Opinion ID: 757033
Heading Depth: 3
Heading Rank: 3

Heading: Testamentary Device

Text: 33 Decedent's estate admits that, in addition to serving a legitimate business purpose, the agreement was a means to transfer Gloeckner's assets to his kin without having them shoulder the burden of his estate taxes. As noted earlier, under the terms of the agreement, the company was required to purchase as many shares as necessary to satisfy whatever estate tax was owed. The tax court ruled that Gloeckner was attempting to reduce the tax on his estate, and therefore entered the agreement in 1987 for a testamentary purpose. 34 The terms testamentary substitute and testamentary device are often used interchangeably with the phrase device to pass the decedent's shares to the natural objects of his bounty. When analyzing the nature of a restrictive agreement, courts must tread with care in deciding what the terms employed actually mean. The plain language of Treas. Reg. § 20.2031-2(h), combined with courts' application of that regulation, suggests the tax court used too broad a concept in making that determination. 35 According to the regulation, an agreement is said to be testamentary when it seeks to convey shares of stock to the natural objects of decedent's bounty for less than full and adequate consideration. Therefore, the first question to ask is whether a natural object of decedent's bounty benefits from the conveyance in the restrictive agreement. If the answer to that question is no, then the inquiry ends, and a court must conclude that the agreement at issue is not a testamentary device. Concluding instead that the agreement may serve some kind of very general testamentary purpose without focusing on to whom the shares of stock are conveyed, and then jumping ahead to ask whether full and adequate consideration was received--as the tax court did here--misses the relevance of the phrase natural object of decedent's bounty. See Silverman v. Eastrich Multiple Investor Fund, L.P., 51 F.3d 28, 31 (3d Cir.1995) ([A] basic tenet of statutory construction, equally applicable to regulatory construction, [is] that a statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous.). 36 Although the regulations do not define natural objects of [decedent's] bounty, we glean certain clues from the 1990 Act's legislative history. When the IRS promulgated its new regulations following the passage of the Act, it explained why it omitted a definition for this particular phrase. The agency said [t]his concept has long been part of the transfer tax system and cannot be reduced to a simple formula or specific classes of relationship. The class of persons who may be the objects of an individual's bounty is not necessarily limited to persons related by blood or marriage. Special Valuation Rules, 57 Fed.Reg. 4250, 4253 (1992). 37 Hence, an intended beneficiary need not be a relative, in the commonly-understood sense of the word, to qualify as a natural object of a decedent's bounty. Nevertheless, for an agreement to be testamentary, the beneficiary must have enjoyed a relationship with the decedent in which he was considered as though he were in some manner related to the decedent. Cf. Estate of Schwab v. Commissioner, 42 T.C.M. (CCH) 989 (1981) (finding that decedent's housekeeper and companion, who lived and travelled with decedent for roughly 33 years, was a natural object of the decedent's bounty for purposes of determining whether certain of decedent's lifetime transfers were made in contemplation of death). 38 Obviously, when there is no blood or marital tie between the decedent shareholder and the other parties to the restrictive agreement, a declaration that the agreement does not evince a testamentary intent is greeted with considerably less skepticism. See Estate of Seltzer, 50 T.C.M. (CCH) at 1254 (In this case only two of the five agreeing shareholders were legally related.... With those facts, it is less likely that relationship would have played a role in the execution of the Agreement.); Estate of Carpenter, 64 T.C.M. (CCH) at 1280 ([T]he lack of [a family] relationship has been considered evidence of a lack of testamentary intent by the agreement.); cf. Estate of Lauder, 64 T.C.M. (CCH) at 1657 ([I]t is evident that intrafamily agreements restricting the transfer of stock in a closely held corporation must be subjected to greater scrutiny than that afforded similar agreements between unrelated parties.); Cameron W. Bommer Revocable Trust v. Commissioner, 74 T.C.M. (CCH) 346, 355 (1997) (same). Thus, in order to apply Treas. Reg. § 20.2031-2(h) with greater scrutiny, sufficient evidence must first exist to suggest that an unrelated party shares a relationship with decedent such as to be effectively considered a member of his family. In this respect, we do not foreclose the possibility that the existence of past transfers of property at significantly less than market value, or of arrangements designed to do the same, might, in appropriate circumstances, give rise to an inference that the transferee was effectively considered a member of decedent's family. 