146 T.C. 117 (T.C. 2016), 21992-13, Estate of Dieringer v. Commissioner of Internal Revenue
|Citation:||146 T.C. 117, 146 T.C. No. 8|
|Opinion Judge:||KERRIGAN, Judge:|
|Party Name:||ESTATE OF VICTORIA E. DIERINGER, DECEASED, EUGENE DIERINGER, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||Marc Kellogg Sellers, for petitioner. Randall G. Durfee, Janis B. Geier, and Jeffrey D. Rice, for respondent.|
|Case Date:||March 30, 2016|
|Court:||United States Tax Court|
Decision will be entered for respondent.
Decedent (D) and some family members owned DPI, a closely held real property management corporation. D was a majority shareholder in DPI, owning 425 out of 525 voting shares and 7,736.5 out of 9,920.5 nonvoting shares.
During her life D established Trust (T) and Foundation (F). Her son G was sole trustee of T and F. D's will left her entire estate to T. Pursuant to the terms of the trust agreement, $600,000 went to various charitable organizations and D's children received minor amounts of her personal effects. The remainder of her estate, consisting primarily of DPI stock, would be distributed to the acting trustee of F to be administered in accordance with the terms of the trust agreement.
An appraisal for purposes of determining the date-of-death fair market value (FMV) of D's property valued D's DPI nonvoting and voting shares at $14,182,471. The appraisal valued the voting stock at $1,824 per share with no applicable discount. The nonvoting stock was valued at $1,733 per share, including a 5% discount to reflect the lack of voting power at shareholder meetings.
Numerous events occurred after D's death but before D's bequeathed property was transferred to F. Seven months after D's death DPI elected S corporation status. DPI also agreed to redeem all of D's bequeathed shares from T. DPI and T amended and modified the redemption agreement, with DPI agreeing to redeem all 425 of the voting shares but only 5,600.5 of the nonvoting shares. In exchange for the redemption, T received a short-term promissory note for $2,250,000 and a long-term promissory note for $2,968,462 (as amended). At the same time as the redemption, pursuant to subscription agreements, three of D's sons, including G, purchased additional shares in DPI. F later reported that it had received three noncash contributions consisting of the short-term and long-term promissory notes (as amended) plus nonvoting DPI shares.
An appraisal of D's DPI stock for purposes of the redemption and subscription agreements determined that D's DPI voting shares had a FMV of $916 per share and the nonvoting shares, of $870 per share. The appraisal of the voting stock included discounts of 15% for lack of control and 35% for lack of marketability. The appraisal of the nonvoting stock included the lack of control and marketability discounts plus an additional 5% discount for the lack of voting power at stockholder meetings.
The parties dispute the amount of the charitable contribution. The estate (E) argues that the charitable contribution should not depend upon or be measured by the value received by F. Respondent ® argues that the amount of the charitable contribution should be determined by postdeath events.
Because R found that the value of E's charitable contribution was lower than reported on its Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, R determined that additional estate tax is due. R also determined that E is liable for an accuracy-related penalty under I.R.C. sec. 6662(a) for an underpayment attributable to negligence or disregard of rules or regulations within the meaning of I.R.C. sec. 6662(b)(1).
Held: E's charitable contribution is less than the date-of-death fair market value of the bequeathed property because numerous events occurred after D's death that changed the nature and reduced the value of the property that was actually transferred to F.
Held, further, R properly allocated the proportionate share of additional estate tax due to each of the specific bequests and reduced the charitable contribution deduction attributable to those bequests respectively.
Held, further, E is liable for an accuracy-related penalty under I.R.C. sec. 6662(a) for an underpayment attributable to negligence.
Marc Kellogg Sellers, for petitioner.
Randall G. Durfee, Janis B. Geier, and Jeffrey D. Rice, for respondent.
Respondent determined a deficiency of $4,124,717 in the Federal estate tax of the Estate of Victoria E. Dieringer (estate) and an accuracy-related penalty under section 6662(a) of $824,943.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.
The issues for consideration are: whether the estate is entitled to a charitable contribution deduction equal to the date-of-death fair market value of stock bequeathed to the Bob and Evelyn Dieringer Family Foundation (foundation); and whether the estate is liable for a section 6662(a) accuracy-related penalty due to negligence or a disregard of rules or regulations.1
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Victoria E. Dieringer (decedent) lived in Oregon at the time of her death. She died unexpectedly on April 14, 2009. Her son Eugene Dieringer (Eugene) was appointed executor of the estate. Eugene resided in Oregon at the time the petition was filed.
Family and Business Background
Decedent married Robert E. Dieringer, and they had 12 children, including Eugene, Patrick Dieringer (Patrick), and Timothy Dieringer (Timothy).
Decedent and her husband owned a grocery retail store. Decedent and some family members also owned Dieringer Properties, Inc. (DPI), a closely held real property management corporation that manages a combination of commercial and residential properties in Portland, Oregon. DPI also owns and manages a Wendy's restaurant property in Texas. DPI primarily earns rental income with ancillary income generated from loans provided to developers or builders.
Decedent was chairman of the board of directors (board), vice president, and a shareholder of DPI. She actively participated in board and officer's meetings. Eugene is president, a director, and a shareholder of DPI. He became president shortly after his father died in 2007. Patrick is executive vice president, secretary, and a shareholder of DPI. His responsibilities include managing and overseeing maintenance of the residential properties. Timothy is DPI's office manager. His primary responsibilities include managing the accounts payable and the accounts receivable. Patrick and Timothy were also directors of DPI at the time of decedent's death. No other siblings were involved in DPI in any capacity. Thomas Keepes was the only additional director.
Before her death, decedent was a majority shareholder, owning 425 out of 525 voting shares and 7,736.5 out of 9,220.5 nonvoting shares. The only other shareholders were Eugene and Patrick. Eugene owned 100 voting shares, and Eugene and Patrick each owned 742 nonvoting shares.
Decedent's Estate Plan
Decedent and her husband planned their estates together with the assistance of an attorney. On November 10, 2000, decedent and her husband created the Victoria Evelyn Dieringer Trust (trust) and their wills. Decedent created an irrevocable life insurance trust that distributed proceeds to her children upon her death. Decedent's husband also carried a life insurance policy separate from the irrevocable life insurance trust. Eugene received proceeds from this life insurance policy upon his father's death.
Decedent's will, dated November 10, 2000, left her entire estate to the trust. Under the terms of the trust agreement, as amended on April 22, 2005, $600,000 went to various charitable organizations and decedent's children received minor amounts of decedent's personal effects. The $600,000 was bequeathed as follows:
|Mt. Angel Abbey||$100,000|
|Holy Name Sisters||100,000|
|St. Ignatius Catholic Church||100,000|
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