McCord v. Comm'r of Internal Revenue
| Decision Date | 14 May 2003 |
| Docket Number | No. 7048–00.,7048–00. |
| Citation | 120 T.C. No. 13,120 T.C. 358 |
| Parties | Charles T. MCCORD, Jr., and Mary S. McCord, Donors, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Taxpayers petitioned for redetermination of deficiencies arising from assignment of interests in family limited partnership (FLP) based on formula clause to their children, trusts for benefit of children and charitable organization, having an aggregate fair market value of a set dollar amount, with remaining value of assigned interest given to second charitable organization. The Tax Court, Halpern, J., held that: (1) taxpayers assigned economic rights of FLP, and assignees received no partner status; (2) aggregate fair market value of assigned interests was $9,833,832; (3) charitable deduction attributable to gift to second exempt organization was amount allocated under redemption agreement and not fair market value determined by Court; and (4) taxable gifts resulting from assignments were determined without reference to contingent estate tax liability of children under net gift agreement.
Ordered accordingly.
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.
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.
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¦FINDINGS OF FACT ¦5 ¦
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¦OPINION ¦15 ¦
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¦I. Introduction ¦15 ¦
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¦II. Relevant Statutory Provisions ¦16 ¦
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¦III. Arguments of the Parties ¦18 ¦
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¦IV. Extent of the Rights Assigned ¦19 ¦
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¦V. Fair Market Value of the Gifted Interest ¦25 ¦
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¦A. Introduction ¦25 ¦
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¦1. General Principles ¦25 ¦
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¦2. Expert Opinions ¦26 ¦
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¦a. In General ¦26 ¦
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¦b. Petitioners' Expert ¦27 ¦
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¦c. Respondent's Expert ¦28 ¦
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¦B. Value of Underlying Assets ¦28 ¦
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¦C. Minority Interest (Lack of Control) Discount ¦29 ¦
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¦1. Introduction ¦29 ¦
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¦2. Discount Factors by Asset Class ¦30 ¦
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¦a. Equity Portfolio ¦30 ¦
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¦(1) Measurement Date ¦31 ¦
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¦(2) Sample Funds ¦31 ¦
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¦(3) Representative Discount Within the Range of Sample Fund Discounts¦34 ¦
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¦(4) Summary ¦36 ¦
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¦b. Municipal Bond Portfolio ¦37 ¦
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¦(1) Measurement Date ¦37 ¦
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¦(2) Sample Funds ¦37 ¦
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¦(3) Representative Discount Within the Range of Sample Fund Discounts¦38 ¦
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¦(4) Summary ¦40 ¦
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¦c. Real Estate Partnerships ¦41 ¦
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¦(1) The Appropriate Comparables ¦41 ¦
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¦(2) Determining the Discount Factor ¦43 ¦
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¦d. Direct Real Estate Holdings ¦45 ¦
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¦e. Oil and Gas Interests ¦45 ¦
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¦3. Determination of the Minority Interest Discount ¦46 ¦
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¦D. Marketability Discount ¦46 ¦
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¦1. Introduction...To continue reading
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