Adams v. United States

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
______________________

No. 99-10497
______________________

PATRICIA M. ADAMS, et al.
Plaintiffs-Appellants

versus

UNITED STATES OF AMERICA,
Defendant-Appellee.
_______________________

Appeal From The United States District Court
for the Northern District of Texas
_______________________
July 5, 2000

Before JONES, DUHÉ, and WIENER, Circuit Judges.

WIENER, Circuit Judge:

This estate tax case presents a single issue: Whether

discounts for lack of control, lack of marketability, and poor

portfolio diversity are applicable when appraising the value of an

assignee’s fractional interest in a Texas general partnership for

estate tax purposes. The district court correctly identified the

relevant interest of the partnership in question —— that of a

partner’s assignee, not that of a full-fledged partner —— but

reached the erroneous legal conclusion that the assignee of a 25

percent partner’s interest has a “well-established” right to

receive a 25 percent pro rata share of the partnership’s net asset

value (“NAV”) without being reduced by such discounts. Proceeding

on the basis of this erroneous conclusion of law, the district
court held that the assignee’s interest would change hands between

a willing buyer and a willing seller for a price equal to such an

undiscounted 25 percent ratable share of the partnership’s NAV.1

Our “Erie Guess” would likely be that —— under the Texas

partnership law, which is applicable to this case —— an assignee’s

interest in a partnership would be subject to such discounts; but,

more significant to today’s inquiry, we are firmly convinced that

it is anything but “well-established” that a partner’s assignee has

the right to receive a 25 percent share of NAV. We discern a very

real possibility that, as a matter of law, the holder of an

assignee interest in the partnership could be stuck with an

unmarketable interest in a partnership that owns a poorly

diversified mix of assets and over which the assignee has no legal

control. If this proved to be the case, the fair market value of

the 25 percent assignee interest would be substantially less than

a straight, ratable 25 percent share of the partnership’s NAV,

thereby reflecting these undesirable characteristics. More to the

point, the legal uncertainty that obscures the extent, if any, to

which an assignee has the right to provoke liquidation or,

alternatively, to force a straight pro rata redemption of his

interest, suggests that any effort to exercise such putative rights

would be met with strong resistance from the remaining partners.

1
The court recognized, and the government does not contest,
the propriety of a discount for liquidation-related brokerage
costs.

2
This legal uncertainty —— which raises the specter of costly

litigation in addition to an adverse result —— is itself a factor

that must be taken into account when appraising the fair market

value of an assignee’s interest for estate tax purposes. We

therefore reverse the district court’s judgment in favor of the

government and remand the case for further proceedings.

I.

FACTS AND PROCEEDINGS

The material facts are undisputed and have for the most part

been stipulated by the parties. Mildred M. Mendenhall (“Decedent”)

died owning a 25 percent interest in Taylor Properties, a Texas

general partnership (the “partnership”). The other 75 percent of

the partnership was owned equally by three of Decedent’s siblings,

25 percent each. The four siblings had formed the partnership to

hold and manage several items of family property inherited from

their father, including ranch land, marketable securities, and

mineral royalties and working interests.

At all times relevant to this appeal the partnership was

governed by the Texas Uniform Partnership Act (“TUPA”),2 that

state’s version of the Uniform Partnership Act (1914) (“UPA”).3

2
Tex. Civ. Stat. art. 6132b §§1-46. Texas has adopted the
Revised Uniform Partnership Act (1996). See Tex. Civ. Stat. art.
6132b-1.01 et seq. The parties agree that this case is governed by
the UPA. See infra n.29.
3
6 Uniform Laws Annotated 125 (1995 Master Edition).

3
The partnership agreement designated Decedent’s brother as the

managing partner; he alone was given responsibility for managing

the day-to-day affairs of the partnership and for executing

documents on the partnership’s behalf.

Under the TUPA, the death of a partner causes a partnership to

dissolve, absent a contrary provision in the partnership

agreement.4 No such contrary provision is contained in the instant

partnership agreement.

Decedent died in 1992. The executors of the Decedent’s estate

filed a Federal Estate Tax Return (Form 706) in which the 25

percent partnership interest that passed from Decedent to her heirs

was returned at $7.481 million.5 The IRS audited the return and

assessed a deficiency based in part on the IRS’s conclusion that

the Decedent’s 25 percent interest in the partnership should have

been valued at $7.604 million. The Estate paid the assessment and,

pursuant to I.R.C. §6511, filed suit for a refund in federal

district court.

