t c no united_states tax_court charles t mccord jr and mary s mccord donors petitioners commissioner of internal revenue respondent v docket no filed date ps their children and their children’s partnership formed a family limited_partnership pt in ps assigned interests in pt to several assignees pursuant to an agreement that contains a formula_clause the formula_clause provides that ps’ children trusts for their benefit and s a charitable_organization are to receive interests having an aggregate fair_market_value of a set dollar amount and c another charitable_organization is to receive any remaining portion of the assigned interests ps’ children agreed to pay all transfer_taxes resulting from the transaction including the estate_tax liability under then sec_2035 i r c that would arise if one or both ps were to die within years of the date of the assignments pursuant to a second agreement the assignees allocated the assigned interests among themselves in accordance with the formula_clause based on an agreed aggregate value of dollar_figure for the assigned interests less than months after the date of the assignment pt redeemed the interests of s and c pursuant to a call option contained in pt’s partnership_agreement held ps assigned only economic rights with respect to pt such assignments did not confer partner status on the assignees held further the aggregate fair_market_value of the interests assigned by ps on the date of the gifts was dollar_figure held further the amount of ps’ aggregate charitable_contribution_deduction under sec_2522 i r c resulting from the transfer to c is determined on the basis of the fair_market_value of the interest actually allocated to c under the second agreement rather than the interest that would have been allocated to c under the second agreement had the donees determined a fair_market_value for the assigned interests equal to the fair_market_value determined by the court held further ps’ respective taxable_gifts for are determined without reference to the contingent estate_tax liability that their children assumed under the first agreement john w porter and stephanie loomis-price for petitioners lillian d brigman and wanda m cohen for respondent table of contents findings_of_fact opinion dollar_figure i introduction dollar_figure ii relevant statutory provisions dollar_figure iii arguments of the parties dollar_figure iv extent of the rights assigned dollar_figure v fair_market_value of the gifted interest dollar_figure a introduction dollar_figure general principles dollar_figure expert opinions dollar_figure a in general dollar_figure b petitioners’ expert dollar_figure c respondent’s expert dollar_figure b value of underlying assets dollar_figure c minority interest lack of control discount dollar_figure introduction dollar_figure discount factors by asset class dollar_figure a equity portfolio dollar_figure measurement date dollar_figure sample funds dollar_figure representative discount within the range of sample fund discounts dollar_figure summary dollar_figure b municipal_bond portfolio dollar_figure measurement date dollar_figure sample funds dollar_figure representative discount within the range of sample fund discounts dollar_figure summary dollar_figure c real_estate partnerships dollar_figure the appropriate comparables dollar_figure determining the discount factor dollar_figure d direct real_estate holdings dollar_figure e oil_and_gas interests dollar_figure determination of the minority interest discount dollar_figure d marketability discount dollar_figure introduction dollar_figure traditional approaches to measuring the discount dollar_figure a in general dollar_figure b rejection of ipo approach dollar_figure mr frazier’s restricted_stock analysis dollar_figure dr bajaj’s private_placement analysis dollar_figure a comparison of registered and unregistered private placements dollar_figure b refinement of registered unregistered discount differential dollar_figure c further adjustments dollar_figure d application to mil dollar_figure determination of the marketability discount dollar_figure a discussion dollar_figure b conclusion dollar_figure e conclusion dollar_figure vi charitable_contribution_deduction for transfer to cft dollar_figure a introduction dollar_figure b the assignment agreement dollar_figure c conclusion dollar_figure vii effect of children’s agreement to pay estate_tax liability dollar_figure a introduction dollar_figure b discussion dollar_figure c conclusion dollar_figure viii conclusion dollar_figure judge swift’s concurring opinion dollar_figure judge chiechi’s concurring in part dissenting in part opinion dollar_figure judge foley’s concurring in part dissenting in part opinion dollar_figure judge laro’s dissenting opinion halpern judge by separate notices of deficiency dated date the notices respondent determined deficiencies in federal gift_tax for calendar_year with respect to petitioner charles mccord jr mr mccord and petitioner mary mccord mrs mccord in the amounts of dollar_figure and dollar_figure respectively the dispute centers around the gift_tax consequence of petitioners’ assignments to several charitable and noncharitable donees of interests in a family limited_partnership unless otherwise noted all section references are to the internal_revenue_code in effect on the date of the assignments and all rule references are to the tax_court rules_of_practice and procedure all dollar amounts have been rounded to the nearest dollar findings_of_fact some facts are stipulated and are so found the stipulation of facts with accompanying exhibits is incorporated herein by this reference petitioners petitioners are husband and wife they have four sons all adults the children charles iii michael frederick and stephen in response to the notices petitioners filed a single petition at the time they filed the petition petitioners resided in shreveport louisiana formation of mccord interests ltd l l p mccord interests ltd l l p mil or the partnership is a texas limited_partnership formed on date among petitioners as class a limited partners petitioners the children and another partnership formed by the children mccord brothers partnership as class b limited partners and the children as general partners all such partners being hereafter referred to as the initial mil partners on formation as well as on the date of the assignments in question the principal assets of mil were stocks bonds real_estate oil_and_gas investments and other closely_held_business interests on the date of the assignments approximately percent and percent of the partnership’s assets consisted of marketable_securities and interests in real_estate limited_partnerships respectively the remaining approximately percent of the partnership’s assets consisted of direct real_estate holdings interests in oil_and_gas partnerships and other oil_and_gas interests in mid-date the mil partnership_agreement was amended and restated effective as of date such amended and restated partnership_agreement being referred to hereafter as simply the partnership_agreement attached to the partnership_agreement is a schedule setting forth the capital contributions and ownership interests of the initial mil partners as follows class and contributor contribution_percentage interest class a limited partners mr mccord mrs mccord dollar_figure big_number -- -- general partners charles iii michael frederick stephen big_number big_number big_number big_number class b limited partners mr mccord mrs mccord mccord brothers big_number big_number big_number total big_number relevant provisions of the partnership_agreement among other things the partnership_agreement provides as follows mil will continue in existence until december the termination_date unless sooner terminated in accordance with the terms of the partnership_agreement any class b limited_partner may withdraw from mil prior to the termination_date and receive a payment equal to the fair_market_value as determined under the partnership_agreement of 1under the terms of the partnership_agreement a class a limited_partnership_interest does not carry with it a percentage interest as that term is defined in the partnership_agreement in mil such partner’s class b limited_partnership_interest the put right partners may freely assign their partnership interests to or for the benefit of certain family members and charitable organizations permitted assignees a partner desiring to assign his partnership_interest to someone other than a permitted assignee must first offer that interest to mil and the other partners and assignees who have the right to purchase such interest at fair_market_value as determined under the partnership_agreement the term partnership_interest means the interest in the partnership representing any partner’s right to receive distributions from the partnership and to receive allocations of partnership profit and loss regardless of the identity of the assignee no assignee of a partnership_interest can attain the legal status of a partner in mil without the unanimous consent of all mil partners mil may purchase the interest of any charity assignee ie a permitted assignee of a partnership_interest that is a charitable_organization that has not been admitted as a partner of mil at any time for fair_market_value as determined under the partnership_agreement the call_right for purposes of the partnership_agreement a class b limited partner’s put right is disregarded for purposes of determining the fair_market_value of such partner’s class b limited_partnership_interest and any dispute with respect to the fair_market_value of any interest in mil is to be resolved by arbitration as provided in exhibit g attached to the partnership_agreement limited partners generally do not participate in the management of the partnership’s affairs however limited partners do have veto power with respect to certain major decisions most notably relating to voluntary bankruptcy filings in addition if any two of the children are not serving as managing partners class b limited partners have voting rights with respect to certain large dollar managerial decisions limited partners also have access to certain partnership financial information southfield school foundation on date petitioners assigned their respective class a limited_partnership interests in mil to the hazel kytle endowment fund of the southfield school foundation the foundation pursuant to an assignment of partnership_interest and addendum agreement the southfield agreement the recitals to the southfield agreement provide that all of the partners of the partnership desire that assignee become a class a limited_partner of the partnership upon execution of this assignment of partnership_interest and all consents required to effect the conveyance of the assigned partnership_interest and the admission of assignee as a class a limited_partner of the partnership have been duly obtained and are evidenced by the signatures hereto all of the initial mil partners executed the southfield agreement further assignments on date the valuation_date petitioners as assignors entered into an assignment agreement the assignment agreement with respect to their class b limited_partnership interests in mil the other parties to the assignment agreement the assignees were the children four trusts for the benefit of the children the trusts and two charitable organizations-- communities foundation of texas inc cft and shreveport symphony inc the symphony by the assignment agreement petitioners relinquished all dominion and control_over the assigned partnership interests and assigned to the assignees all of their rights with respect to those interests the assignment agreement does not contain language similar to that quoted above from the southfield agreement regarding the admission of the assignees as partners of the partnership and two of the partners of the partnership mccord brothers partnership and the foundation did not execute the assignment agreement in any capacity the interests that petitioners assigned to the assignees by way of the assignment agreement collectively the gifted interest are the subject of this dispute under the terms of a formula_clause contained in the assignment agreement the formula_clause the children and the trusts were to receive portions of the gifted interest having an aggregate fair_market_value of dollar_figure if the fair_market_value of the gifted interest exceeded dollar_figure then the symphony was to receive a portion of the gifted interest having a fair_market_value equal to such excess up to dollar_figure and if any portion of the gifted interest remained after the allocations to the children trusts and symphony then cft was to receive that portion ie the portion representing any residual_value in excess of dollar_figure the children individually and as trustees of the trusts agreed to be liable for all transfer_taxes ie federal gift estate and generation-skipping_transfer taxes and any resulting state taxes imposed on petitioners as a result of the conveyance of the gifted interest the assignment agreement leaves to the assignees the task of allocating the gifted interest among themselves in other words in accordance with the formula_clause the assignees were to allocate among themselves the approximately 82-percent partnership_interest assigned to them by petitioners in that regard the assignment agreement contains the following instruction concerning valuation the valuation instruction for purposes of this paragraph the fair_market_value of the assigned partnership_interest as of the date of this assignment agreement shall be the price at which the assigned partnership_interest would change hands as of the date of this assignment agreement between a hypothetical willing buyer and a hypothetical willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts any dispute with respect to the allocation of the assigned partnership interests among assignees shall be resolved by arbitration as provided in the partnership_agreement the confirmation agreement in date the assignees executed a confirmation agreement the confirmation agreement allocating the gifted interest among themselves as follows assigned partnership_interest assignee charles t mccord iii gst_trust michael s mccord gst_trust frederick r mccord gst_trust stephen l mccord gst_trust charles iii michael frederick stephen cft symphony total the assignees based that determination on an appraisal report dated date prepared at the behest of the children’s counsel2 by howard frazier barker elliott inc hfbe that report the hfbe appraisal report concludes that taking into account discounts for lack of control and lack of marketability the fair_market_value of a 1-percent assignee’s interest in the class b limited_partnership interests on the valuation_date was dollar_figure representatives of cft and the symphony respectively including their respective outside counsel reviewed the hfbe appraisal report and determined that it was not necessary to obtain their own appraisals furthermore under the terms of the confirmation agreement cft and the symphony as well as the other assignees agreed not to seek any judicial alteration of the allocation in the confirmation agreement and waived their arbitration rights granted under the assignment agreement mil’s exercise of the call_right on date mil exercised the call_right with respect to the interests held by the symphony and cft it did so pursuant to a document styled agreement--exercise of call option by mccord interests ltd l l p the exercise agreement the purchase_price for the redeemed interests was based on a two-page letter from hfbe the hfbe letter previewing an updated appraisal report to be prepared by hfbe the hfbe letter the children’s counsel had also represented petitioners in connection with the transaction however petitioners were not involved in the allocation of the gifted interest among the assignees pursuant to the confirmation agreement concludes that the fair_market_value of a 1-percent assignee’s interest in the class b limited_partnership interests as of date was dollar_figure cft and the symphony raised no objections to the value found in the hfbe letter and accepted dollar_figure and dollar_figure respectively in redemption of their interests the gift_tax returns petitioners timely filed form sec_709 united_states gift and generation skipping transfer_tax return for the form sec_709 in schedules attached to the form_709 petitioners reported a gross value of dollar_figure for their respective shares of the gifted interest each petitioner reduced that amount by the amount of federal and state louisiana gift_tax generated by the transfer that the children agreed to pay as a condition of the gift each petitioner further reduced that amount by a computation of the actuarial value as of the valuation_date of the contingent obligation of the children to pay again as a condition of the gift the additional estate_tax that would result from the transaction if that petitioner were to die within years of the valuation_date based on those adjustments mr and mrs mccord reported total gifts of dollar_figure and dollar_figure respectively mr and mrs mccord each claimed an annual exclusion amount of dollar_figure and a charitable_contribution those figures also reflect cash gifts of dollar_figure by each petitioner to nominally fund the trusts deduction of dollar_figure yielding taxable_gifts of dollar_figure and dollar_figure respectively the notices by the notices respondent determined deficiencies in gift_tax with respect to mr and mrs mccord in the amounts of dollar_figure and dollar_figure respectively based on increases in taxable_gifts in the amounts of dollar_figure and dollar_figure respectively respondent determined that each petitioner understated the gross value of his or her share of the gifted interest and improperly reduced such gross value by the actuarial value of the children’s obligation to pay additional estate_taxes potentially attributable to the transaction i introduction opinion mil is a texas limited_partnership formed on date in exchange for their class b limited_partnership interests in mil petitioners contributed to mil closely_held_business interests oil_and_gas interests real_estate stocks bonds and other_securities the parties have stipulated that the value of petitioners’ contributions in exchange for their class b limited_partnership interests was dollar_figure dollar_figure apiece on date petitioners assigned as gifts their partnership interests in mil the gifted interest on that date approximately percent of the partnership’s assets consisted of marketable_securities and approximately percent consisted of interests in real_estate limited_partnerships the assignees were petitioners’ children trusts for the benefit of the children and two charitable organizations communities foundation of texas inc cft and shreveport symphony inc the symphony in calculations submitted with their federal gift_tax returns petitioners reported the gross value of the gifted interest as dollar_figure dollar_figure apiece respondent’s adjustments reflect his determination that the gross fair_market_value of the gifted interest was dollar_figure dollar_figure apiece principally we must determine the fair_market_value of the gifted interest and whether each petitioner may reduce his or her one-half share thereof to account for the children’s contingent obligation as a condition of the gift to pay the additional estate_tax that would result from the transaction if that petitioner were to die within years of the date of the gift preliminarily we must determine whether petitioners transferred all of their rights as class b limited partners or only their economic rights with respect to mil we must also determine the amount_of_the_gift to cft ii relevant statutory provisions sec_2501 imposes a tax on the transfer of property by gift sec_2512 provides that if a gift is made in property the value of the property on the date of the gift is considered the amount_of_the_gift in determining the amount of taxable_gifts