55 T.C. 172 (1970), 1577-67, Estate of Gibbons v. C.I.R.

Docket Nº:1577-67- 1579-67, 1605-67, 1606-67.
Citation:55 T.C. 172
Opinion Judge:FORRESTER, Judge:
Party Name:ESTATE OF PEARL GIBBONS REYNOLDS, DECEASED, WALTER EDWIN BIXBY, EXECUTOR, ET AL.,[1] PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Attorney:Reece A. Gardner, George E. Gibson, and D. W. Gilmore, for the petitioners. Bert L. Kahn, for the respondent.
Case Date:October 29, 1970
Court:United States Tax Court
 
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Page 172

55 T.C. 172 (1970)

ESTATE OF PEARL GIBBONS REYNOLDS, DECEASED, WALTER EDWIN BIXBY, EXECUTOR, ET AL., [1] PETITIONERS

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Nos. 1577-67- 1579-67, 1605-67, 1606-67.

United States Tax Court

October 29, 1970

Page 173

Reece A. Gardner, George E. Gibson, and D. W. Gilmore, for the petitioners.

Bert L. Kahn, for the respondent.

Decedents and their family owned virtually all of the unites in a voting trust which held a majority of the shares of a stock life insurance company. Under the terms of the voting trust the units could not be sold unless they were first offered to the other holders of units at a formula price based upon the dividends distributed by the company. If the other unit holders refused the offer, the units would have to be offered a second time to the company's board of directors at the same formula price. The unites could be gifted or devised but in the hands of any donee or devisee remained subject to the first offer restrictions of the voting trust. At all relevant dates the formula price was appreciably less than the over-the-counter price of the shares underlying the voting trust units. From 1947 through 1961 the decedents made several gifts of the voting trust units to members of their family and to the company's employees pension trust. They received promissory notes in partial consideration for some of the units they transferred. At their deaths the decedents also owned large blocks of these units. Held:

1. In determining the units' fair market value for gift and estate tax purposes, the first-offer restrictions were a relevant factor to be considered along with all of the other relevant valuation factors, and neither the over-the-counter price of the underlying shares nor the formula price represented the absolute index of fair market value.

2. Respondent was not arbitrary or unreasonable in determining that the value of the notes was substantially less than their face value.

3. Petitioner in docket No. 1578-67 is subject to an addition to tax for the year 1958 because decedent's failure to file a gift tax return for that year was not due to reasonable cause.

FORRESTER, Judge:

Respondent has determined deficiencies in petitioners' estate and gift taxes and has also made additions to those taxes pursuant to section 6651(a) of the Internal Revenue Code of 1954 and section 291(a) of the Internal Revenue Code of 1939[2] for the years indicated as follows:

Docket Type Petitioner Year Deficiency Additions
No. of tax to taxes
1577-67 Gift__ Estate of Pearl Gibbons (1947 $36,171.57 $9,042.89
Reynolds, Walter Edwin (1948 1,147.50 286.88
Bixby, Executor. (1953 24,766.12 6,191.53
(1961 765,462.92
(1947 725.25 181.31
(1948 688.50 172.13
1578-67 Gift__ Estate of Angeline (1950 528.75 132.19
Reynolds Bixby, (1953 82,084.12 20,521.03
Deceased, Walter Edwin (1958 10,224.00 2,556.00
Bixby, Executor. (1961 370,912.39
1579-67 Gift__ Walter Edwin Bixby 1961 328,283.44
1605-67 Estate-- Estate of Pearl Gibbons Year of 11,322,504.16
Reynolds, Deceased, death:
Walter Edwin Bixby,
Executor.
1606-67 Estate-- Estate of Angeline Year of 9,649,991.03
Reynolds Bixby, death:
Deceased, Walter
Edwin, Bixby,
Executor.
Page 174 The proceedings have been consolidated because the principal issue in each docket is whether respondent erred in determining the fair market value for estate and gift tax purposes of certain voting trust certificates. Concessions having been made, the only other issues that remain for decision are whether respondent erred in his valuation of three promissory notes given in consideration for transfers of voting trust certificates and whether the failure to file gift tax returns in 1947, 1948, 1950, 1953, and 1958 was due to reasonable cause and not due to willful neglect so as to preclude imposition of the penalties provided in section 6651(a) and its analogue, section 3612(d)(1) of the 1939 Code.[3] FINDINGS OF FACT Many of the facts have been stipulated and are so found. The stipulation and exhibits attached thereto are incorporated herein by reference. Petitioner in docket Nos. 1577-67 and 1605-67 is Estate of Pearl Gibbons Reynolds, deceased, Walter Edwin Bixby, executor. Petitioner in docket Nos. 1578-67 and 1606-67 is Estate of Angeline Reynolds Bixby, deceased, Walter Edwin Bixby, executor. Petitioner in docket No. 1579-67 is Walter Edwin Bixby. For the years in issue, Pearl Reynolds (hereinafter referred to as Pearl) filed a gift tax return in 1961 but did not file gift tax returns in 1947, 1948, and 1953; Angeline Bixby (hereinafter referred to as Angeline) filed a gift tax return in 1961 but did not file gift tax returns in 1947, 1948, 1950, 1953, and 1958; and Walter Bixby (hereinafter referred to as Walter) filed a gift tax return in 1961. At the time of filing of the petitions herein, Walter resided in Kansas City, Mo., where he also maintained his principal office as fiduciary of the two estates. The gift tax returns were filed with the district director of internal revenue at Kansas City, Mo. The estate tax returns were filed with the district director of internal revenue at St. Louis, Mo. Page 175 Pearl was born in 1876 and died on December 7, 1962, of chronic myocardial failure. She was the surviving spouse of Joseph Reynolds. Angeline was born in 1900 and died on January 3, 1963, of lymphosar-coma. She was the sole child of Pearl and Joseph Reynolds. Walter was born in 1896 and is the surviving spouse of Angeline.[4] The names and dates of birth of all of the descendants of Pearl and Angeline are as follows:
Name Date of birth
Sons of Walter and Angeline:
Joseph Bixby Apr. 7, 1925
Walter Bixby, Jr Feb. 12, 1932
Daughters of Joseph Bixby:
Kathryn Bixby Nov. 28, 1949
Nancy Bixby May 23, 1952
Children of Walter Bixby, Jr.:
Angeline I. Bixby Apr. 28, 1952
Robert Bixby May 12, 1953
Walter Bixby III Dec. 18, 1958
The Kansas City Life Insurance Co. (hereinafter referred to as the company) is a legal reserve life insurance company founded by Joseph Reynolds and incorporated under the laws of Missouri. As of January 1, 1963, it did business in the District of Columbia and all 50 States except Alaska, Hawaii, and the New England States. Since the company's incorporation in 1895, the number of shares outstanding and the stated capital of the company have changed as follows:
Shares Stated capital
increase increase
(decrease) (decrease)
1895 original issue 250 $25,000
1903 original issue 1,000 100,000
1904 capital reduction (250) (25,000)
1918 stock dividend 1,000 100,000
1923 stock dividend 3,000 300,000
1925 stock dividend 5,000 500,000
1943 stock dividend 30,000 3,000,000
Totals 40,000 4,000,000
Walter began working for the company in 1923. He was a clerk in 1923 and 1924, an assistant secretary from 1924 to 1937, executive vice president from 1937 to 1939, president from 1939 to 1964, and chairman of the board from 1964 on. His son, Joseph Bixby, succeeded him as president in 1964. The Reynolds-Bixby family first acquired a 51-percent controlling interest in the company in 1916 or 1918 and have retained that interest Page 176 directly until 1946 and indirectly through a voting trust since 1946. Before he died in 1937, Joseph Reynolds wished that the company's stock would gradually devolve upon his grandsons. As of Joseph Reynolds' death in 1937 Pearl and Angeline each owned 1,700 shares of the company's common stock. Upon Joseph Reynolds' death Pearl and Angeline each inherited an additional 850 shares of the company's common stock. Therefore, as of 1937 Pearl and Angeline each owned 25.5 percent of the 10,000 shares of the company stock of the company then outstanding. From 1937 to 1946 both Pearl and Angeline engaged in a continuous program of making gifts to Joseph Bixby and Walter Bixby, Jr. From December 23, 1937, through February 9, 1946, Pearl made, either directly or in trust, 42 such transfers of the company's common stock. From December 23, 1937, through April 29, 1946, Angeline directly made 20 similar transfers of the company's common stock. After adjustment for the 1943 three-for-one one stock dividend, the transfers through April 29, 1946, may be summarized as follows:
Pearl to Joseph Bixby-in trust 429
Pearl to Joseph Bixby 371
Angeline to Joseph Bixby 582
Transfers to Joseph Bixby 1,382
Pearl to Walter Bixby, Jr.-in trust 429
Pearl to Walter Bixby, Jr. 371
Angeline to Walter Bixby, Jr 582
Transfers to Walter Bixby, Jr 1,382
Prior to April 29, 1946, Joseph Bixby and Walter Bixby, Jr., had each acquired, by other means, four additional shares of the company's common stock. Before 1946, Pearl, Angeline, and Walter often traveled together, and had talked about the possibility of their simultaneously dying in a train or automobile accident. They sought to adopt some mechanism which would enable them to perpetuate the company's management and policy in the event of such an accident. Pearl and Angeline also desired that the stock owned by the family should remain within the family. They believed that because of the youth of Joseph Bixby and Walter Bixby, Jr., the boys' interests in the company might be greatly endangered. In particular, they worried that the management of the company might be affected if one of the boys...

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