T.C. Memo. 2001-263
UNITED STATES TAX COURT
ESTATE OF ELMA MIDDLETON DAILEY, DECEASED, DONOR,
K. ROBERT DAILEY, II, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
ESTATE OF ELMA MIDDLETON DAILEY, DECEASED,
K. ROBERT DAILEY, II, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 6251-00, 6262-00. Filed October 3, 2001.
Harold A. Chamberlain and Michael C. Riddle, for
petitioners.
Richard T. Cummings, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: By notices dated March 15, 2000, respondent
determined a 1992 Federal gift tax deficiency of $53,808 and
section 6651(a) addition to tax of $13,452 relating to docket No.
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6251-00, and a Federal estate tax deficiency of $143,932 relating
to docket No. 6262-00. Unless otherwise indicated, all section
references are to the Internal Revenue Code as amended, and all
Rule references are to the Tax Court Rules of Practice and
Procedure. The issues are the valuation of certain retained and
gift interests in a Family Limited Partnership (FLP) and
liability for the section 6651(a) addition to tax.
FINDINGS OF FACT
When the petitions were filed, K. Robert Dailey II was a
resident of Harris County, Texas, where, in 1997, his mother,
Elma Middleton Dailey, had died, and Mr. Dailey had received an
appointment to be her executor. On December 2, 1982, Mrs.
Dailey’s husband died, leaving to her, among other things, the
following:
Number of Value per Total
Company Shares Share Value
Exxon Corp. 11,108 $33.63 $373,562
American Telephone
& Telegraph Co. (AT&T) 400 65.75 26,300
On October 20, 1992, Mrs. Dailey executed a will, a
Revocable Living Trust (Trust), and an Agreement of Limited
Partnership (Agreement) of Elma Middleton Dailey FLP. The will
provided that Mrs. Dailey’s residuary estate would pass to the
Trust, from which her son would receive the corpus outright.
Upon execution of the Agreement, Mrs. Dailey took a 1-
percent general and a 98-percent limited partnership interest,
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and Mr. Dailey received a 1-percent limited partnership interest.
On November 13, 1992, Mrs. Dailey contributed, to the FLP, 400
AT&T, 20,000 Exxon, and 895 Bell South Corp. shares. Mr. Dailey
did not contribute any assets to the FLP. On December 4, 1992,
the Texas Secretary of State filed the FLP’s Certificate of
Limited Partnership.
On December 8, 1992, Mrs. Dailey signed a letter which
stated that by “the terms of the Elma Middleton Dailey Family
Limited Partnership, this letter shall be sufficient evidence of
my transfer and conveyance to you of the following limited
partnership interest”, giving 45-, 15-, and 38-percent interests
to Mr. Dailey, his wife, and the Trust, respectively. On that
date, the FLP had $1,267,619, consisting of:
Number of Value per Total Value
Company Shares Share
Exxon Corp. 20,000 $60.19 $1,203,750
AT&T 400 47.94 19,175
Bell South 895 49.94 44,694
On March 16, 1995, Mrs. Dailey appointed Mr. Dailey as the
FLP managing partner. On July 26, 1995, he replaced her as the
trustee of the Trust and FLP general partner, and her 1-percent
general partnership interest became a limited one.
On January 10, 1997, Mrs. Dailey died, when the FLP had
$1,047,603, consisting of:
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Number of Value per Total Value
Company Shares Share
Exxon Corp. 10,000 $102.88 $1,028,750
American
Veterinary Corp. 1,000 10.88 10,875
Olde Money
Market Fund 7,978 1.00 7,978
The FLP had substantial unrealized capital gains due to the
increase in the value of the Exxon stock. On April 17, 1997,
Mrs. Dailey’s attorney filed, and respondent received, a gift tax
return reflecting the gifts of the 45- and 15-percent limited
partnership interests to Mr. Dailey and his wife. On the gift
tax return, Mrs. Dailey reported a 40-percent discount from the
net asset value (NAV) of the partnership’s assets.
OPINION
The FLP was validly formed pursuant to Texas law, and we do
not disregard it for tax purposes. See Estate of Strangi v.