39 None of the evidence in the case at hand supports such an inference that Simone--to whom decedent's shares were passed--enjoyed an especially close relationship with decedent. The tax court characterized the relationship between Simone and Gloeckner simply as a close personal one. Although Gloeckner made two loans to Simone in different years totalling $175,000 and named his friend Simone a minor beneficiary in his will, we have no other information about decedent's feelings toward this associate beyond this small glimpse. What is in the record is Simone's uncontradicted testimony that the two of them maintained a business relationship. The tax court does not suggest that Simone held a place in decedent's life similar to that held by his kin. Nor did the Commissioner introduce evidence to support such a theory, even though it advised the trial court it would do so. As a consequence, Gloeckner's relationship with Simone strikes us as a little more than kind, but certainly less than kin. 1 40 Moreover, it is appropriate when analyzing the relationship between the decedent and the beneficiaries of a restrictive agreement to look at not only the relationship itself, but also the circumstances surrounding the agreement. See Slocum v. United States, 256 F.Supp. 753, 755 (S.D.N.Y.1966) (holding that the family relationship among the shareholders, combined with the poor health of one of those family members at the time the restrictive shareholder agreement was drafted, raised an inference that the agreement was testamentary in nature); see also St. Louis County Bank, 674 F.2d at 1210-11 (holding same, with the additional fact that the value of the shares, according to the formula set forth in the agreement, had dropped to zero at the time of decedent's death because the nature of the business had completely changed). 41 The other circumstances divulged by this record lend no support to the tax court's implicit conclusion that Gloeckner sought to convey his shares to a natural object of his bounty. For example, there was no evidence that Gloeckner was in poor health when he executed both the agreement and his will in 1987. To the contrary, Simone testified that decedent hoped to run his business for another 20 years. Further, in contrast to the situation in St. Louis County Bank, where a zero value on the shares meant no estate tax would be assessed, the agreement did not place Gloeckner's kin in a position to avoid all estate taxes. As it turned out, Gloeckner's plan that his estate taxes be paid completely out of the proceeds of the sale of his stock did not come to fruition. His kin, as noted, had to pay nearly $1 million in estate taxes and expenses. 42 At the same time, although Simone ultimately owned 100 percent of the company due to the 20 shares given him by Gloeckner in 1987, the business was worth much less since it was forced by the agreement to redeem all of decedent's shares at a price exceeding $2 million. In contrast, had common shares of stock not been redeemed, Simone could have received them at no cost to him or the company through the bequest in decedent's will. Simone was, accordingly, actually worse off because of the redemption agreement. Indeed, and most importantly, in the peculiar circumstances of this case, at the time the agreement was made and while Poesch was still an owner of the company, both Gloeckner's kin and Simone would most likely have been better off had the redemption price been higher than it was. Given this fact, it is hard to see how the agreement could be viewed as a testamentary scheme designed to favor natural objects of decedent's bounty. 43 As a final consideration, courts scrutinize the processes employed in reaching the share price contained within the redemption agreement to shed light on the nature of the relationship between the decedent and the person to whom the stock was conveyed. Estate of Lauder was concerned with the absence of a formal appraisal and the failure to consider the specific trading prices of comparable companies or to obtain professional advice, especially when decedent's son, who settled on the values, was an experienced businessman with the family's international cosmetics company. See 64 T.C.M. (CCH) at 1658. Cameron W. Bommer Revocable Trust was equally leery of decedent's failure to hire a professional appraiser, consulting instead only once with his attorney who had completed the computations in one day. See 74 T.C.M. (CCH) at 356. 44 No similar problem exists here. Gloeckner hired KPMG Benchmark, an independent accountant, to assign a value to the stock. The firm comprehensively analyzed the various factors earlier enumerated. Furthermore, the appraiser interviewed company management and other advisors and reviewed the bases of investors' appraisals of publicly-traded shares of comparable companies at the valuation date. The end result was a 27-page report complete with appendices. Unlike the agreements in Estate of Lauder and Cameron W. Bommer Revocable Trust, there is no suggestion that the appraisal Gloeckner obtained either ignored relevant industry practices or was hastily conducted. We have no cause therefore to question Gloeckner's motives as to whether a fair value was placed on his shares. Indeed, further evidence that the fixed price was fairly obtained is found in the fact that Poesch sold his shares to the company in 1988 at the price that KPMG Benchmark set in its report. 45 Finding no evidence to support the view that Simone was a natural object of Gloeckner's bounty, the tax court erred in classifying Gloeckner's redemption agreement as a testamentary device as that term is used in Treas. Reg. § 20.2031-2(h) and rejecting the price included in the Gloeckner agreement. Having made this determination, we need not consider whether the agreement reflects full and adequate consideration. See Estate of Seltzer, 50 T.C.M. (CCH) at 1254 (ending its analysis after having found the agreement was not a testamentary substitute, even though other considerations suggested the fixed price was too low); Estate of Carpenter, 64 T.C.M. (CCH) at 1279-80 (same); cf. Estate of Lauder, 64 T.C.M. (CCH) at 1659 (continuing its analysis to discern whether the price paid reflected an adequate and full consideration in money or money's worth only after having found a fair inference that the restrictive agreements at issue were designed to serve a testamentary purpose). Neither are we obliged to explore the alternative arguments raised by petitioners.