Succession of McCord v. Commissioner

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED SEPTEMBER 15, 2006
August 22, 2006
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk

No. 03-60700

SUCCESSION OF CHARLES T. McCORD, JR., Deceased,
CHARLES T. McCORD III and MICHAEL S. McCORD,
EXECUTORS; MARY S. McCORD, Donors,

Petitioners-Appellants,

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

--------------------
Appeals from the United States Tax Court
(7048-00)
--------------------

Before GARWOOD, WIENER, and DeMOSS, Circuit Judges.

WIENER, Circuit Judge.

This is an appeal from an adverse opinion and judgment of an

8-judge majority (the “Majority”) of a splintered United States Tax

Court.1 The Petitioners-Appellants (the “Taxpayers”)2 seek reversal

1
McCord v. Commissioner, 120 T.C. 358 (2003) (Halpern, J.,
joined by Wells, Cohen, Swift, Gerber, Colvin, Gale, and
Thornton, JJ. Separate opinions were filed by (1) Swift, J.,
concurring, (2) Chiechi, J., joined by Foley, J., concurring in
part and dissenting in part, (3) Foley, J., joined by Chiechi,
J., concurring in part and dissenting in part, and (4) Laro, J.,
joined by Vasquez, J., dissenting.)
2
Charles T. McCord, Jr., and Mary S. McCord were husband
and wife. Mr. McCord died in August, 2001, while this matter was
pending in the Tax Court, and his Succession, represented by two
of the Taxpayers’ four sons as testamentary co-executors, was
of the Majority’s holdings, which the Taxpayers accurately

characterize as:

(1) The aggregate fair market value of the
Taxpayers’ donated interests in a family limited
partnership, McCord Interests, Ltd., L.L.P. (“MIL”) was
$9,883,832 instead of the substantially lesser value of
$7,369,215 claimed by the Taxpayers on their returns.

(2) The Taxpayers’ charitable deductions under
§ 2522 of the Internal Revenue Code of 1986 (“I.R.C.”)
for gifts to one of two tax-exempt organizations
(collectively, “exempt donees”) must be calculated not on
the basis of the plain language of the act of gift
(“Assignment Agreement”) of January 12, 1996, but on the
Tax Court’s own gloss thereon and its determination of
the various percentage interests in MIL that —— two
months after the gifts —— were agreed on and accepted by
all donees (but not by Taxpayers) in a post-gift sharing
arrangement (the “Confirmation Agreement”) entered into
in March of 1996.

(3) The taxable value of the gifts made by the
Taxpayers to (a) their four sons individually (“the
Sons”) and (b) generation skipping tax trusts (“GST
trusts”) of which the Sons were trustees (collectively,
“the non-exempt donees”) must be calculated not only on
the basis of the Tax Court’s independently determined
fair market value and the percentage interests in MIL of
the residuary exempt donee, but also without a reduction
in fair market value of the gifts to the non-exempt
donees for the actuarially determined liability, assumed
by such donees contemporaneously with the gifts, for any
additional estate taxes that might be incurred under §
2035 (and, in the case of Mr. McCord, that were incurred)
if either or both of the Taxpayers should die within
three years following the date of the gifts3 —— death
within that post-gift period being a condition subsequent

substituted for the decedent as a petitioner-appellant.
3
Such potential § 2035 estate tax liability was expressly
assumed pro rata by the non-exempt donees as conditions to their
entitlement to the subject gifts. None disputes that the taxable
values of the gifts made to the non-exempt donees were properly
reduced by the gift taxes incurred by the Taxpayers,
responsibility for which also was assumed by these donees.

2
 that would terminate the donors’ (and thus the non-exempt
donees’) present obligations to pay any and all eventual
§ 2035 estate taxes.

For the reasons explained below, we reverse the Tax Court and

remand this case to it with instructions to enter judgment for the

Taxpayers consistent with this opinion.

I. FACTS & PROCEEDINGS

A. Background

With the exception of the ultimate fact question of the

taxable and deductible values of the limited partnership interests

in MIL that comprise the completed, irrevocable inter vivos

donations (the “gifts”) made by the Taxpayers to the exempt and

non-exempt donees on January 12, 1996, the discrete facts framing

this case are largely stipulated or otherwise undisputed. Having

lived in Shreveport, Louisiana for most of their adult lives, and

having accumulated substantial and diversified assets, these

octogenarian Taxpayers embarked on a course of comprehensive family

wealth preservation and philanthropic support planning, including

transfer tax aspects of implementing such a plan. This was done in

consultation with Houston-based specialists in that field.

Effective June 30, 1995, the Taxpayers had joined with the

Sons and an existing ordinary partnership (“McCord Bros.” formed

and owned equally by the Sons) to create MIL, a Texas limited

partnership. In creating MIL, (1) each Taxpayer had contributed

$10,000 for which each had received one-half of the Class A limited

3
partnership interest in MIL; (2) each Son had contributed $40,000

for which he had received one-fourth of the general partnership

interest in MIL; (3) each Taxpayer had contributed identical

interests in substantial business and investment assets (valued at

$6,147,192 per Taxpayer) for which each Taxpayer had received equal

portions (but less than all) of the Class B limited partnership

interest in MIL, representing in the aggregate just over 82 per

cent of the value of that partnership; and (4) McCord Bros. had

contributed interests in similar business and investment assets

(valued at $2,478,000), for which it had received the remaining

Class B limited partnership interest in MIL, representing roughly

16.6 per cent of the value of that partnership.4 As a result, MIL

was initially owned as follows:

Class and Contributor Contribution Percentage
Interest
Class A limited partners:
Mr. McCord $ 10,000 ––
Mrs. McCord 10,000 ––

4
The Taxpayers’ contributions to MIL for their Class A
limited partnership interests and the Sons’ contributions for
their general partnership interests were made in cash. The
values of the in-kind interests in business and investment assets
contributed to MIL in exchange for Class B limited partnership
interest were based on appraisals by William H. Frazier, a
principal in the Houston-based valuation and consulting firm of
Howard, Frazier, Barker, Elliott, Inc. Mr. Frazier’s testimony
was submitted in the trial of this case as an expert witness on
behalf of the Taxpayers.

4
General partners:
Charles III 40,000 0.26787417
Michael 40,000 0.26787417
Frederick 40,000 0.26787417
Stephen 40,000 0.26787417
Class B limited partners:
Mr. McCord 6,147,192 41.16684918
Mrs. McCord 6,147,192 41.16684918
McCord Brothers 2,478,000 16.59480496
Total $14,952,384 100.0

As found by the Majority, MIL’s partnership agreement (the

“Partnership Agreement”) provides, inter alia:

MIL will continue in existence until
December 31, 2025 (the termination date),
unless sooner terminated in accordance with
applicable terms of the partnership agreement.

Any class B limited partner may withdraw
from MIL prior to its termination date and
receive payment equal to the fair market value
(as determined under the partnership
agreement) of such partner’s class B limited
partnership interest (the put right).

Partners may freely assign their
partnership interests to or for the benefit of
certain family members and charitable
organizations (permitted assignee).

