Fulk & Needham, Inc. v. United States

• Decision Date: 29 July 1968
• Docket Number: No. C-80-WS-66.,C-80-WS-66.
• Citation: 288 F. Supp. 39
• Court: U.S. District Court — Middle District of North Carolina
• Parties: FULK & NEEDHAM, INC., Plaintiff, v. UNITED STATES of America, Defendant.

288 F. Supp. 39

FULK & NEEDHAM, INC., Plaintiff, v. UNITED STATES of America, Defendant.

No. C-80-WS-66.

United States District Court M. D. North Carolina, Winston-Salem Division.

July 29, 1968.

COPYRIGHT MATERIAL OMITTED

Leon L. Rice, Jr., and Murray C. Greason, Jr. (of Womble, Carlyle, Sandridge & Rice), Winston-Salem, N. C., for plaintiff.

Benjamin A. Douglas, Dept. of Justice, Washington, D. C., and William H. Murdock, U. S. Atty., Greensboro, N. C., for defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND OPINION.

GORDON, District Judge.

This is an action for the refund of taxes paid by the plaintiff to the defendant for the calendar years 1960, 1961, and 1962. The parties have agreed that the amount involved is merely a matter of mathematical calculation which can be worked out by agreement if required by the results of this action. On November 28, 1958, the shareholders of the plaintiff signed a consent, pursuant to Section 1372(a) of the Internal Revenue Code of 1954, to the election of the plaintiff to be treated as a small business corporation for income tax purposes. The question for decision by the Court is as follows: Was the plaintiff ineligible to elect to be treated as a small business corporation for income tax purposes at the time the election was filed and continuing through the calendar year 1962 by reason of the fact that some of its shares were held in trust? This issue is answered in the affirmative.

Findings of Fact

A. P. Fulk, a partner with a one-half interest in the construction firm of Fulk & Needham, died testate July 14, 1954. The pertinent portion of his will provided as follows for the disposition of his estate:

"As to any and all real and personal property which is a part of my estate at my death, I do hereby name Ida R. Fulk, my loving wife, and Mary Susan Fulk and Virginia Fulk Petretti as co-trustees of my estate; that said real and personal property of whatever kind, nature and description is to be conveyed by this instrument to said trustees to be held in trust for and during the lifetime of Ida R. Fulk, subject to the following terms and conditions: That Ida R. Fulk is to have a lifetime interest in the benefits of said both real and personal property, for the period of her lifetime only; that at the death of the said Ida R. Fulk, this trust instrument is to terminate and the interest so conveyed and held in trust is then to be divided equally among my two daughters, Mary Susan Fulk, and Virginia Fulk Petretti, share and share alike. In other words, my property is conveyed by this trust instrument, giving my widow a lifetime interest in said both real and personal property, with remainder to my two daughters, Mary Susan Fulk and Virginia Fulk Petretti. By so doing, the trustees above mentioned, by this instrument, are to give to the first taker, that is, Ida R. Fulk, who has a life estate in all of my real and personal property, the interest, income and profits from the same for the period of her lifetime only; that at her death, the property, real and personal, by said trust instrument, is automatically to go to the above two daughters, in fee simple, share and share alike, thereby terminating the trust instrument without further court action, and without further signatures, title automatically vesting in Mary Susan Fulk and Virginia Fulk Petretti individually by the operation of the law, and by this instrument.

"And it is further my desire that in setting up this trust instrument, that said trustees, as trustees, have the authority without court order, and without court confirmation, and without any prior court approval, to sell, convey, exchange any and all assets conveyed to them as trustees, including both real and personal property. By this instrument, I am doing away with the necessity of any court procedure, proceedings in law or otherwise, giving said trustees the full authority to sell any asset, real or personal without court approval, or confirmation, or other legal proceeding; however, bearing in mind that they will seek legal advice and business advice prior to any exchange of property real or personal, always bearing in mind the best interest of the estate, the best interest of the life estate holder and the best interest of the remaindermen. That they have the authority as trustees to sell any asset of this estate, and to reinvest the funds either in personal property or real property, always considering the best interest of my estate; that any and all acts of buying, selling, exchanging, or reinvesting is to be done by this instrument without court authority or approval; and that the sole accounting to the court is to be had solely by the reports and accounting as provided by law; that no further reports or orders being necessary. It is therefore impossible that my estate be closed within one year, and this trust therefore will not terminate until the death of my widow, bearing in mind that any reinvestment will be made in the name of the trustees herein mentioned for the use and benefit of the beneficiaries as hereinabove set forth, and subject to the same terms and conditions, if reinvested, as said assets would have been formerly.

