Estate of Magnin v. Comm. Of Internal Rev.

• Decision Date: 13 July 1999
• Docket Number: No. 96-70578,96-70578
• Citation: 184 F.3d 1074
• Parties: (9th Cir. 1999) ESTATE OF CYRIL I. MAGNIN, Deceased; DONALD ISAAC MAGNIN, Executor, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Aruged and
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1074

184 F.3d 1074 (9th Cir. 1999)

ESTATE OF CYRIL I. MAGNIN, Deceased; DONALD ISAAC MAGNIN, Executor, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 96-70578

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Aruged and Submitted November 6, 1998

Decided July 13, 1999

Jerome B. Falk, Jr., Howard, Rice Nemerovski, Canady, Falk & Rabkin, San Francisco, California, for the appellant.

Gilbert S. Rothenberg and Pamela C. Berry, United States Department of Justice, Washington, D.C., for the appellee.

Appeal from the Decision of the United States Tax Court. Tax Ct. No. 24883-92.

Before: Mary M. Schroeder and Sidney R. Thomas, Circuit Judges, and Barry Ted Moskowitz, District Judge.¹

SCHROEDER, Circuit Judge:

This tax appeal concerns the interpretation of Section 2036 of the Internal Revenue Code, which imposes an estate tax on the full value of property that a decedent transferred during his life while retaining a life interest. The section contains an exception for transfers for which the decedent had received full and adequate consideration. See 26 U.S.C. 2036(a).

The major issue we must decide is how to measure whether the decedent, Cyril Magnin, received full and adequate consideration under an agreement entered into between Cyril and his father, Joseph Magnin. In the agreement, Joseph promised to bequeath Cyril the life and voting interest of Joseph's stock in the family corporations, in exchange for Cyril's promise to bequeath Cyril's remainder interest in the family corporations to Cyril's children. If Cyril did not receive full and adequate consideration, the consequences are substantial, for the Commissioner of the Internal Revenue Service has assessed an estate tax deficiency approaching two million dollars.

The Tax Court held that the adequacy of the consideration for the transfer should be measured by the fee-simple value of the stock at the time of the transaction, not by the value of the remainder interest the children would receive. The Tax Court relied on our decision in United States v. Past, 347 F.2d 7 (9th Cir. 1965), which appellant, the Estate of Cyril Magnin ("Estate"), contends does not control. We agree with the Estate, and reverse the Tax Court. We remand for further findings on the value, at the time of the transaction, of both the remainder interest transferred by Cyril and the life estate received by him.

Background

The facts are extensive and involve some family intrigue. The Tax Court recounted the facts in detail in its opinion. See T.C. Memo 1996-25, 71 T.C.M. (CCH) 1856, 1856-61 (1996). We summarize them here.

Joseph Magnin owned an upscale clothing store called Joseph Magnin Co., Inc. ("JM"). He and his son, Cyril, disagreed about how to run JM. In 1937, Joseph, though retaining the title as president of JM, handed over JM's reins to Cyril. In 1940, Joseph, Cyril, and a friend formed a Nevada Corporation called "Specialty Shops, Inc." ("Specialty") whose immediate purpose was to open a JM store in Reno.

Joseph was very close to Cyril's wife, Anna. After she died unexpectedly in 1948, Cyril began dating. In 1951, both Joseph and Cyril were concerned about the future of the business. Joseph worried about the business staying in the family and did not want Cyril to give or leave stock to any of the women he dated. Cyril worried that when his father died Cyril would lose control of the company, which Cyril valued highly for social, political, and business reasons.

On October 31, 1951, Joseph and Cyril executed a document ("Agreement") concerning their JM and Specialty stock. At the time of the Agreement, Joseph held 28.26% of the voting power of JM and Cyril held 33.73% of the voting power. It appears that Cyril and Joseph jointly owned 50% of Specialty's stock. Both Cyril and Joseph held an option to purchase JM shares from an outside source. Cyril also held an option to purchase some of Joseph's stock after Joseph's death.

The Agreement, inter alia, provided that Joseph had to bequeath his JM and Specialty stock to Cyril as sole trustee for Cyril's life, during which time Cyril would have the sole right to vote the stock. Cyril had to will in trust all of his JM and Specialty stock to a bank trustee for the benefit of his three children. The Agreement also provided that if the corporations were sold, Cyril would create a trust of the proceeds received, under which he would retain a life estate in the income and the remainder would be distributed at Cyril's death to his children. Two supplementary agreements in 1952 did not alter the above terms. Both Joseph and Cyril complied with the Agreement in their respective wills. Joseph died in 1953.

