David Metzger Trust v. Comm'r of Internal Revenue , Docket Nos. 8824-77

CourtUnited States Tax Court
Citation76 T.C. 42
Docket NumberDocket Nos. 8824-77,6990-79.,8856-77
Decision Date12 January 1981

76 T.C. 42


Docket Nos. 8824-77



United States Tax Court

Filed January 12, 1981.

A brother and two sisters were shareholders in MDI and remaindermen in a trust which also held stock in MDI. Family hostility among the siblings caused MDI to redeem the stock owned by the trust and the two sisters. The trust was included in the redemption because under its terms, the stock it held in MDI would have passed to the remaindermen who were attempting to separate their business and family relations.

The trust complied with the prerequisites of sec. 302(c)(2)(A), I.R.C. 1954, and filed an agreement purporting to waive the trust-beneficiary attribution rules of sec. 318(a)(3).

In partial payment of the redemption price, MDI executed a promissory note to one of the sisters. MDI claimed deductions for accrued interest expenses with regard to the note but did not actually make payment to the sister within 2 1/2 months after the close of its fiscal years. Family hostility existed between the brother who owned more than 50 percent of the stock in MDI and the payee-sister. Held:

1. Family hositility does not nullify the attribution rules of sec. 318. The redemption was essentially equivalent to a dividend under sec. 302(b)(1). There was no complete termination of the trust's interest in MDI under sec. 302(b)(3). Thus, under sec. 302(d), the distribution is governed by sec. 301.

2. The agreement filed by the trust under sec. 302(c)(2)(A)(iii) was ineffective to waive the trust-beneficiary attribution rules of sec. 318(a)(3). The trust may not treat the redemption of stock as a complete termination of a shareholder's interest under sec. 302(b)(3).

3. Family hostility does not nullify the attribution rules of sec. 267. MDI may not deduct accrued interest expenses paid over 21;2 months after the close of its fiscal years.

[76 T.C. 42]

Herbert S. Kendrick and Don C. Stephenson for the petitioners.

Thomas G. Potts for the respondent.

Dawson, Judge:

In these consolidated cases respondent determined the following deficiencies in the Federal income taxes of petitioners:

                ¦Petitioner ¦Docket No. ¦Year ¦Amount ¦
                ¦ ¦ ¦ ¦ ¦
                ¦David Metzger Trust ¦8824-77 ¦1973 ¦$292,977.47¦
                ¦Metzger Dairies, Inc.¦8856-77 ¦1973 ¦2,106.86 ¦
                ¦ ¦ ¦1974 ¦24,856.38 ¦
                ¦Metzger Dairies, Inc.¦6990-79 ¦1975 ¦6,684.68 ¦

[76 T.C. 43]

Because of concessions, the remaining issues for decision are:

(1) Whether family hostility among the shareholders of Metzger Dairies, Inc., who are also beneficiaries of the David Metzger Trust, nullifies the attribution rules of section 3181 so that a redemption by the corporation of stock owned by the trust qualifies as an exchange under section 302(b)(1) or 302(b)(3).

(2) Whether a waiver agreement filed by the trust pursuant to section 302(c)(2)(A)(iii) was effective to waive the trust-beneficiary attribution rules of section 318(a)(3) so that the trust may treat a redemption of stock as a complete termination of a shareholder's interest under section 302(b)(3).

(3) Whether Metzger Dairies, Inc., may, notwithstanding section 267(a)(2), deduct accrued interest expenses owed to a cash method taxpayer but which were not actually paid until more than 2 1/2 months after the close of its fiscal year where hostility existed between the payee and her brother, who owned more than 50 percent of the corporation's stock.

These cases were submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulations of fact and attached exhibits are incorporated herein by this reference. The pertinent facts are set forth below.

Jacob Metzger, Trustee of the David Metzger Trust (sometimes hereinafter referred to as the Trust) was a legal resident of Van Zandt County, Tex., when the Trust filed its petition herein. Metzger Dairies, Inc. (MDI), had its principal office in Dallas, Tex., at the time it filed its petition herein.

David Metzger formed MDI in 1946 to operate a dairy business in Dallas, Tex. He had earlier created the David Metzger Trust for his family, with his wife, Nora, as life income beneficiary, and his three children, Jacob Metzger, Catherine Staacke, and Cecelia Jane Frew, each as one-third remaindermen. This trust later became a shareholder of the corporation.

