Court Opinion

ID: 4474480
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:57.592071+00
Date Added: 2024-06-11T12:25:40.633328
License: Public Domain

Laro, J., dissenting: A thin majority holds today that “each petitioner is entitled to a charitable contribution deduction under section 2522 of $207,510 resulting from the transfer to CFT [Communities Foundations of Texas, Inc.].” Majority op. p. 398. Each petitioner reported for that transfer a charitable deduction of $162,172.60, and CFT is not entitled to enjoy any funds in excess of that amount. In that the majority respects the subject transaction and allows each petitioner to deduct a charitable contribution of approximately $45,000 for value that a charity will never enjoy, I dissent. 1. Majority Applies Its Own Approach To reach the result that the majority desires, the majority decides this case on the basis of a novel approach neither advanced nor briefed by either party and concludes that the Court need not address respondent’s arguments as to public policy and integrated transaction. Majority op. p. 398 note 47. Specifically, under the majority’s approach (majority’s approach), the term “fair market value” as used in the assignment agreement denotes simply the value ascertained by the parties to that agreement (or, in certain cases by an arbitrator) and not the actual amount determined under the firmly established hypothetical willing buyer/hypothetical willing seller test that has been a fundamental part of our Federal tax system for decades on end. Id.; see also United States v. Cartwright, 411 U.S. 546, 550-551 (1973) (“The willing buyer-willing seller test of fair market value is nearly as old as the federal income, estate, and gifts taxes themselves”). Whereas the majority ostensibly recognizes that firmly established test in its determination of the fair market value of the subject property, majority op. p. 397 note 46, the majority essentially holds that the parties to the assignment agreement are not bound by that test when they themselves ascertain the fair market value of that property, id. pp. 395-398. As I understand the majority’s rationale, the parties to the assignment agreement are not bound by that test because the assignment agreement uses only the phrase “fair market value” and not the phrase “fair market value as finally determined for Federal gift tax purposes”. To my mind, the subject property’s fair market value is its fair market value, notwithstanding whether fair market value is ascertained by the parties or “finally determined for Federal gift tax purposes”. I know of nothing in the tax law (nor has the majority mentioned anything) that provides that property such as the subject property may on the same valuation date have one “fair market value” when “finally determined” and a totally different “fair market value” if ascertained beforehand.1 The majority’s interpretation of the assignment agreement is at odds with the interpretation given that agreement by not only the trial Judge, but by both parties as well. The majority allows petitioners an increased charitable contribution that would be disallowed under either the public policy or integrated transaction doctrine. In that both of these doctrines are fundamental to a proper disposition of this case, it is incumbent upon the Court to address one or both of them. The majority inappropriately avoids discussion of these doctrines by relying on the principle that the Court “may approve a deficiency on the basis of reasons other than those relied upon by the Commissioner”. Majority op. p. 398 note 47. The majority, however, fails to recognize that the majority is not approving respondent’s deficiency in full but is rejecting a portion of it. In fact, the majority even acknowledges that “the application of respondent’s integrated transaction theory would result in an initial increase in the amount of petitioners’ aggregate taxable gift by only $90,011”. Id. Whereas the majority attempts to downsize the significance of a $90,011 adjustment by recharacterizing it as “only” and “less than 1 percent”, id., the fact of the matter is that the dollar magnitude of a $90,011 increase is significant to the fisc (as well as to most people in general) notwithstanding that it may constitute a small percentage of the aggregate taxable gift as found by the majority.2 I know of no principle of tax law (nor has the majority cited one) that provides that an adjustment otherwise required by the tax law is inappropriate when it is a small percentage of a base figure such as aggregate taxable gifts. 2. Increased Charitable Deduction Is Against Public Policy Allowing petitioners to deduct as a charitable contribution the increase in value determined by the Court is against public policy and is plainly wrong. No one disputes that CFT will never benefit from the approximately $45,000 that each petitioner is entitled to deduct as a charitable contribution pursuant to the majority opinion. Nor does anyone dispute that the only persons benefiting from the increased value are petitioners and that the only one suffering any detriment from the increased value is the fisc. I do not believe that Congress intended that individuals such as petitioners be entitled to deduct charitable contributions for amounts not actually retained by a charity. See Hamm v. Commissioner, T.C. Memo. 1961-347 (charitable contribution under section 2522 requires “a reasonable probability that the charity actually will receive the use and benefit of the gift, for which the deduction is claimed”), affd. 325 F.2d 934 (8th Cir. 1963). I would deny a charitable deduction for the increased value by applying to this case a public policy doctrine that is similar to the doctrine applied by the courts in Commissioner v. Procter, 142 F.2d 824, 827 (4th Cir. 1944), revg. on other grounds a Memorandum Opinion of this Court, and Ward v. Commissioner, 87 T.C. 78 (1986). In Commissioner v. Procter, supra, the taxpayer transferred certain property interests to a trust benefiting his children. The trust instrument provided that, if a competent Federal court of last resort should find any part of the transfer to be subject to gift tax, then that portion of the property subject to such tax would not be considered to have been transferred to the trust. The Court of Appeals for the Fourth Circuit declined to respect this adjustment provision. The court stated: We do not think that the gift tax can be avoided by any such device as this. Taxpayer has made a present gift of a future interest in property. He attempts to provide that, if a federal court of last resort shall hold the gift subject to gift tax, it shall be void as to such part of the property given as is subject to the tax. This