Court Opinion

ID: 4474600
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:02.366805+00
Date Added: 2024-06-11T07:55:54.889268
License: Public Domain

Laro, J., concurring in result: I concur only because I am uncomfortable with the analysis used by the majority in arriving at its result. That analysis applies a new test that the majority has created to decide whether a transfer to a family limited partnership should be respected for Federal tax purposes. The majority applies its test in lieu of deeply ingrained caselaw that conditions satisfaction of the “bona fide sale for an adequate and full consideration in money or money’s worth” exception of section 2036(a) (adequate and full consideration exception) on the transferor’s receipt of property equal in value to that of the property transferred by the transferor. In other words, under that caselaw, the adequate and full consideration exception may apply only where the transferor’s receipt of consideration is of a sufficient value to prevent the transfer from depleting the transferor’s gross estate. The majority states its test as follows: “In the context of family limited partnerships, the bona fide sale for adequate and full consideration exception is met where [1] the record establishes the existence of a legitimate and significant nontax reason for creating the family limited partnership, and [2] the transferors received partnership interests proportionate to the value of the property transferred.” Majority op. p. 118. I disagree with both prongs of this test. I believe that a transferor satisfies the adequate and full consideration exception in the context of a transfer to a partnership only when: (1) The record establishes either that (i) in return for the transfer, the transferor received a partnership interest and any other consideration with an aggregate fair market value equal to the fair market value of the transferor’s transferred property, or (ii) the transfer was an ordinary commercial transaction (in which case, the transferred property and the consideration received in return are considered to have the same fair market values), and (2) the transfer was made with a business purpose or, in other words, a “useful nontax purpose that is plausible in light of the taxpayer’s [transfer- or’s] conduct and useful in light of the taxpayer’s economic situation and intentions.” ACM Pship. v. Commissioner, T.C. Memo. 1997-115, affd. in part and revd. in part on an issue not relevant herein 157 F.3d 231 (3d Cir. 1998); see also CMA Consol., Inc. v. Commissioner, T.C. Memo. 2005-16; Salina Pship., L.P. v. Commissioner, T.C. Memo. 2000-352. 1. Majority’s Conclusion That Transferors Receive Partnership Interests Proportionate to the Value of the Property Transferred Where the record establishes the existence of a legitimate and significant nontax reason for creating a family limited partnership, the majority concludes that the adequate and full consideration exception is met if the transferors received partnership interests proportionate to the value of the property transferred. I disagree with this conclusion. Section 2036(a) provides: SEC. 2036(a). General Rule. — The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death— (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. [Emphasis added.] Firmly established caselaw holds that the emphasized text, the adequate and full consideration exception, is satisfied only when a transferor receives consideration in money or money’s worth equal to the value of the property transferred by the transferor; i.e., consideration with a value sufficient to prevent the transfer from depleting the transferor’s gross estate. E.g., Estate of Wheeler v. United States, 116 F.3d 749, 761 (5th Cir. 1997) (“unless a transfer that depletes the transferor’s estate is joined with a transfer that augments the estate by a commensurate (monetary) amount, there is no ‘adequate and full consideration’ for the purposes of either the estate or gift tax”); Estate of D’Ambrosio v. Commissioner, 101 F.3d 309, 312 (3d Cir. 1996) (“consideration should be measured against the value that would have been drawn into the gross estate absent the transfer”), revg. 105 T.C. 252 (1995); United States v. Past, 347 F.2d 7, 12 (9th Cir. 1965) (“The value of what the decedent received under the trust must be measured against the value of the property she transferred to the trust”); United States v. Allen, 293 F.2d 916, 917-918 (10th Cir. 1961) (consideration is “adequate and full” only if it equals or exceeds the value of the property that would otherwise be included in the gross estate absent the transfer); Estate of Frothingham v. Commissioner, 60 T.C. 211, 215-216 (1973) (“unless replaced by property of equal value that could be exposed to inclusion in the decedent’s gross estate, the property transferred in a testamentary transaction of the type described in the statute must be included in his gross estate”); see also Commissioner v. Wemyss, 324 U.S. 303, 307 (1945); Estate of Gregory v. Commissioner, 39 T.C. 1012 (1963). The adequacy of consideration for purposes of the adequate and full consideration exception is measured by the value of the property that would have otherwise been included in the transferor’s gross estate had the transferor died immediately before the transfer. Estate of D’Ambrosio v. Commissioner, supra at 313. Because transfers of assets under facts similar to those here are typically motivated primarily (if not entirely) by testamentary concerns, section 2036(a) preserves the integrity of the Federal estate tax system by preventing a depletion of an estate by testamentary-like inter vivos transfers for less than an adequate and full consideration. See United States v. Estate of Grace, 395 U.S. 316 (1969). Whether the value of consideration received in the form of an interest in a partnership is “adequate and full” within the meaning of section 2036(a) is a valuation issue. For this purpose, I believe that the Court must determine the fair market value of the partnership