for any particular year a donor is entitled to deduct the amount of gifts made during the year that qualify for the charitable_contribution_deduction provided for in sec_2522 sec_2503 sec_2502 provides that the donor is the person liable for the payment of the gift_tax if a donor makes a gift subject_to the condition that the donee pay the resulting gift_tax the amount_of_the_gift is reduced by the amount_of_such_gift tax revrul_75_72 1975_1_cb_310 such a gift is commonly referred to as a net_gift net_gift under sec_2035 current sec_2035 a decedent’s gross_estate is increased by the amount of any gift_tax paid_by the decedent or his estate on any gift made by the decedent during the 3-year period preceding the decedent’s death for purposes of this gross-up provision gift_tax paid_by the decedent or his estate on gifts made during the relevant 3-year period is deemed to include gift_tax attributable to net_gifts made by the decedent during such period ie even though the donees are responsible for paying the gift_tax in such situation 88_tc_769 affd in part and revd in part on another ground 856_f2d_1158 8th cir iii arguments of the parties petitioners contend that they correctly valued the gifted interest in determining their respective taxable_gifts petitioners contend in the alternative that if we determine an increased value for the gifted interest then by operation of the formula_clause in the assignment agreement they are entitled to an identical increase in the amount of their aggregate charitable_contribution_deduction under sec_2522 resulting in no additional gift_tax due petitioners also contend that under net_gift principles enunciated in revrul_75_72 supra and estate of sachs v commissioner supra they properly reduced their respective taxable_gifts by the actuarial value of the children’s contingent obligation under the terms of the assignment agreement to pay additional estate_tax under sec_2035 respondent contends that petitioners undervalued the gifted interest by mischaracterizing the assignment and applying excessive discounts respondent also contends that the formula_clause in the assignment agreement designed to neutralize the tax effect of any upward adjustment to the valuation of the gifted interest is ineffectual finally respondent contends that petitioners improperly reduced the amount of their taxable consistent with that argument petitioners have preserved their right to claim an increased charitable_contribution_deduction under sec_170 on an amended income_tax return for petitioners’ income_tax_liability is not before us gifts to account for the possibility that the children would be obligated to pay additional estate_tax under sec_2035 by reason of the transaction the parties have stipulated that respondent bears the burden_of_proof and we accept that stipulation iv extent of the rights assigned the divergence of the parties’ valuations of the gifted interest is attributable in part to their disagreement regarding the extent of the rights assigned by petitioners petitioners contend that they assigned to the assignees certain rights with respect to their class b limited_partnership interests in mil but did not and could not admit the assignees as class b limited partners the assignment they argue did not entitle the assignees to exercise certain rights that petitioners possessed as partners under the partnership_agreement thus they argue the value of the gifted interest is something less than the value of all of their rights as class b limited partners respondent on the other hand argues that the gifted interest consists of the sum and total of petitioners’ rights as class b limited partners ie that as a result of the assignment the the parties have not informed us of their basis for stipulating that respondent bears the burden_of_proof the burden_of_proof is normally on petitioner see rule a under certain circumstances the burden_of_proof can be shifted to the commissioner see sec_7491 rule a we assume without deciding that the conditions necessary to shift the burden to respondent have been satisfied assignees became class b limited partners the parties’ experts agree that if the gifted interest does not include all of petitioners’ rights as class b limited partners the fair_market_value of the gifted interest is lower than it would be if the gifted interest did include all such rights whenever the concept of property is relevant for federal tax purposes it is state law that defines the property interest to which federal tax consequences attach e g 535_us_274 federal_tax_lien attaches to property held under state law as tenants by the entireties thus in order to determine the federal gift_tax consequences that attach to petitioners’ assignment of the gifted interest we look to applicable state law to determine the extent of the rights transferred because petitioners transferred interests in a texas limited_partnership texas law governs our determination in that regard specifically we look to the texas revised limited_partnership act the act tex rev civ stat ann art 6132a-1 as in effect on the date of the gift under the act a partnership_interest is personal_property tex rev civ stat ann art 6132a-1 sec dollar_figure vernon a partnership_interest is assignable in whole or in part unless the partnership_agreement provides otherwise id sec a however an assignee of a partnership_interest attains the legal status of a limited_partner only if the partnership_agreement so provides or all of the partners consent id sec a section dollar_figure of the partnership_agreement governs the admission of new partners to mil that section provides that notwithstanding the occurrence of a valid assignment of a partnership_interest in mil in compliance with the terms of the partnership_agreement no person shall become a partner without the unanimous consent of the existing partners there is no evidence indicating that all of the mil partners explicitly consented to the admission of the assignees as partners in mil our inquiry does not end there however in 113_tc_449 affd on another issue 292_f3d_490 5th cir we demonstrated our willingness to look beyond the formalities of intrafamily partnership transfers to determine what in substance was transferred in that case also involving texas partnership law the taxpayers argued that the interests they transferred to two grantor retained annuity trusts grats were assignee interests because the other general partners of the partnership the taxpayers’ adult children whose trusts were the remainder beneficiaries of the grats did not consent to the admission of the grats as additional partners id pincite we found that such lack of formal consent did not preclude a finding that the taxpayers for purposes of this report we use the term assignee interest assignee interest to signify the interest held by an assignee of a partnership_interest who has not been admitted as a partner in the partnership effected a transfer of all their rights as partners id in essence we inferred the necessary consent of the other general partners to admit the grats as partners based on all of the facts and circumstances id pincite our decision in kerr was influenced by a number of factors that are not present in this case for instance the taxpayers in kerr asked us to construe strictly the consent provision in their partnership_agreement in the context of their transfers to the grats notwithstanding the fact that they had disregarded that provision in other situations id pincite in addition we found it difficult to reconcile the taxpayers’ characterization of the transfers with the language of their assignment documents each of which contained the following statement the assigned partnership_interest constituted a class b limited_partnership_interest in the partnership at issue when owned by assignor and when owned by assignee shall constitute a class b limited_partnership_interest in said partnership id pincite finally from an economic reality standpoint we found it significant that the taxpayers and their children being all of the general partners of the partnership could have formally admitted the assignee grats as partners at any time without having to obtain the consent of any other person id pincite in the instant case there is no evidence that petitioners and the other partners of mil ever disregarded section dollar_figure of the partnership_agreement the provision on which they now rely indeed when petitioners assigned their class a limited_partnership interests to the foundation in all of the initial mil partners consented in writing to the admission of the foundation as a class a limited_partner as required by said section furthermore the assignment agreement with respect to the gifted interest does not contain language of the type quoted above from the kerr assignment documents nor does it contain any of the language in the southfield agreement relating to the admission of the assignee as a partner in mil finally petitioners and their children could not unilaterally admit the assignees as partners in mil any such admission required the consent of the foundation an unrelated third party respondent makes note of the fact that the assignment agreement provides that assignors hereby relinquish all dominion and control_over the assigned partnership_interest and assign to assignees all of assignors’ rights with respect to the assigned partnership_interest however the issue in this case is not whether petitioners transferred partnership interests under the terms of the act the partnership_agreement and the assignment agreement they undoubtedly could and did that having been said both the act and the partnership_agreement define the term partnership_interest in terms of economic rights and do not equate the term with membership in the partnership thus it is entirely consistent to say that petitioners assigned all of their rights with respect to their partnership interests yet did not assign all of their rights as class b limited partners ie did not cause the assignees to be admitted as substitute class b limited partners in sum we conclude that the facts in this case do not permit us to infer as we did in kerr that petitioners intended to transfer all of their rights as partners and that all of the other partners effectively consented to the admission of the assignees as partners rather petitioners assigned only economic rights with respect to mil and we shall proceed to value the gifted interest on that basis the partnership_agreement provides that the term partnership_interest means the interest in the partnership representing any partner’s right to receive distributions from the partnership and to receive allocations of partnership profit and loss the statutory definition is similarly worded see tex rev civ stat ann art 6132a-1 sec_1 vernon the act and accompanying bar committee comment see also id sec a and assignment of partnership_interest entitles the assignee to distributions and allocations but the assignor continues to be a partner and to have the power to exercise any rights or powers of a partner until the assignee becomes a partner to use the terminology favored by the parties we shall value the gifted interest as an assignee interest v fair_market_value of the gifted interest a introduction general principles sec_25_2512-1 gift_tax regs provides that the value of property for gift_tax purposes is the price at which such property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts the willing buyer and willing seller are hypothetical persons rather than specific individuals or entities and their characteristics are not necessarily the same as those of the donor and the donee 94_tc_193 citing 658_f2d_999 5th cir dollar_figure the hypothetical willing buyer and willing relying on 243_f3d_1145 9th cir revg estate of kaufman v commissioner tcmemo_1999_119 and estate of smith v commissioner tcmemo_1999_368 petitioners contend that the confirmation agreement is conclusive proof of the value of the gifted interest because such agreement was an arm’s-length transaction that was the functional equivalent of an actual sale we disagree suffice it to say that in the long run it is against the economic_interest of a charitable_organization to look a gift horse in the mouth although the cited cases involved the estate_tax it is well settled that the estate_tax and the gift_tax being in_pari_materia should be construed together see eg 283_f3d_1258 n 11th cir citing 340_us_106 affg 115_tc_376 seller are presumed to be dedicated to achieving the maximum economic advantage id pincite expert opinions a in general in deciding valuation cases courts often look to the opinions of expert witnesses nonetheless we are not bound by the opinion of any expert witness and we may accept or reject expert testimony in the exercise of our sound judgment 304_us_282 estate of newhouse v commissioner supra pincite although we may largely accept the opinion of one party’s expert over that of the other party’s expert see 74_tc_441 we may be selective in determining what portions of each expert’s opinion if any to accept 86_tc_547 finally because valuation necessarily involves an approximation the figure at which we arrive need not be directly traceable to specific testimony if it is within the range of values that may be properly derived from consideration of all the evidence estate of true v commissioner tcmemo_2001_167 citing 538_f2d_927 2d cir affg t c memo b petitioners’ expert petitioners offered william h frazier mr frazier as an expert witness to testify concerning the valuation of the gifted interest mr frazier is a principal of howard frazier barker elliott inc hfbe a houston-based valuation and consulting firm he is a senior member of the american society of appraisers and has been involved in valuation and general investment banking activities since the court accepted mr frazier as an expert in the valuation of closely held entities and received written reports of hfbe into evidence as mr frazier’s direct and rebuttal testimony respectively in his direct testimony mr frazier concludes that based on a 22-percent minority interest discount and a 35-percent marketability discount the fair_market_value of a 1-percent assignee interest in mil on the valuation_date was dollar_figure based on that figure mr frazier further concludes that the fair_market_value of each petitioner’s one-half share of the gifted interest on the valuation_date was dollar_figure a figure that due to rounding is slightly lower than the value reported on the form sec_709 dollar_figure mr frazier asserts that a 167-percent assignee interest in mil ie one-half of the gifted interest has no more proportionate value than a 1-percent assignee interest therein and respondent’s expert does not dispute that assertion c respondent’s expert respondent offered mukesh bajaj ph d dr bajaj as an expert witness to testify concerning the valuation of closely held entities dr bajaj is the managing director of the finance and damages practice of lec llc he also has experience as a university professor of finance and business economics dr bajaj has lectured extensively on valuation issues and he has testified as an expert in several valuation cases the court accepted dr bajaj as an expert in the valuation of closely held entities and received his written reports into evidence as his direct and rebuttal testimony respectively in his direct testimony dr bajaj concludes that based on an 34-percent minority interest discount and a 7-percent marketability discount the fair_market_value of a 1-percent assignee interest in mil on the valuation_date was dollar_figure based on that figure dr bajaj further concludes that the fair_market_value of each petitioner’s one-half share of the gifted interest on the valuation_date was dollar_figure b value of underlying assets the parties agree that on the valuation_date mil’s net asset value nav was dollar_figure broken down by asset class as follows asset type equities portfolio bond portfolio real_estate partnerships value dollar_figure big_number big_number real_estate oil_and_gas interests big_number big_number total big_number in determining the value of the gifted interest mr frazier first ie before applying any discounts subtracts dollar_figure from mil’s nav to reflect the class a limited partner’s dollar_figure priority claim against mil’s assets under the terms of the partnership agreementdollar_figure dr bajaj makes no such preliminary adjustment we concur with mr frazier’s approach in that regard and therefore we conclude that the appropriate base_amount for determining the value of the gifted interest is dollar_figure c minority interest lack of control discount introduction a hypothetical buyer of the gifted interest would have virtually no control_over his investment for instance such we note that the class a limited partner’s sole economic_interest in mil consists of a guaranteed_payment for_the_use_of such partner’s nominal capital this case does not require us to determine whether the class a limited_partner is a partner of mil for federal tax purposes for purposes of determining mil’s nav mr frazier does not apply discounts to the real_estate limited_partnership interests that mccord brothers partnership contributed to mil upon formation mr frazier did however discount the value of those real_estate limited_partnership interests by dollar_figure percent for purposes of valuing mccord brothers partnership’s capital_contribution to mil and determining the mil partners’ percentage interests in mil this case does not require us to address the gift_tax consequences if any of the initial capital contributions to and allocation of percentage interests in mil holder would have no say in mil’s investment strategy and could not unilaterally recoup his investment by forcing mil either to redeem his interest or to undergo a complete_liquidation mr frazier and dr bajaj agree that the hypothetical willing buyer of the gifted interest would account for such lack of control by demanding a reduced sales_price ie a price that is less than the gifted interest’s pro_rata share of mil’s nav they further agree that in the case of an investment_company such as mil the minority interest discount should equal the weighted average of minority interest discount factors determined for each type of investment held by mil equities municipal_bonds real_estate interests and oil_and_gas interests discount factors by asset class a equity portfolio mr frazier and dr bajaj both determine the minority interest discount factor for mil’s equity portfolio by reference to publicly traded closed end equity_investment funds specifically they both derive a range of discounts by determining for a sample of closed end equity funds the discount at which a share of each sample fund trades relative to its pro_rata share of the nav of the funddollar_figure they differ in their unlike a shareholder of an open-end fund a shareholder of a closed end fund cannot at will by tendering his shares to the fund for repurchase obtain the liquidation value of his continued selection of measurement dates sample funds and representative discounts within the range of the sample fund discounts measurement date mr frazier calculates discounts for his sample of closed end equity funds on the basis of date trading prices and date nav information dr bajaj on the other hand utilizes trading prices and nav data as of the valuation_date ie date we agree with dr bajaj that to the extent possible data from date should be utilized to determine discounts with respect to the sample funds sample of funds mr frazier derives his sample of closed end equity funds from the list of domestic equity funds set forth in morningstar’s mutual funds guide from that list he purports to exclude from consideration special purpose funds ie those primarily invested in a specific industry funds with a stated maturity and funds that had provisions regarding votes to open- continued investment ie his pro_rata share of the fund’s nav for that reason a share of a closed end fund typically trades at a discount relative