Estate of True v. Commissioner

F I L E D
United States Court of Appeals
Tenth Circuit

PUBLISH DEC 2 2004

PATRICK FISHER
UNITED STATES COURT OF APPEALS Clerk
TENTH CIRCUIT

ESTATE OF H. A. TRUE, JR.,
Deceased, H. A. True III Personal
Representative; JEAN D. TRUE,

Petitioners-Appellants,
Nos. 02-9010, 02-9011, 02-9012
v.

COMMISSIONER OF INTERNAL
REVENUE,

Respondent-Appellee.

Appeal from the United States Tax Court
(T.C. Nos. 10940-97, 3408-98, 3409-98)

Buford P. Berry (Mary A. McNulty and Katherine Quigley, Thompson & Knight
L.L.P., and Ronald M. Morris, Casper, Wyoming, with him on the briefs),
Thompson & Knight L.L.P., Dallas, Texas, for Petitioners-Appellants.

Joan I. Oppenheimer, Attorney, Tax Division, Department of Justice (Eileen J.
O’Connor, Assistant Attorney General, and Jonathan S. Cohen, Attorney, Tax
Division, Department of Justice, with her on the briefs), Washington, D.C., for
Respondent-Appellee.

Before SEYMOUR, Circuit Judge, PORFILIO, Senior Circuit Judge, and
MURPHY, Circuit Judge.

SEYMOUR, Circuit Judge.
 This appeal arises out of the consolidation of three separate tax deficiency

notices issued by the Commissioner of Internal Revenue (I.R.S.) against the estate

of H. A. True, Jr., deceased, H. A. True III, personal representative, and Jean D.

True (collectively, taxpayers), regarding the transfer of interests in six different

family businesses subject to longstanding buy-sell agreements. Taxpayers filed

timely petitions in tax court challenging the I.R.S.’s estate and gift tax deficiency

determinations. After a week-long trial, the tax court issued an extensive 336

page Memorandum Findings of Fact and Opinion, see Estate of True v. C.I.R., 82

T.C.M. (CCH) 27 (2001), in which it rejected taxpayers’ contention that the

formula price and other restrictive terms in the buy-sell agreements controlled the

value of the transferred business interests for estate and gift tax purposes. The

court also imposed penalties against taxpayers for undervaluing the interests on

their tax returns. Taxpayers appeal, and we affirm.

I

H. A. True, Jr. (Dave True or Dave), was born on June 12, 1915, and

married Jean Durland (Jean True or Jean) in 1938. They remained married until

Dave’s death on June 4, 1994. During their marriage they had four children:

Tamma True Hatten (Tamma), H. A. True III (Hank), Diemer D. True (Diemer),

and David L. True (David).

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 Dave was a successful entrepreneur and established a number of companies

involved in oil and gas exploration, marketing, and transportation. The

companies relevant to this appeal include True Oil Company, Belle Fourche

Pipeline Company, Eighty-Eight Oil Company, and Black Hills Trucking

Company. These companies often worked in concert, providing services to one

another and assisting in one another’s efforts. Companies which generated a

substantial amount of revenue often provided the funds to support companies

which were not as profitable. Dave also established ranching operations. These

included the True Ranches, Inc., “a vertically integrated cattle operation, running

herds of cows and their offspring from conception through finishing ready for

slaughter,” Estate of True, 82 T.C.M. (CCH) at 36, and White Stallion Ranch,

Inc., which operated as a guest ranch. 1

Due to an unsatisfactory work experience early in his career, Dave

developed a business philosophy which was guided by four basic principles. He

did not want to own a business with anyone but his own family members, every

business owner or partner should be actively engaged in the business, buy-sell

agreements were necessary to avoid conflicts among owners and to establish clear

1
Of these business entities, True Oil, Eighty-Eight Oil, and the True
Ranches were structured as partnerships under Wyoming law. Belle Fourche
Pipeline, Black Hills Trucking, and White Stallion Ranch were structured as
Subchapter S corporations.

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exit strategies, and outside debt would be incurred only as a last resort. Each

True company was governed by buy-sell agreements which embodied these

business principles. The agreements dictated that an owner or partner could not

transfer or encumber his or her interests in the business, and each owner or his or

her spouse had to work in the business. Failure to work in the business, any

attempt to transfer an interest in the business, death, and disability were each

treated as if the holder of the interest had notified the other owners of his or her

intent to withdraw from ownership. Upon the occurrence of such an event, the

other owners were required to purchase the departing owner’s interests at a

formula price listed in the buy-sell agreement.

The formula prices in the buy-sell agreements were derived from a

calculation of the tax book value for the various True companies. The companies

characteristically kept their business records according to tax book values rather

than following generally accepted accounting principles (GAAP). The companies

used the tax book accounting method for a variety of reasons. Under this method,

the companies could take greater advantage of certain tax deductions and

accelerated rates of depreciation granted to the oil and ranching industries.

Likewise, because the Trues intended to keep their businesses strictly within the

family, they determined there was no need to have their financial records exhibit

the value of their companies as if placed on the public market. By using a tax

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value accounting method, however, the book values for the True companies

tended to be much lower than what would be calculated under GAAP and did not

always represent the fair market value of the businesses had they been liquidated.

Because of the varying tax incentives granted to the oil, gas, and ranching

industries, which allow for increased rates of depreciation and deductions, the tax

value accounting method occasionally even resulted in a negative book value

figure for some of the True companies.

As Dave and Jean True established new businesses or gained full control

over businesses in which they formerly shared interests with non-family members,

they entered into buy-sell agreements with one another. Characteristically, Dave

possessed a larger percentage of shares or interest in the businesses than did Jean.

Dave and Jean also took steps to ensure their children’s involvement in the family

businesses. As high school students, the True children participated in the

businesses by attending the True companies’ annual supervisor meetings and

semiannual family business meetings. Likewise, throughout junior high school,

high school, and college, the True sons had jobs on the family’s ranches and in

the oil businesses.

In 1971, each child acquired a one percent interest in Belle Fourche

Pipeline, which they purchased from the corporation at tax book value. At this

time, the children were between twenty-one and thirty-one years of age. Dave

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and Jean did not report the transfers on a gift tax return because the children’s

acquisition of the Belle Fourche Pipeline stock had been structured as a sale

rather than a gift. In 1973, Dave and Jean also gave each child an eight percent

interest in True Oil and True Drilling. 2 Dave and Jean both reported the 1973

gifts to their children on their gift tax returns for that year, valuing the gifts in

terms of their tax book values. 3

The I.R.S. determined gift tax deficiencies against Dave and Jean for both

the 1971 and 1973 transfers, asserting that the transfers involved “unreported

gifts equal to the difference between the fair market value of the transferred

interests and the amount paid for the interests or the amount reported as gifts.”

Aplt. br. at 9. The Trues paid the deficiencies and brought two refund suits in

federal district court. See True v. United States, 547 F. Supp. 201 (D. Wyo. 1982)

(1973 gift tax case); True v. United States, No. C79-131K (D. Wyo. Oct. 1, 1980)

(1971 gift tax case). In both cases, the district court sustained the Trues’

argument that the fair market value of the transferred interests was the reported

tax book value. 4

2
The value of transferred interests in True Drilling are not at issue in this
case. We therefore limit our subsequent discussions regarding the 1973 transfers
to that of True Oil.
3
Jean True agreed to treat the gifts as being made one-half by each spouse.
4
The district court reached its conclusions, in large measure, by relying on
(continued...)

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 Dave and Jean also consistently made annual gifts to their children and

their spouses. These gifts tended to consist of “cash or ownership interests in

various True companies valued at the maximum allowable amount that would not

trigger gift tax.” Estate of True, 82 T.C.M. (CCH) at 37. However, the gifts were

never received as cash in hand. Rather, cash gifts were deposited into business

bank accounts assigned to each recipient. The funds were then “invested in the

True companies, either by purchasing ownership interests or by making interest-

bearing loans, or both.” Id.

Over the years, the children acquired interests in other True companies,

4
(...continued)
valuation reports written by Standard Research Consultants (SRC) on behalf of
the Trues for the purpose of litigating the gift tax cases. In valuing the two
companies, SRC first determined what it considered to be the freely traded values
for Belle Fourche Pipeline and True Oil. Rec., ex. 235-P at 55-57; id., ex. 236-P
at 68-70. SRC then engaged in a marketability discount analysis for each
company. Id., ex. 235-P at 58-59; id., ex. 236-P at 70-72. However, the SRC
reports rejected their own marketability discount findings, concluding that the
parties to the agreements could never look forward to a public market and would
always be limited to the price terms set out in the agreement because of the
restrictions in the buy-sell agreements. Id., ex. 235-P at 58-60; id., ex. 236-P at
72. Hence, the SRC reports essentially accepted the price terms in the Belle
Fourche Pipeline and True Oil agreements as the equivalent of the fair market
value for the transferred interests. In relying on the SRC reports, the district
court spoke more directly about applying marketability and minority discounts to
the transferred interests, but accepted the SRC valuations as representing
appropriately discounted values for Belle Fourche Pipeline and True Oil. See
True v. United States, 547 F. Supp. 201, 203 (D. Wyo. 1982) (1973 gift tax case);
True v. United States, No. C79-131K, 3, 5, 6-7 (D. Wyo. Oct. 1, 1980) (1971 gift
tax case).

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including Eighty-Eight Oil, Black Hills Trucking, True Ranches, and White

Stallion Ranch. In obtaining these interests, the children became partners or

shareholders in the companies, entered into buy-sell agreements for each, and

fulfilled the terms of the agreements by active participation in the businesses.

The True children, or their spouses, owned equal percentages of interest in the

companies, regardless of the extent of their individual involvement in each. Hank

eventually became responsible for managing Belle Fourche Pipeline, Eighty-Eight

Oil, and the True family environmental cleanup company. Diemer managed Black

Hills Trucking, as well as another True business. David became manager of True

Ranches and True Drilling. Tamma briefly worked for the family businesses as a

personnel coordinator, and her husband, Donald Hatten, also worked for the True

businesses for about ten years.

In 1984, Tamma and her husband withdrew from the True companies to

open a ranch operation wholly independent from the True businesses. In

accordance with the buy-sell agreements, Tamma’s parents and brothers bought

out her interests in the companies at tax book value. The combined purchase

price Tamma accrued for these interests equaled over $8.5 million. This amount

was offset, however, by two of the True companies’ negative book values

amounting to nearly $1.7 million at the time of the sale. After the sale, the rest of

the family amended their various buy-sell agreements to reflect that Tamma and

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her husband were no longer owners or participants in the family businesses.

Likewise, Dave and Jean ceased making annual gifts to Tamma and amended both

of their wills and other estate planning documents to delete any specific

provisions for Tamma and her family. 5 They did so out of the belief that Tamma

was financially secure as a result of the sale, and because Dave and Jean True

wanted their estate to go to their sons so that family funds would be reinvested in

the companies and the businesses would stay together. Rec., vol. II at 123; id.,

vol. III at 397. In one of his testamentary documents, Dave also stated that

Tamma was not to receive any assets from his estate. He noted that she had

“severed her financial ties with the True companies, and thus her potential

inheritance” had been fully satisfied during his lifetime as a result of the sale of

her interests. Rec., ex. 13-J at 4; Estate of True, 82 T.C.M. (CCH) at 42.

During the 1980s, the True family (except Tamma) purchased several

pieces of property to add to the operations of the True Ranches. As discussed in

detail in True v. United States, 190 F.3d 1165 (10th Cir. 1999), our decision

concerning these purchases, the properties were not directly purchased by the

True Ranches, but by another one of the True companies. Id. at 1168-69.

Through a variety of step-transactions–subsequent acquisitions, transfers, and

5
Tamma’s descendants nonetheless remain beneficiaries of the True Family
Education Trust. See Estate of True v. C.I.R., 82 T.C.M. (CCH) 27, 42 (2001);
rec., vol. III at 398.

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exchanges among the various True companies–the new ranch land finally became

the property of the True Ranches. In the course of this process, the Trues were

able to reduce the tax value of the acquired property to zero. The I.R.S.

challenged the validity of these transactions and issued tax deficiencies against

taxpayers, which they in turn challenged in district court. On appeal, we agreed

with the I.R.S. that taxpayers could not reduce the tax value of the ranch lands by

taking advantage of various tax depreciations which would normally accompany

the series of transactions by which the True Ranches acquired the property. Id. at

1179. We held that the varying transactions were “nothing but the Trues’

prearranged, integrated plan to accomplish indirectly tax advantages they could

not accomplish directly.” Id. Therefore, we treated the ranch land acquisitions as

if they had been directly acquired by the True Ranches, and precluded the Trues

from claiming a zero tax value for the new land. Id.

In January 1993 and in response to changes in the tax laws, Dave sold to

his wife and sons, in accordance with the buy-sell agreements, a portion of his

partnership interests in several True companies. Prior to the 1993 sales, Dave

held a majority interest in a number of the True partnerships. Under the new tax

laws, the transfer of his interests in the partnerships to his wife and sons upon his

death in accordance with the buy-sell agreements would have resulted in a

termination of the partnerships as well as possible termination of the buy-sell

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agreements. See I.R.C. § 2701. In order to avoid this result, Dave transferred

some of his interests in each partnership to Jean and his sons at tax book value to

reduce his overall holdings. Dave and Jean disclosed the transfers on their 1993

gift tax returns but treated them as sales, thereby not reporting any taxable gifts

resulting from the transfers. In March 1997, the I.R.S. issued notices of

deficiency for the 1993 transfers, contending the values of the transferred

interests were higher than the tax book values reported on the tax returns.

On June 4, 1994, Dave died unexpectedly. In accordance with the buy-sell

agreements, Dave’s remaining interests in the True family companies were

transferred to his wife and sons at tax book value. The estate subsequently filed

an estate tax return reporting the date-of-death value of Dave’s interest in the

True family companies as equal to the proceeds the estate received under the buy-

sell agreements. In January 1998, the I.R.S. issued a notice of deficiency against

the estate, asserting that the values of the True companies listed in the return were

higher than the tax book values at which they were sold.

After Dave died, Jean decided she wanted to retire from active participation

in the True companies. In compliance with the buy-sell agreements, she sold

most of her interests in the companies to her sons at tax book value in June and

July 1994. She filed a timely gift tax return for 1994, disclosing the transactions

but treating them as sales and reporting she owed no taxes. As with the two

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previous transactions, the I.R.S. issued a notice of deficiency, claiming that the

values of the interests Jean sold were higher than their reported value.

According to the I.R.S., and as set out here in tabular form, the deficiencies

for each of the transactions were as follows:

1993 gift transfer $15,201,984

1994 estate value $43,639,111

1994 gift transfer $17,094,788.