The government filed a motion for partial summary judgment

seeking a determination that the proper interest to value for

federal estate tax purposes is an assignee interest in a

4
See TUPA §31(4) (“[Dissolution is caused by] the death of any
partner unless the agreement between the partners provides
otherwise”).
5
As shall be seen in subsequent portions of this opinion, the
Estate’s original return value of the interest was substantially
greater than the value asserted in its suit for refund.

4
liquidating partnership. The Estate did not dispute that the

relevant interest for federal estate tax purposes was an assignee

interest,6 but maintained that because “dissolution” of the

partnership would not necessarily result in a “winding up”7 or

liquidation of that partnership, the government is wrong in

contending that liquidation of the partnership was inevitable. The

district court agreed with the Estate, finding that “[a]s an

alternative to liquidation, the remaining partners can continue the

business of a dissolved partnership, provided they pay the deceased

partner’s estate the value of her [assignee] interest as of the

date of the dissolution.” The court concluded that the relevant

interest for federal estate tax purposes is “most accurately

described as an assignee interest in a dissolved, rather than

liquidating, partnership.”

The parties incorporated this conclusion into their joint

6
See TUPA §28-B(B) (“On the death of a partner, such partner’s
surviving spouse (if any) and such partner’s heirs, legatees or
personal representative, shall to the extent of their respective
interest in the partnership, be regarded for purposes of this Act
as assignees and purchasers of such interest from such partner.”).
7
“Dissolution” and “winding up” are terms of art under the
UPA. Section 29 provides: “Dissolution of a partnership is defined
as the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from
the winding up of the business.”
As one court succinctly explained, “[d]issolution is the first
of three stages in the ending of a partnership. The next two
stages are winding up and termination. Winding up is the process
of settling partnership affairs after dissolution. Termination is
the point in time when all the partnership affairs are wound up.”
Weisbrod v. Ely, 767 P.2d 171, 174 (Wyo. 1989) (internal citations
omitted).

5
stipulation of facts. They further stipulated that (1) the gross

value of the partnership’s assets at the time of Decedent’s death

was $33.328 million, and that the partnership had $.247 million in

debt, resulting in an “NAV” equal to the difference, i.e., $33.081

million, 25 percent of which is $8.270 million; and (2) $8.270

million is the starting point for valuing the assignee interest

that passed from the Decedent to her heirs. These stipulations

leave as the sole point of contention between the parties the

applicability of discounts for (1) lack of marketability, (2) lack

of control, (3) uncertain rights, and (4) ownership of an

undesirable mix of assets.

Following a bench trial, the district court entered a

memorandum opinion under Fed. R. Civ. P. 52(a) in favor of the

government. The court held the discounts relied on by the Estate

irrelevant and accepted the government expert’s appraisal of

$7.821 million, derived by (1) discounting NAV by 5.4 percent for

brokerage costs that would be incurred in a liquidation and (2)

multiplying that discounted NAV by .25 to determine the appropriate

pro rata share. Consequently, the court denied the Estate’s refund

claim, and the Estate timely appealed.

II.

ANALYSIS

A. Jurisdiction

We have jurisdiction to hear appeals from final judgments of

6
the district courts pursuant to 28 U.S.C. § 1291.

B. Standard of Review

As a general rule, valuation of property for federal tax

purposes is a question of fact that we review for clear error.8

This case is unusual, however, because there is a pure question of

law imbedded in the valuation calculus: To arrive at a reasonable

conclusion regarding the value of the property at issue in this

case, one must first determine the rights afforded to the owner of

such property by the applicable state law. More specifically, to

appraise the value of a fractional assignee interest in a dissolved

Texas general partnership, one must consider whether, under Texas

partnership law, the holder of such an assignee interest has the

right to force liquidation of the partnership or, alternatively,

the right to force the remaining partners to buy out his interest,

and, if so, for what value, i.e., for a pro rata share of NAV

undiscounted except for liquidation-related brokerage costs or for

a fully discounted share. So, despite the general rule that

valuation is a question of fact reviewed for clear error, this case

presents an exception. 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

8
See, e.g., Estate of Bonner v. United States, 84 F.3d 196
(5th Cir. 1996) (per curiam); Propstra v. United States, 680 F.2d
1248 (11th Cir. 1982).

