Estate of Christian v. C.I.R., 081089 FEDTAX, 7369-76

Docket Nº:7369-76, 7370-76, 7371-76, 7372-76, 7373-76, 7374-76, 7375-76, 11092-76, 11093-76, 3740-77, 3892-77.
Opinion Judge:HAMBLEN, JUDGE:
Party Name:ESTATE OF ELIZABETH CHRISTIAN, DECEASED, LINDA A. STEELE AND CATHERINE J. RODINO, CO-EXECUTRIXES, ET AL.,[1] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Joe C. Emerson and Theodore J. Esping, for the petitioners. Brett James Miller, for the respondent.
Case Date:August 10, 1989
Court:United States Tax Court
 
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57 T.C.M. (CCH) 1231

ESTATE OF ELIZABETH CHRISTIAN, DECEASED, LINDA A. STEELE AND CATHERINE J. RODINO, CO-EXECUTRIXES, ET AL.,[1] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 7369-76, 7370-76, 7371-76, 7372-76, 7373-76, 7374-76, 7375-76, 11092-76, 11093-76, 3740-77, 3892-77.

United States Tax Court

August 10, 1989

         Joe C. Emerson and Theodore J. Esping, for the petitioners.

         Brett James Miller, for the respondent.

          MEMORANDUM FINDINGS OF FACT AND OPINION

          HAMBLEN, JUDGE:

         Respondent determined deficiencies in petitioners' Federal income taxes, and also determined that petitioners are liable as transferees, as follows:

Docket Taxable Deficiency/
Petitioner(s) No. Year Liability
Elizabeth Christian2 7369-76 12/31/73 $ 1,415
Estate of F. Thomas Christian, Deceased, Linda A. Steele and Catherine J. Rodino, Co-Executrixes and June L. Christian, Transferees of F.& C. Enterprises, Inc. 7370-76 2/28/73 $ 9,686
Estate of F. Thomas Christian, Decease, Linda A. Steele, and Catherine Rodino, Co-Executrixes and June L.Christian 7371-76 12/31/73 $67,628
Estate of F. Thomas Christian, Deceased, Linda A. Steele and Catherine Rodino, Co-Executrixes and June L. Christian, Transferees of L.& J. Corporation 7372-76 2/28/73 $12,710
Harry Fein and Lillian Fein 7373-76 12/31/73 $ 8,303
Harry Fein and Lillian Fein Transferees of L.& J. Corporation 7374-76 2/28/73 $12,710
Harry Fein and Lillian Fein Transferees of F.& C. Enterprises 7375-76 2/28/73 $ 9,686
Harry Fein, Transferee of F.& C. Enterprises 11092-76 2/28/73 $ 9,686
Estate of F. Thomas Christian, Deceased, Linda A. Steele and Catherine Rodin, Co-Executrixes, Transferees of F. & C. Enterprises 11093-76 2/28/73 $12,710
Harry Fein, Transferee of L. & J. Corporation 3740-77 2/28/73 $12,710
Estate of F. Thomas Christian, Deceased, Linda A. Steele and Catherine Rodino, Co-Executrixes, Transferee of L.& J. Corporation 3892-77 2/28/73 $ 9,686
         After concessions, [3] the sole issue for decision is whether the exchange of stock of corporations owned by Harry Fein, Fred Thomas Christian, and Elizabeth Christian (hereinafter collectively referred to as ‘ petitioners ‘ ) for stock of McDonald's Corporation (‘ McDonald's‘ ) qualifies as a tax-free reorganization under section 368.          FINDINGS OF FACT          Some of the facts of this case have been stipulated and are found accordingly. The stipulation of facts, first supplemental stipulation of facts, second supplemental stipulation of facts, and exhibits are incorporated herein by this reference.          On the date of filing her petition in this case, Elizabeth Christian, whose estate is a petitioner in these consolidated cases, resided in Elkhart, Indiana. Elizabeth Christian filed a U.S. Individual Income Tax Return, Form 1040, for the calendar year 1973, with the Internal Revenue Service Center at Memphis, Tennessee. Elizabeth Christian was the mother of Fred Thomas Christian.          On the date of filing their petitions in their respective cases, Fred Thomas Christian, whose estate is a petitioner in these consolidated cases, and June L. Christian, respectively, resided in South Bend, Indiana and Elkhart, Indiana. Fred Christian and June Christian filed a joint U.S. Individual Income Tax Return, Form 1040, for the calendar year 1973 with the Internal Revenue Service Center at Memphis, Tennessee.          On the date of filing their petitions in their respective cases, Harry Fein and Lillian Fein resided in South Send, Indiana. Harry Fein and Lillian Fein filed a joint U.S. Individual Income Tax Return, Form 1040, for the calendar year 1973 with the Internal Revenue Service Center at Memphis, Tennessee.          In the late 1950's, Harry Fein (‘ Fein‘ ) and Fred Christian (‘ Christian ‘ ) separately opened McDonald's restaurants in northern Indiana under franchise agreements with McDonald's. Fein's first restaurant was located in Mishawaka, Indiana, and Christian's was located in Elkhart, Indiana. McDonald's, based in Oak Brook, Illinois, is a franchisor and owner of fast food restaurants located throughout the United States and in many foreign countries.          In the early 1960's, Fein and Christian combined their businesses and operations. Throughout the 1960's and early 1970's, the combined Fein and Christian businesses prospered and expanded. As of late 1972, the Fein and Christian businesses included nine franchised McDonald's restaurants in northern Indiana and southern Michigan. Eight of the restaurants were located in the South Bend metropolitan area; one was located in Niles, Michigan.          Fein and Christian owned and operated their McDonald's restaurants through three closely-held corporations (the ‘ Fein- Christian Companies‘ ). Those corporations were F. and C. Enterprises, Inc., L. and J. Corporation, and Fein and Christian Enterprises, Inc. The Fein-Christian Companies each held stock in subsidiary companies, each of which in turn controlled and operated franchised McDonald's restaurants. Fein and Christian each owned 500 shares of stock in F. and C. Enterprises, Inc. and L. and J. Corporation. Fein, Christian, and Elizabeth Christian respectively owned 500 shares, 375 shares and 125 shares of stock in Fein and Christian Enterprise, Inc. Elizabeth Christian had no active involvement in the operations or management of the Fein-Christian Companies.          The relationship between McDonald's and the principals of the Fein-Christian Companies was at all times positive. Gerald Newman (‘ Newman‘ ), who was McDonald's Vice-President and Controller and who had significant responsibility for franchisee restaurant acquisitions, had a high regard for Christian.          In the late 1960's and early 1970's, McDonald's pursued a program of acquiring McDonald's restaurants from its franchisees. Some of the acquisitions were for cash, but others were for McDonald's common stock. [4] McDonald's completed numerous such restaurant acquisitions during that period.          In the latter part of 1972, executives of McDonald's and the principals of the Fein-Christian Companies began discussions about the potential acquisition by McDonald's of the Fein-Christian Companies. By letter dated December 1, 1972, McDonald's formally offered to acquire the Fein-Christian Companies. The proffered purchase price was payable in unregistered shares of McDonald's common stock and equalled:
A. $3,500,000
B. Plus
(i) Cash,
(ii) Leasehold security deposits,
(iii) Inventory,
(iv) Receivables, and
(v) Real Estate at appraisal value,
Less the total liabilities of the Fein-Christian Companies and liabilities related to the other assets being acquired.
         The offer provided that ‘ You will be required to furnish investment representations with regard to your acquisition of said stock, and all stock certificates will bear appropriate restrictive legends.‘ Fein and Christian were also offered the right to participate by way of ‘ piggyback‘ rights in such public offerings as McDonald's might conduct during a negotiated period of time. The amount of stock subject to such sale was also to be negotiated. McDonald's offering letter further noted that ‘ The transaction must be treated as a pooling of interests for McDonald's and may be structured either as a taxable or tax free exchange for you.‘          On December 1 and 20, 1972, petitioners' representatives Frederick Baer (‘ Baer ‘ ), an attorney, and Daniel Chiddister, a certified public accountant, met with representatives of McDonald's to discuss the proposed acquisition. McDonald's representatives at one or both of these meetings included Paul Duncan (‘ Duncan ‘ ), an attorney in McDonald's legal department, and Newman. The negotiations focused on price and other negotiable terms of the acquisition and on the preparation of the necessary voluminous documentation.          Baer, an experienced attorney whose practice was concentrated in corporate and business matters, was the principal representative of the Fein-Christian Companies in the negotiations and documentation preparation. Fein and Christian had complete confidence in Baer and relied upon him for negotiating all but the most basic terms and conditions of the merger. Fein and Christian themselves had little involvement in the negotiations.          The representatives of the Fein-Christian Companies and McDonald's reached agreement as to price following a meeting held December 22, 1972. Baer had sought a purchase price of $4,620,000. The finally agreed-to purchase price, payable in shares of unregistered, restricted McDonald's common stock, was $4,012,000 plus an amount equal to the following items as set forth in the audited combined balance sheet of the Fein-Christian Companies as of January 31, 1973:          A. All leasehold security deposits,          B. Inventory of food and paper,          C. Cash on hand and on deposit in banks,          D. Accounts receivable, and          E. Interpolated cash surrender value of life insurance policies,          F. Minus total liabilities of the Fein-Christian Companies as set forth in the closing balance sheet.          In mid to late February of 1973, the parties to the merger executed an Agreement and Plan of Merger, an Agreement of Merger, and other related documents. With the execution of the Agreement of Merger on February 28, 1973, the three Fein-Christian Companies were merged into McDonald's effective February 28, 1973. McDonald's utilized the ‘ pooling of interests‘ method to account for the business combination...

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