*1 However, § 1983 claim has another son’s 1983 claim based on UAMS’s con- that, by Dodson asserts send- dimension. II, duct after proper Dodson dismissal was embryo ing storage her bills for the fees 12(b)(6). pursuant to Rule years, nearly recognized seven UAMS embryos property Dodson’s interest right to
and her constitutional decide the embryos. agree I
disposition conclusive,
even if Dodson II is
Dodson
which,
alleges
deprivation,
a constitutional
HOLMAN, Jr.;
Thomas H.
Kim D.L.
claim,
implied
goes
like the
contract
be-
Holman, Donors, Appellants,
Nonetheless,
yond
scope
of Dodson II.
v.
dismissal of Dodson’s entire
1983 claim
COMMISSIONER OF INTERNAL
proper
grant-
was
because relief cannot be
REVENUE, Appellee.
embryo storage
ed on the basis of the
fees.
situations,
Surely,
some
a constitutional-
No. 08-3774.
ly protected property interest can arise
United
Appeals,
States Court of
implied
Winegar
out of an
contract. See
Eighth Circuit.
Dist.,
Indep.
v. Des Moines
Comm. Sch.
(8th Cir.1994).
895,
F.3d
But such an
22,
Sept.
Submitted:
2009.
cannot
from a
interest
arise
“unilateral
7,
April
Filed:
expectation,”
Regents
Bd.
State Col-
Rehearing and
En
Rehearing
Banc
Roth,
564, 577,
v.
leges
408 U.S.
92 S.Ct.
11,
Denied June
2010.*
2701,
(1972),
claim of entitlement” to an individual.
Meyer City Joplin, 281 F.3d (8th Cir.2002) curiam). Here, (per Dod- alleged property
son’s interest is based
solely expectation paying on her own from storage allegation fees. There is no long-
that UAMS rescinded or waived its position Program
held the IVF Di- authority full
rector retained over the em- best,
bryos. alleges At Dodson facts
support inference administrative
negligence, but not a constitutional entitle- Dodson appar-
ment. cannot use UAMS’s billing alleged
ent error to revive the con- relinquished
stitutional that she
upon holding her divorce. Such a would
stretch 1983 too far. See San Bernardi- Physicians’ Group,
no Med. Serv. Inc. v. Bernardino,
County San (9th Cir.1987) (“It is neither workable within the
nor intent of section 1983 to every of contract
convert breach claim claim.”).
against a state into a federal
Thus, if even we distill a version of Dod-
* Judge grant rehearing by panel. Beam would *2 Porter, argued, (Stephanie
John William Loomis-Price, brief), Houston, TX, on the brief, appellant. on the (Jonathan Sheehan, expert based on Anthony argued, T. Commissioner’s DC, brief), Cohen, Washington, on the historical studies of restricted stock sales. S. appellee. The Tax Court noted that the only highly easily liquid, held valued assets *3 MELLOY, BEAM, and Before agreement and that the contained a con- GRUENDER, Judges. Circuit granted and provision sensual dissolution management gen- broad discretion to the MELLOY, Judge. Circuit partners. According eral to the Holman, H. and Kim D.L. Thomas Jr. Court, economically because rational ac- “donors”) (the created a limited Holman advantage tors would take of the dissolu- common stock partnership, funded with provision tion to dissolve and reconstitute Dell, Inc., gifted partnership limited and partnership buy the or otherwise out a In gift-tax to their children. shares departing partner, there was a natural cap return, lack-of-mar- the donors asserted any lack-of-marketability on discount. ketability minority-interest discounts and substantially gifts court, to claim a value for the appeal On to our the Commission- underlying value Dell below the challenge er does not the determination so, doing In the donors relied stock. gifts gifts that were of partnership part on transfer restrictions contained challenge shares. The donors the Tax partnership agreement, asserting application of I.R.C. its depress would the transfer restrictions marketability determination of and minori- partnership value of the shares relative to ty-interest discounts, and its overall valua- underlying assets. the value of the judg- tion determination. We affirm the challenged the re- The Commissioner ment of the Tax Court.
turn, characterizing gifts gifts as Background I. gifts rather than of limited Dell stock addition, In nership shares. the Commis- primarily The donors amassed wealth applied Internal Revenue Code sioner during the form of Dell stock Thomas’s disregarded partnership § 2703 and employee. They sought tenure as Dell agreement’s transfer restrictions for valua- children, pre- to transfer wealth to their purposes. Finally, tion the Commissioner family, serve wealth within their and pre- agreed lack-of-marketability and mi- dissipating vent their children from assets. nority-interest apply discounts should but time, they At sought the same teach asserted that the- discounts should be investing principles their children basic by smaller than claimed the donors. impart general and to their children a gifts
The Tax Court1 held that the were understanding responsibility attendant gifts partnership of limited shares. The part to wealth. As overall estate- Tax Court also held that the Commissioner planning seeking to achieve process these correctly applied prop- 2703 and I.R.C. goals, Kim Thomas and met with counsel erly disregarded partnership agree- developed gifting plan an estate and Finally, transfer restrictions. ment’s wills, that involved execution of creation of applied Tax Court smaller lack-of-market- partnership, the limited transfer of Dell ability minority-interest discounts partnership, stock into the limited by than claimed the donors. to a partnership transfer of limited shares so, trustee and conservator for the children. doing adopted the Tax Court children, already who owned some lack-of-marketability discount as asserted Halpern, 1. The James S. United States Tax Court. Honorable through strategy the trustee and conser- investments and investment Dell stock vator or in accounts under different states’ Partnership.” Sections 8.4 and 9.1 Mi- versions of the Uniform Transfers to provide partners may Act, into nors transferred Dell stock partnership withdraw from the or involun- exchange for additional tarily voluntarily assign or encumber partnership shares. except their limited interests provisions permitted agreement. Several Section agreement are material to the issues permitted assign- 9.2 describes various appeal. this Section 3.1 lists the assignments ments such as mem- partnership: assignments bers or to trusts or to certain *4 Purposes. 