Kerr v. C.I.R., 00-60903.
| Decision Date | 10 June 2002 |
| Docket Number | No. 00-60903.,00-60903. |
| Citation | 292 F.3d 490 |
| Parties | Baine P. KERR; Mildred C. Kerr, Petitioners-Appellees-Cross-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant-Cross-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
John W. Porter (argued), Baker Botts, Houston, TX, for the Kerrs.
Ann Wray Johnson Muoio, Jonathan S. Cohen (argued), U.S. Dept. of Justice, Tax Div., Charles Casazza, Clerk, U.S. Tax Court, Richard W. Skillman, Chief Counsel, Internal Revenue Service, Eileen J. O'Connor, Asst. Atty. Gen., U.S. Dept. of Justice, Washington, DC, for C.I.R.
Appeal from the Decision of the United States Tax Court.
Before DUHÉ, BARKSDALE and DENNIS, Circuit Judges.
Today we consider the method for evaluating for gift tax purposes interests in a closely held family partnership. In valuing an interest in a closely-held partnership, a discount for lack of liquidity or marketability which would be generally appropriate may be inappropriate if the valuation is to determine tax owing on a gift of such interest. In establishing the valuation for gift tax purposes, the Internal Revenue Code disregards certain "applicable restrictions" on liquidation in a partnership agreement if the gift is made to a family member. I.R.C. § 2704(b).
In this case involving intra-family gifts of partnership interests, the taxpayers challenge noticed gift tax deficiencies based on the Commissioner's position that Code § 2704(b) barred them from applying a marketability discount to the values of the interests they transferred. The Tax Court ruled summarily for the taxpayers, holding that the special rule in § 2704(b) did not bar their marketability discounts.
The Commissioner now appeals the Tax Court's decision, arguing that certain partnership agreement restrictions were "applicable restrictions" on liquidation within the meaning of § 2704(b) and should be disregarded, thus precluding a marketability discount in valuing the gifts. Taxpayers cross appeal the court's determination that certain transferred interests should be considered partnership interests. Because the undisputed facts lead us to conclude that the restrictions in the partnership agreements were not "applicable restrictions" within the meaning of § 2704(b), we affirm.
To make gifts to their children, Baine P. Kerr and Mildred C. Kerr ("taxpayers") created two family limited partnerships in 1993, the Kerr Family Limited Partnership (KFLP) and Kerr Interests, Ltd. (KIL), pursuant to the Texas Revised Limited Partnership Act.1 Taxpayers made capital contributions to KFLP and KIL. The interests were allocated so that in KFLP, taxpayers and their children were general partners; taxpayers were also Class A and Class B limited partners.2 In KIL, KFLP was the general partner; taxpayers were Class A limited partners; and KFLP, taxpayers, and their children were Class B limited partners.
In June 1994 taxpayers transferred Class A limited partnership interests in KFLP and KIL to the University of Texas (UT). In December 1994, the KIL partnership agreement was amended to admit UT as a Class A limited partner.
In December 1994 and December 1995, taxpayers each donated Class B partnership interests in KIL to their children. These are the first transfers at issue.
In December 1994, taxpayers each created an irrevocable Grantor Retained Annuity Trust (GRAT) to which each grantor transferred assets retaining a right to receive a fixed annuity for a term of years. Each taxpayer was the sole trustee of his GRAT, and their children and grandchildren were the beneficiaries of the remainder interests via generation-skipping transfer trusts, called the Kerr Issue GST Trusts. Each taxpayer contributed a Class B interest in KFLP to his GRAT. These transfers by taxpayers of interests in KFLP to their GRATs are the second transfers at issue.
In exchange for the contribution of a Class B interest in KFLP to his GRAT, each taxpayer received an annuity with a present value of 95% of the value of that interest. The annuity payments were due in two installments: the first on the day after the creation of the GRATs, and the second a year and a day later. Neither of the annuity payments was made. Instead, on each payment date, the trustees executed demand notes to taxpayers in the amounts of the annuity payments then due.
A year and a day after their creation, the GRATs terminated. The remaining assets and liabilities (including the demand notes) passed to the Kerr Issue GST Trusts. In February 1998, taxpayers forgave the demand notes, then a liability of the Kerr Issue GST Trusts, subject to the condition that those trusts pay the resulting gift taxes.
On their 1994 and 1995 gift tax returns, taxpayers reported all the transfers at issue. Taxpayers reported valuations arrived at by applying marketability discounts reflecting the partnership agreements' restrictions on liquidation. Further, they considered the KFLP interests transferred to the GRATs to be only assignee interests, not veritable partnership interests to which § 2704(b) might apply.3 Thus in valuing all those interests to determine tax liability, taxpayers ignored § 2704(b) and applied marketability discounts.
The Commissioner's notice of deficiency asserted that taxpayers' valuations of the transferred interests were understated. The Commissioner contended that both partnership agreements' restrictions on the right to liquidate constituted "applicable restrictions" within the meaning of Code § 2704(b). An "applicable restriction" on liquidation in a partnership agreement, to the extent that it is more restrictive than state partnership law, is disregarded under Code § 2704(b) in valuing the transferred interests. The Commissioner also contended that the KFLP interests assigned to the GRATs were equally subject to § 2704(b) because in truth they were partnership interests.
