## Facts

- Wayne C. Bongard founded and controlled Empak, Inc., a closely held manufacturer.
- Bongard created an irrevocable trust for his children and transferred Empak stock to it.
- Bongard and the trust transferred their Empak shares to WCB Holdings, LLC, receiving membership units proportionate to their contributed shares; voting rights were held through designated governance units.
- The stated business purpose for WCB was to pool family ownership to position Empak for a liquidity event and capital raising.
- The next day, Bongard and the trust formed the Bongard Family Limited Partnership (BFLP).
- Bongard transferred all his WCB Class B units to BFLP for a 99% limited partnership interest; the trust contributed WCB Class B units for a 1% general partnership interest.
- Bongard later gifted a 7.72% BFLP interest to his wife and made no further lifetime transfers of his BFLP interest before his death.
- The IRS asserted gross-estate inclusion under I.R.C. §§ 2035(a), 2036(a), and 2036(b), targeting (i) the Empak-to-WCB transfer and (ii) the WCB-to-BFLP transfer.

## Issues

1. Whether the transfer of Empak stock to WCB Holdings, LLC qualified as a bona fide sale for adequate and full consideration, avoiding inclusion under § 2036.
2. Whether the transfer of WCB Class B units to BFLP qualified as a bona fide sale for adequate and full consideration.
3. If the BFLP transfer was not a bona fide sale, whether Bongard retained (expressly or by implied agreement) possession, enjoyment, income rights, or the power to designate enjoyment under § 2036(a)(1) or (2), requiring estate inclusion.

## Decision

- The Tax Court held that the Empak-to-WCB transfer satisfied the § 2036 bona fide sale exception because it was supported by a legitimate and significant nontax reason and proportionate consideration.
- The Tax Court held that the WCB-to-BFLP transfer did not satisfy the bona fide sale exception because it lacked a legitimate and significant nontax purpose and did not function as a meaningful business arrangement.
- The court found an implied agreement that Bongard retained a § 2036(a) interest in the WCB units transferred to BFLP, triggering inclusion of the value attributable to those units in the gross estate.
- Although § 2036 applied to the BFLP layer, the court respected valuation discounts at the WCB level.

## Legal Principles

- Section 2036(a) includes in a decedent’s gross estate property transferred during life if the decedent retained, for life or the relevant period, (i) possession or enjoyment or the right to income, or (ii) the right to designate who will possess or enjoy the property or its income.
- The § 2036(a) exception for a “bona fide sale for an adequate and full consideration in money or money’s worth” requires:
  - a bona fide transfer comparable to an arm’s-length transaction (commonly shown in family-entity cases by a legitimate and significant nontax reason); and
  - receipt of interests proportionate to the value contributed (adequate and full consideration).
- Intra-family entity transfers are evaluated by substance: lack of meaningful economic activity, lack of an investment plan, and failure to change the transferor’s relationship to the property weigh against bona fide sale treatment.
- A retained interest for § 2036(a) can be established by an implied agreement, not only by express retained rights.

## Conclusion

The Tax Court distinguished between a holding-company restructuring supported by a significant business purpose (protected by the § 2036 bona fide sale exception) and a later FLP transfer lacking operational substance and involving implied retained enjoyment, which caused estate inclusion under § 2036(a) while still allowing valuation discounts at the valid LLC level.


Estate of Bongard v. Comm’r, 124 T.C. 95 (2005)