to its pro_rata share of the fund’s nav since according to the expert witnesses that discount has no marketability element it is to some extent considered reflective of a minority interest discount end the fund that screening process produced a sample of funds dr bajaj derives his sample of closed end equity funds from the list of general equity funds set forth in the date edition of the wall street journal for reasons not entirely clear dr bajaj excludes two of those funds from consideration leaving a sample of fundsdollar_figure dr bajaj’s sample contains nine funds that mr frazier excludes from his sample with regard to the first two of mr frazier’s three screening criteria dr bajaj states in his rebuttal testimony that none of those nine funds was a special purpose fund and that none had a stated maturity_date with regard to mr frazier’s third screening criterion dr bajaj states that the fact that a fund’s shareholders can vote to open- end the fund does not mean that such a conversion is imminent dr bajaj also states that the summary descriptions contained in mr frazier’s direct testimony of five of the funds included by as noted earlier a shareholder of an open-end fund generally can obtain the liquidation value of his investment ie his pro_rata share of the fund’s nav by tendering his shares to the fund for repurchase it stands to reason that to the extent the conversion of a closed end fund to open-end status is imminent the share price of such fund will tend to approach the fund’s nav per share in his direct testimony dr bajaj states that the two excluded funds could not be identified in morningstar principia dataset as of date since mr frazier excludes those funds from his sample as well we similarly exclude them from consideration mr frazier in his sample of funds mention open-ending votes or procedures which according to mr frazier’s criteria should have required their exclusion in his rebuttal testimony mr frazier does not directly challenge dr bajaj’s inclusion of any specific fund in his sample rather he simply asserts that some of these funds could have announced their intent to convert to an open-end fund and that other funds may be non-diversified in the absence of more specific objections to dr bajaj’s additional sample funds we are persuaded to include such funds in our own analysis mr frazier’s sample contains three funds that dr bajaj excludes from his sample gemini ii quest for value and liberty all star growth fund gemini ii and quest for value were dual purpose funds which were scheduled for either liquidation or open-ending in january dollar_figure given the effect that the impending liquidation or conversion may have had on share prices of those funds we exclude them from our analysis since dr bajaj’s rebuttal testimony raises no specific objection to the inclusion of liberty all star growth fund in the sample we include that fund in our analysisdollar_figure a dual purpose fund has both income shares and capital shares at a set expiration date the fund redeems all income shares and the capital shareholders then vote either to liquidate the fund or convert it to open-end status dr bajaj may have excluded liberty all star growth fund from his sample due to the lack of nav information with respect continued representative discount within the range of sample fund discounts mr frazier concludes that because an interest in mil’s equity portfolio would not compare favorably to an interest in an institutional fund the minority interest discount factor for mil’s equity portfolio should derive from the higher end of the sample’s range of discounts dr bajaj on the other hand concludes that such discount factor should derive from the lower end of the range of discounts for the reasons discussed below we find neither expert’s arguments convincing on that point mr frazier concludes that a higher than average minority interest discount factor for mil’s equity portfolio is warranted in part because of the relative anonymity of mil’s investment managers the relatively small size of mil’s equity portfolio and mil’s policy of not making distributions other than distributions to satisfy tax obligations however mr frazier elsewhere testifies that based on his regression analysis there is no clear correlation between the discounts observed in his sample of closed end funds and any of the variables he analyzed including morningstar rating largely indicative of management reputation the size of the fund and distributions as a percentage of nav we are similarly unpersuaded by mr frazier’s continued to such fund as of the valuation_date for purposes of our analysis we utilize the fund’s nav and price data as of date which is in the record assertion unsupported by empirical evidence that fewer administrative and regulatory controls on mil’s investment activity as compared to that of institutional funds should result in a higher discount factor as a matter of coursedollar_figure dr bajaj’s argument that the minority interest discount factor for mil’s equity portfolio should derive from the lower end of the range of observed discounts is based primarily on the premise that on the valuation_date mil was akin to a new investment fund dr bajaj’s research along with that of others cited in his direct testimony indicates that new investment funds tend to trade at lower discounts than seasoned funds however dr bajaj’s analysis fails to recognize that while mil was a relatively new entity on the valuation_date its equity portfolio had been in place in the hands of the contributing partners for years furthermore of the four factors that dr bajaj specifically identifies as possible determinants of lower initial fund discounts only one--lack of unrealized capital gains--perhaps would have informed the pricing decision of a hypothetical buyer of an interest in mildollar_figure the other factors for instance less regulation implies lower compliance costs which seemingly would offset at least to some extent any pricing effect of relatively lax investor protections although mil inherited any unrealized_gain with respect to assets contributed by the initial mil partners see sec_723 the portion of such precontribution gain otherwise allocable to a subsequent purchaser of an interest in mil see sec_1 a income_tax regs generally would be eliminated if the continued cited by dr bajaj the initial diminution of fund nav relative to issue proceeds due to flotation and other startup costs the prevalence of new funds in hot investment sectors and the initial lack of management inefficiencies simply do not readily translate from the public capital markets to the hypothetical private sale of an interest in mil because we are unpersuaded by the respective arguments of mr frazier and dr bajaj for a higher than average or lower than average minority interest discount factor for mil’s equity portfolio we utilize the average discount of the sample funds under considerationdollar_figure summary in determining the appropriate minority interest discount factor for mil’s equity portfolio we utilize dr bajaj’s price and nav data as of date with the exception of liberty all star growth fund for which we utilize nav data from date contained in the record dr bajaj’s sample of funds with the addition of liberty all star growth fund and continued general partners of mil were to agree to make a timely sec_754 election with respect to mil see sec_754 sec_743 sec_1 b ii income_tax regs the same would be true with respect to any postcontribution unrealized_appreciation with respect to mil’s assets in their reports mr frazier and dr bajaj determine the average but not the weighted average of the discounts with respect to the equity funds in their respective samples we follow the same approach here the average discount of the sample funds the resulting discount factor is dollar_figure percent which we round up to percent b municipal_bond portfolio both mr frazier and dr bajaj determine the minority interest discount factor for mil’s municipal_bond portfolio by reference to publicly traded closed end municipal_bond investment funds once again they disagree on measurement dates sample funds and representative discounts within the range of the sample fund discounts measurement date mr frazier calculates discounts for his sample closed end municipal_bond funds on the basis of date trading prices and date nav data dr bajaj utilizes trading prices and nav information as of the valuation_date ie date we agree with dr bajaj that to the extent possible data from date should be utilized in determining discounts with respect to the sample funds sample of funds mr frazier derives his sample of closed end municipal_bond funds from the list of municipal_bond funds set forth in morningstar’s mutual funds guide in his direct testimony mr frazier indicates that he excluded from consideration funds that were heavily weighted toward a specific sector and funds with scheduled liquidation dates with regard to the first screening factor it appears that mr frazier was referring to single-state funds mr frazier’s screening process produced a sample of eight funds dr bajaj derives his sample from the list of closed end municipal_bond funds set forth in the date edition of the wall street journal for reasons not entirely clear dr bajaj excludes six of the funds from consideration leaving a sample of fundsdollar_figure that sample includes numerous single- state funds and funds with scheduled liquidation dates we agree with mr frazier that funds with scheduled liquidation dates should not be included in the sample however given the fact that louisiana-based obligations accounted for approximately percent of the value of mil’s bond portfolio we are somewhat puzzled by mr frazier’s exclusion of single-state funds from his sample indeed we believe that the sample should consist entirely of single-state funds we therefore utilize a sample consisting of the single-state funds in dr bajaj’s sample that do not have scheduled liquidation dates representative discount within the range of sample fund discounts as is the case with mil’s equity portfolio mr frazier concludes that the minority interest discount factor for mil’s bond portfolio should derive from the higher end of the sample’ sec_22 in his direct testimony dr bajaj states that the six excluded funds could not be identified in morningstar principia dataset as of date range of discounts while dr bajaj concludes that such discount factor should derive from the lower end of the range of discounts once again we find neither expert’s arguments convincing on this point mr frazier states that according to his regression analysis the three factors that are the most determinative of discounts with respect to the closed end funds in his sample are distributions as a percentage of nav built-in_gain as a percentage of nav and 3-year average annual return we see no error in mr frazier’s calculation of his first factor although he seems to take the same factor into account as an aspect of the discount for lack of marketability with regard to the second two factors mr frazier provides no data with respect to mil’s bond portfolio that can be compared to the data from his sample funds mr frazier also repeats factors that he deemed relevant in the context of mil’s equity portfolio notwithstanding the fact that his own regression analysis indicates little if any correlation between those factors management quality and the size of the fund and the level of discounts in his bond fund sampledollar_figure mr frazier’s regression analysis produced r-squared calculations of dollar_figure for the morningstar rating management quality variable and dollar_figure for the fund size variable elsewhere in his direct testimony mr frazier indicates that an r-squared calculation of dollar_figure is relatively low leading to the conclusion of no clear correlation between the variable in question and the level of sample fund discounts dr bajaj applies his new fund analysis discussed above in the context of mil’s equity portfolio to mil’s bond portfolio as well again dr bajaj’s analysis fails to recognize that while mil was a relatively new entity on the valuation_date its bond portfolio had been in place in the hands of the contributing partners for years for that reason and the other reasons discussed supra in section v c a we reject this portion of dr bajaj’s analysis because we are unpersuaded by the respective arguments of mr frazier and dr bajaj for a higher than average or lower than average minority interest discount factor for mil’s bond portfolio we utilize the average discount of the sample funds under considerationdollar_figure summary in determining the appropriate minority interest discount factor for mil’s bond portfolio we utilize dr bajaj’s price and nav data as of date a sample of funds consisting of the single-state funds in dr bajaj’s sample that do not have scheduled liquidation dates and the average discount of the sample funds the resulting discount factor is dollar_figure percent which we round up to percent in their reports mr frazier and dr bajaj determine the average but not the weighted average of the discounts with respect to the bond funds in their respective samples we follow the same approach here c real_estate partnership sec_25 the appropriate comparables in contrast to their opinions regarding mil’s equity and bond portfolios dr bajaj and mr frazier sharply disagree on the general type of publicly traded entity from which to extrapolate the minority interest discount factor for mil’s real_estate partnership interests dr bajaj argues that the discount factor should be based on data pertaining to real_estate_investment_trusts reits dollar_figure mr frazier on the other hand excludes reits from consideration since they are primarily priced on a current yield basis because reits are required_by_law to annually pay out a large portion of earnings to shareholders that justification overlooks the fact that the investment funds mr frazier analyzes in determining the minority interest discount factors for mil’s equity and bond portfolios are also required to distribute substantially_all of their income each year in order to maintain their tax-favored status as regulated_investment_companies rics compare sec_852 income distribution requirement for rics with sec_857 income distribution requirement for reits in the absence of any dr bajaj limits his real_estate analysis to mil’s real_estate partnership interests we address the minority interest discount factor for mil’s direct real_estate holdings infra in sec v c d a real_estate_investment_trust is a tax-favored vehicle through which numerous investors can pool their resources to invest in real_estate see secs explanation as to why the current_distribution requirement should disqualify reits but not rics from consideration in our analysis we are persuaded to evaluate the reit data we are further persuaded to utilize the reit data in light of the alternative offered by mr frazier mr frazier’s search for comparable publicly traded real_estate companies yielded a sample of five companies and he derives his range of discounts from only three of those companies while we have utilized small samples in other valuation contexts we have also recognized the basic premise that a s similarity to the company to be valued decreases the number of required comparables increases estate of heck v commissioner tcmemo_2002_34 one of mr frazier’s three sample companies developed planned communities conducted farming operations and owned royalty interests in more than oil_and_gas wells another owned and managed shopping centers and malls and developed the master-planned community of columbia maryland the assets and activities of those companies are not sufficiently similar to those of mil’s real_estate partnerships to justify the use of such a small sampledollar_figure in contrast dr bajaj’s reit sample consists of companies in recognition of the fact that two of the real_estate limited_partnerships in which mil was a partner owned cf estate of desmond v commissioner tcmemo_1999_76 approving the use of the market approach for valuing an operating business based on two guideline companies in the same --as opposed to similar--line of business unimproved land that could be used for a variety of purposes dr bajaj’s sample includes reits specializing in a broad array of real_estate investments including office residential and retail properties given the size of the sample we believe that any dissimilarities in the assets and activities of particular reits in the sample as compared to those of mil’s real_estate partnerships are tolerabledollar_figure determining the discount factor because reits offer investors the opportunity to invest in an illiquid asset ie the underlying real_estate in liquid form ie the reit shares investors in reits are willing to pay a liquidity premium relative to nav to invest in reit shares according to dr bajaj that does not imply that a minority discount is nonexistent it only means that the difference between price and nav for a reit may have two components one positive the liquidity premium and one negative the minority discount from his sample data dr bajaj calculated a median price-to-nav premium of percent to be conservative and to reflect mil’s distribution policy dr bajaj looked below the median to the 25th percentile and began with a price-to-nav discount of percent an adjustment to nav of minus - percent since dr bajaj believes that that we note that while mr frazier questions the composition of dr bajaj’s sample of reits he offers no specific suggestions for modifying the sample adjustment reflects both a minority discount and a smaller liquidity premium he then proceeded to identify and eliminate the effect of the liquidity premium in order to determine the minority discount based on his opinion that as of the valuation_date the prevailing illiquidity discount for privately placed restricted_stock was approximately percent he calculated a 53-percent liquidity premiumdollar_figure based on that liquidity premium of dollar_figure percent and his selected price-to-nav discount of percent from his reit sample dr bajaj added the two percentages to calculate a minority discount of dollar_figure percent ie he increased the price-to-nav discount to reflect the elimination of the effect of the liquidity premium which he rounded to percent using the same procedure as dr bajaj but substituting an illiquidity discount of percent for his 7-percent figure we arrive at a liquidity premium of percent and therefore conclude that the minority discount imbedded in the 3-percent price-to-nav discount selected from the reit sample i sec_23 percent which we shall apply to mil’s real_estate partnership interests we have substituted percent for percent because as discussed infra in section v d a dr bajaj has not been clear in distinguishing between the apparently different but as dr bajaj explains his calculation if an illiquid security trades at a discount of relative to a liquid asset this suggests that the liquid asset is trading at a premium of about relative to the illiquid asset overlapping concepts of marketability and liquidity our substitute percentage derives from a published study referenced in his direct testimony the wruck study which reported that on average discounts observed in private placements of unregistered shares exceeded those observed in private placements of registered shares freely tradable in the public market by percentage points which we round up to percent the theory discussed in more detail infra in section v d is that such additional discount represents to some degree pure illiquidity concerns since a ready public market is available to owners of registered shares and unavailable to owners of restricted shares d direct real_estate holdings respondent has instructed dr bajaj to base his value conclusion regarding mil’s direct real_estate holdings on the percent minority interest discount factor for those assets appearing in the hfbe appraisal report on that basis we find that the minority interest