
Mirowski’s transfers to MFV, respondent advances certain other
contentions, including the following: (1) Ms. Mirowski failed to
retain sufficient assets outside of MFV for her anticipated
financial obligations (respondent’s contention (1)); (2) MFV
lacked any valid functioning business operation (respondent’s
contention (2)); (3) Ms. Mirowski delayed forming and funding MFV
until shortly before her death and her health had begun to fail
(respondent’s contention (3)); (4) Ms. Mirowski sat on both sides
of Ms. Mirowski’s transfers to MFV (respondent’s contention (4));
45
Ms. Mirowski’s formation of MFV and her lifetime gift of
an equal interest in it to each of her daughters’ trusts enabled
Ms. Mirowski to ensure that her daughters and eventually her
grandchildren would continue to hold respective interests of
equal worth in the bulk of the family’s assets.
Respondent asserts that under Estate of Bongard v. Commis-
sioner, 124 T.C. 95 (2005), facilitation of lifetime giving may
never qualify as a significant nontax reason for forming and
funding a family LLC or a family partnership. We reject respon-
dent’s assertion. In Estate of Bongard, we did not conclude that
an intention to facilitate lifetime giving may never be a signif-
icant nontax factor. Rather, we found on the record presented
there that such an intention was not a significant nontax reason
for forming the partnership involved in that case. Id. at 127.
- 52 -
and (5) after Ms. Mirowski died, MFV made distributions totaling
$36,415,810 to decedent’s estate that that estate used to pay
Federal and State transfer taxes, legal fees, and other estate
obligations (respondent’s contention (5)).46 According to re-
spondent, certain caselaw47 supports respondent’s view that the
presence of the foregoing types of factors necessarily estab-
lishes in the instant case the absence of a bona fide sale for an
adequate and full consideration in money or money’s worth under
section 2036(a).
With respect to respondent’s contentions (1), (2), and (3),
those contentions are not supported by the record in this case
and/or ignore material facts that we have found on the basis of
that record. We reject those contentions.
With respect to respondent’s contention (1), we have found
that the only anticipated significant financial obligation of Ms.
46
Respondent also points out that MFV’s Form 1065 for its
taxable year 2002 erroneously reported that the distributions
that MFV made during that year were charged against its respec-
tive members’ capital accounts on virtually a pro rata basis.
The record does not disclose why that form contained that error.
In any event, we do not find that error to be a material factor
in our resolving the issues presented.
47
The caselaw on which respondent relies includes Estate of
Korby v. Commissioner, 471 F.3d 848 (8th Cir. 2006), affg. T.C.
Memo. 2005-103, Estate of Thompson v. Commissioner, 382 F.3d 367
(3d Cir. 2004), affg. T.C. Memo. 2002-246, Estate of Rosen v.
Commissioner, T.C. Memo. 2006-115, Estate of Strangi v. Commis-
sioner, T.C. Memo. 2003-145, affd. on one ground only 417 F.3d
468 (5th Cir. 2005), Estate of Harper v. Commissioner, T.C. Memo.
2002-121, and Estate of Harrison v. Commissioner, T.C. Memo.
1987-8.
- 53 -
Mirowski when she formed and funded MFV was the substantial gift
tax for which she would be liable with respect to her contem-
plated respective gifts of 16-percent interests in MFV to her
daughters’ trusts. We have also found that at no time before Ms.
Mirowski’s death did the members of MFV have any express or
unwritten agreement or understanding to distribute assets of MFV
in order to pay that gift tax liability. In order to pay the
anticipated gift tax liability with respect to her contemplated
respective gifts of 16-percent interests in MFV to her daughters’
trusts, Ms. Mirowski could have (1) used a portion of the over
$7.5 million of personal assets that she retained and did not
transfer to MFV, including cash and cash equivalents of over $3.3
million, (2) used a portion or all of the distributions that she
expected to receive as a 52-percent interest holder in MFV of the
millions of dollars of royalty payments under the ICD patents
license agreement that she expected MFV to receive, and
(3) borrowed against (a) the personal assets that she retained
and did not transfer to MFV and (b) her 52-percent interest in
MFV,48 see Md. Code Ann., Corps. & Assns. sec. 4A-602 (West
48
Under applicable Maryland law, the interest of a member in
an LLC constitutes personal property, Md. Code Ann., Corps. &
Assns. sec. 4A-602 (West 2008), and the term “security interest”
is defined as an interest in personal property that secures
payment or performance of an obligation, Md. Code Ann., Com. Law
sec. 1-201(37) (West 2008). Thus, under applicable Maryland law,
a member of an LLC may grant an interest in that member’s inter-
est in the LLC in order to secure payment of a loan.
- 54 -
2008); Md. Code Ann., Com. Law sec. 1-201(37) (West 2008).
With respect to respondent’s contention (1), we have also
found that at no time before September 10, 2001, when Ms.
Mirowski’s condition unexpectedly deteriorated significantly, did
Ms. Mirowski, her daughters, or her physicians expect her to die
and that consequently at no time did Ms. Mirowski and her daugh-
ters discuss or anticipate the estate tax and similar transfer
taxes and the other estate obligations that would arise only as a
result of Ms. Mirowski’s death.49
With respect to respondent’s contention (2), we have found
that at all relevant times, including after Ms. Mirowski’s death,
MFV has been a valid functioning investment operation and has
been managing the business matters relating to the ICD patents
and the ICD patents license agreement, including related litiga-
49
The estate tax that would arise only as a result of Ms.
Mirowski’s death would not have been the obligation of Ms.
Mirowski. The estate tax is imposed on “the transfer of the
taxable estate” of a person who dies, sec. 2001(a), and the
liability for the payment of the estate tax is imposed on the
executor (or other personal representative) of the estate, sec.
2002. Moreover, unless the estate tax is paid in full or becomes
unenforceable by reason of the lapse of time, the estate tax
generally
shall be a lien upon the gross estate of the decedent
for 10 years from the date of death, except that such
part of the gross estate as is used for the payment of
charges against the estate and expenses of its adminis-
tration, allowed by any court having jurisdiction
thereof, shall be divested of such lien.
Sec. 6324(a)(1).
- 55 -
tion. Moreover, we reject the suggestion in respondent’s conten-
tion (2) that the activities of MFV had to rise to the level of a
“business” under the Federal income tax laws in order for the
exception under section 2036(a) for a bona fide sale for an
adequate and full consideration in money or money’s worth to
apply.50
With respect to respondent’s contention (3), as discussed
above with respect to respondent’s contention (1), we have found
that at no time before September 10, 2001, when Ms. Mirowski’s
condition unexpectedly deteriorated significantly, did Ms.
Mirowski, her daughters, or her physicians expect her to die and
that consequently at no time did Ms. Mirowski and her daughters
discuss or anticipate the estate tax and similar transfer taxes
and the other estate obligations that would arise only as a
result of Ms. Mirowski’s death. We have also found that Ms.
Mirowski was being treated since January 2001 both at home and at
Johns Hopkins Hospital for a diabetic foot ulcer and that she was
admitted to Johns Hopkins Hospital on August 31, 2001, for
further treatment of that ulcer. In addition, we have found that
at all times throughout the course of her treatment from January
2001 until September 10, 2001, when Ms. Mirowski’s condition
unexpectedly deteriorated significantly, the expectations of the
50
See, e.g., Estate of Stone v. Commissioner, T.C. Memo.
2003-309.
- 56 -
members of the medical staff at that hospital who were responsi-
ble for treating Ms. Mirowski and the expectations of Ms.
Mirowski and her daughters were that the treatment of her foot
ulcer would allow her to recover.
With respect to respondent’s contention (4), that contention
reads out of section 2036(a) in the case of any single-member LLC
the exception for a bona fide sale for an adequate and full
consideration in money or money’s worth that Congress expressly
prescribed when it enacted that statute. Respondent’s contention
(4) also ignores that Ms. Mirowski fully funded MFV; her daugh-
ters’ trusts did not contribute any assets to that company.
Instead, each of those trusts was the recipient of a gift from
Ms. Mirowski consisting of a 16-percent interest in MFV. We
reject respondent’s contention (4).
With respect to respondent’s contention (5), that contention
ignores our findings that at no time before September 10, 2001,
when Ms. Mirowski’s condition unexpectedly deteriorated signifi-
cantly, did Ms. Mirowski, her family, or her physicians expect
her to die and that consequently at no time did Ms. Mirowski and
her daughters discuss or anticipate the estate tax and similar
transfer taxes and the other estate obligations that would arise
only as a result of Ms. Mirowski’s death.51 Moreover, we reject
the suggestion of respondent that respondent’s contention (5) is
51
See supra note 49.