3.1 The of the Part- custodians where or such trusts custodians nership profit, are to make a increase partnership exclusively hold the interests wealth, provide a for and means the for the benefit of members. Sec- of, Family gain knowledge manage, to 9.3, tion which we address more detail preserve Family and Assets. The Part- below, describes conditions under which nership accomplish is intended to the partnership may acquire partnership the following: lawfully interests that assigned are (1) Assets; Family maintain control of prohibited by agreement. manner the Fi- (2) consolidate fractional interests nally, 12.1 provides part- section that the Family and realize the efficien- Assets nership may by be dissolved the written cies of coordinated investment man- partners. consent of all agement; provides Section 9.3 partnership the (3) wealth; Family increase option purchase has an to at an appraised (4) by gifts establish a method which any value partnership assigned can fractionalizing be made without a manner that is prohibited agree- the Assets; Family ment but that is lawful. Specifi- otherwise ownership Family continue the cally, provides partner- section 9.3 that the right Assets and restrict of non- ship may purchase such interest over a Family persons acquire to interests in five-year period at a determined interest Assets; Family a ten-percent payment. rate with down (6) provide protection Family to As- Further, partnership may assign sets from claims of future creditors right acquire such an interest to one or members; against Family partners. more current Finally, (7) provide flexibility plan- in business may ners consent prohibited to let trusts, ning through not available cor- assignee partner. become limited If the porations, entities; or other business partners refuse such consent and elect not (8) facilitate the administration and right to exercise the acquire the as- reduce the cost associated with the shares, signed impermissible otherwise disability probate or of the estates of assigned holder of the gain shares does not members; Family Rather, rights partner. (9) promote Family’s knowledge gains merely such a holder the limited Family and communication about right to receive distributions to which Assets. assignor-partner would have been entitled. grants general partners Section 6.1 gifts shares occurred management “exclusive and control of the 1999, 2000, gift business of and 2001. In tax Partnership” including “the re- power authority ... to determine years, turns for these the donors claimed represented approximate- held slightly over 49% rela- discounts of overall prices Dell, market then-prevailing ly outstanding tive to 0.28 % of the stock of stock. These dis- underlying Dell parties agree and the the broader appraisal based on recommen- counts were easily market could absorb this amount. minority that considered status dations goal Mr. Holman testified as to the marketability. dis- lack of These preservation, asset and the Tax Court in- per- consideration the counts also took into terpreted protection this to mean of assets of sections 8.4 and 9.1-9.3 impact ceived dissipation by from the children. Mr. Hol- limited-partnership the value of upon explained understanding man his of sec- deficiency, In notices of the Com- shares. tions 9.1-9.3 and how these sections would that it be initially missioner asserted would preclude assigning the children from an overall discount of 28% proper to allow giving away their interests. Mrs. Holman minority lack of marketabili- status and purpose testified that the of the partner- based this lower ty. The Commissioner ... ship was “to be able teach [the] on the view that the discount responsibili- children about wealth and the regard “should be valued without units ty wealth.” *5 any right restriction on the to sell or use light purposes In of the in section stated within the mean- partnership Agreement, light 3.1 of the and in of the 2703(a)(2)].” ing of [I.R.C. testimony, donors’ the Tax conclud- progressed Ultimately, when the ease ed: Court, the Commissioner before the that paragraphs We believe 9.1 argued an that an employed appraiser through designed principally 9.3 were to apply. The even smaller discount should discourage dissipation by the children of appraiser, employed donors also the wealth that Tom and Kim had trans- appraisers’ methods were detailed and by way gifts. ferred to them of the require some discussion. We describe of the term “bona fide business meaning opinions their methods and their detailed arrangement” section analysis of our ad- below the section apparent. supra, self As discussed dressing the valuation. C.I.R., Amlie v. T.C.M. [91 Court, testimony In before the Tax (CCH) 1017, 995337], 2006 WL we inter- described their for creat- donors ar- preted the term “bona fide business funding partnership, gifting ing and value-fixing rangement” encompass to children, including shares to their arrangements by a conservator made partnership transfer seeking prudent manage- to exercise an in- agreement. Neither donor claimed minority ment of his ward’s stock invest- tent to maintain Dell stock as the sole ment in a bank consistent with his fidu- any of the nor described asset ciary obligations to the ward and to strategy they investment intend- particular provide expected liquidity for the needs employ, other than a future intent to ed to pur- not the of her estate. Those are diversify portfolio’s holdings. Neither through 9.3. poses paragraphs 9.1 anything an intent to hold donor claimed closely There was no held business here passive than investments other protect, nor are the reasons set forth any activity nership nor described report on Finance the Committee partnership. to the Between for- related buy-sell agreements consistent justifying of the and the submis- mation goals educating their case, petitioners’ with only held sion of the management and children as to wealth Dell stock. The total amount of stock actions, “disincentivizing” getting them from rid ent’s even in the absence of formal shares, spending rep- restrictions, of Dell the wealth and where transactions often shares, by feeling resented the Dell length. do not occur at arms In this con- to the Dell shares. entitled others, Congress text and in expressed has paragraphs through We find that 9.1 concern over the abusive use of such re- pur- See, 9.3 do not serve bona fide business e.g., strictions. Explanatory Material poses. paragraphs Those do not consti- on Concerning Committee Finance 1990 arrangement tute a bona fide business Reconciliation Submission Pursuant 2703(b)(1). meaning of within the section House Concurrent Resolution (1990) (“Fi- C.I.R., 15629-04, 170, 195, Cong. Rec. Holman v. S S15681 T.C. (2008). (“[T]he Report”) WL 2189089 nance Committee com- potential buy-sell mittee is aware of the The Tax Court also concluded that the agreements distorting tax transfer val- merely restrictions were a testamentary Therefore, ue. the committee establishes device such that the donors failed satis- 2703(b)(2). fy attempt distinguish The Tax rules Court did not between arms-length reach the transaction test of agreements designed to avoid estate taxes 2703(b)(3). Having determined that the and those with