discount factor for mil’s direct real_estate holdings i sec_40 percent e oil_and_gas interests mr frazier assigns a 5-percent minority interest discount factor to mil’s oil_and_gas interests respondent ha sec_30 wruck equity ownership concentration and firm value evidence from private equity financings j fin econ instructed dr bajaj to base his value conclusion regarding the oil_and_gas component of mil’s portfolio on the 5-percent minority interest discount factor for those assets appearing in the hfbe appraisal report on that basis we find that the minority interest discount factor for mil’s oil_and_gas investments i sec_33 percent determination of the minority interest discount the minority interest discount factors determined above yield a weighted average discount of dollar_figure percent determined as follows asset class equities bonds r e pships real_estate oil_and_gas discount disc percent percent of nav factor percent weighted average dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure rounding to the nearest percentage_point we conclude that the appropriate minority interest discount with respect to the gifted interest i sec_15 percent d marketability discount introduction the parties agree that to reflect the lack of a ready market for assignee interests in mil an additional discount after applying the minority interest discount should be applied mr frazier and dr bajaj agree on the percentages of nav assigned to each asset class to the net asset value of mil’s assets to determine the fair_market_value of the gifted interest such a discount is commonly referred to as a marketability discount the marketability discount analyses of mr frazier and dr bajaj differ from their minority interest discount analyses in that they seek to identify a single entity-wide discount rather than a weighted average of discount factors specific to each category of assets held by mil the parties disagree as to the amount of that discount traditional approaches to measuring the discount a in general mr frazier and dr bajaj agree that empirical studies of the marketability discount fall into two major categories the first major_category the ipo approach consists of studies that compare the private-market price of shares sold before a company goes public with the public-market price obtained in the initial_public_offering ipo of the shares or shortly thereafter the second major_category the restricted_stock approach consists of studies that compare the private-market price of restricted shares of public companies ie shares that because they have not been registered with the securities_and_exchange_commission generally cannot be sold in the public market for a 2-year period with their coeval public-market price mr frazier see c f_r sec d the required holding_period was shortened to year in see fed reg date relies primarily on data from the restricted_stock approach to support a marketability discount of percent although he also contends that data from the ipo approach strongly support that level of discount dr bajaj relies on a variant of the restricted_stock approach which we shall refer to as the private_placement approach to support a marketability discount of percent b rejection of ipo approach dr bajaj argues that the ipo approach is flawed both in concept and in application his principal criticism is that the ipo premium over the pre-ipo private market price may reflect more than just the availability of a ready market he believes that buyers of shares prior to the ipo are likely to be insiders who provide services to the firm and who are compensated at least in part by a bargain price more importantly he believes that a pre-ipo purchaser demands compensation in the form of a lower price for bearing the risk that the ipo will not occur or will occur at a lower price than expected his opinion is t he ipo approach probably generates inflated estimates of the marketability discount consequently it is of limited use in estimating the value of closely held firms in his rebuttal testimony mr frazier fails to offer any rebuttal of dr bajaj’s criticism of the ipo approach mr frazier’s support for the ipo approach consists only of his reference to a series of studies undertaken by shannon pratt chairman of willamette management associates inc a national business valuation firm the willamette studies without explaining the basis of his testimony mr frazier’s opinion is t he evidence from the willamette study was quite compelling and offered strong support for the hypothesis that the fair market values of minority interests in privately held companies were and should be greatly discounted from their publicly-traded counterparts by contrast in his rebuttal testimony dr bajaj offers a compelling criticism of both the willamette studies and another series of studies undertaken by john d emory vice president of appraisal services at robert w baird and co a regional investment banking firmdollar_figure he concludes that the latest study conducted by mr emory is biased because it does not adequately take into account the highest sale prices in pre-ipo transactions and he criticizes the willamette studies for not disclosing enough data to reveal whether they suffer from a similar bias dr bajaj has convinced us to reject as unreliable mr frazier’s opinion to the extent it is based on the ipo approach we shall proceed to consider mr frazier’s restricted_stock analysis and dr bajaj’s private_placement analysis mr frazier relied on mr emory’s studies in the hfbe appraisal report but makes no mention of those studies in either his direct testimony or his rebuttal testimony mr frazier’s restricted_stock analysis mr frazier reviews four studies under the restricted_stock approach34 and then attempts to infer an appropriate marketability discount by placing mil within the range of observed discounts in those studies and the willamette studies on the basis of certain characteristics of mil revenue income and nav and the gifted interest size of the interest expressed both as a percentage of mil and as a dollar amount the results of that attempt are set forth in table of the report constituting mr frazier’s direct testimony table based on data from the five studies mr frazier identifies hypothetical discount levels for the gifted interest some expressed as a specific percentage eg and some expressed as being greater or less than a specific percentage eg six of the hypothetical discounts were greater than percent and four were less than percent he states mr frazier reviews the following studies the restricted_stock studies securities_and_exchange_commission discounts involved in purchases of common_stock h_r doc no part pincite6 silber discounts on restricted_stock the impact of illiquidity on stock prices financial analysts journal july-date pincite a study only described as the standard research consultants src study hertzel smith market discounts and shareholder gains for placing equity privately j fin based on these studies alone we concluded that the discount applicable to the partnership’s block should approximate percent we find several flaws in mr frazier’s analysis for example table indicates that mil’s projected revenue of dollar_figure is consistent with a discount of percent based on data from the willamette studies the willamette studies are ipo studies rather than restricted_stock studies and they do not so far as we can tell from mr frazier’s testimony analyze firm revenuesdollar_figure table also indicates that one can infer a discount from the hertzel and smith study based on the proportional size of the offering although mr frazier gives no indication that that study drew any correlations between that variable and the level of discount furthermore under the heading size of block as total outstanding in table the entry corresponding to mil is when in fact each half of the gifted interest represents a greater than 40-percent interest with respect to mil similarly although there is no entry in table for the dollar size of the gifted interest it is evident that the discount inferred from that variable in table is based on the same mischaracterization of each half of indeed under the heading revenues in table of mr frazier’s direct report the entry corresponding to willamette is na the gifted interest as a 1-percent interest in mildollar_figure in light of those numerous defects we give little weight to mr frazier’s restricted_stock analysis dr bajaj’s private_placement analysis a comparison of registered and unregistered private placements dr bajaj believes that the discounts observed in restricted_stock studies are attributable in part to factors other than impaired marketabilitydollar_figure in support of his position dr bajaj analyzes data from studies including his own unpublished study involving both registered private placements and unregistered private placements the private_placement studies he observes that if discounts found in unregistered restricted private placements are attributable solely to impaired marketability then there should be no discounts associated with specifically one restricted_stock study the silber study found that the average dollar size of private placements with discounts in excess of percent was dollar_figure million while the average dollar size of private placements with discounts less than percent was dollar_figure million even taking into account mr frazier’s suggested minority interest discount of percent the dollar size of each half of the gifted interest was approximately dollar_figure million that would indicate that based on the silber study a discount of less than percent would be appropriate for each half of the gifted interest we note that such other factors should not include the purchaser’s minority ownership position if applicable presumably a minority interest discount is already reflected in the market price of a share of the issuer other than his own study he refers to the wruck study supra note and the hertzel smith study supra note registered private placements ie because such shares can be sold in the public market however the results of the private_placement studies indicate that even registered private_placement shares are issued at a discount although such discounts tend to be lower than those observed in unregistered private placements dr bajaj explains that phenomenon by positing that privately placed shares whether registered or unregistered tend to be issued to purchasers of large blocks of stock who demand discounts to compensate them for assessment costs and anticipated monitoring costs he states the discount offered to buyers is a compensation_for the cost of assessing the quality of the firm and for the anticipated costs of monitoring the future decisions of its managers b refinement of registered unregistered discount differential dr bajaj further contends that the additional discount typical of unregistered private placements as compared to registered private placements is not entirely attributable to the fact that unregistered shares unlike registered shares generally cannot be sold in the public market rather he contends that such differential is attributable in part to higher assessment and monitoring costs incurred in unregistered private placements as compared to registered private placements in support of his theory dr bajaj suggests four factors that might have a correlative relationship to assessment and monitoring costs and by extension to private_placement discounts the size of the private_placement relative to the issuer’s total shares outstanding the volatility of the issuer’s recent economic_performance the overall financial health of the issuer and the size of the private_placement in terms of total_proceeds dr bajaj posits that the additional discount observed in unregistered issues could be attributable solely to impaired marketability only if those four additional factors were present in equal measure among both registered and unregistered private placements dr bajaj analyzes the effects of the four additional factors listed above and concludes that the first three but not the fourth of those factors are systematically related to the level of private_placement discounts specifically he concludes that relatively speaking a high ratio of privately placed shares to total shares of the issuer high issuer volatility and weak financial health of the issuer tend to be indicative of higher discounts dr bajaj then demonstrates that as compared to registered private placements unregistered private placements tend to involve a higher percentage of the issuer’s total shares higher issuer volatility and financially weaker issuers that being the case dr bajaj concludes that the registered- unregistered private_placement discount differential must be attributable in part to those three factors rather than just impaired marketability in other words the additional discount typical of unregistered private placements as compared to registered private placements does not represent solely compensation_for impaired marketability but represents in part compensation_for the relatively higher assessment and anticipated monitoring costs normally associated with unregistered issues having concluded that factors unrelated to impaired marketability play a variable role in the total discounts observed in private_placement transactions dr bajaj then attempts to isolate the effect that impaired marketability has on such total discounts to that end he adds a variable for stock registration to variables representing the three additional correlative factors and uses the statistical technique of multivariate regression to determine the effect of each such variable on the discounts observed in his sample of private placements he concludes from that analysis that over the to period of his study a private issue that was registered thereby allowing purchasers to immediately resell in the public market would have required a discount that was dollar_figure percentage points less than an otherwise identical issue in terms of the three additional correlative factors that was unregistered c further adjustments dr bajaj considers and rejects any additional adjustment discount on account of the long-term impaired marketability of an assignee interest in mil39 as compared to the limited impaired marketability of restricted shares of stock his rejection is based primarily on his opinion supported by the economic analysis of others that the level of discount does not continue to increase with the time period of impaired marketability because investors with long-term horizons would provide a natural clientele for holding illiquid assets and would compete to purchase all or a portion of the gifted interest d application to mil dr bajaj concludes considering the available data the partnership’s holdings and history and the marketability discount of suggested by my regression analysis involving a broad range of economic sectors i conclude that a marketability discount of rounded from dollar_figure percent is appropriate for all the assets held by mil when valuing the subject interest determination of the marketability discount a discussion mr frazier in his testimony in rebuttal to dr bajaj criticizes dr bajaj for focusing narrowly on liquidity at the expense of other factors that contribute to a lack of marketability mr frazier states that t he impediments to value associated with inability to easily sell an interest in a both experts operate under the assumption that there will not be a ready market for assignee interests in family limited_partnerships during the remainder of mil’s 30-year term amihud mendelson asset pricing and bid-ask spread j fin econ closely-held entity go well beyond the narrowly defined ‘liquidity costs’ dr bajaj has isolated in his analysis and that the marketability discount is caused not by just ‘liquidity’ but the other negative characteristics that attend securities issued by small closely-held entities dr bajaj has indeed been helpful in focusing our attention and mr frazier’s attention on the distinction between illiquidity and other factors eg assessment and monitoring costs that contribute to private_placement discounts however his apparent confusion regarding the nature of the discount for lack of marketability ie whether such discount can be explained purely in terms of illiquidity or whether other factors may be involved is troubling in his direct testimony dr bajaj is fairly clear that assessment and monitoring costs associated with private placements are outside the realm of the marketability discount in his rebuttal testimony however he indicates that such costs may contribute to the marketability discount for a closely held entity that leads us to question whether other negative characteristics in the words of mr frazier associated with closely held entities may contribute to the appropriate marketability discount for an assignee interest in mil therefore while we are impressed by portions of dr bajaj’s analysis he has not convinced us that the appropriate marketability discount in this case can be inferred from the illiquidity cost associated with private placements although we reject dr bajaj’s quantification of the appropriate marketability discount in this case we look to the data from his private_placement study for two reasons first we believe that given mil’s status as an investment_company what dr bajaj refers to in the context of private placements as assessment and monitoring costs would be relatively low in the case of a sale of an interest in mil that belief coupled with dr bajaj’s persuasive argument that such costs are relatively high in unregistered private placements leads us to conclude that a sample consisting entirely of unregistered private placements would be inappropriately skewed second only dr bajaj’s study and not the other private_placement studies on which he relies covers the period immediately preceding the valuation_date in table of the report constituting his direct testimony dr bajaj separates the private placements in his sample into three groups according to the level of discounts ie the lowest discounts the middle discounts and the highest discounts presumably the low category is dominated by on the valuation_date percent of mil’s assets consisted of marketable_securities and an additional percent consisted of real_estate limited_partnership interests subject_to well-known and relatively routine appraisal techniques such as cashflow analysis or market multiple methods registered private placements which unlike an assignee interest in mil did not suffer from impaired marketability similarly it is likely that the high category is dominated by unregistered private placements which unlike the sale of an interest in an investment_company entailed relatively high assessment and monitoring costs accordingly we look to the middle group of private placements in dr bajaj’s sample in determining the appropriate marketability discount for an assignee interest in mil the average discount of that group of private placements was dollar_figure percentdollar_figure we are not persuaded that we can refine that figure any more to incorporate characteristics specific to mil b conclusion we find that a discount for lack of marketability of percent rounded from dollar_figure percent is appropriate in determining the fair_market_value of each half of the gifted interest e conclusion we conclude that the fair_market_value of each half of the gifted interest is dollar_figure determined as follows that discount is consistent with the average discount dollar_figure percent observed in the hertzel smith private_placement study supra note the study other than his own primarily relied upon by dr bajaj for ease of computation we determine the fair_market_value of a 1-percent interest total nav less class a preference net nav percent of net nav less 15-percent minority interest discount marketable value less 20-percent marketability discount dollar_figure big_number big_number big_number big_number big_number big_number fmv of 1-percent interest fmv of 16684918-percent big_number