Court Opinion

ID: 4474076
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:44.852752+00
Date Added: 2024-06-11T14:53:48.394987
License: Public Domain

Whalen, J., concurring: I agree with both the reasoning and result of the majority opinion, but I write separately to make the point that this case does not present the same issues concerning the valuation of the indirect gifts as were presented in Estate of Bosca v. Commissioner, T.C. Memo. 1998-251, and to comment on the position of Judges Beghe and Ruwe, who make interesting and worthwhile points, especially in light of the increasing use of family partnerships. In this case, the majority opinion decides two principal issues. First, it rejects petitioner’s contention that the transfers of leased land and bank stock made by petitioner should be characterized as gifts to petitioner’s two sons of minority interests in a family partnership, or as enhancements of his sons’ existing partnership interests. Petitioner sought that characterization of the transfers to justify the application of substantial discounts in valuing the property. Contrary to petitioner’s position, the majority characterizes the transfers as indirect gifts to the sons of the leased land and bank stock. The majority relies on section 25.2511-l(h)(l), Gift Tax Regs., which provides: A transfer of property by B to a corporation generally represents gifts by B to the other individual shareholders of the corporation to the extent of their proportionate interests in the corporation. Based thereon, the majority holds that the transfers represent an indirect gift to each of petitioner’s two sons of an undivided 25-percent interest in the leased land and bank stock. To my knowledge, there is no disagreement as to this aspect of the majority opinion. Second, the majority opinion values the two gifts made by petitioner. In the case of the bank stock, the parties stipulated that before the transfer to the partnership the aggregate value of the stock of the three banks that was included in the transfer was $932,219. In view of the fact that the stock of each of the three banks represented a minority interest in the bank, the majority reduced or discounted the value of the stock by 15 percent. This discount was claimed on petitioner’s gift tax return, and respondent did not contest it in these proceedings. There is nothing to suggest that the amount of this discount would vary depending on whether the gifts were valued in the aggregate or separately. The majority then, in effect, treats 50 percent of the remaining value as having been retained by petitioner through his interest in the family partnership and treats 25 percent of the remaining value, $198,097, as a gift to each son in accordance with section 25.2511-l(h)(l), Gift Tax Regs. In the case of the leased land, after resolving various factual disputes between and among the parties’ expert witnesses, the majority opinion concludes that the present value of the leased land, before the transfer to the partnership, was $757,064. In view of the fact that the gifts made by petitioner were gifts of undivided interests in the leased land, the majority agrees that the value of the leased land should be reduced or discounted by 15 percent due to the fact that the donees did not have complete control over the property. In note 28 of the opinion, the majority notes that the 15-percent discount is based upon “a 50-percent undivided interest in the leased land, as opposed to a 25-percent undivided interest” due to petitioner’s failure to provide evidence as to “what additional amount of discount, if any, should be attributable to a 25-percent undivided interest as opposed to a 50-percent undivided interest.” Thus, based upon the record at trial, the same discount is applicable regardless of whether the gifts of the leased land are valued on an aggregate basis or separately. The majority opinion then, in effect, treats 50 percent of the remaining value as having been retained by petitioner through his interest in the partnership and treats 25 percent of the remaining value, $160,876, as a gift to each son in accordance with section 25.2511-l(h)(l), Gift Tax Regs. The majority opinion, p. 390, states as follows: We have not, however, aggregated the separate, indirect gifts to his sons, John and William. See Estate of Bosca v. Commissioner, T.C. Memo. 1998-251 (for purposes of the gift tax, each separate gift must be valued separately), and cases cited therein; cf. Estate of Bright v. United States, 658 F.2d 999 (5th Cir. 1981) (rejecting family attribution in valuing stock for estate tax purposes). As the author of the Estate of Bosca v. Commissioner, supra, I appreciate the approval of that opinion by the majority. However, the approach of the majority in the instant case, as discussed above, is different from the approach used in Estate of Bosca because, in this case, there is no difference between the valuation of petitioner’s gifts to his sons depending on whether the gifts are valued on an aggregate basis or separately. The value of 50 percent of the gifted property, or $378,532 (50 percent of $757,064), less a 15-percent discount is the same as two 25-percent undivided interests in the leased land, $378,532, less a 15-percent discount. In valuing the gifts in Estate ofBosca, it was necessary for the Court to decide whether the gifts should be valued on an aggregate basis; i.e., as part of a 50-percent block of stock, or whether they should be valued separately; i.e., as two 25-percent blocks of stock. In deciding to take the latter approach, we followed the longstanding position of this Court that separate gifts must be valued separately. See, e.g., Calder v. Commissioner, 85 T.C. 713 (1985); Rushton v. Commissioner, 60 T.C. 272, 278 (1973), affd. 498 F.2d 88 (5th Cir. 1974); Standish v. Commissioner, 8 T.C. 1204 (1947); Phipps v. Commissioner, 43 B.T.A. 1010-1022 (1941), affd. 127 F.2d 214 (10th Cir. 1942); Hipp v. Commissioner, T.C. Memo. 1983-746. As I understand their position, Judges Ruwe and Beghe agree that, under the facts of this case, petitioner made a gift to each of his two sons, but they do not agree with the approach used by the majority in valuing the gifts. They appear to take the position that in computing the difference between the value of the property transferred by the donor and the value of the consideration received by the donor, as required by section 2512(b), the property is to be valued in the donor’s hands prior to the transaction with no discounts or reductions permitted. For example, in the case of the leased land, the only asset as to which respondent has raised an issue in this case, it appears that Judges Ruwe and Beghe take the position that the value of the property in the donor’s hands before the transfer, $757,064, must also be the value of the property transferred by the donor. Presumably, they would