Blumenthal v. Lynch

• Decision Date: 18 February 1986
• Docket Number: No. 20A85,20A85
• Court: North Carolina Supreme Court
• Parties: Herman BLUMENTHAL, Executor of the Estate of I.D. Blumenthal, Deceased v. Mark G. LYNCH, Secretary of Revenue of the State of North Carolina.

Page 358

340 S.E.2d 358

315 N.C. 571

Herman BLUMENTHAL, Executor of the Estate of I.D. Blumenthal, Deceased v. Mark G. LYNCH, Secretary of Revenue of the State of North Carolina.

No. 20A85.

Supreme Court of North Carolina.

Feb. 18, 1986.

Parker, Poe, Thompson, Bernstein, Gage and Preston by H. Bryan Ives, Charlotte, III, for plaintiff-appellant.

Lacy H. Thornburg, Atty. Gen. by Marilyn R. Rich, Asst. Atty. Gen., Raleigh, for defendant-appellee.

MEYER, Justice.

Plaintiff is the executor of the estate of I.D. Blumenthal who died testate, a resident of North Carolina, on 6 December 1978. On 4 April 1981, plaintiff filed with the Secretary of Revenue intangibles personal property tax returns for the years 1978, 1979, and 1980. Said returns were filed under protest and without remittance of the tax. On 7 May 1981, the Secretary of Revenue issued notices of tax assessment for unpaid intangibles tax, interest, and penalties. Plaintiff-executor timely protested the assessment, and a hearing was held on 9 September 1981 before the Secretary, who thereafter on 16 October 1981 issued his "Final Decision" waiving the penalty but sustaining the balance of the assessment as follows:

                For the year--1978  $14,314.25
                            --1979   14,606.06
                            --1980   22,710.75
                                    ----------
                         Total      $51,631.06
                

Plaintiff-executor paid the foregoing amount and filed his complaint in the present civil action pursuant to N.C.G.S. § 105-267 for a refund under N.C.G.S. §§ 105-241.4 and 105-267. The case came on for trial before Snepp, J., who found the facts to be as stipulated by the parties and concluded as a matter of law that plaintiff-executor was not entitled to a refund of the intangibles tax or the interest thereon and entered judgment in favor of the Secretary of Revenue on 27 December 1983. Plaintiff-executor gave notice of appeal, and on 18 December 1984, the Court of Appeals filed its decision, one judge dissenting, affirming Judge Snepp's judgment in favor of the Secretary of Revenue. For the reasons set forth herein, we affirm the decision of the Court of Appeals.

I.D. Blumenthal (the "decedent") was the founder and principal shareholder of Radiator Specialty Company. Earlier in his lifetime, decedent had established the Blumenthal Foundation for Charity, Religion, Education and Better Interfaith Relations (hereinafter the "Foundation"), a private, charitable foundation under federal tax law and exempt from North Carolina intangibles tax. At his death, his estate was valued at approximately $8.6 million, $6.8 million of which represented the value of decedent's stock in Radiator Specialty Company (hereinafter "Radiator") and its Canadian subsidiary (hereinafter "Canada Radiator").

In his will, decedent bequeathed to his three sisters $100,000 each in cash and the remainder of his estate to the Foundation. Plaintiff, who is a brother of the decedent and who is a trustee of the Foundation and an officer of both Radiator and Canada Radiator, qualified as executor of the estate on 20 December 1978. The executor paid the cash bequests to the sisters on 11 January 1979, and after that date all distributions from the estate have been to the Foundation.

Keeping in mind that the plaintiff qualified as executor on 20 December 1978 and that the estate remains open to the present time, it is important to note that the major portion of the tax and interest assessed by the Secretary of Revenue (hereinafter "Secretary") was a result of the executor's holding the stock of Radiator and Canada Radiator on December 31 of 1978, 1979, and 1980.

Plaintiff found it advantageous for tax reasons to delay distribution to the Foundation until 1981 as he explains in his brief before this Court as follows:

In addition to the typical duties of an executor, the plaintiff had to deal with stock in the two closely-held corporations. The problem was compounded because the Foundation was the major beneficiary under the decedent's will and codicil.