- 57 -
determinative in the instant case of whether Ms. Mirowski’s
transfers to MFV were bona fide sales for adequate and full
consideration in money or money’s worth under section 2036(a).
With respect to respondent’s reliance on certain caselaw to
support respondent’s view that the existence of the various
alleged contentions advanced by respondent necessarily estab-
lishes in the instant case the absence of a bona fide sale for an
adequate and full consideration in money or money’s worth under
section 2036(a), we find the cases on which respondent relies to
be factually distinguishable from the instant case and respon-
dent’s reliance on them to be misplaced.52
In support of respondent’s position that the exception under
section 2036(a) for a bona fide sale for an adequate and full
consideration in money or money’s worth does not apply to Ms.
Mirowski’s transfers to MFV, respondent also contends that,
because Ms. Mirowski did not at any time contemplate forming and
funding MFV without making respective gifts of 16-percent inter-
ests in MFV to her daughters’ trusts, Ms. Mirowski, “in sub-
stance, * * * received only a 52% MFV interest” in exchange for
Ms. Mirowski’s transfers to MFV of 100 percent of its assets. As
a result, according to respondent, Ms. Mirowski “did not receive
52
For example, the Court did not find in any of the cases on
which respondent relies that there was a significant and legiti-
mate nontax reason for the transfer involved to which the Court
held sec. 2036(a) applied.
- 58 -
adequate and full consideration in the form of a proportionate
MFV interest.” On the record before us, we reject respondent’s
contention. Ms. Mirowski made two separate, albeit integrally
related, transfers of property that are at issue in this case,
namely, Ms. Mirowski’s transfers to MFV of certain assets on
September 1, 5, 6, and 7, 2001, and Ms. Mirowski’s respective
gifts of 16-percent interests in MFV to her daughters’ trusts on
September 7, 2001. In return for Ms. Mirowski’s transfers to
MFV, Ms. Mirowski received and held 100 percent of the interests
in MFV. In return for Ms. Mirowski’s respective gifts to her
daughters’ trusts, Ms. Mirowski received and held nothing.53
On the record before us, we find that Ms. Mirowski received
an interest in MFV proportionate to the value of the assets that
she transferred to it on September 1, 5, 6, and 7, 2001. On that
record, we also find that Ms. Mirowski’s capital account was
properly credited with the assets that she transferred to it on
September 1, 5, 6, and 7, 2001, and that, in the event of a
liquidation and dissolution of MFV, Ms. Mirowski had the right to
a distribution of property from MFV in accordance with her
capital account.
53
Decedent’s personal representatives timely filed Form 709
for 2001 on behalf of decedent, in which those representatives
reported Ms. Mirowski’s gifts. The parties have resolved their
dispute relating to the total value of those gifts.
- 59 -
Based upon our examination of the entire record before us,
we find that Ms. Mirowski’s transfers to MFV were bona fide sales
for adequate and full consideration in money or money’s worth
under section 2036(a). Based upon that examination, we further
find that the exception under section 2036(a) for a bona fide
sale for an adequate and full consideration in money or money’s
worth applies to Ms. Mirowski’s transfers to MFV.
Possession or Enjoyment of, or Right to Income From,
the Property Transferred or Right To Designate the
Persons Who Shall Possess or Enjoy the Property
Transferred or the Income From Such Property
We have found that Ms. Mirowski’s transfers to MFV were bona
fide sales for adequate and full consideration in money or
money’s worth under section 2036(a). Consequently, we need not,
and we shall not, address with respect to those transfers the
factual issue presented under section 2036(a)(1) as to whether
Ms. Mirowski retained for life the possession or the enjoyment
of, or the right to the income from, the property transferred or
the factual issue presented under section 2036(a)(2) as to
whether Ms. Mirowski retained for life the right, either alone or
in conjunction with any person, to designate who shall possess or
enjoy the property transferred or the income therefrom.
Based upon our examination of the entire record before us,
we hold that section 2036(a) does not apply to Ms. Mirowski’s
transfers to MFV.
- 60 -
Ms. Mirowski’s Gifts
Transfer of Property by Ms. Mirowski
Decedent’s estate acknowledges that Ms. Mirowski’s respec-
tive gifts of 16-percent interests in MFV to her daughters’
trusts on September 7, 2001, were transfers of property. In
light of that acknowledgment by decedent’s estate, we find that
Ms. Mirowski’s gifts were transfers of property under section
2036(a).
Transfer Other Than a Bona Fide Sale for an Adequate
and Full Consideration in Money or Money’s Worth
Decedent’s estate also acknowledges that Ms. Mirowski’s
gifts were not bona fide sales for adequate and full consider-
ation in money and money’s worth under section 2036(a). In light
of that acknowledgment by decedent’s estate, we find that Ms.
Mirowski’s gifts were not bona fide sales for adequate and full
consideration in money or money’s worth under section 2036(a).
Possession or Enjoyment of, or Right to Income From,
the Property Transferred or Right To Designate the
Persons Who Shall Possess or Enjoy the Property
Transferred or the Income From Such Property
The parties agree that an interest or a right described in
section 2036(a)(1) and (2) is treated as having been retained if
at the time of the transfer of property there was an express or
implied agreement or understanding that the interest or right
would later be conferred. See sec. 20.2036-1(a), Estate Tax
Regs. They disagree over whether there was such an express or
- 61 -
implied agreement or understanding at the time Ms. Mirowski made
respective gifts of 16-percent interests in MFV to her daughters’
trusts.
Possession or Enjoyment of, or Right to
Income From, the Property Transferred
It is the position of decedent’s estate that
there was no understanding, express or implied, that
decedent retained [sic] any interest in the 16% MFV
interests that had been transferred to the [respective]
Trusts for the benefit of decedent’s daughters and
their issue. * * * Decedent completed those gifts of
MFV interests on September 7, 2001, and thereafter had
no right to receive, and did not receive, any benefit
whatsoever from such interests. * * *
Moreover, this case does not involve the kinds of
facts that have led courts to find implied agreements
that a decedent has retained an interest in the
decedent-transferred property. * * *
Respondent counters that at the time of Ms. Mirowski’s gifts
and at the time of her death an agreement, both express and
implied, existed that Ms. Mirowski retain the possession or the
enjoyment of, or the right to the income from, the respective 16-
percent interests in MFV that she gave to her daughters’
trusts.54
In support of respondent’s contention that at the time of
Ms. Mirowski’s gifts and at the time of her death there was an
54
As discussed below, respondent advances the same conten-
tion with respect to the respective 16-percent interests in MFV
that Ms. Mirowski gave to her daughters’ trusts in support of
respondent’s argument under sec. 2036(a)(2) that Ms. Mirowski
“retained the right to designate the persons who could possess or
enjoy the assets or the income therefrom during her lifetime.”
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express agreement that Ms. Mirowski retain an interest or a right
described in section 2036(a)(1) with respect to the respective
16-percent interests in MFV that she gave to her daughters’
trusts, respondent asserts:
Decedent was designated MFV’s General Manager at
the time of its formation, and continued to be its
General Manager until the time of her death. * * *
[MFV’s operating agreement section] 5.1.1. * * * As
General Manager, decedent had sole and exclusive au-
thority to manage MFV’s affairs. * * * [MFV’s operating
agreement section] 5.1.2. * * * Her authority included
the authority to decide the timing and amounts of
distributions from MFV. * * * [MFV’s operating agree-
ment section] 4.5.1. * * * Decedent could not be re-
moved and replaced as General Manager because, even
after the gifts to the daughters’ trusts, she still
held a majority (52%) interest. * * * [MFV’s operating
agreement section] 5.1.5. * * * Thus, when decedent
formed and funded MFV and at her death, she expressly
retained, [sic] the right to possession or enjoyment
of, or the right to the income from, the transferred
assets * * *.
The linchpin in respondent’s argument that at the time of
Ms. Mirowski’s gifts and at the time of her death Ms. Mirowski
expressly retained the right to the possession or the enjoyment
of, or the right to the income from, the respective 16-percent
interests in MFV that she gave to her daughters’ trusts is that
under section 4.5.1 of MFV’s operating agreement “Her authority
[as MFV’s general manager] included the authority to decide the
timing and amounts of distributions from MFV.” Before addressing
respondent’s contention regarding section 4.5.1 of MFV’s operat-
ing agreement, we shall describe the authority that Ms. Mirowski
had as MFV’s general manager under that agreement.
