Succession of McCord v. C.I.R.
| Decision Date | 22 August 2006 |
| Docket Number | No. 03-60700.,03-60700. |
| Citation | 461 F.3d 614 |
| Parties | SUCCESSION OF Charles T. McCORD, Jr., Deceased, Charles T. McCORD III and Michael S. McCord, Executors; Mary S. McCord, Donor, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
John W. Porter (argued), Stephanie Loomis-Price, Baker Botts, Houston, TX, for Petitioners-Appellants.
Thomas James Sawyer (argued), Jonathan S. Cohen, Tax Div. App. Section, Eileen J. O'Connor, Asst. Atty. Gen., U.S. Dept. of Justice, Robert R. Di Trolio, U.S. Tax Court, B. John Williams, Jr., Donald L. Korb, Chief Counsel, IRS, Washington DC, for CIR.
Appeals from the United States Tax Court.
Before GARWOOD, WIENER, and DeMOSS, Circuit Judges.
This is an appeal from an adverse opinion and judgment of an 8-judge majority (the "Majority") of a splintered United States Tax Court.1 The Petitioners-Appellants (the "Taxpayers")2 seek reversal of the Majority's holdings, which the Taxpayers accurately characterize as:
(1) The aggregate fair market value of the Taxpayers' donated interests in a family limited partnership, McCord Interests, Ltd., L.L.P. ("MIL") was $9,883,832 instead of the substantially lesser value of $7,369,215 claimed by the Taxpayers on their returns.
(2) The Taxpayers' charitable deductions under § 2522 of the Internal Revenue Code of 1986 ("I.R.C.") for gifts to one of two tax-exempt organizations (collectively, "exempt donees") must be calculated not on the basis of the plain language of the act of gift ("Assignment Agreement") of January 12, 1996, but on the Tax Court's own gloss thereon and its determination of the various percentage interests in MIL that — two months after the gifts — were agreed on and accepted by all donees (but not by Taxpayers) in a post-gift sharing arrangement (the "Confirmation Agreement") entered into in March of 1996.
(3) The taxable value of the gifts made by the Taxpayers to (a) their four sons individually ("the Sons") and (b) generation skipping tax trusts ("GST trusts") of which the Sons were trustees (collectively, "the non-exempt donees") must be calculated not only on the basis of the Tax Court's independently determined fair market value and the percentage interests in MIL of the residuary exempt donee, but also without a reduction in fair market value of the gifts to the non-exempt donees for the actuarially determined liability, assumed by such donees contemporaneously with the gifts, for any additional estate taxes that might be incurred under § 2035 () if either or both of the Taxpayers should die within three years following the date of the gifts3 — death within that post-gift period being a condition subsequent that would terminate the donors' (and thus the non-exempt donees') present obligations to pay any and all eventual § 2035 estate taxes.
For the reasons explained below, we reverse the Tax Court and remand this case to it with instructions to enter judgment for the Taxpayers consistent with this opinion.
With the exception of the ultimate fact question of the taxable and deductible values of the limited partnership interests in MIL that comprise the completed, irrevocable inter vivos donations (the "gifts") made by the Taxpayers to the exempt and non-exempt donees on January 12, 1996, the discrete facts framing this case are largely stipulated or otherwise undisputed. Having lived in Shreveport, Louisiana for most of their adult lives, and having accumulated substantial and diversified assets, these octogenarian Taxpayers embarked on a course of comprehensive family wealth preservation and philanthropic support planning, including transfer tax aspects of implementing such a plan. This was done in consultation with Houston-based specialists in that field.
Effective June 30, 1995, the Taxpayers had joined with the Sons and an existing ordinary partnership ("McCord Bros." formed and owned equally by the Sons) to create MIL, a Texas limited partnership. In creating MIL, (1) each Taxpayer had contributed $10,000 for which each had received one-half of the Class A limited partnership interest in MIL; (2) each Son had contributed $40,000 for which he had received one-fourth of the general partnership interest in MIL; (3) each Taxpayer had contributed identical interests in substantial business and investment assets (valued at $6,147,192 per Taxpayer) for which each Taxpayer had received equal portions (but less than all) of the Class B limited partnership interest in MIL, representing in the aggregate just over 82 per cent of the value of that partnership; and (4) McCord Bros. had contributed interests in similar business and investment assets (valued at $2,478,000), for which it had received the remaining Class B limited partnership interest in MIL, representing roughly 16.6 per cent of the value of that partnership.4 As a result, MIL was initially owned as follows:
Percentage
Class and Contributor Contribution 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
As found by the Majority, MIL's partnership agreement (the "Partnership Agreement") provides, inter alia:
MIL will continue in existence until December 31, 2025 (the termination date), unless sooner terminated in accordance with applicable terms of the partnership agreement.
Any class B limited partner may withdraw from MIL prior to its termination date and receive 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 assignee).
A partner desiring to assign his interest to someone other than a permitted assignee must first offer that interest to MIL and all other partners and assignees, who have the right to purchase such interest at fair market value (as determined under the Partnership agreement).
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 partner in MIL without the unanimous consent of all MIL partners.
MIL may purchase the interest of any [exempt donee] (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.5 In addition, if any two of the [Sons] 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.6
MIL's partnership agreement was amended and restated in October 1995, prospectively effective November 1, 1995. Twenty days after the effective date of this act, Taxpayers, as owners of all Class A limited partnership interests in MIL, donated these interests to The Southfield School Foundation (the "Foundation"), a § 501(c)(3) tax exempt organization. All original MIL partners — general, Class A limited, and Class B limited — executed an Assignment of Partnership Interests and Addendum Agreement (the "Southfield Agreement") to implement this gift. The Southfield Agreement declares that "all of the partners of [MIL] desire that [the Foundation] become a Class A limited partner of [MIL] upon execution of this assignment of partnership interest" and that "all consents required to effect the conveyance of the Assigned Partnership Interest and the admission of assignee as a Class A limited partner of [MIL] have been duly obtained and/or evidenced by the signatures hereto." After executing the Southfield Agreement, the Taxpayers were left with only their Class B limited partnership interests in MIL. (The donation to the Foundation is not at issue in this litigation; we discuss it only to note differences in its details from those of the Assignment Agreement, which was used to effectuate the Taxpayers' below-discussed donations of Class B interests in MIL to the exempt and non-exempt donees.)
On January 12, 1996, through a combination of simultaneous taxable gifts to...
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