The I.R.S. also determined that taxpayers should be subject to a penalty for

substantial underpayment on the estate and gift tax returns. See I.R.C. § 6662(a),

(b)(5). These penalties were calculated as follows:

1993 gift transfer $6,080,794

1994 estate value $17,455,644

1994 gift transfer $6,791,715.

In total, the I.R.S. calculated the tax deficiencies at over $75 million and the

penalties at over $30 million.

Taxpayers filed timely petitions with the tax court contesting the I.R.S.’s

rulings. During the one week trial, taxpayers’ core argument was that the tax

book value and other restrictive terms detailed in the buy-sell agreements

established the value of the transferred interests for estate and gift tax purposes.

The tax court rejected this argument and instead determined the value of the

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transferred interests based on evidence presented at trial, including appraisals

presented by experts for taxpayers and evidence from an expert rebuttal witness

presented by the I.R.S. Based on its own valuation of the interests at issue, the

court concluded their values substantially exceeded the amounts asserted by

taxpayers, resulting in tax deficiencies and associated penalties under I.R.C. §

6662(a), (b)(5).

The tax court determined the tax deficiencies as follows:

1993 gift transfer $2,660,800

1994 estate value $11,162,543

1994 gift transfer $4,446,600.

In affirming the I.R.S.’s application of penalties, the tax court rejected taxpayers’

argument that they showed reasonable cause and good faith in their

understatement of tax values and were therefore not subject to penalties. See

I.R.C. § 6664(c). The tax court calculated the penalties as follows:

1993 gift transfer $317,352

1994 estate value $1,888,032

1994 gift transfer $909,590.

In total, the court’s calculation amounted to approximately $18.2 million for tax

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deficiencies and $3.1 million for penalties. 6

In appealing the tax court’s decision, taxpayers assert the court erred in

concluding the formula prices in the buy-sell agreements did not establish the

value of the interests for estate and gift tax purposes. They also argue that even if

the formula prices should be disregarded, the tax court erred in not considering

the other restrictive terms in the buy-sell agreements when it determined the fair

market value of the interests. Finally, taxpayers challenge the tax court’s

conclusion that the imposition of penalties was appropriate.

II

We exercise jurisdiction over this case pursuant to I.R.C. § 7482(a)(1) and

review the tax court’s decision “in the same manner and to the same extent as

decisions of the district courts . . . tried without a jury.” Id. Therefore, we

review legal questions de novo and factual questions for clear error. IHC Health

Plans, Inc. v. C.I.R., 325 F.3d 1188, 1193 (10th Cir. 2003); Kurzet v. C.I.R., 222

F.3d 830, 833 (10th Cir. 2000). The primary issue we address is whether the

price terms in the buy-sell agreements controlled for the purpose of valuing the

6
We note that while the tax court assessed tax deficiencies and penalties
against taxpayers, the court’s calculations were substantially lower than that
calculated by the I.R.S. To taxpayers’ benefit, the I.R.S. does not challenge the
tax court’s lower calculations.

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interests in Dave True’s estate.

The estate of every decedent who is a United States citizen or resident is

subject to tax. See I.R.C. § 2001(a). The value of a decedent’s gross estate is

“determined by including . . . the value at the time of his death all property, real

or personal, tangible or intangible, wherever situated.” I.R.C. § 2031(a). The

value of such property is generally measured in terms of its fair market value,

which is the price at which a willing buyer and willing seller with knowledge of

all the relevant facts would agree to exchange the property or interest at issue.

See United States v. Cartwright, 411 U.S. 546, 550-51 (1973); Heyen v. United

States, 945 F.2d 359, 364 (10th Cir. 1991); Treas. Reg. § 20.2031-1(b). In

determining the fair market value of partnership interests or stock in a closely

held corporation where no public market exists, courts have looked at a variety of

factors to calculate the worth of an interest included in an estate. See I.R.C. §

2031(b) (valuation of unlisted stock and securities). To determine the value of

closely held stock, it is appropriate to consider

[t]he good will of the business; the economic outlook of the
particular industry; the company’s position in the industry and its
management; the degree of control of the business represented by the
block of stock to be valued; and the values of securities of
corporations engaged in the same or similar lines of businesses which
are listed on a stock exchange.

Treas. Reg. § 20.2031-2(f). Partnership interests can be valued by “[a] fair

appraisal as of the applicable valuation date of all the assets of the business,

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tangible and intangible, including good will; [t]he demonstrated earning capacity

of the business;” and other factors relating to the valuation of corporate stock.

Treas. Reg. § 20.2031-3. Finally, and particularly relevant here, the price terms

in buy-sell agreements can sometimes control the value of assets for estate tax

purposes.

As developed in case law, and embodied in Treasury Regulation § 20.2031-

2(h), 7 the stated price in a buy-sell agreement will control for estate tax purposes

where (1) the price is determinable from the agreement, (2) the terms of the

agreement are binding throughout life and death, (3) the agreement is legally

binding and enforceable, and (4) the agreement was entered into for bona fide

7
The relevant portion of the regulation reads:
The effect, if any, that is given to the option or contract
price in determining the value of the securities for estate
tax purposes depends upon the circumstances of the
particular case. Little weight will be accorded a price
contained in an option or contract under which the
decedent is free to dispose of the underlying securities at
any price he chooses during his lifetime. . . . Even if the
decedent is not free to dispose of the underlying
securities at other than the option or contract price, such
price will be disregarded in determining the value of the
securities unless it is determined under the circum-
stances of the particular case that the agreement
represents a bona fide business arrangement and not a
device to pass the decedent’s shares to the natural
objects of his bounty for less than an adequate and full
consideration in money or money’s worth.
Treas. Reg. § 20.2031-2(h).

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business reasons and is not a testamentary substitute intended to pass on the

decedent’s interests for less than full and adequate consideration. See, e.g.,

Estate of Gloeckner v. C.I.R., 152 F.3d 208, 212-14 (2d Cir. 1998); St. Louis

County Bank v. United States, 674 F.2d 1207, 1210 (8th Cir. 1982); Estate of

Godley v. C.I.R., 80 T.C.M. (CCH) 158, 164 (2000); Estate of Lauder v. C.I.R.,

T.C.M. (RIA) 92736, 3716, 3729-30 (1992) (Lauder II); Treas. Reg. § 20.2031-

2(h); Rev. Rule 59-60, 1959-1 C.B. 237, § 8 (1959). For ease of reference, we

will refer to this test as the “price term control test.”

The tax court found, and the parties generally agree, that the first three

prongs of the test are not at issue. 8 We therefore limit our determination to

whether the tax court correctly concluded that the price terms in the True

company buy-sell agreements do not control for estate tax valuation purposes

because the agreements failed to satisfy the fourth prong of the test. We review

this question of fact for clear error. See Estate of Gloeckner, 152 F.3d at 212,

8
The buy-sell agreement for White Stallion Ranch is an exception. The tax
court found that the White Stallion Ranch buy-sell agreement was structured so
that it was not equally binding upon transfers during life and death, thereby
failing the second prong of the test. Estate of True, 82 T.C.M. (CCH) at 58. See
also Cameron W. Bommer Revocable Trust v. C.I.R., T.C.M. (RIA) 97380, 2422
(1997) (price term in buy-sell agreement cannot control for estate tax purposes
where agreement non-binding upon decedent during life and at death). Taxpayers
do not challenge this finding on appeal. Therefore, we uphold the tax court’s
determination that the price terms in the White Stallion Ranch buy-sell agreement
should be disregarded.

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215-16; Treas. Reg. § 20-2031-2(h) (“effect . . . given to the option or contract

price . . . depends upon the circumstances of the particular case”) (emphasis

added). We will not reverse the tax court’s decision on this question unless “we

are ‘left with the definite conviction that a mistake has been committed.’” Wolf v.

C.I.R., 4 F.3d 709, 712 (9th Cir. 1993) (quoting United States v. U.S. Gypsum

Co., 333 U.S. 364, 395 (1948)).

As noted above, the fourth prong of the price term control test asks whether

a buy-sell agreement is entered into for bona fide business purposes and does not

represent a testamentary substitute intended to pass a decedent’s interests on to

the natural objects of his bounty for less than full and adequate consideration.

This prong of the price term control test is conjunctive in nature. The buy-sell

agreement must be entered into for a legitimate business purpose, and it cannot be

a testamentary device. Dorn v. United States, 828 F.2d 177, 182 (3d Cir. 1987);

St. Louis County Bank, 674 F.2d at 1210; Estate of Godley, 80 T.C.M. (CCH) at

164; Cameron W. Bommer Revocable Trust v. C.I.R., T.C.M. (RIA) 97380, 2423

(1997); Lauder II, T.C.M. (RIA) 92736 at 3730-31. The tax court found here, and

the I.R.S. does not contest, that the True buy-sell agreements were entered into

for a variety of legitimate business reasons. Estate of True, 82 T.C.M. (CCH) at

58-59. See also St. Louis County Bank, 674 F.2d at 1210 (maintenance of family

ownership and control over business is legitimate business purpose); Lauder II,

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T.C.M. (RIA) 92736 at 3731 (preserving family control and ownership over

family business is bona fide purpose for buy-sell agreement); Estate of Bischoff v.

C.I.R., 69 T.C. 32, 39-40 (1977) (keeping business in family is legitimate

business purpose). Our analysis is thus further refined to examining whether the

tax court erred when it determined the True buy-sell agreements nonetheless

served as testamentary substitutes.

The tax court reached its conclusion that the True company buy-sell

agreements were substitutes for testamentary dispositions by first examining a

variety of factors permitting an inference that the agreements served a

testamentary purpose. The court then determined taxpayers failed to prove the

price terms in the agreements represented adequate consideration at the time the

parties entered into the agreements. Consequently, the court found the price

terms were not binding for estate tax valuation purposes.

Challenging the tax court’s decision, taxpayers contend the court erred by

placing too great an emphasis on whether the buy-sell agreements had a

testamentary purpose rather than on whether the agreements represented an

exchange for full and adequate consideration. Taxpayers therefore devote little, if

any, analysis to the question of testamentary purpose, instead focusing the

majority of their argument on whether the buy-sell agreements were in fact

supported by adequate consideration. They argue they satisfy this latter question

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primarily by virtue of this court’s ruling in Brodrick v. Gore, 224 F.2d 892 (10th

Cir. 1955), and the alleged preclusive effect of the rulings in the 1971 and 1973

gift tax cases. Upon our review of the tax court’s extensive opinion, as well as

our own close examination of the relevant case law and the record on appeal, we

conclude taxpayers’ arguments cannot prevail.

A. Testamentary purpose

From the outset, we note there is not a wealth of cases outlining the full

process by which a court should examine whether a buy-sell agreement satisfies

the fourth prong of the price term control test. When this portion of the test is at

issue, however, courts generally begin their analysis by examining a variety of

factors from which they may draw an inference that the agreement served as a

testamentary substitute. See St. Louis County Bank, 674 F.2d at 1211; Slocum v.

United States, 256 F. Supp. 753, 754-56 (S.D.N.Y. 1966); Cameron W. Bommer

Revocable Trust, T.C.M. (RIA) 97380 at 2424-27; Lauder II, T.C.M. (RIA) 92736

at 3731-33. These factors include the health or age of the decedent when entering

into the buy-sell agreement, Estate of Gloeckner, 152 F.3d at 216; St. Louis

County Bank, 674 F.2d at 1210; Slocum, 256 F. Supp. at 755; the lack of regular

enforcement of the agreement, St. Louis County Bank, 674 F.2d at 1211; the

exclusion of significant assets from the agreement, Lauder II, T.C.M. (RIA)

92736 at 3732; the arbitrary manner in which the price term was selected,

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including the failure to obtain appraisals or seek professional advice, id.; Estate

of Gloeckner, 152 F.3d at 216; Cameron W. Bommer Revocable Trust, T.C.M.

(RIA) 97380 at 2425; the lack of negotiation between the parties in reaching the

agreement terms, id.; Lauder II, T.C.M. (RIA) 92736 at 3732; whether the

agreement allowed for adjustments or revaluation of its price terms, Estate of

Godley, 80 T.C.M. (CCH) at 164; Cameron W. Bommer Revocable Trust, T.C.M.

(RIA) 97380 at 2424, 2426; whether all the parties to the agreement were equally

bound to its terms, Brodrick, 224 F.2d at 896; Lauder II, T.C.M. (RIA) 92736 at

3731; Estate of Bischoff, 69 T.C. at 41; Estate of Littick v. C.I.R., 31 T.C. 181,

187-88 (1958); and any other testimony or evidence highlighting that the

agreement supported the decedent’s testamentary plan, Estate of Godley, 80

T.C.M. (CCH) at 161. Moreover, “intrafamily agreements restricting the transfer

of stock in a closely held corporation are subject to greater scrutiny than that

given to similar agreements between unrelated parties.” Cameron W. Bommer

Revocable Trust, T.C.M. (RIA) 97380 at 2423. See also Lauder II, T.C.M. (RIA)

92736 at 3731 (same); cf. Estate of Gloeckner, 152 F.2d at 214-15 (where

beneficiary of buy-sell agreement not natural object of decedent’s bounty, no

testamentary device); Bensel, 36 B.T.A. at 252-53 (buy-sell agreement between

father and son who were hostile and estranged from one another not testamentary

device).

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 Throughout this analysis, and in light of the many factors listed above,

courts often ask whether the terms of the agreement, and the manner in which

those terms were established, reflect an agreement reached by parties operating at

arm’s length. In Dorn, the court noted that

[o]ur interpretation of [20.2031-2(h)] is informed by the fact that
Congress’s overarching goal in this area was to limit circumvention
of the general rule of fair market value at the date of death by
transactions that are not at arm’s length. See I.R.C. § 2036 (1954).
Although few cases have relied on Treasury Regulation §
20.2031(h) for support, those which do discuss it support the position
that the option price affects the value of the gross estate only if the
option was granted at arm’s length.

Dorn, 828 F.2d at 181. See also Estate of Godley, 80 T.C.M. (CCH) at 164;

Estate of Littick, 31 T.C. at 186; Bensel v. C.I.R., 36 B.T.A. 246, 252-53 (1937),

affd. 100 F.2d 639 (3rd Cir. 1938). 9

9
Taxpayers challenge any reference to the arm’s length standard in
examining whether the buy-sell agreements were testamentary substitutes
intended to pass Dave True’s interests on to the natural objects of his bounty for
less than full and adequate consideration. Taxpayers contend application of the
arm’s length standard is erroneous and represents an improper retroactive
application of I.R.C. § 2703. They specifically raise this argument in challenging
the tax court’s adequacy of consideration finding. Aplt. br. at 40-44; Aplt. reply
br. at 10-11. We address it here because courts refer to the arm’s length standard
when addressing both the question of testamentary intent and adequacy of
consideration.
Section 2703 of the tax code details how restrictions in buy-sell agreements
entered into after October 8, 1990, should be evaluated for tax purposes.
Building upon Treasury Regulation § 20.2031-2(h), § 2703 of the tax code
indicates that an option provision in a buy-sell agreement can control where
[i]t is a bona fide business arrangement. . . . It is not a device to
(continued...)