is clearly a condition subsequent and void because contrary to public policy. A contrary holding would mean that upon a decision that the gift was subject to tax, the court making such decision must hold it not a gift and therefore not subject to tax. Such holding, however, being made in a tax suit to which the donees of the property are not parties, would not be binding upon them and they might later enforce the gift notwithstanding the decision of the Tax Court. It is manifest that a condition which involves this sort of trifling with the judicial process cannot be sustained. * * * [Id. at 827.] The court also noted that the adjustment clause was contrary to public policy because: (1) Public officials would be discouraged from attempting to collect the tax since the only effect would be to defeat the gift; (2) the adjustment provision would tend to obstruct the administration of justice by requiring the court to address a moot case; and (3) the provisions should not be permitted to defeat a judgment rendered by the court. Id. We followed Procter in Ward v. Commissioner, supra. In Ward, the taxpayers, husband and wife, each transferred 25 shares of stock to each of their three sons. At the time of the gifts, the taxpayers and their sons executed a “gift adjustment agreement” that was intended to ensure that the taxpayers’ gift tax liability for the stock transfers would not exceed the unified credit against gift tax that the taxpayers were entitled to at that time. Id. at 87-88. The agreement stated that, if it should be finally determined for Federal gift tax purposes that the fair market value of the transferred stock either was less than or greater than $2,000 per share, an adjustment would be made to the number of shares conveyed so that each donor would have transferred $50,000 worth of stock to each donee. Id. We concluded that the fair market value of the stock exceeded $2,000 per share for each of the relevant years. Id. at 109. More importantly, we declined to give effect to the gift adjustment agreement. We noted that honoring the adjustment agreement would run counter to the policy concerns articulated in Commissioner v. Procter, supra. Ward v. Commissioner, supra at 113. We also concluded that upholding the adjustment agreement would result in unwarranted interference with the judicial process, stating: Furthermore, a condition, that causes a part of a gift to lapse if it is determined for Federal gift tax purposes that the value of the gift exceeds a given amount, so as to avoid a gift tax deficiency, involves the same sort of “trifling with the judicial process” condemned in Procter. If valid, such condition would compel us to issue, in effect, a declaratory judgment as to the stock’s value, while rendering the case moot as a consequence. Yet, there is no assurance that the petitioners will actually reclaim a portion of the stock previously conveyed to their sons, and our decision on the question of valuation in a gift tax suit is not binding upon the sons, who are not parties to this action. The sons may yet enforce the gifts. [Id. at 114.] Here, CFT receives no benefit from the Court-determined increase in the value of the subject property, but petitioners benefit in that they are entitled to an additional charitable deduction. As was true in Commissioner v. Procter, supra, the possibility of an increased charitable deduction serves to discourage respondent from collecting tax on the transaction because any attempt to enforce the tax due on the transaction is of no advantage to the fisc. 3. Each Step of the Transaction Is Part of an Integrated Transaction All of the steps which were taken to effect the transfer of petitioners’ partnership interests to their sons (inclusive of the trusts) were part of a single integrated transaction. The purpose of that transaction was to transfer the interests with an avoidance of Federal gift taxes, while, at the same time, discouraging audit of the transfer and manufacturing phantom charitable gift and income tax deductions in the event that the value of the transfer was later increased. I reach my conclusion in light of the following facts which were found by the trial judge or are reasonable inferences therefrom: (1) Petitioners were seeking expert advice on the transfer of their wealth with minimal tax consequences, (2) the transaction contemplated that the charities would be out of the picture shortly after the gift was made, (3) the transfers of the partnership interests to the charities were subject to a call provision that could be exercised at any time, (4) the call provisions were exercised almost contemporaneously with the transfers to the charities, (5) the call price was significantly below fair market value, (6) the charities never obtained a separate and independent appraisal of their interests (including whether the call price was actually the fair market value of those interests), (7) neither charity ever had any managerial control over the partnership, (8) the charities agreed to waive their arbitration rights as to the allocation of the partnership interests, and (9) petitioners’ sons were at all times in control of the transaction. I also query as to this case why a charity would ever want to receive a minority limited partnership interest, but for an understanding that this interest would be redeemed quickly for cash, and find relevant that the interest was subject to the call provision that could be exercised at any time. 4. Conclusion The majority has placed its stamp of approval on a transaction that not only is a prime example of clear taxpayer abuse but has as its predominant (if not sole) purpose the avoidance of Federal taxes. The majority has done so either because it does not recognize the abuse or, more likely, that it feels impotent to stop the abuse. The majority has gone as far as to condone taxpayer-abusive behavior by allowing petitioners to deduct a charitable contribution for amounts which will never benefit a charity. For these and the other reasons stated herein, I dissent. VASQUEZ, J., agrees with this dissenting opinion.   The three regulatory provisions relied upon by the majority (majority op. p. 397 note 46) in support of its position do not adequately support that position. Sec. 1.664 — 2(a)(X)(iii), Income Tax Regs., for example, uses the phrase “fair market value * * * incorrectly determined by the fiduciary” to refer to an earlier determination of fair market value that is inconsistent with the fair market value “finally determined for Federal tax purposes”.    The majority does not state what the $90,011 is less than 1 percent of. I believe the majority is referring to the relationship of the $90,011 to the aggregate taxable gift as found by the majority.