concurring in part and dissenting in part: I agree with the majority opinion except for its allowance of a 15-percent valuation discount with respect to what the majority describes as “indirect gifts [by petitioner] to each of his sons, John and William, of undivided 25-percent interests in the leased land”. Majority op. p. 390. In my opinion, no such discount is appropriate because undivided interests in the leased land were never transferred to petitioner’s sons. The transfer in question was a transfer of petitioner’s entire interest in the leased land to the partnership. This transfer was to a partnership in which petitioner held a 50-percent interest. Except for enhancing the value of petitioner’s 50-percent partnership interest, he received no other consideration for the transfer.
Section 2512(b) provides:
SEC. 2512. Valuation of Gifts.
(b) Where property is transferred for less than an 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.
The Supreme Court has described previous versions of the gift tax statutes (section 501, imposing the tax on gifts and section 503, which is virtually identical to present section 2512(b)) in the following terms:
Sections 501 and 503 are not disparate provisions. Congress directed them to the same purpose, and they should not be separated in application. Had Congress taxed “gifts” simpliciter, it would be appropriate to assume that the term was used in its colloquial sense, and a search for “donative intent” would be indicated. But Congress intended to use the term “gifts” in its broadest and most comprehensive sense. H. Rep. No. 708, 72d Cong., 1st Sess., p.27; S. Rep. No. 665, 72d Cong., 1st Sess., p.39; cf. Smith v. Shaughnessy, 318 U.S. 176; Robinette v. Helvering, 318 U.S. 184. Congress chose not to require an ascertainment of what too often is an elusive state of mind. For purposes of the gift tax it not only dispensed with the test of “donative intent.” It formulated a much more workable external test, that where “property is transferred for less than an adequate and full consideration in money or money’s worth,” the excess in such money value “shall, for the purpose of the tax imposed by this title, be deemed a gift . . .” And Treasury Regulations have emphasized that common law considerations were not embodied in the gift tax. [Commissioner v. Wemyss, 324 U.S. 303, 306 (1945); in. ref. omitted.]
The Supreme Court described the objective of these statutory provisions as follows:
The section taxing as gifts transfers that are not made for “adequate and full [money] consideration” aims to reach those transfers which are withdrawn from the donor’s estate. * * * [Id. at 307.]
Under the applicable statutory provisions, it is unnecessary to consider the value of what petitioner’s sons received in order to determine the value of the property that was transferred. Indeed, the regulations provide that it is not even necessary to identify the donee.1 The regulations provide that the gift tax is the primary and personal liability of the donor, that the gift is to be measured by the value of the property passing from the donor, and that the tax applies regardless of the fact that the identity of the donee may not be presently known or ascertainable. See sec. 25.2511-2(a), Gift Tax Regs.2
The majority correctly states the formula for valuing transfers of property:
If property is transferred for less than adequate and full consideration, then the excess of the value of the property transferred over the consideration received is generally deemed a gift. See sec. 2512(b). The gift is measured by the value of the property passing from the donor, rather than by the property received by the donee or upon the measure of enrichment to the donee. See sec. 25.2511-2(a), Gift Tax Regs. [Majority op. p. 383.]
This is exactly the formula used in the cases on which the majority relies for the proposition that a gift was made. See Kincaid v. United States, 682 F.2d 1220 (5th Cir. 1982); Heringer v. Commissioner, 235 F.2d 149 (9th Cir. 1956); Ketteman Trust v. Commissioner, 86 T.C. 91 (1986). In each of these cases, property was transferred to a corporation for less than full consideration. All or part of the stock of the transferee corporations was owned by persons other than the transferor. In each case, the value of the gift was found to be the fair market value of the property transferred to the corporation minus any consideration received by the trans-feror. None of these cases allowed a discount based upon a hypothetical assumption that fractionalized interests in the transferred property were given to the individual shareholders of the transferee corporations. Unfortunately, the majority does not follow its own formula, as quoted above, or the above-cited cases.