-22-
 The tax court engaged in an extensive review of all the facts and

circumstances surrounding the creation and terms of the True company buy-sell

agreements, and determined there was much about the agreements to support a

conclusion they were testamentary substitutes. We agree. 10

9
(...continued)
transfer such property to members of the decedent’s family for less
than full and adequate consideration in money or money’s worth. . . .
[And], [i]ts terms are comparable to similar arrangements entered
into by persons in an arms’ length transaction.
I.R.C. § 2703(b)(1)-(3). Commentary to § 2703 notes that the arm’s length
standard was a new requirement “not found in previous law.” CCH-Standard
Federal Tax Reports, Vol. 77, no. 46 at 68 (Oct. 18, 1990). From this, taxpayers
contend the tax court erred by applying the arm’s length standard to evaluate the
True buy-sell agreements, as those agreements were executed long before the
applicable date of § 2703. Their argument is unfounded.
While the commentary to § 2703 does indicate that the arm’s length
standard is a new statutory factor, taxpayers overlook the fact that long before the
passage of § 2703, courts consistently considered the arm’s length nature of
transactions when determining the validity of buy-sell agreements created before
1990. See, e.g., Dorn v. United States, 828 F.2d 177, 181 (3d Cir. 1987); Bensel
v. C.I.R., 36 B.T.A. 246, 252-53 (1937), affd. 100 F.2d 639 (3rd Cir. 1938);
Estate of Lauder v. C.I.R., T.C.M. (RIA) 92736, 3716, 3733-34 (1992) (Lauder
II); Estate of Littick v. C.I.R., 31 T.C. 181, 186 (1958). Consequently, the tax
court did not err by including within its testamentary purpose and adequacy of
consideration analyses an examination of whether the parties engaged in arm’s
length transactions when they entered into the buy-sell agreements.
10
We acknowledge that factors such as the decedent’s health, the consistent
enforcement of the agreements, and the binding of all parties equally regardless of
who died first, weigh in favor of taxpayers’ argument that the buy-sell agreements
were not testamentary devices. Dave True was in good health in 1971 and 1973
when he entered into the buy-sell agreements with his children for True Oil and
Belle Fourche Pipeline, and there is no indication Dave’s health was in jeopardy
as the children gained interests in the other family businesses. Similarly, the tax
court found the True family was generally quite consistent in complying with the
(continued...)

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 As we have pointed out, where the price term in a buy-sell agreement is

reached in an arbitrary manner, is not based on an appraisal of the subject

interest, or is done without professional guidance or consultation, courts draw an

inference that the buy-sell agreement is a testamentary substitute. See Cameron

W. Bommer Revocable Trust, T.C.M. (RIA) 97380 at 2425 (inference of

testamentary device where decedent failed to obtain professional appraisal for

properties and did nothing more than consult attorney who came up with price

term in one day for interests listed in buy-sell agreement); Lauder II, T.C.M.

(RIA) 92736 at 3732 (price term reached after only informal consultation with

close family financial advisor and without any formal appraisals of company); cf.

Estate of Gloeckner, 152 F.3d at 216 (inference of testamentary intent diminished,

10
(...continued)
terms of the buy-sell agreements and executed formal waivers where deviation
from the agreements’ terms was appropriate. Estate of True, 82 T.C.M. (CCH) at
61. Finally, taxpayers are correct to note that the buy-sell agreements bound all
the parties equally, regardless of who died first. See, e.g., Estate of Bischoff v.
C.I.R., 69 T.C. 32, 41 (1977) (buy-sell agreement not testamentary device where
all provisions equally applicable to all partners); Estate of Littick, 31 T.C. at 187
(where agreement equally binding on all family members regardless of who died
first, no testamentary intent found). But we are not persuaded that these factors
outweigh the many other indicators that the buy-sell agreements served as
testamentary substitutes for Dave True. See, e.g., Lauder II, T.C.M. (RIA) 92736
at 3731-32 (court acknowledged that good health of decedent at time of entering
into agreements, long period of time between execution of agreements and
decedent’s death, the parties’ consistent adherence to the agreements, and fact
that any bound party could have predeceased the others, all supported taxpayers’
argument that buy-sell agreements were not testamentary substitutes; however,
other factors compelled court to conclude otherwise).

-24-
in part, by fact that decedent hired independent accountant to value stock listed in

buy-sell agreement). Here, Dave True sought only a limited amount of

professional advice in determining to use the tax book value for the price terms in

the buy-sell agreements, and he did not substantially rely on any independent

appraisals in doing so.

Cloyd Harris, a long time friend and accountant of the True family and their

companies, testified that Dave wanted to pick a value that “was easily determined,

without having to hire appraisers and oil field engineers and so on to come up

with a valuation.” Rec., vol. II at 233. In discussions with Dave about the

manner in which he might bring his children into the family businesses, id. at 228,

Mr. Harris said he did not object to the use of tax book value in the buy-sell

agreements. Id. at 232. Nevertheless, he did express some concern that when

valuing the different True companies as stand-alone operations, “it would be very

hard to justify book value or income tax basis value as fair market value . . . . If

[one] were looking at a liquidating situation, then it would not have been a true

value, but [the True companies were] an ongoing operating situation.” Id. at 233-

34. Mr. Harris believed “book value was not out of line,” id. at 234, as a method

of pricing the interests in the buy-sell agreements.

Dave True did obtain one appraisal in connection with his 1973 gift of True

Oil to his children. See Estate of True, 82 T.C.M. (CCH) at 40; rec., vol. II at

-25-
205-06. However, the record indicates that at most the appraisal of True Oil was

obtained and reviewed for litigation purposes during the 1973 gift tax case, rec.,

vol. II at 206, and was not relied upon by the children when entering into the

agreements with their father. Id. at 328. Nor do taxpayers present evidence of

any other appraisals obtained in connection with the children’s subsequent entry

into buy-sell agreements with their parents for the other True companies.

Therefore, for the majority of interests at issue here, there were no outside

evaluations of the value of the companies for the purpose of determining whether

their fair market value was adequately represented by the price terms in the buy-

sell agreements. In similar fashion to the courts in Cameron W. Bommer

Revocable Trust and Lauder II, which expressed concern regarding experienced

businessmen setting price terms in buy-sell agreements with only the most limited

of professional advice, Cameron W. Bommer Revocable Trust, T.C.M. (RIA)

97380 at 2425; Lauder II, T.C.M. (RIA) 92736 at 3732, we agree with the tax

court’s determination that the manner by which Dave True selected the price

terms for the buy-sell agreements contributes to a finding that the agreements

were testamentary substitutes.

The court in Lauder II also noted that where the price term in a buy-sell

agreement excluded the value of intangible assets, a further inference could be

drawn that the agreement in question served a testamentary purpose. Id. Here,

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the nature of tax book value accounting for True Oil allowed the company’s

proven oil and gas reserves to be omitted “because the reserves were essentially

purchased with earnings from the other True companies and their value likely

would be dissipated in the unsuccessful search for replacement reserves.” Estate

of True, 82 T.C.M. (CCH) at 69; see also id. at 63, 70-71; rec., vol. II at 234-43.

Hence,

while we appreciate that an adjusted book value formula may provide
a simple and inexpensive means for evaluating shares in a company,
we cannot passively accept such a formula where, as here, it appears
to have been adopted in order to minimize or mask the true value of
the [interests] in question.

Lauder II, T.C.M. (RIA) 92736 at 3732.

Another factor considered by the tax court in making its testamentary

purpose determination was that the buy-sell agreements did not contain within

their provisions a mechanism by which to reevaluate the price terms listed therein.

See, e.g., Cameron W. Bommer Revocable Trust, T.C.M. (RIA) 97380 at 2424,

2426 (lack of periodic revaluation of price term one factor contributing to

conclusion that buy-sell agreement was testamentary substitute). The tax court

concluded, and we agree, that unrelated parties negotiating at arm’s length would

likely have required a periodic reevaluation of the use of tax book accounting to

value the interests in the buy-sell agreements. As Mr. Harris testified, keeping

True Oil’s books on a tax value accounting method and employing the accelerated

-27-
depreciation methods permitted thereunder took into account the company’s

practice of expending the value of proven oil and gas reserves to finance the

costly search for new reserves. Rec., vol. II at 234-43. If the company were to

cease operating in such a manner, however, the tax book value accounting method

would not be the best manner by which to value the company because the values

of its reserves would not be considered. One would thus expect arm’s length

parties to require a regular reevaluation of True Oil’s pricing formula, especially

to the extent it took into account or omitted the company’s proven reserves.

Similarly, Eighty-Eight Oil, which was labeled as one of the True companies

which generated “large sums of cash,” id. at 242, was nonetheless reported at a

negative tax book value upon Tamma’s sale of her interests in that company to

her brothers and parents. Rec., ex. 154-J, attachment D. Parties operating at

arm’s length would have certainly required the buy-sell agreements to include

within their terms a method by which to reevaluate the price terms of the company

in light of such a disparity.

Additionally, when the True children entered into the buy-sell agreements,

there was no negotiation between the children and their father as to the terms of

the agreements. The parties discussed the agreements and the reasons for the

restrictions contained therein, rec., vol. II at 81, 84, 97, 303, 321-22; id., vol. III

at 432, but the children did not engage in any bargaining with their father about

-28-
the terms, rec., vol. II at 303. They did not seek outside counsel to represent their

interests when entering or exiting the agreements, id. at 102, 298, 299, 361-62,

nor did they have any knowledge as to who drafted the agreements, id. at 362; id.,

vol. III at 471. Rather, they were presented with a business opportunity crafted

by their father which they could accept or reject. Id. at 83-84, 132, 304; id., vol.

III at 432. In Lauder II, the tax court expressed concern about a buy-sell

agreement in which the family patriarch appeared to decide unilaterally the

formula price for the exchanged interests. Lauder II, T.C.M. (RIA) 92736 at

3732. Similarly, in Cameron W. Bommer Revocable Trust, the tax court viewed

with suspicion a buy-sell agreement that was not reached by bona fide

negotiations with respect to the price terms, and in which all the parties to the

agreement were represented by the same lawyer. Cameron W. Bommer Revocable

Trust, T.C.M. (RIA) 97380 at 2425.

Finally, what we deem most telling are the facts surrounding Tamma’s

departure from the True companies. Prior thereto, her father’s will generally

provided that the residue of his estate would pass to Jean, with the remainder

passing to his four children in equal shares upon Jean’s death. Rec., ex. 14-J at 1-

2. After Tamma’s departure from the businesses, she was wholly excluded from

any interest in her father’s estate. Tamma was removed from Dave’s will, id. at

ex. 11-J, and was no longer listed as a beneficiary under his living trust

-29-
agreement, id. at ex. 12-J, 13-J. In a document exercising a power of appointment

in favor of his living trust, Dave specifically noted that Tamma’s potential

inheritance had been fully satisfied when she severed her financial ties with the

True companies. Id. at 13-J at 4. At trial, Diemer testified he was aware his

father excluded Tamma from his will after she sold her interests in the companies.

He stated he and his father talked about the issue and that Dave “was very

committed to keeping the businesses together, and he felt, on his death, that the

cash [from the estate] would be necessary to keep–to stay in the business. And

so, it was a conscious decision, I believe, since he made that comment, to make

that decision.” Rec., vol. II at 123.

Taxpayers also reported that at the time of his death, Dave’s total estate

was worth just over $120 million, forty-four percent of which represented the

reported value attributable to Dave’s interests in the True companies. Aplt. supp.

br. at 2, 7. 11 If, as taxpayers contend, the buy-sell agreements were not

testamentary substitutes, Tamma likely would have been excluded only from that

11
In response to questioning at oral argument, counsel for taxpayers
asserted that only about ten percent of Dave’s estate was not connected with the
True companies but admitted he was not confident this percentage was accurate.
The court received supplemental briefing from the parties to clarify the total value
of Dave True’s estate, as well as to clarify the portion of his estate attributable to
his interests in the True companies. The court also received information
regarding any other irrevocable trusts, testamentary devices, or life insurance
policies created or purchased by Dave or Jean during their lifetimes, and the
beneficiaries listed thereunder for each.

-30-
percentage of her father’s estate relating to his interests in the True companies.

Instead, she garnered no benefit from her father’s estate, not even from the

portion not directly associated with the True companies.

Like the court deciding Estate of Godley, in which the decedent indicated

in a deposition prior to his death that the transfer of certain interests to his son

was a gift executed for the purpose of circumventing estate tax liability, Estate of

Godley, 80 T.C.M. (CCH) at 161, we have trouble ignoring Dave’s own statement

in exercising his power of appointment that Tamma’s inheritance had been

satisfied by the sale of her interests in the True companies. Diemer’s testimony

supporting the same position, as well as Tamma’s exclusion from the large

percentage of her father’s reported estate values not associated with the True

companies, clearly support an inference that the buy-sell agreements served as

testamentary substitutes for Dave True.

B. Adequacy of Consideration

Having determined the evidence supports the tax court’s inference that the

True company buy-sell agreements were testamentary substitutes, we turn to

whether the tax court erred in finding the agreements were not supported by

adequate consideration.

Where shareholders are members of the same family and the
circumstances indicate that testamentary considerations influenced
the decision to enter into a restrictive stock agreement, an
assumption that the price stated in the agreement is a fair one is

-31-
 unwarranted. It is then incumbent upon the estate to demonstrate
that the agreement establishes a fair price for the subject stock.

Cameron W. Bommer Revocable Trust, T.C.M. (RIA) 97380 at 2427. See also

Lauder II, T.C.M. (RIA) 92736 at 3733. Taxpayers devote the majority of their

analysis to this issue.

Courts addressing this question in the context of Treasury Regulation §

20.2031-2(h) have provided slightly varying definitions for adequacy of

consideration. However, in concert with the question of whether the buy-sell

agreements raise an inference of testamentary intent, courts tend to agree that the

option price will be deemed adequate consideration where it represents the price a

willing buyer and willing seller would have reached in the course of an arm’s

length negotiation. Dorn, 828 F.2d at 181; Estate of Godley, 80 T.C.M. (CCH) at

164; Cameron W. Bommer Revocable Trust, T.C.M. (RIA) 97380 at 2427. In

Lauder II, the court stated:

[adequate and full consideration] is best interpreted as requiring a
price that is not lower than that which would be agreed upon by
persons with adverse interests dealing at arm’s length. Under this
standard, the formula price generally must bear a reasonable
relationship to the unrestricted fair market value of the stock in
question.

