dissenting: Having joined the dissents of Judges Parr and Ruwe, I write separately to describe another path to the conclusion that SFLP had no effect on the value of Mr. Strangi’s gross estate under sections 2031 and 2033. In my view, the property to be valued is the property originally held by Mr. Strangi, the so-called contributed property. Notwithstanding that the property in question may have been contributed to a partnership formed on Mr. Strangi’s behalf in exchange for a 99-percent limited partnership interest, we’re not bound to accept the estate’s contention that the property to be valued is its interest in SFLP, subject to all the disabilities and resulting valuation discounts entailed by ownership of an interest in a limited partnership. Instead, the facts of this case invite us to use the end-result version of the step-transaction doctrine to treat the underlying partnership assets — -the property originally held by the decedent — as the property to be valued for estate tax purposes.
The value of property for transfer tax purposes is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. See United States v. Cartwright, 411 U.S. 546, 550-551 (1973); sec. 20.2031-l(b), Estate Tax Regs.; sec. 25.2512-1, Gift Tax Regs. The majority state that SFLP’s existence “would not be disregarded by potential purchasers of decedent’s assets”; the majority also suggest that this is why the partnership should not be disregarded as a substantive sham. See majority op. p. 487.
I support the use of substance over form analysis to decide whether a transaction qualifies for the tax-law defined status its form suggests. A formally correct transaction without a business purpose may not be a “reorganization”, and a title holder of property without an economic interest may not be the tax “owner”. However, I share the majority’s concerns about using substance over form analysis to alter the conclusion about a real-world fact, such as the fair market value of property, which the law tells us is the price at which the property actually could be sold.1
Although my approach to the case at hand employs a step-transaction analysis, which is a variant of substance over form, I do not use that analysis to conclude anything about fair market value. Instead, I use it to identify the property whose transfer is subject to tax. Step-transaction analysis has often been used in transfer tax cases to identify the transferor or the property transferred.
The step-transaction doctrine is a judicially created concept that treats a series of formally separate “steps” as a single transaction if those steps are “in substance integrated, interdependent and focused toward a particular end result.” Penrod v. Commissioner, 88 T.C. 1415, 1428 (1987). The most far-reaching version of the step-transaction doctrine, the end-result test, applies if it appears that a series of formally separate steps are really prearranged parts of a single transaction that are intended from the outset to reach the ultimate result. See Penrod v. Commissioner, 88 T.C. at 1429, 1430 (citing Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179 (1942); South Bay Corp. v. Commissioner, 345 F.2d 698 (2d Cir. 1965); Morgan Manufacturing Co. v. Commissioner, 124 F.2d. 602 (4th Cir. 1941); Heintz v. Commissioner, 25 T.C. 132 (1955); Ericsson Screw Machine Prods. Co., v. Commissioner, 14 T.C. 757 (1950); King Enters., Inc. v. United States, 189 Ct. Cl. 466, 475, 418 F.2d 511, 516 (1969)). The end-result test is flexible and grounds tax consequences on what actually happened, not on formalisms chosen by the participants. See Penrod v. Commissioner, supra.
The sole purpose of the transactions orchestrated by Mr. and Mrs. Gulig was to reduce Federal transfer taxes by depressing the value of Mr. Strangi’s assets as they passed through his gross estate, to his children, via the partnership. The arrangement merely operated to convey the assets to the same individuals who would have received the assets in any event under Mr. Strangi’s will. Nothing of substance was intended to change as a result of the transactions and, indeed, the transactions did nothing to affect Mr. Strangi’s or his children’s interests in the underlying assets except to evidence an effort to reduce Federal transfer taxes. The control exercised by Mr. Strangi and his children over the assets did not change at all as a result of the transactions. For instance, shortly after Mr. Strangi’s death SFLP made substantial distributions to the children, the Merrill Lynch account was divided into four separate accounts to allow each child to control his or her proportionate share of SFLP assets, and distributions were made to the estate to enable it to pay death taxes and post a bond. Mr. Strangi’s testamentary objectives are further evidenced by his practical incompetency and failing health at formation and funding of SFLP and Stranco and the short time between the partnership transactions and Mr. Strangi’s death.