big_number interest vi charitable_contribution_deduction for transfer to cft a introduction the gift_tax is imposed on the value of what the donor transfers not what the donee receives 115_tc_376 citing inter alia 318_us_184 affd 283_f3d_1258 11th cir in essence petitioners contend that because they transferred to cft a portion of the gifted interest corresponding to the excess of the fair_market_value of that interest over dollar_figure and we have determined the fair_market_value of the gifted interest to be dollar_figure it follows from the maxim beginning this paragraph that they are entitled to a charitable_contribution_deduction in the amount of dollar_figure for their gift to cft because the assignment agreement does not equate the term fair_market_value with the term fair_market_value as finally determined for federal gift_tax purposes petitioners’ argument must fail b the assignment agreement by way of the assignment agreement petitioners transferred to cft the right to a portion of the gifted interest that portion was not expressed as a specific fraction of the gifted interest eg one-twentieth nor did petitioners transfer to cft a specific assignee interest in mil eg a 3-percent assignee interest rather cft was to receive a fraction of the gifted interest to be determined pursuant to the formula_clause contained in the assignment agreement the formula_clause provides that cft is to receive that portion of the gifted interest having a fair_market_value equal to the excess of the total fair_market_value of the gifted interest over dollar_figure the formula_clause is not self-effectuating and the assignment agreement leaves to the assignees the task of determining the fair_market_value of the gifted interest and plugging that value into the formula_clause to determine the fraction of the gifted interest passing to cft petitioners argue that because the assignment agreement defines fair_market_value in a manner that closely tracks the definition of fair_market_value for federal gift_tax purposes see sec_25_2512-1 gift_tax regs the assignment agreement effects a transfer to cft of a portion of the gifted interest determinable only by reference to the fair_market_value of that interest as finally determined for federal gift_tax purposes we do not believe that the language of the assignment agreement supports petitioners’ argument the assignment agreement provides a formula to determine not only cft’s fraction of the gifted interest but also the symphony’s and the children’s including their trusts’ fractionsdollar_figure each of the assignees had the right to a fraction of the gifted interest based on the value of that interest as determined under federal gift_tax valuation principles if the assignees did not agree on that value then such value would be determined again based on federal gift_tax valuation principles by an arbitrator pursuant to the binding arbitration procedure set forth in the partnership_agreement there is simply no provision in the assignment agreement that contemplates the allocation of the gifted interest among the assignees based on some fixed value that might not be determined if f equals the fair_market_value of the gifted interest determined by the assignees or an arbitrator based on federal gift_tax valuation principles and the gifted interest is shown as the percent class b assignee interest in mil transferred by petitioners then assuming f is equal to or greater than dollar_figure the products of the following formulas show the percentage assignee interests apportioned to the children including the trusts the symphony and cft expressed as x1 x2 and x3 respectively dollar_figure f x dollar_figure x f f dollar_figure f x - - for several years rather the assignment agreement contemplates the allocation of the gifted interest based on the assignees’ best estimation of that value moreover each of the assignees’ percentage interests was determined exactly as contemplated in the assignment agreement without_recourse to arbitration and none can complain that they got any less or more than petitioners intended them to getdollar_figure had petitioners provided that each donee had an enforceable right to a fraction of the gifted interest determined with reference to the fair_market_value of the gifted interest as finally determined for federal gift_tax purposes we might have reached a different result however that is not what the assignment agreement provides we suppose that at least in theory there might be a difference between petitioners’ and the assignees’ expectation on date the valuation_date regarding the value of the portion of the gifted interest passing to cft and the value of that portion as subsequently determined by the assignees however no one has suggested how to value the first quantity or that on the facts before us the difference would be significant see eg sec_1_664-2 income_tax regs providing that a sum certain may be expressed as a fraction or percentage of the value of property as finally determined for federal tax purposes but requiring that actual adjusting payments be made if such finally determined fair_market_value differs from the initially determined value sec e vi a estate_tax regs similar sec_25 b ii b gift_tax regs similar revproc_64_19 1964_1_cb_682 discussing conditions under which the federal estate_tax_marital_deduction may be allowed where under the terms of a will or trust an executor or trustee is empowered to satisfy a pecuniary_bequest or transfer in trust to a decedent's surviving_spouse with assets at their value as finally determined for federal estate_tax purposes of course the assignees’ determination of the fair_market_value of the gifted interest while binding among themselves for purposes of determining their respective assignee interests has no bearing on our determination of the federal gift_tax value of the assignee interests so allocated since we find that the fair_market_value of a 1-percent assignee interest in mil on the valuation_date was dollar_figure the following table expresses the fair market values of the percentage assignee interests passing to the various assignees assignee children and trusts symphony cft percentage assignee interest fair_market_value dollar_figure big_number big_number big_number c conclusion we find that the fair_market_value of the property right transferred by petitioners to cft was dollar_figure taking into the rule is well established that we may approve a deficiency on the basis of reasons other than those relied on by the commissioner see 39_tc_839 and cases cited therein affd 332_f2d_421 2d cir because our conclusion that the valuation clause of the assignment agreement does not achieve the claimed tax neutralization effect is based on the language of the assignment agreement we need not address respondent’s arguments that the formula_clause is against public policy and the transaction should be recast as transfers of cash by petitioners to cft and the symphony under an integrated transaction theory we note that the application of respondent’s integrated transaction theory would result in an initial increase in the amount of petitioners’ aggregate taxable gift of only dollar_figure less than percent which would be partially offset by the resulting increase in the gift_tax liability that the noncharitable donees assumed under the assignment agreement account annual exclusions see sec_2503 and sec_2524 each petitioner is entitled to a charitable_contribution_deduction under sec_2522 of dollar_figure resulting from the transfer to cftdollar_figure vii effect of children’s agreement to pay estate_tax liability a introduction recently in 105_tc_358 revd on another issue 103_f3d_332 4th cir we described the nature of a net_gift as follows where a net_gift is made the donor and donee agree that the donee will bear the burden of the gift_tax the value of the property transferred is reduced by the amount_of_the_gift tax paid_by the donee resulting in the net amount transferred by gift or the net_gift the irs has provided an algebraic formula for determining the amount of gift_tax owed on a net_gift in revrul_75_72 1975_1_cb_310 it is important to keep in mind that once the net_gift is calculated the full amount_of_the_gift tax is paid on the net_gift when a net_gift is made a portion of the property is transferred by gift and the remaining portion is transferred by sale the net_gift rationale flows from the basic premise that the gift_tax applies to transfers of property only to the extent that the value of the property transferred exceeds the value in money or we note that under our analysis the assignee interest received by the symphony is worth more than dollar_figure nevertheless we do not believe that petitioners have claimed any increased charitable_contribution_deduction under sec_2522 on account of the transfer to the symphony if we are mistaken on that point petitioners can bring that to our attention or perhaps petitioners and respondent can deal with it in the rule computation money’s worth of any consideration received in exchange therefor see sec_2512 sec_25_2512-8 gift_tax regs petitioners each reported his or her transfer of one-half of the gifted interest as a net_gift each treated as sales proceeds consideration received the amount of federal and state gift_taxes that he or she calculated were to be paid_by the children the gift_tax amount and an amount described on brief as the mortality-adjusted present_value mortality- adjusted present_value of the children’s contingent obligation to pay the additional estate_tax that would have been incurred on account of sec_2035 the tax if that petitioner had died within years of the date of the gift petitioners describe their computation of the mortality-adjusted present_value as follows petitioners estimated the amount of estate_tax that would be owed under sec_2035 based on an expected marginal estate_tax rate then petitioners adjusted that amount to present_value at the applicable discount rate under sec_7520 for date with further adjustment for the possibility that they would survive each year of the three-year period with no estate_tax actually being owed the probability of death in each of the ensuing three years was calculated and then the probability- weighted tax amounts were discounted to present_value at the required_interest rate all calculations were made as required under sec_7520 by reference to petitioners’ ages as of their nearest birthdays the applicable_interest_rate under sec_7520 for january and mortality factors provided by table 80cnsmt as found in respondent’s pub actuarial values alpha volume petitioners computed the mortality-adjusted present values of the above described obligations as being dollar_figure and dollar_figure with respect to mr and mrs mccord respectively respondent does not take issue with petitioners’ treatment of the gift_tax amounts as sale proceeds however he disputes petitioners’ treatment of the mortality-adjusted present values as sale proceeds primarily on the grounds that those amounts are too speculative to be taken into account respondent cites 132_fsupp2d_421 w d va affd sub nom 277_f3d_490 4th cir in armstrong trust supra a gift was made and because of current sec_2035 the donees were subject_to a potential liability as transferees for estate_taxes see sec_6324 plaintiffs argued that liens or encumbrances were created on the gift by reason of the potential estate_tax liability assumed by the donees thereby reducing the value_of_the_gift id f_supp 2d pincite the district_court found that the possibility of future estate_tax liability was too speculative to reduce the value_of_the_gift relying on an opinion of the united_states court of claims 687_f2d_386 the court_of_appeals for the fourth circuit affirmed the district court’s decision in armstrong trust also on the basis that the donees’ potential liability for the donor’s estate_tax was too speculative to reduce the value of the gifts estate of armstrong v united_states supra pincite it was of no moment to the court_of_appeals that the donor had in fact died within years of the gift thus causing a tax to be due or that the plaintiffs apparently had produced expert calculations of an amount similar to the mortality-adjusted present_value at issue in this case the court_of_appeals said the litigation attempts of the estate and the trust to quantify through expert calculations the value of potential estate_taxes at the time of the transfers is irrelevant what is relevant is that the children’s obligation to pay any estate_taxes was then highly conjectural murray f 2d pincite and so provides no ground for applying net_gift principles id in murray v united_states supra the donor had made gifts in trust pursuant to an instrument that obligated the trustees to pay among other debts the donor’s estate and death taxes liabilities the plaintiffs executors of the donor’s estate argued that the obligation to pay the donor’s estate and death taxes rendered the gifts without value when made the court of claims disagreed finding that the obligation to pay estate and death taxes was not susceptible to valuation at the date of the gifts because the economic burden of paying these taxes was then unknown id f 2d pincite the court questioned whether it was even possible to approximate the value of the trustee’s obligation to pay the donor’s estate and death_tax liabilities the amount of estate and death taxes payable from the trusts was highly conjectural if oliver lived until date the value of the family_trust would no longer have been included in his estate as a gift_in_contemplation_of_death under sec_2035 significantly reducing his estate_tax liability moreover had he lived for several more years the size of his estate would have continued to diminish leaving the family trusts with an ever-decreasing estate_tax obligation id pincite the court of claims concluded thus plaintiffs’ inability to reasonably estimate the amount of tax if any to be paid from the trusts made it proper to compute the gift_tax on the basis of the full value of the trust assets 318_us_184 id at dollar_figure b discussion the specific question before us is whether to treat as part of the sale proceeds consideration received by each petitioner on the transfer of the gifted interest any amount on account of the children’s obligation pursuant to the assignment agreement to pay the tax that would be occasioned by the death of that petitioner within years of the valuation_date we have not faced that specific question beforedollar_figure neither armstrong trust in 318_us_184 the supreme court held that in computing the value of a gift of a remainder_interest in property the value as an offset of the donor’s contingent reversionary remainder_interest was to be disregarded because there was no recognized method of determining its value nevertheless in estate of armstrong v commissioner continued v united_states supra nor murray v united_states supra is binding on us and indeed the facts of both cases are somewhat different from the facts before us today armstrong trust did not involve a specific assumption of the potential tax as a condition of the underlying gift as is the case here rather the donees were statutorily liable for any tax under sec_6324 in murray unlike the instant case the obligation was not limited to the gross-up tax of original sec_2035 with its preordained inclusion amount and accompanying 3-year window of inclusion indeed that provision and the unified gift and estate_tax system had yet to be enacted nevertheless we agree with what we believe to be the basis of those two opinions ie that in advance of the death of a person no recognized method exists for approximating the burden of the estate_tax with a sufficient degree of certitude to be effective for federal gift_tax purposes see also 119_tc_220 petitioners’ computation of the mortality-adjusted present_value of the children’s obligation to pay the tax doe sec_50 continued 119_tc_220 addressing certain federal estate_tax questions with respect to the same gifts in question in 132_fsupp2d_421 w d va affd sub nom 277_f3d_490 4th cir we said the donee children’s mere conditional promise to pay certain additional gift_taxes that decedent might be determined to owe does not reduce the amount of decedent’s gift_taxes included in the gross_estate under sec_2035 nothing more than demonstrate that if one assumes a fixed dollar amount to be paid contingent on a person of an assumed age not surviving a 3-year period one can use mortality tables and interest assumptions to calculate the amount that without any loading charge an insurance_company might demand to bear the risk that the assumed amount has to be paid however the dollar amount of a potential liability to pay the tax is by no means fixed rather such amount depends on factors that are subject_to change including estate_tax rates and exemption amounts not to mention the continued existence of the estate_tax itself51 for that reason alone we conclude that petitioners are not entitled to treat the mortality-adjusted present values as sale proceeds consideration received for purposes of determining the amounts of their respective gifts at issuedollar_figure see 318_us_184 donor’s reversionary_interest contingent not only on donor outliving see economic_growth_and_tax_relief_reconciliation_act_of_2001 publaw_107_16 sec_901 115_stat_38 repealing the estate_tax with respect to decedents dying after date and reinstating same with respect to decedents dying after date we recognize that in 17_tc_1350 we reduced the amount of a gift of a_trust remainder by the present_value of the trustee’s obligation under the terms of the trust agreement to pay the settlor-life beneficiary’s income_tax_liability attributable to the trust’s income for the remainder of her life federal income taxes have become a permanent and growing part of our economy and there is no likelihood that such taxes will not continue to be imposed throughout the life expectancy of petitioner we do not have occasion today to reconsider that opinion 30-year old daughter but also on the failure of any issue of the daughter to attain the age of years is disregarded as an offset in determining the value_of_the_gift actuarial science cannot establish the probability of whether the daughter would marry and have children our conclusion is further buttressed by broader considerations of federal gift_tax law under the estate depletion theory of the gift_tax it is the benefit to the donor in money or money’s worth rather than the detriment to the donee that determines the existence and amount of any consideration offset sale proceeds in the context of an otherwise gratuitous transfer see 324_us_303 paul federal estate_and_gift_taxation when a donee agrees to pay the gift_tax liability resulting from a gift the benefit to the donor in money or money’s worth is readily apparent and ascertainable since the donor is relieved of an immediate and definite liability to pay such tax if that donee further agrees to pay the potential tax that may result from the gift then any benefit in money or money’s worth from the arrangement arguably would accrue to the benefit of the donor’s estate and the beneficiaries thereof rather than the donor the donor in that situation might receive peace of mind but that is not the type of tangible benefit required to invoke net_gift principles c conclusion because petitioners have failed to show that their computation of the value of the children’s obligation to pay any tax is reliable we do not accept it as establishing any proceeds received by petitioners and reducing the value of the net_gifts made by them viii conclusion the fair_market_value of the gifted interest on the date of the gift was dollar_figure dollar_figure for each half thereof petitioners are entitled to an aggregate charitable_contribution_deduction under sec_2522 for the transfer to cft in the amount of dollar_figure dollar_figure apiece to reflect the foregoing decision will be entered under rule reviewed by the court wells cohen swift gerber colvin gale and thornton