Lauder II, T.C.M. (RIA) 92736 at 3733-34 (citation omitted). In the instant case,

in addressing the question of adequacy of consideration, the tax court concluded

“the formula price under the buy-sell agreement must be comparable to what

-32-
would result from arm’s length dealings between adverse parties, and it must bear

a reasonable relationship to the unrestricted fair market value of the interest in

question.” Estate of True, 82 T.C.M. (CCH) at 53. The court then determined

taxpayers failed to satisfy this test.

In contesting the tax court’s determination of the adequacy of

consideration, taxpayers assert the court’s emphasis on the arm’s length standard

is contrary to law, an argument we have already rejected. See note 8 supra. They

also argue this circuit’s ruling in Brodrick is binding precedent that the price

terms in the agreements are controlling. Finally, they contend the Wyoming

district court’s decisions in the 1971 and 1973 gift tax cases collaterally estop the

I.R.S. from disputing that the price terms in the buy-sell agreements here

represented adequate consideration at the time the Trues entered into the

agreements. Based on these primary arguments, taxpayers maintain the True

company buy-sell agreements were all supported by adequate consideration when

they were executed, and therefore the price terms in those agreements should

control for estate tax purposes.

1. Brodrick v. Gore

In challenging the tax court’s finding that the price terms in the buy-sell

agreements are not binding, taxpayers assert the court erred by not following our

ruling in Brodrick. They contend Brodrick controls in resolving this controversy

-33-
and that “[t]he Tax Court cannot ignore precedent that is squarely on point in the

circuit to which its decision will be appealed unless the Supreme Court has

changed the manner in which the law is interpreted or the law itself has changed.”

Aplt. br. at 21. 12 In light of taxpayers’ assertions, we have carefully reviewed

Brodrick, the statutes and regulations under which Brodrick was decided, and the

relevant statutes and regulations passed since Brodrick’s issuance. We have

examined those cases which reference or rely on Brodrick in their own analysis of

whether the price terms in a buy-sell agreement control for estate tax purposes.

We have also surveyed those cases which independently address the question of

when and to what extent buy-sell agreement price terms implicate estate tax

values. Having undertaken this analysis, we note that since we decided Brodrick

in 1955, the manner by which courts determine when terms in a buy-sell

agreement control estate tax values has evolved beyond the approach applied by

our court in Brodrick. After due consideration and in light of this development in

the law, we hold that Brodrick no longer represents controlling authority for our

circuit on the question of when the price terms in buy-sell agreements set estate

12
Taxpayers refer to the rule outlined in Golson v. C.I.R., 54 T.C. 742, 756-
57 (1970), aff’d. 445 F.2d 985 (10th Cir. 1971), in which the tax court held it was
bound “to follow a Court of Appeals decision which is squarely [on] point where
appeal from our decision lies to that Court of Appeals and to that court alone.”
Id. at 757.

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tax values. 13 We therefore reject taxpayers’ argument that the tax court erred in

not treating Brodrick as wholly binding precedent for this case.

In Brodrick, a father and his two sons entered into a partnership governed

by a written agreement. 224 F.2d at 894. The agreement’s terms included a

requirement that if any of the partners decided to withdraw from the partnership,

or upon the death of any partner, the withdrawing partner or his estate was

obliged to offer the remaining partners his shares at a set book value, and the

remaining partners were required to buy those shares. By will, the father also

bequeathed to his sons his interest in the partnership. Id. Upon his death in 1951,

the sons brought an action in probate court “to compel themselves, as executors,

to sell to themselves, as individuals, the decedent’s interest in the partnership for

. . . the alleged book value of such interest at the time of the death of the

decedent.” Id. The probate court appointed a special administrator to represent

the estate and held an adversary hearing. Id. at 895. The probate court

determined thereafter that the estate was required to sell the partnership interest

to the copartners for the book value of $345,897.53. That sum was paid to the

estate by the copartners and the partnership interest of the decedent was in turn

13
This opinion has been circulated to the en banc court whose members
have unanimously agreed to our specific overruling of Broderick to the extent it
holds, contrary to the analysis set forth infra, that restrictive price terms in a buy-
sell agreement that determine the amount the decedent’s estate will receive for the
property are, as a matter of law, binding for estate tax purposes.

-35-
conveyed to the sons as copartners. Id.

The sons, as executors of their father’s estate, then filed an estate tax return

reporting the value of the partnership interest as the $345,897.53 received by the

estate for that interest. Id. The I.R.S. challenged the reported value of the

partnership interest, asserting that the interest’s fair market value was higher than

the amount received and that the former should control for estate tax purposes.

The district court granted summary judgment for the sons and the I.R.S. appealed.

Relying on Supreme Court authority, we held in Brodrick that

in the absence of collusion, in the absence of other bad faith, and in
the absence of its entry in a nonadversary proceeding, the order or
judgment [of the probate court] must be given effect as a judicial
determination that the executors were obligated to sell and convey to
the surviving copartners the interest of the decedent in the
partnership property for a sum equal to the book value thereof, and as
a judicial determination of such book value.

Id. at 896 (citing Freuler v. Helvering, 291 U.S. 35, 45 (1934)). While we

acknowledged that the book value of the partnership interests was lower than the

fair market value, we stated that

such interest was burdened and encumbered with a certain restriction
contained in the partnership agreement . . . . Upon the death of the
decedent, the executors under his will were . . . effectively bound and
obligated to sell such interest to the surviving copartners for a sum
equal to its book value at the time of the death of the decedent. The
surviving copartners were effectively bound and obligated to
purchase such interest from the estate and to pay therefor its book
value. And inasmuch as the estate was thus bound and obligated,
such interest had no value to the estate in excess of its book value.
In other words, the interest of the estate in the property was by the

-36-
 contract limited in respect to value, the limitation being the book
value thereof at the time of the death of the decedent. And where the
interest of an estate in property is burdened and encumbered in that
respect by such an effective contractual provision, the estate tax
should be based upon the book value rather than a fair market value
in excess of the book value.

Id. (citations omitted). Because the I.R.S. had failed to raise any challenge to the

validity of the probate court proceeding, “and did not deny that in compliance

with [the probate court] order the interest of the decedent in the partnership assets

was conveyed to the surviving copartners at and for a sum equal to the book value

thereof,” id. at 897, we held the I.R.S. essentially foreclosed its opportunity to

assert that the price term in the buy-sell agreement should not control for estate

tax purposes. In sum, we ruled that where a property interest was burdened by

specific contractual provisions, and such provisions equally bound all parties to

the contract at life and at death, the value of such property for estate tax purposes

would be based on the terms in the contract, rather than the property’s fair market

value. Id. at 896.

In questioning Brodrick’s precedential value to the case currently before us,

we must remember that the instant controversy centers on determining whether

the True buy-sell agreements satisfy the price term control test and, in particular,

whether the agreements represent bona fide business arrangements and not

testamentary substitutes intended to pass on Dave True’s interests for less than

full and adequate consideration. In answering this question, we are governed by

-37-
the applicable portions of the Internal Revenue Code of 1986, which is a re-

designation of the Internal Revenue Code of 1954, along with Treasury

Regulation § 20.2031-2(h). See Tax Reform Act of 1986, Pub. L. 99-514, 100

Stat. 2095. 14

Brodrick examined portions of the Internal Revenue Code of 1939, in

particular sections 811(a), (c), and (d). 15 In reaching our decision in Brodrick, we

did not include in our analysis any reference to the tax regulations promulgated

under the 1939 Code. See generally Treas. Reg. § 81 et seq. (1944 cum. supp.).

Likewise, in determining that book value rather than fair market value should

14
As relevant here, and highlighted throughout this opinion, this case is
driven by the command of I.R.C. § 2001(a) (2000), which directs that “[a] tax is .
. . imposed on the transfer of the taxable estate of every decedent who is a citizen
or resident of the United States.” Section 2031(a) of the tax code further directs
that “[t]he value of the gross estate of the decedent shall be determined by
including . . . the value at the time of his death of all property, real or personal,
tangible or intangible, wherever situated.” I.R.C. § 2031(a) (2000). The Internal
Revenue Code of 1986 can be found in the most recent edition of the U.S. Code,
published in 2000.
15
In Brodrick, we acknowledged section 811(a) of the 1939 Code directed
that “for purposes of estate tax the value of the gross estate of a decedent shall be
determined by including the value of all property of the decedent to the extent of
his interest therein at the time of his death.” 224 F.2d at 896. In rejecting a
series of affirmative defenses raised by the I.R.S. in its attempt to challenge the
district court’s grant of summary judgment to the Brodrick taxpayers, we also
determined that the agreement between the father and his sons did not represent a
transfer made in contemplation of death under section 811(c), or a revocable
transfer under 811(d). Id. at 896-97. It was in this context that we said in
passing, without any substantive analysis, that the agreement was supported by
full and adequate consideration. Id. at 897.

-38-
control for estate tax purposes where the interest in the estate was burdened by an

effective contractual provision, we relied on cases which focused their analysis on

two core questions: was the agreement binding throughout life and death, and was

it legally binding and enforceable? See May v. McGowan, 194 F.2d 396 (2d Cir.

1952); Lomb v. Sugden, 82 F.2d 166 (2d Cir. 1936); Wilson v. Bowers, 57 F.2d

682 (2d Cir. 1932). These cases devoted very little analysis, if any, to whether

the agreement represented a testamentary substitute intended to pass on the

decedent’s interests for less than full and adequate consideration. The agreements

in those cases were either not solely between family members, thereby limiting

concerns regarding testamentary purposes, see Lomb, 82 F.2d at 166-67; Wilson,

57 F.2d at 683; or, where the agreement was between family members, the district

court had “found there was no purpose to evade taxes.” May, 194 F.2d at 397.

Hence, when determining whether a buy-sell agreement should control for estate

tax purposes, the focus of these earlier cases remained on the legal enforceability

of the agreement and whether the agreement equally bound the parties at life and

death.

It has also been noted that these early cases, including Brodrick, were

decided principally

by the use of a syllogism: the then Revenue Act provided that the
estate tax value is the value of the decedent’s property at the date of
death; the value at the date of death is the amount the estate will
receive for the property under the buy-sell agreement; therefore, the

-39-
 estate tax value is equal to the amount payable under the buy-sell
agreement.

Roger R. Fross, Estate Tax Valuation Based on Book Value Buy-Sell Agreements,

49 T AX L AW . 319, 327-28 (1996); see also Fiorito v. C.I.R., 33 T.C. 440, 444

(1959) (where agreement sets price to be paid for property and binds all parties

equally during life and at death, price term controls for estate tax purposes);

Estate of Littick, 31 T.C. at 185-87 (agreement which binds parties to set price at

life and at death will control for valuing property in estate).

The 1939 Code was revised in 1954. See Act of Aug. 16, 1954, Pub. L. No.

591, 68A Stat. 3, 374, 380-83. With respect to the relevant estate tax laws in this

case, the statutory changes between the 1939 and the 1954 Codes were minimal.

See H.R. Rep. No. 1337 (1954), reprinted in 1954 U.S.C.C.A.N. 4017, 4456-57

(noting how I.R.C. § 2031(a) (1954) (general definition for gross estate) largely

corresponds to introductory material in I.R.C. § 811 (1939) (same), and how

I.R.C. § 2037 (1954) (transfers taking effect at death) represent a combination

and revision of law found in sections 811(c)(1)(C), (c)(2) and (c)(3) of the 1939

Code). 16 Congress also included within the Code’s 1954 revisions a general

delegation to the Secretary of Treasury to “prescribe all needful rules and

regulations for the enforcement of [the Code], including all rules and regulations

As noted above, the 1954 Code was re-designated under the 1986 Code.
16

See Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2095.

-40-
as may be necessary by reason of any alteration of the law in relation to internal

revenue.” I.R.C. § 7805(a).

Under the authority of § 7805(a), and after engaging in the process of

notice and comment rulemaking, see 23 F.R. 4529 (June 24, 1958), the Secretary

of the Treasury promulgated a series of regulations in 1958, including those

addressing the implementation of the estate tax. The introduction states that the

regulations pertain to taxes imposed on transfers of estates of decedents dying

after August 16, 1954, “and supercede the regulations contained in Part 81,

Subchapter B, Chapter I, Title 26, Code of Federal Regulations (1939)

(Regulations 105, Estates Tax), as prescribed and made applicable to the Internal

Revenue Code of 1954 by Treasury Decision 6091 . . . .” Treas. Reg. § 20.0-

1(a)(1); see also 25 F.R. 14021 (Dec. 31, 1960) (noting “[r]egulations under the

1939 Code, as made applicable to corresponding provisions of the 1954 Code by

Treasury Decision 6091 . . . have been systematically superseded by regulations

under the 1954 Code.”). The new regulations constituted an effort to provide

direction on how to determine the extent of taxes to be “imposed on the transfer

of the taxable estate of every decedent who is a citizen or resident of the United

States.” I.R.C. § 2001(a). As particularly relevant here, in order to provide

guidance on how to calculate the value of a decedent’s gross estate, including

property in the form of unlisted stock and securities, see I.R.C. § 2031(a), (b), the

-41-
Secretary of the Treasury promulgated regulation § 20.2031-2(h), detailing factors

to be considered when determining the value of property interests contained in an

estate subject to an option or contract to purchase. See Treas. Reg. § 20.2031-

2(h). 17 No similar regulation existed under the 1939 Code. See generally Treas.

Reg. § 81 et seq. (1944 cum. supp.). Unlike Broderick, which involved the estate

of a person who died in 1951, we are faced here with the proper method of

determining the value of an estate of an individual who died in 1994, and we must

include in our analysis consideration of § 20.2031-2(h), which is applicable to

“the transfer of estates of decedents dying after August 16, 1954. . . .” Treas.

Reg. § 20.01-1(a)(1).

With the promulgation of § 20.2031-2(h), and as evidenced by our general

discussion of the regulation supra at 16-31, evaluation of buy-sell agreements for

estate tax purposes evolved beyond merely examining the manner and extent to

which the parties were bound to an agreement’s terms and the syllogism noted by

Fross. Today courts are required to engage in a careful examination of whether

the contested agreement was a testamentary substitute intended to pass a

decedent’s interests to the natural objects of his or her bounty for less than full

and adequate consideration. See, e.g., Estate of Gloeckner, 152 F.3d at 214-17;

17
While Treasury Regulation § 20.2031-2(h) is titled “Valuation of stocks
and bonds,” it is also employed in the course of valuing partnership interests. See
Treas. Reg. § 20.2031-3. See also supra 15-16.