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Pursuant to section 5.1.1 of MFV’s operating agreement, MFV
was to be managed by a general manager, and the initial general
manager was to be Ms. Mirowski. Section 5.1.2 of MFV’s operating
agreement provided:
The General Manager shall have full, exclusive, and
complete discretion, power, and authority, subject in
all cases to the other provisions of this Agreement and
the requirements of applicable law, to manage, control,
administer, and operate the business and affairs of the
Company for the purposes herein stated, and to make all
decisions affecting such business and affairs * * *[55]
On the record before us, we find that, pursuant to section
5.1.2 of MFV’s operating agreement, Ms. Mirowski’s discretion,
power, and authority as MFV’s general manager were subject to the
other provisions of MFV’s operating agreement, including section
4.1 (regarding the distribution of cash flow and the allocation
of profit or loss from transactions other than capital transac-
tions); section 4.2 (regarding the distribution of capital
proceeds and the allocation of profit or loss from capital
transactions); section 4.4 (regarding the distribution of MFV’s
assets upon the liquidation and dissolution of MFV); section
55
MFV’s operating agreement expressly listed in section
5.1.2 various powers, including the following, that were among
the powers of MFV’s general manager, subject in all cases to the
other provisions of that operating agreement and the requirements
of applicable law: Acquire by purchase, lease, or otherwise any
real or personal property; sell, dispose of, trade, or exchange
MFV’s assets in the ordinary course of MFV’s business; borrow
money for and on behalf of MFV; enter into any kind of activity
necessary to, in connection with, or incidental to the accom-
plishment of the purposes of MFV; and invest and reinvest MFV
reserves in short-term instruments or money market funds.
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5.1.3 (regarding extraordinary transactions); section 7.1 (re-
garding events resulting in the dissolution of MFV); and section
7.2 (regarding the procedure for winding up and dissolving MFV).
On that record, we further find that, pursuant to section 5.1.2
of MFV’s operating agreement, Ms. Mirowski’s discretion, power,
and authority as MFV’s general manager were subject to the
requirements of applicable Maryland law, including the Maryland
law that imposed on her fiduciary duties to the other members of
MFV, namely, her daughters’ trusts56 to which she made respective
gifts of 16-percent interests in MFV.57 See Robinson v. Geo
Licensing Co., L.L.C., 173 F. Supp. 2d 419, 427 (D. Md. 2001);
Froelich v. Erikson, 96 F. Supp. 2d 507, 526 (D. Md. 2000), affd.
per curiam sub nom. Froelich v. Senior Campus Living, L.L.C., 5
Fed. Appx. 287 (4th Cir. 2001).
On the record before us, we find that the discretion, power,
and authority that MFV’s operating agreement granted to Ms.
Mirowski as MFV’s general manager do not require us to find that
at the time of Ms. Mirowski’s gifts and at the time of her death
there was an express agreement that Ms. Mirowski retain an
56
Ms. Mirowski held no powers over her daughters’ trusts.
Ms. Mirowski’s daughters as the trustees of each of the daugh-
ters’ trusts were subject to the fiduciary duties imposed on them
by Maryland law. See, e.g., Madden v. Mercantile-Safe Deposit
& Trust Co., 339 A.2d 340, 348 (Md. Ct. Spec. App. 1975).
57
We find nothing in the record that establishes that Ms.
Mirowski intended to, or did, violate her fiduciary duties under
Maryland law.
- 65 -
interest or a right described in section 2036(a)(1) (or section
2036(a)(2)) with respect to the respective 16-percent interests
in MFV that she gave to her daughters’ trusts.
We turn now to the linchpin in respondent’s contention that
at the time of Ms. Mirowski’s gifts and at the time of her death
there was an express agreement in section 4.5.1 of MFV’s operat-
ing agreement that Ms. Mirowski retain an interest or a right
described in section 2036(a)(1) with respect to the respective
16-percent interests in MFV that she gave to her daughters’
trusts. According to respondent, under section 4.5.1 of MFV’s
operating agreement, as MFV’s general manager, Ms. Mirowski’s
“authority included the authority to decide the timing and
amounts of distributions from MFV.”58 That section of MFV’s
operating agreement provides: “Except as otherwise provided in
this Agreement, the timing and amount of all distributions shall
be determined by the Members holding a majority of the Percent-
ages then outstanding.”
Contrary to respondent’s contention, section 4.5.1 of MFV’s
operating agreement did not give Ms. Mirowski as MFV’s general
manager the authority to determine the timing and the amount of
all distributions from MFV. Any authority that Ms. Mirowski had
under that section was in her capacity as the member of MFV who
owned a majority of the outstanding percentage interests in MFV
58
See supra note 54.
- 66 -
(majority percentage member of MFV). Moreover, any authority
that section 4.5.1 of MFV’s operating agreement gave Ms. Mirowski
as the majority percentage member of MFV did not include the
authority to determine the timing and the amount of distributions
from MFV where that agreement “otherwise provided”. That agree-
ment otherwise provided in, inter alia, section 4.1 and 4.2.
Pursuant to section 4.1 of MFV’s operating agreement, Ms.
Mirowski had no authority as the majority percentage member of
MFV (or as MFV’s general manager) to determine for each taxable
year the distribution of MFV’s cash flow (i.e., cash funds
derived in the ordinary course of MFV’s operations) or the
allocation of MFV’s profit or loss from the ordinary course of
MFV’s operations. With respect to the distribution of MFV’s cash
flow, section 4.1.2 of MFV’s operating agreement provided that
“Cash Flow for each taxable year * * * shall be distributed to
the Interest Holders * * * no later than seventy-five (75) days
after the end of the taxable year.”59 Section 4.1.2 of MFV’s
operating agreement is unequivocal in mandating the distribution
of MFV’s cash flow no later than 75 days after the end of a
taxable year.
59
Section 4.1 of MFV’s operating agreement required for each
taxable year the allocation of profit or loss from the ordinary
course of MFV’s operations and the distribution of MFV’s cash
flow to MFV’s interest holders in proportion to their respective
percentage interests in MFV.
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Pursuant to section 4.2 of MFV’s operating agreement, Ms.
Mirowski had no authority as the majority percentage member of
MFV (or as MFV’s general manager) to determine the distribution
of MFV’s capital proceeds (i.e., gross receipts from a capital
transaction, namely, a transaction not in the ordinary course of
MFV’s operations) or the allocation of profit or loss from any
capital transaction.60 With respect to the distribution of MFV’s
capital proceeds, section 4.2.3 of MFV’s operating agreement
provided that “Capital Proceeds shall be distributed and applied
by the Company” as specified in that section.61 Section 4.2.3 of
MFV’s operating agreement is unequivocal in mandating the distri-
bution (and application) of MFV’s capital proceeds as specified
in that section.
In an attempt to qualify the unequivocal words of section
4.2.3 of MFV’s operating agreement mandating the distribution of
MFV’s capital proceeds, respondent attempts to inflate the
60
Pursuant to section 5.1.3.1 and 5.1.3.2 of MFV’s operating
agreement, Ms. Mirowski did not have the authority as MFV’s
general manager (or as the majority percentage member of MFV) to
undertake, inter alia, a capital transaction, the only type of
transaction under that operating agreement giving rise to capital
proceeds, unless all of MFV’s members approved.
61
Section 4.2 of MFV’s operating agreement required the
allocation of profit or loss from any MFV capital transaction and
the distribution of MFV’s capital proceeds to MFV’s interest
holders in proportion to their respective capital accounts.
Respondent does not dispute that, in general, the respective
capital account balances of MFV’s interest holders matched those
interest holders’ respective percentage interests in MFV.
- 68 -
significance of the language “no later than seventy-five (75)
days after the end of the taxable year” appearing in section
4.1.2 of MFV’s operating agreement that mandates the distribution
of MFV’s cash flow. We reject respondent’s reliance on that
language to change the unequivocal words of section 4.2.3 of
MFV’s operating agreement mandating the distribution of MFV’s
capital proceeds.
Section 4.1.2 of MFV’s operating agreement governs the
distribution of MFV’s cash flow “for each taxable year” of MFV.
Thus, that section cannot be implemented until a taxable year of
MFV has ended. It is only after the end of a taxable year that
cash flow and profit or loss from the ordinary course of MFV’s
operations for the taxable year may be computed, allocated, and
distributed as required by section 4.1 of MFV’s operating agree-
ment. Section 4.1.2 of MFV’s operating agreement ensures that
there will be enough time after the end of each taxable year, but
no more than 75 days after the end of each such year, within
which to make the computations, allocations, and distributions
for each such taxable year required by section 4.1 of MFV’s
operating agreement. There was no reason to add similar language
to section 4.2 of MFV’s operating agreement. That is because the
term “capital proceeds” is defined in section I of MFV’s operat-
ing agreement as “the gross receipts received by the Company from
a Capital Transaction.” As soon as each capital transaction of
- 69 -
MFV is undertaken, section 4.2 of MFV’s operating agreement
requires the allocation of profit or loss and the distribution
and the application of capital proceeds from that capital trans-
action as specified in that section.