jj agree with this majority opinion swift j concurring the majority opinion adopts an interpretation of the fair_market_value language of the formula_clause that recognizes the sophistication of the tax planning before us and that gives significance to the failure of that formula_clause to use commonly recognized language in the estate_planning profession under which--had it been intended--a fair_market_value determination and an allocation between the donees of the gifted interest based thereon as finally determined for federal gift_tax purposes would have been made explicit in my opinion the failure of the formula_clause to reflect such well- recognized language belies petitioners’ claim that such language interpretation and result were intended and now should be inferred under the majority’s interpretation of the formula_clause the abuse potential inherent therein is essentially negated if however petitioners’ interpretation of the formula_clause were adopted under which petitioners claim an increasd charitable deduction equal to all excess value of the gifted interest over dollar_figure as finally determined for federal gift_tax purposes without property representing such excess value actually passing to charity the long-standing reasonable probability and public policy doctrines applicable generally to gifts would become applicable see eg hamm v commissioner tcmemo_1961_347 affd 325_f2d_934 8th cir applying the reasonable probability standard to the question of whether a charitable donee will ever receive gifted property 142_f2d_824 4th cir applying public policy principles to the question of whether abusive valuation or adjustment clauses are to be respected with regard to judge foley’s criticism of these doctrines see dissenting op pp i would suggest that the reasonable probability and public policy doctrines should not be confined to stale factual situations involved in old cases to the contrary these doctrines live and breathe and have a life that should be broad and flexible enough to apply to contemporary and overly aggressive gift and estate_tax planning such as that involved herein --particularly where charity is involved with regard further to the nature or extent of the gift to charity involved herein i would emphasize that not all of petitioners’ mil partnership_interest was transferred respondent argues that all of petitioners’ mil partnership_interest was transferred but petitioners contend otherwise and the majority opinion concludes that something less than all of petitioners’ interest in the mil partnership was transferred namely only an assignee interest was transferred see majority op pp in light of the majority’s conclusion in that regard had respondent argued in the alternative that the partial interest gift rules of sec_2522 and sec_25_2522_c_-3 gift_tax regs were applicable to petitioners’ gift to charity it would appear that petitioners’ claimed charitable deduction herein would have been completely disallowable see the analysis below relating to the deductibility of gifts to charity of partial_interests the gift petitioners formed mil as a texas family limited_partnership and made gifts of a portion of their interests therein by way of an assignment agreement and a formula_clause which according to petitioners and the majority opinion transferred only assignee interests in mil to four levels of donees generally as follows first and second level noncharitable donees trusts for the benefit of the donors’ four children first level donees to receive portions of the gifted interest and outright gifts to the donors’ four children second level donees with an aggregate fair_market_value on the valuation_date up to dollar_figure third level donee if the fair_market_value of the gifted interest exceeds dollar_figure symphony a charitable donee to receive such excess up to a maximum value of dollar_figure fourth level donee if the fair_market_value of the gifted interest exceeds dollar_figure dollar_figure plus dollar_figure cft also a charitable donee to receive such excess without limit focusing on the gift to the fourth level charitable donee the gift to cft petitioners themselves allege in order to beef up the valuation discounts they seek and the majority opinion finds majority op pp that the gifted mil partnership_interest transferred to cft included only certain economic rights with regard to the gifted interest and did not consist of all of the donors’ rights as limited partners in that particular limited_partnership_interest upon petitioners’ transfer and upon cft’s receipt of the gifted interest in the mil partnership petitioners retained and cft never received the following rights associated with petitioners’ interest in mil references are to the mil amended partnership_agreement the right to vote on mil partnership matters sec_3_10 the right to redeem the mil partnership_interest section b the right to inspect financial and other pertinent information relating to mil sec_3 d i - v the right to access any properties or assets owned by mil sec_3 d vi and the right to veto early liquidation of mil unless such liquidation is required by state law section under section dollar_figure of the texas revised limited_partnership act a partnership_agreement may but is not required to limit the partnership rights that may be transferred when a partner transfers or assigns an interest in a partnership in this case petitioners made their retention of the above rights and the nonreceipt thereof by cft explicit by the terms of the mil partnership_agreement that they adopted section dollar_figure of the mil partnership_agreement discussing the transfer of a limited_partnership_interest to an assignee is set forth in part below a n assignee shall be entitled only to allocations of profits and losses and distributions which are attributable to the assigned partnership interests held by the assignee and shall not be entitled to exercise any powers of management nor otherwise participate in the management of the partnership nor the control of its business and affairs as explained the above limitations on the charitable gift transferred by petitioners to cft are the basis for petitioners’ claimed characterization and valuation of the gift to cft as an assignee interest in mil as distinguished from an mil partnership_interest and as petitioners themselves contend they would appear to constitute substantive and significant limitations deductibility of gifts to charity of partial_interests generally and apart from certain specified statutory exceptions noted below where less than donors’ entire interests in property are transferred to charity the charitable contributions--for federal gift_tax purposes as well as for federal income and estate_tax purposes--are to be treated as partial_interests and any claimed gift income and estate_tax charitable deductions relating thereto are to be disallowed see sec_2522 gift_tax disallowance f income_tax disallowance e estate_tax disallowance set forth below in part is the statutory language of sec_2522 that for federal gift_tax purposes generally disallows charitable deductions for gifts to charity of partial_interests sec_2522 disallowance of deductions in certain cases -- where a donor transfers an interest in property other than an interest described in sec_170 to a person or for a use described in subsection a or b qualified charities and an interest in the same property is retained by the donor or is transferred or has been transferred for less than an adequate_and_full_consideration in money or money’s worth from the donor to a person or for a use not described in subsection a or b no deduction shall be allowed under this section for the interest which is or has been transferred to the person or for the use described in subsection a or b treasury regulations applicable to the above statutory provisions provide examples of charitable gifts of partial_interests subject_to the above disallowance rule sec_1_170a-7 example income_tax regs treats as a partial interest a gift to charity of the rent-free use of one floor of an office building where the donor owns the entire office building sec_20_2055-2 estate_tax regs classifies as a partial interest a gift to charity of a reversionary_interest in an office building where the decedent transfers to his wife a life_estate in the office building and where the decedent’s wife is still living when the reversionary_interest passes to charity sec_25_2522_c_-3 example gift_tax regs treats as a partial interest a gift to charity of the right to rental income from real_property where the remaining interest in the property is transferred to a noncharitable donee other authorities recognize and discuss the above general_rule under which charitable deductions are disallowed for gifts to charity of partial_interests in 86_tc_243 we held that a gift to the u s forest service of real_property constituted a partial interest where the donor retained a mineral_interest in the real_property the gift to charity however of the partial interest was deductible because the particular restricted mineral_interest retained by the taxpayer was not regarded as substantial in interpreting sec_170 for income_tax purposes we stated that the partial interest rule applies to contributions to charity of less than the taxpayer’s entire_interest in property including but not limited to contributions of the right to use property id pincite in revrul_81_282 1981_2_cb_78 it was held that a gift to charity of corporate stock constituted a disallowed partial interest where the donor retains the right to vote the gifted stock a gift not dissimilar from the gift to cft of the nonvoting assignee interest in the mil partnership see also stewart et al charitable giving and solicitation par pincite which states that a donor can run afoul of the partial interest rules by retaining a property interest or right while transferring the primary incidents_of_ownership to charity as indicated previously for federal gift income and estate_tax purposes certain limited statutory exceptions to the above rule applicable to partial_interests are available under which specified types of partial_interests transferred to charity will qualify for charitable deductions namely certain fixed income transfers to charity and certain remainder interests gifted to charitable_annuity trusts to unitrusts and to pooled income funds see sec_2522 and b gift_tax f a and b income_tax e a and b estate_tax these statutorily qualified forms of deductible partial treatises discussing charitable_contributions interpret the relevant code provisions as outlined above and i have not discerned how the situation involved in the instant case would not be covered by the above code provisions disallowing a tax deduction for gifts to charity of partial_interests see eg mertens law of federal income_taxation sec_31 to rev beckwith tax mgmt bna estate and gift_tax charitable deductions secs v xi at a-50 kirschten freitag 521-2d tax mgmt bna charitable_contributions income_tax aspects sec ii-f samansky charitable_contributions and federal taxes ch stephens et al federal estate_and_gift_taxation sec_5 dollar_figure 8th ed stewart et al charitable giving and solicitation pars big_number big_number interest charitable gifts are subject_to strict guidelines which provide assurance that the charitable deductions to be allowed reflect the approximate amount to be received by charity see sec_25_2522_c_-3 gift_tax regs in addition to the above statutorily qualified forms of deductible partial_interests transferred to charity sec_170 sets forth a number of other types of partial interest gifts with respect to which charitable deductions are allowable under sec_170 charitable deductions are allowed for gifts not in trust of remainder interests in a personal_residence or farm sec_170 gifts to charity not in trust of an undivided portion of a transferor’s entire_interest in property sec_170 and qualified conservation contributions sec_170 with regard to charitable gifts of an undivided portion of a transferor’s entire_interest in property sec_25 c - c i gift_tax regs provides in part as follows an undivided portion of a donor’s entire_interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the donor in such property parallel provisions for income and estate_tax purposes with regard to deductions relating to charitable gifts of an undivided portion of a taxpayer’s entire_interest in property are set forth in sec_1_170a-7 income_tax regs and sec_20_2055-2 estate_tax regs in stark v commissioner supra pincite we explained as follows where the interest retained by the taxpayer is so insubstantial that he has in substance transferred his entire_interest in the property the tax treatment should so reflect a charitable_contribution_deduction should be allowed only where the retained_interest has a de_minimis value moreover the insubstantial retained_interest must not potentially interfere in any manner with the donee’s interest citation omitted in revrul_81_282 1981_2_cb_78 it was concluded that a taxpayer’s retention of a right to vote shares of stock contributed to charity constitutes a substantial right because a right to vote gives the holder a voice in the management of the company and is crucial to protecting a stockholder’s financial interest in 67_tc_793 involving the transfer of stock into a subordinated securities account we concluded that retained voting rights among others constitute substantial rights application to mccord as stated the retained rights involved in revrul_81_282 1981_2_cb_78 appear to be analogous to the rights retained by petitioners herein by providing in the mil partnership_agreement limitations on transfers of mil partnership interests and by transferring to cft only an assignee interest in mil petitioners retained the voting and the other rights in the mil limited_partnership associated with the assignee interest transferred to charity because the rights retained by petitioners with regard to their mil limited_partnership_interest would be treated as substantial under sec_170 the portion thereof transferred to cft would appear not to qualify as an undivided portion of petitioners’ entire mil limited_partnership_interest i would reiterate that it is the perceived substantial significance of petitioners’ retained rights on which petitioners themselves petitioners’ valuation experts and the majority opinion rely to justify assignee status and increased valuation discounts for the gifted interest it would appear that for the above analysis not to apply to the gift involved in the instant case petitioners’ mil limited_partnership_interest would have to be interpreted as consisting of two separate and distinct interests an economic_interest and a noneconomic interest with petitioners transferring to cft an undivided portion of the separate economic_interest i submit that the correct interpretation would be to treat petitioners’ mil limited_partnership_interest as one interest consisting of both economic and noneconomic rights with petitioners having transferred to cft only their economic rights therein under this interpretation it would appear that petitioners should be regarded as having made a charitable gift to cft of a partial interest in their mil limited_partnership_interest which charitable gift would be subject_to the gift_tax disallowance provision of sec_2522 i recognize that under the disallowance rule_of sec_2522 as suggested herein petitioners’ claimed charitable deduction for their gift to symphony also would be disallowed as a gift of a partial interest chiechi j concurring in part and dissenting in part i concur in result with respect to the portions of the majority opinion under the headings iv extent of the rights assigned and vii effect of children’s agreement to pay estate_tax liability i cannot responsibly cast an affirmative vote with respect to the portion of the majority opinion under the heading v fair_market_value of the gifted interest the determination of fair_market_value is a factual determination and is necessarily a matter of judgment and approximation see eg 110_tc_530 i am not in a position to state that i agree with every judgment and every approximation made by the majority opinion in determining the fair_market_value of the gifted interest moreover because valuation is a factual matter and necessarily an approximation and a matter of judgment i do not believe that the court is bound in other cases by the judgments and approximations in the majority opinion i dissent from the portion of the majority opinion under the heading vi charitable_contribution_deduction for transfer to cft and from the ultimate holding of the majority opinion under the heading viii conclusion although i join judge foley’s dissent i write separately to express additional reasons for my dissent and to emphasize certain of the reasons for judge foley’s dissent i disagree with the following characterization by the majority opinion of what petitioners transferred to cft under the assignment agreement by way of the assignment agreement petitioners transferred to cft the right to a portion of the gifted interest majority op p emphasis added under the assignment agreement petitioners did not transfer to cft merely the right to a specified portion of the gifted interest on date petitioners transferred to cft the portion of the gifted interest described in that agreement in other words on that date petitioners transferred to cft that portion if any of the 33369836-percent assignee interest in mil remaining after the respective transfers under the assignment agreement to petitioners’ children the trusts and the symphony ie that portion of such assignee interest having a fair_market_value as of the date of that agreement in excess of dollar_figure i also disagree with the position of the majority opinion see majority op pp that under the assignment agreement petitioners transferred to cft a 62376573-percent assignee interest in mil the 62376573-percent assignee interest was set forth in the confirmation agreement that was executed in date the majority opinion does not mention the confirmation agreement but nevertheless requires that agreement to control for purposes of determining the assignee percentage interest that petitioners transferred under the assignment agreement to cft as well as the respective assignee percentage interests that petitioners transferred under the assignment agreement to petitioners’ children the trusts and the symphony the confirmation agreement on which the majority opinion relies was not executed until date months after the assignment agreement was effective and is not the controlling donative instrument instead of referring to the confirmation agreement in support of the position that petitioners transferred to cft a 62376573-percent assignee interest in mil the majority opinion maintains that there is in effect a valuation instruction in the assignment agreement which mandates that result according to the majority opinion pursuant to that purported valuation instruction the fair_market_value agreed upon by the donees to determine the assignee percentage interest transferred to cft as well as to determine the respective assignee percentage interests transferred to petitioners’ children the trusts and the symphony is fixed and may never change for purposes of determining such interest even if such value agreed upon by the donees is ultimately determined not to be the fair_market_value of such interest the majority opinion concludes that therefore the resulting assignee percentage interest transferred to cft as well as the respective assignee percentage interests transferred to petitioners’ children the trusts and the symphony as set forth in the confirmation agreement is fixed and may never change the assignment agreement does not contain a valuation instruction that requires what the majority opinion indicates that agreement requires according to the majority opinion that valuation instruction appears in the following paragraph in the assignment agreement for purposes of this paragraph the paragraph