Estate of Blount v. Commissioner

• Decision Date: 12 May 2004
• Docket Number: Docket No. 540-02.
• Citation: 87 T.C.M. 1303
• Parties: Estate of George C. Blount, Deceased, Fred B. Aftergut, Executor, v. Commissioner.
• Court: U.S. Tax Court

87 T.C.M. 1303

T.C. Memo. 2004-116 Estate of George C. Blount, Deceased, Fred B. Aftergut, Executor, v. Commissioner.

Docket No. 540-02.

United States Tax Court.

May 12, 2004.

R. Douglas Wright, Larry S. Pike, Alfred B. Adams, III, and Sara L. Doyle, for petitioner.

Travis Vance, III, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

                FINDINGS OF FACT
                I.   Decedent and BCC
                II.  1981 Agreement
                III. ESOP
                IV.  Life Insurance and the Death of Mr. Jennings
                V.   1996 Agreement and Redemption of Decedent's BCC Shares
                VI.  Estate's Return
                VII. Expert Testimony
                     A. Estate's Expert Mr. Grizzle
                     B. Estate's Expert Mr. Fodor
                     C. Respondent's Expert, Mr. Hitchner
                OPINION
                I.   Effectiveness of the Buy-Sell Agreement
                     A. Terms of the Buy-Sell Agreement
                     B. Binding-During-Life Requirement
                     C. Section 2703
                        1.  Applicability of Section 2703
                        2.  Section 2703(b)(3)
                II.  Valuation of Decedent's BCC Shares
                     A. Fair Market Value
                     B. Expert Testimony
                     C. BCC's Value Exclusive of Insurance Proceeds
                        1.  Experts' Concluded Value Exclusive of Insurance Proceeds
                        2.  Mr. Fodor's Adjustment for ESOP Repurchase Obligation
                        3.  Mr. Hitchner's Estimate of Excess Cash
                        4.  Conclusion
                     D. Effect of Redemption Obligation on Insurance Proceeds
                     E. Accounting for Insurance Proceeds
                III. Conclusion
                

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge:

Respondent determined a Federal estate tax deficiency of $2,354,521 with respect to the Estate of George C. Blount (the estate). After concessions, the issue remaining for decision is the value for Federal estate tax purposes of 43,079.9657 shares of Blount Construction Co. (BCC) owned by George C. Blount (decedent) on September 21, 1997, his date of death and the valuation date. Subsumed within that issue is the question of whether a buy-sell agreement covering the BCC shares fixes their value, or whether the agreement should be disregarded in determining that value.

Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. We incorporate by this reference the stipulation of facts and the accompanying exhibits.

I. Decedent and BCC

Decedent was a U.S. citizen domiciled in Georgia when he died testate on September 21, 1997. Decedent's will was probated in Fulton County, Georgia, with Fred B. Aftergut appointed as executor.

At his death, decedent owned 43,079.9657 (hereinafter rounded to 43,080) shares of BCC, constituting 83.2 percent of its outstanding stock. BCC was located in Atlanta, Georgia, and had been in existence in one form or another since 1946, when decedent's father founded Blount Asphalt Co. Decedent became involved in the business shortly thereafter, and when his father died, decedent and his brother-in-law, James M. Jennings, became equal owners.

BCC was in the general business of the construction and repair of roads, streets, driveways, parking lots, and similar projects. At decedent's death, BCC also operated an asphalt plant. In addition, BCC had certain nonoperating assets, including an idle asphalt plant and notes receivable. BCC required approximately $1.5 million in cash and cash equivalents to operate. Among other things, this allowed it to meet bonding requirements without the need for personal guaranties. When decedent died, BCC had at least $2.5 million in cash and cash equivalents.

BCC performed work for private entities, commercial enterprises, municipalities, and the State of Georgia. It obtained work through a competitive bid and negotiation process and did not rely on any one client or customer for a large percentage of its revenues. BCC operated on a fiscal year ending January 31. Each year, it prepared "value in use" analyses in which it estimated the value of its assets, relying on published information regarding used equipment values, including auction prices and information published by the equipment manufacturers.

Other than his brother-in-law, Mr. Jennings, decedent had no family member who owned stock in or worked at BCC. BCC had a core group of long-term employees, some employed at BCC for more than 30 years when decedent died. Decedent did not have a personal relationship with these or any other BCC employees outside of work. Decedent served as BCC's president and was actively involved in its management, making most major decisions, including the selection of projects on which to bid and the bid amounts, until the months preceding his death.