agree- transfer restrictions of sections 9.1-9.3 ments. These generally disregard rules disregarded were to pur- be valuation buy-sell agreement that would not have poses, the Tax Court assessed the remain- been entered into parties unrelated act- ing aspects competing experts’ valu- ing at length.”). arm’s opinions. accepted ation The Tax Court attempting permissi- to sort between lack-of-marketability discounts of 12.5% *6 ble and impermissible uses of such restric- year minority-interest each tax tions, Congress repealed an earlier Code 4.63-14.34%, discounts of all as asserted 2036(c) (1987) provision, § I.R.C. because expert. Commissioner’s The donors “the committee concerned that [was] appeal. breadth, complexity, statute’s vague- ness posed impediment an unreasonable II. Discussion the transfer family of businesses.” Fi- § a. I.R.C. Report, nance Committee Cong. Rec. Restrictions on the prop- sale or use of In Congress S15680. enacted in its erty generally depress tend to the value of place a statute that broadly prohibits con- property. Oftentimes, such restric- sideration of pur- restrictions for valuation tions serve purposes, business 2703(a), § poses, see I.R.C. but allows tax- impose actual and meaningful limitations payers prove eligibility exception for an on transferability the use or of property, that permits valuation based on such re- accepted by and are parties dealing with 2703(b). strictions, see I.R.C. one another in arms-length transactions. eligible To be for the exception and carefully When crafted and applied cer- gain the having benefit of such restrictions circumstances, however, tain such restric- purposes, considered for valuation the tax tions can consequences minimize the tax of payer satisfy must a three-part test: gifts or imposing transfers without sub- restriction must be “a bona fide business stantial additional on limitations the trans- arrangement,” it must not be “a ferability or device to property. use of the This is transfer such particularly property true in the to members of family context of may transfers where a decedent’s donor hold some for less than full and degree practical of control recipi- adequate consideration,” over a and its terms strat- any particular of investment arrange- pursuit “comparable to similar must be emphasized per- egy. Mrs. Holman in an arms’ by persons into ments entered educating the children as to goals con- sonal Because we transaction.”2 length responsibility. correctly held the financial Tax Court clude that the not “a bona fide are present restrictions conclusion, opposite of the support in accordance with arrangement” cite several Tax Court cases the donors 2703(b)(1), only that first we address business-purpose element addressing the test. part of clauses in other or similar Tax The donors provisions of the Code. whether question ultimate present the Tax Court case argue arrange a fide business there was bona definition for applied overly an restrictive reviewed question a of fact to be ment is arrangement” “business phrase True v. See Estate for clear error. “operating an effectively imposed (10th 1210, 1218-19 Cir. requirement underlying that the nexus” 2004) whether (holding question that the actively managed an enter- partnership be was entered into for bona “agreement argue The donors also prise. reasons and is not testa fide business arrangement” ap- test should be “business of fact mentary question substitute” is a solely at plied looking taxpayer’s stat- error); Louis for clear St. reviewed cf. language intentions and at the of the ed States, 674 F.2d County Bank v. United partnership agreement restrictions in the Cir.1982) (8th (affirming 1210-11 considering without the actual context of agreement stock-purchase finding underlying and the nature of the this case purpose” but “had a bona fide business up position sum their assets. The donors outstanding question of fact as finding an brief, asserting in their that “the nature merely testamentary to whether it was transfer). Partnership is irrelevant the assets determining whether the noted, present As paragraphs 9.1 and 9.3 con- failing the restrictions as case viewed arrangement. a bona fide business stitute arrangement” fide business test. “bona Partnership no that the dispute There is Mr. Holman’s emphasized The Tax Court *7 enterprise pur- an with the business was identify any testimony in which he failed to profits through long- pose generating activity by partner- planned current or growth.” term passive invest- ship holding other than agree with the Tax Court’s conclu- clearly articulated invest- We ments without a addition, reject to attempt sion and the donor’s strategy. he made clear ment opinion as preservation meant characterize the preservation that asset children, creating “operating an business nexus.” by the not the dissipation from (a) (b) ap- Exceptions. shall not provides: 2. Section 2703 —Subsection any option, agreement, right, ply or re- to (a) this subti- General rule.—For following striction which meets each of tle, any property deter- the value of shall be requirements: regard mined without to— (1) arrangement. a bona fide business It is (1) any option, agreement, right or other (2) property It not a device to transfer such property price acquire or use the at a less family to members of the decedent's less property than the fair market value adequate than full and consideration in (without option, agreement, regard to such money’s money or worth. right), (3) comparable or ar- terms are to similar Its (2) any right by persons or use in an rangements restriction on the to sell entered into length arms’ transaction. property. such 770
In answering
question
of whether a
dividends did not
“carrying
amount to
on a
business”);
restriction constitutes a bona fide business
Thompson v.
arrangement, context matters.
Comm’r,
(3d Cir.2004)
Here that
367,
380
context shows that the Tax
correctly- (“Other
than favorable estate tax treat-
personal
assessed the
testamentary
form,
resulting
change
ment
from the
nature of the
Simply
transfer restrictions.
is difficult to see what benefit could be
case,
put, in the present
there was and is
holding
derived from
portfolio
untraded
“business,”
no
active or otherwise. The
partner-
securities
this
presented any argument
donors have not
with
ship
ongoing
no
opera-
business
any
distinguish
or asserted
facts to
their
tions.”).
situation from
partner
the use of a similar
One case the
in support
donors cite
ship
passbook savings
structure to hold a
C.I.R.,
position
is Estate Amlie v.
account, an interest-bearing checking ac
(CCH) 1017,
91 T.C.M.
771
dissenting
pork-
co-owners of a
potentially
such the donor’s
process. As
gift planning
enterprise).
processing
misplaced.
is
on Amlie
reliance
Comm’r,
strongest cases for the
Arguably,
T.C.
v.