transferring to petitioners’ children the trusts the symphony and cft certain portions of the percent assignee interest in mil that petitioners transferred under the assignment agreement the fair_market_value of the assigned partnership_interest the gifted interest consisting of the 33369836-percent assignee interest in mil as of the date of this assignment agreement shall be the price at which the assigned partnership_interest would change hands as of the date of this assignment agreement between a hypothetical willing buyer and a hypothetical willing seller neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts any dispute with respect to the allocation of the assigned partnership interests among assignees shall be resolved by arbitration as provided in the partnership_agreement as can be seen from reading the foregoing paragraph the purported valuation instruction consists of a paragraph in the assignment agreement which defines the term fair_market_value petitioners required the donees to use that definition when they allocated among themselves the respective portions of the gifted interest which petitioners transferred to them under the assignment agreement the definition of the term fair_market_value for that purpose is the same definition used for federal gift_tax purposes see sec_25_2512-1 gift_tax regs the last sentence of the above-quoted paragraph merely requires that any dispute with respect to the allocation of the gifted interest among the donees be resolved by arbitration as provided in the partnership_agreement nothing in that paragraph mandates that if the fair_market_value of the gifted interest to which the various donees agreed is ultimately determined not to be the fair_market_value of that interest no adjustment may be made to the respective assignee percentage interests allocated to cft and the other donees as set forth in the confirmation agreement i believe that the majority opinion’s construction of the above- quoted paragraph is strained unreasonable and improper and leads to illogical results in essence the majority opinion concludes that the donees of the gifted interest made a mistake in determining the fair_market_value of that interest and that petitioners are stuck with that mistaken value solely for purposes of determining the respective assignee percentage interests transferred to the donees under that agreement the majority opinion states that the assignment agreement contemplates the allocation of the gifted interest based on the assignees’ best estimation of that value moreover each of the assignees’ percentage interests was determined exactly as contemplated in the assignment agreement without_recourse to arbitration and none can complain that they got any less or more than petitioners intended them to get majority op p the assignment agreement does not contemplate as the majority opinion states that the allocation of the gifted interest be based on the assignees’ best estimation of that fair_market_value id under the assignment agreement petitioners transferred to the donees specified portions of the gifted interest determined by reference to the fair_market_value of such portions as defined in that agreement and not upon some best estimation of that value the assignment agreement required that the allocation be based upon fair_market_value as defined in that agreement which the majority opinion acknowledges is the same definition of that term for federal gift_tax purposes the majority opinion has found that the donees did not make the allocation on the basis of that definition the donees thus failed to implement the donors’ ie petitioners’ mandate in the assignment agreement when they arrived at amounts which they believed to be the respective fair market values of the specified portions of the gifted interest that petitioners transferred to them but which the majority opinion has found are not the fair market values of such portions the majority opinion using the definition of fair_market_value in the federal gift_tax regulations and the assignment agreement determines that the fair_market_value of the gifted interest used by the donees is not the fair_market_value of such interest it follows that the assignee percentage interest allocated to cft in the confirmation agreement in date as well as the respective assignee percentage interests allocated in that confirmation agreement to petitioners’ children the trusts and the symphony is not the assignee percentage interest that petitioners transferred in the assignment agreement to that donee on date the position of the majority opinion conflicts with the provisions of the assignment agreement as to the respective portions of the gifted interest that petitioners transferred under that agreement to petitioners’ children the trusts the symphony and cft consequently that position leads to results that are in violation of what petitioners transferred to the donees under that agreement according to the majority opinion the aggregate fair_market_value of the aggregate percent assignee interests allocated to petitioners’ children and the trusts is dollar_figure majority op p however under the assignment agreement petitioners transferred to their children and the trusts portions of the gifted interest having an aggregate fair_market_value equal to dollar_figure determined according to the definition of the term fair_market_value in the assignment agreement which is the same definition in the federal gift_tax regulations thus the aggregate fair_market_value of the aggregate assignee percentage interests transferred to petitioners’ children and the trusts as determined by the majority opinion ie dollar_figure exceeds the aggregate fair_market_value of such interests that petitioners transferred to those donees in the assignment agreement ie dollar_figure such a result is rejected by and violates that agreement foley j agrees with this concurring in part and dissenting in part opinion 1according to the majority opinion the fair_market_value of the 49712307-percent assignee interest allocated to the symphony is dollar_figure majority op p however under the assignment agreement petitioners transferred to the symphony a portion of the gifted interest having an aggregate fair_market_value of at most dollar_figure determined according to the definition of the term fair_market_value in the assignment agreement which is the same definition in the federal gift_tax regulations 2the same is true of the result with respect to the symphony under the majority opinion’s analysis foley j concurring in part1 and dissenting in part undaunted by the facts well-established legal precedent and respondent’s failure to present sufficient evidence to establish his determinations the majority allow their olfaction to displace sound legal reasoning and adherence to the rule_of law the gift closed on date and on that date petitioners transferred to cft all of petitioners’ assigned partnership interests exceeding dollar_figure ie the amount exceeding the dollar_figure transferred to the sons and the trusts plus the dollar_figure transferred to the symphony as the trial judge i concluded that on date petitioners transferred a dollar_figure assignee interest to cft on that date the interest was accepted and received by cft and not subject_to a condition_precedent or subsequent sec_25_2522_c_-3 gift_tax regs see also 348_us_187 hamm v commissioner tcmemo_1961_347 affd 325_f2d_934 8th cir furthermore i concluded that respondent fell woefully short of meeting his burden2 regarding the applicability of the substance over form violation of public policy and reasonable probability i concur only in result with respect to secs iv v e and vii c of the majority opinion the parties agree that respondent pursuant to sec_7491 had the burden_of_proof of receipt doctrines inexplicably the majority ignore respondent’s primary contentions ie that the substance over form and violation of public policy doctrines are applicable and base their holding on an interpretation of the assignment agreement that respondent never raised in section i i address the majority’s holding in sections ii and iii respectively i address respondent’s contentions relating to the substance over form and violation of public policy doctrines i the majority’s analysis of the assignment agreement is faulty the majority begin by stating correctly that the gift_tax is imposed on the value of what the donor transfers not what the donee receives majority op p yet they then proceed to rely on a tortured analysis of the assignment agreement that is ostensibly justification for shifting the determination of transfer_tax consequences from the date of the transfer ie date the date of the assignment setting forth what petitioners transferred to date ie the date of the confirmation agreement the majority’s analysis of the assignment agreement requires that petitioners use the court’s valuation to determine the value of the transferred interests but the donees’ appraiser’s valuation to determine the percentage the reasonable probability of receipt doctrine was not one of respondent’s primary contentions but it was referenced in his opening brief interests transferred to the charitable organizations there is no factual legal or logical basis for this conclusion a the gift was complete on date the value of the transferred property and the amount of the transferor’s charitable deduction are determined as of the date the gift became complete sec_2512 pursuant to texas law the transfer became complete on date the date petitioners and the donees executed the assignment agreement in fact respondent states it is undisputed that the date assignment agreement was executed by competent donors evidenced the donors’ present intent to irrevocably divest themselves of ownership of the partnership interests delivered to the partnership and signed and accepted by donees competent to receive such a transfer accordingly the assignment agreement effected the present transfer under texas law of beneficial and legal_title to the partnership interests to the donees emphasis added the court like petitioners and respondent is bound by sec_2512 which requires us to value the property at the date of the gift emphasis added the charitable donees and the amount allocated to them were specifically identified and thus ascertainable upon the execution of the assignment agreement respondent readily acknowledges and petitioners undoubtedly agree that the date assignment agreement was signed and accepted by donees competent to receive such a transfer yet in determining the charitable deduction the majority rely on the confirmation agreement without regard to the fact that petitioners were not parties to this agreement and that this agreement was executed by the donees more than months after the transfer the majority state that the property transferred to cft was not expressed as a specific fraction of the gifted interest eg one-twentieth nor did petitioners transfer to cft a specific assignee interest in mil eg a 3-percent assignee interest majority op p the majority appear to assert without any authority that petitioners’ charitable deduction cannot be determined unless the gifted interest is expressed in terms of a percentage or fractional share the assignment agreement specifically identified the transferees and the transferred property regardless of how the transferred interest was described it had an ascertainable value subsequent events typically do not affect the value of transferred property see 279_us_151 243_f3d_1254 10th cir revg tcmemo_1999_82 estate of 198_f3d_515 5th cir revg 108_tc_412 680_f2d_1248 9th cir this position is reminiscent of previous attempts by respondent to impose a fractional or percentile share rule in the marital_deduction context--a position that was consistently rejected by the courts and not implemented until congress amended sec_2056 to conform with respondent’s position see sec_2056 and 387_us_213 366_us_213 82_tc_34 affd without published opinion 760_f2d_264 4th cir accordingly pursuant to sec_2501 the entire dollar_figure transfer is subject_to gift_tax and a charitable deduction is allowed for the dollar_figure ie dollar_figure - dollar_figure transferred to or for_the_use_of the symphony and cft sec_2522 cft’s retention of a much smaller interest ie percent than what petitioners transferred to it has no effect on the value of the transferred property on the date the gift became complete b determination by the donees does not bind this court the majority conclude that petitioners may deduct the dollar_figure ie dollar_figure - dollar_figure transferred to cft on date only if the agreement gave each donee an enforceable right to a fraction of the gifted interest determined with reference to the fair_market_value of the gifted interest as finally determined for federal gift_tax purposes majority op p emphasis added simply put the majority are wrong first a dollar_figure mil interest was transferred to or for_the_use_of cft in their fervor to reject this transaction the cft’s subsequent transfer of mil interests may have conferred an impermissible private benefit on petitioners’ sons see am campaign acad v commissioner 92_tc_1053 holding that conferral of a benefit on an unrelated_person may constitute an impermissible private benefit the deduction pursuant to sec_2522 is not allowed for a transfer to an organization unless such organization is operated exclusively for one or more of its charitable purposes sec_25_2522_a_-1 gift_tax regs respondent however did not raise or present any evidence relating to this issue majority assert a line of analysis that is contrary to both the established facts and respondent’s litigating position pursuant to the assignment agreement the gift closed and beneficial and legal_title to the assigned interest was transferred to cft on date respondent contends that irrespective of when the gift closed the court must ignore all intermediate steps and focus on the end result ie the cash received in redemption the majority sidestep the assignment agreement and redemption and focus on the allocation in the confirmation agreement second the majority cite regulations that are inapplicable to petitioners’ transfer see sec_1_664-2 income_tax regs relating to charitable_remainder annuity trusts sec_20_2055-2 and vi a estate_tax regs relating to guaranteed annuity interests and b ii b and b gift_tax regs relating to qualified annuity interests majority op pp note the deductibility of all transfers to charities is not governed by these requirements third as the majority acknowledge petitioners transferred to the donees a fraction of the gifted interest based on the value of that interest as determined under federal gift_tax valuation principles majority op p there is no material difference between fair_market_value as determined under federal gift_tax valuation principles and fair_market_value as finally determined for federal gift_tax purposes once this court’s jurisdiction is properly invoked the fair_market_value of any property is what this court determines it is and a determination relating to a charitable deduction pursuant to sec_2522 requires use of the court’s fair_market_value of the transferred property our determination of fair_market_value is both fair_market_value under gift_tax principles and as finally determined for federal gift_tax purposes moreover had petitioners’ assignment agreement included the magical words as finally determined for federal gift_tax purposes the majority assert only that they might have reached a different result majority op p fourth the majority state there is simply no provision in the assignment agreement that contemplates the allocation of the gifted interest among the assignees based on some fixed value that might not be determined for several years rather the assignment agreement contemplates the allocation of the gifted interest based on the assignees’ best estimation of that value majority op pp the fact is the assignment agreement effected the transfer of an assignee interest petitioners’ assignment agreement could not and does not limit the court’s ability to correctly determine the fair_market_value of such interest nor could the assignment agreement mandate that the donees’ determination of fair_market_value is conclusive and final for gift_tax purposes finally unlike respondent who contends that the charitable deduction is limited to the dollar_figure cft received in the redemption the majority seek to restrict petitioners’ charitable deduction to the dollar_figure interest ie percent cft retained pursuant to the confirmation agreement in essence the reasoning set forth by the majority borrows from both the integrated transaction and violation of public policy doctrines the majority’s disregard of the transfer of property interests pursuant to the assignment agreement and focus on the allocation of interests pursuant to the confirmation agreement implicates the integrated_transaction_doctrine similarly the majority’s refusal to adhere to the explicit terms of the assignment agreement implicates the violation of public policy doctrine ii respondent did not establish applicability of the substance_over_form_doctrine respondent contended that formation of the limited_partnership assignment of partnership interests confirmation of the assignment and redemption of the charities’ partnership interests were all part of an integrated transaction where petitioners intended to transfer all of their assets to their sons and the trusts respondent simply failed to meet his burden courts have employed the substance_over_form_doctrine where a taxpayer intending to avoid the gift_tax transfers property to an intermediary who then transfers such property to the intended beneficiary in some instances the intermediary was the court_of_appeals for the fifth circuit and other continued used to disguise the transferor see 493_f2d_1225 4th cir finding that brothers planned to avoid gift_taxes through repeated reciprocal_gifts to each others’ children 42_fsupp2d_700 w d tex finding that husband and wife engaged in a scheme where the wife was merely the intermediary through which the stock passed on its way to the ultimate beneficiary estate of murphy v commissioner tcmemo_1990_472 disregarding an intrafamily stock transfer where the court found an informal family agreement to control the stock collectively in 945_f2d_359 10th cir disregarding as sham sec_27 transfers of stock to intermediate beneficiaries who then transferred the stock to the original transferor’s family however the intermediary was used in an attempt to disguise the transferee respondent relying on heyen asserts that the symphony and cft were merely intermediaries in petitioners’ plan to transfer their mil interests to their sons and the trusts in heyen a taxpayer seeking to avoid the gift_tax by taking advantage of the annual_gift_tax_exclusion transferred stock to intermediate recipients all but two of whom made continued courts have been reluctant to use substance over form in certain cases involving completed gifts to charity e g 476_f2d_704 5th cir holding in an income_tax case that where respondent seeks to use the step_transaction_doctrine to disregard a donation of appreciated_property to a charitable_organization the central inquiry is whether the donor parted with all dominion and control affg tcmemo_1971_222 blank endorsements of the stock which the issuing bank subsequently reissued to the intended beneficiaries the court stated the intermediate recipients either did not know they were receiving a gift of stock and believed they were merely participating in stock transfers or had agreed before receiving the stock that they would endorse the stock certificates in order that the stock could be reissued to decedent’s family id pincite the court further stated the evidence at trial indicated decedent intended to transfer the stock to her family rather than to the intermediate recipients the intermediary recipients only received the stock certificates and signed them in blank so that the stock could be reissued