II. 1981 Agreement

In 1981, decedent, Mr. Jennings, and BCC entered into an agreement restricting the transfer of BCC's stock entitled "Shareholders Agreement" (the 1981 Agreement).¹ At the time, decedent and Mr. Jennings each owned one-half of BCC's outstanding stock. The 1981 Agreement contained restrictions on transfers of BCC stock both during the shareholders' lifetimes and at death. The preamble provided that subsequent shareholders would "benefit from and be bound by" the agreement. With respect to lifetime transfers, a section entitled "Restrictions on Transfer of Capital Stock During Life" provided: "No

Shareholder shall transfer or encumber any of his Capital Stock in the Company to any person, firm, or corporation without the written consent of the other Shareholders." "Shareholders" were defined in the 1981 Agreement's first paragraph as decedent and Mr. Jennings, a definition that excluded subsequent shareholders. However, section 3(a) of the 1981 Agreement, entitled "Other Shareholders to be Bound", also denoted as "shareholders" persons other than Mr. Jennings or decedent who received shares directly from BCC or as transferees from other shareholders. The section further provided that the shares of such other shareholders would be subject to the same terms and conditions as the shares owned by decedent and Mr. Jennings.²

With respect to transfers at death, the 1981 Agreement in a section entitled "Purchase Upon Death" required that a shareholder's estate sell and BCC buy the shareholder's stock at an established price. The purchase price initially set in the 1981 Agreement was $3,300 per share, described as book value. The 1981 Agreement provided that BCC and the shareholders were to redetermine the per-share purchase price annually on August 1, but no such redetermination was ever done. In the absence of any redetermination, the 1981 Agreement provided that the per-share purchase price would be equal to BCC's book value at the fiscal yearend immediately preceding the deceased shareholder's death.

The 1981 Agreement provided that it would be governed by Georgia law, and it expressly set forth the manner in which it could be modified: "Modification —No change or modification of this Agreement shall be valid unless it is in writing and signed by all of the parties hereto." The 1981 Agreement did not define "parties" or contain any mechanism for adding parties.

III. ESOP

In 1992, BCC adopted the Blount Construction Co. Employee Stock Ownership Plan (ESOP).³ BCC made annual cash contributions to the ESOP, and the ESOP obtained shares of BCC stock either from decedent and Mr. Jennings or from the company, making it a third, minority shareholder. According to the ESOP's Summary Plan Description, when plan participants retired or were otherwise entitled to obtain distributions, the ESOP was to distribute shares of BCC stock to them, and they had the right to require BCC to purchase their shares at designated times.

The ESOP participants were BCC employees, excluding decedent and Mr. Jennings. Decedent, Mr. Jennings, and Richard E. Lord (a longtime employee) were the original trustees of the ESOP. John Truono, who served as BCC's controller and corporate secretary, replaced Mr. Jennings as a trustee as of February 1, 1996.

Business Valuation Services, Inc. (BVS), performed an independent appraisal of BCC each year to establish the per-share value of BCC stock to be used for ESOP transactions. These per-share values were used when the ESOP purchased BCC shares and when the BCC stock of ESOP participants was redeemed. BVS concluded that the value of 100 percent of BCC stock was $8,041,126 ($86.73/share) as of January 31, 1996, and $8,491,321 ($164.01/share) as of January 31, 1997.⁴

IV. Life Insurance and the Death of Mr. Jennings

As part of succession planning, BCC obtained life insurance of approximately $3 million each on the lives of decedent and Mr. Jennings. Decedent also had BCC's controller, Mr. Truono, prepare "pro forma" financial analyses showing the impact on BCC of the redemption of his and Mr. Jennings's shares at different prices and under various assumptions. Mr. Jennings died on January 13, 1996, and BCC received $3,046,823 in life insurance proceeds. BCC redeemed Mr. Jennings's shares in September 1996 for $2,990,791, the price being based on BCC's book value of approximately $6.4 million at the preceding fiscal yearend, as required in the 1981 Agreement.⁵ BCC used $1,990,791 in cash and issued a note to Mr. Jennings's estate for $1 million to fund the redemption.

1996 Agreement and Redemption of Decedent's BCC Shares

As a result of Mr. Jennings's death and the subsequent redemption of his shares in September 1996, decedent's 43,080 BCC shares became a controlling interest in the company, constituting 83.2 percent of the outstanding shares. The ESOP held the remaining 8,692 outstanding shares. After Mr. Jennings's death, decedent was the sole member of BCC's board of directors, and decedent and BCC were the only remaining signatories to the 1981 Agreement.

In October 1996, decedent discovered he had cancer. After consulting several doctors, decedent came to understand he was gravely ill, and the available treatment options would only extend his life a short...