United States v. Land, 18958 and 18959.

• Decision Date: 16 May 1962
• Docket Number: No. 18958 and 18959.,18958 and 18959.
• Citation: 303 F.2d 170
• Parties: UNITED STATES of America, Appellant, v. Charles M. LAND, as Successor Executor of the Last Will and Testament of John Robert Land, Deceased, Appellee. UNITED STATES of America, Appellant, v. Charles M. LAND, Ernest H. Land and Margaret L. Haney, as Executors of the Last Will and Testament of Robert Land, Deceased, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

303 F.2d 170 (1962)

UNITED STATES of America, Appellant, v. Charles M. LAND, as Successor Executor of the Last Will and Testament of John Robert Land, Deceased, Appellee.

UNITED STATES of America, Appellant, v. Charles M. LAND, Ernest H. Land and Margaret L. Haney, as Executors of the Last Will and Testament of Robert Land, Deceased, Appellees.

Nos. 18958 and 18959.

United States Court of Appeals Fifth Circuit.

May 16, 1962.

Ralph Kennamer, U. S. Atty., Mobile, Ala., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Harvey G. Schneider, Attys., Dept. of Justice, Washington, D. C., Vernol R. Jansen, U. S. Atty., Mobile, Ala., Meyer Rothwacks, Atty., Dept. of Justice, Washington, D. C., Alfred P. Holmes, Jr., Asst. U. S. Atty., for appellant.

John E. Adams, Grove Hill, Ala., for appellee.

Adams, Gillmore & Adams, Grove Hill, Ala., of counsel.

Before RIVES and WISDOM, Circuit Judges, and CARSWELL, District Judge.

WISDOM, Circuit Judge.

These cases pose a problem in the valuation, for federal estate tax purposes, of a partnership interest subject to a restrictive agreement limiting the sales price of the interest to two-thirds of its value in the event of its sale during the partner's lifetime. The district court agreed with the taxpayers that the restriction limited the valuation to two-thirds of the property's calculated net value. We reverse. A restriction on the value of a partnership interest that expires at the decedent's death cannot affect the valuation of the interest for estate tax purposes.

The decedents, John Robert Land and his father, Robert Land, were members of a family partnership, Land Brothers & Company, formed in 1939 to engage in the general merchandise business in Melvin, Alabama. The partnership agreement provided that if any member wished to withdraw from the partnership during his lifetime the other partners would have the option of purchasing his interest at two-thirds its calculated value. At the death of a partner, the surviving partners became entitled to purchase his interest at its full value; if they did not do so, the partnership would be dissolved and its assets liquidated and distributed. John Robert Land died January 5, 1955. His father died a few months later. In reporting the value of each decedent's partnership interest the executors reduced the fair market value by one-third on the theory that value is determined before death and that the restriction controlled the valuation for federal estate taxes. There is no dispute as to the value of the interests apart from the controversy over the effect of the restriction in the partnership agreement.

The taxpayers rely primarily on the Supreme Court's pronouncement in Edwards v. Slocum, 1924, 264 U.S. 61, 44 S.Ct. 293, 68 L.Ed. 564, that the object of an estate tax is "not the interest to which some person succeeds on a death, but the interest which ceased by reason of the death". This reliance is misplaced. This is another instance of the truth of Justice Holmes's observation that there is "danger in reasoning from generalizations unless you have the particulars which they embrace in mind".¹ As other courts have pointed out in² referring to Edwards v. Slocum, the Supreme Court described the estate tax as one on "the interest which ceases by reason of the death" simply to distinguish it from a succession tax, which is calculated and graduated on the individual portion of the estate each heir or legatee receives rather than on the aggregate property passing from the decedent. Edwards v. Slocum did not involve the valuation of property for estate taxes.³

The statute applicable here is the general provision, Section 2033 of the Internal Revenue Code of 1954, 26 U.S. C.A. § 2033. This provides that "the gross estate shall include the value of all property * * * to the extent of the interest therein of the decedent at the time of his death." The Regulations reiterate the truism that the tax is "an excise tax on the transfer of property at death and is not a tax on the property transferred." Treas.Reg. 20.2033-1(a). It is of course imperative that the tax be imposed on the transfer of the property in order to avoid the constitutional prohibition against unapportioned direct taxes. From this, it seems to us, it follows that the valuation of the estate should be made at the time of the transfer. The time of transfer is the time of death. Treas.Reg. 20.2031-1(b). In Knowlton v. Moore, 1900, 178 U.S. 41, 56, 20 S.Ct. 747, 44 L.Ed. 969 the Supreme Court said, "tax laws of this nature in all countries rest in their essence upon the principle that death is the generating source from which the particular taxing power takes its being and that it is the power to transmit, or the transmission from the dead to the living, on which such taxes are more immediately rested." See Shedd's Estate v. Commissioner, 9 Cir., 1956, 237 F.2d 345, 350, cert. denied, 352 U.S. 1024, 77 S.Ct. 590, 1 L.Ed.2d 596.