interest as of the date of the transfer, applying the well-established valuation principles that take into account discounts and/or premiums inhering in that fair market value.1 The value of the transferred property that would have been included in the transferor’s gross estate absent the transfer would have been determined under such a valuation approach. I believe it only natural to conclude that the same approach should apply to determine the value of the consideration that would have replaced the transferred property in the transferor’s gross estate had the transferor died immediately after the transfer. Moreover, the phrase “adequate and full consideration” has the same meaning in both gift and estate tax cases, Merrill v. Fahs, 324 U.S. 308, 309-311 (1945); Estate of Friedman v. Commissioner, 40 T.C. 714, 718-719 (1963), and this Court has previously applied such a valuation approach in a gift tax case, Estate of Trenchard v. Commissioner, T.C. Memo. 1995-121, arising under section 2512(b) from a transfer of property to a corporation upon its formation.2 In Estate of Trenchard, the decedents (husband and wife), their daughter, and her three children (the six of whom are collectively referred to as the subscribers) each transferred property to a newly formed corporation in exchange for debt and stock; the decedents’ daughter and her three children were the only ones who received common stock. The Court determined that the fair market value of the property that each decedent transferred to the corporation exceeded the fair market value of the stock and debt that they each received in return. The Court determined the fair market value of that stock, noting that a marketability discount inhered in it and that a premium for control also inhered in the fair market value of the decedent/husband’s shares. Consistent with the test applied in this case by the majority, the executrix argued that the excess values were not gifts from each of the decedents to the common shareholders because the decedents’ proportionate interests in all of the property transferred to the corporation did not exceed their interests in the total consideration that the subscribers had received in return. The Court disagreed. The Court held that the excess values were a gift from the decedents to the common shareholders in that the excess values accrued to the benefit of the common shareholders and increased the value of the interests received by them. With but a passing reference to language in Estate of Stone v. Commissioner, T.C. Memo. 2003-309, the majority declines to address whether valuation discounts are taken into account for purposes of valuing the consideration received by decedent from the Bongard Family Limited Partnership (bflp). See majority op. p. 117. Nor does the majority mention that this referenced language was recently rejected by a majority of a panel of the Court of Appeals for the Third Circuit in Estate of Thompson v. Commissioner, 382 F.3d 367, 386-387 (3d Cir. 2004) (Greenberg, J., concurring and joined by Rosenn, J.),3 affg. T.C. Memo. 2002-246. This majority in Estate of Thompson (Thompson majority) “[rejected] Stone on the quoted point [the referenced language] as the Commissioner’s position [that the valuation of partnership interests for purposes of section 2036(a) must take into account valuation discounts] in no way reads the [adequate and full consideration] exception out of section 2036(a) and the Tax Court does not explain why it does.” Id. The Thompson majority went on to explain that the Commissioner merely “seeks to apply the exception precisely as written as his position should not be applied in ordinary commercial circumstances even though the decedent may be said to have enjoyed the property until his death.” Id. at 387. The majority in this case does not address the Thompson majority’s conclusion that valuation discounts may be taken into account for purposes of the adequate and full consideration exception. Nor does the majority in this case attempt to answer the Thompson majority’s query as to why applying valuation discounts for such a purpose reads the adequate and full consideration exception out of section 2036(a). I recognize that the Court of Appeals for the Fifth Circuit in Kimbell v. United States, 371 F.3d 257, 266 (5th Cir. 2004), stated that valuation principles should not be equated with the test of “adequate and full consideration” because business or other financial considerations may enter into a transferor’s decision to receive an interest in a limited partnership that may not be immediately sold for 100 cents on the dollar. While I do not disagree that these considerations may cause a transferor to accept such an interest in a partnership, the issue as I see it is whether the inability to realize the 100 cents is attributable to (1) an actual difference in value between the transferred and received properties or (2) the presence of one or more intangible assets the sales price of which is subject to dispute. Under the caselaw referenced above, the adequate and full consideration exception does not apply where a difference in value between transferred and received properties causes a depletion in the transferor’s gross estate. Nor does Kimbell v. United States, supra, hold otherwise. As the Thompson majority observed as to Kimbell: Kimbell does not take into account that to avoid the recapture provision of section 2036(a) the property transferred must be replaced by property of equal value that could be exposed to inclusion in the decedent’s gross estate * * * on a money or money’s worth basis. [Estate of Thompson v. Commissioner, supra at 387 n.24 (Greenberg, J., concurring and joined by Rosenn, J.); citations and quotation marks omitted.] 