Court Opinion

ID: 4474477
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:57.571643+00
Date Added: 2024-06-11T12:25:40.621283
License: Public Domain

Swift, J., concurring: The majority opinion adopts an interpretation of the “fair market value” language of the formula clause that recognizes the sophistication of the tax planning before us and that gives significance to the failure of that formula clause to use commonly recognized language in the estate planning profession under which — had it been intended — a fair market value determination (and an allocation between the donees of the gifted interest based thereon) “as finally determined for Federal gift tax purposes” would have been made explicit. In my opinion, the failure of the formula clause to reflect such well-recognized language belies petitioners’ claim that such language, interpretation, and result were intended and now should be inferred. Under the majority’s interpretation of the formula clause, the abuse potential inherent therein is essentially negated. If, however, petitioners’ interpretation of the formula clause were adopted, under which petitioners claim an increasd charitable deduction equal to all excess value of the gifted interest over $7,044,093, as finally determined for Federal gift tax purposes, without property representing such excess value actually passing to charity, the long-standing “reasonable probability” and “public policy” doctrines applicable generally to gifts would become applicable. See, e.g., Hamm v. Commissioner, T.C. Memo. 1961-347, affd. 325 F.2d 934 (8th Cir. 1963), applying the reasonable probability standard to the question of whether a charitable donee will ever receive gifted property; Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944) (applying public policy principles to the question of whether abusive valuation or adjustment clauses are to be respected). With regard to Judge Foley’s criticism of these doctrines, see dissenting op. p. 416, 423-424, I would suggest that the reasonable probability and public policy doctrines should not be confined to stale factual situations involved in old cases. To the contrary, these doctrines live and breathe and have a life that should be broad and flexible enough to apply to contemporary and overly aggressive gift and estate tax planning (such as that involved herein) — particularly where charity is involved. With regard further to the nature or extent of the gift to charity involved herein, I would emphasize that not “all” of petitioners’ MIL partnership interest was transferred. Respondent argues that “all” of petitioners’ MIL partnership interest was transferred, but petitioners contend otherwise, and the majority opinion concludes that something less than all of petitioners’ interest in the MIL partnership was transferred (namely, only an “assignee” interest was transferred). See majority op. pp. 370-373. In light of the majority’s conclusion in that regard, had respondent argued in the alternative that the “partial interest” gift rules of section 2522(c)(2) and section 25.2522(c)-3(c), Gift Tax Regs., were applicable to petitioners’ gift to charity, it would appear that petitioners’ claimed charitable deduction herein would have been completely disallowable. See the analysis below relating to the deductibility of gifts to charity of partial interests. The Gift Petitioners formed MIL as a Texas family limited partnership and made gifts of a portion of their interests therein by way of an assignment agreement and a formula clause which, according to petitioners and the majority opinion, transferred only assignee interests in MIL to four levels of donees, generally as follows: First and Second Level (Noncharitable) Donees'. Trusts for the benefit of the donors’ four children (first level donees) to receive portions of the gifted interest and outright gifts to the donors’ four children (second level donees) with an aggregate fair market value on the valuation date up to $6,910,933; Third Level Donee: If the fair market value of the gifted interest exceeds $6,910,933, Symphony, a charitable donee, to receive such excess up to a maximum value of $134,000; Fourth Level Donee: If the fair market value of the gifted interest exceeds $7,044,933 ($6,910,933 plus $134,000), CFT, also a charitable donee, to receive such excess without limit. Focusing on the gift to the fourth level charitable donee (the gift to CFT), petitioners themselves allege (in order to beef up the valuation discounts they seek) and the majority opinion finds, majority op. pp. 370-373, that the gifted MIL partnership interest transferred to CFT included only certain “economic rights” with regard to the gifted interest and did not consist of all of the donors’ rights as limited partners in that particular limited partnership interest. Upon petitioners’ transfer and upon CFT’s receipt of the gifted interest in the MIL partnership, petitioners retained, and CFT never received, the following rights associated with petitioners’ interest in MIL (references are to the MIL amended partnership agreement): (1) The right to vote on MIL partnership matters (section 3.10); (2) The right to redeem the MIL partnership interest (section 9.02(b)); (3) The right to inspect financial and other pertinent information relating to MIL (section 3.0 9(d)(i) — (v)); (4) The right to access any properties or assets owned by MIL (section 3.09(d)(vi)); and (5) The right to veto early liquidation of MIL, unless such liquidation is required by State law (section 10.01). Under section 7.02 of the Texas Revised Limited