take the position that the value of the consideration received by the donor is 50 percent of the value of the property transferred or $378,532, based upon the fact that petitioner retained a 50-percent interest in the partnership. Under this approach the aggregate value of the gifts would be $378,532, and that amount must be included in computing the amount of gifts made by petitioner during the calendar year. Thus, they disagree that a discount of 15 percent is proper to reflect the reduced value of undivided interests in the leased land. Their view appears to be at odds with the fact that discounts and reductions are permitted in the case of direct gifts. If a donor makes a direct gift to one or more donees, the sum of the gifts may be less than the value of the property in the donor’s hands before the transfer. For example, we have held that the sum of all the fractional interests in real property gifted by a donor was less than the value of the whole property in the donor’s hands. In Mooneyham v. Commissioner, T.C. Memo. 1991-178, the donor owned 100 percent of a certain parcel of real property worth $1,302,000 before transferring a 50-percent undivided interest in the property to her brother. We held that the value of the gift, the 50-percent fractional interest, was “50 percent of the total less a 15-percent discount or $553,350.” Thus, the property transferred by the donor was worth $97,650 less than it was in the donor’s hands. Similarly, in Estate of Williams v. Commissioner, T.C. Memo. 1998-59, the owner of two parcels of property transferred 50-percent undivided interests in each of the parcels. We held that each of the two gifts in that case should be valued as 50 percent of the fair market value of the property less aggregate discounts of 44 percent. See also Heppenstall v. Commissioner, a Memorandum Opinion of this Court dated Jan. 31, 1949 (minority discount). These cases show that, in appropriate cases, the minority discount and fractionalized interest discount can be taken into account for purposes of valuing direct gifts under section 2512(a). This suggests that such discounts can also be taken into account in valuing indirect gifts under section 2512(b). Otherwise, there would be a difference in the application of the willing buyer, willing seller standard depending on whether the valuation is of a direct gift or an indirect gift. As described above, in valuing the gifts of bank stock, the majority opinion applied a minority interest discount to reflect the fact that a willing buyer would pay less for the minority interests in the three banks that petitioner transferred. In valuing the leased land, the majority opinion applied a fractional interest discount to reflect the fact that a willing buyer would pay less for the undivided interest in the leased land that petitioner transferred. These discounts are attributable to the nature of the property transferred by the donor. They are not attributable to restrictions imposed by the terms of the conveyance. See Citizens Bank & Trust Co. v. Commissioner, 839 F.2d 1249 (7th Cir. 1988). In my view, neither of these discounts is inconsistent with section 25.2511-2(a), Gift Tax Regs., and the corresponding case law which require that the gift be measured by the value of the property passing from the donor, and not by what the donee receives. See, e.g., Ahmanson Found. v. United States, 674 F.2d 761, 767-769 (9th Cir. 1981). Chabot, Colvin, Halpern, and Thornton, JJ., agree with this concurring opinion. Halpern J., concurring: I write to state my agreement with the majority opinion and to respond to the suggestion that in allowing a fractional interest discount with respect to the leased land, the majority opinion has deviated from the valuation rule of section 2512(b). The threshold question under section 2512(b) is what “property is transferred”. As germane to the facts of the case under review, the question is whether petitioner’s transfer of land to the partnership should be deemed to represent a single transfer of petitioner’s 100-percent interest in the land, or whether it should be viewed as separate, indirect transfers of fractional interests to his two sons. The instant case, like Kincaid v. United States, 682 F.2d 1220 (5th Cir. 1982), is based on application of an indirect gift rule as provided in the regulations: “A transfer of property by B to a corporation [for less than full and adequate consideration] generally represents gifts by B to the other shareholders of the corporation to the extent of their proportionate interests in the corporation.” Gift Tax Regs. sec. 25.2511-l(h)(l) (emphasis added). Applying this regulation, the court in Kincaid concluded that the taxpayer’s single transfer of a ranch to the family-owned corporation represented “a gift to each of her sons” to the extent of their proportionate interests. Id. at 1224. Given the unambiguous premise of the cited regulation, as applied in Kincaid, that the transfer gives rise to separate “gifts”, it follows that for purposes of valuing those separate gifts, the “property transferred” should be viewed as the property transferred by virtue of each of the deemed separate gifts. Otherwise, we must construe section 2512(b) to apply not on a gift-by-gift basis, but on the basis of aggregate gifts made by the donor to different donees — a result without basis in law or common sense. It would seem beyond cavil that if the petitioner had made direct gifts to his sons of 25-percent undivided interests in the land, we would permit appropriate fractional interest discounts in valuing the gifts. It would be anomalous if by making the same gifts indirectly, through a partnership, instead of directly, such fractional interest discounts were precluded. Having applied the indirect gift rule to deny the donor entity-level discounts on the basis that the transfer to the entity was in essence multiple transfers to the individual objects of the donor’s bounty, it would be unfair then to ignore the operation of that rule in concluding that in considering the availability of a fractional interest discount, the transfer should be treated as a unitary transfer to the entity. Finally, it is true, as Judge Ruwe notes, that neither Kincaid nor several of its progeny allowed any fractional interest discount with respect to the transferred property. There is no indication in any of these cases, however, that the taxpayer raised or that the court considered such an issue. The only case in the Kincaid line of cases to expressly consider the issue was Estate of Bosca v. Commissioner, T.C. Memo. 1998-251, which concluded, consistent with the majority opinion, that fractional interest discounts were permissible. I see no reason why we should now abandon this precedent, which is soundly reasoned. Chabot, Cohen, Whalen, Colvin, Laro, Gale, and Thornton, JJ., agree with this concurring opinion.