In Estate of Bischoff
(1977),
involving
are a line of cases
invest-
question
was
donors
1977 WL
imposed to
buy-sell
in a
ment entities with restrictions
contained
price
whether
of an investment mod-
perpetuation
ensure
regarding limited-partnership
agreement
pur-
strategy.
valuation
el or
See Estate
Black
controlling for
shares was
of
Comm’r,
case,
stated,
Tax
133 T.C.
WL
In that
Court
poses.
States,
(2009);
Murphy v.
that the maintenance
Estate
United
have held
“the cases
of
07-CV-1013, 2009
control constitut- No.
WL 3366099
family ownership and
(W.D.Ark.
2, 2009);
consideration.”
Oct.
Estate
Schutt
legitimate
a
business
ed
(CCH)
(2005).
underlying asset
in v.
89 T.C.M.
Id. at 39^40. The
proposition
for the
pork processing
“a
business The donors cite Schutt
was
Bischoff
controlled,
by
relatively
inactive investment
trusts
managed
organized,
involving
rights may
“to assure their
or shells
restricted
sought
three families” who
carry
pork
legitimate
on
nevertheless
involve
business
continuing ability to
gain
outside inter-
favored tax treatment.
processing business without
ference,
point, the
making
again
that of a dissident limit-
In
this
donors
including
then,
present
Tax
attempt
portray
at 40.
In
Court
partner.”
ed
Id.
Bischoff
opinion
imposing
“operating
perceived
a
risk of an outsider
as
business
there was
arguably contrary
to Schutt.
interfering
management.
nexus”
with
cases, however,
These
are more nuanced
similarity between the facts
There is no
assert,
than the donors
and each involves
present
and the
case because
of Bischoff
present
in our
unique facts
case.4
partner-
partners
the Holman
Schutt,
ability to interfere
In
the Tax Court addressed a
held little-to-no
ship
section,
Further,
code
but one of the un-
management.
do- different
with asset
they,
derlying questions
as
at issue was similar:
allegation
have made no
nors
savvy
publicly
whether
the transfer of
traded
general partners, are skilled or
expertise
a business trust was a bona fide
managers whose
stock into
investment
adequate
for full and
consideration.
philosophy
or whose investment
sale
needed
(discussing
the “bona fide sale”
protected
conserved or
from Id.
*18
needs to be
2036(a)).
justify
exception
to 26 U.S.C.
Under
might
placement
interference as
authority,
Finally,
relevant Third Circuit
partnership.
stock assets into the
a
requirement
having
viewed this
passively
the assets of the
—
good
“legitimate
faith element and also
held Dell stock—are not assets with which
at *19-20
might
purpose”
owner
inter-
element.
Id.
an outsider or dissident
mere
untraded
of
may
believe
be taken from Schutt and
weighs negatively
marketable
securities
cases like
is that context matters such
potential
the assessment of
nontax bene-
that it
rea-
appropriate
defer to the
fits.” Id.
ability
judgment
fact-finding
soned
and
up
The facts of
did not end
being
Schutt
the Tax
In
regard,
Court.
this
we note
unique as
and the Tax
suggested,
Court
Bank,
-in
County
that
St.
our case
Louis
subsequently
a
district court
reached
steps
set forth two
the three
Murphy
results in
and Black.
In
similar
Congress
subsequently
adopted
Erickson v.
T.C.M.
2703(b),
clearly
im-
emphasized
we
(CCH)
(2007), however,
the Tax
portance
factually
of context
this
intense
Schutt,
distinguished
effectively
il-
inquiry.
emphasized
We
that the transac-
lustrating an
difference
important
between
place
tion at issue
taken
had
the context
present
like Schutt and the
case:
cases
of a
facing present
donor who was
heart
significant
pur-
We have found a
nontax
condition
a history
and had
condi-
heart
justification
pose where the
for the
suggesting
predominately
tions
testa-
transaction
personal
was the decedent’s
mentary motive
St.
transactions.
views and
regarding
opera-
concerns
Bank,
County
Louis
Here, Erickson, When viewed in this little there is as in the family part- doubt that the restrictions included in the nership is “a mere asset container.” Id. partnership agreement Holmans’ limited The donors purport any do not to hold arrange- were not a fide bona particular philosophy pos- investment ment, rather, but any particular investing predominately were insight. sess reduction, planning, tax present partnership agreement does estate transference, require general partners protection wealth against retain children, Dell stock dissipation by held education donors apparently diversify intend to for the children.5 Given requirements our resolution of the "business ar- additional of 2703. elec- Our issue, rangement” we need not address the
773 ability unregistered stock in ers’ sell b. Valuation (1) companies other than sales to public Court, parties Tax In the buyers, subject institutional sales underlying the value of the disagreed as to 144, holding periods. certain Rule gifts dates of the as well Dell stock on the 1972, two-year adopted imposed hold- mi marketability and appropriate as the period on the resale of restricted stock. ing (lack-of-control) discounts. nority-interest (1972); § Fed.Reg. 17 230.144 37 C.F.R. issue, § from the 2703 appeal, On aside (Jan. 1972). 14, 144A, adopted Rule only Tax de challenge donors 1990, permits qualified buyers institutional marketability of a discount. termination buy unregistered, and sell restricted dis appropriate of an The determination (1990); § stock. C.F.R. 230.144A fact that we review question is a count 1990). 