7
novo review.9

C. Federal Estate Tax Valuation Standard

The Federal Estate Tax is an excise tax imposed on the fair

market value of property transferred at death, less allowable

deductions.10 The property to be valued is “the property which is

actually transferred, as contrasted with the interest held by the

decedent before death or the interest held by the legatee after

death.”11 To determine the exact nature of the property or interest

in property that is transferred federal courts must look to state

law, in this case Texas partnership law.12

Fair market value is determined by application of the

ubiquitous “willing buyer-willing seller” test, defined as “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.”13 When applying the willing buyer-willing seller test, “the

9
Cf. Fuji Photo Film Co. v. Shinohara Shoji Kabushiki Kaisha,
754 F.2d 591, 595 & n.4 (1985) (“The ‘clearly erroneous’ rule does
not apply . . . to determinations reached by application of an
incorrect legal standard.”). See also Steven A. Childress & Martha
S. Davis, Federal Standards of Review § 2.16 (3d ed.).
10
See Estate of Bright v. United States, 658 F.2d 999, 1001
(5th Cir. 1981) (en banc).
11
Id. (citing United States v. Land, 303 F.2d 170 (5th Cir.
1962)).
12
Id.
13
See Treas. Reg. §20.2301-1(b); United States v. Cartwright,
411 U.S. 546, 551 (1973); see also Treas. Reg. §20.2301-3

8
potential transaction is to be analyzed from the viewpoint of a

hypothetical buyer whose only goal is to maximize his advantage.

Courts may not permit the positing of transactions which are

unlikely and plainly contrary to the economic interest of a

hypothetical buyer.”14 In that same vein, the “‘willing seller’ is

not the estate itself, but is a hypothetical seller.”15

Considerations that “depend[] on the identity of the seller as the

legatee and the executor, cannot control the value of the asset.”16

In every case all relevant facts must be considered.17

D. District Court Opinion

The district court’s opinion is grounded in a legal premise

with which we take issue, i.e., that under Texas partnership law,

a partner’s assignee has a “well-established statutory right”

either (1) to force the partnership to liquidate and distribute to

the assignee his pro rata share of the partnership’s NAV, or (2) if

the remaining partners chose to carry on the partnership business,

to force the remaining partners to pay the assignee what he would

(“Valuation of Interests in Businesses”).
14
Estate of Smith v. Commissioner, 198 F.3d 515, 529 (5th Cir.
1999)(emphasis added) (quoting Eisenberg v. Commissioner, 155 F.3d
50, 57 (2d Cir. 1998) (quoting Estate of Curry v. United States,
706 F.2d 1424, 1428 (7th Cir. 1983))); see also Estate of Bright v.
United States, 658 F.2d 999 (5th Cir. 1981) (en banc).
15
Estate of Bonner v. United States, 84 F.3d 196, 198 (5th Cir.
1996) (per curiam). (Emphasis added).
16
Id.
17
Estate of Smith, 198 F.3d at 529.

9
have received had there been a liquidation. From the assignee’s

perspective these two options are economically indistinguishable,

so we shall refer to them collectively as “liquidation rights.”

It follows from the district court’s conclusion that a

partner’s assignee has “well-established” statutory liquidation

rights that entitle the assignee to convert his partnership

interest into money, that the discounts incorporated into the

Estate’s valuation analysis could not be applied. These discounts

are premised on the existence of undesirable characteristics

inherent in the ownership of a minority assignee interest in a

partnership in which the assignee does not possess the power to

compel liquidation. If a hypothetical willing buyer of the

assignee interest knew for a legal certainty that, as the district

court held, he could exercise liquidation rights on a favorable

basis immediately following purchase and thereby trade his newly-

acquired assignee interest for cash, he could ignore the problems

that attend the ownership of an assignee interest in an ongoing

partnership and pay up to the amount that would be obtained in a

liquidation, i.e., a full pro rata share of the partnership’s NAV,

discounted only for its share of the liquidation-related brokerage

costs. The district court held that such a legal certainty exists;

we are less sanguine, falling somewhere between serious doubt and

total disagreement.

