120 T.C. 358 (T.C. 2003), 7048-00, McCord v. Commissioner of Internal Revenue

Docket Nº:7048-00
Citation:120 T.C. 358, 120 T.C. No. 13
Opinion Judge:HALPERN, Judge:
Party Name:CHARLES T. MCCORD, JR., AND MARY S. MCCORD, DONORS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:John W. Porter and Stephanie Loomis-Price, for petitioners. Lillian D. Brigman and Wanda M. Cohen, for respondent.
Judge Panel:Halpern, James S., opinion; Swift, Stephen J., concurring; Chiechi, Carolyn P., concurring in part; Foley, Maurice B., concurring in part; Laro, David, dissenting WELLS, COHEN, SWIFT, GERBER, COLVIN, GALE, and THORNTON, JJ., agree with this majority opinion. SWIFT; CHIECHI; FOLEY CONCURRENCE OF J...
Case Date:May 14, 2003
Court:United States Tax Court
 
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Page 358

120 T.C. 358 (T.C. 2003)

120 T.C. No. 13

CHARLES T. MCCORD, JR., AND MARY S. MCCORD, DONORS, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 7048-00

United States Tax Court

May 14, 2003

As Corrected May 15, 2003.

As Corrected May 16, 2003.

Page 359

VASQUEZ, J., agrees with this dissenting opinion.

SYLLABUS

Ps, their children, and their children's partnership formed a family limited partnership (PT). In 1996, Ps assigned interests in PT to several assignees pursuant to an agreement that contains a formula clause. The formula clause provides that (1) Ps' children, trusts for their benefit, and S, a charitable organization, are to receive interests having an aggregate fair market value of a set dollar amount, and (2) C, another charitable organization, is to receive any remaining portion of the assigned interests. Ps' children agreed to pay all transfer taxes resulting from the transaction, including the estate tax liability under then sec. 2035(c), I.R.C. 1986, that would arise if one or both Ps were to die within 3 years of the date of the assignments.

Pursuant to a second agreement, the assignees allocated the assigned interests among themselves in accordance with the formula clause, based on an agreed aggregate value of $ 7,369,277.60 for the assigned interests. Less than 6 months after the date of the assignment, PT redeemed the interests of S and C pursuant to a call option contained in PT's partnership agreement.

1. Held: Ps assigned only economic rights with respect to PT; such assignments did not confer partner status on the assignees.

2. Held, further, the aggregate fair market value of the interests assigned by Ps on the date of the gifts was $ 9,883,832.

3. Held, further, the amount of Ps' aggregate charitable contribution deduction under sec. 2522, I.R.C. 1986, resulting from the transfer to C is determined on the basis of the fair market value of the interest actually allocated to C under the second agreement, rather than the interest that would have been allocated to C under the second agreement had the donees determined a fair market value for the assigned interests equal to the fair market value determined by the Court.

4. Held, further, Ps' respective taxable gifts for 1996 are determined without reference to the contingent estate tax liability that their children assumed under the first agreement.

John W. Porter and Stephanie Loomis-Price, for petitioners.

Lillian D. Brigman and Wanda M. Cohen, for respondent.

Halpern, James S., opinion; Swift, Stephen J., concurring; Chiechi, Carolyn P., concurring in part; Foley, Maurice B., concurring in part; Laro, David, dissenting

OPINION

Page 360

HALPERN, Judge:

By separate notices of deficiency dated April 13, 2000 (the notices), respondent determined deficiencies in Federal gift tax for calendar year 1996 with respect to petitioner Charles McCord, Jr. (Mr. McCord) and petitioner Mary McCord (Mrs. McCord) in the amounts of $ 2,053,525 and $ 2,047,903, respectively. The dispute centers

Page 361

around the gift tax consequence of petitioners' assignments to several charitable and noncharitable donees of interests in a family limited partnership.

Unless otherwise noted, all section references are to the Internal Revenue Code in effect on the date of the assignments, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts have been rounded to the nearest dollar.

FINDINGS OF FACT

Some facts are stipulated and are so found. The stipulation of facts, with accompanying exhibits, is incorporated herein by this reference.

