Armstrong v. Comm'r of Internal Revenue (In re Estate of Armstrong)

• Decision Date: 29 October 2002
• Docket Number: No. 1118–98.,1118–98.
• Parties: ESTATE OF FRANK ARMSTRONG, Jr., Deceased, Frank Armstrong III, Executor, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

119 T.C. 220

119 T.C. No. 13

ESTATE OF FRANK ARMSTRONG, Jr., Deceased, Frank Armstrong III, Executor, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 1118–98.

United States Tax Court.

Oct. 29, 2002.

Executor petitioned for redetermination of estate tax deficiency arising from inclusion of gifts made within three years of decedent's death and inclusion of gift tax paid on such gifts. IRS moved for partial summary judgment. The Tax Court, Thornton, J., held that: (1) decedent's gross estate included gift taxes paid with respect to stock gifts undiminished by alleged consideration received in connection with payment of such taxes; (2) provision requiring inclusion of gift tax paid on gifts made within three years of death did not violate due process; (3) provision requiring inclusion of gift tax paid on gifts made within three years of death did not violate equal protection; and (4) no deduction for charitable transfer was allowable for gift taxes paid on gifts made within three years of death.

Motion granted.

See also, 277 F3d 490; 114 T.C. 94. Aubrey J. Owen and Stephen L. Pettler, Jr., for petitioner.

Veena Luthra, Deborah C. Stanley, and Cheryl M.D. Rees, for respondent.

OPINION

THORNTON, J.

In 1991 and 1992, D gave stock to Cs and other donees. For gift tax purposes, D valued the stock at $100 per share. As a condition of receiving certain of these gifts, Cs agreed to pay additional gift taxes arising if the gifts of stock were later determined to have a fair market value greater than $100 per share. In 1993, D died. Subsequently, R determined that D's gifts of stock should be valued at $109 per share, resulting in gift tax deficiencies which were paid by a trust that D had established. The total gift taxes paid on D's 1991 and 1992 gifts of stock were $4,680,284. Cs paid none of these gift taxes.

D's estate and the trust sued for refunds of gift taxes paid, claiming that Cs' obligations to pay additional gift taxes as a condition of the gifts they received reduced the value of the gifts. The U.S. Court of Appeals for the Fourth Circuit rejected the refund claims, holding that Cs' obligations to pay additional gift taxes were contingent and highly speculative. Estate of Armstrong v. United States, 277 F.3d 490 (4th Cir.2002).

1. Held: Pursuant to sec.2035(c), I.R.C., D's gross estate includes the $4,680,284 in gift taxes paid by or on behalf of D with respect to his 1991 and 1992 gifts of stock. Held, further, the amount includable in D's gross estate pursuant to sec.2035(c), I.R.C., is not reduced to take into account consideration allegedly received by D in connection with payment of the gift taxes.

2. Held, further, sec.2035(c), I.R.C., does not violate due process under the Fifth Amendment.

3. Held, further, sec.2035(c), I.R.C., does not violate equal protection requirements of the Fourteenth Amendment as encompassed by the Fifth Amendment.

4. Held, further, no deduction is allowable under sec.2055(a), I.R.C., with respect to gift taxes included in D's gross estate pursuant to sec.2035(c), I.R.C.

Respondent determined a $2,350,071 Federal estate tax deficiency with respect to the Estate of Frank Armstrong, Jr. (the estate). This case is before us on respondent's motion for partial summary judgment under Rule 121.¹ Respondent seeks summary judgment upon the following issues: (1) Whether gift taxes of $4,680,284 paid by or on behalf of Frank Armstrong, Jr. (decedent), on gifts made within 3 years of his death are includable in his gross estate; (2) whether decedent received partial consideration for the gifts so as to reduce the gifts' value and consequently the gift taxes includable in decedent's gross estate; (3) whether section 2035(c) violates the Due Process Clause of the Fifth Amendment of the U.S. Constitution; (4) whether section 2035(c) violates the equal protection requirements of the Fourteenth Amendment, as embodied in the Fifth Amendment; and (5) whether the estate may deduct under section 2055 Federal gift taxes paid on gifts that decedent made in 1991 and 1992. As discussed in detail below, we will grant respondent's motion.

Summary judgment may be granted under Rule 121(b) if the moving party shows there is no dispute as to any material fact and that a decision may be rendered as a matter of law; however, the factual materials and inferences to be drawn from them must be viewed most favorably for the party opposing the motion, who “cannot rest upon mere allegations or denials, but must set forth specific facts showing there is a genuine issue for trial.” Brotman v. Commissioner, 105 T.C. 141, 142, 1995 WL 502048 (1995).