The estate asserts that property with a stated value of $9,876,929, in the form of cash and securities, when funneled through the partnership, took bn a reduced value of $6,560,730. It is inconceivable that Mr. Strangi would have accepted, if dealing at arm’s length, a partnership interest purportedly worth only two-thirds of the value of the assets he transferred. This is especially the case given Mr. Strangi’s age and health, because it would have been impossible for him ever to recoup this immediate loss.
It is also inconceivable that Mr. Strangi (or his representatives) would transfer the bulk of his liquid assets to a partnership, in exchange for a limited interest (plus a minority interest in the corporate general partner) that would terminate his control over the assets and their income streams, if the other partners had not been family members. See Estate of Trenchard v. Commissioner, T.C. Memo. 1995-121; there the Court found “incredible” the assertion of the executrix that the decedent’s transfer of property to a family corporation in exchange for stock was in the ordinary course of business. It is clear that the sole purpose of SFLP was to depress the value of Mr. Strangi’s assets artificially for a brief time as the assets passed through his estate to his children. See Estate of Murphy v. Commissioner, T.C. Memo. 1990-472, in which this Court denied decedent’s estate a minority discount on a 49.65-percent stock interest because the prior inter vivos transfer of a 1.76-percent interest did “not appreciably affect decedent’s beneficial interest except to reduce Federal transfer taxes.” Estate of Murphy v. Commissioner, supra, 60 T.C.M. (cch) 645, 661, 1990 T.C.M. (ria) par. 90,472, at 90-2261.
Thus, under the end-result test, the formally separate steps of the transaction (the creation and funding of the partnership within 2 months of Mr. Strangi’s death, the substantial outright distributions to the estate and to the children, and the carving up of the Merrill Lynch account) that were employed to achieve Mr. Strangi’s testamentary objectives should be collapsed and viewed as a single integrated transaction: the transfer at Mr. Strangi’s death of the underlying assets.
In many cases courts have collapsed multistep transactions or recast them to identify the parties (usually the donor or donee) or the property to be valued for transfer tax purposes. See, e.g., Estate of Bies v. Commissioner, T.C. Memo. 2000-338 (identifying transferors for purposes of gift tax annual exclusions); Estate of Cidulka v. Commissioner, T.C. Memo. 1996-149 (donor’s gift of minority stock interests to shareholders followed by redemption of donor’s remaining shares treated as single transfer of controlling interest); Estate of Murphy v. Commissioner, supra (decedent’s inter vivos transfer of minority interest followed by testamentary transfer of her remaining shares treated as integrated plan to transfer control to decedent’s children); Griffin v. United States, 42 F. Supp. 2d 700 (W.D. Tex. 1998) (transfer of 45 percent of donor’s stock to donor’s spouse followed by a transfer by spouse and donor of all their stock to a trust for the benefit of their child treated as one gift by donor of the entire block).2
The reciprocal trust doctrine, another application of substance over form, has been used in the estate and gift tax area to determine who is the transferor of property for the purposes of inclusion in the gross estate. See United States v. Grace, 395 U.S. 316, 321 (1969) (applying the reciprocal trust doctrine in the estate tax context to identify the grantor, and quoting with approval Lehman v. Commissioner, 109 F.2d 99, 100 (2d Cir. 1940): “The law searches out the reality and is not concerned with the form.”). More recently, Sather v. Commissioner, T.C. Memo. 1999-309, applied the reciprocal trust doctrine to cut down the number of present interest annual exclusions for gift tax purposes:
We must peel away the veil of cross-transfers to seek out the economic substance of the foregoing series of transfers. * * *
if: ífi í{í si? if: if;
We are led to the inescapable conclusion that the form in which the transfers were cast, i.e., gifts to the nieces and nephews, had no purpose aside from the tax benefits petitioners sought by way of inflating their exclusion amounts. The substance and purpose of the series of transfers was for each married couple to give to their own children their Sathers stock. After the transfers, each child was left in the same economic position as he or she would have been in had the parents given the stock directly to him or her. Each niece and nephew received an identical amount of stock from his or her aunts and uncles and was left in the same economic position in relation to the others. This was not a coincidence but rather was the result of a plan among the donors to give gifts to their own children in a form that would avoid taxes. * * *
DSather v. Commissioner, T.C. Memo. 1999-309, 78 T.C.M. (CCH) 456, 459-460, 1999 T.C.M. (RIA) par. 99,309, at 99-1964-99-1965.]