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Dorn, 828 F.2d at 181-82; St. Louis County Bank, 674 F.2d at 1210-1211;

Cameron W. Bommer Revocable Trust, T.C.M. (RIA) 97380 at 2424-29; Lauder

II, T.C.M. (RIA) 92736 at 3731-35; see also Gloeckner, 152 F.3d at 213

(“essentially four requirements have evolved for a redemption price to be

considered binding for estate tax purposes.”); Lauder II, T.C.M. (RIA) 92736 at

3729-30 (noting evolution of test for determining whether price in buy-sell

agreement should control for estate tax purposes); Fross, supra at 330-39 (noting

current focus of courts is on whether buy-sell agreement is a testamentary device).

In the almost fifty years since § 20.2031-2(h) was issued, neither its construction

nor its validity has ever been adversely challenged in the courts. Rather, private

parties, the I.R.S., and the courts consistently cite to and rely on the regulation

without question. See, e.g., Cartwright, 411 U.S. at 554; Estate of Gloeckner,

152 F.3d at 212-13; Dorn, 828 F.2d at 178; St. Louis County Bank, 674 F.2d at

1210; Slocum, 256 F. Supp. at 754; Estate of Blount v. C.I.R., 87 T.C.M. (CCH)

1303, 1309 (2004); Cameron W. Bommer Revocable Trust, T.C.M. (RIA) 97380 at

2423; Lauder II, T.C.M. (RIA) 92736 at 3729-30; Estate of Hall v. C.I.R., 92 T.C.

312, 334 (1989); Cobb v. C.I.R., T.C.M. (P-H) 85208, 906, 915 (1985); Estate of

Bischoff, 69 T.C. at 39.

With the rise of § 20.2031-2(h) and the law’s evolution in this area,

Brodrick’s influence on the question of whether price terms in a buy-sell

-43-
agreement control for estate and gift tax purposes has waned. Brodrick was once

regularly cited in support of the proposition that when all parties to a buy-sell

agreement were equally bound at life and death, the agreement controlled for

estate tax purposes. See, e.g., Estate of Seltzer v. C.I.R., 50 T.C.M. (CCH) 1250,

1253 (1985) (construing a 1950 agreement and holding “an enforceable

agreement, which fixes the price to be paid, may limit the value of property for

estate tax purposes”); Estate of Reynolds v. C.I.R., 55 T.C. 172, 189 n. 9 (1970)

(construing restrictive price terms in 1946 agreement and holding “where the

estate of a deceased partner was obligated to offer the decedent’s interest to the

surviving partners and where the surviving partners were obligated to buy that

interest at a predetermined price based solely on book value, the predetermined

price was held to be the proper one for estate valuation purposes”); Fiorito, 33

T.C. at 444 (applying buy-sell restrictions in 1945 agreement and holding: “It now

seems well established that the value of property may be limited for estate tax

purposes by an enforceable agreement which fixes the price to be paid therefor,

and where the seller if he desires to sell during his lifetime can receive only the

price fixed by the contract and at his death his estate can receive only the price

theretofore agreed upon.”). However, as the law has shifted to require additional

scrutiny to whether the agreement fulfilled a bona fide business purpose and was

also not some form of testamentary substitute, see Dorn, 828 F.2d at 182; St.

-44-
Louis County Bank, 674 F.2d at 1210; Estate of Godley, 80 T.C.M. (CCH) at 164;

Cameron W. Bommer Revocable Trust, T.C.M. (RIA) 97380 at 2423; Lauder II,

T.C.M. (RIA) 92736 at 3730-31, citations to Brodrick have relegated it to

supporting the general approach of regulation § 20.2031-2(h), or as a specific

example of how an agreement can satisfy the second prong of the price term

control test by being enforceable at both life and death. See Slocum, 256 F. Supp

at 754 (Brodrick supports position that agreement be binding at life and death);

Lauder II, T.C.M. (RIA) 92736 at 3729-30 (referencing Brodrick as supporting

general proposition that property values may be limited for tax purposes by terms

in buy-sell agreement, but more specifically relying on Brodrick for proposition

that agreement must bind all parties at life and death); Estate of Lauder v. C.I.R.,

T.C.M. (P-H) 90530, 2595, 2600 (1990) (Lauder I) (noting evolution of law and

citing Brodrick for proposition that agreement must be binding at life and death);

Estate of Wildman v. C.I.R., T.C.M. (P-H) 89667, 3449, 3453 (1989) (citing

Brodrick as one of many cases embodying portions of price term control test);

Cobb, T.C.M. (P-H) 85208 at 915 (noting evolution of law and citing Brodrick for

proposition that agreement must be binding at life and death); Estate of Bischoff,

69 T.C. at 41 (citing Brodrick as case requiring agreement to be binding during

life and at death); Estate of Caplan v. C.I.R., 33 T.C.M. (CCH) 189, 192 (1974)

(referencing Brodrick for proposition that agreement must be binding at life and

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death).

Treasury Regulation § 20.2031-2(h) also supports this shift. After making

explicit that “[l]ittle weight will be accorded a price contained in an option or

contract under which the decedent is free to dispose of the underlying securities at

any price he chooses during his lifetime,” the regulation then provides that

“[e]ven if the decedent is not free to dispose of the underlying securities at other

than the option or contract price,” the price will be disregarded if the agreement

does not represent a bona fide business agreement or is a testamentary substitute.

Treas. Reg. § 20.2031-2(h) (emphasis added). Thus, although all parties may be

equally bound to an agreement furthering legitimate business purposes, it must

still be shown that the agreement is not serving as a testamentary device.

Finally, it is worth observing that when Congress passed § 2703 of the tax

code, see Pub. L. 101-508, Nov. 5, 1990, 104 Stat. 1388-498, it essentially

codified the rules laid out in § 20.2031-2(h). See I.R.C. § 2703; see also Estate of

Gloeckner, 152 F.3d at 214 (“the 1990 Act for all intents and purposes codifie[d

the] pre-existing regulatory language” of § 20.2031-2(h)). As we discussed

earlier in this opinion, see supra note 8, § 2703 of the tax code applies to buy-sell

agreements entered into after October 8, 1990 and dictates that an option

provision in a buy-sell agreement can control where

[i]t is a bona fide business arrangement . . . . It is not a device to
transfer such property to members of the decedent’s family for less

-46-
 than full and adequate consideration in money or money’s worth . . . .
[And], [i]ts terms are comparable to similar arrangements entered
into by persons in an arms’ length transaction.

I.R.C. § 2703(b)(1)-(3). To a great extent, this language mirrors the language

found in Treasury Regulation § 20.2031-2(h), which indicates that a price term

will not control unless

the agreement represents a bona fide business arrangement and not a
device to pass the decedent’s shares to the natural objects of his
bounty for less than an adequate and full consideration in money or
money’s worth.

Treas. Reg. § 20.2031-2(h). The regulation also currently directs readers to refer

to tax code § 2703 for agreements “entered into (or substantially modified after)

October 8, 1990.” Id. For buy-sell agreements entered into or substantially

modified during the last fourteen years, there is thus no question that courts must

pay explicit attention to whether the agreement was a testamentary substitute

before allowing the agreement’s terms to control for estate tax purposes. The

striking similarity between the language appearing in § 2703 of the tax code and

that found in regulation § 20.2031-2(h) contributes to our ultimate conclusion that

the True buy-sell agreements should not be examined solely in accordance with

Brodrick’s more limited and narrow approach.

In light of the foregoing analysis, Brodrick is overruled to the extent it

holds that the terms in a buy-sell agreement are wholly controlling for estate tax

purposes when the agreement’s restrictive terms bind all parties equally at life

-47-
and death. For us to constrain our analysis on this question to the approach

employed in Brodrick would run counter to the last fifty years of development in

this area of the law. We are unwilling to take such a limited approach. Instead,

as embodied in the analysis employed in this opinion, as well as marshaled by the

tax court here and other contemporary courts addressing this question, the

controlling force of a buy-sell agreement on estate tax values should be

determined only after a full and careful examination of all the factors laid out in

the price term control test. Estate of True, 82 T.C.M. (CCH) at 47-53; Estate of

Gloeckner, 152 F.3d at 212-14; St. Louis County Bank, 674 F.2d at 1210; Estate

of Godley, 80 T.C.M. (CCH) at 164; Lauder II, T.C.M. (RIA) 92736 at 3730-31;

I.R.C. § 2703; Treas. Reg. 20.2031-2(h).

2. 1971 and 1973 gift tax cases

Taxpayers also contend the 1971 and 1973 gift tax cases collaterally estop

the I.R.S. from arguing that the price terms in the buy-sell agreements did not

represent the fair market value of the transferred interests at the time the parties

entered into the agreements, and support their assertions that the price terms

represent adequate consideration for estate tax purposes. Taxpayers’ argument

has an initial appeal because the gift tax cases did determine that the price terms

in two of the buy-sell agreements represented the fair market value of the

interests for gift tax purposes. Nevertheless, taxpayers draw too broad a

-48-
comparison between the gift tax cases and the current controversy.

In our circuit, a party can rely on the doctrine of collateral estoppel where

(1) the issue previously decided is identical with the one presented in
the action in question, (2) the prior action has been finally
adjudicated on the merits, (3) the party against whom the doctrine is
invoked was a party, or in privity with a party, to the prior
adjudication, and (4) the party against whom the doctrine is raised
had a full and fair opportunity to litigate the issue in the prior action.

Dodge v. Cotter Corp., 203 F.3d 1190, 1198 (10th Cir. 2000). See also Murdock

v. Ute Indian Tribe of Uintah & Ouray Reservation, 975 F.2d 683, 687 (10th Cir.

1992). The Supreme Court has noted that “once an issue is actually and

necessarily determined by a court of competent jurisdiction, that determination is

conclusive in subsequent suits based on a different cause of action involving a

party to the prior litigation.” Montana v. United States, 440 U.S. 147, 153

(1979). See also C.I.R. v. Sunnen, 333 U.S. 591, 599-600 (1948) (use of

collateral estoppel “must be confined to situations where the matter raised in the

second suit is identical in all respects with that decided in the first proceeding and

where the controlling facts and applicable legal rules remain unchanged”). We

review the 1971 and 1973 gift tax cases with these precepts in mind.

As noted earlier in this opinion, Dave and Jean True transferred interests in

Belle Fourche Pipeline and True Oil to their children and asserted that the book

value of those interests represented the companies’ fair market values. The I.R.S.

disagreed and issued gift tax deficiencies against the Trues. In two different

-49-
actions, the District Court of Wyoming held the price terms listed in the buy-sell

agreements for the transferred interests represented the fair market value for those

companies and the I.R.S. erred in issuing gift tax deficiencies against the

taxpayers. As discussed in more detail earlier in the opinion, see supra note 3,

the district court specifically took into account the restrictive provisions in the

buy-sell agreements when determining that the agreements’ price terms

represented the fair market value of the transferred interests. See True, 547 F.

Supp. at 203; True, No. 679-131K at 3, 7.

We acknowledge that for the purposes of collateral estoppel, the second and

third factors of the Dodge test are satisfied. The prior actions were finally

adjudicated on their merits, and the party against whom the doctrine of collateral

estoppel is being invoked, the I.R.S., was a party. We are not convinced,

however, that the issues in the 1971 and 1973 gift tax cases are identical to those

raised here, or that the I.R.S. had a full and fair opportunity to litigate the

relevant issues in this case in the prior action. See Dodge, 203 F.3d at 1198.

First, the district court cases only examined whether the price terms for the

interests in True Oil and Belle Fourche Pipeline represented the fair market value

for those transactions, but did not address in any manner the value of the

remaining interests at issue in this case. Thus, neither the Trues nor the I.R.S.

had the opportunity to litigate whether the buy-sell agreements for Eighty-Eight

-50-
Oil, Black Hills Trucking, the True Ranches, or White Stallion Ranch represented

adequate consideration at the time the agreements were executed. Second, and

most importantly, the gift tax cases did not address the question the tax court had

to examine here: whether the buy-sell agreements for the True companies served

as testamentary substitutes.

Although the district court in the 1971 and 1973 gift tax cases determined

that the price terms in the True Oil and Belle Fourche Pipeline buy-sell

agreements represented the fair market value of the transferred interests for gift

tax purposes, it did so by taking into account the restrictive terms in the buy-sell

agreements. As we develop further in the following section, for the tax court to

follow this course would run counter to the task presented to it in the current

controversy. Here, any question of adequate consideration must be asked in the

specific context of determining whether the True buy-sell agreements are

testamentary substitutes. For the tax court to grant automatic credence to the buy-

sell agreements’ restrictive terms would be to assume, at the start of its inquiry, a

negative answer to the core issue the court had to address: do the buy-sell

restrictions serve testamentary purposes?

Moreover, because the district court in the gift tax cases was not

considering testamentary intent, it did not evaluate many of the factors that

indicate such an intent, as we discussed supra at 25-29. There was no

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consideration of the fact that Dave True did not seek independent appraisals at the

time he set the formula prices, id. at 26, nor was there any negotiation between

the children and their father as to the price terms, id. at 29. It is also significant

that the buy-sell agreements did not contain a mechanism to periodically

reevaluate the price terms over time, id. at 28. These are all factors relevant to

whether the formula was created as a testamentary substitute intended to pass on

Dave True’s interest for less than full and adequate consideration, an issue which

it was unnecessary for the district court to consider in determining fair market

value for gift tax purposes.

Consequently, when the district court made its determinations in the 1971

and 1973 gift tax cases, it was not deciding an issue “identical with the one

presented in the action in question,” Dodge, 203 F.3d at 1198, and neither the

I.R.S. nor the taxpayers had a “full and fair opportunity to litigate the issue in the

prior action.” Id. Because the 1971 and 1973 gift tax cases did not purport to

decide whether the buy-sell agreements at issue were testamentary substitutes, we

reject taxpayers’ argument that those cases have preclusive effect on whether the

buy-sell agreements were based on adequate consideration for estate tax purposes.

3. Tax court’s adequacy of consideration determination

Having disposed of taxpayers’ primary arguments regarding adequacy of

consideration, we must now determine if the tax court clearly erred in holding

-52-
taxpayers failed to satisfy their burden of showing the agreements represented

adequate consideration. After reviewing the record, we conclude the answer to

this question is no.