Brief as is the instant of death, the court must pinpoint its valuation at this instant — the moment of truth, when the ownership of the decedent ends and the ownership of the successors begins. It is a fallacy, therefore, to argue value before — or — after death on the notion that valuation must be determined by the value either of the interest that ceases or of the interest that begins. Instead, the valuation is determined by the interest that passes, and the value of the interest before or after death is pertinent only as it serves to indicate the value at death. In the usual case death brings no change in the value of property. It is only in the few cases where death alters value, as well as ownership, that it is necessary to determine whether the value at the time of death reflects the change caused by death, for example, loss of services of a valuable partner to a small business.

An examination of several instances where the value of a decedent's property differs after death from its value during his life indicates that whether the subsequent value is increased or reduced, the valuation at death uniformly gives full effect to the change that accompanies the death. In Goodman v. Granger, 3 Cir., 1957, 243 F.2d 264, cert. denied, 355 U.S. 835, 78 S.Ct. 57, 2 L.Ed.2d 47, the court was called on to evaluate three employment contracts carrying contingent benefits of $2000 annually for fifteen years after termination of the employee's employment, provided that the employee did not engage in any competing business for a certain period of time and provided that his post-employment earnings from other work did not exceed a specified amount. The trial court held that the value of the contracts must be limited to the interest of the decedent during his life and that his interest could not be valued because of the contingencies. On appeal the Third Circuit reversed. It ruled that since the possibility of forfeiture was extinguished by the decedent's death the contract rights should be given their full value for estate tax purposes. In May v. McGowan, 2 Cir., 1952, 194 F.2d 396 a father and son had organized a corporation which assumed a large debt owed by the father. Each agreed that he would not sell his stock without first offering it to the other at a specified price, and if the son should buy his father's stock the price was to be reduced by the amount of any portion of the debt still outstanding. At the death of either the other would become entitled as of right to purchase the stock at the same specified price. The father died while the debt still exceeded the price the son was to pay for his father's stock, and the question arose as to the valuation of the father's stock for estate taxes. Although the stock presumably must have had some value during the father's life, because of his right to hold it so long as he lived and to receive any dividends paid, the Court found that the stock was valueless for estate tax purposes since the son could acquire it under the agreement for nothing once his father died. Similarly, when the value of an interest in a corporation or partnership depends in part on the decedent's ability, activity, or goodwill, the value for estate taxes will be reduced to reflect the loss of the decedent. Newell v. Commissioner, 7 Cir., 1933, 66 F. 2d 102; see Estate of Maddock, 1951, 16 T.C. 324. The same rule applies in the case of life insurance contracts. During the life of the insured the value of a policy is its cash surrender value. After death the beneficiary holds a ripened claim for the face value. See Commissioner v. Chase Manhattan Bank, 5 Cir., 1958, 259 F.2d 231, cert. denied, 359 U.S. 913, 79 S.Ct. 589, 3 L.Ed.2d 575. Section 2042 expressly provides that the latter valuation shall be used in determining estate taxes.⁴

Underlying the determination in these instances that the valuation of property passing at death reflects the changes wrought by death is a basic economic fact: value looks ahead. To find the fair market value of a property interest at the decedent's death we put ourselves in the position of a potential purchaser of the interest at that time. Such a person would not be influenced in his calculations by past risks that had failed to materialize or by restrictions that had ended. Death tolls the bell for risks, contingencies, or restrictions which exist only during the life of the decedent. A potential buyer focuses on the value the property has in the present or will have in the future. He attributes full value to any right that vests or matures at death, and he reduces his valuation to account for any risk or deprivation that death brings into effect, such as the effect of the death on the brains of a small, close corporation. These are factors that would affect his enjoyment...