87 T.C. 349 (1986), 6859-80, Northern Trust Co. v. C.I.R.

Docket Nº:6859-80, 21439-80, 21440-80, 21441-80, 21442-80.
Citation:87 T.C. 349
Opinion Judge:NIMS, JUDGE:
Party Name:THE NORTHERN TRUST COMPANY, TRANSFEREE AND TRUSTEE; ARTHUR L. SIMON, TRANSFEREE AND TRUSTEE; AND JEFFERY J. SIMON, TRANSFEREE AND TRUSTEE, ET AL., [1] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:William H. Pokorny, Jr. and James A. Clark, for the petitioners. Thomas C. Borders and Luanne D. Dimauro, for the respondent.
Case Date:August 11, 1986
Court:United States Tax Court
 
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Page 349

87 T.C. 349 (1986)

THE NORTHERN TRUST COMPANY, TRANSFEREE AND TRUSTEE; ARTHUR L. SIMON, TRANSFEREE AND TRUSTEE; AND JEFFERY J. SIMON, TRANSFEREE AND TRUSTEE, ET AL., [1] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 6859-80, 21439-80, 21440-80, 21441-80, 21442-80.

United States Tax Court

August 11, 1986

In furtherance of an ‘ estate tax freeze‘ plan, after a corporate reorganization J, W, P, L and C transferred shares of Class A voting common stock and Class B non-voting common stock of CCC, a closely held company, to certain long-term trusts. C died three days after transferring her shares. HELD, the fair market value of the shares for Federal estate and gift tax purposes determined. The value was not affected by the transfer of the stock to the trusts. Estate of Curry v. United States, 706 F.2d 1424 (7th Cir. 1983); and Ahmanson Foundation v. United States, 674 F.2d 761 (9th Cir. 1981), applied.

William H. Pokorny, Jr. and James A. Clark, for the petitioners.

Thomas C. Borders and Luanne D. Dimauro, for the respondent.

NIMS, JUDGE:

Respondent determined a deficiency of $154,683.45 in the Federal estate tax of petitioner, the Estate of Cecilia C. Simon. [2] Respondent determined the following deficiencies in other petitioners' Federal gift taxes: [3]

