The parties dispute the validity of the formula clauses. Petitioners contend that the formula clauses are valid because the clauses were used to fix the transferred amount of JHHC's hard-to-value stock and the parties to those clauses conducted themselves at arm's length. Petitioners conclude that the applicable value of the stock is $36.66 per share, as reported, and that they may deduct the $100,000 claimed as charitable contributions. Respondent argues that the formula clauses are invalid because they were not reached at arm's length and are contrary to public 2011 Tax Ct. Memo LEXIS 130">*142 policy. Respondent concludes that the value of the stock is $48.60 per share and that each petitioner may deduct charitable contributions totaling $66,284.57 (i.e., $48.60 multiplied by the number of shares transferred to the Foundation).³ We agree with petitioners that the applicable value of the stock is $36.66 per share and that each petitioner may deduct the claimed $50,000 in charitable contributions.

Taxpayers normally bear the burden of proof in this Court. See Rule 142(a)(1). In certain cases, however, the burden of proof may shift to the Commissioner. See sec. 7491(a); Rule 142(a)(2). Petitioners claim this is one of those cases. Respondent does not dispute petitioners' claim that the burden has shifted to respondent with respect to the validity of the formula clauses. Respondent 2011 Tax Ct. Memo LEXIS 130">*143 argues only that petitioners bear the burden if they aspire to deduct more than $66,284.57 in charitable contributions. Because petitioners aspire only to deduct $50,000 in charitable contributions, respondent's argument is irrelevant. Therefore, on the only issue for decision that remains (validity of the formula clauses), we conclude on the basis of the record that the burden of proof is on respondent.

Sections 2501 and 2512 govern the valuation of the JHHC stock transferred to the trusts and to the Foundation. Section 2501 imposes a tax on an individual's transfer of property by gift during the calendar year. Section 2512(a) provides that the amount of the gift is the value of the property on the date of the gift. Section 2512(b) provides that where property is transferred for less than an adequate and full consideration in money or money's worth, the amount by which the value of the property exceeds the value of the consideration is a gift and is included in computing the amount of gifts made during the year.

This case is appealable to the Court of Appeals for the Fifth Circuit, and we follow precedent of that 2011 Tax Ct. Memo LEXIS 130">*144 court that is squarely on point. See Golsen v. Commissioner,54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971). Petitioners argue that Succession of McCord v. Commissioner,461 F.3d 614">461 F.3d 614 (5th Cir. 2006), revg. 120 T.C. 358">120 T.C. 358 (2003), is such precedent. We agree. As discussed below, Succession of McCord is dispositive of this case except to the extent that respondent argues that: (1) The formula clauses are not the result of an arm's-length transaction or (2) the formula clauses are void as contrary to public policy.

Succession of McCord is factually similar to this case. There, Charles and Mary McCord (collectively, McCords) transferred their interest in McCord Interests, Ltd., L.L.P. (MIL), to nonexempt and exempt donees according to a formula clause nearly identical to the one here. MIL was a limited liability partnership formed by the McCords, their sons, and the sons' limited liability partnership.

On 2011 Tax Ct. Memo LEXIS 130">*145 January 12, 1996, the McCords executed an assignment agreement that used a formula clause to irrevocably dispose of their class B limited partnership interest to GST trusts, to their sons, to the Community Foundation of Texas, Inc. (CFT), and to the Shreveport Symphony, Inc. (Symphony).⁴ The formula clause stated that: (1) GST trusts would receive interests in MIL with a fair market value equal to the dollar amount of the McCords' net remaining generation-skipping tax exemption, reduced by the dollar value of any transfer tax obligation assumed by the trusts; (2) the sons would receive interests in MIL with a fair market value of $6,910,932.52, reduced by the dollar value of the interests given to the GST trusts and any transfer tax obligation assumed by the sons; (3) the Symphony would receive an interest in MIL with a fair market value of $134,000; and (4) CFT would receive any remaining interest. The assignment agreement defined fair market value according to the willing buyer/wiling seller test specified in the regulations and required the donees to apply that standard to ascertain the fair market value of the class B limited partnership interests. The assignment agreements did 2011 Tax Ct. Memo LEXIS 130">*146 not specify any method that the donees had to employ to equate their dollar amount of gifts to percentages of interest in MIL, and the parties to the transaction lacked any agreement, either oral or expressed, on any such method. See 461 F.3d 614">id. at 618-619.

Howard Frazier was hired to value a 1-percent limited partnership interest in MIL, and on February 28, 1996, the sons and their trusts presented CFT and the Symphony with a Howard Frazier appraisal stating that the fair market value of a 1-percent limited partnership interest was $89,505 on the date of the gift. CFT exercised its right to retain outside counsel to review the appraisal independently. Although CFT did not retain an independent appraiser, the CFT officers and their outside counsel expressed confidence in Howard Frazier's methodology and service and accepted its valuation. In March 1996 all the donees executed a confirmation agreement allocating the partnership interests to the parties according to the value stated in the appraisal.