The only case cited by the majority where a discount was given based on a hypothetical assumption that fractionalized interests in the transferred property were given to the indirect beneficiaries (shareholders or partners) is Estate of Bosca v. Commissioner, T.C. Memo. 1998-251. I believe that Estate of Bosca was incorrectly decided on this point. That opinion improperly relied upon cases that dealt with determining the number of annual gift tax exclusions and blockage discounts.
Opinions dealing with the number of annual gift tax exclusions under section 2503(b)3 have no application in determining the value of gifts under section 2512(b). Under the annual gift tax exclusion, the first $10,000 of gifts made to any person is excluded from total taxable gifts. Unlike section 2512(b), section 2503(b) focuses on the identity of the donee. Section 2503(b) specifically addresses “gifts * * * made to any person” and excludes “the first $10,000 of such gifts to such person”. In explaining the meaning of “gift” in the statute providing for the annual exclusion, the Supreme Court explained:
But for present purposes it is of more importance that in common understanding and in the common use of language a gift is made to him upon whom the donor bestows the benefit of his donation. One does not speak of making a gift to a trust rather than to his children who are its beneficiaries. The reports of the committees of Congress used words in their natural sense and in the sense in which we must take it they were intended to be used in § 504(b) when, in discussing § 501, they spoke of the beneficiary of a gift upon trust as the person to whom the gift is made. * * * [Helvering v. Hutchings, 312 U.S. 393, 396 (1941).]
The Supreme Court’s interpretation of the term “gift” for purposes of the annual exclusion was based upon the common meaning and understanding of the term “gift”. The Supreme Court’s interpretation of the term “gift” in section 2503(b) must be contrasted with the Supreme Court’s broad interpretation of section 2512(b). Section 2512(b) specifies a formula for determining when a transfer will be deemed a gift and for determining the amount of the gift for gift tax purposes. In explaining the broad reach of the predecessor of section 2512(b), the Supreme Court in Commissioner v. Wemyss, 324 U.S. 303 (1945), explained that Congress was applying the gift tax to transfers that were beyond the common meaning of the term gift.
Had Congress taxed “gifts” simpliciter, it would be appropriate to assume that the term was used in its colloquial sense, and a search for “donative intent” would be indicated. But Congress intended to use the term “gifts” in its broadest and most comprehensive sense. * * * [Id. at 306.]
Thus, for purposes of the gift tax, a transfer that is deemed to be a “gift” is statutorily defined in section 2512(b) in broad and comprehensive terms and is not limited to the common meaning of that term.
Reliance on cases based on blockage discounts is also misplaced in the context of section 2512(b). The gift tax regulations permit an exception to the traditional definition of fair market value for gifts of large blocks of publicly traded stock. Under the regulations, a blockage discount can be allowed “If the donor can show that the block of stock to be valued, with reference to each separate gift, is so large in relation to the actual sales on the existing market that it could not be liquidated in a reasonable time without depressing the market.” Sec. 25.2512-2(e), Gift Tax Regs, (emphasis added). The cases dealing with blockage discounts are distinguishable because they were decided on the basis of a specific regulation dealing with blockage discounts and involved either separate transfers of properties to various persons or transfers in trust where the transferor allocated specific properties to the trust accounts of individual donees. See Rushton v. Commissioner, 498 F.2d 88 (5th Cir. 1974), affg. 60 T.C. 272 (1973); Calder v. Commissioner, 85 T.C. 713 (1985). In the instant case, there was a single transfer of petitioner’s property for less than full and adequate consideration. Pursuant to section 2512(b), such a transfer is deemed to be a gift to the extent the fair market value of the transferred property exceeded the value of any consideration received by the transferor.