Petitioners

Petitioners are husband and wife. They have four sons, all adults (the children): Charles III, Michael, Frederick, and Stephen. In response to the notices, petitioners filed a single petition. At the time they filed the petition, petitioners resided in Shreveport, Louisiana.

Formation of McCord Interests, Ltd., L.L.P.

McCord Interests, Ltd., L.L.P. (MIL or the partnership), is a Texas limited partnership formed on June 30, 1995, among petitioners, as class A limited partners; petitioners, the children, and another partnership formed by the children (McCord Brothers Partnership), as class B limited partners; and the children as general partners (all such partners being hereafter referred to as the initial MIL partners).

On formation, as well as on the date of the assignments in question, the principal assets of MIL were stocks, bonds, real estate, oil and gas investments, and other closely held business interests. On the date of the assignments, approximately 65 percent and 30 percent of the partnership's assets consisted of marketable securities and interests in real estate limited partnerships, respectively. The remaining approximately 5 percent of the partnership's assets consisted of direct real estate holdings, interests in oil and gas partnerships, and other oil and gas interests.

In mid-October 1995, the MIL partnership agreement was amended and restated, effective as of November 1, 1995

Page 362

(such amended and restated partnership agreement being referred to hereafter as, simply, the partnership agreement). Attached to the partnership agreement is a schedule setting forth the capital contributions and ownership interests of the initial MIL partners, as follows: [1]

Class and Contributor Contribution Percentage Interest
Class A limited partners:
Mr. McCord $ 10,000
Mrs. McCord 10,000
General partners:
Charles III 40,000 0.26787417
Michael 40,000 0.26787417
Frederick 40,000 0.26787417
Stephen 40,000 0.26787417
Class B limited partners:
Mr. McCord 6,147,192 41.16684918
Mrs. McCord 6,147,192 41.16684918
McCord Brothers 2,478,000 16.59480496
Total 14,952,384 100.0
Relevant Provisions of the Partnership Agreement Among other things, the partnership agreement provides as follows: MIL will continue in existence until December 31, 2025 (the termination date), unless sooner terminated in accordance with the terms of the partnership agreement. Any class B limited partner may withdraw from MIL prior to the termination date and receive a payment equal to the fair market value (as determined under the partnership agreement) of such partner's class B limited partnership interest (the put right). Partners may freely assign their partnership interests to or for the benefit of certain family members and charitable organizations (permitted assignees). A partner desiring to assign his partnership interest to someone other than a permitted assignee must first offer that interest to MIL and the other partners and assignees, who have the right to purchase such interest at fair market value (as determined under the partnership agreement). Page 363 The term " partnership interest" means the interest in the partnership representing any partner's right to receive distributions from the partnership and to receive allocations of partnership profit and loss. Regardless of the identity of the assignee, no assignee of a partnership interest can attain the legal status of a partner in MIL without the unanimous consent of all MIL partners. MIL may purchase the interest of any " charity assignee" (i.e., a permitted assignee of a partnership interest that is a charitable organization that has not been admitted as a partner of MIL) at any time for fair market value, as determined under the partnership agreement (the call right). For purposes of the partnership agreement, (1) a class B limited partner's put right is disregarded for purposes of determining the fair market value of such partner's class B limited partnership interest, and (2) any dispute with respect to the fair market value of any interest in MIL is to be resolved by arbitration as provided in Exhibit G attached to the partnership agreement. Limited partners generally do not participate in the management of the partnership's affairs. However, limited partners do have veto power with respect to certain " major decisions", most notably relating to voluntary bankruptcy filings. In addition, if any two of the children are not serving as managing partners, class B limited partners have voting rights with respect to certain " large dollar" managerial decisions. Limited partners also have access to certain partnership financial information. Southfield School Foundation On November 20, 1995, petitioners assigned their respective class A limited partnership interests in MIL to the Hazel Kytle Endowment Fund of The Southfield School Foundation (the foundation) pursuant to an Assignment of Partnership Interest and Addendum Agreement (the Southfield agreement). The recitals to the Southfield agreement provide that " all of the partners of the Partnership desire that Assignee become a Class A Limited Partner of the Partnership upon execution of this Assignment of Partnership Interest" and " all consents required to effect the conveyance of the Assigned Partnership Interest and the admission of Assignee Page 364...

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