By separate notices of deficiency, the Commissioner determined a deficiency 2011 Tax Ct. Memo LEXIS 130">*147 in the Federal gift tax of each of the McCords on the basis of their understatement of the value of the limited partnership interests. The McCords petitioned this Court, and we decided that they had inaccurately determined the fair market value of the 1-percent limited partnership interest. See McCord v. Commissioner,120 T.C. 358">120 T.C. 358 (2003). The Court of Appeals for the Fifth Circuit disagreed, holding that the fair market value of the 1-percent limited partnership interest was as determined by the Howard Frazier report and used by the McCords to prepare their gift tax returns. See 461 F.3d 614">Succession of McCord v. Commissioner, supra at 628. The court noted that the Commissioner had relied in this Court on the doctrine of violation of public policy but had waived that doctrine on appeal. See 461 F.3d 614">id. at 623.

Respondent states that 461 F.3d 614">Succession of McCord v. Commissioner, supra, is not controlling precedent because the Court of Appeals for the Fifth Circuit did not consider specific arguments that respondent makes here. We agree that Succession of McCord does not control this case to the extent that respondent's current arguments implicate issues not decided by the Court of 2011 Tax Ct. Memo LEXIS 130">*148 Appeals for the Fifth Circuit in Succession of McCord. Respondent makes two such arguments in this case. First, respondent argues as a point of fact that the formula clauses are invalid because they were not reached at arm's length. Second, respondent argues as a point of law that the formula clauses are void as contrary to public policy. We proceed to address those two arguments. Succession of McCord disposes of all other arguments.

Generally, a taxpayer may structure a transaction in a manner that minimizes or avoids taxes by any means the laws allow. Gregory v. Helvering,293 U.S. 465">293 U.S. 465, 293 U.S. 465">469, 55 S. Ct. 266">55 S. Ct. 266, 79 L. Ed. 596">79 L. Ed. 596 (1935). Courts, however, may disregard the form of a transaction in favor of its substance where there is collusion, an understanding, a side deal, or another indicium that the transaction was not at arm's length. The disregard of a transaction for lack of substance, however, cannot be based on mere suspicion and speculation arising from the fact that a taxpayer engaged in estate planning. See Strangi v. Commissioner,293 F.3d 279">293 F.3d 279, 293 F.3d 279">282 (5th Cir. 2002), affg. in part and revg. in part T.C. Memo. 2003-145; Hall v. Commissioner,92 T.C. 312">92 T.C. 312, 92 T.C. 312">335 (1989). Nor do we strictly 2011 Tax Ct. Memo LEXIS 130">*149 scrutinize a transaction, or presume that a transfer is a gift, where, as here, the transaction involves a third party without familial or financial ties to the transferee's family group. Cf. Kimbell v. United States,371 F.3d 257">371 F.3d 257, 371 F.3d 257">263 (5th Cir. 2004) (applying the strict scrutiny standard and imposing a presumption that the transferred property is a gift when a mother transferred a large portion of her estate to three entities her son owned); Harwood v. Commissioner,82 T.C. 239">82 T.C. 239, 82 T.C. 239">258 (1984) (applying the strict scrutiny standard and raising the presumption that the property transferred among a family was a gift where a mother transferred her partnership interest to her sons), affd. without published opinion 786 F.2d 1174">786 F.2d 1174 (9th Cir. 1986). Instead, we must find credible evidence that the parties colluded or had side deals or that the form of the transactions otherwise differed from the substance. We find no such credible evidence here.

Respondent argues that the formula clauses failed to be reached at arm's length because petitioners and their daughters (or their trusts) were close and lacked adverse interests, the daughters benefited from petitioners' estate plan, and the clauses were 2011 Tax Ct. Memo LEXIS 130">*150 not thoroughly negotiated. We disagree. The mere facts that petitioners and their daughters were "close" and that petitioners' estate plan was beneficial to the daughters does not necessarily mean that the formula clauses failed to be reached at arm's length. Nor is a finding of negotiation or adverse interests an essential element of an arm's-length transaction, see 371 F.3d 257">Kimbell v. United States, supra at 263; Huber v. Commissioner,T.C. Memo 2006-96; Estate of Stone v. Commissioner,T.C. Memo. 2003-309, although we find nothing in the record to persuade us either that the formula clauses were not subject to negotiation or that petitioners and the daughters' trusts lacked adverse interests. We also note economic and business risk assumed by the daughters' trusts as buyers of the stock (i.e., the daughters' trusts could receive less stock for their payment if the JHHC stock was overvalued) placed them at odds with petitioners and the Foundation.

