Davis v. Comm'r of Internal Revenue (In re Estate of Davis) , 9337–96.
| Citation | 110 T.C. No. 35,110 T.C. 530 |
| Decision Date | 30 June 1998 |
| Docket Number | No. 9337–96.,9337–96. |
| Parties | Estate of Artemus D. DAVIS, Deceased, Robert D. Davis, Personal Representative, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Gregory V. Nelson, John W. Porter, and Richard A. Husseini, for petitioner.
Victoria J. Sherlock, Norman N. Pickett, and Harve M. Lewis, for respondent.
Respondent determined a deficiency of $5,283,894 in the Federal gift tax of Artemus D. Davis (decedent) who died on June 11, 1995, after he made the two gifts to which that deficiency pertains. The sole issue for decision is the fair market value on November 2, 1992, of each of two blocks of 25 shares of common stock of A.D.D. Investment and Cattle Company (ADDI & C), one of which decedent gave to his son Robert D. Davis (Robert Davis) and the other of which decedent gave to his son Lee W. Davis (Lee Davis).
Some of the facts have been stipulated and are so found.
Decedent, who was one of the founders of Winn–Dixie Stores, Inc. (Winn–Dixie), died testate on June 11, 1995, while he was a legal resident of Florida. Robert Davis, the personal representative of decedent's estate, resided in Jacksonville, Florida, at the time the petition was filed.
On or about November 2, 1992 (the valuation date), ADDI & C, a closely held Florida corporation that was incorporated on December 22, 1947, had a total of 97 shares of common stock issued and outstanding, all of which were owned by a trust (Davis trust) for the benefit of decedent and none of which was subject to any restrictive sale provisions or buy-sell agreements. On the valuation date, decedent transferred 25 shares of such stock to his son Robert Davis and 25 shares of such stock to his son Lee Davis. On that date, each of those two blocks of ADDI & C common stock constituted 25.77 percent of the issued and outstanding common stock of ADDI & C.
As of the valuation date, ADDI & C was primarily a holding company for various assets of decedent, although ADDI & C also had certain cattle operations (both feeder and breeding cattle) as of that date. Specifically, on the valuation date, ADDI & C owned 1,020,666 shares, or 1.328 percent, of the issued and outstanding common stock of Winn–Dixie, which was at all relevant times traded on the New York Stock Exchange (N.Y.SE); 3,456 shares, or .0737 percent, of the issued and outstanding common stock of D.D.I., Inc. (DDI), which was a holding company for various assets of decedent and his family and the stock of which was at all relevant times not publicly traded; various feeder and breeding cattle; certain equipment; and certain other unidentified assets.
As of the valuation date, ADDI & C's management group consisted of the following individuals who were serving in the positions indicated: Artemus D. Davis, chairman of the board of directors, president, and director; James E. Davis, executive vice president and director; Robert Davis, vice president, assistant secretary, and director; H.J. Skelton, vice president, treasurer, and director; Harry D. Francis, vice president and assistant secretary; and G.P. Bishop, Jr., secretary and assistant treasurer.
On or before the valuation date, decedent, James E. Davis, and Robert Davis were directors of Winn–Dixie. For the 12–month period prior to the valuation date, the average daily trading volume of Winn–Dixie stock was 47,400 shares. For the 4–week period prior to the valuation date, the average weekly trading volume of Winn–Dixie stock was 310,675 shares.
As of the valuation date, decedent, ADDI & C, and the Davis trust were affiliates within the meaning and for purposes of 17 C.F.R. sec. 230.144 (1992) 1 with respect to the sale of Winn–Dixie stock. Pursuant to SEC rule 144, shares of Winn–Dixie stock held by affiliates were subject to certain restrictions, including restrictions on the sale of such shares prescribed by SEC rule 144(e)(1).
ADDI & C received the following dividends during its fiscal years ended October 31, 1988, 1989, 1990, 1991, and 1992:
+----------------------------+
¦¦Fiscal Year ¦Dividends¦
++-----------------+---------¦
¦¦Ended October 31 ¦Received ¦
++-----------------+---------¦
¦¦1988 ¦$888,330 ¦
++-----------------+---------¦
¦¦1989 ¦996,584 ¦
++-----------------+---------¦
¦¦1990 ¦1,044,926¦
++-----------------+---------¦
¦¦1991 ¦1,145,370¦
++-----------------+---------¦
¦¦1992 ¦1,272,699¦
+----------------------------+
Over $1.2 million of the dividends that ADDI & C received during its fiscal year ended October 31, 1992, were dividends received on the Winn–Dixie stock that it owned.