First, taxpayers challenge the tax court’s statement that only the

unrestricted fair market value of the interests should be considered in evaluating

whether the price terms in the buy-sell agreements represented adequate

consideration when the parties entered into them. In this context, we must

remember that adequacy of consideration is part of a larger determination of

whether the buy-sell agreements at issue were testamentary substitutes. Lauder II

appears to be the only case to devote any discussion to whether, when there is a

strong inference that a buy-sell agreement serves a testamentary purpose,

restrictions in the agreement should be given controlling weight to determine if

the agreement does in fact represent the transfer of interests for adequate

consideration.

As noted earlier, the tax court in Lauder II defined adequate consideration

as “a price that is not lower than that which would be agreed upon by persons

with adverse interests dealing at arm’s length. Under this standard, the formula

price must bear a reasonable relationship to the unrestricted fair market value of

the stock in question.” Lauder II, T.C.M. (RIA) 92736 at 3733-34 (emphasis

added) (citation omitted). The court in Lauder II then assessed whether the price

-53-
in the agreements equaled adequate consideration at the time the agreements were

executed. After examining a variety of experts’ reports, the court included a

discount for lack of liquidity as part of its valuation of the stock at issue. Id. at

3734-35. In doing so, the court did not specifically attribute the discount to any

of the terms in the buy-sell agreements.

The approach taken by the court in Lauder II, and adopted by the tax court

in this case, makes sense when we recall that the Lauder II court’s analysis began

with the goal of determining whether the buy-sell agreements served as

testamentary substitutes. The question of adequate consideration arose only after

the court drew a testamentary inference from the restrictions in the buy-sell

agreements and the parties’ conduct with respect to them. Cameron W. Bommer

Revocable Trust, T.C.M. (RIA) 97380 at 2427; Lauder II T.C.M. (RIA) 92736 at

3733-34. Here, a number of inferences support the finding that the True company

buy-sell agreements served to fulfill Dave True’s testamentary plans. To allow

the non-price terms in the agreements to automatically depress the value of the

transferred interests for the purpose of determining whether they were transferred

for adequate consideration would re-validate the controlling force of the

restrictions from which a testamentary inference has already been drawn.

Proceeding in such a manner would presume the viability of the agreements

whose very validity is at issue for valuation purposes. Therefore, we are not

-54-
persuaded the tax court erred in following the approach laid out in Lauder II.

In similar fashion to the court in Lauder II, and in the course of examining

whether the price terms in the buy-sell agreements for True Oil and Belle Fourche

pipeline represented adequate consideration when the parties entered into the

agreements, the tax court here applied a lack-of-marketability discount. Relying

in part on the calculations provided in the SRC reports, including the report’s

lack-of-marketability discounts, the tax court determined that the fair market

value for the Belle Fourche Pipeline interests was $80.40 per share, while the tax

book value was $38.69 per share. For True Oil, the court determined the fair

market value of an eight-percent partnership interest was $353,100, while the tax

book value was $54,653. Estate of True, 82 T.C.M. (CCH) at 67. The court

therefore concluded the tax book value did not equal the fair market value for the

transferred interests in True Oil or Belle Fourche Pipeline. We agree and reject

taxpayers’ argument that the tax court’s adequacy of consideration determination

for True Oil and Belle Fourche Pipeline was faulty. Through its use of a lack-of-

marketability discount, the tax court appropriately gave weight to taxpayers’

intent to keep these companies within the family.

Aside from the SRC reports for True Oil and Belle Fourche Pipeline,

taxpayers did not present to the tax court any evidence regarding the four

remaining buy-sell agreements to prove they represented adequate consideration

-55-
at the time the True family members entered into them. Nor did they present any

other substantive arguments for why the tax book values for the transferred

interests constituted adequate consideration or represented the price at which

willing buyers and willing sellers operating at arm’s length would agree.

There are certainly cases in which courts have found that book value

represented the fair market value or adequate consideration for transferred

interests. See, e.g., Brodrick, 224 F.2d at 896; Estate of Carpenter v. C.I.R.,

T.C.M. (RIA) 92653, 3332-33 (1992); Estate of Hall, 92 T.C. at 335-38; Estate of

Bischoff, 69 T.C. at 41 n.9. These cases are distinguishable from the present

controversy, however, as the majority of those courts rejected any potential

inferences that the agreements served as testamentary substitutes. See Estate of

Carpenter, T.C.M. (RIA) 92653, 3333 (lack of familial relation between parties to

agreement); Estate of Hall, 92 T.C. at 334-35 (court determined I.R.S.’s argument

regarding testamentary intent not supported by evidence); Estate of Bischoff, 69

T.C. at 41-42 (agreement not testamentary device because it was equally binding

on all partners and not all partners were related). Likewise, as we discussed

above in examining Brodrick, see supra section II.B.2.a, our conclusion in that

case was predicated in large measure on a far more limited analysis than the tax

court employed here.

Other courts have expressed doubt that book valuation can adequately

-56-
represent the fair market value of a transferred interest. See, e.g., Ketler v. C.I.R.,

196 F.2d 822, 827 (7th Cir. 1952); Biaggi v. C.I.R., T.C.M. (RIA) 2000-048, 1490

(2000); Estate of Ford v. C.I.R., T.C.M. (RIA) 93580, 3032-33 (1993). Taxpayers

conceded as much at trial. Mr. Harris acknowledged that if one were valuing the

True companies as stand-alone operations, “it would be very hard to justify book

value or income tax basis as fair market value . . . . If you were looking at a

liquidating situation, then it would not have been a true value . . . .” Rec., vol. II

at 233-34. He justified use of tax book value in this case because the Trues

viewed their companies as collective, ongoing concerns. Id.

Morever, as discussed earlier in this opinion, the deductions and rates of

depreciation allowed for the oil, gas, and ranching industries pursuant to tax book

accounting greatly reduced the book value of many of the True companies. For

example, the book values of Belle Fourche Pipeline and Black Hills Trucking

depreciated at a faster rate under tax book accounting than they would have if the

companies had followed GAAP. Id., vol. II at 240-41. True Oil’s deductions and

depletions of intangible drilling expenses also allowed for a lower tax book

figure, sometimes even resulting in a negative valuation. Id. at 236-40; id., 256.

Likewise, True Oil’s accounting methods ignored the “current ‘discovery value’

of proven reserves,” Estate of True, 82 T.C.M. (CCH) at 71, which if recognized

would have increased the stated value of the company and would likely have

-57-
affected the price a well-informed buyer would be willing to pay. Finally, tax

book accounting and the associated tax incentives granted to the ranching and

farming industries also allowed the taxpayers to further reduce the tax book value

of their holdings. Id. at 71. We have difficulty believing that a businessman as

successful and sophisticated as Dave True, if engaged in arm’s length dealings

with an unrelated party, would have sold True Oil at its low and sometimes

negative tax book value even with all the restrictions included.

We do not contest that the use of tax book accounting methods may have

been a legitimate way to account for the regular and ongoing businesses of the

True companies, as well as providing a convenient and easy way to compute the

value of the companies for the purposes of the buy-sell agreements. But

taxpayers do not present any substantial evidence to prove that such a valuation

method would be one to which parties dealing at arm’s length would agree. In

fact, the record indicates that taxpayers did not always structure their buy-sell

agreements with outside parties in the same manner as they did for intra-family

agreements. For instance, Dave and Jean True first owned Belle Fourche Pipeline

with outside parties, and the company kept its books according to GAAP. Rec.,

vol. II at 78-79, 200-01. Dave and Jean eventually acquired full ownership of

Belle Fourche, buying its shares from the other owners at the GAAP calculated

book price or higher. Id., vol. II at 200-01; id., ex. 235-P, 4-5.

-58-
 The White Stallion Ranch buy-sell agreement, which included members of

Dave True’s extended family, also departed from the standard pricing and limiting

provisions existing in the other buy-sell agreements. 18 Under the agreement, the

two families were separated into two stockholder groups and the agreement

allowed one group to accept a bona fide sale offer from an outside party to

acquire its entire interest in the ranch if the other stockholder group failed to

exercise its right of first refusal. Id., ex. 134-J at 4; rec., vol. III at 400. Finally,

Toolpushers Supply Company, another True family entity, specifically exempted

shares held in the company by the True Companies Employee’s Profit Sharing

Trust from the restrictive terms of its buy-sell agreement. Id., ex. 117-J at 7.

This provision allowed the trust to sell its shares back to the company for more

than book value.

The facts surrounding the step-transactions case, see True, 190 F.3d 1165,

while occurring long after the parties entered into the buy-sell agreements, further

support the argument that taxpayers’ use of tax book value did not represent the

fair market value of their properties, and would not have represented the price at

which taxpayers, as willing sellers operating at arm’s length, would have sold

their interests to willing buyers. In the step-transactions case, taxpayers’ use of

18
The outside parties to the agreement were Dave True’s brother, Allen, and
Allen’s family.

-59-
“a series of unnecessary exchanges and transfers,” id. at 1179, resulted in the

True Ranches’ acquired property being valued at a zero tax basis, notwithstanding

the fact that the aggregate purchase price for the land was over $6.8 million.

True v. United States, 1997 WL 1524779 at *4 (D. Wyo. Nov. 5, 1997). We

rejected the validity of these transactions and treated the acquisition of the land as

if it had been directly purchased by the True Ranches. True, 190 F.3d at 1179.

We agree with the tax court’s statement that the step transactions’ effect “was to

minimize or eliminate tax book value of certain assets so that Dave True could

transfer interests in the affected True companies for less than adequate and full

consideration.” Estate of True, 82 T.C.M. (CCH) at 69.

Having reviewed the tax court’s findings regarding testamentary inferences

and adequacy of consideration, we are not convinced the court erred in

determining that the True company buy-sell agreements served a testamentary

purpose: to pass on Dave True’s interests in the companies to his family for less

than adequate consideration. The tax court did not err in determining the price

terms in the buy-sell agreements were not controlling for estate tax purposes.

III

The second and allied issue we address is whether, as the Trues contend,

the price terms in the buy-sell agreements control as a matter of law for the

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purposes of valuing the 1993 and 1994 lifetime transfers made by Dave and Jean

True. We review the tax court’s conclusions of law on this question under the de

novo standard, and any factual determinations for clear error. IHC Health Plans

Inc., 325 F.3d at 1193. So doing, we conclude the tax court correctly held the

price terms in the buy-sell agreements do not control for gift tax purposes.

A federal gift tax is imposed “on the transfer of property by gift during [a]

calendar year by any individual . . . .” I.R.C. § 2501(a)(1).

Where property is transferred for less than adequate and full
consideration in money or money’s worth, then the amount by which
the value of the property exceeded the value of the consideration
shall be deemed a gift, and shall be included in computing the
amount of gifts made during the calendar year.

I.R.C. § 2512(b). The gift tax does not apply, however, to “a sale, exchange, or

other transfer of property made in the ordinary course of business . . . .” Treas.

Reg. § 25.2512-8. In this context, we agree with the tax court’s conclusion that

the 1993 and 1994 lifetime transfers do not satisfy the definition of a transfer

made in the ordinary course of business. Estate of True, 82 T.C.M. (CCH) at 73.

In elaborating on the scope of what constitutes a transaction made in the

ordinary course of business, the Supreme Court has stated that

[t]o reinforce the evident desire of Congress to hit all the protean
arrangements which the wit of man can devise that are not business
transactions within the meaning of ordinary speech, the Treasury
Regulations make clear that no genuine business transaction comes
within the purport of the gift tax by excluding a sale, exchange, or
other transfer of property made in the ordinary course of business (a

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 transaction which is bona fide, at arm’s length, and free from any
donative intent). Thus on finding that a transfer in circumstances of
a particular case is not made in the ordinary course of business, the
transfer becomes subject to the gift tax to the extent that it is not
made for an adequate and full consideration in money or money’s
worth.

C.I.R. v. Wemyss, 324 U.S. 303, 306-07 (1945) (emphasis added) (quotations and

citations omitted). “Simply put, any proof of donative intent will defeat the gift

tax exclusion for ordinary business transactions.” Heyen v. United States, 731 F.

Supp. 1488, 1490 (D. Kan. 1990). See also Cullison v. C.I.R., T.C.M. (RIA)

98216, 1201, 1210 (1998) (transaction not within ordinary course of business

where no evidence existed indicating arm’s length bargaining between

grandmother and grandchildren, agreement was structured by grandmother’s

accountant and attorney, and agreement was created as a substitute for

testamentary disposition of land); Harwood v. C.I.R., 82 T.C. 239, 258 (1984)

(transfer by mother to sons of interests in family partnership not in ordinary

course of business where agreement was structured totally by accountant and

there was no evidence of arm’s length bargaining).

Our discussion in the previous section largely establishes that the

transactions at issue here were neither conducted at arm’s length nor without

donative or testamentary intent. We noted the lack of arm’s length negotiations

between the True family members when entering into the various buy-sell

agreements, as well as the inferences properly drawn from those agreements: they

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served, in part, to fulfill Dave and Jean True’s overall testamentary plan to pass

the family business on to their sons. The tax court did not clearly err in finding

that these transactions could not aptly be construed as occurring within the

ordinary course of business.

Nor does taxpayers’ argument that the estate tax and gift tax are to be

construed in pari materia help them. See generally, Harris v. C.I.R., 340 U.S.

106, 107 (1950) (“The federal estate and the federal gift tax . . . are construed in

pari materia, since the purpose of the gift tax is to complement the estate tax by

preventing tax-free depletion of the transferor’s estate during his lifetime.”);

United States v. Botefuhr, 309 F.3d 1263, 1276 n.9 (10th Cir. 2002) (same) (citing

Estate of Sanford v. C.I.R., 308 U.S. 39, 44 (1939)). Reflecting the in pari

materia principle, courts valuing transferred property for gift tax purposes apply

the same hypothetical willing-buyer and willing-seller standard employed in the

estate tax arena. See Estate of Reynolds, 55 T.C. at 188-89. Identical factors are

also used to determine the fair market value for a closely held business. See

Ward v. C.I.R., 87 T.C. 78, 101 (1986). Finally, a familiar echo arises from our

previous discussion: “[t]ransactions within a family group are subject to special

scrutiny, and the presumption is that a transfer between family members is a gift.”

Harwood, 82 T.C. at 258 (citing Reynolds, 55 T.C. at 201). In light of our

conclusion that the buy-sell agreements cannot control for estate tax purposes, see

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supra § II, taxpayers’ reference to the in pari materia rule undermines their cause

rather than advancing it.

Moreover, numerous courts have held that restrictive buy-sell agreements,

like the ones in this case, should not necessarily control for later gift tax valuation

purposes. See, e.g., Spitzer v. C.I.R., 153 F.2d 967, 971 (8th Cir. 1946); Krauss v.