A partner desiring to assign his interest
to someone other than a permitted assignee
must first offer that interest to MIL and all
other partners and assignees, who have the
right to purchase such interest at fair market
value (as determined under the Partnership
agreement).

The term “partnership interest” means the
interest in the partnership representing any
partner’s right to receive distributions from

5
 the partnership and to receive allocations of
partnership profit and loss.

Regardless of the identity of the
assignee, no assignee of a partnership
interest can attain the legal status of
partner in MIL without the unanimous consent
of all MIL partners.

MIL may purchase the interest of any
[exempt donee] (i.e., a permitted assignee of
a partnership interest that is a charitable
organization that has not been admitted as a
partner of MIL) at any time for fair market
value, as determined under the partnership
agreement (the call right).

For purposes of the partnership
agreement, (1) a class B limited partner’s put
right is disregarded for purposes of
determining the fair market value of such
partner’s class B limited partnership
interest, and (2) any dispute with respect to
the fair market value of any interest in MIL
is to be resolved by arbitration as provided
in Exhibit G attached to the partnership
agreement.

Limited partners generally do not
participate in the management of the
partnership’s affairs. However, limited
partners do have veto power with respect to
certain “major decisions”, most notably
relating to voluntary bankruptcy filings.5 In
addition, if any two of the [Sons] are not
serving as managing partners, class B limited
partners have voting rights with respect to
certain “large dollar” managerial decisions.
Limited partners also have access to certain
partnership financial information.6

5
A class A limited partnership interest does not carry with
it a “Percentage Interest” in MIL (as that term is defined in the
Partnership Agreement).
6
McCord, 120 T.C. at 362-63.

6
 MIL’s partnership agreement was amended and restated in

October 1995, prospectively effective November 1, 1995. Twenty

days after the effective date of this act, Taxpayers, as owners of

all Class A limited partnership interests in MIL, donated these

interests to The Southfield School Foundation (the “Foundation”),

a § 501(c)(3) tax exempt organization. All original MIL partners

—— general, Class A limited, and Class B limited —— executed an

Assignment of Partnership Interests and Addendum Agreement (the

“Southfield Agreement”) to implement this gift. The Southfield

Agreement declares that “all of the partners of [MIL] desire that

[the Foundation] become a Class A limited partner of [MIL] upon

execution of this assignment of partnership interest” and that “all

consents required to effect the conveyance of the Assigned

Partnership Interest and the admission of assignee as a Class A

limited partner of [MIL] have been duly obtained and/or evidenced

by the signatures hereto.” After executing the Southfield

Agreement, the Taxpayers were left with only their Class B limited

partnership interests in MIL. (The donation to the Foundation is

not at issue in this litigation; we discuss it only to note

differences in its details from those of the Assignment Agreement,

which was used to effectuate the Taxpayers’ below-discussed

donations of Class B interests in MIL to the exempt and non-exempt

donees.)

On January 12, 1996, through a combination of simultaneous

taxable gifts to the non-exempt donees and charitable-deduction

7
gifts to the exempt donees, the Taxpayers irrevocably disposed of

all their Class B limited partnership interests in MIL, retaining

no interest whatsoever in the Partnership. They did this by

joining with all non-exempt donees and two new exempt donees,

namely, the Community Foundation of Texas, Inc. (“CFT”), and the

Shreveport Symphony, Inc. (the “Symphony”), in the execution of the

Assignment Agreement. In it, the Taxpayers transferred all of

their Class B limited partnership interests in MIL to the exempt

and non-exempt donees in varying portions, expressly relinquishing

all dominion and control over the partnership interests thus

assigned and transferred. The Assignment Agreement differs from

the Southfield Agreement in that (1) it does not contain parallel

language admitting the new donees as partners, and (2) two of the

limited partners of MIL —— McCord Bros. and the Foundation —— did

not join in the execution of the Assignment Agreement in any

capacity.

At the heart of this case lies the question of the value of

the Class B limited partnership interests in MIL thus transferred

by the Taxpayers to the exempt and non-exempt donees via the

Assignment Agreement of January 12, 1996. We have observed that

these gifts divested the Taxpayers of their entire interest in MIL

then remaining. It did so, however, not in percentages of interest

in MIL, however, but in dollar amounts of the net fair market value

of MIL, according to a sequentially structured “defined value

clause”:

8
 DONEE GIFT
1. First, to the Generation A dollar amount of fair market
Skipping Tax Trusts (“GST value in interest of MIL equal
trusts”) to the dollar amount of
Taxpayers’ net remaining
generation skipping tax
exemption, reduced by the
dollar value of any transfer
tax obligation owed by these
trusts by virtue of their
assumption thereof.
2. Second, to the Sons $6,910,932.52 worth of fair
market value in interest of
MIL, reduced by the dollar
value of (1) the interests in
MIL given to the GST trusts,
and (2) any transfer tax
obligation owed by the Sons by
virtue of their assumption
thereof.
3. Third, to the Symphony $134,000.00 worth of such in
interest of MIL.7
4. Last, to CFT The dollar amount of the
interests of the Taxpayers in
MIL, if any, that remained
after satisfying the gifts to
the GST trusts, the Sons, and
the Symphony.

All gifts were complete on execution of the Assignment

Agreement on January 12, 1996. No other agreements —— written or

oral, express or implied —— were found to have existed between the

Taxpayers and (1) the Sons, (2) the GST trusts, (3) the Symphony,

or (4) CFT, as to what putative percentage interest in MIL belonged

7
$7,044,932.52 less $6,910,932.52; but only if the full
difference of $134,000 remained; otherwise, any actual, lesser
amount remaining after satisfying the gifts to the GST trusts and
the Sons.

9
to, or might eventually be received by, any of the donees under the

dollar-value formula clause. Rather, because the interests donated

by the Taxpayers to the GST trusts, the Sons, and the Symphony were

expressed in dollars, “fair market value” is defined in the

Assignment Agreement in terms of the applicable “willing-

buyer/willing-seller” test specified in the applicable Treasury

Regulation.8

As reflected in the allocation provisions of the Assignment

Agreement, the Taxpayers conditioned their gifts to the non-exempt

donees on the presently binding assumption by those donees of

responsibility for payment of any and all federal and state gift

taxes resulting from the taxable gifts of January 12, 1996. In

addition, those donees assumed responsibility for the future

payment of only those federal estate taxes that would be assessed

on the amount of Taxpayers’ gift taxes pursuant to § 2035, unless

the condition subsequent expressed in that section should occur,

i.e., unless the Taxpayer in question should survive for three

years following the completion of the gift.9

On February 28, 1996, Mr. Frazier completed his appraisal of

the various classes of partnership interest in MIL as of the

January 12, 1996 date of the gifts. He determined that the value

8
Treas. Reg. § 25.2512-1
9
§ 2035(b) specified that if a taxpayer were to die within
three years following the date of the gifts, an amount equal to
the gift taxes paid on such gifts would be deemed included in his
or her gross estates and subjected to federal estate tax.