DDI declared and paid dividends with respect to all of its issued and outstanding stock, including the shares of such stock owned by ADDI & C, in the following aggregate amounts during its fiscal years ended November 30, 1989, 1990, 1991, 1992:
+------------------------+
¦¦Fiscal Year¦Aggregate ¦
++-----------+-----------¦
¦¦Ended ¦Dividends ¦
++-----------+-----------¦
¦¦November 30¦Paid ¦
++-----------+-----------¦
¦¦1989 ¦$21,093,694¦
++-----------+-----------¦
¦¦1990 ¦21,796,815 ¦
++-----------+-----------¦
¦¦1991 ¦23,437,435 ¦
++-----------+-----------¦
¦¦1992 ¦23,906,184 ¦
+------------------------+
Subject to the caveats stated below, the following table shows as of the valuation date ADDI & C's assets and liabilities, the historical cost basis and the fair market value of each such asset, and ADDI & C's net asset value:
Historical Asset Cost Basis Fair Market Value ----- ---------- ---------------------Feeder cattle, cost $6,474,368 $8,074,368Breeding herd, net 1,072,843 1,894,400Winn“Dixie stock 338,283 70,043,204DDI stock 120,263 535,162Total equipment, net 172,999 130,294Other assets 1.295.539 1.295.539 ---------- ---------- Total assets 9,474,295 81,972,967 Total liabilities 1.832.698 1,832.698 ---------- ---------- Net asset value 7,641,597 80,140,269
The fair market value of ADDI & C's Winn–Dixie stock and its net asset value that are shown in the foregoing table do not reflect any type of discount or adjustment with respect to that stock which is attributable to blockage and/or SEC rule 144 (). Nor do the fair market value of each of ADDI & C's assets and its net asset value that are shown in the foregoing table reflect any type of discount or adjustment which is attributable to, inter alia, lack of a controlling interest, lack of marketability, or the Federal and State income tax (ADDI & C's built-in capital gains tax) that ADDI & C would have incurred at a combined tax rate of 37.63 percent on the gains as of the valuation date on ADDI & C's assets (i.e., the difference between the historical cost basis and the fair market value of each of its assets, hereinafter referred to as ADDI & C's built-in-capital gains) if on that date each such asset had been sold or otherwise disposed of or ADDI & C had liquidated.
During 1990, ADDI & C paid $252,602 to an affiliated company as reimbursement for the use of an airplane by one of its shareholders. For Federal income tax purposes, ADDI & C reported that payment as a shareholder dividend. With the exception of that dividend, ADDI & C has not declared or paid any dividends to its shareholders.
On the valuation date, ADDI & C had not adopted a formal plan of liquidation, nor was there any intention by that corporation or decedent to liquidate ADDI & C or to dispose of its Winn–Dixie stock.
On October 31, 1992, ADDI & C's net operating loss carry-forwards totaled $1,580,217.
On or about April 15, 1993, decedent timely filed for 1992 Form 709, United States Gift (and Generation–Skipping Transfer) Tax Return (gift tax return). In that return, decedent reported that the value on the valuation date of each of the two 25–share blocks of ADDI & C stock that he transferred to his sons was $7,444,250, or $297,770 a share. The value reported by decedent in the gift tax return was based on an appraisal by Alex W. Howard (Mr. Howard) of Howard Frazier Barker Elliott, Inc. (Mr. Howard's appraisal).
Respondent determined in the notice of deficiency (notice) that on the valuation date the fair market value of each of the two 25–share blocks of ADDI- & C stock-that decedent transferred to his sons was $12,046,975, or $481,879 a share.
OPINIONPetitioner modified the position reflected in decedent's gift tax return as to the value on the valuation date of each of the two blocks of stock in question and now claims that the fair market value of each of those blocks on that date was $6,904,886, or $276,195 per share. Respondent modified the determination in the notice as to that value and now contends that the fair market value on the valuation date of each of the two blocks of ADDI & C stock in question was $13,518,500, or $540,740 per share.2
If a gift is made in property, its value at the date of the gift is considered the amount of the gift. Sec. 2512(a); 3 sec. 25.2512–1, Gift Tax Regs. The value of the property for Federal gift tax purposes is
the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. * * * All relevant facts and elements of value as of the time of the gift shall be considered. * * * [Sec. 25.2512–1, Gift Tax Regs.]
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