E. Appraisals

10
 The parties’ respective valuation analyses are grounded in the

reports of their experts. The government’s expert appraised the

assignee interest at $7.821 million. As noted earlier, this figure

was calculated by (1) reducing the partnership’s total NAV of

$33.081 by 5.4 percent to reflect the brokerage expenses that would

be incurred if the partnership were liquidated, and (2) multiplying

that sum by 25 percent to compute the assignee’s pro rata share of

NAV net of brokerage costs that would be incurred in liquidation.

The government’s expert conceded that if, unlike a partner, an

assignee does not have the absolute legal right to demand

liquidation, discounts for lack of marketability and lack of

control would be applicable. But as he expressly proceeded on the

assumption that TUPA grants liquidation rights to the holder of an

assignee interest in a dissolved Texas general partnership, he

treated the discounts as inapplicable.

In contrast, the Estate’s expert appraised the assignee

interest at $3.871 million. He proceeded on the premise that there

is no clearly-established right of liquidation in favor of the

holder of an assignee interest under Texas partnership law. He

therefore concluded that a fully informed hypothetical willing

buyer of the assignee interest would take cognizance of the

likelihood that he might be buying a share in a business (1) over

which he has no control, (2) that owns an unattractive mix of

assets, and (3) that is not readily marketable. Based on these

assumptions, the Estate’s expert began his analysis with the

11
partnership NAV and discounted it as follows:

partnership NAV $33,081,400
less: lack-of-control discount (20%) (6,616,400)
26,465,000

26,465,000
less: portfolio-mix discount (10%) (2,646,500)
23,818,500

23,818,500
less: lack-of-marketability discount (35%) (8,336,475)
15,482,025

15,482,025
multiplied by: share of ownership 25%
3,871,00018

F. Does an Assignee Have Absolute Liquidation Rights as a Matter

of Law?

The pivotal difference between the valuation methodologies

employed by the parties’ experts is their disagreement on whether

the hypothetical willing buyer of the assignee interest would be

acquiring an interest that includes, as a legal certainty, the

right to demand liquidation. We agree with the Estate’s expert

that under Texas law there is either no clear answer to the

question whether an assignee has liquidation rights or that the

best Erie guess is that he does not.

The government cites to TUPA §§26, 27(2), 37, and 42 to

support its contention that an assignee has “absolute” liquidation

rights. We conclude that there is only one section of TUPA that

bears on this question —— §42. As the district court considered

18
Figures are rounded.

12
other sections, however, and as the government urges that the

district court was correct in so doing, we too shall address them.

The government places primary emphasis on the following two

sections:

§ 26. Nature of Partner’s Interest in Partnership
A partner’s interest in the partnership is his share of
the profits and surplus, and the same is personal
property for all purposes.

§ 27. Assignment of Partner’s Interest
(1) * * *
(2) In case of dissolution of the partnership, the
assignee is entitled to receive his assignor’s interest.

By their plain terms these sections provide that a partner’s

assignee is entitled to receive his assignor’s interest, defined as

“his share of the profits and surplus.” It does not necessarily

follow, however, that an assignee has the right to extract that

share from the partnership on demand. To reach that conclusion,

one would have to read the grant of liquidation rights into the

above quoted TUPA provisions; at a minimum, that would be an

unwarranted extension of the plain language of these sections.19

Furthermore, to accept the government’s assertion that

together §§26 and 27(2) grant liquidation rights to an assignee is

19
A report by the UPA Revision Subcommittee of the Committee
on Partnerships and Unincorporated Business Organizations found
that “[t]he expression ‘his assignor’s interest’ in subsection (2)
is ambiguous.” The Subcommittee recommended that subsection (2) be
revised to read that an assignee is “entitled to receive . . . the
distribution which the assigning partner would be entitled to
receive upon dissolution of the partnership . . . .” Harry J.
Haynsworth IV et al, Report: Should the Uniform Partnership Be
Revised?, 43 Bus. Law. 121, 156 (Nov. 1987).

13
to render §37 surplusage. Section 37 provides:

§ 37. Right to Wind Up
Unless otherwise agreed the partners who have not
wrongfully dissolved the partnership or the legal
representative of the last surviving partner, not
bankrupt, has the right to wind up the partnership
affairs; provided, however, that any partner, his legal
representative or his assignee, upon cause shown, may
obtain winding up by the court. (Emphasis added).