10
on that date had been $89,505 for each one per cent (1%) of Class

B limited partnership interest in the hands of a donee immediately

following completion of the gifts.

In March 1996, all donees entered into the Confirmation

Agreement, based on that appraisal. In essence, the Confirmation

Agreement translated the dollar value of each gift made under the

Assignment Agreement’s defined value formula into percentages of

interest in MIL, as follows:

1. GST trusts 8.24977954% each

2. The Sons 11.05342285% each

3. The Symphony 1.49712307%

4. CFT 3.62376573%

Total 82.33369836%

The Taxpayers, who two months earlier had divested themselves

of all interest in MIL, were not parties to the Confirmation

Agreement or otherwise involved in it. Neither did the Assignment

Agreement “call for,” i.e., either expressly or impliedly, specify

any method or manner that the donees must or were expected to

employ in determining how to equate their respective dollar-amount

gifts to percentages of interest in MIL.10 Moreover, each donee was

represented by independent counsel and each had the express right

10
The Commissioner’s appellate brief uses the term “called
for” in reference to the post-gift acts of the donees under the
Confirmation Agreement, as though the Assignment Agreement
required these acts. It does no such thing; it leaves
everything post-gift to the independent discretion of each donee.

11
to review the Frazier appraisal before entering into the

Confirmation Agreement. In addition, any exempt donee that might

question or disagree with the Frazier appraisal had the right to

retain its own appraiser and, if still dissatisfied, to resolve

questions of value and allocation of interests in MIL through

binding arbitration.

CFT elected to retain outside counsel who, in consultation

with CFT’s president and its director of development (both of whom

were lawyers with extensive experience in reviewing appraisals of

closely-held interests), independently analyzed the Frazier

appraisal in light of the then-current circumstances. CFT

subsequently accepted the Frazier appraisal. Although CFT did not

retain an independent appraiser, its officers and outside counsel

expressed confidence in Mr. Frazier and his firm, found his

methodology appropriate, and concluded that the value of CFT’s

percentage interest in MIL proposed in the Confirmation Agreement

was an acceptable reflection of the dollar value of the interest in

MIL that CFT had received from the Taxpayers in January. Neither

the Majority Opinion nor any of the four other opinions filed in

the Tax Court found evidence of any agreement —— not so much as an

implicit, “wink-wink” understanding —— between the Taxpayers and

any of the donees to the effect that any exempt donee was expected

to, or in fact would, accept a percentage interest in MIL with a

12
value less than the full dollar amount that the Taxpayers had given

to such a donee two months earlier.11

Late in June of 1996, approximately three months after all

donees had entered into the Confirmation Agreement, MIL exercised

its “call right” under the Assignment Agreement to redeem the

exempt donees’ interests in MIL. Even though only months had

elapsed since the January gifts had been appraised, MIL contracted

with Mr. Frazier to update his original appraisal as of June 29,

1996, to determine the then-current fair market value of the

interests to be redeemed. After that updated appraisal was

completed, MIL, the Symphony, and CFT reviewed it and agreed to

accept its figure of $93,540 as the fair market value of each one

per cent interest in MIL to be redeemed. This in turn produced

slightly increased redemption prices of $140,041 for the Symphony’s

1.497 per cent interest (originally $134,000) and $338,967 for

CFT’s 3.624 per cent interest (originally $324,283). None of the

opinions filed in this case contends that the Taxpayers had

anything at all to do with MIL’s exercise of the call right or with

11
The lone exception is a gratuitous generalization in a
footnote of the Majority opinion, in reference to the
Confirmation Agreement, to which the Taxpayers were not parties.
McCord, 120 T.C. at 373 n.9 (stating that “it is against the
economic interest of a charitable organization to look a gift
horse in the mouth.”).

13
the redemption prices paid by MIL to the Symphony and CFT for these

interests.12

B. Taxation of 1996 Gifts

In 1997, the Taxpayers timely filed federal gift tax returns

for calendar year 1996, reflecting the aggregate values of their

January 12, 1996 gifts as $2,475,896.40 and $2,482,604.84,

respectively. These taxable values (before adjustment for annual

exclusions of $60,000 per Taxpayer and charitable contribution

deductions of $209,173 per Taxpayer) were determined on the basis

of the Frazier appraisal for that date, in which the gross fair

market value of the respective gifts were reduced by, among other

things, (1) total federal gift taxes payable by the Taxpayers on

their gifts to the non-exempt donees, payment of which was assumed

by these donees, and (2) the actuarially determined present value

of the non-exempt donees’ contractually assumed liability for the

additional estate taxes that would be incurred pursuant to the

current version of § 2035 and the date-of-gift estate tax rates,

should the triggering condition subsequent of the subject Tax Code

provision occur, i.e., should either or both of the Taxpayers fail

to survive for three years after January 12, 1996.13

12
See id. at 365 n.2 (“[P]etitioners were not involved in
the allocation of the gifted interest among the assignees
pursuant to the Confirmation Agreement.”).
13
On their gift tax returns, the Taxpayers claimed annual
exclusions totaling $60,000 on gifts to non-charitable donees and
charitable deductions on gifts to the charitable donees in the
amount of $209,173, reducing their respective amounts of taxable

14
C. Deficiency

The Commissioner of Internal Revenue (the “Commissioner”)

issued deficiency notices on Taxpayers’ 1996 gift taxes in amounts

of $2,053,525 and $2,047,903, respectively. These amounts resulted

from the Commissioner’s proposed increases in the values of taxable

gifts for 1996 of $3,740,904 and $3,730,439, respectively. The

Commissioner based these asserted increases on his contentions that

the Taxpayers had (1) understated the fair market value of the

donated interests in MIL, and (2) erred in discounting the fair

market value of those interests by the mortality-based, actuarially

calculated present value of the non-exempt donees’ assumed

obligations for additional estate taxes under § 2035. The

Commissioner’s fair market value of a one-percent interest in MIL

was $171,749, almost double the Taxpayers’ one-percent figure of

$89,505.

D. Proceedings

Shortly after these notices of deficiency were issued, the

Taxpayers filed a petition in the Tax Court contesting the

Commissioner’s proposed deficiencies. The case was tried several

months later before Judge Maurice B. Foley, largely on a joint

stipulation of facts filed on the day of trial. The principal

contested matters were those raised by the Commissioner in his

deficiency notices: (1) the values of the Taxpayers’ interest in

gifts to $2,206,724 and $2,213,432.

15
MIL given under the dollar-value formula clause to the exempt and

non-exempt donees on January 12, 1996, and (2) the propriety of

discounting the gross fair market value of the gifts to the non-

exempt donees on the basis of the actuarially determined negative

present value of these donees’ assumed liability for additional

estate taxes of the Taxpayer or Taxpayers who might die within

three years following the gifts. In their joint stipulations, the

parties agreed that the Commissioner had the burden of proof

pursuant to § 7491. The Majority expressly accepted that

evidentiary standard.14

In the trial before Judge Foley, the main thrust of the

Commissioner’s attack was grounded in the equitable doctrines of

form-over-substance and violation-of-public-policy. The

Commissioner did not advance an argument about the way that the

Assignment Agreement should be interpreted or about the role of the

Confirmation Agreement, if any, in determining fair market value.