30, In Fed.Reg. (April 17933-01 Ford v. for clear error. Estate of (8th Cir.1995). the SEC amended Rule to re- 926-27 holding period years from two duce the Ingham, Mr. expert, donor’s The (1997); year. 17 230.144 one C.F.R. Burns, expert, Mr. the Commissioner’s (Feb. 28,1997). Fed.Reg. 9242-01 methodologies were similar employed experts’ opinions present The case They compar- looked to studies part. restricted, unreg- degree differed in the of detail with which ing private sales public companies they evolving with discussed these rules and the istered stock marketability unrestricted sales of dis- contemporaneous, general inferences about companies. in those same registered might stock be drawn from sales counts experts, although to the these According throughout years that these rules were perfect analogs for sales studies were not Ingham sample in effect. Mr. studied a interests, they did serve as transactions with median and mean dis- insight price as to dis- examples providing 27.4%, respectively. counts of 24.8% and freely transferable crepancies between concluded, without additional He then publicly companies traded stock qualitative quantitative explanation, the same marketable versions of less differences between restricted-stock stock, illustrating pricing dis- thereby partner- present, studies and the to the ab- counts that could be attributed marketability ship justified situation dis- ready market. sence of of 35%. Mr. Burns criticized this count adjustment and un- upward speculative as agreed experts Tax with the The Court agreed The Tax Court with useful, supported. studies were and we also that the rejected Ingham’s Mr. Burns and Mr. con- Ex- general, Securities and agree. (SEC) clusion, noting rely that it “need not on the rules limit own- change Commission issues, however, expert opined you that "when look at the er’s address these tion not to agree- ... the issue of re- interpreted implicit [transfer overall context not be should arise, nobody at strictions] wouldn’t because the dissent. We note that the ment with 2703(b)(3) get length into this deal.” He arm’s would elected not to decide the stated, my experience ... I comparability on requirement regarding ”[B]ased later deal, anybody who would do this arms-length transac- couldn't find to those found in terms dissent, let their client into a deal like this recites limited who would however tions. writing very partner without parties’ experts as a limited agreement between the on memo, against saying: 'We advise large CYA recognized in dicta from the Tax this issue as ” therefore, disagreement and the ab- Given this compelled, to note this.' Court. We are ruling, we it is parties’ experts of a Tax Court believe sence that we do not believe prudent address the re- aligned suggested not to on this issue as were as quirement appeal. example, on the Commission- the dissent. For *11 unsupported assumption expert of an wit- buy out an exiting part- ness.” ner. He also noted the ease with which underlying the value of the assets could be Mr. Burns examined restricted-stock any on given day. determined opined He greater sales with detail. He looked at buyers that if outside were to demand too during separate sales windows of time cor- great a discount then-pre- relative to the responding adoption to the SEC’s of its vailing price stock, of Dell economically regulations. different Mr. Burns ex- rational insiders would have a clear incen- plained marketability that per discounts as step tive to into the holding-period purchase the studies included void and compo- liquidity components.6 exiting partner’s nents and He ob- shares at a lesser dis- count, served that for sales of thereby restricted stock providing capa or ceiling to between 1972 and when there was a any potential discount. two-year holding period and no institution- The donors on appeal vigorously do not market, al-buyer the sale price for restrict- expert’s defend their opinion regarding a was, ed shares average on 34% than lower 35% discount based on studies of restrict- sales of corresponding unrestricted shares. They ed-stock sales. do not claim that He then noted that between 1990 and expert their disagreed with Mr. Burns’s 1997, when a limited market was created characterization of marketability discounts among buyers, institutional average as including holding-period liquidity price difference between restricted stock components. Nor they do discuss their and corresponding non-restricted stock expert’s failure to address this distinction. opined was 22%. He that the 12% differ- They do note that expert’s opinion is periods ence these two of time was scope commensurate in with the discounts buyers reflective of the fact that demanded Mr. Burns cited restricted stock sales a 12% discount to account for the lack of a between 1972 and They do point secondary market. He concluded that the record, anything however, sug- remaining portion of the discounts ob- gesting that Mr. Ingham based his overall served the studies were holding- due to recommendation on the prevailing discount
period
not applicable
from that era.
context of the Holman partnership shares.
concluded, therefore,
primary
donor’s
argument
ap-
He
on
the 12%
peal
on
liquidity
lack-of-market or
focuses
the later aspect
discount
of Mr.
was
similar to
Burn’s
private buyers
opinion
what
discussing
the limit-
what
insiders
ed-partnership
likely
shares would demand.
would do in the
potentially
face of
large discounts in partnership
price
share
Mr. Burns
analysis by
continued his
ex-
relative to Dell stock prices. The donors
plaining why he believed it
appropri-
was
argue that
reasoning
this line of
violates
ate to accept marketability
discount in
hypothetical
willing buyer/willing seller
range
of 12% rather
adjusting
than
by asking
test
what
or
substantially
this amount
upward. Look-
particular
family members in this case
ing at the
Agreement,
terms of the
he
would do
than asking
rather
what hypo-
found a natural
limit
cap
any
or
on
dis-
buyers
thetical
See
counts. He
sellers would do.
discussed the fact
(“The
Agreement
Reg. §
Treas.
permitted
shareholders,
all
25.2512-1
value of
agreement,
unanimous
property
to dissolve the
is the
price at which such
nership and that it permitted partners
property
change
would
hands between a
Ingham appears
6. Mr.
planation
to have conceded
components
for different
of overall
qualitative
Mr. Burns was correct in this
marketability
ex-
discounts.
*12
seller,
yield
profit-maximizing
to
the
willing
expected
a
neither
be
buyer and
willing
compulsion
buy
to
or to
any
subjective
....
intention or
being
[T]he
under
result
sell,
reasonable knowl-
having
both
and
plaintiff corporation
particular
‘idea’ of this
facts.”);
id.
2512-3
relevant
edge of
...
irrelevant....
To hold otherwise
(“The
in a
any
value of
interest
fair market
juries
command future
would be to
business,
pro-
a
or a
whether
personal corporate
wade into the thicket
a
amount which
is the net
prietorship,
motives as
idiosyncrasies and non-market
an individual or
whether
willing purchaser,
....”)
