Tax Court Fumbles Substance-Over-Form Ball in Estate of Brown

Tax lawyers are abuzz over Tax Court Judge David Laro’s aggressive application of the substance-over-form doctrine in ACM Partnership v. Commissioner, T.C. Memo. 1997-115. In that case, Judge Laro rejected Colgate-Palmolive’s use of the contingent payment installment sales rules to shelter $100 million of gain. In contrast, Tax Court Judge John O. Colvin recently rejected the Service’s substance-over-form argument in Estate of Brown v. Commissioner, T.C. Memo. 1997-195, thereby permitting control of the Cincinnati Bengals football team to pass to the children of the team’s founder free of over $30 million of estate tax. The decision creates a quasi-business judgment rule in the estate tax - whatever a closely held company and the estate planning advisers of a major shareholder decide to do to shift control of the company to the shareholder’s children seemingly is automatically imbued with a business purpose as long as an unrelated shareholder receives sufficient cash to go along with the transaction. Although the technique may be difficult for other sports plutocrats to replicate, Estate of Brown gives credence in the estate tax context to matters of form rightfully scorned by ACM Partnership in the income tax context.