Rather, he asked the court to disregard the plain wording of the

Assignment Agreement, as well as the undisputed facts of the

relationships among the parties and their actions vis-à-vis one

another —— actions both taken and not taken —— and to decide the

case on one or both of these doctrinaire principles.15 Judge Foley

14
McCord, 120 T.C. at 369; see also U.S.T.C. R. Prac. & P.
142(a)(1)-(2).
15
It appears that the Commissioner also referenced the
doctrine of reasonable-probability-of-receipt in a brief to the
Tax Court, but he did not pursue or rely on it there or here.

16
determined the outcome of the case on the stipulated evidentiary

standard, holding that the Commissioner had failed to meet his

burden of proof on any contested issue of fact or law and therefore

could not prevail.

Approximately two years after that trial, the Acting Chief

Judge of the Tax Court issued an unusual order that resulted in a

proceeding that resembles an en banc rehearing. In essence, the

case was taken away from Judge Foley retroactively and reassigned

to Judge James S. Halpern who, on the same day, filed an opinion on

behalf of the Majority. He was joined by seven other Tax Court

judges, including the Acting Chief Judge. The Majority disagreed

with Judge Foley’s original opinion, which had turned on the

Commissioner’s failure to meet his burden of proof, and held

instead for the Commissioner.

The Majority’s holdings for the Commissioner were not,

however, based on any of the overarching equitable doctrines that

the Commissioner had advanced at trial. Instead, the Majority

crafted its own interpretation of the Assignment Agreement and gave

controlling effect to the post-gift Confirmation Agreement, all

based entirely on a theory that the Commissioner had never

espoused. At the core of the novel methodology thus conceived and

implemented, sua sponte, by the Majority is the consistently

rejected concept of postponed determination of the taxable value of

a completed gift —— postponed here until, two months after the

Taxpayers gifts were completed, the donees decided among themselves

17
(with neither actual nor implied participation of or suasion by the

donors) how they would equate the dollars-worth of interest in MIL

given to them on January 12, 1996, with percentages of interests in

MIL decided two months later by the donees in the Confirmation

Agreement. Stated differently, the Majority in essence suspended

the valuation date of the property that the Taxpayers donated in

January until the date in March on which the disparate donees

acted, post hoc, to agree among themselves on the Class B limited

partnership percentages that each would accept as equivalents of

the dollar values irrevocably and unconditionally given by the

Taxpayers months earlier. As shall be seen, we hold that the

Majority’s unique methodology violated the immutable maxim that

post-gift occurrences do not affect, and may not be considered in,

the appraisal and valuation processes.

The Taxpayers timely filed their notice of appeal.

II. ANALYSIS

A. Standard of Review

The complex appellate review required in this gift tax case

implicates (1) the interpretation and effect of contractual

agreements, (2) the nature of property interests transferred by

gift, (3) determination of the fair market value of such interests,

and (4) special law rules governing that kind of evaluation

exercise, including the types and percentages of discounts that may

be applied. Thus, our standard of review here cannot be covered

18
adequately by rotely reciting the ubiquitous single-sentence mantra

that “we review factual determinations for clear error and legal

determinations de novo.” The particularized standard of review

applicable in this case is accurately stated in the Taxpayers’

appellate brief:

An appellate court reviews a trial court’s
conclusions of law de novo and draws its own conclusions
in place of those of the trial court. See American Home
Assurance Co. v. Unitramp Ltd., 146 F.3d 311, 313 (5th
Cir. 1998); Estate of Dunn v. Commissioner, 301 F.3d 339,
348 (5th Cir. 2002). Where a question of fact, such as
valuation, requires legal conclusions, this Court reviews
those underlying legal conclusions de novo. See Adams v.
United States, 218 F.3d 383, 386 (5th Cir. 2000). The
determination of the nature of the property rights
transferred is a question of state law that this Court
reviews de novo. Id. (holding valuation subject to de
novo review because “to arrive at a reasonable conclusion
regarding the value of the [transferred] property . . . ,
one must first determine the rights afforded to the owner
[recipient] of such property by the applicable state
law”). The [Majority Opinion’s] failure to properly
define the nature of the property rights transferred
under the fixed-value formula in the Assignment Agreement
and its [rejection of the Taxpayers’ reduction of] the
value of the interests transferred by the value of the
[non-exempt] donees’ contractual obligation to pay estate
tax liability are questions of law subject to de novo
review by this Court. Id. (“Inasmuch as the trial
court’s ultimate finding here is predicated on a legal
conclusion regarding the rights inherent in the property,
its valuation is subject to de novo review.”). If this
Court ignores the Assignment Agreement and determines
that the interest to be valued are those set forth in the
Confirmation Agreement,16 the Tax Court’s factual
findings in the determination of the fair market value of
the interests transferred are reviewed for clear error.
See McInvale v. Commissioner, 936 F.2d 833, 836 (5th Cir.
1991).

16
Emphasis ours.

19
B. Burden of Proof

As we noted above, the parties stipulated (and the Tax Court

accepted for purposes of this case) that, pursuant to § 7491, the

Commissioner had the burden of proof. We review this case on

appeal accordingly.

C. Merits

1. Commissioner’s Theory on Appeal.

At the outset, we reiterate that, although the Commissioner

relied on several theories before the Tax Court, including

doctrines of form-over-substance, violation-of-public policy, and,

possibly, reasonable-probability-of-receipt, he has not advanced

any of those theories on appeal. Accordingly, the Commissioner has

waived them,17 and has instead —— not surprisingly —— devoted his

efforts on appeal solely to supporting the methodology and holdings

of the Majority, as succinctly summarized in the Taxpayers’

appellate brief:

[t]he Majority held that (1) the interests transferred
[by the Assignment Agreement of January 12, 1996] were
assignee interests in [MIL]; (2) the Majority was not
required to follow the terms of the Assignment Agreement
in determining the fair market value of the interests in
the partnership transferred by [the Taxpayers]; (3) the
fair market value of the total interests transferred was
$9,883,832, or $120,046 per 1% interest; (4) the value of

17
See Webb v. Investacorp, Inc., 89 F.3d 252, 257 n.2 (5th
Cir. 1996)(holding that a party who fails to raise an issue in
its brief waives the right to appellate review of that issue);
see also Fed.R.App.P. 28(a)(9)(A) (stating that appellant’s brief
must contain “appellant’s contentions and the reasons for them,
with citations to the authorities and parts of the record on
which the appellant relies”).

20
 the interests transferred should be based on the value
determined by the Majority on a per unit basis times the
percentage interests determined by the donees in a
Confirmation Agreement reached by the donees two months
after the gifts were made; and (5) the value of the [non-
exempt] donees’ contractual obligation to pay estate tax
liability [under § 2035] could not be deducted in
determining the value of [the Taxpayers’] gift.18

We address each of these holdings, albeit in a different sequence.