On the record before us, we find that section 4.5.1 of MFV’s
operating agreement did not give Ms. Mirowski as the majority
percentage member of MFV (or as MFV’s general manager) the
authority to determine the timing and the amount of distributions
of MFV’s cash flow and MFV’s capital proceeds.62 On that record,
62
In so finding, we have considered respondent’s contention
that Ms. Mirowski had “by implication” the power to determine the
respective amounts of MFV’s cash flow and MFV’s capital proceeds
to be distributed. According to respondent,
[MFV’s operating agreement] Section 4.2.3, which states
that the amount of capital proceeds to be distributed
is to be reduced by “any reserves which the General
Manager deems necessary for liabilities or obligations
of the Company . . . .”, gives decedent the power to
determine the amount of such reserves, and by implica-
tion, the amount of such distributions. [MFV’s operat-
ing agreement] Section 1 [defines] “Cash Flow” [and]
gives decedent a similar power “to pay or establish
reasonable reserves for future expenses, debt payments,
capital improvements or replacements . . .” and thereby
the amount of distributable cash flow. * * *
Ms. Mirowski’s authority as MFV’s general manager to estab-
lish reserves was limited to establishing reserves for MFV’s
liabilities and obligations and future expenses, debt payments,
capital improvements, and replacements. Moreover, Ms. Mirowski’s
authority as MFV’s general manager to establish the types of
reserves in question was subject to the fiduciary duties imposed
on her by Maryland law. See Robinson v. Geo Licensing Co.,
L.L.C., 173 F. Supp. 2d 419, 427 (D. Md. 2001); Froelich v.
Erikson, 96 F. Supp. 2d 507, 526 (D. Md. 2000), affd. per curiam
sub nom. Froelich v. Senior Campus Living, L.L.C., 5 Fed. Appx.
(continued...)
- 70 -
we further find that section 4.5.1 of MFV’s operating agreement
did not give Ms. Mirowski as the majority percentage member of
MFV (or as MFV’s general manager) the authority to determine the
timing and the amount of distributions upon the liquidation and
dissolution of MFV.63
On the record before us, we find that at the time of Ms.
Mirowski’s gifts and at the time of her death there was no
express agreement in MFV’s operating agreement (or elsewhere)
that Ms. Mirowski retain the possession or the enjoyment of, or
the right to the income from, the respective 16-percent interests
in MFV that she gave to her daughters’ trusts.
62
(...continued)
287 (4th Cir. 2001). We find nothing in the record that shows
that Ms. Mirowski intended to establish, or would have estab-
lished, the reserves in question in violation of those duties.
On the record before us, we conclude that Ms. Mirowski’s author-
ity as MFV’s general manager to establish reserves as specified
in MFV’s operating agreement did not give Ms. Mirowski an inter-
est or a right described in sec. 2036(a)(1) (or sec. 2036(a)(2)).
63
Section 4.4.1 of MFV’s operating agreement provides that
if MFV were to be liquidated, its assets
shall be distributed to the Interest Holders in accor-
dance with the balances in their respective Capital
Accounts, after taking into account the allocations of
Profit or Loss pursuant to Section 4.1 or 4.2, if any,
and distributions, if any, of cash or property, if any,
pursuant to Sections 4.1 and 4.2.3 [of MFV’s operating
agreement].
We conclude that section 4.5.1 of MFV’s operating agreement
merely served as a backstop to the other sections of MFV’s
operating agreement that controlled the timing and the amount of
distributions by MFV.
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In support of respondent’s contention that at the time of
Ms. Mirowski’s gifts and at the time of her death there was an
implied agreement that Ms. Mirowski retain an interest or a right
described in section 2036(a)(1) with respect to the respective
16-percent interests in MFV that she gave to her daughters’
trusts, respondent relies on essentially the same contentions on
which respondent relies in support of respondent’s argument that
Ms. Mirowski’s transfers to MFV were not bona fide sales for
adequate and full consideration in money or money’s worth under
section 2036(a). We have considered and rejected those conten-
tions. For the reasons stated above, we reject respondent’s
contentions here in determining whether at the time of Ms.
Mirowski’s gifts and at the time of her death there was an
implied agreement that she retain an interest or a right de-
scribed in section 2036(a)(1) with respect to the respective 16-
percent interests in MFV that she gave to her daughters’ trusts.
We shall, however, address again what respondent considers
to be of “particular significance” in our determining whether at
the time of Ms. Mirowski’s gifts and at the time of her death
there was an implied agreement that she retain an interest or a
right described in section 2036(a)(1) with respect to the respec-
tive 16-percent interests in MFV that she gave to her daughters’
trusts, namely, during 2002, MFV distributed $36,415,810 to
decedent’s estate which that estate used to pay Federal and State
- 72 -
transfer taxes, legal fees, and other estate obligations.64 As
discussed above, we have found that the only anticipated signifi-
cant financial obligation of Ms. Mirowski when she formed and
funded MFV and when she made the respective gifts to her daugh-
ters’ trusts was the substantial gift tax for which she would be
liable with respect to those gifts. We have also found that at
no time before Ms. Mirowski’s death did the members of MFV have
any express or unwritten agreement or understanding to distribute
assets of MFV in order to pay that gift tax liability. In order
to pay the anticipated gift tax liability with respect to her
contemplated respective gifts of 16-percent interests in MFV to
her daughters’ trusts, Ms. Mirowski could have (1) used a portion
of the over $7.5 million of personal assets that she retained and
did not transfer to MFV, including cash and cash equivalents of
over $3.3 million, (2) used a portion or all of the distributions
that she expected to receive as an interest holder in MFV of the
millions of dollars of royalty payments under the ICD patents
64
Included in the Federal and State transfer taxes was
$11,750,623 that decedent’s personal representatives paid in
April 2002 as the estimated gift tax liability with respect to
Ms. Mirowski’s respective gifts of 16-percent interests in MFV to
her daughters’ trusts. In July 2002, those representatives filed
on behalf of Ms. Mirowski the 2001 Form 709 that showed actual
gift tax liability for 2001 of $9,729,280, resulting in a credit
to decedent’s estate. Respondent determined a deficiency in Ms.
Mirowski’s gift tax for 2001 attributable to the value of each of
Ms. Mirowski’s gifts. The parties have resolved their dispute as
to the gift tax of Ms. Mirowski for 2001. See supra notes 1 and
36.
- 73 -
license agreement that she expected MFV to receive, and
(3) borrowed against (a) the personal assets that she retained
and did not transfer to MFV and (b) her 52-percent interest in
MFV,65 see Md. Code Ann., Corps. & Assns. sec. 4A-602 (West
2008); Md. Code Ann., Com. Law sec. 1-201(37) (West 2008).
In addition, as also discussed above, we have found that at
no time before September 10, 2001, when Ms. Mirowski’s condition
unexpectedly deteriorated significantly, did Ms. Mirowski, her
daughters, or her physicians expect her to die and that conse-
quently at no time did Ms. Mirowski and her daughters discuss or
anticipate the estate tax and similar transfer taxes and the
other estate obligations that would arise only as a result of Ms.
Mirowski’s death.66
In 2002, after Ms. Mirowski died, MFV distributed over $36
million to decedent’s estate in order for the estate to pay
Federal and State transfer taxes, legal fees, and other estate
obligations. At the time in 2002 when MFV made those distribu-
tions to decedent’s estate, MFV’s members (i.e., the daughters’
trusts),67 through their respective trustees (i.e., Ms.
65
See supra note 48.
66
As discussed supra note 49, the estate tax that would
arise only as a result of Ms. Mirowski’s death would not have
been the obligation of Ms. Mirowski.
67
The daughters’ trusts were the remaining members of MFV
after Ms. Mirowski’s death.
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Mirowski’s daughters), agreed and decided that MFV should not
make distributions to them.68 In making that decision, MFV’s
members had in mind that those members will own collectively 100
percent of MFV, in three equal shares, after decedent’s estate is
closed.
On the record before us, we conclude that the decision by
MFV’s members after Ms. Mirowski died to have MFV distribute
during 2002 over $36 million to decedent’s estate, which the
estate used to pay Federal and State transfer taxes, legal fees,
and other estate obligations, is not determinative in the instant
case of whether at the time of Ms. Mirowski’s gifts and at the
time of her death there was an implied agreement that Ms.
Mirowski retain an interest or a right described in section
2036(a)(1) with respect to the respective 16-percent interests in
MFV that she gave to her daughters’ trusts.
On the record before us, we find that at the time of Ms.
Mirowski’s gifts and at the time of her death there was no
implied agreement or understanding that Ms. Mirowski retain the
possession or the enjoyment of, or the right to the income from,
the respective 16-percent interests in MFV that she gave to her
daughters’ trusts.
