Shepherd v. Comm'r of Internal Revenue
| Decision Date | 26 October 2000 |
| Docket Number | No. 2574–97.,2574–97. |
| Citation | 115 T.C. 376,115 T.C. No. 30 |
| Parties | J.C. SHEPHERD, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P transferred to a newly formed family partnership, of which P is 50–percent owner and his two sons are each 25–percent owners, (1) P's fee interest in timberland subject to a long-term timber lease and (2) stocks in three banks.
Held: P's transfers represent separate indirect gifts to his sons of 25 percent undivided interests in the leased timberland and stocks. Held, further, the fair market value of petitioner's gifts determined. David D. Aughtry, James M. Kane, and Howard W. Neiswender, for petitioner.
Robert W. West, for respondent.
Respondent determined a $168,577 deficiency in petitioner's Federal gift tax for calendar year 1991. The issues for decision are: (1) The characterization, for gift tax purposes, of petitioner's transfers of certain real estate and stock into a family partnership of which petitioner is 50–percent owner and his two sons are each 25–percent owners; (2) the fair market value of the transferred real estate interests; and (3) the amount, if any, of discounts for fractional or minority interests and lack of marketability that should be recognized in valuing the transferred interests in the real estate and stock.
Section references are to the Internal Revenue Code as in effect on the date of the gifts. Rule references are to the Tax Court Rules of Practice and Procedure.
The parties have stipulated some of the facts, which are so found.
Petitioner is married to Mary Ruth Shepherd and has two adult sons, John Phillip Shepherd (John) and William David Shepherd (William). When he filed his petition, petitioner resided in Berry, Alabama.
Beginning in 1911, petitioner's grandfather—at first singly and later with petitioner's father—acquired a great deal of land in and around Fayette County, Alabama. In April 1949, petitioner's grandfather died and left petitioner, his only grandchild, a 25–percent interest in all that he owned. Among the grandfather's possessions was an interest in more than 9,000 acres spread over numerous parcels in and around Fayette County, Alabama (the land), and stock (the bank stock) in three rural Alabama banks—the Bank of Parish, the Bank of Berry, and the Bank of Carbon Hill (the banks).
Prior to 1957, petitioner's father gave petitioner an additional 25–percent interest in the land, thereby increasing petitioner's ownership interest to 50 percent. As described in more detail below, on January 3, 1957, petitioner and his father leased the land to Hiwassee Land Co. (Hiwassee) under a 66–year timber lease. On June 2, 1965, petitioner's father died, leaving all his property—including his 50–percent interest in the land and an undisclosed amount of stock in the banks—to petitioner's mother. Petitioner's mother died shortly thereafter, devising to petitioner her 50–percent interest in the land and the bank stock. Petitioner then owned the entire interest in the land, subject to Hiwassee's leasehold interest. Petitioner also owned more than 50 percent of the common stock of the banks, of which he was then president. 1
As described above, by 1957 petitioner and his father each owned a 50–percent interest in the family land. On January 3, 1957, petitioner and his father entered into a long-term timber lease with Hiwassee, granting Hiwassee the right to cut and remove timber on 9,091 acres (the leased land).2 The term of the lease is for 66 years, expiring on January 1, 2023.
Hiwassee agreed to pay annual rent of $1.75 per acre, payable for each calendar year by February 1 of that year. The annual rent is to be adjusted each year by the same percentage as the annual average of the Wholesale Price Index for all commodities (now the Producer Price Index) (PPI) increases or decreases relative to the Wholesale Price Index for 1955. The annual rents are adjusted “only for increments of increase or decrease equaling or exceeding five percent (5%) from the 1955 average or from the average resulting in the previous adjustment.” 3
Under the lease, the lessors retain all mineral rights on the land but must obtain the lessee's consent (“which shall not be unreasonably withheld”) to develop the minerals.4
The lease allows the lessors to sell the leased land, subject to Hiwassee's right of first refusal; if Hiwassee elects not to purchase, then the sale is to be made subject to the terms of the lease.
