Court Opinion

ID: 9497334
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:49:00.000029+00
Date Added: 2024-06-11T17:58:08.307175
License: Public Domain

GREENBERG, Circuit Judge,
concurring.
I join in Chief Judge Scirica’s opinion in this case without reservation but want to add a few thoughts with respect to the issue of whether we are dealing with transfers for “adequate and full consideration in money or money’s worth.” Preliminarily on this point I think that Chief Judge Scirica gets to the heart of the matter by noting that “[i]n one sense, claiming an estate tax discount on assets received in exchange for an inter vivos transfer should defeat the § 2036(a) exception outright *384[for][i]f assets are transferred inter vivos in exchange for other assets of lesser value, it seems reasonable to conclude that there is no transfer for ‘adequate and full consideration’ because the decedent has not replenished the estate with other assets of equal value.” Maj. opinion at 381.
This conclusion is consistent with Estate of D’Ambrosio v. Commissioner, 101 F.3d 309, 312 (3d Cir.1996) (quoting Estate of Frothingham v. Commissioner, 60 T.C. 211, 215, 1973 WL 2531 (1973)), in which we indicated that a transfer is for adequate and full consideration when “the transferred property is replaced by other property of equal value received in exchange.” Our conclusion in D Ambrosio was unassailable inasmuch as section 2036(a) sets the standard for “adequate and full consideration” in the unmistakable term of “money or money’s worth” and thus does not permit the use of intangible nonmonetary considerations in determining value. Therefore, a transfer of $1,000,000 in assets will be for an adequate and full consideration if it is for $1,000,000 in money. If a transfer is for property then the “money’s worth” of the property should be of the same value as money received for the transferred property would have had to have been, ie., $1,000,000.23
In this case, inasmuch as the transfers were not for money the exception can apply only if the transfers were for property that can be regarded as being for “money’s worth.” Yet one of the motivations for the transfers was that there would be a substantial discount, claimed by the estate to be 40%, when the assets transferred instead of being valued directly were valued indirectly as the direct valuation for estate tax purposes was of the estate’s interests in the partnerships and corporations holding the assets. To me nothing could be clearer than a conclusion that if the discount was justified (even if in a lesser percentage than the estate claimed) in a valuation sense then the decedent could not have received an adequate and full consideration for his transfers in terms of “money’s worth.” Thus, I think it clear that the Fortress Plan as applied in a case in which the decedent retained for his life the enjoyment from the transferred property should be completely ineffective to create a tax benefit by reducing the value of the decedent’s estate as the transferred property must be recaptured by the estate for estate tax purposes. Accordingly, in joining in Chief Judge Scirica’s opinion I agree with it on the consideration issue.
I, however, wish to make three additional points. The first point relates to the estate’s vigorous argument, which Chief Judge Sciriea does not address, that the decedent did not make a gift for gift tax purposes upon the formation of the partnerships and therefore there must have been an adequate and full consideration for his transfers. The estate explains its argument as follows:
Here, the IRS has not contended nor did the Tax Court find that there was a gift on formation of the Partnerships and no such gift was made. No gratuitous transfer occurred upon the formation of the Partnerships because each participant’s interest in the Partnerships was proportional to the capital contributed. The partners received a pro-rata interest in each Partnership equal to their pro-rata contribution. [The decedent’s] contribution did not enhance any other partner’s interests. None of the partners received any property from [the decedent] directly or indirectly when the Partnerships were formed. Therefore, no gratuitous transfer oc*385curred upon the formation of the Partnerships and section 2036(a)(1) is inapplicable.
Appellant’s br. at 24 (footnote omitted). The estate’s predicate for the argument is that the gift tax and estate tax are in pari materia so that a transfer made for an adequate and full consideration for gift tax purposes also is made for an adequate and full consideration under section 2036(a). The Commissioner answers that “[t]here were no gifts on formation [of the partnerships] not because there was full consideration, but because there were no gifts at all. Decedent’s retention of control over the assets is inconsistent with a donative transfer.” Appellee’s br. at 47 n.12.
The Commissioner is not being inconsistent in contending that there was not an adequate and full consideration for the transfers under section 2036(a) while acknowledging that the decedent did not make taxable gifts upon the creation of the partnerships. Even if the estate’s claim that the discount is justified would be well founded were it not for section 2036(a), that assumption does not mean that the value decedent lost upon the creation of the partnerships went to someone else. Rather, the recycling of the assets so that they were valued indirectly rather than directly simply caused them to lose value. Therefore, precisely as the Commissioner contends, there were no gifts at all when the partnerships were formed. Indeed, as the estate’s brief plainly reveals, the estate, perhaps not recognizing the significance of its concession, acknowledges that none of the partners received any property from the decedent “directly or indirectly” when the partnerships were formed. Thus, there were no gifts and the estate’s observation that the gift tax and estate tax are in pari materia is immaterial as this relationship does not change the fact that the decedent enjoyed the property he transferred until his death and did not receive adequate and full consideration for it in money’s worth.
The second point I make is that the logic of the court in this case should not be applied too broadly and I see no reason why it will be. In this regard I acknowledge that there surely are numerous partnerships in which a partner dies after contributing assets to the partnership and therefore has made a transfer that arguably could be said to be within section 2036(a). Certainly the court is not holding that in all such circumstances section 2036(a) could be applicable requiring that the valuation of the decedent’s interest at death be made by looking through his interest in the partnership directly to its assets, thus disregarding the partnership’s existence for purposes of estate tax valuation.
Here, however, we have a narrow situation in which the partnerships were created in furtherance of what the estate calls an “estate plan” with “[t]he primary purposes ... to provide a vehicle for gift giving, to preserve assets and ultimately to transfer the partnership interests ... in an orderly and efficient fashion.” Appellant’s br. at 5. In addition, as the Tax Court pointed out, the parties intended that implementation of the plan save taxes by lowering the taxable value of the estate. Furthermore, as the estate acknowledges, “the primary objective of the partners in forming the Partnerships was not to engage in or acquire active trades and businesses, [though] the Partnerships were involved in various investments and activities.” Id. at 29. In fact, the Commissioner emphasizes that the “estate concedes that the partnerships never intended to carry on any sort of active trade or business,” and he points out that “the partnerships [did not] carry on any sort of common investment activity of any *386significance.” Appellee’s br. at 45-46. It therefore appears that the Commissioner implicitly recognizes that there are limitations on his argument.
I make this second point as I do not want it thought that the court’s reasoning here should be applied in routine commercial circumstances and in this regard I note that Chief Judge Scirica observes that the partnerships do not operate legitimate businesses. Accordingly, I believe that the court’s opinion here should not discourage transfers in ordinary commercial transactions, even within families. Cf. Estate of Strangi, 115 T.C. 478, 484, 2000 WL 1755274 (2000) (“Family partnerships have long been recognized where there is a bona fide business carried on after the partnership is formed.”), aff'd in part, rev’d in part on other grounds, 293 F.3d 279 (5th Cir.2002). Rather, we are addressing a situation in which the family partnerships obviously were used as tax dodges in circumstances that section 2036(a) was intended to thwart. Therefore, the result the court reaches on the adequate and full consideration issue readily accommodates the estate’s observation that “[a]n interest received in a closely held business entity typically has a value less than a pro rata part of the contributed assets for reasons relating to lack of marketability, minority interest and the like.” Appellant’s reply br. at 14.
This second point is important because courts should not apply section 2036(a) in a way that will impede the socially important goal of encouraging accumulation of capital for commercial enterprises. Therefore in an ordinary commercial context there should not be a recapture under section 2036(a) and thus the value of the estate’s interest in the entity, though less than the value of a pro rata portion of the entity’s assets, will be determinative for estate tax purposes. This case simply does not come within that category.
My third point relates to Estate of Stone v. Commissioner, 86 T.C.M. (CCH) 551, 581 (2003), in which, in language similar to that of the estate that I quoted above, the court indicated:
[The Commissioner] nonetheless argues that, because Mr. Stone and Ms. Stone received respective partnership interests in each of the Five Partnerships the value of which, taking into account appropriate discounts, was less than the value of the respective assets that they transferred to each such partnership, they did not receive adequate and full consideration for the assets transferred. [The Commissioner’s] argument in effect reads out of section 2036(a) the exception for ‘a bona fide sale for an adequate and full consideration in money or money’s worth’ in any case where there is a bona fide, arm’s-length transfer of property to a business entity (e.g., a partnership or a corporation) for which the transferor receives an interest in such entity (e.g., a partnership interest or stock) that is proportionate to the fair market value of the property transferred to such entity and the determination of the value of such an interest takes into account appropriate discounts. We reject such an argument by [the Commissioner] that reads out of section 2036(a) the exception that Congress expressly prescribed when it enacted that statute.
The Commissioner correctly recognizes that Stone is inconsistent with his position here and the estate understandably relies on Stone. I reject Stone on the quoted point as the Commissioner’s position in no way reads the exception out of section 2036(a) and the Tax Court does not explain *387why it does.24 Rather, the Commissioner 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.
Judge Rosenn joins in this concurring opinion.

