concurring in part1 and dissenting in part: Undaunted by the facts, well-established legal precedent, and respondent’s failure to present sufficient evidence to establish his determinations, the majority allow their olfaction to displace sound legal reasoning and adherence to the rule of law. The gift closed on January 12, 1996, and on that date petitioners transferred to CFT all of petitioners’ assigned partnership interests exceeding $7,044,933 (i.e., the amount exceeding the $6,910,933 transferred to the sons and the trusts plus the $134,000 transferred to the Symphony).
As the trial judge, I concluded that, on January 12, 1996, petitioners transferred a $2,838,899 assignee interest to CFT. On that date, the interest was accepted and received by CFT, and not subject to a condition precedent or subsequent. Sec. 25.2522(c) — 3(b)(1), Gift Tax Regs.; see also Commissioner v. Sternberger’s Estate, 348 U.S. 187 (1955); Hamm v. Commissioner, T.C. Memo. 1961-347, affd. 325 F.2d 934 (8th Cir. 1963). Furthermore, I concluded that respondent fell woefully short of meeting his burden2 regarding the applicability of the substance over form, violation of public policy, and reasonable probability of receipt doctrines.3 Inexplicably, the majority ignore respondent’s primary contentions (i.e., that the substance over form and violation of public policy doctrines are applicable) and base their holding on an interpretation of the assignment agreement that respondent never raised. In section I, I address the majority’s holding. In sections II and III, respectively, I address respondent’s contentions relating to the substance over form and violation of public policy doctrines.
I. The Majority’s Analysis of the Assignment Agreement Is Faulty
The majority begin by stating correctly that the “gift tax is imposed on the value of what the donor transfers, not what the donee receives.” Majority op. p. 395. Yet, they then proceed to rely on a tortured analysis of the assignment agreement that is, ostensibly, justification for shifting the determination of transfer tax consequences from the date of the transfer (i.e., January 12, 1996, the date of the assignment setting forth what petitioners transferred) to March 1996 (i.e., the date of the confirmation agreement). The majority’s analysis of the assignment agreement requires that petitioners use the Court’s valuation to determine the value of the transferred interests, but the donees’ appraiser’s valuation to determine the percentage interests transferred to the charitable organizations. There is no factual, legal, or logical basis for this conclusion.
A. The Gift Was Complete on January 12, 1996
The value of the transferred property and the amount of the transferor’s charitable deduction are determined as of the date the gift became complete. Sec. 2512(a). Pursuant to Texas law, the transfer became complete on January 12, 1996, the date petitioners and the donees executed the assignment agreement. In fact, respondent states:
It is undisputed that the January 12, 1996 Assignment Agreement was executed by competent donors, evidenced the donors’ present intent to irrevocably divest themselves of ownership of the partnership interests, delivered to the partnership, and signed and accepted by donees competent to receive such a transfer. Accordingly, the Assignment Agreement effected the present transfer under Texas law of beneficial and legal title to the partnership interests to the donees. [Emphasis added.]
The Court, like petitioners and respondent, is bound by section 2512(a), which requires us to value the property “at the date of the gift”. (Emphasis added.) The charitable donees and the amount allocated to them were specifically identified, and thus ascertainable, upon the execution of the assignment agreement. Respondent readily acknowledges, and petitioners undoubtedly agree, that the January 12, 1996, assignment agreement was “signed and accepted by donees competent to receive such a transfer.” Yet, in determining the charitable deduction, the majority rely on the confirmation agreement without regard to the fact that petitioners were not parties to this agreement, and that this agreement was executed by the donees more than 2 months after the transfer.4
The majority state that the property transferred to CFT “was not expressed as a specific fraction of the gifted interest (e.g., one-twentieth), nor did petitioners transfer to CFT a specific assignee interest in MIL (e.g., a 3-percent assignee interest).” Majority op. p. 396. The majority appear to assert, without any authority, that petitioners’ charitable deduction cannot be determined unless the gifted interest is expressed in terms of a percentage or fractional share.5 The assignment agreement specifically identified the transferees and the transferred property. Regardless of how the transferred interest was described, it had an ascertainable value.
Accordingly, pursuant to section 2501, the entire $9,883,832 transfer is subject to gift tax, and a charitable deduction is allowed for the $2,972,899 (i.e., $9,883,832 - $6,910,933) transferred to or for the use of the Symphony and CFT. Sec. 2522. CFT’s retention of a much smaller interest (i.e., 3.62376573 percent) than what petitioners transferred to it has no effect on the value of the transferred property on the date the gift became complete.6
B. Determination by the Donees Does Not Bind This Court
The majority conclude that petitioners may deduct the $2,838,899 (i.e., $9,883,832 - $7,044,933) transferred to CFT on January 12, 1996, only if the agreement gave each donee “an enforceable right to a fraction of the gifted interest determined with reference to the fair market value of the gifted interest as finally determined for Federal gift tax purposes”. Majority op. p. 397 (emphasis added). Simply put, the majority are wrong.