Partnership Act, a partnership agreement may, but is not required to, limit the partnership rights that may be transferred when a partner transfers or assigns an interest in a partnership. In this case, petitioners made their retention of the above rights (and the nonreceipt thereof by CFT) explicit by the terms of the MIL partnership agreement that they adopted. Section 8.03 of the MIL partnership agreement, discussing the transfer of a limited partnership interest to an assignee, is set forth, in part, below: an Assignee shall be entitled only to allocations of Profits and Losses * * * and distributions * * * which are attributable to the Assigned Partnership Interests held by the Assignee and shall not be entitled to exercise any Powers of Management nor otherwise participate in the management of the Partnership nor the control of its business and affairs. * * * As explained, the above limitations on the charitable gift transferred by petitioners to CFT are the basis for petitioners’ claimed characterization and valuation of the gift to CFT as an assignee interest in MIL, as distinguished from an MIL partnership interest, and (as petitioners themselves contend) they would appear to constitute substantive and significant limitations. Deductibility of Gifts to Charity of Partial Interests Generally, and apart from certain specified statutory exceptions noted below, where less than donors’ entire interests in property are transferred to charity, the charitable contributions — for Federal gift tax purposes, as well as for Federal income and estate tax purposes — are to be treated as partial interests, and any claimed gift, income, and estate tax charitable deductions relating thereto are to be disallowed. See secs. 2522(c)(2) (gift tax disallowance), 170(f)(3) (income tax disallowance), 2055(e)(2) (estate tax dis-allowance). Set forth below, in part, is the statutory language of section 2522(c)(2) that, for Federal gift tax purposes, generally disallows charitable deductions for gifts to charity of partial interests: SEC. 2522(c). Disallowance of Deductions in Certain Cases.— (2) Where a donor transfers an interest in property (other than an interest described in section 170(f)(3)(B)) to a person, or for a use, described in subsection (a) or (b) [qualified charities] and an interest in the same property is retained by the donor, or is transferred or has been transferred (for less than an adequate and full consideration in money or money’s worth) from the donor to a person, or for a use, not described in subsection (a) or (b), no deduction shall be allowed under this section for the interest which is, or has been transferred to the person, or for the use, described in subsection (a) or (b) * * * Treasury regulations applicable to the above statutory provisions provide examples of charitable gifts of partial interests subject to the above disallowance rule. Section 1.170A-7(d), Example (7), Income Tax Regs., treats as a partial interest a gift to charity of the rent-free use of one floor of an office building where the donor owns the entire office building. Section 20.2055-2(e)(2)(i), Estate Tax Regs., classifies as a partial interest a gift to charity of a reversionary interest in an office building where the decedent transfers to his wife a life estate in the office building and where the decedent’s wife is still living when the reversionary interest passes to charity. Section 25.2522(c)-3(c)(l)(i), Example (3), Gift Tax Regs., treats as a partial interest a gift to charity of the right to rental income from real property where the remaining interest in the property is transferred to a noncharitable donee. Other authorities recognize and discuss the above general rule under which charitable deductions are disallowed for gifts to charity of partial interests. In Stark v. Commissioner, 86 T.C. 243 (1986), we held that a gift to the U.S. Forest Service of real property constituted a partial interest where the donor retained a mineral interest in the real property. The gift to charity, however, of the partial interest was deductible because the particular restricted mineral interest retained by the taxpayer was not regarded as substantial. In interpreting section 170(f)(3) for income tax purposes, we stated that the partial interest rule “applies to contributions [to charity] of less than the taxpayer’s entire interest in property, including, but not limited to, contributions of the right to use property.” Id. at 250. In Rev. Rui. 81-282, 1981-2 C.B. 78, it was held that a gift to charity of corporate stock constituted a disallowed partial interest where the donor retains the right to vote the gifted stock (a gift not dissimilar from the gift to CFT of the nonvoting, assignee interest in the mil partnership). See also Stewart et al., Charitable Giving and Solicitation, par. 9004, at 9002 (1999), which states that “A donor can run afoul of the partial interest rules by retaining a property interest or right while transferring the primary incidents of ownership to charity.”1  As indicated previously, for Federal gift, income, and estate tax purposes, certain limited statutory exceptions to the above rule applicable to partial interests are available under which specified types of partial interests transferred to charity will qualify for charitable deductions (namely, certain fixed income transfers to charity and certain remainder interests gifted to charitable annuity trusts, to unitrusts, and to pooled income funds). See secs. 2522(c)(2)(A) and (B) (gift tax), 170(f)(2)(A) and (B) (income tax), 2055(e)(2)(A) and (B) (estate tax). These statutorily qualified forms of deductible partial interest charitable gifts are subject to strict guidelines which provide assurance that the charitable deductions to be allowed reflect the approximate amount to be received by charity. See sec. 25.2522(c)-3(d)(2)(iv), Gift Tax Regs. In addition to the above statutorily qualified forms of deductible partial interests transferred to charity, section 170(f)(3)(B) sets forth a number of other types of partial interest gifts with respect to which charitable deductions are allowable. Under section 170(f)(3)(B), charitable deductions are allowed for gifts not in trust of remainder interests in a personal residence or farm (sec. 170(f)(3)(B)(i)), gifts to charity not in trust of an “undivided portion” of a transferor’s entire interest in property (sec. 170(f)(3)(B)(ii)), and qualified conservation contributions (sec. 170(f)(3)(B)(iii)). With regard to charitable gifts of an undivided portion of a transferor’s entire interest in property, section 25.2522(c)-3(c)(2)(i), Gift Tax Regs., provides, in part, as follows: An undivided portion of a donor’s entire interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the donor in such property * * * [2] In Stark v. Commissioner, supra at 252-253, we explained as follows: Where the interest retained by the taxpayer is so insubstantial that he has, in substance, transferred his entire interest in the property, the tax treatment should so reflect. * * * * * * A charitable contribution deduction should be allowed only where the retained interest has a de minimis value. Moreover, the insubstantial retained interest must not potentially interfere in any manner with the donee’s interest. * * * [Citation omitted.] In Rev. Rui. 81-282, 1981-2 C.B. 78, it was concluded that a taxpayer’s retention of a right to vote shares of stock contributed to charity constitutes a substantial right because a right to vote gives the holder a voice in the management of the company and is crucial to protecting a stockholder’s financial interest. In Miami Natl. Bank v. Commissioner, 67 T.C. 793, 800 (1977) (involving the transfer of stock into a subordinated securities account), we concluded that retained voting rights, among others, constitute substantial rights. Application to McCord As stated, the retained rights involved in Rev. Rui. 81-282, 1981-2 C.B. 78, appear to be analogous to the rights retained by petitioners herein. By providing in the mil partnership agreément limitations on transfers of MIL partnership interests and by transferring to CFT only an assignee interest in MIL, petitioners retained the voting and the other rights in the mil limited partnership associated with the assignee interest transferred to charity. Because the rights retained by petitioners with regard to their MIL limited partnership interest would be treated as substantial, under section 170(f)(3)(B)(ii) the portion thereof transferred to CFT would appear not to qualify as an undivided portion of petitioners’ entire MIL limited partnership interest. I would reiterate that it is the perceived substantial significance of petitioners’ retained rights on which petitioners themselves, petitioners’ valuation experts, and the majority opinion rely to justify assignee status and increased valuation discounts for the gifted interest. It would appear that for the above analysis not to apply to the gift involved in the instant case, petitioners’ MIL limited partnership interest would have to be interpreted as consisting of two separate and distinct interests (an economic interest and a noneconomic interest) with petitioners transferring to CFT an undivided portion of the separate economic interest. I submit that the correct interpretation would be to treat petitioners’ MIL limited partnership interest as one interest consisting of both economic and noneconomic rights, with petitioners having transferred to CFT only their economic rights therein. Under this interpretation, it would appear that petitioners should be regarded as having made a charitable gift to CFT of a partial interest in their MIL limited partnership interest, which charitable gift would be subject to the gift tax disallowance provision of section 2522(c)(2).3    Treatises discussing charitable contributions interpret the relevant Code provisions as outlined above, and I have not discerned how the situation involved in the instant case would not be covered by the above Code provisions disallowing a tax deduction for gifts to charity of partial interests. See, e.g., 8 Mertens, Law of Federal Income Taxation, secs. 31:97 to 31:112 (1999 rev.); Beckwith, 839 Tax Mgmt. (BNA), “Estate and Gift Tax Charitable Deductions”, secs. V, XI at A-50 (2001); Kirschten & Freitag, 521-2d Tax Mgmt. (BNA), “Charitable Contributions: Income Tax Aspects”, sec. II-F (2002); Samansky, Charitable Contributions and Federal Taxes, ch. 8 (1993); Stephens et al., Federal Estate and Gift Taxation, secs. 5.05, 11.02 (8th ed. 2002); Stewart et al., Charitable Giving and Solicitation, pars. 9001-9012, 10,022, 11,012 (1999).    Parallel provisions for income and estate tax purposes with regard to deductions relating to charitable gifts of an undivided portion of a taxpayer’s entire interest in property are set forth in sec. 1.170A-7(b)(l)(i), Income Tax Regs., and sec. 20.2055-2(e)(2)(i), Estate Tax Regs.    1 recognize that under the disallowance rule of sec. 2522(c)(2), as suggested herein, petitioners’ claimed charitable deduction for their gift to Symphony also would be disallowed as a gift of a partial interest.