All this is set out most clearly in our reviewed opinion in Bischoff v. Commissioner, 69 T.C. 32 (1977), as explained by the Court of Appeals for the Federal Circuit in Exchange Bank & Trust Co. v. United States, 694 F.2d 1261, 1269 (Fed. Cir. 1982): “We agree with the majority in Bischoff and the appellee in this action [the United States] that the reciprocal trust doctrine merely identifies the true transferor, but the actual basis for taxation is founded upon specific statutory authority.”
In Estate of Montgomery v. Commissioner, 56 T.C. 489 (1971), affd. 458 F.2d 616 (5th Cir. 1972), an elderly decedent, who was otherwise uninsurable, purchased a single premium annuity and was thereby able to obtain life insurance that he assigned to trusts. The Court held that the arrangement was not life insurance within the meaning of the parenthetical exception contained in section 2039, and therefore the proceeds of the policies were includable in the decedent’s gross estate. In so holding, the Court used the language of step transactions to find that the annuity and insurance were part of a single investment agreement.
Daniels v. Commissioner, T.C. Memo. 1994-591, applied the step-transaction doctrine in a gift tax case in favor of the taxpayers to conclude that an outright gift of common stock to children and a simultaneous exchange of some common for preferred were parts of the same gift. As a result, the Commissioner’s belated attempt to tax the imbalance in values on the common-preferred exchange was barred by the statute of limitations.
My conclusion that the property to be valued for estate tax purposes should be the property transferred to SFLP is further supported by the decision of Citizens Bank & Trust Co. v. Commissioner, 839 F.2d 1249 (7th Cir. 1988), affg. Northern Trust Co. v. Commissioner, 87 T.C. 349 (1986). There, the Court of Appeals for the Seventh Circuit held that the taxable value of a gift is not altered by the terms of the conveyance; therefore, “restrictions imposed in the instrument of transfer are to be ignored for purposes of making estate or gift tax valuations”. Id. at 1252-1253. I conclude that the formation of SFLP and subsequent distributions of partnership assets should be treated as parts of a single, integrated transaction, and that the SFLP agreement is properly viewed as a restriction included in the testamentary conveyance to the Strangi children. Accordingly, under Citizens Bank & Trust Co. v. Commissioner, supra, and the other authorities previously discussed, any reduction in values allegedly caused by the SFLP agreement should be disregarded; under sections 2031 and 2033, the contributed property is the property to be included and valued in the gross estate.
Parr, J., agrees with this dissenting opinion.
Against the grain of the majority's conclusions that the SFLP arrangements were neither a factual sham nor a substantive sham, I would observe that another “conceivable basis for concluding that decedent retained control over the assets that he contributed to the partnership” (Ruwe, J., dissenting op. p. 499 n. 2) are the multiple roles played by Mr. Gulig, who had decedent’s power of attorney and caused himself to be employed by Stranco to manage the affairs of SFLP, and the tacit understanding of the other family members that he would look out for their interests. Although I would agree with the majority that use of substantive sham analysis may not be appropriate in transfer tax cases, I believe that factual sham analysis can be used in appropriate cases in the transfer tax area and that the case at hand is one of those cases; the terms of the SFLP partnership agreement should be disregarded because the parties to the agreement didn’t pay any attention to them. Cf. Heyen o. United States, 945 F.2d 359 (10th Cir. 1991). To adapt to the case at hand the hypothetical posed by the Court of Appeals in Citizens Bank & Trust Co. v. Commissioner, 839 F.2d 1249, 1254-1255 (7th Cir. 1988), the magic marker the Guligs used to paint the mustache on the Mona Lisa was filled with disappearing ink. However, the discussion in the text is presented as an alternative to a factual sham analysis.
In Griffin v. United States, 42 F. Supp. 2d 700, 706 n.4 (W.D. Tex. 1998), the court distinguished Estate of Frank v. Commissioner, T.C. Memo. 1995-132, where this Court declined to integrate the steps of the transaction.