First, a $2,838,899 MIL interest was transferred to or for the use of CFT. In their fervor to reject this transaction, the majority assert a line of analysis that is contrary to both the established facts and respondent’s litigating position. Pursuant to the assignment agreement, the gift closed, and beneficial and legal title to the assigned interest was transferred to CFT on January 12, 1996. Respondent contends that, irrespective of when the gift closed, the Court must ignore all intermediate steps and focus on the end result (i.e., the cash received in redemption). The majority sidestep the assignment agreement and redemption, and focus on the allocation in the confirmation agreement.
Second, the majority cite regulations that are inapplicable to petitioners’ transfer. See sec. 1.664-2(a)(l)(iii), Income Tax Regs, (relating to charitable remainder annuity trusts); sec. 20.2055-2(e)(2)(v) and (vi)(a), Estate Tax Regs, (relating to guaranteed annuity interests); sec. 25.2702-3(b)(l)(ii)(B) and (b)(2), Gift Tax Regs, (relating to qualified annuity interests). Majority op. p. 397 note 46. The deductibility of all transfers to charities is not governed by these requirements.
Third, as the majority acknowledge, petitioners transferred to the donees “a fraction of the gifted interest based on the value of that interest as determined under Federal gift tax valuation principles.” Majority op. p. 397. There is no material difference between fair market value “as determined under Federal gift tax valuation principles” and fair market value “as finally determined for Federal gift tax purposes”. Once this Court’s jurisdiction is properly invoked, the fair market value of any property is what this Court determines it is, and a determination relating to a charitable deduction pursuant to section 2522 requires use of the Court’s fair market value of the transferred property. Our determination of fair market value is both fair market value under gift tax principles and as finally determined for Federal gift tax purposes. Moreover, had petitioners’ assignment agreement included the magical words “as finally determined for Federal gift tax purposes”, the majority assert only that they “might have reached a different result.” Majority op. p. 397.
Fourth, the majority state:
There is simply no provision in the assignment agreement that contemplates the allocation of the gifted interest among the assignees based on some fixed value that might not be determined for several years. Rather, the assignment agreement contemplates the allocation of the gifted interest based on the assignees’ best estimation of that value. * * * [Majority op. p. 397.]
The fact is, the assignment agreement effected the transfer of an assignee interest. Petitioners’ assignment agreement could not, and does not, limit the Court’s ability to correctly determine the fair market value of such interest. Nor could the assignment agreement mandate that the donees’ determination of fair market value is conclusive and final for gift tax purposes.
Finally, unlike respondent, who contends that the charitable deduction is limited to the $338,967 CFT received in the redemption, the majority seek to restrict petitioners’ charitable deduction to the $435,019 interest (i.e., 3.62376573 percent) CFT retained pursuant to the confirmation agreement. In essence, the reasoning set forth by the majority borrows from both the integrated transaction and violation of public policy doctrines. The majority’s disregard of the transfer of property interests pursuant to the assignment agreement, and focus on the allocation of interests pursuant to the confirmation agreement, implicates the integrated transaction doctrine. Similarly, the majority’s refusal to adhere to the explicit terms of the assignment agreement implicates the violation of public policy doctrine.
II. Respondent Did Not Establish Applicability of the Substance Over Form Doctrine
Respondent contended that formation of the limited partnership, assignment of partnership interests, confirmation of the assignment, and redemption of the charities’ partnership interests were all part of an integrated transaction where petitioners intended to transfer all of their assets to their sons and the trusts. Respondent simply failed to meet his burden.
Courts have employed the substance over form doctrine where a taxpayer, intending to avoid the gift tax, transfers property to an intermediary who then transfers such property to the intended beneficiary.7 In some instances the intermediary was used to disguise the transferor. See Schultz v. United States, 493 F.2d 1225, 1226 (4th Cir. 1974) (finding that brothers planned to avoid gift taxes through repeated reciprocal gifts to each others’ children); Griffin v. United States, 42 F. Supp. 2d 700, 707 (W.D. Tex. 1998) (finding that husband and wife engaged in a scheme where the wife “was merely, the intermediary through which the stock passed on its way to the ultimate beneficiary”); Estate of Murphy v. Commissioner, T.C. Memo. 1990-472 (disregarding an intrafamily stock transfer where the Court found an informal family agreement to control the stock collectively). In Heyen v. United States, 945 F.2d 359 (10th Cir. 1991) (disregarding as shams 27 transfers of stock to intermediate beneficiaries who then transferred the stock to the original transferor’s family), however, the intermediary was used in an attempt to disguise the transferee. Respondent, relying on Heyen, asserts that the Symphony and CFT were merely intermediaries in petitioners’ plan to transfer their MIL interests to their sons and the trusts.