The value of the property to which the gift tax applies in the instant case is the fair market value of the leased property that petitioner transferred to the partnership, minus the portion of that value that served to enhance petitioner’s 50-percent partnership interest. See Kincaid v. United States, supra at 1224; Heringer v. Commissioner, 235 F.2d at 152-153;4 Ketteman Trust v. Commissioner, 86 T.C. at 104. There is nothing in that formula that would justify a discount for two 25-percent undivided interests in the leased property. Petitioner never transferred 25-percent fractional interests in the leased property. His sons never received or owned 25-per-cent undivided interests in the leased property. Indeed, no such fractionalized interests ever existed. After the transfer, the partnership held the same property interest that petitioner held before the transfer; there was no fractionalization of ownership; and the partnership could have sold the leased property for the same fair market value that petitioner could have realized. Nevertheless, the majority values the leased property by giving a discount for hypothetical fractional interests that never existed. On this point, the majority is in error.
VAsquez and Marvel, JJ., agree with this concurring in part and dissenting in part opinion. Beghe, J.,concurring in part and dissenting in part: I concur in the majority’s conclusion that, in computing the value of the gifts, the donor is not entitled to entity level discounts; I dissent from the majority’s conclusion that petitioner’s transfer of the leased land should be valued as separate indirect transfers to his sons of individual 25-percent interests, rather than as a unitary transfer to the partnership.1
With all the woofing these days about using family partnerships to generate big discounts, the majority opinion provides salutary reminders that the “gift is measured by the value of the property passing from the donor, rather than by the property received by the donee or upon the measure of enrichment of the donee”, majority op. p. 383, and that “How petitioner’s transfers of the leased land and bank stock may have enhanced the sons’ partnership interests is immaterial, for the gift tax is imposed on the value of what the donor transfers, not what the donee receives”, majority op. p. 385 (citing section 25.2511-2(a), Gift Tax Regs., Robinette v. Helvering, 318 U.S. 184, 186 (1943), and other cases therein); see also sec. 25.2512-8, Gift Tax Regs.
This is the “estate depletion” theory of the gift tax,2 given its most cogent expression by the Supreme Court in Commissioner v. Wemyss, 324 U.S. 303, 307-308 (1945):
The section taxing as gifts transfers that are not made for “adequate and full [money] consideration” aims to reach those transfers that are withdrawn from the donor’s estate. To allow detriment to the donee to satisfy the requirement of “adequate and full consideration” would violate the purpose of the statute and open wide the door for evasion of the gift tax. See 2 Paul, supra Federal Estate and Gift Taxation (1942) at 1114.[3]
The logic and the sense of the estate depletion theory require that a donor’s simultaneous or contemporaneous gifts to or for the objects of his bounty be unitized for the purpose of valuing the transfers under section 2511(a). After all, the gift tax was enacted to protect the estate tax, and the two taxes are to be construed in pari materia. See Merrill v. Fahs, 324 U.S. 308, 313 (1945). The estate and gift taxes are different from an inheritance tax, which focuses on what the individual donee-beneficiaries receive; the estate and gift taxes are taxes whose base is measured by the value of what passes from the transferor. I would hold, contrary to the majority and the approach of Estate of Bosca v. Commissioner, T.C. Memo. 1998-251,4 that the gross value of what petitioner transferred in the case at hand is to be measured by including the value of his entire interest in the leased land.5 I would then value the net gifts by subtracting from the gross value so arrived at the value, at the end of the figurative day, of the partnership interest that petitioner received back and retained, see sec. 2512(b),6 not 50 percent of the value of the leased land that he transferred to the partnership.
Sec. 25.2511-2(a), Gift Tax Regs., provides:
§ 25.2511-2. Cessation of donor’s dominion and control, (a) The gift tax is not imposed upon the receipt of the property by the donee, nor is it necessarily determined by the measure of enrichment resulting to the donee from the transfer, nor is it conditioned upon ability to identify the donee at the time of the transfer. On the contrary, the tax is a primary and personal liability of the donor, is an excise upon his act of making the transfer, is measured by the value of the property passing from the donor, and attaches regardless of the fact that the identity of the donee may not then be known or ascertainable.
See also Robinette v. Helvering, 318 U.S. 184 (1943), in which the taxpayer argued that there could be no gift of a remainder interest where the putative remaindermen (prospective unborn children of the grantor) did not exist at the time of the transfer. The Supreme Court rejected this argument, stating that the gift tax is a primary and personal liability of the donor measured by the value of the property passing from the donor and attaches regardless of the fact that the identity of the donee may not be presently known or ascertainable.