. I do not suggest that absolute parity is required.

. In Kimbell v. United States, 371 F.3d 257, 265-66 (5th Cir.2004), the court quoted the above language from Stone with approval and went on to point out that:
We would only add to the Tax Court’s rejection of the government’s inconsistency argument that it is a classic mixing of apples and oranges: The government is attempting to equate the venerable 'willing buyer-willing seller’ test of fair market value (which applies when calculating gift or estate tax) with the proper test for adequate and full consideration under § 2036(a). This conflation misses the mark: The business decision to exchange cash or other assets for a transfer-restricted, non-managerial interest in a limited partnership involves financial considerations other than the purchaser's ability to turn right around and sell the newly acquired limited partnership interest for 100 cents on the dollar. Investors who acquire such interests do so with the expectation of realizing benefits such as management expertise, security and preservation of assets, capital appreciation and avoidance of personal liability. Thus there is nothing inconsistent in acknowledging, on the one hand, that the investor's dollars have acquired a limited partnership interest at arm's length for adequate and full consideration and, on the other hand, that the asset thus acquired has a present fair market value, i.e., immediate sale potential, of substantially less than the dollars just paid — a classic informed trade-off.
I believe, however, that 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” D‘Ambrosio, 101 F.3d at 313 (quoting Frothingham, 60 T.C. at 216 (omitting emphasis)), on a "money or money’s worth” basis.