Calendar
Docket No. quarter ending Petitioner Deficiency
21439-80 June 30, 1976 John H. Curran $131,777.60
21440-80 June 30, 1976 William Curran 131,777.60
21441-80 June 30, 1976 Patricia A. Curran 131,777.60
21442-80 June 30, 1976 Linda R. Curran 131,777.60
Page 350 The issue for decision is the fair market value of six shares of Class A common voting stock and 2,300 share of Class B non-voting common stock of Curran Contracting Company held respectively by petitioners John Curran, William Curran and the Estate of Cecilia Simon on May 7, 1976 (see footnote 21). FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. Cecilia Simon died a resident of Illinois on May 11, 1976. Petitioners John H. Curran and Linda Curran, husband and wife, and petitioners William Curran and Patricia Curran, husband and wife, resided in Illinois at the time their respective petitions were filed. Petitioners John Curran (John) and William Curran (William), together with their sisters Cecilia Simon (Cecilia) and Judy Pokorny (Judy), were the sole shareholders of Curran Contracting Company (CCC), a Delaware corporation engaged in the asphalt paving business. CCC had been incorporated in December, 1975, as part of an overall plan of reorganization of several companies owned by members of the Curran family. The reorganization of the Curran family companies occurred as follows: Prior to the incorporation of CCC, John, William, Cecilia and Judy, together with their cousin Henrietta Johnston (Henrietta), owned all of the issued and outstanding stock of Suburban Oil Company (Suburban) and H.J. Curran Contracting Company (HJCCC) as follows:
Stock ownership
Shareholder Suburban HJCCC
John 144 shares of voting common 148 shares of voting common
William 144 shares of voting common 148 shares of voting common
Cecilia 142 shares of voting common 146 shares of voting common
Judy 142 shares of voting common 146 shares of voting common
Henrietta 16 shares of voting common 3,520 shares of preferred
Page 351 Suburban was the parent company directly or indirectly of Holland Company (Holland) and Holland Railway Equipment, Ltd. (Holland, Ltd.). HJCCC was the parent company directly or indirectly of Stahl Construction Company (Stahl), Curran Development Corporation (Curran Development) and Kaneland Construction Company (Kaneland). As the first step in a reorganization of the above companies, Suburban merged [4] with HJCCC. To effect this merger Suburban redeemed the 16 shares of Suburban common stock owned by Henrietta for $3,730 per share. The remaining shareholders then contributed their shares of Suburban common stock to HJCCC, where it was included in the paid-in capital surplus account of that company. Subsequent to the merger of Suburban and HJCCC, HJCCC redeemed the 3,520 shares of HJCCC preferred stock owned by Henrietta for $30 per share. HJCCC then merged with CCC. Pursuant to the terms of the merger, John, William, Judy and Cecilia received the following shares of CCC stock:
Shareholder Shares of stock owned
John 6 shares class A voting common
2,300 shares class B nonvoting common
1,960 shares nonvoting preferred
William 6 shares class A voting common
2,300 shares class B nonvoting common
1,960 shares nonvoting preferred
Judy 6 shares class A voting common
2,300 shares class B nonvoting common
1,933 shares nonvoting preferred
Cecilia 6 shares class A voting common
2,300 shares class B nonvoting common
1,933 shares nonvoting preferred
Page 352 Each share of CCC preferred stock provided for a non-cumulative dividend of $80. At the time of the reorganization, CCC had adequate earnings to pay these dividends. The Curran companies, however, had historically paid very small dividends and at the time of the reorganization CCC's board of directors did not intend to pay dividends on CCC's preferred stock. The past and present management of CCC believed that profits should be reinvested in the business rather than paid out as dividends. Moreover, the preferred shareholders of CCC could not compel the company to redeem their stock. The board of directors of CCC, however, could call the preferred stock at a charter specified redemption price of $1,000 per share. John and William intended to cause CCC to redeem their preferred shares at the time of their respective deaths for an amount that would produce sufficient income to pay the living expenses of their surviving spouses. They also intended to redeem the preferred shares owned by Cecilia and Judy at the time of each of their husband's deaths for an amount that would produce sufficient income to pay the living expenses of Cecilia and Judy. John and William did not intend to redeem the preferred stock for the stated price of $1,000 per share. After the merger of CCC and HJCCC, John became CCC's president and chairman of its board of directors. William became CCC's vice- president and a member of its board of directors. Jim Johnston, a cousin of John and William, served as CCC's secretary and as the third and final member of its board of directors. As a result of the merger of HJCCC with CCC, CCC became the parent company directly or indirectly of Stahl, Kaneland, Suburban, Curran Development, Holland and Holland, Ltd. These companies were engaged in the following businesses: CCC, Stahl and Kaneland were primarily engaged in he asphalt paving business. CCC performed most of its work in McHenry County, Illinois, which was the site of its asphalt production plant. [5] CCC received approximately 80 percent of its work from Federal, state and local governments. The Page 353 remaining 20 percent of its work was done for larger commercial concerns. Stahl performed most of its work for Northern Illinois University located in DeKalb County, Illinois. DeKalb County was the site of Stahl's asphalt production plant. During the l970s, Northern Illinois University was rapidly expanding. As of May, 1976, this expansion was projected to continue through 1978. Kaneland, which was located in Kane County, Illinois, had no access to an asphalt plant. Kaneland was therefore limited to performing ‘ squirt work‘ in Kane County, which involved spraying oil on dusty gravel roads. Suburban was engaged in the retail sale of heating oil to homeowners and commercial and industrial concerns located on the west side of Chicago and its western suburbs. During the early l970s, Suburban's oil business sharply declined as gas replaced oil as the main energy source for residential and commercial heating. John and William therefore decided on or before May 7, 1976, to dispose of Suburban's retail fuel oil business and become fuel brokers. As fuel brokers, John and William intended to purchase oil from the major refineries and to hire independent truckers to deliver the oil to commercial and industrial concerns in retail quantities. As brokers, John and William would never take actual possession of the fuel. Suburban also owned a parcel of investment property which was located in Oak Brook, Illinois. In 1974, Suburban entered into a contract to sell the property for $740,000. The purchaser subsequently paid an earnest money deposit of $40,000 but eventually defaulted on the contract. Curran Development was formed in the l970s to purchase and hold title to a parcel of land located adjacent to property that had been donated to the DeKalb YMCA. Stahl constructed roads on the acquired property to provide access to the donated property and to facilitate the development of the YMCA. As of May 7, 1976, approximately 50 percent of the parcel had been sold. The company had no plans to acquire or develop additional land. Holland Company was acquired by Suburban in 1974. The company consisted of the following divisions: 1) the rail weld division which manufactured equipment used for Page 354 welding rail on railroads and also provided welding services on a contract basis and 2) the railroad equipment division which designed, patented and sold products that extend the useful life of railroad cars and parts used by the railroad industry. Holland, Ltd. was formed as a subsidiary of Holland for the sole...

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