United States, 140 F.2d 510, 511 (5th Cir. 1944); C.I.R. v. McCann, 146 F.2d 385,

386 (2d Cir. 1944); Ward, 87 T.C. at 105; Harwood, 82 T.C. at 260. See also

Rev. Rul. 59-60, 1959-1 C.B. 237, § 8. The common theme in these cases is

clear: where the terms of a buy-sell agreement detail the price at which an interest

is to be sold but that interest is instead given as a gift rather than transferred as a

result of an involuntary “critical event” triggering the terms of the agreement,

Spitzer, 153 F.2d at 970-71, the agreement does not control for gift tax valuation

purposes. At most, the agreement terms may serve as factors to be considered by

the court in making its valuation determination. Spitzer, 153 F.2d at 971; Krauss,

140 F.2d at 511; McCann, 146 F.2d at 386; Ward, 87 T.C. at 105; Harwood, 82

T.C. at 260.

Here, the tax court concluded that Dave and Jean True’s 1993 and 1994

transfers of company interests did not constitute the requisite “critical events”

triggering the terms of the buy-sell agreements because the sales of the interests

were the result of Dave and Jean True’s individual and voluntary choices, rather

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than being predicated on the occurrence of some involuntary event. Estate of

True, 82 T.C.M, (CCH) at 72-73. See also Aple. br. at 58-60. We need not

determine whether the tax court’s conclusion on this specific question was

accurate because we agree with the court’s alternative conclusion that in any

event, the agreements did not satisfy the price term control test for the purposes

of estate tax valuations. Therefore, taxpayers’ in pari materia argument for why

the buy-sell agreements should control for gift tax purposes stumbles without

hope of recovery. Coupled with its findings that the 1993 and 1994 lifetime

transfers did not occur within the ordinary course of business, the tax court did

not clearly err in concluding the price terms in the buy-sell agreements do not

control for gift tax purposes.

IV

Having determined that the tax court did not err in finding that the price

terms in the True company buy-sell agreements do not control for estate tax or

gift tax valuation purposes, we must now examine whether the tax court properly

valued these different interests. Taxpayers raise only one objection to the tax

court’s extensive valuation discussion, arguing the court erred by ignoring the

buy-sell agreements’ non-price terms in its valuation analysis of the True

companies. Specifically, taxpayers contend the tax court wrongly failed to

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consider the following: the requirement of active participation in the business; the

fact that the sale of company interests was limited to other company owners; the

fact that upon withdrawal of an owner, the others were required to purchase their

proportional shares of the departing owner’s interests; and the fact that under

state partnership law the partnership could terminate when a holder of fifty

percent or more of the partnership interests sold his interests within one year.

Aplt. br. at 51. “We review de novo a valuation question turning on a pure

question of law,” Kerr v. C.I.R., 292 F.3d 490, 493 (5th Cir. 2002) (citing Adams

v. United States, 218 F.3d 383, 386 (5th Cir. 2000)), and hold the tax court did

not err in the process by which it valued the True Companies.

After determining the price terms in the True company buy-sell agreements

did not control the values of the True companies, the tax court also held the

“restrictive provisions of the buy-sell agreements (including but not limited to the

formula price) are to be disregarded” for estate and gift tax valuation purposes.

Estate of True, 82 T.C.M. (CCH) at 74. The court reached this conclusion by

relying in large measure on an earlier decision of the tax court in Estate of Lauder

v. C.I.R., T.C.M. (RIA) 94527, 2726 (1994) (Lauder III), and on Revenue Ruling

59-60, 1959-1 C.B. 237, 243-44.

In Lauder III, the tax court was presented with the task of valuing stocks

which had been subject to restrictive buy-sell agreements. In Lauder II, the tax

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court had previously determined that the buy-sell agreements were testamentary

substitutes intended to pass on the decedent’s shares to the natural objects of his

bounty for less than full and adequate consideration. Lauder II, T.C.M. (RIA)

92736 at 3735. In assessing whether the formula prices in the agreements

represented adequate consideration, the court considered the unrestricted fair

market value of the shares with a discount applied for lack of liquidity. Id. at

3734. The court noted that while it did not deem the buy-sell “agreements invalid

per se,” they nonetheless had no viability for estate tax valuation purposes and

were “an artificial device to minimize such taxes.” Id. at 3735.

In Lauder III, the taxpayers reasserted that the buy-sell agreements should

still be given some controlling force over the tax court’s valuation of the stock.

The court rejected this position, stating

it would be anomalous if particular portions of the shareholder
agreement are now deemed relevant to the question of the fair market
value of the decedent’s stock. . . . In our prior opinion, we resolved
that the formula price was intended to serve a testamentary purpose,
and thus would not be respected for Federal estate tax purposes. It is
worth noting at this point that we have not had the opportunity to
address the validity of each and every aspect of the shareholder
agreement. Nonetheless, we repeat the observation made earlier in
these proceedings that there is no evidence in the record that the
Lauders engaged in arm’s-length negotiations with respect to any
aspect of the shareholder agreement. Absent proof on the point, we
presume that all aspects of the agreement, particularly those tending
to depress the value of the stock, are tainted with the same
testamentary objectives rendering the formula price invalid.
In light of our holding in [Lauder II], we hold that the specific
provisions of the shareholder agreement are not relevant to the

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 question of the fair market value of the decedent’s stock on the
valuation date. Simply put, the willing buyer/willing seller analysis
that we undertake in this case would be distorted if elements of such
testamentary origin are injected into the determination.

Lauder III, T.C.M. (RIA) 94527 at 2741. But the court did not completely

disregard the buy-sell agreement in its valuation analysis. Instead, it noted

generally that “the shareholder agreement affirmatively demonstrates the Lauders’

commitment to maintain family control over [the company.] This element is

properly accounted for . . . as a component of the discount applied to reflect the

lack of a public market for [the company’s] stock.” Id. at 2742. Accordingly, the

tax court applied a discount for the stock’s lack of liquidity or marketability. Id.

at 2742-43.

Revenue Ruling 59-60, 1959-1 C.B. 237, instructs that a buy-sell agreement

may serve as a factor in determining the fair market value of transferred interests

in closely held corporations for gift tax and estate tax purposes. After discussing

the factors to be considered when determining what impact an agreement might

have for valuation purposes, however, the ruling notes that

[i]t is always necessary to consider the relationship of the parties, the
relative number of shares held by the decedent, and other material
facts, to determine whether the agreement represents a bona fide
business arrangement or is a device to pass the decedent’s shares to
the natural objects of his bounty for less than an adequate and full
consideration in money or money’s worth.

Id. at 243-44. Reading Revenue Ruling 59-60 in concert with the tax court’s

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analysis in Lauder III, the tax court in the instant case held that because of the

testamentary inferences drawn from the True company buy-sell agreements, the

other terms in the agreements should be disregarded for gift and estate tax

valuation purposes. Estate of True, 82 T.C.M. (CCH) at 74. See also Estate of

Blount, 87 T.C.M. (CCH) at 1319 (where agreement fails to satisfy price term

control test, its other terms are to be disregarded when determining fair market

value of shares subject to the agreement).

In challenging the tax court’s decision to ignore the non-price terms in the

buy-sell agreements, taxpayers contend the case law overwhelmingly supports a

contrary position, arguing “that the restrictions in a buy-sell agreement, other than

price, must be taken into account to determine the value of interests for estate and

gift tax purposes.” Aplt. br. at 50. See, e.g., Spitzer, 153 F.2d at 972 (price term

does not control for gift tax purposes but tax court properly took into account

other restrictive terms to value transferred interests); McCann, 146 F.2d at 386

(where gift tax not controlled by price term in agreement, other restrictive factors

should nonetheless have been considered); Mathews v. United States, 226 F.

Supp. 1003, 1008-09 (E.D.N.Y. 1964) (even where price terms in agreement do

not control for calculating estate tax, other terms should be taken into account for

valuation purposes); Estate of Godley, 80 T.C.M. (CCH) at 171-72 (after rejecting

option price terms in agreement for estate tax purposes, court nonetheless applied

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marketability discount in light of right of first refusal term in agreement);

Baltimore Nat’l Bank v. United States, 136 F. Supp. 642, 655 (D. Md. 1955)

(restrictive agreement should be considered as relevant factor in valuation for

estate and gift tax); Brookshire v. C.I.R., 76 T.C.M. (CCH) 659, 661-62 (1998)

(formula price rejected for estate tax purposes, but restrictive agreement

nonetheless a factor warranting discount in value); Estate of Wildman, T.C.M. (P-

H) 89667 at 3453-54 (despite price terms not controlling, other restrictions in

agreement required value of interest to be discounted for calculation of estate

tax); Harwood, 82 T.C. at 263-64 (court took into account depressive effect of

agreement’s restrictive clauses on partnership value for gift tax purposes, even

where price terms in agreement disregarded); Reynolds, 55 T.C. at 190-91 (where

agreement price term does not control for gift tax purposes, restrictive provisions

may still serve as factors in valuation process).

Given the tax court’s strong language indicating it was disregarding the

restrictive provisions in the buy-sell agreements to determine the value of the

transferred interests, and in light of the cases cited above, one might be tempted

to agree with taxpayers’ assertions that the tax court erred in its valuation. The

case law does generally indicate that the restrictive impact of a buy-sell

agreement should be considered as a factor in valuing the interests for estate and

gift tax purposes even if its specific price terms are held not to be controlling.

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We agree that the existence of such a restrictive agreement, and the bona fide

business reasons supporting it, should be acknowledged when determining the fair

market value of an interest. A willing buyer and a willing seller with knowledge

of all the relevant facts surrounding the exchange would certainly take this

approach. Despite the tax court’s seemingly ardent language to the contrary,

however, we are not convinced the court ignored the restrictive nature of the True

company buy-sell agreements in the course of valuing the interests at issue here.

In similar fashion to the tax court in Lauder III, the tax court here did not

completely fail to consider the existence of the True companies’ buy-sell

agreements. Instead, the court acknowledged the agreements and recognized “that

their existence demonstrates the True family’s commitment to maintain family

control over the True companies.” Estate of True, 82 T.C.M. (CCH) at 89.

Likewise, for those True partnerships whose agreements incorporated state

partnership law, the tax court did “not ignore State law transfer restrictions.” Id.

Instead, the court noted that state partnership law imposed a variety of

qualifications on an individual’s ownership of interests in one of the True

partnerships, which could very well depress the value of that partnership interest.

Id. at 89-90. Some of these state law limitations included the fact that a person

only becomes a partner by consent of all the other partners; a partner’s

transferrable interest is limited to his interests in distributions; the transferee of

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an interest, unless that individual is deemed a partner, is not entitled to participate

in management decisions of the partnership or inspect its books and records; a

transferee of partnership interests is merely entitled to receive the distributions to

which the transferor would be entitled, and upon dissolution of the partnership,

the amount to which the transferor would be entitled pursuant to the partnership

agreement; and the partnership is not terminated unless holders of fifty percent or

more of the total partnership interests sell such interests in one year. Id.; rec., ex.

241-P at 8-11, ex. 242-P at 9-11.

In valuing the different True companies, the tax court applied marketability

discounts to all the transferred interests by taking into account both the impact of

state law partnership restrictions on the partnership interests and the restricted

market which existed for the companies due to the True’s intent to keep the

business under family control and management. See Estate of True, 82 T.C.M.

(CCH) at 90 (applying thirty percent marketability discount to interests in True

Oil, by taking into account that interests were less marketable than actively traded

interests, and that interests were subject to state law transfer restrictions); id., 97-

98 (applying twenty-seven percent marketability discount to Jean True’s interests

in Belle Fourche Pipeline in part because of family’s commitment to keeping

corporation privately owned); id., 101-02 (applying ten percent marketability

discount to interests in Eighty-Eight Oil, recognizing family’s intent to keep

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partnership privately owned, as well as limits imposed on interests by virtue of

state partnership law); id., 107 (assigning thirty percent marketability discount to

Jean True’s interests in Black Hills Trucking, factoring in part, family’s desire to

keep company under True control); id., 111-12 (applying thirty percent

marketability discount to True Ranches, recognizing family interest in keeping

partnership private, as well as acknowledging impact state partnership laws might

have on interests); id., 116 (applying thirty percent marketability discount to

White Stallion Ranch in light of family intent to keep ranch privately owned).

By applying marketability discounts to the True companies, the tax court

explicitly acknowledged the True family’s bona fide business purpose of keeping

the companies under family control as embodied in the buy-sell agreements. Id.

at 73-74. The court also recognized the depressive effect state partnership law

had on the agreements, but it declined, based on its testamentary findings, to give

any specific weight to the other terms present in the agreements. Id. at 89.

Following the guidance of Lauder III, we are not persuaded the tax court’s

approach was inappropriate.

Where a court’s task is to determine the value of interests on which a

willing buyer and willing seller would agree, its analysis would be distorted by

giving explicit weight and recognition to buy-sell restrictions whose testamentary

purpose has been established. Lauder III, T.C.M. (RIA) 94527 at 2741.

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However, a willing buyer and a willing seller would certainly take into account

the limited market existing for the True companies by virtue of the family’s intent

to keep the entities under their control, as well as the impact state partnership law

would have on the value of the interests. The tax court’s application of a general

marketability discount adequately took such limitations into account. 19 “[A] fair

consideration of the court’s opinion shows that in appraising the value of the

[transferred interests] it gave to the provisions of the restrictive [agreements] the

weight to which it thought them entitled in light of all the evidence in the record.”

Spitzer, 153 F.2d at 972.

V

The final issue we must address is whether the tax court erred by imposing

penalties on taxpayers for their undervaluation of the True companies. Pursuant

to the tax code, the I.R.S. can assess a penalty against a taxpayer for the

19
In this context, we do not think the tax court’s valuation determinations
are contrary to the Wyoming district court’s reference in the 1971 and 1973 gift
tax cases to the buy-sell agreements’ restrictive provisions, or to our court’s
references to the agreement restrictions in Brodrick. See Brodrick, 224 F.2d at
896; True, 574 F. Supp. at 203; True, No. C79-131K at 4-5. As we have
discussed above, those cases can be partially distinguished from the present
controversy because the courts there did not engage, nor had any specific reason
to engage, in a substantial analysis of whether the agreements lacked persuasive
force by virtue of being testamentary substitutes. Moreover, the tax court here
implicitly recognized the limited market for the companies through its application
of marketability discounts.