Sec. 2503(b) provides in part:
SEC. 2503(b). Exclusions From Gifts. — In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year, the first $10,000 of such gifts to such person shall not, for purposes of subsection (a), be included in the total amount of gifts made during such year. * * *
In Heringer v. Commissioner, 235 F.2d 149 (9th Cir. 1956), the taxpayers held a 40-percent interest in the corporation to which they transferred property. The taxpayers argued that any gift should not exceed 60 percent of the value of the transferred property because the taxpayers’ 40-percent stock interest was increased proportionately by the transfer and that such increase was analogous to receipt of consideration. The Court of Appeals agreed, citing sec. 1002, I.R.C. 1939, which contains the same language as the current version of sec. 2512(b). See id. at 152-153.
Although the majority describe the gifts as “undivided 25-percent interests in the leased land”, majority op. p. 389, the 15-percent discounts allowed by the majority in valuing those interests amount to no more than the discount petitioner’s experts attributed to the transfer of a 50-percent interest. This is because petitioner’s experts “presented no concrete, convincing evidence as to what additional amount of discount, if any, should be attributable to a 25-percent undivided interest as opposed to a 50-percent undivided interest”. Majority op. note 28. For an example of an agreement by the parties as to the difference in value between a transfer of a 50-percent block and two 25-percent blocks of the stock of a closely held corporation, see Estate ofBosca v. Commissioner, T.C. Memo. 1998-251.
See, e.g., Lowndes et al., Federal Estate and Gift Taxes 356 (1974); Solomon et al., Federal Taxation of Estates, Trusts and Gifts 191 (1989).
The Paul treatise, cited twice with approval in Commissioner v. Wemyss, 324 U.S. 307, 308 (1948), put it this way:
It is Congress’s intention to reach donative transfers which diminish the taxpayer’s estate. The existence of “an adequate and full consideration in money or money’s worth” which is not received by the taxpayer has that very same effect. Since the section is aimed essentially at “colorable family contracts and similar undertakings made as a cloak to cover gifts,” it is fair to assume that Congress intended to exempt transfers only to the extent that the taxpayer’s estate is simultaneously replenished. The consideration may thus augment his estate, give him a new right or privilege, or discharge him from liability. [2 Paul, Federal Estate and Gift Taxation 1114-1115 (1942); citations omitted.]
Contrary also to the Commissioner’s concession, in Rev. Rui. 93-12, 1993-1 C.B. 202, that a donor’s simultaneous equal gifts aggregating 100 percent of the stock of his wholly owned corporation to his five children are to be valued for gift tax purposes without regard to the donor’s control and the family relationship of the donees. The ruling is wrong because it focuses on what was received by the individual donees; what is important is that the donor has divested himself of control. The cases relied upon by the ruling — Estate of Bright v. United States, 658 F.2d 999 (5th Cir. 1981); Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982); Estate of Andrews v. Commissioner, 79 T.C. 938 (1982); Estate of Lee v. Commissioner, 69 T.C. 860 (1978) — address an arguably different question: whether for estate tax purposes a decedent’s transfer at death of interests in real property or shares of a family corporation should be valued by aggregating them with interests in the same property or shares already held by the decedent’s spouse or siblings.
I see no problem in harmonizing the above-suggested approach with the considerations that apply in determining whether a gift qualifies as a present interest rather than future interest for the purpose of the annual exclusion under sec. 2503(b). The annual exclusion inquiry necessarily focuses on the quality and quantity of the donee’s interest. See Stinson Estate v. United States, 214 F.3d 846 (7th Cir. 2000); sec. 25.2503-3, Gift Tax Regs.; see also Helvering v. Hutchings, 312 U.S. 393 (1941); Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991). Analogous considerations apply in computing the value of bequests entitled to the estate tax charitable or marital deduction. See, e.g., Ahmanson Found. v. United States, supra; Estate of Chenoweth v. Commissioner, supra.