After Cyril died in 1988, the Commissioner assessed an estate tax deficiency of $ 1,921,528. The Estate initiated this lawsuit. By amended answer, the Commissioner increased the deficiency by $ 157,685. The Tax Court determined that the Agreement and its supplements were made at arm's length. 71 T.C.M. at 1862. Nonetheless, the Tax Court held that the entire value of the property that Cyril had transferred to the trust should be included in his estate because the value of the life estate Cyril received in Joseph's stock did not amount to "adequate and full consideration," under 26 U.S.C. 2036(a), in exchange for the transfer of Cyril's property to the trusts. Id. at 1863. Moreover, the Tax Court held that for purposes of the offset allowed under 26 U.S.C. 2043 for the consideration that Cyril received, the trust property must be valued as of the time of Cyril's death, while the consideration he received must be valued as of the time of the transfer, notwithstanding the substantial appreciation the property underwent in the intervening years. Id. at 1863-64. The Estate appealed.

Analysis

A. Interpretation of Section 2036(a)

Section 2036(a) addresses the proper calculation of a decedent's gross estate if the decedent had transferred property into a trust, under which the decedent retained a life estate. The section provides that generally, the IRS will include the value of the transferred property in the decedent's gross estate. The section, however, excepts from this general rule bona fide transfers that were made for full consideration. Section 2036(a) states, in pertinent part:

The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life . . . (1) the possession or enjoyment of, or (2) the right to the income from, the property . . . .

The parties dispute the proper interpretation of the parenthetical "adequate and full consideration" exception. The Commissioner contends that the Tax Court correctly held that "adequate and full consideration" must equal the value of the entire property transferred by the decedent into a trust, while the Estate asserts that the consideration need only amount to the remainder interest of the transferred property.

Until recently, courts had uniformly held that "adequate and full consideration" equaled the fee-simple value of the property transferred into the trust. See, e.g., United States v. Allen, 293 F.2d 916 (10th Cir. 1961); Gradow v. United States, 11 Cl. Ct. 808 (1987), adopted by 897 F.2d 516 (Fed. Cir. 1990); Estate of Gregory v. Commissioner, 39 T.C. 1012 (1963). These cases have been attacked by legal commentators. See, e.g., Jacques T. Schlenger et al., Cases Addressing Sale of Remainder Wrongly Decided, 22 Est. Plan. 305 (1995). The tide has recently turned. Since the Tax Court ruled in the present case, both the Third Circuit and the Fifth Circuit have rejected the above line of cases and held that "adequate and full consideration" need only equal the value of the remainder interest transferred by the decedent. See D'Ambrosio v. Commissioner, 101 F.3d 309 (3d Cir. 1996); Wheeler v. United States, 116 F.3d 749 (5th Cir. 1997).

The Commissioner argues that this court held in United States v. Past, 347 F.2d 7 (9th Cir. 1965), that "adequate and full consideration" equals the value of the entire property interest transferred to the trust. While Past did assume the rule that the Commissioner asserts, Past did not elaborate upon the rule or evaluate its merit. 347 F.2d at 12 (citing Estate of Gregory, 39 T.C. 1012). When a case assumes a point without discussion, the case does not bind future panels. See Sakamoto v. Duty Free Shoppers, Ltd., 764 F.2d 1285, 1288 (9th Cir. 1985); see also Indian Oasis-Baboquivari Unified Sch. Dist. No. 40 v. Kirk, 91 F.3d 1240, 1244 (9th Cir. 1996). Moreover, in a later Ninth Circuit decision, Estate of Christ v. Commissioner, 480 F.2d 171, 172 (9th Cir. 1973), we seem to have assumed a different rule than did the Past court. Under these circumstances, Past cannot be considered binding and we may consider the issue afresh.

We look first to the statute's language. The text of 2036(a) is susceptible to differing readings. Compare, Gradow, 11 Ct. Cl. at 813 (finding that the "most natural reading" of the statute and "fundamental principles of grammar" dictate that "adequate and full consideration" must be measured against the entire property transferred to the trust), with D'Ambrosio, 101 F.3d at 314-15 (finding Gradow omitted significant portions of the section's language and concluding that the language "to the extent of any interest therein" indicates that "the gross estate shall include the value of the remainder interest, unless it was sold for adequate and fair consideration").

In our view, the better reading of the section supports the Estate's position. The parenthetical exception for transfers made for "adequate and full consideration" immediately follows the phrase "to the extent of any interest therein of which the...