68
In other words, MFV’s members (i.e., the daughters’
trusts) agreed and decided that during 2002 MFV should not make
pro rata distributions to all of the interest holders of MFV.
- 75 -
Based upon our examination of the entire record before us,
we find that at the time of Ms. Mirowski’s gifts and at the time
of her death Ms. Mirowski did not retain the possession or the
enjoyment of, or the right to the income from, the 16-percent
interests in MFV that she gave to her daughters’ trusts within
the meaning of section 2036(a)(1).
Right To Designate the Persons Who Shall
Possess or Enjoy the Property Transferred
or the Income From Such Property
It is the position of decedent’s estate that Ms. Mirowski
did not retain a right described in section 2036(a)(2) with
respect to the respective 16-percent interests in MFV that she
gave to her daughters’ trusts.
Respondent counters:
With the approval of the daughters (now the other
interest holders), decedent had the authority to
dispose of assets in other than the ordinary course of
business. [MFV’s operating agreement] Section 5.1.3.1.
As the holder of a majority of the MFV interests,
decedent alone held the power to determine the timing
of the distribution of the capital transaction
proceeds. [MFV’s operating agreement] Section 4.5.1.
Thus, after the transfer of the three 16 percent
interests, decedent held the right, in conjunction with
her daughters, to designate the person or persons who
shall possess or enjoy the proceeds of the transferred
property, within the meaning of section 2036(a)(2),
with the result that the assets transferred to MFV are
includible in the gross estate. * * *
Before addressing the linchpin in respondent’s argument
under section 2036(a)(2), we reject respondent’s contention that
Ms. Mirowski’s daughters were members of MFV after Ms. Mirowski’s
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gifts. After those gifts, the daughters’ trusts, and not Ms.
Mirowski’s daughters, were members of MFV.69
We turn now to the linchpin in respondent’s argument under
section 2036(a)(2), namely, under section 4.5.1 of MFV’s
operating agreement Ms. Mirowski “alone held the power to
determine the timing of the distribution of the capital
transaction proceeds.” We have considered and rejected that
contention when we addressed respondent’s argument under section
2036(a)(1) with respect to Ms. Mirowski’s gifts. For the reasons
stated above, we reject respondent’s contention here in
determining whether at the time of Ms. Mirowski’s gifts and at
the time of her death Ms. Mirowski retained a right described in
section 2036(a)(2) with respect to the respective 16-percent
interests in MFV that she gave to her daughters’ trusts.
Based upon our examination of the entire record before us,
we find that at the time of Ms. Mirowski’s gifts and at the time
of her death Ms. Mirowski did not retain, either alone or in
conjunction with any person, the right to designate the persons
who shall possess or enjoy the respective 16-percent interests in
MFV that she gave to her daughters’ trusts or the income from
such interests within the meaning of section 2036(a)(2).
Based upon our examination of the entire record before us,
we hold that section 2036(a) does not apply to Ms. Mirowski’s
69
See supra note 56.
- 77 -
respective gifts of 16-percent interests in MFV to her daughters’
trusts.
Section 2038(a)(1)
In order to resolve the parties’ dispute under section
2038(a)(1),70 we must consider the following factual issues
(1) with respect to Ms. Mirowski’s transfers to MFV and (2) with
respect to Ms. Mirowski’s gifts:
(1) Was there a transfer of property by Ms. Mirowski?
(2) If there was a transfer of property by Ms. Mirowski, was
such a transfer not a bona fide sale for an adequate and full
consideration in money or money’s worth?
70
Sec. 2038(a)(1) provides:
SEC. 2038. REVOCABLE TRANSFERS.
(a) In General.--The value of the gross estate
shall include the value of all property--
(1) Transfers after June 22, 1936.--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, where the enjoyment thereof
was subject at the date of his death to any change
through the exercise of a power (in whatever
capacity exercisable) by the decedent alone or by
the decedent in conjunction with any other person
(without regard to when or from what source the
decedent acquired such power), to alter, amend,
revoke, or terminate, or where any such power is
relinquished during the 3-year period ending on
the date of the decedent’s death.
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(3) If there was a transfer of property by Ms. Mirowski that
was not a bona fide sale for an adequate and full consideration
in money or money’s worth, (a) at the time of her death was the
enjoyment of the property transferred subject to any change
through the exercise of a power by Ms. Mirowski, alone or in
conjunction with any other person,71 to alter, amend, revoke, or
terminate within the meaning of section 2038(a)(1) or (b) did Ms.
Mirowski relinquish any such power during the three-year period
ending on the date of her death within the meaning of that
section?
Ms. Mirowski’s Transfers to MFV
Transfer of Property by Decedent
As discussed above, decedent’s estate acknowledges that Ms.
Mirowski made transfers of assets to MFV on September 1, 5, 6,
and 7, 2001. In light of that acknowledgment by decedent’s
estate, we find that Ms. Mirowski’s transfers to MFV were
transfers of property under section 2038(a)(1).
71
Sec. 2038(a)(1) does not apply
If the decedent’s power could be exercised only with
the consent of all parties having an interest (vested
or contingent) in the transferred property, and if the
power adds nothing to the rights of the parties under
local law * * *
Sec. 20.2038-1(a)(2), Estate Tax Regs.
- 79 -
Transfer Other Than a Bona Fide Sale for an Adequate
and Full Consideration in Money or Money’s Worth
Like section 2036(a), section 2038(a)(1) excepts from its
application any transfer of property otherwise subject to that
section which is a “bona fide sale for an adequate and full
consideration in money or money’s worth”. The respective
exceptions in sections 2036(a) and 2038(a)(1) have the same
meaning. Based upon our examination of the entire record before
us and for the reasons stated above with respect to our finding
that Ms. Mirowski’s transfers to MFV were bona fide sales for
adequate and full consideration in money or money’s worth under
section 2036(a), we find that Ms. Mirowski’s transfers to MFV
were bona fide sales for adequate and full consideration in money
or money’s worth under section 2038(a)(1). Based upon that
examination and for those reasons, we further find that the
exception under section 2038(a)(1) for a bona fide sale for an
adequate and full consideration in money or money’s worth applies
to Ms. Mirowski’s transfers to MFV.
Power To Alter, Amend, Revoke, or Terminate
the Enjoyment of the Property Transferred or
Relinquishment of Any Such Power During the
Three-Year Period Ending on the Date of Death
We have found that Ms. Mirowski’s transfers to MFV were bona
fide sales for adequate and full consideration in money or
money’s worth under section 2038(a)(1). Consequently, we need
not, and we shall not, address the factual issues presented under
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section 2038(a)(1) as to (1) whether at the time of Ms.
Mirowski’s death the enjoyment of the property transferred was
subject to any change through the exercise of a power by Ms.
Mirowski, alone or in conjunction with any other person, to
alter, amend, revoke, or terminate or (2) whether Ms. Mirowski
relinquished any such power during the three-year period ending
on the date of her death.
Based upon our examination of the entire record before us,
we hold that section 2038(a)(1) does not apply to Ms. Mirowski’s
transfers to MFV.
Ms. Mirowski’s Gifts
Transfer of Property by Ms. Mirowski
As discussed above, decedent’s estate acknowledges that Ms.
Mirowski’s respective gifts of 16-percent interests in MFV to her
daughters’ trusts on September 7, 2001, were transfers of
property. In light of that acknowledgment by decedent’s estate,
we find that Ms. Mirowski’s gifts were transfers of property
under section 2038(a)(1).
Transfer Other Than a Bona Fide Sale for an Adequate
and Full Consideration in Money or Money’s Worth
Decedent’s estate also acknowledges that Ms. Mirowski’s
gifts were not bona fide sales for adequate and full
consideration in money or money’s worth under section 2038(a)(1).
In light of that acknowledgment by decedent’s estate, we find
that Ms. Mirowski’s gifts were not bona fide sales for adequate
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and full consideration in money or money’s worth under section
2038(a)(1).
Power To Alter, Amend, Revoke, or Terminate
the Enjoyment of the Property Transferred or
Relinquishment of Any Such Power During the
Three-Year Period Ending on the Date of Death
Power To Alter, Amend, Revoke, or Terminate
the Enjoyment of the Property Transferred
It is the position of decedent’s estate that at no time was
the enjoyment of the respective 16-percent interests that Ms.
Mirowski gave to her daughters’ trusts subject to change through
the exercise of a power by Ms. Mirowski to alter, amend, revoke,
or terminate.
Respondent counters that after Ms. Mirowski’s respective
gifts of 16-percent interests in her daughters’ trusts,
With the approval of the other interest holders (the
daughters),[72] decedent had the authority to dispose of
assets in other than the ordinary course of business.
[MFV’s operating agreement] Section 5.1.3.1. As the
holder of a majority of the MFV interests, decedent
alone held the power to determine the timing of the
distribution of the capital transaction proceeds.
