Rothstein v. United States, Civ. A. No. N 76-167.
| Decision Date | 09 June 1983 |
| Docket Number | Civ. A. No. N 76-167. |
| Citation | 574 F. Supp. 19 |
| Court | U.S. District Court — District of Connecticut |
| Parties | Harold ROTHSTEIN and David M. Rothstein, As Executors of the Estate of Alexander Rothstein, Deceased, and Reba Rothstein, Plaintiffs, v. UNITED STATES of America, Defendant. |
Howard A. Jacobs, Jacobs, Jacobs & Grudberg, P.C., Ira B. Grudberg, Jonathan Katz, New Haven, Conn., for plaintiffs.
Alan H. Nevas, U.S. Atty., Frank H. Santoro, Asst. U.S. Atty., New Haven, Conn., Vincent James Ferraro, James W. Littlefield, Trial Attys., Dept. of Justice, Tax Div., Washington, D.C., for defendant.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The court, having tried the above entitled matter with the aid of an advisory jury, now finds the following facts and states the following conclusions of law pursuant to Federal Rule of Civil Procedure 52(a):
FINDINGS OF FACT
1. The plaintiffs, Harold Rothstein and David M. Rothstein, are executors of the estate of Alexander Rothstein, and reside in the State of Connecticut. The plaintiff, Reba Rothstein, resides in Florida.
2. The defendant is the United States of America.
3. In 1951, Alexander Rothstein and Abraham Savin formed a real estate holding company named Industrial Developers, Inc., (IDI).
4. In 1951, Rothstein and Savin bought a parcel of land at 157-175 Park Avenue, East Hartford, Connecticut.
5. Rothstein and Savin each contributed real property worth $30,000 to IDI and each received 300 shares of stock in IDI.
6. Rothstein and Savin received their stock in return for conveying the land to the corporation.
7. The corporation proceeded to construct warehouses for rental on the property.
8. On February 18, 1957, Alexander Rothstein, as grantor, created an irrevocable trust for the benefit of his three children, Harold, David and Edna, by transferring his 300 shares of IDI stock to the trust. At that time, and at all relevant times for purposes of this lawsuit, the sole asset of IDI was the real estate, with improvements, located at 159-175 Park Avenue, East Hartford, Connecticut.
9. The trustee of the trust established by Alexander Rothstein was his wife, Reba Rothstein.
10. As the owner of the IDI stock, the trust was entitled to receive any dividends paid by IDI and required to distribute those dividends to its beneficiaries, Rothstein's children, at least semiannually. Plaintiff's Exhibit A attached to the complaint is a true and correct copy of the Trust.
11. As of 1964, no dividends had been paid on the IDI stock.
12. As of 1964, the Rothstein children never received any income from the trust or its property.
13. In October, 1964 Alexander Rothstein purchased all of Savin's IDI stock for $500,000, which price was paid in January, 1965.
14. On November 13, 1964, Rothstein purchased the trust's 300 shares of IDI from the trustee, his wife, for $320,000.
15. Rothstein and the trust, acting through Reba Rothstein, agreed that the trust would be paid by means of a promissory note in the amount of $320,000, which note was executed by Mr. Rothstein on November 13, 1964.
This note bore interest of 5% per annum payable semiannually beginning May 14, 1965, and principal payments were payable as follows:
16. The Trust's IDI stock was delivered to Alexander Rothstein on November 13, 1964 and the trust retained no pledge or other security interest in the stock.
17. In January of 1965, Alexander Rothstein, who then owned all the outstanding stock of IDI, dissolved IDI and had all of the assets of IDI transferred to himself, which assets consisted of the real estate described in paragraph 8 above.
18. In January, 1965, Alexander Rothstein refinanced the property by replacing the existing mortgage of less than $200,000 with one of $700,000 to Equitable Life Insurance Company.
19. With the proceeds of the mortgage, Alexander Rothstein paid Savin the purchase price for his stock.
20. On February 8, 1965, Alexander Rothstein gave the trustee, Reba Rothstein, a second mortgage on the East Hartford real estate to secure the $320,000 promissory note which Alexander Rothstein had given to the trustee in November of 1964.
21. As a result of the liquidation of IDI in January of 1965, Alexander and Reba Rothstein claimed a short-term capital loss on their 1965 Federal Income Tax Return. For purposes of computing the loss, the Rothsteins claimed a basis in the IDI stock of $820,000 (consisting of the $500,000 paid to Savin, plus the $320,000 note given to the trust).
22. After an audit of Alexander and Reba Rothstein's 1965 tax return, the Internal Revenue Service assessed a deficiency in the amount of $56,664.15 on October 12, 1966, on the ground that the trust established by Alexander Rothstein should be disregarded, and Alexander Rothstein's claimed $320,000 basis in the IDI stock should be accordingly reduced, to $30,000, his original basis prior to the creation of the Trust.
23. In computing the deficiency the IRS used a fair market value of $950,000 for the property.
24. In July, 1967 Alexander and Reba Rothstein paid the assessment and in January, 1969 filed with the Internal Revenue Service a claim for refund with interest of the sum claimed in this action.
25. Alexander Rothstein made the annual interest payments to the trust.
26. In 1969, the Rothstein children purchased the real estate from their father, subject to the first mortgage to Equitable Life Insurance Company.
27. In 1969, the promissory note from Alexander Rothstein to Reba Rothstein, trustee, was renegotiated, allowing for payments of $12,800 per year for 25 years commencing on November 13, 1969.
28. Alexander Rothstein died in 1969.
29. On May 22, 1974, the IRS disallowed Alexander and Reba Rothsteins' claim for refund on the 1965 tax year.
30. Following the denial of the refund claim, the estate of Alexander Rothstein and Reba Rothstein timely filed the instant action for refund of 1965 taxes.
31. This matter was tried to a jury on September 21, 22, and 23, 1982.
32. After all of the evidence was presented to the jury, the jury was asked to answer four special interrogatories. The interrogatories and the jury's answers were as follows:
The principal issue which this court must decide, based upon the advisory findings of the jury, is whether the trust established in 1957 by Alexander Rothstein was a "grantor trust" for purposes of Section 675(3) of the Internal Revenue Code of 1954 (26 U.S. C.).
Section 675(3) provides:
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