(em-
part
quest
of their valuation
interest to
pay
would
for the
corporation,
a
added); Estate
Newhouse v.
phasis
seller,
any
under
being
neither
willing
a
Comm’r,
218,
193,
When tage.”). hypothetical buyers and between actions Here, ap- we the Tax Court’s believe sellers, to ascribe motiva improper it is adopting analysis Mr. Burns’s proach and reflective of personal tions that are casting rule of comports general with this particular individuals. idiosyncracies buyer merely as a rational potential Comm’r, Jung v. 101 T.C. See buyer A possessed economic actor. of all (1993) 412, 438, (refusing 1993 WL (1) relevant information would know that willing family corporation as the to cast highly liquid underlying assets are and buyer attempt where the to do so was (2) easily by amount held priced; view that the non-economic-based based on partnership could be absorbed an family corporation purchase would represents broader market and but a small merely ownership within keep outstanding market fraction of the total States, 680 family); Propstra v. United (3) capitalization corporation; of Dell (9th Cir.1982) 1248, (refusing 1251-52 F.2d partnership agreement permits buying hypo and beneficiaries as to cast executor exiting partners upon out of or dissolution willing sellers to avoid “delicate thetical attitudes, and inquiries feelings, into the all partners; unanimous consent of holding undi anticipated behavior of those no economic risk there would be little or Rather, in ... property.”). interests vided capital infusion likely no additional necessary persons it is to view such buy necessary remaining partners all economically possessing rational actors exiting partner. out seeking to max relevant information Against backdrop, it is not neces- this gains. imize their See Estate Jameson sary personal proclivities to look (5th Cir. idiosyncratic any particular partner or the 2001) (“The buyer hypothet and seller are might specific tendencies that drive such a ical, and each is a persons, not actual person’s only decisions. Rather it is nec- actor, is, each seeks rational economic essary technically per- to examine what is context advantage to maximize his agreement missible in accordance with the at the date of of the market that exists rational actors would do and forecast what valuation.”); Curry’s Estate v. United pending steep sale at a the face of (7th Cir.1983) States, F.2d relative to net asset value. Sim- discount (“[T]he sole relevant consideration de did not ascribe ply put, the here termining company whether strategies non-economic or moti- personal liquidated valued as or as should be merely hypothetical buyers; could vations to going concern is which alternative that, presented opportunity, with the future parties, held creditors and other third money rational actors would not leave on and to educate the Holman children as to the table. management. wealth See ante 766. To in achieving goals, aid these the partner- judgment affirm the of the Tax
We
ship agreement
*13
includes transfer restric-
Court.
(the
right
tions
of first refusal
“re-
BEAM,
Judge, dissenting.
Circuit
strictions”).
agreement
grants
The
also
general
partners, Thomas and Kim
I
Because would reverse the Tax Court’s
Holman,
exclusive control over the
§
applications
property
of I.R.C.
2703’s
business,
nership’s
including
power
Treasury Regulation
valuation rules and
determine the
§
investments and investment
willing buyer/willing
25.2512-1’s
seller
test,
strategy
respectfully
partnership.
I
dissent.
Despite conceding that the partnership
§
I.
I.R.C.
2703
agreement’s restrictions “aid in control of
2703(a)(2)
§
provides
I.R.C.
that the val-
interests,
the transfer”
Hol-
any property
ue of
shall be determined
Commissioner,
170, 194,
man v.
130 T.C.
regard
without
to “any restriction on the
(2008),
ness test as well as the re- awas bona fide arrangement business is a 2703(b)(2) (3). maining tests in question of fact.” Ante at 769. To be A. Arrangement Bona Fide Business sure, the ultimate determination of wheth- Test— er restrictions are bona fide ar- family rangements Holman limited partnership likely question of fact. However, was created family to maintain question control the fundamental before assets, family over coordinate investment us is whether the Tax employed management, protect family criteria, framework, assets from correct or test
777
Commissioner,
32, 39-41,
69 T.C.
This is a v.
this factual determination.
make
holding, con-
law,
novo review.
to bolster its
subject to de
WL 3667
question
Comm’r,
F.2d
v.
cited
gressional
Palmer
committees
Bischoff
Cf.
Cir.1988) (while
(8th
ultimate
First,
“the
propositions.
much broader
support
market value is
of fair
determination
on Taxation cited
the Joint Committee
of what
question
...
finding
[t]he
of fact
that maintain-
proposition
for the
Bischoff
value
to determine
be used
criteria should
control is a
ing
Plans,
law”); IHC Health
question
is a
buy-sell agreements, “even
purpose for
(10th
F.3d
Inc.
is a
being preserved
when the ‘control’
Cir.2003) (“The
legal standard
appropriate
to receive income from investment
right
organization
determining whether
Comm, on Taxa-
assets.” Staff of Joint
*14
purpose
‘charitable’
is a
for a
operates
Sess.,
tion,
Cong., 2d
Federal Trans-
101st
novo.”).
which we review de
legal question,
Consequences
Tax
of Estate Freezes
fer
Moreover,
requires a review
question
this
1990).
(Comm.
Furthermore,
14
Print
the
of
interpretation
Tax
of
the
Court’s
the
parenthetical
following
Committee’s
2703(b)(1),
Tax
§
we review the
and
that “mainte-
explains
citation
Bischoff
de novo.
statutory interpretations
purpose
nance of control is
business
[a]
Comm’r,
987,
989
Scherbart v.
a
being
even if the interest
sold is
limited
Cir.2006).
(8th
Thus,
presented
are
we
in
holding compa-
a
law and
question
a mixed
of
with at least
Finally,
14
ny.” Id. at
n. 44.
the Senate
fact,
Either
question
if
a
of law.
pure
Finance Committee cited
for the
Bischoff
re-
requires de novo
way,
precedent
our
proposition that “[continuation
Comm’r,
1030,
F.3d
Blodgett v.
394
view.
ownership”
legitimate
pur-
is a
business
(8th Cir.2005).
1035
buy-sell agreements
for
“even when
pose
2703(b)(1),
§
our ulti
interpreting
While
being preserved
only
is
the
the ‘control’
Congres
to the
goal
“give
mate
is to
effect
partner.”
as a limited
right
participate
to
enact
intent behind the statute’s
sional
Concerning
Explanatory Material
Commit-
Farnam v.
ment.” Estate of
tee on Finance 1990 Reconciliation Sub-
(8th Cir.2009). Where,
581,
as
F.3d
Pursuant
to House Concurrent
mission
here,
ambiguous,7
language
statute’s
is
the
310,
30,488, 30,-
Cong. Rec.
