City Bank Farmers Trust Co. v. Commissioner

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

City Bank Farmers Trust Co. v. Commissioner

Docket No. 31869.

United States Board of Tax Appeals

23 B.T.A. 663; 1931 BTA LEXIS 1840;

June 11, 1931, Promulgated

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1. ESTATE TAX. - Upon the evidence held that respondent erred in including in the gross estate of the decedent certain stock which decedent had transferred to his wife.

2. Id. - Evidence held insufficient to establish that the Commissioner's valuation of stock of a closely held corporation was erroneous.

3. Id. - Entire amount of money in bank account held by decedent and his wife as joint tenants should be included in decedent's gross estate.

Russell Bradford, Esq., for the petitioner.

Frank T. Horner, Esq., for the respondent.

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MCMAHON

This is a proceeding for the redetermination of an asserted deficiency in estate tax in the amount of $6,543.91, upon the estate of George H. Walker, who died September 28, 1924. The respondent reduced this deficiency by an amount of $1,635.98, representing a credit of 25 per cent of the deficiency on account of State inheritance tax paid by the estate. The petitioners allege that in determining the deficiency the respondent erred in:

(1) including in the gross estate two hundred fifty-nine (259) shares of Walker & Heisler, Inc. stock at a value of $49,728 since this stock belonged to decedent's wife, Delia Walker, who is one of the executors herein;

(2) fixing the value of the stock of Walker & Heisler, Inc. for the stock belonging to the estate of George H. Walker (and not the block herein last before referred to) at a value of $192.00 per share, whereas the reasonable and fair value of the said stock as of the date of death of decedent was a sum less than that;

(3) including in the gross estate the amount of $4,638.33 representing a joint account standing in the name of George H. Walker and Delia Walker and the survivors thereof at the Garfield National Bank;

(4) failing to allow the deductions of the executors' commissions as provided for by the Revenue Act of 1924;

(5) failing to allow attorneys' fees paid and payable as a deduction from the gross estate in the taxation of the net estate of said decedent, contrary to the provisions of the Revenue Act of 1924; and

(6) failing to allow as a deduction the sum of $2,449.41, administration expenses of this estate, in addition to the amount of $102.02 already allowed.

In his brief the respondent admitted that the amount in the joint account in the Garfield National Bank at the time of decedent's death was $2,688.33, instead of $4,638.33, and that that is the amount which should be included in the gross estate. He also admitted that the estate is entitled to the deductions of $13,166.84 for executors' commissions, $5,163.87 for attorneys' fees and $3,808.39 for miscellaneous administration expenses in addition to the amount of $102.02 already allowed.

In paragraph (5)(a) of petition, the petitioner alleged that the said 259 shares of stock of Walker & Heisler, Inc., belonged to Delia Walker and not to George H. Walker or his estate. In his answer the respondent denied the allegation contained in paragraph (5)(a) of the petition and further denied that in determining the deficiency he committed error as alleged in paragraph numbered (4)(a) of the petition. Later, at the hearing, he amended his answer as follows: "Avers that the value of 259 shares of stock, Class A, of Walker & Heisler, Inc. are subject to the Federal estate tax under the provisions of section 302(a) and/or section 302(c) of the Revenue Act of 1924."

FINDINGS OF FACT.

The petitioners, The City Bank Farmers Trust Company (formerly The Farmers' Loan and Trust Company), a corporation with its principal office at 22 William Street, New York City, and Delia Walker, an individual and resident of Bronxville, N.Y., are the duly qualified executor and executrix, respectively, of the estate of George H. Walker, deceased. George H. Walker, hereinafter referred to as the decedent, died on or about September 28, 1924, and his will was duly admitted to probate by the Surrogate's Court of Westchester County, New York.

In 1907 the decedent entered into a partnership with Harry C. Heisler for the purpose of conducting a wholesale business in rugs and carpets, under the name of Walker & Heisler. In 1920, the business was incorporated and its name was changed to Walker & Heisler, Inc. The stock was issued to the four following stockholders: George H. Walker, Harry C. Heisler, Delia Walker, the wife of George H. Walker, and Anna L. Heisler, the wife of Harry C. Heisler. These four persons owned all of the outstanding shares of the stock of the corporation.

In December, 1920, two certificates of stock, one for one share and one for 258 shares, were issued in the name of Dalia Walker and the transfer was effected on the books of the corporation. She was told by her husband that these shares were a gift from him. She always considered that they belonged to her, and was considered the owner by others. It was the custom not to issue dividend checks, but when they were declared the amount of the dividend was credited to the account of the stockholder on the books of the corporation. Then, whenever a stockholder wished to draw against such account he did so. Delia Walker occasionally voted the stock in person but in her absence her husband voted the stock as her proxy. Dividends on these 259 shares were credited to her account on the books of the corporation. In some instances she drew personally or had bills paid on her behalf out of these dividends. She did not make out her income-tax returns, but they were made out for her by her husband and for some years, at least, the amount of the tax was paid out of the dividends credited to her account. On May 17, 1925, she returned the certificates to the corporation and new certificates were issued to her, due to the fact that she had purchased from the estate 300 shares and it was necessary that those certificates be returned in order that new ones for the total number of shares be issued.