In Heyen, a taxpayer, seeking to avoid the gift tax by taking advantage of the annual gift tax exclusion, transferred stock to 29 intermediate recipients, all but two of whom made blank endorsements of the stock, which the issuing bank subsequently reissued to the intended beneficiaries. The court stated:
The [intermediate] recipients either did not know they were receiving a gift of stock and believed they were merely participating in stock transfers or had agreed before receiving the stock that they would endorse the stock certificates in order that the stock could be reissued to decedent’s family. {Id. at 361.]
The court further stated:
The evidence at trial indicated decedent intended to transfer the stock to her family rather than to the intermediate recipients. The intermediary recipients only received the stock certificates and signed them in blank so that the stock could be reissued to a member of decedent’s family. Decedent merely used those recipients to create gift tax exclusions to avoid paying gift tax on indirect gifts to the actual family member beneficiaries. [Id. at 363.]
In order for us to ignore petitioners’ allocation in the assignment agreement, respondent must establish that petitioners coordinated, and the charities colluded in or acquiesced to, a plan to avoid petitioners’ gift taxes by undervaluing the transferred interests and intended to divert CFT’s interest to their sons and the trusts. See Heyen v. United States, supra; Schultz v. United States, supra; Griffin v. United States, supra; Estate of Murphy v. Commissioner, supra. Respondent did not present the requisite evidence for us to invoke the substance over form doctrine.
Respondent stated on brief that, after execution of the assignment agreement, petitioners “washed their hands” of the transaction, and the donees took over. Petitioners’ sons’ involvement in the subsequent allocation of the transferred interests does not affect petitioners’ gift tax liability, particularly in the absence of a showing that petitioners retained some control over the subsequent allocation. See sec. 25.2511-2(a), Gift Tax Regs, (stating that the gift tax is measured by the value of the property passing from the donor). Petitioners’ sons and the estate planner made all the arrangements relating to the valuation. This Court, however, will not impute to petitioners an intent to avoid the gift tax merely from the appraiser’s valuation of the transferred partnership interests, the sons’ involvement in the planning process, or the hiring of an estate planner charged with tax minimization. See Estate of Strangi v. Commissioner, 115 T.C. 478, 484-485 (2000) (“Mere suspicion and speculation about a decedent’s estate planning and testamentary objectives are not sufficient to disregard an agreement in the absence of persuasive evidence”), revd. on other grounds 293 F.3d 279 (5th Cir. 2002); Hall v. Commissioner, 92 T.C. 312 (1989).
Respondent failed to establish that the Symphony or CFT participated, knowingly or otherwise, in a plan to facilitate petitioners’ purported avoidance of gift tax. Indeed, the testimony and evidence established that the Symphony and CFT acted independently. CFT did not hire its own appraiser because it had confidence in the appraiser hired by petitioners’ sons. While in hindsight (i.e., after this Court’s valuation) it was imprudent for the charitable organizations to forgo an independent appraisal,8 these organizations were not sham intermediaries. Prior to signing the confirmation agreement, the Symphony and CFT could have independently valued mil, forced arbitration, and thwarted any purported plan to avoid the gift tax. Cf. Compaq v. Commissioner, 277 F.3d 778, 784 (5th Cir. 2001) (declining, in an income tax case, to disregard a transaction that involved even a minimal amount of risk and was conducted by entities separate and apart from the taxpayer), revg. 113 T.C. 214 (1999).
There is no evidence of an implicit or explicit agreement, between petitioners and either the Symphony or CFT, that the Symphony or CFT would accept less than that which petitioners transferred to each organization. In fact, respondent stipulated that “Before the call right was exercised, there was no agreement among Mr. or Mrs. McCord, the McCord brothers, the Symphony or CFT as to when such a buyout would occur or to the price at which the buyout would occur.”
In sum, respondent failed to establish that the undervaluation of MIL, reallocation of MIL interests, and subsequent transfer of a portion of CFT’s MIL interest to the sons and the trusts were parts of a plan by petitioners to avoid the~gift tax. CFT’s retention of a much smaller interest (i.e., 3.62376573 percent) than petitioners transferred, pursuant to the assignment agreement, has no effect on the value of the transferred property on January 12, 1996, the date the gift became complete.
III. Formula Clause Does Not Violate Public Policy
Relying primarily on Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944), respondent contended that petitioners’ formula clause was against public policy, and therefore void, because such clause “is a ‘poison pill’ created to discourage audit of the gifts and to fabricate phantom charitable gift and income tax deductions.”
