Bischoff v. Comm'r of Internal Revenue (In re Estate of Bischoff)
| Decision Date | 20 October 1977 |
| Docket Number | 1035-73.,Docket Nos. 312-72 |
| Citation | 69 T.C. 32 |
| Parties | ESTATE of BRUNO BISCHOFF, DECEASED, HERBERT BISCHOFF and ALVINA L. MARTIN, EXECUTORS, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTESTATE of BERTHA BISCHOFF, DECEASED, HERBERT BISCHOFF and ALVINA L. MARTIN, EXECUTORS, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Within a very short time period, Bruno and Bertha Bischoff each created identical trusts for their joint grandchildren, naming each other as trustee. On Bruno's and Bertha's deaths, held, the corpora of such trusts are includable in their estates. Held, further: On the facts, the estate tax valuation of decedents' interests in certain partnerships is limited by the restrictive buy-sell provisions to which the interests were subject at death. The value of another limited partnership interest is determined, applying a discount from asset value for minority ownership. Charles H. Miller, Michael L. Hirschfeld, Jesse Safir, and Arthur L. Kimmelfield, for the petitioners.
Marion Westen and Peter Matwiczyk, for the respondent.
Respondent determined a deficiency in petitioners' Federal estate taxes in docket No. 312-72 in the amount of $747,719.01 and in docket No. 1035-73 in the amount of $1,010,775.40.
Other issues having been disposed of by agreement of the parties, the issues remaining for decision are:
(1) Whether the estate tax valuation of decedents' interests in F. B. Associates and Frank Brunckhorst Co. is limited to the amount provided for and paid under the partnership restrictive buy-sell provisions in effect on the date of decedents' deaths;
(2) Whether the trust corpora of certain trusts created by decedents for the benefit of their grandchildren are includable in their gross estates under either section 2036(a)(2) or 2038(a)(1);1
(3) The fair market value for purposes of the Federal estate tax of decedents' partnership interests in a real estate holding company.
Some of the facts have been stipulated and are so found.
Bruno Bischoff and his wife, Bertha, were residents of Roslyn Heights, N. Y., when they died testate. Bruno died on August 1, 1967, and Bertha died on May 7, 1969. Herbert Bischoff2 and Alvina Martin, Bruno's and Bertha's only children, were appointed coexecutors of their estates. At the time of the filing of the petitions in these cases, both executors resided in New York.
At their deaths Bruno and Bertha each owned interests in two limited partnerships: Frank Brunckhorst Co., a company engaged in the wholesale distribution of processed pork products, and F. B. Associates, an investment company the assets of which consisted principally of stock in two closely held pork processing companies, Boar's Head Provisions Co., Inc. (Boar's Head), and Fred Weinkauff, Inc. (Weinkauff, Inc.), and also a portfolio of marketable securities.
Bruno's and Bertha's involvement in the pork processing business began in the 1930's when Bruno, his brother-in-law Frank Brunckhorst,3 and Theodore Weiler organized Boar's Head and Frank Brunckhorst Co. Boar's Head conducted the pork processing activities of the business while Frank Brunckhorst Co. handled product distribution. In addition to these two companies, a third, Specsal Realty Corp. (Specsal), owned and leased to Boar's Head and Frank Brunckhorst Co. their jointly used production and distribution facility.
In the late 1940's Bruno, Frank Brunckhorst, and Theodore Weiler acquired a controlling interest in another smaller pork processing and distribution company, Weinkauff, Inc. They also acquired a controlling interest in the real estate holding company Ridgewood Provision Co., Inc. (Ridgewood), which owned the Weinkauff, Inc., plant facilities and leased those facilities to Weinkauff, Inc.