2. Nature of Rights Assigned

We gather that, in arguing at trial that some of the discounts

employed by the Taxpayers’ expert in valuing the interests donated

were erroneous or inapplicable, the Commissioner specifically

opposed a discount grounded in Mr. Frazier’s contention that the

Taxpayers had transferred less than full limited partners

interests. The Commissioner does not, however, advance such a

contention on appeal; so it too is waived, and we do not address

that issue.19 Our failure to address it should not, however, be

viewed as either agreeing or disagreeing with the Majority’s

determination on this point. Rather, as shall be shown, we have no

need to reach it.

3. Fair Market Value of Interests in MIL Transferred by the
Taxpayers

Contributing to the framework of our review in this section is

the sometimes overlooked fact that this family-partnership case is

not an estate tax case, but a gift tax case. Thus, the aggressive

18
Emphasis ours.
19
See supra note 17 and accompanying text.

21
and sophisticated estate planning embodied here is not typical of

the estate plans that have produced the vast majority of post-

mortem estate tax valuation cases.20 Also helping to frame our

review is the fact that this is not a run-of-the-mill fair market

value gift tax case. Rather, as recognized by the Majority and by

Judges Chiechi and Foley in dissent, the feature that most

fractionated the Tax Court here is the Taxpayers’ use of the

dollar-formula, or “defined value,” clause specified in the

Assignment Agreement (the gift instrument, not either the original

or the amended partnership agreement nor the Confirmation

Agreement) to quantify the gifts to the various donees in dollars

rather than in percentages, the latter being more commonly

encountered in gifts and bequests that parcel out interests in such

assets as corporate stock, partnerships, large tracts of land, and

the like.

a. Fair Market Value Must Be Determined on Date of
Gift.

As detailed above, the Taxpayers irrevocably and gratuitously

donated their entire remaining interests in MIL, constituting in

the aggregate 82.33369836 per cent of that partnership. They did

so on January 12, 1996 by executing the Assignment Agreement, which

specified in dollars the quantum of all gifts of interests in MIL,

except for the one to CFT which was a residual donation of whatever

20
Cf., e.g., Strangi v. Commissioner, 417 F.3d 468 (5th
Cir. 2005).

22
interest remained —— if any —— after all other gifts had been

satisfied. Mr. Frazier appraised the fair market value of the

interests given at $89,505 per one per cent ($7,369,215 for the

Taxpayers’ entire remaining interests in MIL),21 and the Taxpayers

filed gift tax returns calculated on these values.

The Commissioner’s deficiency notices were based on a total

value of the interest given, before adjustments, of $14,140,730,

almost double the Frazier values used by the Taxpayers in preparing

their gift tax returns. The Commissioner calculated his asserted

total value by using $171,749 as the value of a one-percent

interest in MIL.

The Commissioner introduced the expert opinion of Mukesh

Bajaj, Ph.D. This expert’s bottom line was that the fair market

value of a one-percent interest in MIL on the date of the gift was

$150,665.54, producing a total fair market value of $12,404,851.12.

Thus, the Commissioner’s own expert calculated the aggregate fair

market value of all gifts to be $1,735,879 less than the value

asserted by the Commissioner in his deficiency notices. Even

though Dr. Bajaj disagreed with the values returned by the

Taxpayers, he also disagreed substantially with the values asserted

by the Commissioner in his delinquency notices.22

21
The Commissioner’s appellate brief uses $7,369,303.
22
This exemplifies a practice of the IRS that we see with
disturbingly increased frequency, e.g., a grossly exaggerated
amount asserted in a notice of deficiency. See, e.g., Caracci v.
Commissioner, --- F.3d --- (5th Cir. 2006), 2006 WL 1892600.

23
 The Taxpayers adduced the testimony of Mr. Frazier and the

documentary evidence he offered in support of his opinion,

reiterating in detail his appraisal methodology and his conclusion

that $89,505 was indeed the fair market value of one per cent of

the interests donated by the Taxpayers as of January 12, 1996. The

Taxpayers thereby provided the evidentiary underpinning of their

proffered values.

Fast forward two years: Judge Foley’s judgment for the

Taxpayers based on the Commissioner’s failure to meet his burden of

proof is vacated and replaced by the Majority’s. The Majority’s

opinion substantively treats neither the nature of the

Commissioner’s burden of proof nor whether he met it. Instead, the

Majority confects its own methodology grounded in significant part

in the donees’ post-gift Confirmation Agreement. The Majority

first proceeds independently to appraise the donated property,

eventually reaching a value precisely halfway between those of Mr.

Frazier and Dr. Bajaj.23 As we hereafter hold, as a matter of law,

that the methodology employed by the Majority in determining the

taxable and non-taxable values of the various donations constitutes

legal error, the results of the Majority’s independent appraisal of

23
The value of $120,046 per one-percent interest produced
by the Majority has a de minimis $39 variance from the
arithmetically precise median between the dueling experts’
respective one-percent values: (a) $89,505 plus $150,665 =
$240,170; (b) $240,170 divided by 2 = $120,085; (c) $120,085
minus $120,046 = $39. Thus the Majority split this almost $10
million baby precisely halfway between the experts’ respective
values.

24
the donated interests in MIL and their values for gift tax

purposes, become irrelevant to the amount of the gift taxes owed by

the Taxpayers.24

b. Re-Allocating Values of Gifts Based on Post-Gift
Acts of Donees.

Under the instant circumstances, the ultimate-valuation “fact”

is at most a mixed question of fact and law, and thus a legal

conclusion.25 Particularly when, as here, the determination of the

fair market value for gift tax purposes requires legal conclusions,

our review is de novo.26 Indeed, it is settled in this circuit and

others that a trial court’s methodology in resolving fact questions

is a legal issue and thus reviewable de novo on appeal.27

24
Even though (1) Judge Swift concurred, (2) Judges Chiechi
and Foley separately concurred in part and dissented in part (and
joined each others opinions), and (3) Judge Laro dissented and
was joined by Judge Vasquez, none of these five judges advocated
substantially different valuation methodologies than the one
employed by the Majority to determine date-of-gift values before
the Majority proceeded to apply the provisions of the
Confirmation Agreement to such values so as to re-allocate
percentage interests. This we assume is because they (at least
the four judges who totally or partially dissented) would never
have reached the question of fair market value, because they were
either sustaining the Taxpayers for the Commissioner’s failure to
meet his burden of proof, or sustaining the Commissioner under
one or more of the equitable doctrines he advanced at trial but
has abandoned on appeal.
25
See Estate of Dunn v. Commissioner, 301 F.3d 339, 357
(5th Cir. 2002).
26
See Adams v. United States, 218 F.3d 383, 386 (5th Cir.
2000).
27
See, e.g., Estate of Dunn, 301 F.3d at 357; Adams, 218
F.3d at 386 (“Inasmuch as the trial court’s ultimate finding here
is predicated on a legal conclusion regarding the rights inherent