Resolution
his
appropriate
legislative
to examine
Finance Committee
[hereinafter
intent.
Id. In
tory
legislative
to determine
Accordingly, I think the Holman
Report],
2703(b)(l)’s
history,
legislative
light the con-
partnership restrictions served
application
and
interpretation
the court’s
gressionally-recognized legitimate business
give
does not
effect
family control
maintaining
legislative
statute’s
intent.
a
right
participate
over the
Court,
court,
The
like the Tax
essential-
right
to receive income
partner
“maintaining family
that
control”
ly holds
assets.
partnership’s
from the
investment
purpose
legitimate
is a
business
Next,
attempts
distinguish
court
only when the “con-
nership restrictions
value-fixing agreement
right to man-
being preserved is the
trol”
(CCH)
C.I.R.,
1017,
91 T.C.M.
Amlie v.
actively-
an
business or
age
operating
(2006), from the restric-
see also
T.C. at
(quot-
130
193-94
2703(b)(l)’s
In light
leg-
Amlie
same).
ing
Notably,
the Tax Court
history,
partnership
islative
the Holman
recognized
planning
future liquidity
legitimate
serve
business
legitimate
needs as a
business purpose for purpose of protecting partnership assets
agreement
despite the fact that
from
Protecting part-
unrelated parties.9
ward’s stock
an actively managed
nership
“was not
surely
assets from creditors is
a
Amlie,
argued
impermissible
8.
person
assignment
Commissioner
that the
obtained an
agreement
satisfy §
could not
un-
partner
of a limited
interest from one of the
actively managed
less the stock was an
busi-
Holman,
girls.”
(quotation
T.C. at
explained:
ness interest. The Tax Court
"We
omitted).
Indeed,
partnership agreement
rejected
argument
such an
in Estate
Bis-
provides
Holman partnership
was
Commissioner,
32, 40-41,
v.
69 T.C.
choff
right
non-Family
created to
"restrict
(1977),
1977 WL
equally
and find it
persons
acquire
Family
interests
Assets”
Amlie,
995337,
unpersuasive here."
2006 WL
"provide protection
Family
and to
Assets
at *12.
against Family
from claims of future creditors
Moreover,
trial,
members.”
Id. at
at
9. The Tax Court
acknowledged
that the Hol-
Thomas Holman testified: "[W]e were wor-
partnership agreement
man
restrictions were
girls
ried that
that the
intended,
the assets
would even-
part,
place “strong
limitations
tually
sought
come
would be
into
after
partners
on what the
assign-
limited
can do in
friends,
ing
third-party people,
spouses, potential
giving away
or
their interests to other
"
people”
provide
‘safety
a
and to
net' if an
creditors.”
entity
closely-
the intention that the
be
purpose for transfer
legitimate business
restrictions,
regardless
They
ability
of whether
want
to limit
held.
who
manages
operating
busi-
may
partner
without their
become
stock.
merely
publicly-traded
holds
ness or
agreement
person may
that such
take a
T.C.M.
Mundy v.
place at the table.
Cf.
8,
(CCH) 1778, 1976Tax Ct. Memo LEXIS
may
Without restrictions on who
become
*46,
(finding that
10. At
Thomas Holman
give
partnership
agreement provides:
allowed the Holmans "to
partnership
"The Gener-
table,
daughters
to
a seat at the
be-
carry
[their]
al Partners shall use their best efforts to
partners
operation
[the]
come real
in the
purposes
and business of the Partner-
out
Moreover, one of Thomas Hol-
business.”
ship
prudent
in a
and businesslike manner.”
goals
daugh-
long-term
was to have his
man's
engaged
and more
ters "become more
partnership over time.”
Here,
potential
ex-spouses;
and
future
and
express
the Tax Court made
partnership
that the
preserving
partners’
right
factual determination
fundamental
agreement
“designed
restrictions were
partner.
become a
may
to choose who
”
principally
protect family assets from
to
2703(b)(2)
§
B. Device Test—
daughters.
Holman
dissipation
Holman,
added).
(emphasis
130 T.C. at
Having
that the
determined
words,
other
Court determined
2703(b)(1),
§
satisfy
restrictions
I now
designed primar-
that the restrictions were
2703(b)(2)’s
§
turn to
“device” test. Un-
ily
purpose. Notably,
to serve a non-tax
test,
der
Holman partnership
this
re-
the Tax
not find that the Hol-
Court did
be a “device to
strictions must not
transfer
merely
lip
service to
paid
mans
property
such
to members
the decedent’s
the restrictions
full
family
adequate
for less than
con-
while,
reality, using
the restrictions for
money
money’s
sideration in
worth.”
primary purpose
avoiding
taxes.12
added).
2703(b)(2)
§
(emphasis
I.R.C.
Additionally, the Tax Court did not find
1(b)(1)(ii)
Treasury Regulation
25.2703—
the restrictions failed to match the
phrase
excises the
“members of the dece-
partnership’s legitimate,
goals.13
non-tax
2703(b)(2)
§in
family”
dent’s
found
underlying purposes
The
of 2703 are not
phrase
place
substitutes
its
“natural
where,
here,
served
bona fide busi-
objects
bounty,” appar-
of the transferor’s
arrangement
applied
ness
in a man-
test
ently
Secretary
because the
of the Trea-
partners
ner that
discourages
sury
to
interprets
apply
partnerships
creating
from
restrictions
both inter vivos transfers and transfers
non-tax,
principally to achieve
economic
Holman,
death.