2. Majority’s Conclusion That the Record Establishes the Existence of a Legitimate and Significant Nontax Reason for Creating a Family Limited Partnership Where the transferors received family limited partnership interests proportionate to the value of property transferred to the partnership, the majority concludes that the adequate and full consideration exception is satisfied if there was a legitimate and significant nontax reason for creating the partnership. I disagree with this conclusion for three reasons. First, I disagree with the use of the majority’s “legitimate and significant nontax reason” test. See majority op. p. 118. I would apply the longstanding and well-known business purpose test of Gregory v. Helvering, 293 U.S. 465 (1935). Indeed, the Court of Appeals for the Third Circuit used that business purpose test in Estate of Thompson v. Commissioner, supra at 383, when it stated: A “good faith” transfer to a family limited partnership must provide the transferor some potential for benefit other than the potential estate tax advantages that might result from holding assets in the partnership form. Even when all the “i’s are dotted and t’s are crossed,” a transaction motivated solely by tax planning and with “no business or corporate purpose ... is nothing more than a contrivance.” Gregory v. Helvering, 293 U.S. 465, 469 (1935). * * * The Court of Appeals for the Eighth Circuit, the court to which an appeal of this case would most likely lie, also has regularly used a business purpose/economic substance test in Federal tax matters, e.g., IES Indus., Inc. v. United States, 253 F.3d 350 (8th Cir. 2001); Bergman v. United States, 174 F.3d 928 (8th Cir. 1999), including matters dealing with estate and gift taxes, e.g., Estate of Schuler v. Commissioner, 282 F.3d 575 (8th Cir. 2002), affg. T.C. Memo. 2000-392; Sather v. Commissioner, 251 F.3d 1168 (8th Cir. 2001), affg. in part and revg. in part on the applicability of accuracy-related penalties T.C. Memo. 1999-309. Second, the words “legitimate” and “significant” are ambiguous and subject to various interpretations. For example, as I read the meaning of the adjective “legitimate” in Merriam-Webster’s Collegiate Dictionary 665 (10th ed. 1999), I am unsure which of those meanings the majority intends to give to that word. The only possible meanings are: “2 : being exactly as purposed: neither spurious nor false”; “3 a : accordant with law or with established legal forms and requirements”; and “4 : conforming to recognized principles or accepted rules and standards”. An uncertainty in the meaning of the words “legitimate” and “significant” may result in applications not intended by the majority. Third, the majority requires only that the creation of the partnership be supported by a legitimate and significant nontax reason. Under the majority’s analysis, therefore, the adequate and full consideration exception would seem to be satisfied as to all property transferred to a partnership as long as the record establishes the requisite legitimate and significant nontax reason and that the transferors received partnership interests proportionate to the value of the transferred property. Where, as here, the legitimacy of a partnership is not at issue,4 I do not believe that the Court’s analysis should rest solely on the transferor’s reason for forming the partnership; the Court’s analysis should also include an inquiry as to the business purpose for the transfers to the partnership. In fact, as I read the relevant text underlying the adequate and full consideration exception, that text speaks only to a “sale” of property and makes no specific statement as to the purchaser of that property. Marvel, J., agrees with this concurring in result opinion.   The Court need not determine this fair market value, however, if the record establishes that the partnership interest was received in an ordinary commercial transaction. In that case, the values of the transferred and received properties would be considered to be equal. See sec. 25.2512-8, Gift Tax Regs, (transfers “made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth”); see also Estate of Harper v. Commissioner, T.C. Memo. 2002-121.    As is true in sec. 2036(a), sec. 2512(b) refers to “value” and “adequate and full consideration in money or money’s worth”. Specifically, sec. 2512(b) provides: SEC. 2512. VALUATION OP GIFTS. (b) Where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.    I have found no law setting the precedential value of a concurring opinion that garners a second vote so as also to be a majority opinion of a Court of Appeals panel. Cf. Hunt v. Natl. Broadcasting Co., Inc., 872 F.2d 289, 296 (9th Cir. 1989) (recognizing the issue, but stating that it was unnecessary to decide there). To my mind, such a concurring opinion is entitled to the same respect as any other majority opinion of a panel. See Greene v. Massey, 706 F.2d 548, 550 (5th Cir. 1983) (in response to certification from the U.S. Court of Appeals for the Fifth Circuit, the Supreme Court of Florida answered that a concurring opinion by a Justice of that Court is the law of the case if joined by a majority of that Court’s Justices); Detroit v. Mich. Pub. Utils. Commn., 286 N.W. 368, 379 (Mich. 1939) (“It is true that the views of Justice Fellows were expressed in a separate concurring opinion. Views, however, expressed in separate concurring opinions are the views of the court, when it appears that the majority of the court concurred in such separately expressed views”); Anderson v. Sutton, 293 S.W. 770, 773 (Mo. 1927) (“Views expressed in a separate concurring opinion of an individual judge are not the views of the court, unless it appears that the majority of the court concurred in such separately expressed views”); see also State v. Dowe, 352 N.W.2d 660, 662 (Wis. 1984) (“In Outlaw [State v. Outlaw, 321 N.W.2d 145 (Wis. 1982)], the lead opinion represents the majority and is controlling on the issues of the state’s burden and the existence of abuse of discretion by that circuit court. However, the concurring opinions represent the majority on the issue of the test to be applied and therefore control on this point”).    The majority states that it is not deciding whether BFLP is a partnership that should be recognized for Federal tax purposes. Majority op. p. 126 n.11.