The lease contains no requirement that Hiwassee reseed or reforest the leased land at the expiration of the lease.
On or about December 22, 1980, petitioner and his wife established the J.C. Shepherd “Clifford” Trust Agreement (the trust), an inter vivos trust with a term of 10 years. Upon creation of the trust, petitioner and his wife conveyed an undivided 25–percent interest in the leased land to the trust. On January 5, 1981, they conveyed a second 25–percent undivided interest in the leased land to the trust.5
John and William were equal income beneficiaries of the trust. During the term of the trust, they each received one-half of the income from one-half of the Hiwassee lease (i.e., each received 25–percent of the Hiwassee lease income).
On or about April 1, 1991, the trust terminated. The trustee reconveyed the two previously transferred 25–percent undivided interests in the leased land to petitioner and his wife.
On August 1, 1991, petitioner executed the Shepherd Family Partnership Agreement (the partnership agreement). On August 2, 1991, John and William executed it. The Shepherd Family Partnership (the partnership) is a general partnership established pursuant to Alabama State law. The partnership agreement designates petitioner as the managing partner, with power to “implement or cause to be implemented all decisions approved by the Partners, and shall conduct or cause to be conducted the ordinary and usual business and affairs of the Partnership”. The partners' interests in the partnership's net income and loss, capital, and partnership property are as follows: Petitioner—50 percent; John—25 percent; and William—25 percent. The partnership agreement provides that these partnership interests will continue throughout the existence of the partnership unless the partners mutually agree to change their respective interests.
The partnership agreement provides that each partner shall have three capital accounts—a permanent capital account, an operating capital account, and a drawing capital account. The partnership agreement states that the initial permanent capital account for each partner, as of August 1, 1991, is $10 for petitioner and $5 each for William and John. In this same section, captioned “INITIAL CAPITAL CONTRIBUTIONS”, the partnership agreement also states:
In a section captioned “DEBITS/CREDITS”, the partnership agreement provides that the permanent capital account of each partner shall consist of each partner's initial capital contribution as described above increased by the “Partner's Partnership Interest in the adjusted basis for federal income tax purposes of any additional permanent capital contribution of property by a Partner (less any liabilities to which such property is subject)”.
The partnership agreement provides that “Any Partner shall have the right to receive a distribution of any part of his Partnership permanent capital account in reduction thereof with the prior consent of all the other Partners.”
The partnership agreement also provides that all property acquired by the partnership shall be owned by the partners as tenants in partnership in accordance with their partnership interests, with no partner individually having any ownership interest in the partnership property. Additionally, each partner waives any right to require partition of any partnership property.
Under the partnership agreement, any partner may withdraw from the partnership at any time, upon written notice to the other partners. The partnership agreement states that the effect of the withdrawal is to terminate the relationship of the withdrawing partner as a partner and thereby eliminate the withdrawing partner's right to liquidate the partnership. The withdrawing partner may transfer all or any part of his partnership interest with or without consideration, but only after providing the other partners the first option to purchase his interest at fair market value, generally as determined by an independent appraiser.
Upon dissolution of the partnership, proceeds from the liquidation of partnership property, after satisfaction of partnership debts, are to be applied to payment of credit balances of the partners' capital accounts.
On August 1, 1991—one day before John and William had executed the partnership agreement—petitioner and his wife executed two deeds purporting to transfer the leased land to the partnership.6 Each deed purported to transfer to the partnership an undivided 50–percent interest in the leased land (for an aggregate transfer of the entire interest in the leased land). On August 30, 1991, the deeds conveying the leased land to the partnership were recorded.
On September 9, 1991, petitioner transferred to the partnership some of his stock in each of the three banks.7 The parties have stipulated that the bank stock had a fair market value at the time of transfer (prior to any consideration of any partnership adjustment) as follows:
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