## Facts

- Ruth A. Kimbell died in 1998 owning substantial assets, including oil and gas-related interests and other investments.
- In 1991, she created a revocable living trust, serving as co-trustee with her son.
- In January 1998, the trust, her son, and his wife formed an LLC; the trust obtained 50% and the son and his wife obtained 25% each, with the son as sole manager.
- Later in January 1998, the trust and the LLC formed a Texas limited partnership: the trust contributed approximately $2.5 million in varied assets for a 99% limited partner interest, while the LLC contributed cash for a 1% interest and served as general partner.
- The partnership agreement imposed significant transfer and control restrictions on limited partnership interests, reducing their market value relative to a simple pro rata share of underlying assets.
- For estate tax purposes, the estate reported the decedent’s 99% limited partnership interest and claimed a 49% valuation discount reflecting lack of control and marketability.
- The IRS determined that § 2036 required inclusion of the partnership’s underlying assets in the gross estate, asserting the transfer did not qualify as a bona fide sale for adequate and full consideration.
- The estate paid the asserted deficiency, sued for a refund, lost on partial summary judgment, and appealed.

## Issues

1. Whether an intrafamily transfer of assets to a family limited partnership can qualify as a “bona fide sale” within the meaning of the § 2036 exception.
2. Whether receiving a pro rata partnership interest in exchange for contributed assets can constitute “adequate and full consideration in money or money’s worth” under § 2036.
3. Whether the district court applied the correct legal standard and properly evaluated record evidence when ruling that § 2036 required inclusion of the underlying assets in the gross estate.

## Decision

- The Fifth Circuit vacated the judgment for the United States and remanded.
- The court held the district court erred as a matter of law by treating intrafamily transactions as categorically incapable of being bona fide sales.
- The court held the district court also erred as a matter of law by concluding a pro rata exchange of assets for partnership interests cannot satisfy § 2036’s “adequate and full consideration” requirement.
- The court directed the district court to apply the proper legal standard and to consider uncontroverted evidence supporting the estate’s claim that the transfer was a bona fide sale for full and adequate consideration.

## Legal Principles

- I.R.C. § 2036 generally includes transferred property in the gross estate if the decedent retained possession, enjoyment, or income rights, unless the transfer was a “bona fide sale for an adequate and full consideration in money or money’s worth.”
- Family members are not barred from entering bona fide transactions; intrafamily status requires careful scrutiny of substance rather than categorical invalidation.
- Under Fifth Circuit precedent, “adequate and full consideration” focuses on whether the transaction depleted the gross estate; a proportionate (pro rata) receipt of partnership interests for contributed assets generally satisfies the requirement because it does not reduce the estate’s value.
- The bona fide sale inquiry is objective and may be supported by evidence of legitimate, significant nontax purposes (e.g., centralized management, continuity of ownership/management, liability-related structuring) and proportional equity interests reflecting contributed value.

## Conclusion

The Fifth Circuit vacated and remanded because the district court applied incorrect categorical rules under § 2036; intrafamily formation of a limited partnership may qualify for the bona fide sale exception when supported by objective nontax purposes and a pro rata exchange that does not deplete the gross estate.


Kimbell v. United States, 371 F.3d 257 (5th Cir. 2004)