At or about the time of the incorporation of the business on December 31, 1920, the four stockholders entered into a contract providing in part as follows:

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WHEREAS, it is the desire of the stockholders that the stock of the company be at all times owned by the present holders or as hereinafter provided for, and

WHEREAS, George H. Walker and Harry C. Heisler were formerly co-partners, each having a 50% interest in the business, and it is now their desire that the same 50% interest be maintained by each, that is, George H. Walker, on the one hand, and Harry C. Heisler on the other, irrespective of who may own some of the shares, on behalf of each of them, and

WHEREAS, it is the desire that this equality of interest be maintained at all times,

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FIRST. - It is mutually understood and agreed that all transfers of stock may be made by any of the parties hereto to either a father, mother, wife, brother or sister, and son, without being required to comply with any of the terms of this agreement, and that such transfers and re-transfers may be made among such stockholders as if this agreement had never been executed; and it is further agreed that any transfer made by any stockholder to one who is not so related to the stockholders as provided for in this paragraph, that such proposed transferee shall be considered an "outsider."

SECOND. - It is mutually agreed that in the event that any one of the parties hereto being a stockholder, or any other stockholders, should desire to dispose of the shares of stock owned by him or her, that the stockholder so desiring to dispose of the stock will offer to the remaining stockholders for purchase said stock before offering the same to any one else. This shall apply to all stockholders including "outsiders" who become stockholders.

THIRD. - It is mutually agreed that when any stockholder offers his stock to the remaining stockholders as herein provided for, he agrees for himself and his legal representatives to accept in payment as the selling price, a price represented by the book value of the said shares, of stock so offered for sale, said book value being based on the last previously taken inventory less all taxes, federal, state and city, which have accrued up to the date of the last previously taken inventory; and each and every stockholder agrees for himself and his legal representatives that he will not sell, transfer, pledge, nor in any other manner or form, dispose of his or her stock to any one else, at any time, except as herein provided for, and except that upon consent of the other stockholders, any other disposition of the shares may be made.

FOURTH. - It is mutually agreed that all Certificates of Stock issued by Walker & Heisler, Inc. shall be marked or stamped to the effect that the same is subject to the terms of this agreement and that anyone purchasing the same from a stockholder who has not complied with the terms of this agreement takes the same subject to the rights of the other stockholders pursuant to the terms of this agreement.

FIFTH. - It is further mutually agreed that a stockholder offering his stock for sale, or his legal representatives as the case may be, shall offer the sale of the shares of stock and the certificate representing the same by a duly addressed offer sent by registered mail to the other stockholders; and it is mutually agreed that the remaining stockholders shall have the right to offer to purchase such proportions as will maintain the equal division of interests above referred to. The whole group of stockholders representing one-half interest shall have the right to offer to purchase 50% of the stock so offered and each individual in that group shall be permitted to purchase that fractional part of the number of shares offered for sale represented by the fraction one as a numerator and the number of remaining stockholders in his or her group as a denominator, unless, of course, one or more of the remaining stockholders should waive his right to purchase and assign his rights to another stockholder, in which event the stockholder to whom the assignment is made will have the right to purchase the shares represented by the amount assigned to him, together with his own fractional part; but no such assignment of right to purchase shall be made from a stockholder in one group to a stockholder in the other group.

SIXTH. - It is mutually agreed that the stockholder or stockholders offering to purchase, must notify the selling stockholder or his representatives either personally or by registered mail, within 60 days after the receipt of the aforesaid offer to sell, stating that he or she intends to purchase the said stock upon the terms herein provided for, and that he or she as purchaser is prepared to receive a tender of the stock and to make payment therefor in cash or certified check as herein provided for.

SEVENTH. - It is agreed that in the event that all of the remaining stockholders fail to accept the offer to sell, as herein provided, and upon the terms herein provided, that then and in that event, the selling stockholder or his legal representatives may offer the said stock for sale to whomsoever he pleases.

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It is further provided in the contract that upon the failure of any stockholder, or his personal representative, to comply with the terms of sale therein provided for the remaining stockholders should be entitled forthwith to a decree of specific performance by a court of competent jurisdiction requiring the said stockholder or his representative or assignees to comply with the terms of said agreement. Each certificate of stock had the following stamped on its face:

Notice is hereby given that the number of shares represented by this certificate and the certificate itself are subject to the terms of an agreement among the stockholders dated December 31, 1920. Anyone becoming a transferee contrary to the provisions of said agreement takes the same at his or her peril and subject to the rights of the other stockholders pursuant to the terms of that agreement. A copy of said agreement may be obtained from any stockholder upon request.

On April 22, 1925, an agreement was entered into between Harry C. Heisler, Anna L. Heisler, Delia Walker and the Farmers' Loan & Trust Company, as executors and trustees for the estate of George H. Walker, abrogating and rescinding the contract of December 31, 1920.

The respondent included these 259 shares of Walker & Heisler, Inc., stock in the decedent's gross estate at a value of $49,728, or $192 per share.