In Commissioner v. Procter, supra, the court considered a clause causing a gift to revert to the donor if a court determined that the gift was taxable. The court held that such a clause “is clearly a condition subsequent and void because contrary to public policy.” Id. at 827. The court reasoned that the clause would discourage the collection of tax because attempted collection would defeat the gift, the clause would “obstruct the administration of justice by requiring the courts to pass upon a moot case”, and the clause, if allowed to stand, would defeat the judgment of a court. Id. Likewise, in Ward v. Commissioner, 87 T.C. 78 (1986), a clause allowed the taxpayer to revoke a gift of stock if it was determined that, for gift tax purposes, the fair market value of such stock exceeded $2,000 per share. The Court similarly concluded that such a clause was a condition subsequent and void because it was against public policy.
Contrary to the valuation clauses in Commissioner v. Procter, supra, and Ward v. Commissioner, supra, which adjusted the amount transferred based upon a condition subsequent, petitioners’ valuation clause defined the amount of property transferred. Simply put, petitioners’ gift does not fail upon a judicial redetermination of the transferred property’s value. Petitioners made a legally enforceable transfer of assignee interests to CFT, with no provision for the gift to revert to petitioners or pass to any other party on the occurrence of adverse tax consequences. CFT merely failed to protect its interest adequately. Procter and Ward are distinguishable. Petitioners’ formula clause was not against public policy.
IV. Conclusion
The majority seek to restrict petitioners’ charitable deduction to that which CFT accepted in the confirmation agreement. The parties agree that the gift closed upon the execution of the assignment agreement. At that moment, petitioners transferred and CFT had a $2,838,899 MIL interest. CFT waived its arbitration rights, and petitioners did not participate in the subsequent allocation. Whether CFT failed to adequately protect its interest or was swindled by petitioners’ sons does not affect the value of what petitioners transferred to CFT.
The majority prudently avoid using the substance over form, violation of public policy, or realistic possibility of receipt doctrines as support for their holding. The majority, however, disregard the assignment agreement, other established facts, and applicable case law in order to support a line of analysis and conclusion that even respondent did not advocate. We are not responsible for protecting the fisc. Rather, our role and duty are to interpret and adhere to the rule of law — even if uncomfortable with the result.
Chiechi, J., agrees with this concurring in part and dissenting in part opinion.I concur only in result with respect to secs. rV, V(E), and VII(C) of the majority opinion.
The parties agree that respondent, pursuant to sec. 7491, had the burden of proof.
The reasonable probability of receipt doctrine was not one of respondent’s primary contentions, but it was referenced in his opening brief.
Subsequent events typically do not affect the value of transferred property. See Ithaca Trust Co. v. United States, 279 U.S. 151 (1929); Estate of McMorris v. Commissioner, 243 F.3d 1254 (10th Cir. 2001), revg. T.C. Memo. 1999-82; Estate of Smith v. Commissioner, 198 F.3d 515 (5th Cir. 1999), revg. 108 T.C. 412 (1997); Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982).
This position is reminiscent of previous attempts by respondent to impose a fractional, or percentile, share rule in the marital deduction context — a position that was consistently rejected by the courts and not implemented until Congress amended sec. 2056 to conform with respondent’s position. See sec. 2056(b)(5), (7), (10); Northeastern Pa. Natl. Bank & Trust Co. v. United States, 387 U.S. 213 (1967); James v. United States, 366 U.S. 213 (1961); Estate of Alexander v. Commissioner, 82 T.C. 34 (1984), affd. without published opinion 760 F.2d 264 (4th Cir. 1985).
CFT’s subsequent transfer of MIL interests may have conferred an impermissible private benefit on petitioners’ sons. See Am. Campaign Acad. v. Commissioner, 92 T.C. 1053 (1989) (holding that conferral of a benefit on an unrelated person may constitute an impermissible private benefit). The deduction pursuant to sec. 2522 is not allowed for a transfer to an organization unless such organization is operated exclusively for one or more of its charitable purposes. Sec. 25.2522(a)-l(b), Gift Tax Regs. Respondent, however, did not raise, or present any evidence relating to, this issue.
The Court of Appeals for the Fifth Circuit and other courts have been reluctant to use substance over form in certain cases involving completed gifts to charity. E.g., Carrington v. Commissioner, 476 F.2d 704 (5th Cir. 1973) (holding, in an income tax case, that where respondent seeks to use the step transaction doctrine to disregard a donation of appreciated property to a charitable organization, the central inquiry is whether the donor parted with all dominion and control), affg. T.C. Memo. 1971-222.
Ms. Willhoite, president of the Symphony, and Mr. Fjordback, president of CFT, each had an obligation to ensure receipt of the property interests petitioners transferred to the Symphony and CFT, respectively. See Tex. Socy. DAR, Inc. v. Ft. Bend Chapter, 590 S.W.2d 156, 164 (Tex. Civ. App. 1979) (citing Intl. Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567 (Tex. Sup. Ct. 1963)); see also Texas Non-Profit Corporation Act, Tex. Rev. Civ. Stat. art. 1396-2.22 (2002).