The Foundation is a private charitable foundation under federal tax law. As such it would have incurred federal excise tax from holding the stock of Radiator or the stock of Canada [Radiator] bequeathed to it by reason of the "excess business holdings" provision of IRC § 4943. Therefore, either the Foundation had to dispose of the stock or the Estate had to dispose of the stock before it got to the Foundation. As is usual with closely-held securities, each company itself was the best market for the stock. Indeed, the Decedent had anticipated this as to Radiator and had provided by contract for a sale of the Radiator stock, following receipt of a favorable private letter ruling from the IRS. In addition, absent a favorable ruling, such sales to the companies could themselves trigger federal excise tax to the Foundation under IRC § 4941 as prohibited acts of self-dealing. Moreover, only by effecting the sales by the Estate could they be structured as installment sales under applicable Internal Revenue regulations....

As a result of the tax issues encountered, plaintiff acting on advice from the attorneys for the Estate, Foundation and the two companies, decided to hold the stock as executor, request private letter rulings from the IRS on the tax issues, sell the stock to the companies after receipt of the rulings, and distribute the proceeds of sale to the Foundation. Although the plaintiff received federal estate tax and North Carolina inheritance tax clearances in June and July, 1980 and although estates are typically closed after receipt of such clearances, the ruling and sales process described above was not completed until August 17, 1981. By that time, however, the Secretary of Revenue had raised his claim that the plaintiff, as Executor of the Estate, was liable for North Carolina intangibles tax for 1978, 1979 and 1980. The bulk of the tax and interest (approximately 85%) was assessed by the Secretary as a result of the plaintiff's holding, as executor, the stock of the two companies on December 31, 1978, December 31, 1979, and December 31, 1980.... The plaintiff, as executor, paid the $51,631.06 intangibles tax and interest on November 13, 1981, as required by law, G.S. 105-267, in order to pursue in court his contention that he was not liable for the tax. Plaintiff, as Executor, distributed prior to November 30, 1981, all the remaining Estate assets, less cash of $37,768.78, the claim against the Secretary of Revenue and certain other nominal assets, to the Foundation as the sole remaining beneficiary of the Estate. As of the date of trial, the Executor had not filed his final account with Clerk of Superior Court.

(Record page citations omitted; footnote omitted.)

Plaintiff has steadfastly contended that, as executor of the estate, he is exempt from the intangibles tax (after payment of the three $100,000 bequests) under each of the following paragraphs of N.C.G.S. § 105-212 as they appear in the current version of the statute: ¹

[ (1) ] None of the taxes levied in this Article or schedule shall apply to religious, educational, charitable or benevolent organizations not conducted for profit ....

....

[ (3) ] If any intangible personal property held or controlled by a fiduciary domiciled in this State is so held or controlled for the benefit of a nonresident or nonresidents, or for the benefit of any organization exempt under this section for the tax imposed by this Article, such intangible personal property shall be partially or wholly exempt from taxation and under the provisions of this Article in the ratio which the net income distributed or distributable to such nonresident, nonresidents or organization, derived from such intangible personal property during the calendar year for which the taxes levied by this Article are imposed, bears to the entire net income derived from such intangible personal property during such calendar year.

The parties stipulated to the findings of fact which the trial court adopted as its own. Based on the findings of fact, the trial court made the following conclusions of law:

1. That the intangible personal property held or controlled by plaintiff, Herman Blumenthal, Executor of the Estate of I.D. Blementhal [sic], Deceased, is not "intangible personal property held or controlled ... for the benefit of any organization exempt under this section from the tax imposed by this Article" within the meaning of GS 105-212.

2. That the said property does not qualify for the exemption from intangibles tax provided for in GS 105-212.

3. That plaintiff is not entitled to a refund of intangibles tax paid with respect to said property; [sic]

The trial judge's conclusions of law raised the following questions for consideration on appeal: (1) Is the "charitable exemption" contained in the first paragraph of N.C.G.S. § 105-212 applicable to exempt plaintiff from the intangibles tax? (2) Is the "fiduciary exemption" contained in the third paragraph of N.C.G.S. § 105-212 applicable to exempt plaintiff from the intangibles tax?

The Court of Appeals treated both questions simultaneously and held that the trial court properly concluded as a matter of law that the executor of an estate is ineligible for the intangibles tax exemption with respect to "property held or controlled by a fiduciary ... for the benefit of any organization exempt under this section," when the exempt organization is a beneficiary under decedent's will.

The dissenting opinion filed in the Court of Appeals is confined to the single issue of whether the assets held by the plaintiff-executor were held or controlled for the benefit of the exempt charitable foundation and were thus not subject to intangibles tax. In addition to this issue, plaintiff's brief discusses several issues not addressed in the dissent. Plaintiff argues first that he is eligible for an exemption from intangibles tax with respect to the property he held as executor on grounds that he...