Chemical Bank New York Trust Co. v. Comm'rs of Internal Revenue (In re Estate of Gerard)
| Decision Date | 13 March 1972 |
| Docket Number | Docket No. 5573-69. |
| Citation | 75 USTC P 13064,57 T.C. 749 |
| Parties | ESTATE OF SUMNER GERARD, CHEMICAL BANK NEW YORK TRUST COMPANY, C. H. COSTER GERARD, SUMNER GERARD, JR., JAMES W. GERARD II, EXECUTORS, PETITIONER v. COMMISSIONERS OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John P. Campbell, Robert D. Whoriskey, and Anthony J. Leitner, for the petitioner.
Agatha L. Vorsanger, for the respondent.
Held, the transfer of 51 shares of stock of Aeon Realty Co. by the decedent, Sumner Gerard, to his sons on Jan. 2, 1964, followed by his death on Mar. 10, 1966, constituted a gift made in ‘contemplation of death’ within the meaning of sec. 2035, I.R.C. 1954.
The respondent determined a deficiency in the Federal estate tax of the Estate of Sumner Gerard, deceased, in the amount of $4,111,906.38. Except for certain gifts by the decedent, the various issues have been disposed of by agreement of the parties. Consequently, the only issue remaining for decision is whether the transfer by the decedent on January 2, 1964, of 51 shares of stock in Aeon Realty Co., distributed in equal portions to his three sons, was made in contemplation of death within the meaning of section 2035.1
Some of the facts have been stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Sumner Gerard (hereinafter referred to as the decedent) was born on August 25, 1874, and died on March 10, 1966. The executors of his estate are the three sons of the decedent, C. H. Coster Gerard, Sumner Gerard, Jr., and James W. Gerard II, and the Chemical Bank New York Trust Co. (hereinafter referred to as Chemical Bank). The Federal estate tax return was filed with the district director of internal revenue, Manhattan, New York.
At the time of the filing of the petition herein, the legal residences of C. H. Coster Gerard, Sumner Gerard, Jr., and James W. Gerard II, were New York, N.Y., Princeton, N.J., and Bay Harbor, Maine, respectively. The principal place of business of Chemical Bank was New York, N.Y.
Following World War II, Sumner Gerard, Jr., desired to move to the western region of the United States. He began studying the ranching business, and in 1947 he toured several western states. On that tour, he located a ranch in Ennis, Mont. He made a recommendation to his father, the decedent, that said parent purchase the ranch.
In 1948, the decedent purchased all the stock of the Ennis Co., the corporation that owned the ranch. Sumner Gerard, Jr., and his family moved onto the ranch at that time, and continued to reside there at all times material hereto.
In 1954, the Ennis Co. was liquidated and a partnership was formed. On December 31, 1958, the Ennis Co. (hereinafter referred to as Ennis) was reincorporated and the assets of the partnership, consisting principally of the ranch, was transferred to the corporation. At that time, Ennis qualified and elected to be taxed as a ‘small business corporation’ within the provisions of subchapter S of the Internal Revenue Code of 1954. It continued to be taxed in this manner through the date of the decedent's death.
Upon its reincorporation, the decedent received 2,680 shares of the outstanding capital stock of Ennis, which he held through the date of the decedent's death. The remaining 1,320 shares of stock were issued to and held by Sumner Gerard, Jr., and his wife.
As an asset of Ennis, the ranch was run as a livestock operation. The cattle (and some horses) were either bought or bred and then fed and sold as either calves, yearlings, or 2-year-olds, depending upon the state of the market. Depreciation was taken on the purchased animals.
During the calendar years 1959-63, the annual operating statements of Ennis reported net operating losses in the following amounts:
+------------------+
¦Year ¦Loss ¦
+------+-----------¦
¦1959 ¦$72,182.02 ¦
+------+-----------¦
¦1960 ¦14,582.24 ¦
+------+-----------¦
¦1961 ¦40,705.99 ¦
+------+-----------¦
¦1962 ¦46,966.50 ¦
+------+-----------¦
¦1963 ¦121,651.01 ¦
+------------------+
In addition, during the same calendar years, the corporate income tax returns for Ennis reported losses in the following amounts:2
+------------------+
¦Year ¦Loss ¦
+------+-----------¦
¦1959 ¦$72,182.02 ¦
+------+-----------¦
¦1960 ¦4,272.14 ¦
+------+-----------¦
¦1961 ¦28,310.09 ¦
+------+-----------¦
¦1962 ¦32,317.47 ¦
+------+-----------¦
¦1963 ¦121,651.01 ¦
+------------------+
These operating and income statements, however, do not reflect the inventory of cattle and other animals unsold and present on the ranch at the end of each calendar year. Since Ennis was a subchapter S corporation, the decedent and Sumner Gerard, Jr., were each allowed to reflect portions of the losses of Ennis on their respective Federal income tax returns for these years.