As discussed above,20 “winding up” is a term of art under the

UPA that describes the process that occurs during the period

following dissolution and preceding termination, during the course

of which work in process is completed, partnership assets are sold,

creditors are paid, and the business of the partnership is brought

to an orderly close.21 The right to liquidate is thus a lesser

included right within the right to wind up.

Section 37 sets up a dichotomy: (1) All partners have an

unfettered right to wind up, but (2) an assignee can do so only for

cause. If, in combination, §§26 and 27(2) grant an assignee

liquidation rights, then the clause in §37 that limits the

assignee’s right to wind up to only those instances when cause can

be shown would be wholly unnecessary if not internally

inconsistent.

The parties have neither argued that “cause” was shown in this

case nor cited authorities defining “cause” in this context. A

20
See supra n.6.
21
See Estate of McGahren v. Heck (In re Weiss), 111 F.3d 1160,
1166 (4th Cir. 1997).

14
leading treatise on partnership law explains that judicial winding

up for cause is a last resort that is typically granted on a

showing of an immanent possibility that the assets of the business

will be dissipated if left in the partners’ control.22 There are no

facts in this record suggesting that Decedent’s siblings, as the

remaining partners of the dissolved (but not terminated)

partnership, were in any way dissipating partnership assets or

likely to do so. It is therefore antithetical to assume that a

hypothetical willing buyer of the assignee interest could

successfully pursue the remedy of judicial winding up under §37 to

effectuate a liquidation.

The final section relied on by the government is TUPA §42:

§ 42. Rights of Retiring or Estate of Deceased Partner
When the Business is Continued
When any partner retires or dies, and the business is
continued . . . without any settlement of accounts as
between him or his estate and the person or partnership
continuing the business, unless otherwise agreed, he or
his legal representative as against such persons or
partnership may have the value of his interest at the
date of dissolution ascertained, and shall receive as an
ordinary creditor an amount equal to the value of his
interest in the dissolved partnership with interest, or,
at his option or at the option of his legal
representative, in lieu of interest, the profits
attributable to the use of his right in the property of
the dissolved partnership; provided that the creditors of
the dissolved partnership as against the separate
creditors, or the representative of the retired or
deceased partner, shall have priority on any claim
arising under this Section as provided by Section 41(8)
of this Act. (Emphasis added.)

22
See II ALAN R. BROMBERG & LARRY E. RIBSTEIN, BROMBERG AND RIBSTEIN ON
PARTNERSHIP §7.08(b)(7), at 7:125-26 (Supp. 1999-2).

15
The first clause of §42 indicates that when a partner dies, the

surviving partners have the right to continue the dissolved

partnership’s business; and the parties to this appeal have

stipulated that such a right exists.23 If the remaining partners

exercise this right, the question becomes to what would a willing

buyer of the 25 percent assignee interest at issue here be

entitled.

Section 42 answers that the assignee is entitled to “the value

of his interest.”24 This answer obviously begs the question how to

value that interest. The government insists, in essence, that “the

value of [the assignee’s] interest” is an extension of the rights

granted the assignee under §§ 26 and 27(2), i.e., a right to “his

share of the profits and surplus.”25 This is a reasonable

23
The relevant stipulation provides: “As an alternative to
liquidation, the remaining partners had the right to continue the
business of the partnership, provided they paid the Estate the fair
market value of the Decedent’s interest as of the valuation date.”
24
As discussed in Cauble v. Handler, 503 S.W.2d 362 (Tex. App.
1974), in addition to the “value of his interest,” the assignee has
the choice of receiving either (1) interest on that value from the
date of dissolution or (2) profits attributable to the use of his
right in partnership property from the date of dissolution to the
date that he receives the “value of his interest.” This additional
right is not relevant for Federal Estate Tax purposes because of
the date-of-death valuation rule: Estate assets are to be valued as
of death and facts occurring after death can not properly be
considered. See Ithaca Trust Co. v. United States, 279 U.S. 151,
155 (1929); Estate of Smith, 198 F.3d at 521-22.
25
TUPA § 26. Although “surplus” is not defined in TUPA, Texas
courts have held that “‘[s]urplus’ is the excess of assets over
liabilities.” Bader v. Cox, 701 S.W.2d 677, 681 (Tex. App. 1986)
(citing Fulgham v. Gulf, Colorado & Santa Fe Railway Co., 288
S.W.2d 811, 813 (Tex. App. 1956)).