Commissioner, 115 T.C. 478, 487 (2000); Knight v. Commissioner,
115 T.C. 506, 513-515 (2000).
The parties agree that, pursuant to section 7491(a),
petitioners have introduced credible evidence, and respondent
shall have the burden of proof, relating to the valuation issue.
Fair market value is the price at which property would
change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having
reasonable knowledge of relevant facts. Sec. 20.2031-1(b),
Estate Tax Regs.; sec. 25.2512-1, Gift Tax Regs. On brief, the
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estate further contends that a “hypothetical, willing buyer may
only become an assignee under this Partnership Agreement and
Texas law”, and Mrs. Dailey “actually transferred” assignee
interests, but there is “no evidence in the record before this
Court regarding the fair market value of any assignee * * *
interests”. Article IX of the Agreement provides for “Sale of a
Partner’s Interest”, and the Texas Revised Limited Partnership
Act, Tex. Rev. Civ. Stat. Ann. art. 6132a-1 (Vernon 1993),
provides for assignments but does not prohibit sales. The plain
language of Mrs. Dailey’s December 8, 1992, letter states that
she was transferring partnership interests pursuant to the
Agreement. See Kerr v. Commissioner, 113 T.C. 449, 463-465
(1999) (rejecting donors’ contention that Texas partnership
transfers were mere assignments). In addition, the lack of
evidence of the value of any purported assignment supports our
rejection of the estate’s contention.
Mrs. Dailey gave Mr. Dailey a 1-percent limited partnership
interest on formation, but the FLP had no assets on that date.
Mrs. Dailey made gifts of 45- and 15-percent limited partnership
interests to her son and daughter-in-law, respectively, and thus
retained 39 percent in the trust at death. The parties
stipulated, however, that Mrs. Dailey retained 40 percent.
Respondent inexplicably does not contend that the initial 1-
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percent limited partnership interest transferred to Mr. Dailey
had gift tax consequences at formation or funding.
Both parties agree that the given and retained interests
were, on December 8, 1992, and January 10, 1997, worth their
proportionate share of the NAV of $1,267,619 and $1,047,603 for
gift and estate tax purposes, respectively. They disagree,
however, about the size of the minority and marketability
discounts. Both parties’ experts compared the FLP to closed-end
mutual funds, which trade at a discount to NAV, but disagreed on
the amounts of the discounts. Petitioners’ expert, citing
published data, opined that the aggregate discount is 40 percent
for lack of marketability, control, and liquidity and testified
that he considered the significant amount of unrealized capital
gains relating to the Exxon stock.
Respondent’s expert, on the other hand, relied in part on an
unpublished study that he coauthored and, in a revised report
submitted at trial, increased the marketability discount
purportedly substantiated by his unpublished study from 12.5
percent to 14.1 percent. Respondent’s expert opined that an
aggregate discount of 15.72 percent on December 8, 1992, and
13.51 percent on January 10, 1997, should be applied. At trial,
respondent’s expert testified that he could not recall reviewing
the Agreement and, although he believed that unrealized capital
gains are “an important source of discounts”, he did not review
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the documents to determine if the FLP had any such gains.
Respondent’s expert’s testimony was contradictory, unsupported by
the data, and inapplicable to the facts.
We are “not bound by the opinion of any expert witness when
that opinion is contrary to our own judgment.” Estate of Gilford
v. Commissioner, 88 T.C. 38, 56 (1987). Although neither expert
was extraordinary, petitioners’ expert provided a more convincing
and thorough analysis than respondent’s expert. We conclude that
an aggregate marketability and minority discount of 40 percent is
warranted and is applicable to the aforementioned interests.
Section 6651(a)(1) imposes an addition to tax for failure to
file a required return on the date prescribed. This addition to
tax is imposed on the amount of tax required to be shown on the
return. Although decedent’s gift tax return was filed after the
prescribed due date, the property valuation on the return was
correct and, after application of decedent’s unified credit, no
gift tax was due. Accordingly, the estate is not liable for the
section 6651(a)(1) addition to tax.
Contentions we have not addressed are moot, irrelevant, or
meritless.
To reflect the foregoing,
Decisions will be entered
for petitioners.