[MFV’s operating agreement] Section 4.5.1. Thus, after
the transfer of the three 16 percent interests,
decedent held the power, in conjunction with her
daughters, to affect the time or manner of enjoyment of
the transferred property within the meaning of section
2038(a)(1), with the result that despite the gifts, the
assets transferred to MFV are includible in the gross
estate. As decedent retained this power until her
death, there is no need to discuss the application of
the three-year rule * * * of section * * * 2038[(a)(1)]
* * *.
72
We reject here, as we did above, respondent’s contention
that after Ms. Mirowski’s gifts her daughters, and not her
daughters’ trusts, were members of MFV.
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In support of respondent’s argument under section
2038(a)(1), respondent relies on essentially the same contentions
on which respondent relies in support of respondent’s argument
under section 2036(a)(2). We considered and rejected those
contentions when we addressed respondent’s argument under section
2036(a)(2). For the reasons stated above, we reject respondent’s
contentions here in determining whether at the time of Ms.
Mirowski’s death Ms. Mirowski held the power to alter, amend,
revoke, or terminate the enjoyment of the respective 16-percent
interests in MFV that she gave to her daughters’ trusts.
Based upon our examination of the entire record before us,
we find that at no time, including at the time of Ms. Mirowski’s
death, was the enjoyment of the respective 16-percent interests
in MFV that Ms. Mirowski gave to her daughters’ trusts subject to
any change through the exercise of a power by her, alone or in
conjunction with any other person, to alter, amend, revoke, or
terminate within the meaning of section 2038(a)(1).
Relinquishment During the Three-Year
Period Ending on the Date of Death of a
Power To Alter, Amend, Revoke, or Terminate
the Enjoyment of the Property Transferred
We have found that at no time, including at the time of Ms.
Mirowski’s death, was the enjoyment of the respective 16-percent
interests in MFV that Ms. Mirowski gave to her daughters’ trusts
subject to any change through the exercise of a power by her,
alone or in conjunction with any other person, to alter, amend,
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revoke, or terminate within the meaning of section 2038(a)(1). A
fortiori, Ms. Mirowski could not have relinquished, and we find
on the record before us that she did not relinquish, any such
power during the three-year period ending on the date of her
death within the meaning of that section.
Based upon our examination of the entire record before us,
we hold that section 2038(a)(1) does not apply to Ms. Mirowski’s
respective gifts of 16-percent interests in MFV to her daughters’
trusts.
Section 2035(a)
In order to resolve the parties’ dispute under section
2035(a),73 we must consider the following issues with respect to
73
Sec. 2035(a) provides:
SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3
YEARS OF DECEDENT’S DEATH.
(a) Inclusion of Certain Property in Gross
Estate.--If--
(1) the decedent made a transfer (by trust or
otherwise) of an interest in any property, or
relinquished a power with respect to any property,
during the 3-year period ending on the date of the
decedent’s death, and
(2) the value of such property (or an
interest herein) would have been included in the
decedent’s gross estate under section 2036, 2037,
2038, or 2042 if such transferred interest or
relinquished power had been retained by the
decedent on the date of his death, the value of
the gross estate shall include the value of any
property (or interest therein) which would have
(continued...)
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Ms. Mirowski’s respective gifts of 16-percent interests in MFV to
her daughters’ trusts:74
(1) Was there a transfer of property by Ms. Mirowski during
the three-year period ending on the date of her death?
(2) If there was a transfer of property by Ms. Mirowski
during the three-year period ending on the date of her death,
would the value of any such property have been included in her
gross estate under section 2036 or 203875 if the property
transferred by Ms. Mirowski had been retained by her on the date
of her death?
Transfer of Property During the Three-Year
Period Ending on the Date of Death
Decedent’s estate acknowledges that Ms. Mirowski’s
respective gifts of 16-percent interests in MFV to her daughters’
trusts on September 7, 2001, were transfers of property during
the three-year period ending on the date of her death. In light
73
(...continued)
been so included.
74
In advancing respondent’s alternative argument under sec.
2035(a), respondent does not assert that during the three-year
period ending on the date of Ms. Mirowski’s death Ms. Mirowski
relinquished a power with respect to the respective 16-percent
interests in MFV that she gave to her daughters’ trusts.
Therefore, our discussion of sec. 2035(a) is limited to Ms.
Mirowski’s gifts.
75
In advancing respondent’s alternative argument under sec.
2035(a), respondent does not assert that Ms. Mirowski’s transfers
to MFV are includible in her gross estate under sec. 2037 or
2042. Therefore, our discussion of sec. 2035(a) is limited to
secs. 2036 and 2038.
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of that acknowledgment by decedent’s estate, we find that Ms.
Mirowski’s gifts were transfers of property during the three-year
period ending on the date of her death under section 2035(a).
Property Transferred Otherwise Includible in Gross Estate
We have found that sections 2036(a) and 2038(a)(1) do not
apply to Ms. Mirowski’s transfers to MFV. A fortiori, section
2035(a) could not apply, and we hold that that section does not
apply, to Ms. Mirowski’s respective gifts of 16-percent interests
in MFV to her daughters’ trusts.
Based upon our examination of the entire record before us
and our holdings under sections 2036(a) and 2038(a)(1) with
respect to Ms. Mirowski’s transfers to MFV, we hold that section
2035(a) does not apply to Ms. Mirowski’s respective gifts of 16-
percent interests in MFV to her daughters’ trusts.
We have considered all of the parties’ respective
contentions and arguments that are not discussed herein, and we
find them to be without merit, irrelevant, and/or moot.
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.
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APPENDIX
MFV’s operating agreement provided in pertinent part:
SECTION I
DEFINED TERMS
* * * * * * *
“Adjusted Capital Balance” means, as of any day,
an Interest Holder’s total Capital Contributions less
all amounts actually distributed to the Interest Holder
pursuant to Sections 4.2.3.4.1 and 4.4 hereof. If any
Interest is transferred in accordance with the terms of
this Agreement, the transferee shall succeed to the
Adjusted Capital Balance of the transferor to the
extent the Adjusted Capital Balance relates to the
Interest transferred.
* * * * * * *
“Capital Account” means the account to be
maintained by the Company for each Interest Holder in
accordance with the following provisions:
(i) an Interest Holder’s Capital Account shall be
credited with the Interest Holder’s Capital
Contributions, the amount of any Company liabilities
assumed by the Interest Holder (or which are secured by
Company property distributed to the Interest Holder),
the Interest Holder’s allocable share of Profit, and
any item in the nature of income or gain specially
allocated to the Interest Holder pursuant to the
provisions of Section IV (other than Section 4.3.3);
and
(ii) an Interest Holder’s Capital Account shall be
debited with the amount of money and the fair market
value of any Company property distributed to the
Interest Holder, the amount of any liabilities of the
Interest Holder assumed by the Company (or which are
secured by property contributed by the Interest Holder
to the Company), the Interest Holder’s allocable share
of Loss, and any item in the nature of expenses or
losses specially allocated to the Interest Holder
pursuant to the provisions of Section IV (other than
Section 4.3.3).
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If any Membership Interest is transferred pursuant
to the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the
extent the Capital Account is attributable to the
transferred Membership Interest. If the book value of
Company property is adjusted pursuant to Section 4.3.3.
the Capital Account of each Membership Interest Holder
shall be adjusted to reflect the aggregate adjustment
in the same manner as if the Company had recognized a
gain or loss equal to the amount of such aggregate
adjustment. It is intended that the Capital Accounts
of all Interest Holders shall be maintained in
compliance with the provisions of Regulation Section
1.704-1(b), and all provisions of this Agreement
relating to the maintenance of Capital Accounts shall
be interpreted and applied in a manner consistent with
that Regulation.
“Capital Contribution” means that total amount of
cash and the fair market value of any other assets
contributed (or deemed contributed under Regulation
Section 1.704-1(b)(2)(iv)(d)) to the Company by a
Member, net of liabilities assumed or to which the
assets are subject.
“Capital Proceeds” means the gross receipts
received by the Company from a Capital Transaction.
“Capital Transaction” means any transaction not in
the ordinary course of business which results in the
Company’s receipt of cash or other consideration other
than Capital Contributions, including, without
limitation, proceeds of sales or exchanges or other
dispositions of property not in the ordinary course of
business, financings, refinancings, condemnations,
recoveries of damage awards, and insurance proceeds.
“Cash Flow” means all cash funds derived from
operations of the Company (including interest received
on reserves), without reduction for any non-cash
charges, but less cash funds used to pay current
operating expenses and to pay or establish reasonable
reserves for future expenses, debt payments, capital
improvements or replacements as determined in the sole
discretion of the General Manager. Cash Flow shall not
include Capital Proceeds but shall be increased by the
reduction of any reserve previously established.