Taxpayers petitioned for redetermination in Tax Court. They moved for partial summary judgment, asserting that the special valuation rules of § 2704(b) were not applicable in valuing the KFLP interests transferred to the GRATs because those interests were assignee interests, not limited partnership interests at all. Further, even if the transferred interests were limited partnership interests, taxpayers contend that the restrictions in both partnership agreements were not "applicable restrictions" under § 2704(b). Thus § 2704(b), which might otherwise require restrictions on liquidation to be disregarded for valuation purposes, would not bar taxpayers' use of marketability discounts.
The Tax Court ruled summarily for taxpayers. The Tax Court actually rejected taxpayers' argument about assignment, finding that the interests transferred to the GRATs indeed were partnership interests. The Court nevertheless held that the special valuation rule in § 2704(b) did not apply to any of the interests taxpayers transferred, because the partnership agreement restrictions are not "applicable restrictions." Because those restrictions were not disregarded, the taxpayers were allowed their marketability discounts off the values of the transferred interests. After that partial summary judgment, the parties stipulated the taxes that would be owing under the Tax Court's ruling, reserving their right to appeal the issues determined by the court.
The Commissioner appeals the determination that the restrictions are not applicable restrictions, and taxpayers cross-appeal on their alternative argument that the transferred KFLP interests are only assignee interests.
We first address the question whether the restrictions in the partnership agreements are "applicable restrictions" to be disregarded in valuing the transferred interests. We review de novo a valuation question turning on a pure question of law. See Adams v. United States, 218 F.3d 383, 386 (5th Cir.2000). Because the two partnership agreements are identical in all material respects, this question affects all the transfers at issue, those of interests in KIL to the children and KFLP to the GRATs.
The restrictions at issue are in § 9.02 and § 10.01 of the partnership agreements. Section 10.01 provides that the partnerships will dissolve and liquidate on the earlier of December 31, 2043, by agreement of all the partners, or on the occurrence of certain narrowly defined acts of dissolution. Section 9.02 states that no limited partner shall have the right to withdraw from the partnership before it dissolves and liquidates, and also provides a put right for Class B limited partners.
The three defining features of an "applicable restriction" pertinent to this appeal are that it a) effectively limits the ability of the partnership to liquidate, b) lapses or can be removed by the family after the transfer, and c) is more restrictive than State law. I.R.C. § 2704(b)(2)(A), (2)(B), & (3)(B); Treas. Reg. § 25.2704-2(b).4
Because all three features listed above are required, the absence of any one of them is dispositive. We first address the question whether the restrictions lapse or can be removed by the family after the transfer. Since lapsing is not a consideration, the only issue under § 2704(b)(2)(B) is removability. The Tax Court did not reach this issue.5 When reviewing an order granting summary judgment, this Court is not limited to the trial court's conclusion, but can affirm a trial court's judgment on any ground supported by the summary judgment record. Cabrol v. Town of Youngsville, 106 F.3d 101, 105 (5th Cir.1977); see also Hoyt R. Matise Co. v. Zurn, 754 F.2d 560, 565 n. 5. (5th Cir.1985) (applying similar rule for judgment entered in a bench trial).
The Commissioner argues that the restrictions in the agreements were removable by the family, because there is evidence...
To continue reading
Request your trial
-
Estate of True v. C.I.R.
...interests within one year. Aplt. br. at 51. "We review de novo a valuation question turning on a pure question of law," Kerr v. C.I.R., 292 F.3d 490, 493 (5th Cir.2002) (citing Adams v. United States, 218 F.3d 383, 386 (5th Cir.2000)), and hold the tax court did not err in the process by wh......
-
Pierre v. Comm'r of Internal Revenue, No. 753–07.
...disregard restrictions in a partnership agreement). In Kerr v. Commissioner, 113 T.C. 449, 470–474, 1999 WL 1247551 (1999), affd. 292 F.3d 490 (5th Cir.2002), we explained that the special valuation rules were a targeted substitute for the complexity, breadth, and vagueness of prior section......
-
McCord v. Comm'r of Internal Revenue
...Our inquiry does not end there, however. In Kerr v. Commissioner, 113 T.C. 449, 1999 WL 1247551 (1999), affd. on another issue 292 F.3d 490 (5th Cir.2002), we demonstrated our willingness to look beyond the formalities of intrafamily partnership transfers to determine what, in substance, wa......
-
Mccord v. Commissioner of Internal Revenue
...as partners in MIL. Our inquiry does not end there, however. In Kerr v. Commissioner, 113 T.C. 449 (1999), affd. on another issue 292 F.3d 490 (5th Cir. 2002), we demonstrated our willingness to look beyond the formalities of intrafamily partnership transfers to determine what, in substance......
-
The Kaleidoscopic World of Family Limited Partnerships: Issues to Note en Route to the Successfully Planned California Real Estate Family Limited Partnership
...n.15, at 21.143. I.R.C. § 2704(b); Treas. Reg. § 25.2704-2(b).144. See, e.g., Estate of Kerr v. Commissioner, 113 T.C. 449 (1999), aff'd, 292 F.3d 490 (5th Cir. 2002); Estate of Jones v. Commissioner, 116 T.C. 121 (2001); Knight v. Commissioner, 115 T.C. 506 (2000).145. Id.146. See Corporat......
-
Bad Moon Rising? Proposed Section 2704 Regulations
...in respect of, property included in the value of the decedent's gross estate.21. Prop. Treas. Reg. § 25.2704-3(b)(1)(iv).22. Id.23. 292 F.3d 490 (5th Cir. 2002)24. Id. at 494.25. Id.26. Preamble to Department of the Treasury; Estate, Gift, and Generation-Skipping Transfer Taxes; Restriction......