## Facts

- Austin and Edna Korby created a revocable living trust (1993) and later formed Korby Properties Limited Partnership (KPLP) (1994) after estate-planning advice aimed at transferring wealth to their four sons.
- In 1995, the Korbys transferred marketable securities and bonds worth about $1.85 million to KPLP and received a 98% limited partnership interest; their living trust contributed about $37,841 for a 2% general partnership interest.
- The Korbys then gifted the 98% limited partnership interest to four irrevocable trusts for their sons, reporting a valuation discount on the gifted interests.
- KPLP held primarily passive, marketable securities and did not operate an active business.
- After the gifts, KPLP made substantial distributions to the Korbys’ living trust and only minimal distributions to the sons’ trusts; the estates later characterized the payments as “management fees,” but there was no management agreement or supporting business formalities.
- After both deaths, the estates did not include any KPLP assets in the gross estates; the IRS asserted estate tax deficiencies under 26 U.S.C. § 2036(a).

## Issues

1. Whether the transfers to KPLP qualified for § 2036(a)’s exception as bona fide sales for adequate and full consideration in money or money’s worth.
2. Whether the Korbys, despite the partnership and subsequent gifts, retained possession or enjoyment of, or the right to income from, the transferred property under § 2036(a)(1) through an implied agreement.

## Decision

- The Eighth Circuit affirmed the Tax Court.
- The transfers to KPLP were not bona fide sales for adequate and full consideration, so the § 2036 exception did not apply.
- The Tax Court did not clearly err in finding an implied agreement that the Korbys retained access to partnership income and assets during life.
- The value of the assets transferred to KPLP was includible in both decedents’ gross estates under § 2036(a).

## Legal Principles

- Under 26 U.S.C. § 2036(a)(1), property transferred during life is included in the gross estate if the decedent retained possession or enjoyment of, or the right to income from, the property.
- The § 2036(a) “bona fide sale for adequate and full consideration” exception requires a real, significant non-tax purpose and transaction characteristics consistent with arm’s-length dealing.
- In family limited partnership cases, courts evaluate both formation and post-transfer conduct, including whether the transferor effectively stood on both sides of the transaction and whether the entity functioned as represented.
- An implied agreement to retain enjoyment or income may be inferred from facts such as disproportionate distributions to the transferor, continued access to assets, and failure to follow customary business formalities.
- On appeal from the Tax Court, legal conclusions are reviewed de novo and factual findings (including implied-agreement findings) are upheld unless clearly erroneous.

## Conclusion

The court upheld estate inclusion under § 2036 because the family limited partnership lacked a bona fide, arm’s-length character and the evidence supported a fact finding that the decedents continued to enjoy and receive income from the transferred assets through an implied understanding.


Estate of Korby v. Comm’r, 471 F.3d 848 (8th Cir. 2006)