-74-
underpayment of taxes. See I.R.C. § 6662(a). Here, the tax court determined that

taxpayers’ reported values for Belle Fourche Pipeline, Eighty-Eight Oil, and

Black Hills Trucking were all sufficiently undervalued to warrant the imposition

of penalties. Estate of True, 82 T.C.M. (CCH) at 129-30. 20

Taxpayers argue that they should be relieved from paying a penalty because

they showed reasonable cause and acted in good faith in valuing the companies at

issue. See I.R.C. § 6664(c) (outlining reasonable cause exception to tax

penalties). In particular, they contend their valuation was reasonable and done in

good faith based on their own knowledge of the terms and effect of the buy-sell

agreements, their reliance on advice received from Mr. Harris, and their review of

an outside appraisal of the True companies completed by the accounting firm

Arthur Andersen following Dave True’s death. Likewise, they assert that their

own knowledge and understanding of the 1971 and 1973 gift tax cases, coupled

with the lack of any I.R.S. challenge to Tamma’s sale of her interests in the True

companies, substantiated their reasonable and good faith belief that the price

terms in the buy-sell agreements were valid for estate and gift tax purposes. The

tax court rejected these arguments, ruling that notwithstanding their sophistication

20
The tax court found that the interests in Belle Fourche and Black Hills
Trucking were valued at less than twenty-five percent of their actual value on the
1994 gift tax return and on the estate tax return. The interest in Eighty-Eight Oil
was valued on the 1993 gift tax at more than twenty-five percent but less than
fifty percent of the correct value. Estate of True, 82 T.C.M. (CCH) at 129.

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in legal, valuation, and tax matters, taxpayers failed to properly rely on the Arthur

Andersen appraisal or obtain appraisals for Dave True’s 1993 lifetime transfers,

and failed to seek professional legal advice as to the effect of the 1971 and 1973

gift tax cases. Therefore, the court determined the reasonable cause exception did

not apply. Estate of True, 82 T.C.M. (CCH) at 130-31.

“Whether the elements that constitute ‘reasonable cause’ are present in a

given situation is a question of fact, but what elements must be present to

constitute ‘reasonable cause’ is a question of law.” United States v. Boyle, 469

U.S. 241, 249 n.8 (1985) (emphasis deleted). We review the tax court’s legal

determinations de novo and its factual findings for clear error. Jeppsen v. C.I.R.,

128 F.3d 1410, 1415 (10th Cir. 1997). Particularly relevant here, we will “review

the tax court’s factual determinations of whether a taxpayer qualifies for the

reasonable cause exception for clear error.” Sather v. C.I.R., 251 F.3d 1168, 1177

(8th Cir. 2001) (citing Srivastava v. C.I.R., 220 F.3d 353, 367 (5th Cir. 2000);

Parrish v. C.I.R., 168 F.3d 1098, 1102 (8th Cir. 1999)). 21 Upon review, we

21
In Mauerman v. C.I.R., 22 F.3d 1001 (10th Cir. 1994), we addressed
whether the tax court correctly upheld the I.R.S.’s decision to impose penalties
against a taxpayer for substantial understatement of tax. There we held that our
standard of review was for abuse of discretion. Mauerman, 22 F.3d at 1004.
However, in Mauerman the court was examining penalties imposed against
taxpayers under I.R.C. § 6661 (repealed 1989). Section 6661 detailed that “[t]he
Secretary may waive all or part of the addition to tax provided by [the substantial
understatement of liability] section on a showing by the taxpayer that there was
(continued...)

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 21
(...continued)
reasonable cause for the understatement (or part thereof) and that the taxpayer
acted in good faith.” I.R.C. § 6661(c) (repealed 1989) (emphasis added). Our
court, as well as others, interpreted this section to vest with the I.R.S. the
discretion as to whether to waive penalties against a taxpayer for the
understatement of tax liability. See Stanford v. C.I.R., 152 F.3d 450, 460 n.17
(5th Cir. 1998); Mauerman, 22 F.3d at 1004; Karr v. C.I.R., 924 F.2d 1018, 1025-
26 (11th Cir. 1991); Mailman v. C.I.R., 91 T.C. 1079, 1084-85 (1988).
In 1989, Congress repealed § 6661 and replaced it with § 6664, which is at
issue in this case. See Omnibus Budget Reconciliation Act of 1989, Pub. L. No.
101-239, Title VII, § 7721(a), 103 Stat. 2106, 2398 (1989). The relevant
language in § 6664 reads slightly differently from that of the repealed § 6661.
The new section states “[n]o penalty shall be imposed under this part with respect
to any portion of an underpayment if it is shown that there was a reasonable cause
for such portion and that the taxpayer acted in good faith with respect to such
portion.” I.R.C. § 6664(c)(1) (emphasis added). The legislative history
accompanying § 6664(c) notes that the revised reasonable cause exception was
designed, in part, to
provide greater scope for judicial review of I.R.S. determinations of
[underpayment] penalties. Under the waiver provision contained in
[§ 6661(c)], the Tax Court has held that it can overturn an I.R.S.
determination of the substantial understatement penalty on reasonable
cause and good faith grounds only if the Tax Court finds that the
I.R.S. abused its discretion in asserting the penalty. The committee
believes that it is appropriate for the courts to review the
determination of the accuracy-related penalties by the same general
standard applicable to their review of the additional taxes that the
I.R.S. determines are owed. The committee believes that providing
greater scope for judicial review of I.R.S. determinations of those
penalties will lead to greater fairness of the penalty structure and
minimize inappropriate determinations of these penalties.
H.R. No. 101-247, at 1393 (1989), reprinted in 1989 U.S.C.C.A.N. 1906, 2863.
Since the passage of § 6664(c), courts have examined the application of this
section under the clearly erroneous standard. See DHL Corp. & Subsids. v. C.I.R.,
285 F.3d 1210, 1225 (9th Cir. 2002); Sather v. C.I.R., 251 F.3d 1168, 1177 (8th
Cir. 2001); Srivastava v. C.I.R., 220 F.3d 353, 367 (5th Cir. 2000). While our
court has not yet been asked to address this question, we agree with the approach
(continued...)

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acknowledge the parties present comparatively persuasive arguments in support of

their relative positions. On balance, however, we cannot conclude the tax court

was clearly erroneous in imposing penalties on taxpayers for their undervaluation

of interests in Belle Fourche Pipeline, Eighty-Eight Oil, and Black Hills Trucking.

The treasury regulations accompanying the tax code’s reasonable cause

exception detail that “[n]o penalty may be imposed under section 6662 with

respect to any portion of an underpayment upon a showing by the taxpayer that

there was reasonable cause for, and the taxpayer acted in good faith with respect

to, such portion.” Treas. Reg. § 1.6664-4(a). As the tax court recognized,

[g]enerally, the most important factor is the extent of the taxpayer’s
effort to assess the taxpayer’s proper tax liability. Circumstances
that may indicate reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable in light of all the
facts and circumstances, including the experience, knowledge, and
education of the taxpayer.

Id. at § 1.6664-4(b)(1). While a taxpayer’s reliance on an appraisal report or the

advice of a tax attorney or accountant may substantiate that the taxpayer should

not be subject to penalties, see, e.g., Boyle, 469 U.S. at 250; DHL Corp. &

Subsids. v. C.I.R., 285 F.3d 1210, 1225 (9th Cir. 2002); Stanford v. C.I.R., 152

F.3d 450, 460-62 (5th Cir. 1998); Mauerman v. C.I.R., 22 F.3d 1001, 1006 (10th

21
(...continued)
taken by the other circuits, and apply a clearly erroneous standard when
examining whether the reasonable cause exception in § 6664(c) is satisfied.

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Cir. 1994); McMurray v. C.I.R., 985 F.2d 36, 42-43 (1st Cir. 1993), the law does

not require taxpayers to seek outside advice to satisfy the reasonable cause and

good faith exception. We are therefore not convinced that, as a matter of law,

taxpayers’ reasonable cause argument should be dismissed simply because they

failed to obtain or only relied in limited fashion on appraisals for their tax

valuations, or because they failed to seek legal advice regarding the effect of the

1971 and 1973 gift tax cases. But a taxpayer’s failure to refer to appraisals or

seek professional legal advice in the context of all the “pertinent facts and

circumstances” a court should review to determine whether a penalty is

appropriate will support a finding that the taxpayer did not act in good faith or

with reasonable cause when undervaluing his tax liability. See Treas. Reg. §

1.6664-4(b)(1).

In favor of taxpayers, we note that one indicator of reasonable cause and

good faith may “include an honest misunderstanding of fact or law that is

reasonable in light of all the facts and circumstances, including the experience,

knowledge, and education of the taxpayer.” Treas. Reg. § 1.6664-4(b)(1).

Particularly relevant here is taxpayers’ reliance on the 1971 and 1973 gift tax

cases. Rec., vol. II at 104, 152, 157, 158. While earlier portions of this opinion

make clear that the 1971 and 1973 gift tax cases do not control for the purposes

of valuing the True companies, taxpayers’ belief to the contrary can certainly be

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construed as “an honest misunderstanding of . . . law.” Treas. Reg. § 1.6664-

4(b)(1). Likewise, the fact that the I.R.S. did not pose any challenge to Tamma’s

withdrawal from the True companies lends further support to taxpayers’ good

faith belief that the price terms in the buy-sell agreements could control for tax

purposes. Rec., vol. II at 104, 152, 158.

Conversely, the I.R.S. correctly points out that Dave True did not seek an

outside appraisal of his interests in the 1993 lifetime transfers, but instead simply

relied on the tax book values for those interests. Dave even welcomed a

challenge from the I.R.S. as to the accuracy of his valuations. Id., vol. II at 260-

61. Dave’s willingness to allow his 1993 transfers to serve as a test case to

determine whether the company buy-sell agreements controlled for gift tax

purposes, in and of itself, does not strike us as unreasonable or an example of bad

faith. In fact, one of the central business tenets followed by taxpayers in the

course of operating their companies was that the tax consequences of every

business deal should be considered before finalizing any transaction. Id., ex. 19-J

at 1-2. Included in this consideration was whether taxpayers were willing to

litigate the tax issue. Id. at 2. However, in light of Mr. Harris’ intimation that

the I.R.S. might not agree with Dave True’s stated values in the 1993 transfers,

id., vol. II at 260, Dave’s failure to obtain an appraisal undercuts the

reasonableness of his actions. This is all the more so considering Dave obtained

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appraisals in the context of litigating the 1971 and 1973 transfers to his children.

See rec., ex. 235-P; id., ex. 236-P.

Second, while taxpayers did obtain an appraisal of Dave’s interests in the

True companies following his death, their referral to and reliance on this appraisal

is not consistent. In the appraisal completed by Arthur Andersen, see rec., ex.

267-R, many of the True companies’ appraised values matched, with relative

closeness, the reported book values of those interests. Compare ex. 267-R at ii

(listing appraisal values of True companies at death of Dave True) with ex. 27-J

(listing book values of True companies at death of Dave True). The Arthur

Andersen appraisal did not give preclusive effect to the tax book value terms

existing in the buy-sell agreements, but the appraisal did apply significant

marketability discounts to the business interests at issue. See rec., ex. 267-R at ii,

7-8. Most significantly for purposes of the sanction issue, however, substantial

differences existed between the Arthur Andersen appraisals for Black Hills

Trucking and Belle Fourche Pipeline and the book values for those same interests.

Compare rec., ex. 267-R at ii (listing value of Black Hills Trucking at $3,179,530

and value of Belle Fourche Pipeline at $4,108,200) with ex. 27-J (listing book

value of Black Hills Trucking at $951,467 and Belle Fourche Pipeline at

$747,723).

As acknowledged by taxpayers, the “result of [the Arthur Andersen]

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appraisal was an aggregate value of the companies in the magnitude of

$41,215,210 as compared to the formula price of $37,393,676, a variance of about

eight percent.” Aplt. br. at 61. Mr. Harris testified that he looked over the Arthur

Andersen appraisal, and that it “kind of confirmed [his] suspicion that there

wasn’t all that much difference between fair market value and book value . . . .”

Rec., vol. II at 268. However, Mr. Harris did not review the appraisal in great

detail because of his admitted lack of schooling and knowledge in the area of

valuations. Id. at 268-69. While the aggregate differences between the Arthur

Andersen appraisal and the book values were not extraordinary, that fact does not

make taxpayers’ choice to ignore the vast disparity of values for Black Hills

Trucking and Belle Fourche Pipeline a reasonable one.

Nor does our review of the record on appeal support taxpayers’ somewhat

belated argument that they substantially relied on Mr. Harris’ tax advice. Mr.

Harris served as an accountant for the True companies in a variety of different

capacities for several decades, id. at 186-87, and there is no question Dave True

consulted with Mr. Harris regarding the 1971 and 1973 transfers of Belle Fourche

Pipeline and True Oil to his children and the 1993 transfers. Id. at 205-06, 258-

60. Mr. Harris also entered into preliminary discussions with taxpayers about

how to address the continuation of the buy-sell agreements in light of the eventual

deaths of the True sons, as well as whether the businesses will be passed on to

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those grandchildren who express interest in working for the True companies. Id.

at 272-73.

But while Mr. Harris may have reviewed the estate and gift tax returns at

issue in this case, he testified at trial that he was not involved in preparing them.

Id. at 286. Moreover, it was Mr. Harris who expressed concern that the tax book

values might not be accepted by the I.R.S. for the estate and lifetime transfers,

and who suggested obtaining the services of Arthur Andersen for an appraisal.

Id. at 266-68. And, as noted earlier, Mr. Harris admitted he did not thoroughly

review the Arthur Andersen appraisal. Id. at 268-69.

Finally, when testifying at trial as to why they thought use of a tax basis

value was valid, taxpayers made no direct or implied reference to Mr. Harris.

Rather, their faith in the tax basis valuation was predicated on Dave True’s

assumption as to its validity, the alleged precedent set by the 1971 and 1973 gift

tax cases, the lack of any protest by the I.R.S. regarding Tamma’s withdrawal

from the companies, and taxpayers’ own supposition that such a valuation

approach made sense given the nature of the oil and ranching industries.

Therefore, we cannot say the tax court clearly erred in refusing to give much

weight to taxpayers’ argument that they reasonably relied on Mr. Harris’ tax

advice.

In conclusion, we acknowledge that whether the tax court erred in

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determining that taxpayers could not rely on the reasonable cause and good faith

exception laid out in I.R.C. § 6664(c) presents a close question. While we

disagree with the tax court’s apparent conclusion that taxpayers’ failure to seek

legal advice regarding the 1971 and 1973 gift tax cases precludes their ability to

rely on the good faith exception, we nonetheless conclude that by taking into

account “all pertinent facts and circumstances,” Treas. Reg. § 1.6664-4(b)(1), the

tax court did not clearly err in concluding that taxpayers could not be excused

from the tax penalty.

In light of all the foregoing, we AFFIRM the tax court.

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