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

• Decision Date: 17 August 1976
• Docket Number: Docket No. 8685-74.
• Citation: 66 T.C. 861
• Parties: ESTATE OF JOHN L. HUNTSMAN, DECEASED, ANTHONY REDMOND AND WACHOVIA BAND AND TRUST COMPANY, N.A., EXECUTORS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

66 T.C. 861

ESTATE OF JOHN L. HUNTSMAN, DECEASED, ANTHONY REDMOND AND WACHOVIA BAND AND TRUST COMPANY, N.A., EXECUTORS, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 8685-74.

United States Tax Court

Filed August 17, 1976.

Steel and Supply each owned life insurance policies on the life of D, their president and sole shareholder. Upon D's death, the proceeds of such policies were paid to the corporation. Held: In determining the value of the stock of Steel and Supply includable in the estate of D, the proceeds of such life insurance are taken into consideration as assets of the corporations, but such proceeds are not added to the value of the stocks otherwise determined. See sec. 20.2031-2(f), Estate Tax Regs. The fair market value of such stock is determined. Held, further, certain alternative positions alleged by the Commissioner in his second amendment to the answer were new issues not tried with the implied consent of the parties. Rule 41(b)(1), Tax Court Rules of Practice and Procedure. Leon L. Rice, Jr., and R. Stephen Camp, for the petitioner.

Gary F. Walker, for the respondent.

SIMPSON, Judge:

In his notice of deficiency, the Commissioner determined a deficiency in the Federal estate tax of the Estate of John L. Huntsman in the amount of $97,991.40. In his second amendment to the answer, he determined such deficiency to be $107,470.13. The primary issue involves determining the fair market value of the decedent's stock in Asheville Steel Co. and Asheville Industrial Supply Co., including determining how certain life insurance proceeds payable to such corporations by reason of the death of the decedent, are to be taken into consideration. We must also decide whether the Commissioner properly raised a new issue in his second amendment to the answer.

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

John L. Huntsman (the decedent) died testate, a resident of North Carolina, on February 5, 1971. His will was probated in Buncombe County, N.C. Anthony Redmond and Wachovia Bank & Trust Co., N.A., the executors, had their legal address in Asheville, N.C., at the time of filing the petition herein. A Federal estate tax return for the estate was filed with the District Director of Internal Revenue, Greensboro, N.C.

Asheville Steel Co. (Steel), which is located in Asheville, N.C., was chartered as a North Carolina corporation in 1944 and was originally named Asheville Steel & Salvage Co., Inc. (Salvage), but its name was changed to Steel on March 1, 1965. The decedent was originally one of the four equal shareholders in Steel, but by 1959, he had become its sole shareholder. From its creation, the decedent was the dominating force that operated the company.

Asheville Industrial Supply Co. (Supply) was originally organized as a division of Salvage in 1949. It was chartered as a North Carolina corporation on March 1, 1965, and pursuant to a plan of reorganization, it acquired all the assets and liabilities of Steel allocable to the Supply division. The decedent then acquired all the outstanding stock of Supply, and at the time of his death, he owned all the outstanding stock, 25,000 shares, of each of the corporations, Steel and Supply.

Asheville Machine & Foundry Co. (Machine & Foundry) was organized as a North Carolina corporation in 1950 by the decedent and three others, who each owned one-fourth of its stock. Beacon Manufacturing Co. (Beacon), one of the larger industries in the Asheville area, had requested the decedent to start this company as a workshop to service its textile machinery. Prior to October 1, 1970, the decedent's proportionate interest in the stock of Machine & Foundry had been increased to one-third, and Beacon had become the owner of the other two-thirds. On October 1, 1970, the decedent contributed his stock in Machine & Foundry to Steel, which purchased a portion of Beacon's stock in Machine & Foundry; the remainder of Beacon's stock in Machine & Foundry was redeemed. Machine & Foundry thereupon became a wholly owned subsidiary of Steel.