"And I do further authorize my trustees, who are also the sole beneficiaries of my estate, and do now empower them with the authority, if they see fit, to operate my interest in any business which is a part of my estate at my death, or to sell my interest in any business which I own at my death, authorizing them to extend credit, terms, as they see fit, bearing in mind the best interest of said estate, relative to a sale, exchange, or other investment pertaining to any assets of my estate."

The will was duly probated and the named executrixes, Ida R. Fulk, Mary Sue Fulk Baucom, and Virginia Fulk Petretti, accepted the administration of the estate. By a power of attorney executed on July 20, 1954, Virginia Fulk Petretti authorized her sister, Mary Sue Baucom, to sign all papers and perform all acts required of Mrs. Petretti in the administration of the A. P. Fulk estate and the trust created under his will.¹

The bulk of A. P. Fulk's estate consisted of his interest as a partner in the construction firm of Fulk & Needham. In December, 1954, the partnership was incorporated as Fulk & Needham, Inc., and Articles of Incorporation were filed with the Secretary of State. Ida R. Fulk, Virginia Fulk Petretti, and Mary Sue Fulk as "Co-Trustees and Co-Executrixes, Arthur P. Fulk Estate" were named among the original subscribers to stock in the newly formed corporation. The Articles of Incorporation were signed by Ida R. Fulk, Mary Sue Fulk Baucom, and Virginia Fulk Petretti as co-trustees and co-executrixes of the Estate of Arthur P. Fulk. At the first meeting of the incorporators on January 1, 1955, 545 shares of stock were ordered to be issued to the trustees of the A. P. Fulk estate. The issuance of the stock was in consideration of the transfer of assets of the partnership to the corporation.

On or before November 3, 1955, a final report of the Estate of A. P. Fulk was filed with the Clerk of the Superior Court of Surry County, North Carolina, and the estate was closed. The final report signed by the co-executrixes showed the distribution of the assets remaining in the estate to themselves as co-trustees named in A. P. Fulk's will. On October 12, 1955, Ida R. Fulk, Virginia Fulk Petretti, and Mary Sue Fulk Baucom formally acknowledged receipt of all the assets of the A. P. Fulk estate in their capacity as co-trustees of the trust created by his will.

From November 3, 1955, the date on which the estate of A. P. Fulk was closed, the record before this Court contains few, if any, references to the trust set up under the will of A. P. Fulk. Under the terms of A. P. Fulk's will, the testamentary trust was to be the receptacle of most of his property, including his partnership interest in Fulk & Needham. Evidence adduced at the hearing tended to show that portions of the trust corpus other than the interest in Fulk & Needham were also in fact treated as the sole and separate property of Ida R. Fulk. Savings and checking accounts containing property of the A. P. Fulk estate were handled almost exclusively by Ida R. Fulk. She made deposits, withdrawals and transfers of the property without regard to the provisions of her husband's will and in her individual, not her fiduciary, capacity.

Ida R. Fulk's dealings with Fulk & Needham, Inc., also reveal that the testamentary trust was disregarded as an entity. The consent of shareholders required under Section 1372 was signed by Ida R. Fulk personally and on behalf of the "A. P. Fulk, Est. by Ida R. Fulk, Adm." Mary Sue Baucom signed for the shares of stock owned by her personally but did not sign as a trustee. Virginia Petretti did not sign in any capacity.

Ida R. Fulk reported on her personal income tax returns all of the undistributed income of Fulk & Needham, Inc., attributable to the 545 shares of stock listed on the books as owned by the A. P. Fulk estate. No distinction was made on Mrs. Fulk's return between income attributable to those 545 shares and income attributable to shares held by her personally.

Neither of the daughters in fact exercised any discretion or control in the management of Fulk & Needham, Inc. Mrs. Fulk was treated as the authoritative spokesman for all shares owned in the name of the A. P. Fulk estate.

The evidence allows the conclusion that Ida R. Fulk and her daughters looked on the assets from A. P. Fulk's estate as the sole property of Ida R. Fulk; that the provisions in his will pertaining to a trust were disregarded; and that no attempt was made by any of the parties to enforce the provisions of will.²

Discussion of Law

Section 1371(a) (2) of the Internal Revenue Code provides that:

"For purposes of this sub-chapter, the term `small business corporation' means a domestic corporation which is not a member of an affiliated group (as defined

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