Court Opinion

ID: 4474089
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:45.263546+00
Date Added: 2024-06-11T08:49:09.407384
License: Public Domain

Foley, J., concurring in result: Family limited partnerships are proliferating as an estate planning device, taxpayers are planning amid great uncertainty, and respondent is asserting numerous theories (i.e., economic substance, Chapter 14, section 2036, immediate gift upon formation, etc.) in an attempt to address these transactions. It is important that we clarify the law in this area with a careful statement of the applicable principles. While I agree with the majority that the partnership must be respected, I write separately to emphasize two points. I. The “Willing Buyer, Willing Seller” Test Is Not a Relevant Consideration in Determining Whether a Partnership Is To Be Respected Under State Law I disagree with some of the reasoning set forth in the majority opinion. Specifically, the rationale set forth for respecting the partnership is as follows: We do not disregard the partnership because we have no reason to conclude from this record that a hypothetical buyer or seller would disregard it. * % ‡ if: ifc ‡ # we believe the form of the transaction here (the creation of the partnership) would be taken into account by a willing buyer; thus the substance and form of the transaction are not at odds for gift tax valuation purposes. [Majority op. p. 514.] The Knight family limited partnership is a valid legal entity under Texas law. Even if a hypothetical buyer and seller were to determine that the value of the partnership interest was equal, or approximately equal, to the value of the corresponding underlying assets,1 that would not be legal justification for applying the economic substance doctrine and disregarding the partnership. Whether “the form of the transaction here (the creation of the partnership) would be taken into account by a willing buyer” is not a relevant consideration in determining whether the entity must be respected for transfer tax purposes. Our assessment of the property rights transferred is a State law determination not affected by the “willing buyer, willing seller” valuation analysis. Sec. 20.2031-l(b), Estate Tax Regs, (stating that the fair market value of property is “the price at which the property would change hands between a willing buyer and a willing seller”). In essence, that analysis assists the Court in determining the value of partnership interest after the Court establishes whether the entity is recognized under State law. The determination of whether or not the partnership should be respected is independent of the value of the partnership interest. The logical inference from the majority’s statements, however, is that a partnership could be disregarded for lack of economic substance if a hypothetical willing buyer would not respect the partnership form. This language may mislead respondent and encourage him to proffer expert testimony in a fruitless attempt to establish that a partnership should be disregarded because the value of a partnership interest is equal, or approximately equal, to the value of the corresponding underlying assets. The “willing buyer, willing seller” analysis merely establishes the value of a partnership interest, not whether the economic substance doctrine is applicable. II. The Economic Substance Doctrine Should Not Be Employed in the Transfer Tax Regime To Disregard Entities A fundamental premise of transfer taxation is that State law defines and Federal tax law then determines the tax treatment of property rights and interests. See Drye v. United States, 528 U.S. 49 (1999); Morgan v. Commissioner, 309 U.S. 78 (1940). As a result, the courts have not employed the economic substance doctrine to disregard an entity (i.e., one recognized as bona fide under State law) for the purpose of disallowing a purported valuation discount. The application of the economic substance doctrine in the transfer tax context generally has been limited to cases where a taxpayer attempts to disguise the transferor or transferees. The courts in these cases occasionally mention, but do not explicitly incorporate, a business purpose inquiry in their analysis. See Heyen v. United States, 945 F.2d 359 (10th Cir. 1991) (applying only substance over form analysis to a gift of stock to disregard intermediate transferees); Schultz v. United States, 493 F.2d 1225 (4th Cir. 1974) (applying essentially a substance over form analysis to reciprocal gifts); Griffin v. United States, 42 F. Supp. 2d 700 (W.D. Tex. 1998) (discussing the lack of business purpose inherent in gifts, and then applying economic substance analysis to a gift of stock). Generally, the economic substance doctrine, with its emphasis on business purpose, is not a good fit in a tax regime dealing with typically donative transfers. Business purpose will oftentimes be suspect in these transactions because estate planning usually focuses on tax minimization and involves the transfer of assets to family members. If taxpayers, however, are willing to burden their property with binding legal restrictions that, in fact, reduce the value of such property, we cannot disregard such restrictions. To do so would be to disregard economic reality. Wells, C.J., agrees with this concurring opinion.   The value of the partnership interest and its corresponding underlying assets will not be equal because virtually any binding legal restriction will make such partnership interest less than the value of its corresponding underlying assets.