16
interpretation; it is not, however, the only reasonable

interpretation. Another possibility, one forcefully advanced by

the Estate, is that the assignee would be entitled to receive a sum

equal to the price that his interest would command in the open

market considering that it is a mere assignee interest and that its

purchaser (at least potentially) will not enjoy liquidation rights.

In this latter alternative, “the value of his interest” would

reflect the undesirable, discount-producing characteristics

attendant on ownership of an interest in a going concern that

comprises an undesirable mix of assets, for which there is no ready

market, and over which the minority owner lacks control.

There is substantial support for the Estate’s position that

“the value of his interest” is not synonymous with either a pro

rata share of the partnership NAV (as the government’s expert

maintains) or a partner’s share of the partnership “surplus” (an

equivalent concept expressed in different terms).26 First, the

language of the UPA itself supports the Estate’s argument. When

the drafters wanted to grant liquidation rights to a departing

partner, they did so expressly: §38(1) grants a partner, after

dissolution, the right to be paid his share of the partnership’s

surplus. The drafters did this in the sections governing the

rights of partners, but did not do so in §42, the section that

controls the rights of assignees. Inclusio unius est exclusio

26
See supra n.25.

17
alterius.

Second, we are aware of no Texas case that has squarely faced

the question whether the phrase “the value of his interest” as used

in §42 is congruent with pro rata share of NAV in the context of an

assignee rather than a partner demanding to be bought out.27 Cases

from other jurisdictions that have addressed this issue in the

context of the Uniform Act have held that the “value” owed to a

partner’s assignee is his pro rata share of the partnership’s NAV,

less appropriate discounts.28

27
The government relies primarily on Bader v. Cox, 701 S.W.2d
677 (Tex. App. 1985). The central issue in Bader was whether a
deceased law partner’s widow was entitled to share in the proceeds
of contingency fee contracts entered into by her husband’s law
partnership prior to his death. The court ruled that the widow was
entitled to a share of the fees and remanded the case for a
determination on value. There is language in Bader that supports
the government’s contention that “value of his interest” as used in
§ 42 is equivalent to “surplus,” see id. at 681; given the absence
of analysis, however, it would be a mistake to conclude that Bader
conclusively establishes that “the value of his interest” and
“surplus” are synonymous.
The government also cites to Cauble v. Handler, 503 S.W.2d 362
(Tex. App. 1973). The Cauble court stated that “it is section
38(1) of [TUPA] that gave the representative of the estate of the
deceased partner the right to . . . have the partnership assets
liquidated, the debts paid, and the share of each partner in the
surplus paid to him in cash.” As explained above, § 38(1) applies,
by its express terms, to partners, not to assignees. Quite simply,
this statement in Cauble is based on a misapprehension of the
applicable law. See Alan R. Bromberg, Partnership
Dissolution——Causes, Consequences, and Cures 43 TEX. L. REV. 631,
648 (1965). See also King v. Evans, 791 S.W.2d 531 (Tex. App.
1990) (analyzing the rights of a withdrawing partner, not the
rights of an assignee).
28
See Estate of Watts v. Commissioner, 823 F.2d 483, 487 (11th
Cir. 1987) (“the interest held by [the decedent’s estate] did not
carry with it [liquidation rights]. We therefore conclude that the
tax court was correct . . . in determining that the value of [the

18
 Third and finally, a change effected by the Revised Uniform

Partnership Act (“RUPA”)29 suggests that the phrase “value of his

interest” in UPA §42 is ambiguous. RUPA §701(b) states that a

disassociated partner has the right to be paid the “buyout price”30

—— a purposefully created term of art defined as “the greater of

the liquidation value or the value based on a sale of the entire

business as a going concern without the dissociated partner . . .”

