Opinion ID: 757033
Heading Depth: 3
Heading Rank: 1

Heading: Disjunctive or Conjunctive Test?

Text: 28 Nothing in the authorizing statute or commentary surrounding Treas. Reg. § 20.2031-2(h) explains whether the existence of a business purpose necessarily excludes the possibility that the agreement is also a testamentary device, and vice versa. Some courts have expressed the view that the test is conjunctive, suggesting that an agreement that determines value for estate taxes must be found to be both a bona fide business arrangement and not a testamentary substitute. See, e.g., Dorn v. United States, 828 F.2d 177, 182 (3d Cir.1987); St. Louis County Bank v. United States, 674 F.2d 1207, 1210 (8th Cir.1982). Not all courts agree. See, e.g., Estate of Seltzer v. Commissioner, 50 T.C.M. (CCH) 1250, 1254 (1985) (If the contract fixing the price is a substitute for testamentary grant or devise, the contract is held to lack a bona fide business purpose.). 29 Any uncertainty about how to interpret the rule regarding agreements entered into or substantially modified after October 8, 1990 was put to rest when Congress passed the Omnibus Budget Reconciliation Act of 1990 (1990 Act). The Senate specified that an agreement could fix the value of stock for estate tax purposes only if it met two criteria, i.e., it was both a bona fide business arrangement and not a testamentary device (a third criterion also inserted is not applicable on this appeal because it was enacted subsequent to the date of the subject agreement). See Omnibus Budget Reconciliation Act of 1990, Pub.L. No. 101-508, § 2703, 104 Stat. 1388, 1388-498 (codified at I.R.C. § 2703); H.R. Conf. Rep. No. 101-964, at 1133, reprinted in 1990 U.S.C.C.A.N. 2374, 2838. The Internal Revenue Service (IRS) reinforced this understanding when it promulgated new regulations following passage of the 1990 Act. See Special Valuation Rules, 56 Fed.Reg. 14,321, 14,325 (1991) (Consistent with the legislative history, the proposed regulations clarify that these ... tests are independently applied.). 30 Although the Gloeckner agreement is subject only to Treas. Reg. § 20.2031-2(h), the wording of which remained unchanged after the 1990 Act, the history surrounding the statute is nevertheless helpful. Since the 1990 Act for all intents and purposes codifies this pre-existing regulatory language, it is instructive as to how such language should be applied to agreements entered into even before 1990. Moreover, we would not be subjecting the 1987 Gloeckner agreement to a different set of standards than could otherwise be used, considering the reasoning employed in decisions such as St. Louis County Bank and Dorn. Consequently, the price of the shares contained in Gloeckner's redemption agreement will be the value used to calculate decedent's estate taxes only if that agreement is both a bona fide business arrangement and not a testamentary device.