The respondent also included in the gross estate of the decedent, at a value of $192 per share, 2,241 shares of the stock of Walker & Heisler, Inc., which the decedent owned at the time of his death.

There were no sales of Walker & Heisler, Inc., stock prior to decedent's death.

At the time of decedent's death there was an account with the Garfield National Bank in the name of "George H. Walker or Delia Walker" and the amount of the deposit to the credit of the account on September 28, 1924, was $2,688.33.

The following amounts were allowed by the order of the Surrogate's Court ofWestchester County, New York, and paid by the executors: executors' commissions, $13,166.84; attorneys' fees, $5,163.87; and administration expenses, $3,910.41.

OPINION.

MCMAHON: The respondent, in his brief, has admitted that he erred in failing to allow deductions of $13,166.84 for executors' commissions, $5,163.87 for attorneys' fees and an additional amount of $3,808.39 for administration expenses. These amounts will be allowed as deductions from the gross estate.

The first contention of the petitioners is that the respondent erred in including in the gross estate of the decedent the value of 259 shares of Class A stock of Walker & Heisler, Inc., for which certificates were issued in the name of Delia Walker in 1920. At the hearing counsel for both parties agreed that the only issues raised by the pleading on this point were: (1) whether these shares of stock were owned by the decedent at the time of his death, within the meaning of section 302(a) of the Revenue Act of 1924, and (2) if not, whether the transfer of the stock by the decedent to his wife in 1920 was a transfer intended to take effect in possession or enjoyment at or after decedent's death within the meaning of section 302(c) of the Revenue Act of 1924.

Sections 302(a) and 302(c) of the Revenue Act of 1924 provide:

SEC. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated -

(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate.

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(c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for a fair consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of Part I of this title.

No issue has been raised or evidence presented by the parties as to whether there was a transfer made by decedent in contemplation of death.

It is not clear whether or not Delia Walker ever had actual possession of these certificates. However, her husband told her he was giving her the shares of stock. They were transferred to her name on the books of the corporation, dividends thereon were credited to her and all parties concerned considered that the shares of stock were her property. Her income taxes for at least one year were paid out of the dividends credited to her account and in some instances she drew personally or had bills paid for her out of such credits. She voted the stock in person occasionally and her husband in her absence voted the stock as her proxy. Regardless of whether there was actual physical delivery of the certificates, it is clear that there was a complete gift. There was present an intention on the part of the donor to make a gift, to take effect immediately, the knowledge and acceptance thereof by the donee and the stock was transferred to the donee's name on the corporate books. See . Since this was a complete gift, it is not taxable under the provisions of section 302(a). From the evidence we are also satisfied that the transfer was not intended to take effect in possession or enjoyment at or after decedent's death. Since the transfer was made more than two years prior to decedent's death there is no statutory presumption that it was made in contemplation of death. We, therefore, hold that respondent erred in including the 259 shares of Walker & Heisler, Inc., stock in decedent's gross estate.

The respondent also included in the gross estate of the decedent, at a value of $192 per share, 2,241 shares of stock of Walker & Heisler, Inc., which the decedent owned at the date of his death. Section 302 of the Revenue Act of 1924 provides that there shall be included in gross estate the "value" at the time of the death of decedent of all property, real or personal, etc. The petitioners contend that since the contract of December 31, 1920, restricted the sale of this stock by requiring that it should first be offered to the other stockholders at its book value without taking into consideration any good will, it had no higher value than that fixed by the contract. The contract provided that any stockholder desiring to sell his stock should first offer it for sale to the other stockholders, but, if after sixty days none of the other stockholders wished to purchase it, he could then offer the stock to outsiders. It is apparent, however, that the stock must have had a value in excess of the book value. The company had been in business since 1907, first as a partnership and then as a corporation. It had made substantial earnings and had a good will of a considerable value. Although the parties can restrict the sale price of the stock as between themselves they can not, by such a contract, restrict the right of the Government to collect taxes upon the actual value of the stock.

The evidence discloses that there were no sales of this stock prior to the death of the decedent and there is no evidence to show that there were any sales soon after his death. Upon the entire record we must hold that the petitioner has introduced insufficient evidence to overcome the presumption of the correctness of the respondent's determination of a value of $192 per share for the stock, and the respondent's determination is therefore approved. .

As to the joint bank account, it has been stipulated by the parties that the amount of the deposit therein at the time of decedent's death was $2,688.33. The respondent has included the entire amount in gross income, and petitioner contends that no part of such amount should be so included. Section 302(e) of the Revenue Act of 1924 provides that there shall be included in gross estate the value of all property:

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To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than a fair consideration in money or money's worth; * * *

There is no evidence as to whether any part of the money in this account originally belonged to the wife. We must, therefore, hold that the respondent did not err in including the entire amount thereof in the gross estate of the decedent.

Upon the redetermination under Rule 50, proper credit will be allowed the petitioner under the provisions of section 301(b) of the Revenue Act of 1924 for State inheritance taxes paid by the estate.

Reviewed by the Board.

Judgment will be entered under Rule 50.