Comment (c) to the RUPA explains that “‘[b]uyout price’ is a new

term. It is intended that the term be developed as an independent

concept appropriate to the partnership buyout situation, while

drawing on valuation principles developed elsewhere.”31 The

Reporter for the Revision Project further explained that the new

language is “intended to cut through some of the confusion in the

decedent’s interest] could not be ascertained by reference to the
value of that interest upon . . . liquidation”); see also Shopf v.
Marina Del Ray Partnership, 549 So. 2d 833 (La. 1989) (construing
the Louisiana Civil Code analogue to § 42); Hewitt v. Hurwitz, 592
N.E.2d 213 (Ill. App. 1992); II ALAN R. BROMBERG & LARRY E. RIBSTEIN,
BROMBERG AND RIBSTEIN ON PARTNERSHIP § 7.13(b)(1) at 7:186-88 & n.15
(1992-2 Supp).
29
The RUPA is codified in Texas as the Texas Revised
Partnership Act, Tex. Rev. Civ. Stat. art. 6132b-1.01 et seq. It
does not govern the partnership at issue in this case because the
partnership did not so elect. See id. 6132b-11.03.
30
This new statutory term employed by the model act was not
adopted by the Texas legislature when it enacted the RUPA; instead,
the Texas version of the RUPA uses the term “fair value.” See Tex.
Rev. Civ. Stat. art 6132-7.01(b).
31
6 Uniform Laws Annotated 83 (1995 Master Edition).

19
cases . . . .”32 This satisfies us that the drafters of the new

Uniform Act were convinced that the right to be paid a full pro

rata share of the partnership’s NAV was anything but a well-

established right; to the contrary, they found substantial

ambiguity in the existing statute and related case law. If it had

not been “broke” —— or badly bent —— the redactors would not have

fixed it.

We need not and therefore do not attempt today to map the

precise contours of the rights of an assignee of a partner under

the TUPA. Nevertheless, because the hypothetical parties to the

willing buyer-willing seller transaction are deemed to have

“reasonable knowledge of relevant facts,”33 we must assume that they

would conclude, as we have, that the law is not well-settled ——

that it is at best unclear and uncertain.

The district court grounded its holding in the premise that

the law establishes to a legal certainty that the assignee of a

partner has precisely the same liquidation rights as the assigning

partner. We reach the opposite conclusion, i.e., that this premise

is not established to a legal certainty, and to hold that it is

constitutes error. This error of law by the district court caused

32
Donald J. Weidner, Three Policy Decisions Animate Revision
of the Uniform Partnership Act, 46 BUS. LAW. 427, 442 (Feb. 1991);
see also Donald J. Weidner & John W. Larson, The Revised Uniform
Partnership Act: The Reporters’ Overview, 49 BUS. LAW. 1, 11-12
(Nov. 1993).
33
Treas. Reg. § 20.2031-1(b).

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it to pretermit inquiry into the quantum of any lack-of-

marketability discount, lack-of-control discount, and portfolio-mix

discount that might be applicable in this case. Neither did the

district court consider that this very legal uncertainty might

itself be an independent factor depressing the price a willing

buyer would pay (or a willing seller might expect to be paid) for

the assignee interest. We do not go so far as to conclude that all

of the discounts urged by the Estate are necessarily applicable in

this case or to determine the correct percentage of those that

might be; only that some or all might be applicable and that

further fact-findings and legal determinations are necessary to

determine which if any discounts should be applied and the quantum

of each. On remand, the district court must consider evidence from

both parties in light of our determination that the liquidation

rights of an assignee are not clearly established but that, to the

contrary, they are unsettled, and must determine the applicability

of the various claimed discounts and the correct percentages of

those that are found to apply.

G. Administrative Expenses

The parties’ pretrial order contains a stipulation that there

is a contested fact issue regarding the reasonableness of the

contingency fee agreement between the Estate and the attorney’s

prosecuting this action on the Estate’s behalf. We do not find

that the court has disposed of this issue. The Estate also

complains on appeal that the district court failed to make a

21
factual determination regarding the deductibility of accountants’

and appraisers’ fees. The government did not respond to these

arguments, and the record does not reflect what effect these

deductions, if available to the Estate, might have on its refund

claim. On remand, the district court must address these issues as

well.

III.

CONCLUSION

For the forgoing reasons this case is reversed and remanded

for further proceedings consistent with this opinion.

REVERSED AND REMANDED

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