to a member of decedent’s family decedent merely used those recipients to create gift_tax exclusions to avoid paying gift_tax on indirect gifts to the actual family_member beneficiaries id pincite in order for us to ignore petitioners’ allocation in the assignment agreement respondent must establish that petitioners coordinated and the charities colluded in or acquiesced to a plan to avoid petitioners’ gift_taxes by undervaluing the transferred interests and intended to divert cft’s interest to their sons and the trusts see heyen v united_states supra schultz v united_states supra griffin v united_states supra estate of murphy v commissioner supra respondent did not present the requisite evidence for us to invoke the substance_over_form_doctrine respondent stated on brief that after execution of the assignment agreement petitioners washed their hands of the transaction and the donees took over petitioners’ sons’ involvement in the subsequent allocation of the transferred interests does not affect the petitioners’ gift_tax liability particularly in the absence of a showing that petitioners retained some control_over the subsequent allocation see sec_25_2511-2 gift_tax regs stating that the gift_tax is measured by the value of the property passing from the donor petitioners’ sons and the estate planner made all the arrangements relating to the valuation this court however will not impute to petitioners an intent to avoid the gift_tax merely from the appraiser’s valuation of the transferred partnership interests the sons’ involvement in the planning process or the hiring of an estate planner charged with tax minimization see 115_tc_478 mere suspicion and speculation about a decedent’s estate_planning and testamentary objectives are not sufficient to disregard an agreement in the absence of persuasive evidence revd on other grounds 293_f3d_279 5th cir hall v commissioner 92_tc_312 respondent failed to establish that the symphony or cft participated knowingly or otherwise in a plan to facilitate petitioners’ purported avoidance of gift_tax indeed the testimony and evidence established that the symphony and cft acted independently cft did not hire its own appraiser because it had confidence in the appraiser hired by petitioners’ sons while in hindsight ie after this court’s valuation it was imprudent for the charitable organizations to forgo an independent appraisal these organizations were not sham intermediaries prior to signing the confirmation agreement the symphony and cft could have independently valued mil forced arbitration and thwarted any purported plan to avoid the gift_tax cf 277_f3d_778 5th cir declining in an income_tax case to disregard a transaction that involved even a minimal amount of risk and was conducted by entities separate and apart from the taxpayer revg 113_tc_214 there is no evidence of an implicit or explicit agreement between petitioners and either the symphony or cft that the symphony or cft would accept less than that which petitioners transferred to each organization in fact respondent stipulated that before the call_right was exercised there was no agreement among mr or mrs mccord the mccord brothers the symphony or cft as to when such a buyout would occur or to the price at which the buyout would occur in sum respondent failed to establish that the undervaluation of mil reallocation of mil interests and ms willhoite president of the symphony and mr fjordback president of cft each had an obligation to ensure receipt of the property interests petitioners transferred to the symphony and cft respectively see tex socy dar inc v ft bend chapter s w 2d tex civ app citing intl bankers life ins co v holloway s w 2d tex sup ct see also texas non-profit corporation act tex rev civ stat art 1396-dollar_figure subsequent transfer of a portion of cft’s mil interest to the sons and the trusts were parts of a plan by petitioners to avoid the gift_tax cft’s retention of a much smaller interest ie percent than petitioners transferred pursuant to the assignment agreement has no effect on the value of the transferred property on date the date the gift became complete iii formula_clause does not violate public policy relying primarily on 142_f2d_824 4th cir respondent contended that petitioners’ formula_clause was against public policy and therefore void because such clause is a ‘poison pill’ created to discourage audit of the gifts and to fabricate phantom charitable gift and income_tax deductions in commissioner v procter supra the court considered a clause causing a gift to revert to the donor if a court determined that the gift was taxable the court held that such a clause is clearly a condition_subsequent and void because contrary to public policy id pincite the court reasoned that the clause would discourage the collection of tax because attempted collection would defeat the gift the clause would obstruct the administration of justice by requiring the courts to pass upon a moot case and the clause if allowed to stand would defeat the judgment of a court id likewise in 87_tc_78 a clause allowed the taxpayer to revoke a gift of stock if it was determined that for gift_tax purposes the fair_market_value of such stock exceeded dollar_figure per share the court similarly concluded that such a clause was a condition_subsequent and void because it was against public policy contrary to the valuation clauses in commissioner v procter supra and ward v commissioner supra which adjusted the amount transferred based upon a condition_subsequent petitioners’ valuation clause defined the amount of property transferred simply put petitioners’ gift does not fail upon a judicial redetermination of the transferred property’s value petitioners made a legally enforceable transfer of assignee interests to cft with no provision for the gift to revert to petitioners or pass to any other party on the occurrence of adverse tax consequences cft merely failed to protect its interest adequately procter and ward are distinguishable petitioners’ formula_clause was not against public policy iv conclusion the majority seek to restrict petitioners’ charitable deduction to that which cft accepted in the confirmation agreement the parties agree that the gift closed upon the execution of the assignment agreement at that moment petitioners transferred and cft had a dollar_figure mil interest cft waived its arbitration rights and petitioners did not participate in the subsequent allocation whether cft failed to adequately protect its interest or was swindled by petitioners’ sons does not affect the value of what petitioners transferred to cft the majority prudently avoid using the substance over form violation of public policy or realistic possibility of receipt doctrines as support for their holding the majority however disregard the assignment agreement other established facts and applicable case law in order to support a line of analysis and conclusion that even respondent did not advocate we are not responsible for protecting the fisc rather our role and duty are to interpret and adhere to the rule_of law--even if uncomfortable with the result chiechi j agrees with this concurring in part and dissenting in part opinion laro j dissenting a thin majority holds today that each petitioner is entitled to a charitable_contribution_deduction under sec_2522 of dollar_figure resulting from the transfer to cft communities foundations of texas inc majority op pincite each petitioner reported for that transfer a charitable deduction of dollar_figure and cft is not entitled to enjoy any funds in excess of that amount in that the majority respects the subject transaction and allows each petitioner to deduct a charitable_contribution of approximately dollar_figure for value that a charity will never enjoy i dissent majority applies its own approach to reach the result that the majority desires the majority decides this case on the basis of a novel approach neither advanced nor briefed by either party and concludes that the court need not address respondent’s arguments as to public policy and integrated transaction majority op p note specifically under the majority’s approach majority’s approach the term fair_market_value as used in the assignment agreement denotes simply the value ascertained by the parties to that agreement or in certain cases by an arbitrator and not the actual amount determined under the firmly established hypothetical willing buyer hypothetical willing seller test that has been a fundamental part of our federal tax system for decades on end majority op p note see also 411_us_546 the willing buyer- willing seller test of fair_market_value is nearly as old as the federal income estate and gifts taxes themselves whereas the majority ostensibly recognizes that firmly established test in its determination of the fair_market_value of the subject property majority op p note the majority essentially holds that the parties to the assignment agreement are not bound by that test when they themselves ascertain the fair_market_value of that property id pincite as i understand the majority’s rationale the parties to the assignment agreement are not bound by that test because the assignment agreement only uses the phrase fair_market_value and not the phrase fair_market_value as finally determined for federal gift_tax purposes to my mind the subject property’s fair_market_value is its fair_market_value notwithstanding whether fair_market_value is ascertained by the parties or finally determined for federal gift_tax purposes i know of nothing in the tax law nor has the majority mentioned anything that provides that property such as the subject property may on the same valuation_date have one fair_market_value when finally determined and a totally different fair_market_value if ascertained beforehand the majority’s interpretation of the the three regulatory provisions relied upon by the majority majority op p note in support of its position do not adequately support that position sec_1 a iii income_tax regs for example uses the phrase continued assignment agreement is at odds with the interpretation given that agreement by not only the trial judge but by both parties as well the majority allows petitioners an increased charitable_contribution that would be disallowed under either the public policy or integrated_transaction_doctrine in that both of these doctrines are fundamental to a proper disposition of this case it is incumbent upon the court to address one or both of them the majority inappropriately avoids discussion of these doctrines by relying on the principle that the court may approve a deficiency on the basis of reasons other than those relied upon by the commissioner majority op p note the majority however fails to recognize that the majority is not approving respondent’s deficiency in full but is rejecting a portion of it in fact the majority even acknowledges that the application of respondent’s integrated transaction theory would result in an initial increase in the amount of petitioners’ aggregate taxable gift by only dollar_figure id whereas the majority attempts to downsize the significance of a dollar_figure adjustment by recharacterizing it as only and less than percent id the fact of the matter is that the dollar magnitude of a dollar_figure continued fair_market_value incorrectly determined by the fiduciary to refer to an earlier determination of fair_market_value that is inconsistent with the fair_market_value finally determined for federal tax purposes increase is significant to the fisc as well as to most people in general notwithstanding that it may constitute a small percentage of the aggregate taxable gift as found by the majority i know of no principle of tax law nor has the majority cited one that provides that an adjustment otherwise required by the tax law is inappropriate when it is a small percentage of a base figure such as aggregate taxable_gifts increased charitable deduction is against public policy allowing petitioners to deduct as a charitable_contribution the increase in value determined by the court is against public policy and is plainly wrong no one disputes that cft will never benefit from the approximately dollar_figure that each petitioner is entitled to deduct as a charitable_contribution pursuant to the majority opinion nor does anyone dispute that the only persons benefiting from the increased value are petitioners and that the only one suffering any detriment from the increased value is the fisc i do not believe that congress intended that individuals such as petitioners be entitled to deduct charitable_contributions for amounts not actually retained by a charity see hamm v commissioner tcmemo_1961_347 charitable_contribution under sec_2522 requires a reasonable probability the majority does not state what the dollar_figure is less than percent of i believe the majority is referring to the relationship of the dollar_figure to the aggregate taxable gift as found by the majority that the charity actually will receive the use and benefit of the gift_for which the deduction is claimed affd 325_f2d_934 8th cir i would deny a charitable deduction for the increased value by applying to this case a public policy doctrine that is similar to the doctrine applied by the courts in 142_f2d_824 4th cir revg on other grounds a memorandum opinion of this court and 87_tc_78 in commissioner v procter supra the taxpayer transferred certain property interests to a_trust benefiting his children the trust instrument provided that if a competent federal court of last resort should find any part of the transfer to be subject_to gift_tax then that portion of the property subject_to such tax would not be considered to have been transferred to the trust the court_of_appeals for the fourth circuit declined to respect this adjustment provision the court stated we do not think that the gift_tax can be avoided by any such device as this taxpayer has made a present gift of a future_interest in property he attempts to provide that if a federal court of last resort shall hold the gift subject_to gift_tax it shall be void as to such part of the property given as is subject_to the tax this is clearly a condition_subsequent and void because contrary to public policy a contrary holding would mean that upon a decision that the gift was subject_to tax the court making such decision must hold it not a gift and therefore not subject_to tax such holding however being made in a tax suit to which the donees of the property are not parties would not be binding upon them and they might later enforce the gift notwithstanding the decision of the tax_court it is manifest that a condition which involves this sort of trifling with the judicial process cannot be sustained id pincite the court also noted that the adjustment clause was contrary to public policy because public officials would be discouraged from attempting to collect the tax since the only effect would be to defeat the gift the adjustment provision would tend to obstruct the administration of justice by requiring the court to address a moot case and the provisions should not be permitted to defeat a judgment rendered by the court id we followed procter in ward v commissioner supra in ward the taxpayers husband and wife each transferred shares of stock to each of their three sons at the time of the gifts the taxpayers and their sons executed a gift adjustment agreement that was intended to ensure that the taxpayers’ gift_tax liability for the stock transfers would not exceed the unified_credit against gift_tax that the taxpayers were entitled to at that time id pincite the agreement stated that if it should be finally determined for federal gift_tax purposes that the fair_market_value of the transferred stock either was less than or greater than dollar_figure per share an adjustment would be made to the number of shares conveyed so that each donor would have transferred dollar_figure worth of stock to each donee id we concluded that the fair_market_value of the stock exceeded dollar_figure per share for each of the relevant years id pincite more importantly we declined to give effect to the gift adjustment agreement we noted that honoring the adjustment agreement would run counter to the policy concerns articulated in commissioner v procter supra ward v commissioner supra pincite we also concluded that upholding the adjustment agreement would result in unwarranted interference with the judicial process stating furthermore a condition that causes a part of a gift to lapse if it is determined for federal gift_tax purposes that the value_of_the_gift exceeds a given amount so as to avoid a gift_tax deficiency involves the same sort of trifling with the judicial process condemned in procter if valid such condition would compel us to issue in effect a declaratory_judgment as to the stock’s value while rendering the case moot as a consequence yet there is no assurance that the petitioners will actually reclaim a portion of the stock previously conveyed to their sons and our decision on the question of valuation in a gift_tax suit is not binding upon the sons who are not parties to this action the sons may yet enforce the gifts id pincite here cft receives no benefit from the court-determined increase in the value of the subject property but petitioners benefit in that they are entitled to an additional charitable deduction as was true in commissioner v procter supra the possibility of an increased charitable deduction serves to discourage respondent from collecting tax on the transaction because any attempt to enforce the tax due on the transaction is of no advantage to the fisc each step of the transaction is part of an integrated transaction all of the steps which were taken to effect the transfer of petitioners’ partnership interests to their sons inclusive of the trusts were part of a single integrated transaction the purpose of that transaction was to transfer the interests with an avoidance of federal gift_taxes while at the same time discouraging audit of the transfer and manufacturing phantom charitable gift and income_tax deductions in the event that the value of the transfer was later increased i reach my conclusion in light of the following facts which were found by the trial judge or are reasonable inferences therefrom petitioners were seeking expert advice on the transfer of their wealth with minimal tax consequences the transaction contemplated that the charities would be out of the picture shortly after the gift was made the transfers of the partnership interests to the charities were subject_to a call provision that could be exercised at any time the call provisions were exercised almost contemporaneously with the transfers to the charities the call price was significantly below fair_market_value the charities never obtained a separate and independent appraisal of their interests including whether the call price was actually the fair_market_value of those interests neither charity ever had any managerial control_over the partnership the charities agreed to waive their arbitration rights as to the allocation of the partnership interests and petitioners’ sons were at all times in control of the transaction i also query as to this case why a charity would ever want to receive a minority limited_partnership_interest but for an understanding that this interest would be redeemed quickly for cash and find relevant that the interest was subject_to the call provision that could be exercised at any time conclusion the majority has placed its stamp of approval on a transaction that not only is a prime example of clear taxpayer abuse but has as its predominant if not sole purpose the avoidance of federal taxes the majority has done so either because it does not recognize the abuse or more likely that it feels impotent to stop the abuse the majority has gone as far as to condone taxpayer-abusive behavior by allowing petitioners to deduct a charitable_contribution for amounts which will never benefit a charity for these and the other reasons stated herein i dissent vasquez j agrees with this dissenting opinion