Berzon v. C. I. R., s. 860

• Decision Date: 27 April 1976
• Docket Number: 861,Nos. 860,D,s. 860
• Citation: 534 F.2d 528
• Parties: 76-1 USTC P 13,140 Fred A. BERZON, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. Gertrude BERZON, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. ockets 75-4197, 75-4198.
• Court: U.S. Court of Appeals — Second Circuit

Page 528

534 F.2d 528

76-1 USTC P 13,140

Fred A. BERZON, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

Gertrude BERZON, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

Nos. 860, 861, Dockets 75-4197, 75-4198.

United States Court of Appeals Second Circuit.

Argued March 5, 1976.

Decided April 27, 1976.

Leonard L. Silverstein, Washington, D. C. (Robert E. Falb, Silverstein & Mullens, Washington, D. C., and Murray Roth, New York City, on the brief), for appellants.

Stanley S. Shaw, Jr., Dept. of Justice, Washington, D. C. (Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews and Grant W. Wiprud, Dept. of Justice, Washington, D. C., on the brief), for appellee.

Before KAUFMAN, Chief Judge, and SMITH and ANDERSON, Circuit Judges.

ROBERT P. ANDERSON, Circuit Judge:

These are appeals from decisions of the United States Tax Court, holding that certain inter vivos gifts made, in trust, by the appellants, Fred A. Berzon and Gertrude Berzon, ¹ failed to qualify for the $3,000 annual gift tax exclusion under Title 26 U.S.C. § 2503(b) of the Internal Revenue Code, and determining gift tax deficiencies of $19,276.05 for each appellant. The gifts at issue involve a total of eight trusts, five of which Fred Berzon created in 1962 and the other three in 1965 for the benefit of his children and grandchildren. Between 1962 and 1968, Berzon and his wife, Gertrude, donated to these trusts a total of 720 shares in The Simons Co., Inc., a closely-held corporation controlled by Berzon, which constituted the entire corpora of the trusts. The terms of each trust were essentially as follows. In the case of an adult beneficiary, provision was made to distribute the trust income quarterly. In the case of a minor beneficiary, income was to be accumulated, subject to a discretionary power in the trustees to apply it for the beneficiary's support and maintenance, until he or she reached the age of 21, at which time all remaining accumulated income would be distributed, together with any part of the corpus not consisting of shares in the Simons Company. Each trust was to terminate, with the corpus distributed, (a) upon redemption of the Simons Company shares by the corporation, or (b) twenty years after the execution of the trust instrument, or (c) upon the death of the beneficiary, whichever occurred first.

The trustees were given the power to dispose of the trust assets and reinvest the proceeds as they deemed desirable, subject, however, to restrictions which had been placed on all Simons Company shares by virtue of a stockholders' agreement. ² This agreement provided, inter alia, that no stockholder could transfer his shares without the consent of the other stockholders, except by gift to certain relatives, unless he first gave the corporation and the other stockholders the right of refusal. Moreover, once transferred by gift, as in the case of the trusts here in question, shares could not be retransferred except by further gift, but the corporation could redeem the shares from the trusts at any time, provided it had the necessary surplus, and, in any event, it was obligated to repurchase the shares within ten years of the date of the stockholders' agreement (1962), again provided it had the necessary surplus. The stockholders' agreement further required the corporation to repurchase any stockholder's shares at his death, and prohibited the distribution of dividends for the three years during which payment for the shares was to take place. The actual dividend history of the Simons Company stock up to the dates of the appellants' gifts in trust showed that no dividends at all had been paid, at least since 1957. ³

Appellants filed gift tax returns for the years 1962 through 1968 ⁴ in which the total reported value of the shares transferred to the trusts each year varied between $39,200 and $50,000. Each year appellants claimed a $3,000 exclusion under § 2503(b) for each beneficiary, of which there were five between 1962 and 1964 and eight between 1965 and 1968. The Commissioner of Internal Revenue disallowed the exclusions on the ground that the gifts were of future interests, and, therefore, statutorily ineligible for the $3,000 annual exclusion. ⁵ The taxpayers petitioned for a redetermination in the Tax Court, claiming, inter alia, that their gifts were in fact present interests in property.

The Tax Court, citing Commissioner v. Disston, 325 U.S. 422, 65 S.Ct. 1328, 89 L.Ed. 1720 (1945) and Fondren v. Commissioner, 324 U.S. 18, 65 S.Ct. 499, 89 L.Ed. 668 (1945), noted that "a gift may be separated into its component parts, one of which may qualify as a present interest under section 2503(b)." While viewing the right each beneficiary received in his trust corpus as a future interest, the court assumed, without deciding, that the rights to receive trust income were present interests under § 2503(b) and (c). ⁶ It nonetheless found that the taxpayers did not qualify for the exclusions sought because "the income interests in question were insusceptible to valuation."

In reaching this decision, the Tax Court looked to the fact that the Simons Company had not paid any dividends for a number of years, up to and including the dates of the gifts, and that its program of business acquisition and expansion would restrict its ability to do so after the gifts were made. In addition, at the time of the 1968 gifts, dividend payments were precluded for the succeeding three years because of the death of one of the stockholders. Although Fred A. Berzon testified that when the first gifts were made in 1962 he had expected the corporation to pay dividends in the future, the court viewed his testimony as "self-serving" and "entitled to little weight." The court further observed that the corporation "was pursuing a program of expansion which resulted in an increased drain on cash in order to increase its inventory and to open a chain of retail stores." For example, in 1963 or 1964 the Simons Company bought out a competitor for several hundred thousand dollars. The Tax Court further noted that the trustees' ability to exchange the Simons Company stock for income-yielding assets was severely limited by the terms of the stockholders' agreement.

Appellants argue that the income interests in this case did have determinable values, and that those values should have been ascertained by reference to the actuarial tables prescribed by Treasury Regulation § 25.2512-5. That section provides for the valuation of, inter alia, the right to receive income from property for a term of years or for the life of a person or, as here, on a more complicated basis, by applying an assumed annual yield of 31/2 percent ⁷ to the principal. Appellants concede that, since no dividends have in fact been paid out since their gifts were made, the use of this method in the present case would produce a valuation of the income interests which is inaccurate ex post, but they note that determining the value of an income interest is necessarily "fraught with speculation and...