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* * * * * * *
“Interest Holder” means any Person who holds a
Membership Interest, whether as a Member or as an
unadmitted assignee of a Member.
* * * * * * *
“Member” means each Person signing this Agreement
and any Person who subsequently is admitted as a member
of the Company.
* * * * * * *
“Negative Capital Account” means a Capital Account
with a balance of less than zero.
* * * * * * *
“Positive Capital Account” means a Capital Account
with a balance greater than zero.
* * * * * * *
SECTION III
Members; Capital; Capital Accounts
* * * * * * *
3.4. Return of Capital Contributions. Except as
otherwise provided in this Agreement, no Interest older
shall have the right to receive the return of any
Capital Contribution.
3.5. Form of Return of Capital. If an Interest
Holder is entitled to receive a return of a Capital
Contribution, the Company may distribute cash, notes,
property or a combination thereof to the Interest
Holder in return of the Interest Holder’s Capital
Contribution.
3.6. Capital Accounts. A separate Capital
Account shall be maintained for each Interest Holder.
* * * * * * *
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SECTION IV
Profit, Loss and Distributions
4.1. Distributions of Cash Flow and Allocations
of Profit or Loss Other than Capital Transactions.
4.1.1. Profit or Loss other than from a
Capital Transaction. After giving effect to the
special allocations [for purposes of subchapter K of
the Internal Revenue Code] set forth in Section 4.3,
for any taxable year of the Company, Profit or Loss
(other than Profit or Loss resulting from a Capital
Transaction, which Profit or Loss shall be allocated in
accordance with the provisions of Section 4.2.1. and
4.2.2.) shall be allocated to the Interest Holders in
proportion to their Percentages.
4.1.2. Distributions of Cash Flow. Cash
Flow for each taxable year of the Company shall be
distributed to the Interest Holders in proportion to
their Percentages no later than seventy-five (75) days
after the end of the taxable year.
4.2. Distribution of Capital Proceeds and
Allocation of Profit or Loss from Capital Transactions.
4.2.1. Profit. After giving effect to the
special allocations [for purposes of subchapter K of
the Internal Revenue Code] set forth in Section 4.3,
Profit from a Capital Transaction shall be allocated as
follows:
4.2.1.1. If one or more Interest
Holders has a Negative Capital Account, to those
Interest Holders, in proportion to their Negative
Capital Accounts, until all of those Negative Capital
Accounts have been reduced to zero.
4.2.1.2. Any Profit not allocated
pursuant to Section 4.2.1.1 shall be allocated to the
Interest Holders in proportion to, and to the extent
of, the amounts distributable to them pursuant to
Section 4.2.3.4.1. and 4.2.3.4.3
4.2.1.3. Any Profit in excess of the
foregoing allocation shall be allocated to the Interest
Holders in proportion to their Percentages.
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4.2.2. Loss. After giving effect to the
special allocation [for purposes of subchapter K of the
Internal Revenue Code] set forth in Section 4.3, Loss
from a Capital Transaction shall be allocated as
follows:
4.2.2.1. If one or more Interest
Holder(s) has a Positive Capital Account, to those
Interest Holders, in proportion to their Positive
Capital Accounts, until all Positive Capital Accounts
have been reduced to zero.
4.2.2.2. Any Loss not allocated to
reduce Positive Capital Accounts to zero pursuant to
Section 4.2.2.1. shall be allocated to the Interest
Holders in proportion to their Percentages.
4.2.3. Capital Proceeds. Capital Proceeds
shall be distributed and applied by the Company in the
following order and priority:
4.2.3.1. to the payment of all expenses
of the Company incident to the Capital Transaction;
then
4.2.3.2. to the payment of debts and
liabilities of the Company then due and outstanding
(including all debts due to any Interest Holder); then
4.2.3.3. to the establishment of any
reserves which the General Manager deems necessary for
liabilities or obligations of the Company; then
4.2.3.4. the balance shall be
distributed as follows:
4.2.3.4.1. to the Interest Holders
in proportion to their Adjusted Capital Balances, until
their remaining Adjusted Capital Balances have been
paid in full;
4.2.3.4.2. if any Interest Holder
has a Positive Capital Account after the distributions
made pursuant to Section 4.2.3.4.1 and before any
further allocation of Profit pursuant to Section
4.2.1.3., to those Interest Holders in proportion to
their Positive Capital Accounts; then
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4.2.3.4.3. the balance, to the
Interest Holders in proportion to their Percentages.
* * * * * * *
4.4. Liquidation and Dissolution.
4.4.1. If the Company is liquidated, the
assets if the Company shall be distributed to the
Interest Holders in accordance with the balances in
their respective Capital Accounts, after taking into
account the allocations of Profit or Loss pursuant to
Section 4.1 or 4.2, if any, and distributions, if any,
of cash or property, if any, pursuant to Sections 4.1
and 4.2.3.
* * * * * * *
4.5.1. Except as otherwise provided in this
Agreement, the timing and amount of all distributions
shall be determined by the Members holding a majority
of the Percentages then outstanding.
* * * * * * *
SECTION V
Management: Rights, Powers and Duties
5.1. Management.
5.1.1. General Manager. The Company shall
be managed by a General Manager, who may, but need not,
be a Member. Anna Mirowski is hereby designated to
serve as the initial General Manager.
5.1.2. General Powers. The General Manager
shall have full, exclusive, and complete discretion,
power, and authority, subject in all cases to the other
provisions of this Agreement and the requirements of
applicable law, to manage, control, administer, and
operate the business and affairs of the Company for the
purposes herein stated, and to make all decisions
affecting such business and affairs, including without
limitation, for Company purposes, the power to:
5.1.2.1. acquire by purchase, lease, or
otherwise, any real or personal property, tangible or
intangible;
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5.1.2.2. construct, operate, maintain,
finance, and improve, and to own, sell, convey, assign,
mortgage, or lease any real estate and any personal
property;
5.1.2.3. sell, dispose, trade, or
exchange Company assets in the ordinary course of the
Company’s business;
5.1.2.4. enter into agreements and
contract and to give receipts, releases and discharges;
5.1.2.5. purchase liability and other
insurance to protect the Company’s properties and
business;
5.1.2.6. borrow money for and on behalf
of the Company, and, in connection therewith, execute
and deliver instruments authorizing the confession of
judgment against the Company.
5.1.2.7. execute or modify leases with
respect to any part or all of the assets of the
Company;
5.1.2.8. prepay, in whole or in part,
refinance, amend, modify, or extend any mortgages or
deeds of trust which may affect any asset of the
Company and in connection therewith to execute for and
on behalf of the Company any extensions, renewals, or
modifications of such mortgages or deeds of trust;
5.1.2.9. execute any and all other
instruments and documents which may be necessary or in
the opinion of the General Manager desirable to carry
out the intent and purpose of this Agreement,
including, but not limited to, documents whose
operation and effect extend beyond the term of the
Company;
5.1.2.10. make any and all expenditures
which the General Manager, it its sole discretion,
deems necessary or appropriate in connection with the
management of the affairs of the Company and the
carrying out of its obligations and responsibilities
under this Agreement, including, without limitation,
all legal, accounting, and other related expenses
incurred in connection with the organization and
financing and operation of the Company;
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5.1.2.11. enter into any kind of
activity necessary to, in connection with, or
incidental to, the accomplishment of the purposes of
the Company; and
5.1.2.12. invest and reinvest Company
reserves in short-term instruments or money market
funds.
5.1.3. Extraordinary Transactions.
5.1.3.1. Notwithstanding anything to
the contrary in this Agreement, the General Manager
shall not undertake any of the following without the
approval of the Members:
5.1.3.2. any Capital Transaction;
5.1.3.3. the Company’s lending more than
$50,000 of its money on any one occasion;
5.1.3.4. the admission of additional
Members to the Company;
5.1.3.5. the Company’s engaging in
business in any jurisdiction which does not provide for
the registration of limited liability companies; and
5.1.3.6. the Company’s electing to
exercise any Purchase Option pursuant to Section 6.4.
* * * * * * *
5.1.5. Removal of General Manager. A
majority of the Percentages held by all Members, at any
time and from time to time and for any reason, may
remove the General manager then acting and elect a new
General Manager.
