UNITED STATES v. LAND Nos. 18958 and 18959.
303 F.2d 170 (1962)
UNITED STATES of America, Appellant, v. Charles M. LAND, as Successor Executor of the Last Will and Testament of John Robert Land, Deceased, Appellee. UNITED STATES of America, Appellant, v. Charles M. LAND, Ernest H. Land and Margaret L. Haney, as Executors of the Last Will and Testament of Robert Land, Deceased, Appellees.
United States Court of Appeals Fifth Circuit.
May 16, 1962.
Ralph Kennamer, U. S. Atty., Mobile, Ala., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Harvey G. Schneider, Attys., Dept. of Justice, Washington, D. C., Vernol R. Jansen, U. S. Atty., Mobile, Ala., Meyer Rothwacks, Atty., Dept. of Justice, Washington, D. C., Alfred P. Holmes, Jr., Asst. U. S. Atty., for appellant.
John E. Adams, Grove Hill, Ala., for appellee.
Adams, Gillmore & Adams, Grove Hill, Ala., of counsel.
Before RIVES and WISDOM, Circuit Judges, and CARSWELL, District Judge.
WISDOM, Circuit Judge.
These cases pose a problem in the valuation, for federal estate tax purposes, of a partnership interest subject to a restrictive agreement limiting the sales price of the interest to two-thirds of its value in the event of its sale during the partner's lifetime. The district court agreed with the taxpayers that the restriction limited the valuation to two-thirds of the property's calculated net value. We reverse. A restriction on the value of a partnership interest that expires at the decedent's death cannot affect the valuation of the interest for estate tax purposes.
The decedents, John Robert Land and his father, Robert Land, were members of a family partnership, Land Brothers & Company, formed in 1939 to engage in the general merchandise business in Melvin, Alabama. The partnership agreement provided that if any member wished to withdraw from the partnership during his lifetime the other partners would have the option of purchasing his interest at two-thirds its calculated value. At the death of a partner, the surviving partners became entitled to purchase his interest at its full value; if they did not do so, the partnership would be dissolved and its assets liquidated and distributed. John Robert Land died January 5, 1955. His father died a few months later. In reporting the value of each decedent's partnership interest the executors reduced the fair market value by one-third on the theory that value is determined before death and that the restriction controlled the valuation for federal estate taxes. There is no dispute as to the value of the interests apart from the controversy over the effect of the restriction in the partnership agreement.
The taxpayers rely primarily on the Supreme Court's pronouncement in Edwards v. Slocum, 1924,
The statute applicable here is the general provision, Section 2033 of the Internal Revenue Code of 1954, 26 U.S. C.A. § 2033. This provides that "the gross estate shall include the value of all property * * * to the extent of the interest therein of the decedent at the time of his death." The Regulations
Brief as is the instant of death, the court must pinpoint its valuation at this instant — the moment of truth, when the ownership of the decedent ends and the ownership of the successors begins. It is a fallacy, therefore, to argue value before — or — after death on the notion that valuation must be determined by the value either of the interest that ceases or of the interest that begins. Instead, the valuation is determined by the interest that passes, and the value of the interest before or after death is pertinent only as it serves to indicate the value at death. In the usual case death brings no change in the value of property. It is only in the few cases where death alters value, as well as ownership, that it is necessary to determine whether the value at the time of death reflects the change caused by death, for example, loss of services of a valuable partner to a small business.
An examination of several instances where the value of a decedent's property differs after death from its value during his life indicates that whether the subsequent value is increased or reduced, the valuation at death uniformly gives full effect to the change that accompanies the death. In Goodman v. Granger, 3 Cir., 1957,
Underlying the determination in these instances that the valuation of property passing at death reflects the changes wrought by death is a basic economic fact: value looks ahead. To find the fair market value of a property interest at the decedent's death we put ourselves in the position of a potential purchaser of the interest at that time. Such a person would not be influenced in his calculations by past risks that had failed to materialize or by restrictions that had ended. Death tolls the bell for risks, contingencies, or restrictions which exist only during the life of the decedent. A potential buyer focuses on the value the property has in the present or will have in the future. He attributes full value to any right that vests or matures at death, and he reduces his valuation to account for any risk or deprivation that death brings into effect, such as the effect of the death on the brains of a small, close corporation. These are factors that would affect his enjoyment of the property should he purchase it, and on which he bases his valuation. The sense of the situation suggests that we follow suit.
It might be argued that the Regulations abandon this approach and look to the past rather than the future in certain cases. Section 20.2031-2(h) provides that when stock is held subject to an option that is to take effect at death but leaves the decedent free to dispose of the property during his life, the option or contract price will not control the evaluation for estate tax purposes. See Estate of Giannini, 1943,
The cases relied on by the appellees are not in point. They involve restrictions which not only were in effect during the decedent's life but were effective and enforcible on his death; Wilson v. Bowers, 2 Cir., 1932,
Even if the partnership interest should, as the appellees contend, be valued at the moment before the dedecent's death, it would be improper to limit the valuation to two-thirds its value. Although the Supreme Court in Helvering v. Salvage, 1936,
When John Robert Land and his father died, the possibility that either would withdraw from the partnership and surrender his interest at the two-thirds valuation was foreclosed. There was then no contract or option outstanding except in the partners to purchase at full value. Death sealed the fact that their interests would be purchased or redeemed at full value. The fair market value, therefore, of the partnership interest at the time of the death of the partner was its full value. That valuation is controlling for estate tax purposes.
The judgment is
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