Background

In a memorandum of law in support of its objection to respondent's motion for partial summary judgment, the estate states that it agrees, with limited exceptions, to the statement of facts contained in respondent's memorandum of law in support of the motion for partial summary judgment. The following factual summary is based on the undisputed portions of respondent's statement of facts, the parties' stipulations, the estate's admissions, the pleadings, and an affidavit produced by respondent with accompanying documents, to which the estate has not objected. This factual summary is set forth solely for purposes of deciding the motion for partial summary judgment; it does not constitute findings of fact. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520, 1992 WL 88529 (1992), affd. 17 F.3d 965 (7th Cir.1994).

Decedent

Decedent was president and primary stockholder of National Fruit Product Co., Inc. (National Fruit), a closely held Virginia corporation engaged in the manufacture of applesauce, apple juice, and other fruit products. On July 29, 1993, decedent died. His domicile at death was in Winchester, Virginia. When the petition was filed, the executor's legal residence was in Winchester, Virginia.

Decedent's Divestiture of National Fruit Stock

In 1991, at the age of 91, decedent began a program to divest himself of his National Fruit stock. Decedent made gifts of some of his stock; National Fruit redeemed the remainder.

Decedent's Gifts of National Fruit Stock

On December 26, 1991, decedent gave 5,725 shares of National Fruit common stock to each of four children—Frank Armstrong III, William T. Armstrong, JoAnne A. Strader, and Gretchen A. Redmond (the donee children). At the same time, decedent gave 100 shares to each of 11 grandchildren.

On January 3, 1992, decedent made additional gifts of National Fruit common stock: Over 12,000 shares to each of the donee children (12,732 each to two children, 12,532 shares to another child, and 12,332 shares to the fourth child); another 100 shares to each of the 11 grandchildren; and 4,878 total shares to two trusts that he established that same day.

The Transferee Liability Agreement

Also on January 3, 1992, decedent and the donee children executed a transferee liability agreement (the transferee agreement). The transferee agreement stated that for gift tax purposes decedent would report the value of his 1991 and 1992 gifts of National Fruit stock as $100 per share. The transferee agreement stated that decedent was making the January 3, 1992, gifts to the donee children on the condition that they pay the additional gift taxes (along with interest and related costs) arising “by reason of any proposed adjustment to the amount of [the] 1991 and 1992 gifts” by decedent of the National Fruit stock.

Redemption of Decedent's Other National Fruit Shares

On December 26, 1991, National Fruit redeemed all of decedent's preferred stock for cash and a private annuity. On January 6, 1992, National Fruit redeemed decedent's remaining common stock in consideration for a $6,065,300 promissory note (the note) payable to decedent by National Fruit, with payment guaranteed by the donee children. On the same date, decedent established the Frank Armstrong, Jr. Trust for the Benefit of Frank Armstrong, Jr. (the trust), naming Frank Armstrong III as trustee. Decedent assigned the note to the trust. The terms of both the note and the trust provided for the payment of gift and income tax liabilities and related costs resulting from the 1991 and 1992 gifts and redemptions of decedent's National Fruit stock.

1991 and 1992 Gift TaxesDecedent's 1991 and 1992 Gift Tax Returns

On his 1991 and 1992 Federal gift tax returns, decedent reported his gifts of National Fruit stock, valued at $100 per share, resulting in reported gift tax liabilities of $1,229,483 and $3,027,090 for 1991 and 1992, respectively. With each gift tax return, decedent submitted two checks in payment of the reported liabilities: For 1991, he submitted a $1,200,341 check drawn on the trust's bank account and a $29,142 check drawn on his personal bank account; for 1992, he submitted a $3,015,595 check drawn on the trust's bank account and a $11,495 check drawn on his personal bank account.

Respondent's Gift Tax Determinations

After decedent's death in 1993, respondent determined that decedent's 1991 and 1992 gifts of National Fruit stock had a value of $109 per share, rather than $100 per share as reported on the gift tax returns, resulting in gift tax deficiencies of $118,801 and $304,910 for 1991 and 1992, respectively. The estate consented to the immediate assessment and collection of these determined gift tax deficiencies.

Payment of the 1991 and 1992 Assessed Gift Tax Deficiencies

In December 1995, respondent received payment from the trust for the 1991 and 1992 assessed gift tax deficiencies and interest thereon. As of November 20, 1998, none of the donee children had paid any of decedent's gift tax liabilities, gift tax deficiencies, or interest with respect to decedent's gifts for any taxable year.

Refund Claims for Gift Taxes Paid

In April 1996, the estate and the trust filed separate, partially duplicative refund claims with respect to decedent's 1991 and 1992 gift tax liabilities. The trust sought refunds of the $118,801 and $304,910 gift...