Cgf Industries, Inc. v. Commissioner
| Decision Date | 12 February 1999 |
| Docket Number | Docket No. 2452-94.,Docket No. 15978-94.,Docket No. 1090-94.,Docket No. 25343-93. |
| Citation | 77 T.C.M. 1405 |
| Parties | CGF Industries, Inc. and Subsidiaries, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Gale T. Miller, Laurence E. Nemirow, Robert S. Rich, Denver, Colo., and John R. Wilson, for the petitioners in Docket Nos. 25343-93, 1090-94 and 2452-94. Patrick A. Jackman, Laurence E. Nemirow, Robert S. Rich, Denver, Colo., and John R. Wilson, for the petitioner in Docket No. 15978-94. Stephen M. Miller and Richard D. D'Estrada, for the respondent.
CGF Industries, Inc. (CGF), computes its income on the basis of a fiscal year ending on March 31. For its 1988 through 1992 taxable years, CGF was the common parent of an affiliated group of corporations making a consolidated return of income. By notices of deficiency respondent determined deficiencies in Federal income taxes of the CGF affiliated group in the following amounts:
Fiscal Year Ending Deficiency
1988 ......................... $4,369,352
1989 ......................... 745,105
1990 ......................... 362,525
1991 ......................... 259,708
1992 ......................... 214,805
Likewise, Lincoln Industries, Inc. (Lincoln), uses a fiscal year ending on March 31 to compute its income. For taxable years 1989 through 1993, Lincoln was the common parent of an affiliated group of corporations making a consolidated return of income. By notices of deficiency respondent determined deficiencies in Federal income taxes of the Lincoln affiliated group in the following amounts:
Fiscal Year Ending Deficiency
1989 ......................... $294,285
1990 ......................... 562,953
1991 ......................... 562,653
1992 ......................... 562,306
1993 ......................... 578,561
By order of this Court dated January 19, 1995, these cases were consolidated for purposes of trial, briefing, and opinion. In a stipulation of partial settlement filed with the Court on January 18, 1995, respondent conceded all deficiencies determined against CGF and its subsidiaries for 1988, thus removing all issues relating to the 1988 tax year from consideration in these cases. This leaves in controversy the sole remaining issue for our decision: whether CGF and Lincoln are entitled to amortize the costs of acquiring term interests in partnerships where related persons simultaneously acquired the remainder interests in those partnerships.
The facts of these cases are fully stipulated. The stipulation of facts, first supplemental stipulation of facts, stipulation of settled issues, and attached exhibits are incorporated herein by this reference. All section references are to the Internal Revenue Code in effect for the taxable years in issue, all Rule references are to the Tax Court Rules of Practice and Procedure, and dollar amounts have been rounded to the nearest dollar, unless otherwise indicated. The facts necessary for an understanding of these cases are as follows.
CGF, a Kansas corporation since 1972, maintains its principal offices in Topeka, Kansas. It is a family-owned corporation; most of its stock is held by trusts for the benefit of members of that family. It has been engaged, directly and through its subsidiaries, in various businesses, including agriculture, petroleum, real estate, manufacturing, and cable television. As of August 1, 1988, the following entities owned the class A common voting stock of CGF:
Shareholder Ownership Percentage
Diana C. Broze Revocable Trust ....................................... 18.258%
H. Bernerd Fink Revocable Trust ...................................... 2.305
Marcia F. Anderson Revocable Trust ................................... 2.784
Ruth G. Fink Revocable Trust ......................................... 38.893
Curmudgeon Revocable Trust
Bruce G. Cochener, sole beneficiary ................................ 17.749
Bruce G. Cochener Trust Number One ................................... 0.925
Caroline A. Cochener Revocable Trust ................................. 17.255
Bruce M. Bolene Revocable Trust ...................................... 0.490
Joaquin Mason Trust Number One ....................................... 0.416
BENECO, Inc., Bruce M. Bolene
Revocable Trust, sole shareholder .................................. 0.925
_______
Total ............................................................ 100.000
During July 1988, the directors of CGF were the following individuals:
H. Bernerd Fink, chairman
Ruth G. Fink
Marcia F. Anderson
Diana C. Broze
Caroline A. Cochener
Ruth G. Fink also served as president of CGF in July 1988.2
Lincoln, a Kansas corporation since 1972, maintains its principal offices in Lincoln, Nebraska. It is a family-owned corporation; most of its stock is held by trusts for the benefit of members of that family. It has been engaged, directly and through its subsidiaries, in various businesses, including agriculture, petroleum, and the wholesale and retail distribution of textbooks and supplies.