* * * * * * *
SECTION VI
Transfer of Interests and Withdrawals of Members
6.1. Transfers.
6.1.1. No Person may Transfer all or any
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portion of or any interest or rights in the Person’s
Membership Rights or Membership Interest unless the
following conditions (“Conditions of Transfer”) are
satisfied:
6.1.1.1. the Transfer will not require
registration of Membership Interests or Membership
Rights under any federal or state securities laws;
6.1.1.2. the transferee delivers to the
Company a written instrument agreeing to be bound by
the terms of Section VI of this Agreement;
6.1.1.3. the Transfer will not result
in the termination of the Company pursuant to Code
Section 708;
6.1.1.4. the Transfer will not result
in the Company being subject to the Investment Company
Act of 1940, as amended;
6.1.1.5. the transferor or the
transferee delivers the following information to the
Company: (i) the transferee’s taxpayer identification
number; and (ii) the transferee’s initial tax basis in
the Transferred Interest; and
6.1.1.6. the transferor complies with
the provisions set forth in Section 6.1.4.
6.1.2. If the Conditions of Transfer are
satisfied, then a Member or Interest Holder may
Transfer all or any portion of that Person’s Membership
Interest. The Transfer of a Membership Interest
pursuant to this Section 6.1. shall not result,
however, in the Transfer of any of the transferor’s
other Membership Rights, if any, and the transferee of
the Membership Interest shall have no right to: (i)
become a Member; (ii) exercise any Membership Rights
other than those specifically pertaining to the
ownership of a Membership Interest; or (iii) act as na
agent of the Company.
6.1.3. Each Member hereby acknowledges the
reasonableness of the prohibition contained in this
Section 6.1. in view of the purposes of the Company and
the relationship of the Members. The Transfer of any
Membership Rights or Membership Interests in violation
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of the prohibition contained in this Section 6.1 shall
be deemed invalid, null and void, and of no force or
effect. Any Person to whom Membership Rights are
attempted to be transferred in violation of this
Section 6.1. shall not be entitled to vote on matters
coming before the Members, participate in the
management of the Company, act as an agent of the
Company, receive distributions from the Company, or
have any other rights in or with respect to the
Membership Rights.
6.1.4. Right of First Offer.
6.1.4.1. If an Interest Holder (a
“Transferor”) desires to Transfer all or any portion
of, or any interest or rights in, the Transferor’s
Interest (the “Transferor Interest”), the Transferor
shall notify the Company of that desire (the “Transfer
Notice”). The Transfer Notice shall describe the
Transferor Interest. The Company shall have the option
(the “Purchase Option”) to purchase all of the
Transferor Interest for a price, (the “Purchase
Price”), equal to the Transferor’s Percentage times
Appraised Value.
6.1.4.2. The Purchase Option shall be
and remain irrevocable for a period (the “Transfer
Period”) ending at 11:59 p.m. local time at the
Company’s principal office on the thirtieth (30th) Day
following the date the Transfer Notice is given to the
Company.
6.1.4.3. At any time during the
Transfer Period, the Company may elect to exercise the
Purchase Option by giving written notice of its
election to the Transferor. The Transferor shall not
be deemed a Member for the purpose of voting on whether
the Company shall elect to exercise the Purchase
Option.
6.1.4.4. If the Company elects to
exercise the Purchase Option, the Company’s notice of
its election shall fix a closing date (the “Transfer
Closing Date”) for the purchase, which shall not be
earlier than five (5) days after the date of the notice
of election or more than thirty (30) days after the
expiration of the Transfer Period.
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6.1.4.5. If the Company elects to
exercise the Purchase Option, the Purchase Price shall
be paid in cash (or in cash and a promissory note in
accordance with Section 6.5) on the Transfer Closing
Date.
6.1.4.6. If the Company fails to
exercise the Purchase Option, the Transferor shall be
permitted to offer and sell for a period of ninety (90)
days (the “Free Transfer Period”) after the expiration
fo the Transfer Period at a price not less than the
Purchase Price. If the Transferor does not Transfer
the Transferor Interest within the Free Transfer
Period, the Transferor’s right to Transfer the
Transferor Interest pursuant to this Section shall
cease and terminate.
6.1.4.7. Any Transfer of the Transferor
Interest made after the last day of the Free Transfer
Period or without strict compliance with terms,
provisions, and conditions of this Section and other
terms, provisions, and conditions of this Agreement,
shall be null, void and of no force or effect.
6.1.5. Transfers to Affiliates and Family.
Notwithstanding anything set forth in this Agreement to
the contrary, but provided that the Conditions of
Transfer other than Section 6.1.6. are satisfied, any
Member may at any time, and from time to time, Transfer
all, or any portion of, or any interest or rights in,
the Member’s Membership Interest or Membership Rights
to (i) any other Member; (ii) any member of the
Member’s Family; or (iii) any Affiliate of the Member.
6.1.6. Admission of Transferee as Member.
Notwithstanding anything contained herein to the
contrary, the transferee of all or any portion of or
any interest or rights in any Membership Right shall
not be entitled to become a Member or exercise any
rights of a Member and shall only be admitted as a
Member upon the unanimous consent of the Members. The
transferee shall be entitled to receive, to the extent
transferred, only the distributions to which the
transferor would be entitled.
6.2. Voluntary Withdrawal. No Member shall have
the right or power to Voluntarily Withdraw from the
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Company.
6.3. Involuntary Withdrawal. Immediately upon
the occurrence of an Involuntary Withdrawal, the
successor of the withdrawn Member shall thereupon
become an Interest Holder bu shall not become a Member.
If the Company is continued as provided in Section
7.1.3., the successor Interest Holder shall have all
the rights of an Interest Holder but shall not be
entitled to receive in liquidation of the Membership
Interest the fair market value of the Member’s
Membership Interest as of the date the Member
involuntarily withdrew from the Company.
6.4. Appraised Value.
6.4.1. The term “Appraised Value” means the
appraised value of the equity of the Company’s assets
as hereinafter provided. Within fifteen (15) days
after demand by either one or the other, the Company
and the Withdrawing Member shall each appoint an
appraiser to determine the value of the equity of the
Company’s Assets. If the two appraisers agree upon the
equity value of the Company’s assets, they shall joint-
ly render a single written report stating that value.
If the two appraisers cannot agree upon the equity
value of the Company’s assets, they shall each render a
separate written report and shall appoint a third
appraiser, who shall appraise the Company’s assets and
determine the value of the equity therein, and shall
render a written report of his or her opinion thereon.
Each party shall pay the fees and costs of the
appraiser appointed by that party, and the fees and
other costs of the third appraiser shall be shared
equally by both parties.
6.4.2. The equity value contained in the
joint written report of the initial appraisers or the
written report of the third appraiser, as the case may
be, shall by the Appraised Value; provided, however,
that if the value of the equity contained in the
appraisal report of the third appraiser is more than
the higher of the first two appraisals, the higher of
the first two appraisals shall govern; and provided,
further, that if the value of the equity contained in
the appraisal report of the third appraiser is less
than the lower of the first two appraisals, the lower
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of the first two appraisals shall govern.
6.5. Installment Buy-Outs. Rather than pay all
cash on the Closing Date, the Company may elect, on ten
(10) days prior notice to the Transferor, to pay the
Purchase Price on an installment basis. If it does so,
then it shall pay 25% of the Purchase Price in cash on
the Closing Date and the balance by executing and
delivering its promissory note, in a form acceptable to
both the Company and the Transferor, to the Transferor.
6.6. Insolvency.
6.6.1. If, immediately following the
purchase of any Interest or Membership Rights, the
Company would be insolvent, the Company shall be
relieved of its obligation to purchase that portion of
the Interest of Membership Rights that would render the
Company insolvent or may nominate a purchaser for that
portion of the Interest or Membership Rights Interest
or Membership Rights.
6.6.2. If the Company is unable to pay
lawfully for all of the Interests purchased under the
applicable provisions of this Agreement, then no
surviving or remaining Members shall be liable for or
shall be required to assume the Company’s obligation to
purchase the balance of the Interests.
SECTION VII
Dissolution, Liquidation and Termination of the Company
7.1. Events of Dissolution. The Company shall be
dissolved upon the happening of any of the following
events:
7.1.1. upon the unanimous written agreement
of all of the Members; or
7.1.2. upon the occurrence of an Involuntary
Withdrawal of a Member, unless the remaining Members,
within ninety (90) days after the occurrence of the
Involuntary Withdrawal, unanimously elect to continue
the business of the Company pursuant to the terms of
this Agreement.
7.2. Procedure for Winding Up and Dissolution.
If the Company is dissolved, the General Manager shall
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wind up its affairs. On winding up of the Company, the
assets of the Company shall be distributed,
(i) to creditors of the Company, including
interest Holders who are creditors, in satisfaction of
the liabilities of the Company;
(ii) to Interest Holders and former Interest
Holders in satisfaction of unpaid distributions;
(iii) to Interest Holders for the return of
Capital Contributions; and
(iv) to Interest Holders in proportion to
their respective Capital Accounts
and then to the Interest Holders in accordance with
Section 4.4. [Reproduced literally.]