Prior to 1960, ownership of the 5,000-issued and outstanding shares of Boar's Head stock was divided among seven individuals, as follows:
+------------------------------------------+
¦ ¦Number ¦
+------------------------------+-----------¦
¦Name ¦of shares ¦
+------------------------------+-----------¦
¦ ¦ ¦
+------------------------------+-----------¦
¦Frank Brunckhorst ¦1,250 ¦
+------------------------------+-----------¦
¦Bruno Bischoff ¦1,250 ¦
+------------------------------+-----------¦
¦Theodore Weiler ¦1,250 ¦
+------------------------------+-----------¦
¦Herbert Bischoff ¦312 1/2 ¦
+------------------------------+-----------¦
¦Alvina Martin ¦312 1/2 ¦
+------------------------------+-----------¦
¦Barbara Brunckhorst Stravitz ¦312 1/2 ¦
+------------------------------+-----------¦
¦F. Tony Brunckhorst (in trust)¦312 1/2 ¦
+------------------------------------------+
Also prior to 1960, ownership of the 100 issued and outstanding shares of Weinkauff, Inc., stock was as follows:
+------------------------------------------+
¦ ¦Number ¦
+------------------------------+-----------¦
¦Name ¦of shares ¦
+------------------------------+-----------¦
¦ ¦ ¦
+------------------------------+-----------¦
¦Frank Brunckhorst ¦5.2 ¦
+------------------------------+-----------¦
¦Lillian Brunckhorst ¦5.2 ¦
+------------------------------+-----------¦
¦Bruno Bischoff ¦5.2 ¦
+------------------------------+-----------¦
¦Bertha Bischoff ¦5.2 ¦
+------------------------------+-----------¦
¦Theodore Weiler ¦7.8 ¦
+------------------------------+-----------¦
¦Renee Weiler ¦5.2 ¦
+------------------------------+-----------¦
¦Herbert Bischoff ¦4.55 ¦
+------------------------------+-----------¦
¦Alvina Martin ¦4.55 ¦
+------------------------------+-----------¦
¦Barbara Brunckhorst Stravitz ¦4.55 ¦
+------------------------------+-----------¦
¦F. Tony Brunckhorst (in trust)¦4.55 ¦
+------------------------------+-----------¦
¦Fred Weinkauff ¦16 ¦
+------------------------------+-----------¦
¦Fred Weinkauff, Jr ¦4 ¦
+------------------------------+-----------¦
¦Nancy Weinkauff Humphrey ¦4 ¦
+------------------------------+-----------¦
¦Henry Holste ¦24 ¦
+------------------------------------------+
During 1960 this pattern of stock ownership, as well as that of Specsal and Ridgewood, underwent a change. Prior to 1960, four members of the Bischoff family (Bruno, Bertha, and their two children—-Herbert Bischoff and Alvina Martin), and four members of the Brunckhorst family (Frank, Lillian, and their two children—-Barbara Brunckhorst Stravitz and F. Tony Brunckhorst), had been partners in a small, private investment company which was organized as a general partnership. In 1960 these eight individuals transferred to that partnership their holdings in Boar's Head and Weinkauff, Inc., and also their holdings in Specsal and Ridgewood, the respective real estate holding companies.
As a result of these transfers of minority interests by each of the transferors, the general partnership, which was the immediate predecessor of F. B. Associates (formed the following year), acquired a 75-percent stock interest in Boar's Head and Specsal, and a 51.31-percent stock interest in Weinkauff, Inc., and Ridgewood. The shares transferred to the general partnership were valued essentially at book value. For example, the then book value of Boar's Head was.$1.8 million, which was nearly 8 times average earnings over the previous 5 years. The 75-percent interest transferred by the two families was thus valued at $1.35 million, to which was applied a discount for possible liabilities, bringing the total value of the Boar's Head stock transferred by the families to.$1.2 million, “which was felt to be the fair value at the time.”4
By agreement dated August 22, 1961, the partners in the general partnership converted their partnership into a limited partnership known as F. B. Associates. Frank Brunckhorst and Bruno Bischoff, who, among the partners, were the principal operating officers of the pork processing business, became the general partners of F. B. Associates, and the remaining individuals became limited partners.
The 1961 agreement of limited partnership provided that the limited partners could sell their partnership interests or their interests in the partnership assets to members of their immediate families. This agreement was replaced in 1963 by an amended agreement of limited partnership dated as of January 1, 1963. The identity of the partners, general and limited, remained the same. However, the agreement placed an absolute prohibition upon inter vivos transfers of partnership interests, provided that partnership interests could be redeemed only by the partnership, and further provided a mandatory settlement or “buy-out” of a partner's interest upon his death at a price computed in accordance with a “formula” contained in the agreement. The formula price represented the retired partner's capital account with adjustments reflecting partnership income and withdrawals. These restrictions upon transferability were intended to accomplish two objectives. First, they were intended to maintain ownership and control of the businesses of the four corporations, of which F. B. Associates was the majority stockholder, within the Bischoff and Brunckhorst families and thereby assure their continuing ability to carry on their pork processing business without outside interference. Second, the restrictions were intended to provide continuity of management; in effect, the restrictions were to assure that the younger memebers of the Bischoff and Brunckhorst families...
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