As of December 9, 1988, the following entities owned Lincoln's class A common voting stock:
Shareholder Ownership Percentage
George A. Lincoln Revocable Trust .................................... 2.9525%
Olivia G. Lincoln Revocable Trust .................................... 48.3327
Georgia L. Johnson Revocable Trust ................................... 12.1584
Edward M. Lincoln Revocable Trust .................................... 12.1584
Margaret L. Donlan Revocable Trust ................................... 12.1584
Ann L. Hunter Revocable Trust ........................................ 12.2396
________
Total ............................................................ 100.0000
During calendar year 1988, the following individuals served on Lincoln's board of directors:
George A. Lincoln, chairman
Olivia G. Lincoln
Robert A. Page
Georgia L. Johnson
Edward M. Lincoln
Margaret L. Donlan
Serving also as Lincoln's officers during that year were George A. Lincoln as president, Olivia G. Lincoln as vice president, and Bill C. Macy as executive vice president and treasurer.3
By letter dated May 15, 1986, and an addendum dated March 30, 1988, Robert A. Page4 advised CGF and Lincoln's shareholders on the benefits of a "split purchase of assets". According to Mr. Page, the older generation would buy a life estate or term of years, while the younger generation would purchase the remainder interest. In the addendum, Mr. Page substituted the word "corporation" for "older generation". In his words, the objective of a split purchase5 was twofold: (1) To transmit property to future generations without incurring a transfer tax cost; and (2) to extract corporate assets without incurring a dividend or capital gains tax. The addendum stated that the second described objective was the primary one. Indeed, Mr. Page recognized early on that the overall purpose of the joint purchase was transferring wealth to the remaindermen. As he wrote in the May 15, 1986, letter:
The purchaser of the term interest or the life estate has a lousy deal, which is really the purpose of the transaction * * *. The objective is really the same as in a private annuity, i.e., doing in the annuitants for the benefit of the obligor, in this case it is doing in the life tenant for the benefit of the remainderman.
Mr. Page regarded the joint purchase by a closely held corporation and its shareholders of, respectively, a life or income interest and a remainder interest in property to be a favorable device for meeting that objective.
Mr. Page, however, was aware of potential problems which might frustrate a joint purchase, the most important for our purposes being his statement about how a shareholder would fund the remainder interest purchase. Mr. Page warned that "Simultaneous gifts of funds for the acquisition of the [remainder] interest contain an element of risk in collapsing the transaction into one of being a `retained' interest rather than a `purchased' interest, in which case the favorable * * * tax results do not occur."6 Mr. Page then offered his solution: "Gifts separated by time * * * would work." In the addendum of March 30, 1988, he dismissed his prior concern altogether by what he called a "break-through"; namely, the major decline in individual tax rates. This would enable the shareholders to use corporate funds to purchase the remainder interests, albeit at a small tax cost. More specifically, Mr. Page suggested having the corporation declare dividends and make stock redemptions sufficient to generate after-tax funds for the purchase of the remainder interests.
In another letter dated April 6, 1988, Mr. Page described in somewhat greater detail how the joint purchase transaction would take shape.7 Partnerships would be formed, and, where a corporation purchased a term of years in such newly created partnerships, its shareholders, in turn, would purchase the remainder interests. Attached to the letter, Mr. Page provided a partnership agreement form and supplemental agreements related thereto. In order to make their purchases, the shareholders would receive a major portion of the funds "from the after-tax proceeds of a[n] * * * extraordinary dividend". Although Mr. Page recognized that the amount distributed would be subject to "the so-called double tax * * *, i.e.,...
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