Steel was engaged in the business of fabricating and erecting structural steel for industrial and commercial buildings, with about 70 percent of its business consisting of fabrication and 30 percent consisting of erection and millwright work. To perform a typical job, steel, which had been received by rail, normally in 60-foot lengths, was cut to the desired length and brought into the shop. Using blueprints made in the drafting room, holes were (sic) in the steel and clip angles (sic) to allow the steel beam to be attached to a column or another steel beam. Any other changes necessary to make the steel beam fit into the building to be constructed were also made. The steel beams were then cleaned, painted, and shipped to the construction site, where they were erected by the use of a mobile crane. The steel was then bolted together to make the skeletal framework of the building. Because of its limited crane capacity, Steel did not handle heavy jobs for large buildings or highway bridges; nor did it engage appreciably in operating a warehouse or service center for its customers.

Steel's customers were primarily general contractors in the construction business. At the time of the decedent's death, Steel's principal sales area was western North Carolina, extending to a radius of about 100 miles from Asheville. Although occasionally a project was secured outside this area, it was usually not feasible to do so because of the transportation costs involved. Approximately 70 percent of Steel's business was obtained by negotiations, rather than competitive bidding. The margin of profit on a negotiated contract was much greater than on a bid contract. Prior to the decedent's death, he was the chief negotiator, and Steel did not have a sales force as such. Following his death, the bid work increased, and salesmen were used. Steel's principal competitor in Asheville was Dave Steel Co., although Dave usually handled the bigger and heavier jobs, while Steel handled the smaller ones. Outside the immediate Asheville area, it had competitors in Bristol, Tenn., Knoxville, Tenn., Hickory, N.C., and Greenville, S.C.

Steel's plant and office facilities were located on an 11-acre tract of land. The facilities included a main ship building, 120 feet by 300 feet; an office building, 54 feet by 90 feet; a warehouse, 100 feet by 70 feet; and a garage. It had about 50,000 square feet of production area. At the time of the decedent's death, the company had 67 production employees and 27 office employees. Among the larger pieces of production equipment were 6 overhead cranes in the shop having a capacity of 3 tons each. Some of the equipment was purchased used and was getting quite old, requiring considerable maintenance. Steel's production capacity was about 20 tons per week, or 1,000 tons per year.

Prior to the decedent's death, Steel began to modernize and renovate its equipment. In the fiscal year ending January 31, 1971, it purchased a 45-ton mobile crane for $105,000 and spent approximately $35,000 improving existing equipment. It borrowed $100,000 to purchase the crane. At a board of directors meeting shortly after the decedent's death, a preliminary schedule of capital needs, with estimated costs of $333,000, was presented for acquisition over a 5-year period. Of this amount, equipment costing about $262,000 had been purchased by November 1975, and other equipment costing over $280,000 had been purchased between February 1, 1971, and January 31, 1975. By November 1975, Steel's production capacity had been increased to almost 80 tons per week.

Supply was a wholesale business which sold supplies such as bolts, nuts, fasteners, tools, ladders, and paint to industrial and manufacturing plants. It did not deal in heavy equipment or high-priced items, and not more than 10 percent of its business related to the construction business. It had several competitors in the Asheville area. Its customers were located in generally the same area as Steel, but the two companies did not have the same customers and did not feed each other business. Before the decedent's death, about 60 percent of Supply's business involved bidding or quoting prices. About 90 percent of the business was outside sales, and 10 percent was over-the-counter sales. It was not the exclusive agent for any of the products which it sold, and no single customer made up more than 10 percent of its sales. The decedent negotiated many of the sales to the industrial plants, and the company also employed four salesmen. Less than 10 percent of Supply's sales were to Steel, and such sales were strictly at arm's length.

Supply was located about 1 mile from Steel's plant on 1 acre of land. It had a building, 120 feet by 180 feet, and had about 25 employees at the time of the decedent's death.

Machine & Foundry operated a custom machine shop, doing small, miscellaneous job work, utilizing equipment such as lathes and grinders, but it did no foundry work. Its shop was a building, 100 feet by 200 feet, located on a 2-acre lot about 1 mile from Steel's plant. At the time of the decedent's death, it had about 20 employees. Its business was negotiated, and it had no sales force.

The decedent was the president and treasurer of Steel, Supply, and Machine & Foundry and was on the payroll of each corporation. He was closely identified by the public with these three corporations and was the one person that came to mind when one of the companies was mentioned. He was in complete control of all three corporations and made all decisions of any importance, keeping in close contact with each business. He negotiated practically all of the important contracts and sales of the companies up to the time of his death. During the fiscal year ended January 31, 1971, Steel obtained some unusually large one-time contracts involving sales of more than $500,000, which were...