Respondent asks the Court to find collusion between petitioners and the Foundation. We decline to do so. Petitioners' creation of the donor-advised fund at the Foundation did not diverge from their usual course of donation, because they could still 2011 Tax Ct. Memo LEXIS 130">*151 request the Foundation to provide a grant to any of their usual donees. The Foundation, in turn, accepted various potential risks incident to its receipt of petitioners' gift of the JHHC stock, including a loss of the Foundation's tax-exempt status if it failed to exercise due diligence as to the gift. The Foundation, a manager of nearly $270 million in assets, exercised its bargaining power when its counsel insisted that petitioners pay local taxes and penalties as well as Federal and State taxes and penalties if JHHC failed to distribute sufficient income to pay those taxes. The Foundation also was represented by counsel independent of petitioners or their counsel, and the Foundation conducted an independent appraisal through White Petrov. We also note that the Foundation had a fiduciary obligation under Federal and State law to ensure that it received the number of shares it was entitled to receive under the formula clauses. See sec. 501(c)(3); Tex. Rev. Civ. Stat. Ann. art. 1396-2.28 (West 1997).

Respondent argues that the formula clauses are void as contrary to public policy. We disagree. While the Court can disallow a deduction on public policy grounds if allowing 2011 Tax Ct. Memo LEXIS 130">*152 such a deduction would severely and immediately frustrate sharply defined national or State policies proscribing certain conduct, see Tank Truck Rentals, Inc. v. Commissioner,356 U.S. 30">356 U.S. 30, 356 U.S. 30">35, 78 S. Ct. 507">78 S. Ct. 507, 2 L. Ed. 2d 562">2 L. Ed. 2d 562, 1958-1 C.B. 502, 78 Ohio Law. Abs. 220">78 Ohio Law. Abs. 220 (1958), the formula clauses do not immediately and severely frustrate any national or State policy. To the contrary, the fundamental public policy here is one of encouraging gifts to charity, and the formula clauses support that policy.

Respondent relies on Commissioner v. Procter,142 F.2d 824">142 F.2d 824 (4th Cir. 1944), and its progeny, for a contrary result. There, a taxpayer assigned his interest in two trusts subject to the life estate of his mother. The taxpayer instructed the trustees that, upon his mother's death, certain amounts of the corpora should be paid to him during his life, and the remaining corpora should be delivered to his children or their representatives at his death. The amounts of the corpora paid to the taxpayer were tied to the amounts due on loans from his mother secured by his interests in the two trusts. The trust indenture stated as a saving provision that if it was ultimately determined that any part of the transfer in trust was subject to gift tax, then the property subject 2011 Tax Ct. Memo LEXIS 130">*153 to the tax was not to be included in the conveyance to the trust and would remain property of the taxpayer.

The Court of Appeals for the Fourth Circuit held that this saving clause was void as contrary to public policy. Such was so, the court stated, for three reasons. First, the provision discouraged the collection of the tax because any attempt to collect the tax would defeat the gift. See 142 F.2d 824">id. at 827. Second, the effect of the condition was to obstruct the administration of justice by requiring a court to pass upon a moot case. See id. Third, the provision would reduce a Federal court's final judgment to a declaratory judgment. See id. Since 142 F.2d 824">Commissioner v. Procter, supra, Federal courts have relied upon that case to invalidate other saving provisions. See, e.g., Ward v. Commissioner,87 T.C. 78">87 T.C. 78 (1986) (invalidating saving clause that provided for a retroactive adjustment of stock to escape any imposition of gift tax).

The present case is distinguishable from Procter and its progeny. Here, unlike there, the formula clauses impose no condition subsequent that would defeat the transfer. Moreover, as stated above, the formula clauses further the fundamental public policy of encouraging 2011 Tax Ct. Memo LEXIS 130">*154 gifts to charity. Recently, in Estate of Christiansen v. Commissioner,130 T.C. 1">130 T.C. 1, 130 T.C. 1">16-18 (2008), affd. 586 F.3d 1061">586 F.3d 1061 (8th Cir. 2009), we held that an essentially similar dollar-value formula disclaimer was not contrary to public policy. We know of no legitimate reason to distinguish the formula clauses from that disclaimer, and we decline to do so. We hold that the formula clauses are not void as contrary to public policy.

We hold consistently with Succession of McCord v. Commissioner,461 F.3d 614">461 F.3d 614 (5th Cir. 2006), that the formula clauses control the transfers of the JHHC stock to the trusts and the Foundation on December 31, 1999. Given this holding, no additional value passed to the Foundation as of December 31, 1999, and petitioners are entitled to deduct the $100,000 in charitable contributions claimed. All arguments for contrary holdings have been considered and, to the extent not discussed above, we find those arguments to be without merit. Accordingly,

Decision will be entered for petitioners.