Mccord v. Commissioner of Internal Revenue

• Decision Date: 14 May 2003
• Docket Number: Docket No. 7048-00.
• Parties: CHARLES T. MCCORD, JR., AND MARY S. MCCORD, DONORS, Petitioners, <U>v</U>. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

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CHARLES T. MCCORD, JR., AND MARY S. MCCORD, DONORS, Petitioners v COMMISSIONER OF INTERNAL REVENUE, Respondent.

Docket No. 7048-00.

United States Tax Court.

Filed May 14, 2003.

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.

                Table of Contents
                FINDINGS OF FACT..........................................5
                OPINION..................................................15
                   I. Introduction.......................................15
                  II. Relevant Statutory Provisions......................16
                 III. Arguments of the Parties...........................18
                  IV. Extent of the Rights Assigned......................19
                   V. Fair Market Value of the Gifted Interest...........25
                      A. Introduction....................................25
                        1. General Principles............................25
                        2. Expert Opinions...............................26
                        a. In General....................................26
                        b. Petitioners' Expert...........................27
                        c. Respondent's Expert...........................28
                      B. Value of Underlying Assets......................28
                      C. Minority Interest (Lack of Control) Discount....29
                        1. Introduction..................................29
                        2. Discount Factors by Asset Class...............30
                        a. Equity Portfolio..............................30
                        (1) Measurement Date.............................31
                        (2) Sample Funds.................................31
                        (3) Representative Discount Within the Range
                              of Sample Fund Discounts...................34
                        (4) Summary......................................36
                        b. Municipal Bond Portfolio......................37
                        (1) Measurement Date.............................37
                        (2) Sample Funds.................................37
                        (3) Representative Discount Within the Range
                              of Sample Fund Discounts...................38
                        (4) Summary......................................40
                        c. Real Estate Partnerships......................41
                        (1) The Appropriate Comparables..................41
                        (2) Determining the Discount Factor..............43
                        d. Direct Real Estate Holdings...................45
                        e. Oil and Gas Interests.........................46
                        3. Determination of the Minority
                            Interest Discount............................46
                      D. Marketability Discount..........................46
                        1. Introduction..................................46
                        2. Traditional Approaches to Measuring
                            the Discount.................................47
                        a. In General....................................47
                

                        b. Rejection of IPO Approach.....................48
                        3. Mr. Frazier's Restricted Stock Analysis.......50
                        4. Dr. Bajaj's Private Placement Analysis........52
                        a. Comparison of Registered
                            and Unregistered Private Placements..........52
                        b. Refinement of Registered/
                           Unregistered Discount Differential............53
                        c. Further Adjustments...........................56
                        d. Application to MIL............................56
                        5. Determination of the Marketability Discount...56
                        a. Discussion....................................56
                        b. Conclusion....................................59
                      E. Conclusion......................................59
                  VI. Charitable Contribution Deduction for
                       Transfer to CFT...................................60
                      A. Introduction....................................60
                      B. The Assignment Agreement........................61
                      C. Conclusion......................................64
                 VII. Effect of Children's Agreement To Pay Estate
                       Tax Liability.....................................65
                      A. Introduction....................................65
                      B. Discussion......................................69
                      C. Conclusion......................................73
                VIII. Conclusion.........................................73
                Judge Swift's Concurring Opinion.........................74
                Judge Chiechi's Concurring in Part, Dissenting
                  in Part Opinion........................................86
                Judge Foley's Concurring in Part, Dissenting
                  in Part Opinion........................................94
                Judge Laro's Dissenting Opinion.........................109
                

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 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 (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

                                                         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
                

Relevant Provisions of the Partnership Agreement

Among other things, the partnership agreement provides as follows:

MIL will continue in existence until ...