Ennis borrowed funds on a continuing basis from the Metals Bank & Trust Co. of Butte, Mont. (hereinafter referred to as Metals Bank). At the end of each of the calendar years 1959-63, the loan account of Ennis with Metals Bank showed balances in the following amounts:
+-------------------+
¦Year ¦Amount ¦
+------+------------¦
¦ ¦ ¦
+------+------------¦
¦1959 ¦$157,749.04 ¦
+------+------------¦
¦1960 ¦147,079.85 ¦
+------+------------¦
¦1961 ¦179,619.11 ¦
+------+------------¦
¦1962 ¦277,138.48 ¦
+------+------------¦
¦1963 ¦300,769.04 ¦
+-------------------+
The loans by Metals Bank to Ennis were secured by the cattle of Ennis, and by marketable securities owned by the decedent and by Sumner Gerard, Jr., and his wife. In 1961, the decedent pledged 700 shares of stock of Standard Oil of New Jersey to Metals Bank on behalf of Ennis. At that time, the decedent stated by letter that an objective in making such pledge was to permit the bank to release ‘all or the greater portion of (Sumner Gerard, Jr.‘s) securities' that had been pledged to Metals Bank on behalf of Ennis, so that he could ‘use such returned securities in furthering some other enterprise in which he is interested.’ In March 1963, the decedent pledged 200 shares of IBM stocks to Metals Bank as additional security for the loans.
As of March 27, 1963, Metals Bank advised Sumner Gerard, Jr., that the marketable securities held by it were in excess of the collateral required and offered to release to Sumner Gerard, Jr., securities valued at $37,000. It did release such securities to Sumner Gerard, Jr., later in that year. After the release, these securities were kept in a safe-deposit box.
The loss reported by Ennis on its operating and income statements for the calendar years 1959-63 included interest payments that Ennis was required to make on outstanding bank loans in the following amounts:
+--------------------------+
¦Year ¦Interest expense ¦
+------+-------------------¦
¦ ¦ ¦
+------+-------------------¦
¦1959 ¦$14,251.52 ¦
+------+-------------------¦
¦1960 ¦11,608.50 ¦
+------+-------------------¦
¦1961 ¦17,120.67 ¦
+------+-------------------¦
¦1962 ¦17,304.91 ¦
+------+-------------------¦
¦1963 ¦26,833.24 ¦
+--------------------------+
In 1961, Sumner Gerard, Jr., paid $25,000 for a 50-percent interest in the Yellowstone Feed & Cattle Co. (hereinafter referred to as Yellowstone), located in Billings, Mont. The remaining stock of Yellowstone was received by Marshal Young (hereinafter referred to as Mr. Young) and his wife, in exchange for a leasehold interest valued at $25,000 on the minutes books of Yellowstone. Yellowstone, a Montana corporation, operated a livestock-feeding business. It purchased cattle on credit, fed them, and subsequently sold them.
In order to finance this business, Yellowstone arranged a revolving line of credit with the First National Bank & Trust Co. (hereinafter referred to as the First National Bank). In establishing this arrangement, First National Bank required personal guarantees of Yellowstone's obligation by both Sumner Gerard, Jr., and Mr. Young up to $200,000, respectively.
In 1961 and 1962, Yellowstone reported small profits on its net operating statements. However, in 1963, the company reported a net operating loss of $89,062.29. A factor in this reversal was the fall in the price of ‘fat’ cattle in the open market during that year.3
In order to obtain financing to continue its operations, Yellowstone liquidated some of its inventory and increased its open market indebtedness for feed and supplies. In addition, in 1963, Sumner Gerard, Jr., contributed additional funds to the capital of Yellowstone in the total amount of $51,000.
Sometime after becoming a resident of Montana, Sumner Gerard, Jr., became active in Montana State politics. He won election to the Montana State Legislature in 1954. Thereafter, beginning in 1955, he served three successive 2-year terms in the house, serving in the 1959 session as its minority leader. In 1960, he waged an unsuccessful campaign for the Republican nomination from Montana to the U.S. Senate. He estimated his personal cost of this campaign at $20,000. In 1961, he was elected to the Montana State Senate. He served two 4-year terms in the senate, and in 1964 served as its minority leader.
The decedent took an interest in his son's political career. He made modest contributions to his son's campaign for the U.S. Senate, to various congressional candidates suggested by his son, and to the Montana Republican Party.
Sumner Gerard, Jr., has five children. They are Jenny, born in 1945; Molly, born in 1947; Helen, born in 1949; Anne, born in 1951; Sumner III, born in 1953. As his children grew older, Sumner Gerard, Jr., incurred increasing expenses in providing for their education. During the calendar years 1962-64, he incurred such expenses in the following amounts:
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