25
 The Majority’s key legal error was its confecting sua sponte

its own methodology for determining the taxable or deductible

values of each donee’s gift valuing for tax purposes here. The

core flaw in the Majority’s inventive methodology was its violation

of the long-prohibited practice of relying on post-gift events.28

Specifically, the Majority used the after-the-fact Confirmation

Agreement to mutate the Assignment Agreement’s dollar-value gifts

into percentage interests in MIL. It is clear beyond cavil that

the Majority should have stopped with the Assignment Agreement’s

plain wording. By not doing so, however, and instead continuing on

to the post-gift Confirmation Agreement’s intra-donee concurrence

on the equivalency of dollars to percentage of interests in MIL,

the Majority violated the firmly-established maxim that a gift is

valued as of the date that it is complete; the flip side of that

maxim is that subsequent occurrences are off limits.29

In this respect, we cannot improve on the opening sentence of

Judge Foley’s dissent:

Undaunted by the facts, well-established legal precedent,
and respondent’s failure to present sufficient evidence
to establish his determinations, the majority allow their

in the property, its valuation is subject to de novo review.”).
28
See, e.g., Ithaca Trust Co. v. United States, 279 U.S.
151 (1929); Estate of McMorris v. Commissioner, 243 F.3d 1254
(10th Cir. 2001); Estate of Smith v. Commissioner, 198 F.3d 515,
522 (5th Cir. 1999)(“[T]he value of the thing to be taxed must be
estimated as of the time when the act is done.”)(quoting Ithaca
Trust Co., 279 U.S. at 155)(emphasis in original).
29
See supra note 28.

26
 olfaction to displace sound legal reasoning and adherence
to the rule of law.30

Judge Foley’s “facts” are those stipulated and those adduced

(especially the experts’ testimony) before him as the lone trial

judge, including the absence of any probative evidence of

collusion, side deals, understandings, expectations, or anything

other than arms-length, unconditional completed gifts by the

Taxpayers on January 12, 1996, and arm’s-length conversions of

dollars into percentages by the donees alone in March. Judge

Foley’s “well-established legal precedent” includes, without

limitation, constant jurisprudence that has established the

immutable rule that, for inter vivos gifts and post-mortem bequests

or inheritances alike, fair market value is determined, snapshot-

like, on the day that the donor completes that gift (or the date of

death or alternative valuation date in the case of a testamentary

or intestate transfer).31 And, Judge Foley’s use of “olfaction” is

an obvious, collegially correct synonym for the less-elegant

vernacular term, “smell test,” commonly used to identify a decision

made not on the basis of relevant facts and applicable law, but on

the decision maker’s “gut” feelings or intuition. The particular

olfaction here is the anathema that Judge Swift identifies

pejoratively in his concurring opinion as “the sophistication of

30
McCord, 120 T.C. at 416 (Foley, J., concurring in part
and dissenting in part) (emphasis added).
31
See, e.g., Estate of Smith, 198 F.3d at 522.

27
the tax planning before us.”32 The Majority’s election to rule on

the basis of this olfaction is likewise criticized by Judge Laro,

dissenting in part, as the

Majority Appl[ying] Its Own Approach:

To reach the result that the majority desires, the
majority decides this case on the basis of a novel
approach neither advanced nor briefed by either party
. . . .33

Judge Foley also disagrees with the Majority —— and rightly

so, we conclude —— for basing its holding on an interpretation of

the Assignment Agreement and an application of the Confirmation

Agreement that the Commissioner never raised. To this criticism we

add that the Majority not only made a contractual interpretation of

the Assignment Agreement that rests in part on the non sequitur

that it uses the term “fair market value” without including the

modifying language “as finally determined for tax purposes,”34 but

also indicated a palpable hostility to the dollar formula of the

defined value clause in that donation agreement. This is

exacerbated by the Majority’s lip service to, but ultimate

disregard of, the immutable principal that value of a gift must be

determined as of the date of the gift. The Majority violates this

32
McCord, 120 T.C. at 404 (Swift, J., concurring).
33
Id. at 425 (Laro, J., dissenting) (emphasis in original).
34
Id. at 418-419 (Foley, J., concurring in part and
dissenting in part) (“There is no material difference between
fair market value ‘determined under Federal gift tax valuation
principles’ and fair market value ‘as finally determined for
Federal gift tax purposes.’”).

28
doctrine when it relies in principal part on the post-gift actions

of the donees in their March 1996 execution of the Confirmation

Agreement. Judge Foley correctly notes that the Majority erred in

conducting

[A] tortured analysis of the [A]ssignment [A]greement
that is, ostensibly, justification for shifting the
determination of transfer tax consequences from the date
of the transfer [January 12, 1996]...to March 1996 (i.e.,
the date of the [C]onfirmation [A]greement). The
majority’s analysis of the [A]ssignment [A]greement
requires that [Taxpayers] use the Court’s valuation to
determine the [dollar] value of the transferred
interests, but the donees’ appraiser’s valuation to
determine the [percentages of] interests transferred to
the charitable organizations. There is no factual,
legal, or logical basis for this conclusion.35

We obviously agree with Judge Foley’s unchallenged baselines

that the gift was complete on January 12, 1996, and that the courts

and the parties alike are governed by § 2512(a). We thus agree as

well that the Majority reversibly erred when, “in determining the

charitable deduction, the majority rely on the [C]onfirmation

[A]greement without regard to the fact that [the Taxpayers] were

not parties to this agreement, and that this agreement was executed

by the donees more than 2 months after the transfer.”36 In taking

issue with the Majority on this point, Judge Foley cogently points

out that “[t]he Majority appear to assert, without any authority,

35
Id. at 416-17 (emphasis added).
36
Id. at 417-18 (citing Ithaca Trust Co., 279 U.S. at 155;
Estate of McMorris, 243 F.3d at 1259-60; Estate of Smith, 198
F.3d at 522; Propstra v. United States, 680 F.2d 1248, 1250-51
(9th Cir. 1982)).

29
that [the Taxpayers’] charitable deduction cannot be determined

unless the gifted interest is expressed in terms of a percentage or

a fractional share.”37 As implied, the Majority created a valuation

methodology out of the whole cloth. We too are convinced that

“[r]egardless of how the transferred interest was described, it had

an ascertainable value” on the date of the gift.38 That value

cannot, of course, be varied by the subsequent acts of the donees

in executing the Confirmation Agreement. Consequently, the values

ascribed by the Majority, being derived from its use of its own

imaginative but flawed methodology, may not be used in any way in

the calculation of the Taxpayers’ gift tax liability.

