McCord v. Comm'r

Chiechi, J., concurring in part and dissenting in part: I concur in result with respect to the portions of the majority opinion under the headings “IV. Extent of the Rights Assigned” and “VII. Effect of Children’s Agreement To Pay Estate Tax Liability”.

I cannot responsibly cast an affirmative vote with respect to the portion of the majority opinion under the heading “V. Fair Market Value of the Gifted Interest”. The determination of fair market value is a factual determination and is necessarily a matter of judgment and approximation. See, e.g., Estate of Davis v. Commissioner, 110 T.C. 530, 537 (1998). I am not in a position to state that I agree with every judgment and every approximation made by the majority opinion in determining the fair market value of the gifted interest. Moreover, because valuation is a factual matter and necessarily an approximation and a matter of judgment, I do not believe that the Court is bound in other cases by the judgments and approximations in the majority opinion.

I dissent from the portion of the majority opinion under the heading “VI. Charitable Contribution Deduction for Transfer to CFT” and from the ultimate holding of the majority opinion under the heading “VIII. Conclusion”. Although I join Judge Foley’s dissent, I write separately to express additional reasons for my dissent and to emphasize certain of the reasons for Judge Foley’s dissent.

I disagree with the following characterization by the majority opinion of what petitioners transferred to CFT under the assignment agreement: “By way of the assignment agreement, petitioners transferred to CFT the right to a portion of the gifted interest.” Majority op. p. 396 (emphasis added). Under the assignment agreement, petitioners did not transfer to CFT merely “the right to” a specified portion of the gifted interest. On January 12, 1996, petitioners transferred to CFT the portion of the gifted interest described in that agreement. In other words, on that date, petitioners transferred to CFT that portion, if any, of the 82.33369836-percent assignee interest in MIL remaining after the respective transfers under the assignment agreement to petitioners’ children, the trusts, and the Symphony; i.e., that portion of such assignee interest having a fair market value as of the date of that agreement in excess of $7,044,933.

I also disagree with the position of the majority opinion, see majority op. pp. 396-398, that under the assignment agreement petitioners transferred to CFT a 3.62376573-per-cent assignee interest in MIL. The 3.62376573-percent assignee interest was set forth in the confirmation agreement that was executed in March 1996. The majority opinion does not mention the confirmation agreement but nevertheless requires that agreement to control for purposes of determining the assignee percentage interest that petitioners transferred under the assignment agreement to CFT (as well as the respective assignee percentage interests that petitioners transferred under the assignment agreement to petitioners’ children, the trusts, and the Symphony). The confirmation agreement on which the majority opinion relies was not executed until March 1996, 2 months after the assignment agreement was effective, and is not the controlling donative instrument.

Instead of referring to the confirmation agreement in support of the position that petitioners transferred to CFT a 3.62376573-percent assignee interest in MIL, the majority opinion maintains that there is in effect a valuation instruction in the assignment agreement which mandates that result. According to the majority opinion, pursuant to that purported valuation instruction, the fair market value agreed upon by the donees to determine the assignee percentage interest transferred to CFT (as well as to determine the respective assignee percentage interests transferred to petitioners’ children, the trusts, and the Symphony) is fixed and may never change for purposes of determining such interest, even if such value agreed upon by the donees is ultimately determined not to be the fair market value of such interest. The majority opinion concludes that therefore the resulting assignee percentage interest transferred to CFT (as well as the respective assignee percentage interests transferred to petitioners’ children, the trusts, and the Symphony), as set forth in the confirmation agreement, is fixed and may never change.

The assignment agreement does not contain a valuation instruction that requires what the majority opinion indicates that agreement requires. According to the majority opinion, that valuation instruction appears in the following paragraph in the assignment agreement:

For purposes of this paragraph [the paragraph transferring to petitioners’ children, the trusts, the Symphony, and CFT certain portions of the 82.33369836-percent assignee interest in MIL that petitioners transferred under the assignment agreement], the fair market value of the Assigned Partnership Interest [the gifted interest consisting of the 82.33369836-per-cent assignee interest in MIL] as of the date of this Assignment Agreement shall be the price at which the Assigned Partnership Interest would change hands as of the date of this Assignment Agreement between a hypothetical willing buyer and a hypothetical willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Any dispute with respect to the allocation of the Assigned Partnership Interests among Assignees shall be resolved by arbitration as provided in the Partnership Agreement.

