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respondent and encourage him to proffer expert testimony in a
fruitless attempt to establish that a partnership should be
disregarded because the value of a partnership interest is equal,
or approximately equal, to the value of the corresponding
underlying assets. The “willing buyer, willing seller” analysis
merely establishes the value of a partnership interest, not
whether the economic substance doctrine is applicable.
II. The Economic Substance Doctrine Should Not Be Employed in
the Transfer Tax Regime To Disregard Entities
A fundamental premise of transfer taxation is that State law
defines and Federal tax law then determines the tax treatment of
property rights and interests. See Drye v. United States, 528
U.S. 49 (1999); Morgan v. Commissioner, 309 U.S. 78 (1940). As a
result, the courts have not employed the economic substance
doctrine to disregard an entity (i.e., one recognized as bona
fide under State law) for the purpose of disallowing a purported
valuation discount.
The application of the economic substance doctrine in the
transfer tax context generally has been limited to cases where a
taxpayer attempts to disguise the transferor or transferees. The
courts in these cases occasionally mention, but do not explicitly
incorporate, a business purpose inquiry in their analysis. See
Heyen v. United States, 945 F.2d 359 (10th Cir. 1991)(applying
only substance over form analysis to a gift of stock to disregard
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