In the end, whether the controlling values of the donated

interests in MIL on the date of the gifts are those set forth in

the Assignment Agreement based on Mr. Frazier’s appraisal of

$89,505 per one per cent or those reached by the Majority before it

invoked the Confirmation Agreement (or even those used by the

Commissioner in the deficiency notices or those reached by the

Commissioner’s expert witness for that matter), have no practical

effect on the amount of gift taxes owed here. Nevertheless, given

the Majority’s non-erroneous rejection of the Commissioner’s

experts’s values and, as we shall show, its own legal error, not

applying a discount to account for the present negative value of

37
Id. at 418.
38
Id.

30
the non-exempt donees’ assumed liability for § 2035 estate taxes

(even before the Majority translated the defined value clause’s

dollars into percentages by use of the Confirmation Agreement), the

fair market values applicable in this case are, by a process of

elimination, those determined by the Frazier report and used by the

Taxpayers in preparing their gift tax returns for 1996. In sum, we

hold that the Majority erred as a matter of law. Accordingly, the

taxable values used by the Taxpayers in preparing their gift tax

returns must stand, subject only to the question of their having

been arrived at, in part, by applying the actuarially determined

present value of the non-exempt donees’ assumed responsibility for

payment of estate taxes, if any, under § 2035. We address that

issue now.

4. Effect on Present Fair Market Values of Potential Estate
Taxes Under § 2035

Taxes paid by a non-exempt donee on the value of property

gratuitously transferred reduces the taxable value of such gift.39

In calculating the taxable value of their 1996 gifts, the Taxpayers

employed a variation on the venerable “net gift” theme for reducing

that taxable value. They did so in calculating not only the

amounts of correct gift taxes assumed by the non-exempt donees, but

also in calculating the mortality-driven discount that a willing

buyer would require to account for additional estate taxes that

these donees would have to pay, pursuant to § 2035, if the

39
See, e.g., Rev. Rul. 75-72, 1975-1 C.B. 310.

31
Taxpayers or either of them should die within three years following

the gift. The Majority held for the Commissioner, who contended

that this particular factor is “too” speculative to be recognized

in calculating the net gift. It appears that the dissenters and

concurrers would have agreed with the Majority on this point. We,

however, disagree with the Majority and therefore reverse its

ruling on this issue too.

There is nothing speculative about the date-of-gift fact that

if either or both Taxpayers were to die within three years

following the gift (as did Mr. McCord), the non-exempt donees would

have been (and, coincidently, were) legally bound to pay the

additional estate tax that could result from the provisions of §

2035. It is axiomatic contract law that a present obligation may

be, and frequently is, performable at a future date. It is also

axiomatic that responsibility for the future performance of such a

present obligation may be either firmly fixed or conditional, i.e.,

either absolute or contingent on the occurrence of a future event,

a “condition subsequent.” And, it is axiomatic that any

conditional liability for the future performance of a present

obligation is —— to a greater or lesser degree —— “speculative.”

The issue here, though, is not whether § 2035's condition

subsequent is speculative vel non, but whether it is too

speculative to be applicable, a very elastic yardstick indeed.

Conditions subsequent come in a variety of flavors: A future

event that is absolutely certain to occur, such as the passage of

32
time; a future event, like the act of a third party that is not

absolutely certain to occur, but nevertheless may be a “more ...

certain prophec[y]”40; a possible, but low-odds, future event, such

as the reversion of an interest in property if the unmarried and

childless life tenant not only survives the transferor, but herself

bears children who live to the age of majority and at least one of

whom survives the transferor, as in Robinette v. Helvering,41

undeniably a “less ... certain prophec[y] of the future.”42 And

there are all degrees and shades of certainty along the

“speculative” continuum, from absolute certainty to essentially

total impossibility.

The issue presented here regarding the degree of certainty of

the assumed obligation under § 2035, is a legal one (which we

review de novo) To what conditions subsequent are the exempt

donees’ assumed § 2035 obligations subject, and thus

“speculative”?; and, in combination, do these conditions

subsequent’s respective degrees of uncertainty make the contingent

obligation in question too speculative to be credited for purposes

of valuing the gift to the non-exempt donee? The judicial

determination of how much is too much is a subjective one; yet it

remains a mixed question of law and ultimate fact, to be reviewed

40
Ithaca Trust Co., 279 U.S. at 155.
41
318 U.S. 184 (1943).
42
Ithaca Trust Co., 279 U.S. at 155.

33
de novo on the basis of an analysis of all the relevant and

material discrete facts. Here, the discrete facts are not in

dispute; only the extent to which, together, they make the

probability of the occurrence of § 2035's condition subsequent too

speculative to credit.

Putting ourselves in the shoes of the ubiquitous “willing

buyer,” we must first identify each factor that, by future change,

could affect the likelihood that the non-exempt donees’ will

eventually have to pay the additional § 2035 estate tax. After

that, we must identify which of those factors a willing buyer would

(and we, as a matter of law, must) take into consideration in

deciding whether it is too speculative for him to insist on its

being used in reaching a price that the seller is willing to

accept. It is in this context that we must make subjective

determinations as to (1) where, on that continuum between absolute

certainty and virtual uncertainty the non-exempt donees’

contractually assumed responsibility for § 2035 estate taxes falls,

and then (2) whether it is so speculative that our willing buyer

would not insist on its being taken into consideration as a

discount that a willing seller must accept.

Those donees’ future performance of their present § 2035

obligation was subject to a number of factors and conditions at the

time in January 1996 that the gifts were made. And, some of these

factors are not totally predictable or quantifiable:

34
 (1) The amount of gift taxes owed by the Taxpayers
for these gifts.

(2) Whether there would be an estate tax or
essentially identical death-related transfer tax in
existence at the time of the death(s) of a Taxpayer or
Taxpayers.

(3) Whether the amount of gift taxes on the 1996
gifts would be taxable under § 2035, or some similar
successor I.R.C. section, in the estate of a Taxpayer who
dies within three years following the gift.

(4) Whether, if such an estate tax would exist at
the future death of a Taxpayer and, under it, the amount
of the 1996 gift taxes are subjected to the marginal
estate tax rate by § 2035 or any successor provision,
that rate will be greater than, less than, or the same as
the rate that was in effect on January 12, 1996.

(5) Whether, if § 2035 or its equivalent is in
effect at the death or deaths of the Taxpayers, it will
still be conditioned on survivorship for three years
after the 1996 gifts, and if so, the period of
survivorship will be the same, shorter, or longer than
three years.

(6) Whether the interest rate that a willing buyer
and willing seller of the transferred partnership
interests would agree to use in discounting their price
to account for the negative value of the seller’s
potential obligation under § 2035 would be the same rate
of interest as it was on the date of the gifts.

(7) What would be the additional discount in value
for the § 2035 obligation, based on actuarial odds that
the measuring life would exceed the three-year
survivorship trigger that automatically terminates the §
2035 obligation.

We consider each of these factors in turn.

Regarding the continued existence of (1) the estate tax law in

its date-of-gift form and content, including § 2035, and (2) the

estate tax rates in their date-of-gift percentages, this and other

courts have repeatedly held that potential future changes in, or

35
the continued existence of, the federal income tax law in general

and of the capital gains tax in particular, are not contingencies

that a willing buyer would take into consideration.43 For purposes

of our willing buyer/willing seller analysis, we perceive no

distinguishable difference between the nature of the capital gains

tax and its rates on the one hand and the nature of the estate tax

and its rates on the other hand. Rates and particular features of

both the capital gains tax and the estate tax have changed and

likely will continue to change with irregular frequency; likewise,

despite considerable and repeated outcries and many aborted

attempts, neither tax has been repealed. Even though the final

amount owed by the Taxpayer as gift tax on their January 1996 gifts

to non-exempt donees has yet to be finally determined (depending,

as it does, on the final results of this case), we are satisfied

that the transfer tax law and its rates that were in effect when

the gifts were made are the ones that a willing buyer would insist

on applying in determining whether to insist on, and calculate, a

discount for § 2035 estate tax liability.