As can be seen from reading the foregoing paragraph, the purported valuation instruction consists of a paragraph in the assignment agreement which defines the term “fair market value”. Petitioners required the donees to use that definition when they allocated among themselves the respective portions of the gifted interest which petitioners transferred to them under the assignment agreement. The definition of the term “fair market value” for that purpose is the same definition used for Federal gift tax purposes. See sec. 25.2512-1, Gift Tax Regs. The last sentence of the above-quoted paragraph merely requires that any dispute with respect to the allocation of the gifted interest among the donees be resolved by arbitration as provided in the partnership agreement. Nothing in that paragraph mandates that if the fair market value of the gifted interest to which the various donees agreed is ultimately determined not to be the fair market value of that interest, no adjustment may be made to the respective assignee percentage interests allocated to CFT and the other donees, as set forth in the confirmation agreement. I believe that the majority opinion’s construction of the above-quoted paragraph is strained, unreasonable, and improper and leads to illogical results.

In essence, the majority opinion concludes that the donees of the gifted interest made a mistake in determining the fair market value of that interest and that petitioners are stuck with that mistaken value solely for purposes of determining the respective assignee percentage interests transferred to the donees under that agreement.

The majority opinion states that

the assignment agreement contemplates the allocation of the gifted interest phased on the assignees’ best estimation of that value. Moreover, each of the assignees’ percentage interests was determinated exactly as contemplated in the assignment agreement (without recourse to arbitration), and none can complain that they got any less or more than petitioners intended them to get. * * * [Majority op. p. 397.]

The assignment agreement does not “contemplate”, as the majority opinion states, that the allocation of the gifted interest be “based on the assignees’ best estimation of that [fair market] value.” Id. Under the assignment agreement, petitioners transferred to the donees specified portions of the gifted interest determined by reference to the fair market value of such portions, as defined in that agreement, and not upon some “best estimation of that value.”

The assignment agreement required that the allocation be based upon fair market value as defined in that agreement, which the majority opinion acknowledges is the same definition of that term for Federal gift tax purposes. The majority opinion has found that the donees did not make the allocation on the basis of that definition. The donees thus failed to implement the donors’ (i.e., petitioners’) mandate in the assignment agreement when they arrived at amounts which they believed to be the respective fair market values of the specified portions of the gifted interest that petitioners transferred to them but which the majority opinion has found are not the fair market values of such portions.

The majority opinion, using the definition of fair market value in the Federal gift tax regulations and the assignment agreement, determines that the fair market value of the gifted interest used by the donees is not the fair market value of such interest. It follows that the assignee percentage interest allocated to CFT in the confirmation agreement in March 1996 (as well as the respective assignee percentage interests allocated in that confirmation agreement to petitioners’ children, the trusts, and the Symphony) is not the assignee percentage interest that petitioners transferred in the assignment agreement to that donee on January 12, 1996.

The position of the majority opinion conflicts with the provisions of the assignment agreement as to the respective portions of the gifted interest that petitioners transferred under that agreement to petitioners’ children, the trusts, the Symphony, and CFT. Consequently, that position leads to results that are in violation of what petitioners transferred to the donees under that agreement. According to the majority opinion, the aggregate fair market value of the aggregate 77.21280956-percent assignee interests allocated to petitioners’ children and the trusts is $9,269,089. Majority op. p. 398. However, under the assignment agreement, petitioners transferred to their children and the trusts portions of the gifted interest having an aggregate fair market value equal to $6,910,933, determined according to the definition of the term “fair market value” in the assignment agreement, which is the same definition in the Federal gift tax regulations. 1 Thus, the aggregate fair market value of the aggregate assignee percentage interests transferred to petitioners’ children and the trusts, as determined by the majority opinion (i.e., $9,269,089), exceeds the aggregate fair market value of such interests that petitioners transferred to those donees in the assignment agreement (i.e., $6,910,933). Such a result is rejected by and violates that agreement. 2

Foley, J., agrees with this concurring in part and dissenting in part opinion. According to the majority opinion, the fair market value of the 1.49712307-percent assignee interest allocated to the Symphony is $179,724. Majority op. p. 398. However, under the assignment agreement, petitioners transferred to the Symphony a portion of the gifted interest having an aggregate fair market value of at most $134,000, determined according to the definition of the term “fair market value” in the assignment agreement, which is the same definition in the Federal gift tax regulations.

The same is true of the result with respect to the Symphony under the majority opinion’s analysis.