[76 T.C. 44]

After the death of David Metzger in 1953, Jacob assumed managerial control over MDI, installing himself as chairman of the board, and his son, David Metzger II (David II), as president, while Jacob's sisters, Catherine and Cecelia, were directors of the corporation. During the early years of Jacob's term as chief executive officer, the corporation experienced financial success and was able to distribute dividends to its shareholders: Jacob, Catherine, and Cecelia, trusts established for each of them, Nora, and the David Metzger Trust.

During the 1960's, however, corporate earnings declined and dividends were not distributed. When this happened, Catherine and Cecelia became angry and on numerous occasions accused Jacob and his son, David II, of incompetent management; raising their already high salaries at a time when the corporation was unprofitable; spending too much time golfing, hunting, and fishing; and causing MDI to sustain substantial losses by its acquisition of another corporation solely to prevent a default by the latter on a promissory note owed to a Dallas bank of which Jacob was a director. Although Catherine and Cecelia were on the board of directors, they did not attempt to use their directorial voting power to change the management policy or to force a distribution of dividends because (1) Jacob as trustee of the David Metzger Trust voted and controlled its stock holdings in MDI, (2) they believed Jacob controlled the shares owned by their mother, Nora, by virtue of his ability to influence her decisions regarding the family business, (3) they were kept uninformed by Jacob regarding the business and thus lacked sufficient knowledge to suggest or demand corrective measures, and (4) Jacob threatened to use legal ploys to disinherit them from their father's trust should they attempt to overrule his managerial decisions and policies. As a result, Catherine and Cecelia found the meetings of the board of directors to be extremely unpleasant and distasteful.

Catherine also deeply resented Jacob because of his poor treatment of her son, Fred Staacke, Jr. (Fred Jr.). During the relevant years, Fred Jr. was president of Metzger Dairy of San Antonio, Inc. (MSA). This corporation was engaged in the dairy business in San Antonio, Tex., and its stock was owned, but for minor variations, by the same parties and in the same percentages as MDI. Although Fred Jr. was nominally president, his uncle Jacob perceived himself to be the ultimate authority of

[76 T.C. 45]

MSA and proceeded to belittle Fred Jr.'s management, reverse his business decisions, make unannounced inspections, and complain about the company's profitability while refusing to assist in soliciting new customers. Catherine believed Jacob's persistent harassment and humiliation of her son drove Fred Jr. into alcoholism.

Cecelia held an animosity toward Jacob and Catherine because she resented the fact that, although MDI and MSA discontinued paying dividends, Jacob's family (through the employment by MDI of Jacob and David II) and Catherine's family (through the employment by MSA of Fred Jr.) continued to profit from the family businesses. On several occasions, Cecelia suggested that either MDI, Jacob, or Catherine buy her stock, but they refused on the grounds that a fair market value for the shares could not be determined. Sometime thereafter, Stop & Go Food Stores, Inc., an unrelated corporation, offered to purchase the stock of MDI, and Cecelia strongly urged that the offer be accepted. When the offer was rejected (or withdrawn for lack of acceptance), the enmity between Cecelia, on one side, and Jacob and Catherine, on the other side, was greatly aggravated. Cecelia became infuriated when she discovered that she had been purposely excluded from a meeting between them to make a determination as to their continued and future ownership of MDI and MSA. This was not the only occasion that pitted Cecelia against Jacob and Catherine. When the family was deciding to form the Mr. M Corp. of San Antonio, Inc. (Mr. M Corp.), to engage in the ownership and operation of retail convenience stores in San Antonio, Tex., Cecelia suggested it be formed as a wholly owned subsidiary of MDI. Instead, Jacob and his son, David II, and Catherine and her son, Fred Jr., decided the stock should be subscribed for and purchased individually. Because Cecelia was not employed by either of the existing corporations and received no dividends from them, she was financially unable to invest in the new business. Thus, when Jacob, David II, Catherine, and Fred Jr. thereafter profited from the success of Mr. M Corp., Cecelia felt she had been betrayed by her brother and sister.

In addition to matters relating to the business of the three corporations, Jacob, Catherine, and Cecelia fought over other issues. Heated disputes constantly arose among them over whose family could use the family farm, a large estate containing a

[76 T.C. 46]

lake, recreational area, and multiple residences, which they owned in undivided interests along with their mother. In other instances Cecelia and Catherine, each being one-third...

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