The same is true for the interest rate at which a willing

buyer would discount the § 2035 obligation to determine its present

value. The rate of interest is not, however, a matter of

speculation. § 7520 dictates precisely the rate of interest to be

43
See, e.g., Estate of Dunn, 301 F.3d at 351; Estate of
Jameson v. Commissioner, 77 T.C.M. (CCH) 1383 (1999), rev’d on
other grounds, 267 F.3d 366 (5th Cir. 2001).

36
applied; and here, it is the rate that was applicable on the date

of the gift. That date is, after all, the date on which our

mythical willing buyer is deemed to have made his offer and had it

accepted. The interest tables promulgated by the government bind

the Commissioner and the Taxpayers alike.

This leaves for our examination only § 2035's condition

subsequent —— the ipso facto three-year expiration of liability for

additional estate tax if the Taxpayer in question lives that long

after making the gift. We must decide whether, in combination with

the other above-identified factors, § 2035's three-year repose

pushes the obligation assumed by the non-exempt donees beyond the

point on the “speculative” continuum at which this concededly

uncertain factor becomes too speculative. Even though neither we

nor the Tax Court has addressed this precise question before,44 we

conclude on plenary review that it does not.

First, the Commissioner has never contended that Mr. Frazier’s

arithmetic in calculating the net taxable value of the January 1996

gifts was erroneous; only that, inter alia, no discount should have

been taken for the § 2035 factor. Neither did the Commissioner

44
McCord, 120 T.C. at 401-02 (stating “[t]he specific
question before us is whether to treat as part of the sale
proceeds (consideration) received by each [Taxpayer] on the
transfer of the gifted interest any amount on account of the
[non-exempt donees’] obligation pursuant to the [A]ssignment
[A]greement to pay the [§] 2035 tax that would be occasioned by
the death of that [Taxpayer] within 3 years of the valuation
date. We have not faced that specific question before.”)
(emphasis added).

37
dispute that, if legally applicable, the estate and gift tax laws

and rates then in existence were those that were applied; nor that

the correct interest rate for the present-value discount was used;45

nor that the ages of the Taxpayers or the actuarially determined

mortality factors for the Taxpayers at those ages were correct.46

Again, then, the only legal question that remains unanswered in

our de novo review is: Was the limitation of three years on the

Taxpayers’ exposure to the additional estate taxes imposed by §

2035 (which the non-exempt donees assumed), when viewed in pari

materia with all other relevant factors and circumstances, too

speculative to be included when Mr. Frazier calculated the net

taxable value of those 1996 gifts? We answer this question in the

negative, because we are convinced as a matter of law that a

willing buyer would insist on the willing seller’s recognition that

—— like the possibility that the applicable tax law, tax rates,

interest rates, and actuarially determined life expectancies of the

Taxpayer could change or be eliminated in the ensuing three years

—— the effect of the three-year exposure to § 2035 estate taxes was

sufficiently determinable as of the date of the gifts to be taken

45
I.R.C. § 7520.
46
Table 80CNSMT, in Treas. Reg. § 20.2031-
7A(e)(4)(effective April 30, 1989 through May 1, 1999); see
Ithaca Trust Co., 279 U.S. at 155 (stating that property
interests that terminate automatically at the death of the
lifetime owner “must be estimated by the mortality tables.”).

38
into account.47 And, after all, it is the willing buyer/willing

seller test that we are bound to apply.48

III. Conclusion

For the foregoing reasons, we reverse the rulings and judgment

of the Tax Court as embodied in the Majority’s opinion.

Accordingly, we hold that (1) given the Majority’s reversible

errors in evaluating the donated interest and using them in

calculating gift taxes by (a) employing the Confirmation Agreement

in its own calculations and (b) rejecting the § 2035 estate tax

liability to discount the appraised value, the taxable value of the

47
Our holding today approving use of the “mortality-
adjusted” present value of the § 2035 contingent liability for
estate taxes is not weakened by the cases cited by the Majority.
It concedes that “neither Armstrong Trust v. United States, [132
F.Supp. 2d 421 (W.D.Va. 2001)], nor Murray v. United States, [687
F.2d 386 (Ct. Cl. 1982)], is binding on us, and, indeed, the
facts of both cases are somewhat different from the facts before
us today.” Armstrong Trust involved the donees’ statutory
liability under § 6324(a)(2) for all § 2035 estate taxes, a
significantly more speculative contingency than the precise
condition and precisely determinable amount of § 2035 estate
taxes in this case. In Murray, the Court of Claims considered a
substantially different and more speculative contingent liability
than the instant donees for the “gross up” three-year absolute
liability of the Taxpayers under § 2035. Even more inapposite is
the 63-year-old Supreme Court opinion in Robinette v. Helvering,
318 U.S. 184 (1943), a case involving the value of a highly
speculative reversion to the donor, which was contingent not only
on his outliving his 30-year-old daughter, but also on her having
children, at least one of whom attained the age of 21. That
venerable case casts no shadow on our conclusion here.
48
Treas. Reg, § 25.2512-1; see, e.g., Estate of Newhouse v.
Commissioner, 94 T.C. 218, (1990)(citing Estate of Bright v.
United States, 658 F.2d 999, 1006 (5th Cir. 1981)); see also
Shepherd v. Commissioner, 283 F.3d 1258, 1262 n.7 (11th Cir.
2002).

39
interests in MIL given by the Taxpayers to the Sons and the GST

Trusts is not those determined by the Tax Court but are those

determined and used by the Taxpayers, viz., $6,910,932.52; (2) the

Taxpayers are entitled to a charitable deduction for the interests

in MIL transferred to CFT under the Assignment Agreement in the

amount of $324,345.16, being the base fair market value as

determined by Mr. Frazier ($7,369,277.67), less the amounts given

to the non-exempt donees ($6,910,932.51) and less the amount given

to the Symphony ($134,000); (3) the January 12, 1996 taxable values

of the interests in MIL given to the non-exempt donees were

properly determined by applying, among other discounts, the

actuarially determined date-of-gift present “value” of the

obligation assumed by these donees to pay § 2035 estate taxes; and

(4) the resulting fair market value of all interests transferred by

the Taxpayers under the Assignment Agreement on January 12, 1996,

were, respectively, $2,475,896.40 and $2,482,604.82; after annual

exclusions and charitable contribution deductions, $2,206,724 and

$2,213,432, respectively, as taxable gifts.

Accordingly, we reverse the holding of the Tax Court, and we

remand this case to that court for entry of judgment for the

Petitioners, consistent with this opinion, including, without

limitation, assessment of all costs to the Respondent.

REVERSED and REMANDED for entry of consistent judgment.

40
41