781 Moreover, person.” as dead “[a] Internal Reve dent” interpreting the regulations Mayo family” is phrase deference.” “members decedent’s nue Code “substantial & Research Med. Educ. ambiguous greater Found. not when read (8th 675, States, F.3d 679 Cir. 568 United Chapter Congress 14. While context 2009). said, question in our first That 2703(b)(2), § the term “decedent” in used of a agency’s interpretation reviewing an the broader term “transferor” in it used directly has Congress statute is “whether Chapter 14’s other valuation statutes. See at issue.” precise question spoken to 2701(a)(1) 2702(a)(1). And, §§ & as I.R.C. U.S.A., Chevron, Natural Res. Inc. v. Def. out, point Holmans the term “dece- 837, 842, Inc., 467 U.S. S.Ct. Council consistently appears dent” (1984). so, we, If “as 2778, 81 L.Ed.2d 2703(b)(2)’s legislative history. Finally, § effect to the agency, give must well as the telling Congress I that members of find intent of unambiguously expressed Con attempts failed in their to amend have If, gress.” Id. at S.Ct. 2703(b)(2) by substituting legislative § however, ambigu is silent or “the statute family” of the decedent’s phrase “members issue, specific to the respect ous with phrase with the Commissioner’s “natural agen court is whether the question for the bounty.” objects of the transferor’s See permissible con is based on cy’s answer States, Smith v. United No. C.A. 02-264 Id. struction of the statute.” ERIE, 1879212, at *6 n. 2004 WL dispute whether parties primarily (W.D.Pa. 2004). Thus, although June 2703(b)(2) ambiguous. § The Holmans is generally 14 to Congress Chapter enacted unambigu- “decedent” assert that the term schemes, tax address transfer avoidance and, person to a deceased ously refers 2703(b)(2) § applies specifically to trans- 2703(b)(2) therefore, only § asks whether fers death. a device to transfer operate Therefore, Treasury Regulation members at death. property l(b)(l)(ii) § invalid because it is 25.2703— only point out that the term The Holmans give plain language effect to the does not “decedent,” not the broader term “trans- 2703(b)(2). § are Since Holmans 2703(b)(2)’s feror,” § throughout is used definition, are, they living persons, history. Conversely, the Com- legislative 2703(b)(2)’s § “decedents” and device test argues that the term “decedent” missioner is satisfied. ambiguous due to 2703’s location Specifically, the Internal Revenue Code. Comparable Terms Test- C. Code, B is located in Subtitle includes three transfer taxes—the which estate, trans- gift generation-skipping the Holman restric- Since *18 § 2703 is locat- precisely, fer taxes. More (2), § I satisfy now tions B, Chapter Chapter 2703(b)(3). ed Subtitle § analyze the restrictions under joins special § valuation 2703 set 2703(b)(3)’s “comparable § terms” Under tax avoidance targeting rules transfer test, Holman restrictions’ schemes. “comparable ar- terms must be to similar rangements by persons entered into phrase
It
clear that the
“members of
length
arms’
transaction.” While the
lim-
family” unambiguously
the decedent’s
the restric-
2703(b)(2)’s
Court did not decide whether
application
its
to transfers
test,
comparable
terms
tions satisfied
First, the term “decedent” is itself
death.
parties’ experts “agree
that both
it noted
Dictionary
Black’s Law
unambiguous.
ed.2009)
(9th
comparable
transfer
restrictions
plainly defines “dece-
465
seller,
those found
Holman
a willing
being
[the
neither
any
under
agreement] are common in agreements en-
compulsion
buy
sell,
or to
and both
Holman,
length.”14
tered into at arm’s
having reasonable knowledge of relevant
Under
some
Treasury Regulation §
between the
property
value of
tax
discounted value of the
gift
units and the
price
is “the
property
which such
dollar
would
value of the units’ proportional
change
willing buyer
*19
hands between a
and
share of
partnership’s
[net asset val-
best,
appears
14. The court
import
in footnote 5
At
particular
cited emanations of this
language from one of the Commissioner's ex-
barely
proper
witness are
relevant to a
inter-
perts
impeach
the Tax Court's statements
pretation
portion
of this
of the statute.
concerning
2703(b)(3).
requirements
say
That
is not
that courts err
partner
wishing-to-assign
ue].
they
partnership
whenever
consider
get in
more than she would
get
would
provisions
dissolution
agreements’
while
admittedly
private
“thin” market for
calculating
appropriate marketability
transactions,
value of each
and the dollar
example,
For
if the Holman
discount.
of the
remaining partner’s share
partnership
significant
limited
had a
his-
in-
asset
would
nership’s [net
value]
buying
and
out
tory
dissolving
wishing-
crease.
hypothetical willing
a
to-assign partners,
Id. at 214.
buyer
consider this fact while
would
as-
sessing
partnership
interests’ market-
analysis violates the
The Tax Court’s
See,
ability.
e.g., Estate
v.
of Neff
willing buyer/willing seller
hypothetical
Comm’r,
(CCH) 669,
1989 Tax
T.C.M.
hypothetical
it
test because
assumes
278,
*27,
Ct. Memo LEXIS
1989 WL
partnership
limited
buyers own Holman
(1989) (determining
hypo-
that “the
Comm’r,
Jung v.
interests. See Estate of
buyer
willing
certainly
thetical
would
take
(1993).
412, 438,
101 T.C.
assign partner may contrary to the be
partnership’s goals maintaining stated — assets, family continuing control of owner- assets,
ship family restricting
ability of in- parties acquire unrelated Against
terests in assets. this fac- backdrop, hypothetical willing
tual
buyer may find that the probability actual remaining partners unanimously
consenting buy-out to a dissolution and quite
scheme is low.
Thus, the Tax misapplication willing buyer/willing seller test consti-
tutes reversible error. Accordingly, I
would also reverse and remand to the Tax marketability
Court for a new discount
determination. reasons, foregoing
For the respectfully I
dissent. George NOE, Appellant,
Peter America,
UNITED STATES
Appellee.
No. 08-2057.
United States Appeals, Court of
Eighth Circuit.
Submitted: Nov. 2009. April
Filed: