Estate of DiSanto v. Commissioner
| Decision Date | 27 December 1999 |
| Docket Number | Docket No. 21951-97.,Docket No. 10344-97. |
| Citation | 78 T.C.M. 1220 |
| Parties | Estate of Frank M. DiSanto, Deceased, Roxanne DiSanto Tinnell, Byrnadette DiSanto, and Frank DiSanto, CoExecutors v. Commissioner. Estate of Grace J. DiSanto, Deceased, Roxanne DiSanto Tinnell, Byrnadette M. DiSanto, and Frank R. DiSanto, CoExecutors v. Commissioner. |
| Court | U.S. Tax Court |
Respondent determined deficiencies in estate tax of $4,362,142 for the Estate of Frank M. DiSanto (Mr. DiSanto), and $3,791,104 for the Estate of Grace J. DiSanto (Mrs. DiSanto).
Mr. DiSanto owned a controlling block of 186,177 shares (53.5 percent) of the stock in Morganton Dyeing & Finishing Corp. (MD&F) when he died on November 26, 1992. Under his will, Mr. DiSanto left the residue of his estate to a trust for the benefit of Mrs. DiSanto and their children. In May 1993, Mrs. DiSanto disclaimed part of her interest in Mr. DiSanto's estate which resulted in her being entitled to receive only a minority block of MD&F stock. She died on June 4, 1993, before administration of Mr. DiSanto's estate was completed.
After concessions, the issues for decision are:
1. Whether the fair market value of a block of 186,177 shares of MD&F stock on November 26, 1992, was $5,585,310 ($30 per share) as respondent contends; $2,263,912 ($12.16 per share) as petitioners contend; or some other amount. We hold that it was $4,375,160 ($23.50 per share).
2. Whether the fair market value of the MD&F stock Mrs. DiSanto was entitled to inherit from Mr. DiSanto's estate on June 4, 1993, was $1,705,522 ($14 per share) as respondent contends; $270,311 ($2.22 per share) as petitioners contend; or some other amount. We hold that it was $1,583,699 ($13 per share).
3. Whether Mr. DiSanto's estate may compute the marital deduction based on the value of the stock (a controlling interest) he willed to Mrs. DiSanto, as petitioners contend, or based on the value of the shares she was entitled to receive after she executed the disclaimer (a minority interest), as respondent contends. We hold that it must compute the marital deduction based on the value of the shares Mrs. DiSanto was entitled to receive after she executed the disclaimer.
4. Whether checks written on Mrs. DiSanto's bank account that the bank had not paid before she died were completed gifts when she died. We hold that they were not and that those amounts are included in her estate.
Unless otherwise indicated, section references are to the Internal Revenue Code in effect when the decedents died. Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found.
Mr. and Mrs. DiSanto lived in Morganton, North Carolina. Mr. DiSanto died on November 26, 1992. Mrs. DiSanto had cancer and was in very poor health when Mr. DiSanto died. Mrs. DiSanto died at 4:30 a.m. on Friday, June 4, 1993, before administration of Mr. DiSanto's estate had been completed. Mr. DiSanto's estate did not transfer any MD&F stock to Mrs. DiSanto before she died.
Roxanne DiSanto Tinnell, Byrnadette DiSanto, and Frank R. DiSanto are the children of Mr. and Mrs. DiSanto and coexecutors of their parents' estates. Roxanne DiSanto Tinnell and Byrnadette DiSanto lived in Los Angeles, California, when their parents died.2 Alfred (Fred) DiSanto is Mr. DiSanto's younger brother.
Mr. DiSanto and Fred DiSanto founded Morganton Dyeing & Finishing Corp. (MD&F)(formerly known as Bondsville Dyeing & Finishing Corp.), in 1954 in Bondsville, Massachusetts. In 1961, they moved MD&F to Morganton, North Carolina.
MD&F dyed and finished fabric for clothing. It performed services on commission. MD&F sent the finished fabric to a manufacturer which sewed it into garments.
Rocco DiSanto, Fred DiSanto's son, left his dentistry practice and began to work for MD&F in the late 1980's. Rocco DiSanto has undergraduate degrees from Duke University in electrical engineering, mechanical engineering, and biomedical engineering.
Fred DiSanto's and Mr. DiSanto's nephew, Jason Yates, worked for MD&F after he graduated from business school at the University of Tennessee. He worked for MD&F's financial officer, H.L. (Bo) Browning. By 1990, he had become a member of MD&F's management.
On November 26, 1992, the ownership of MD&F's stock was as follows:
Number of shares Percentage
Shareholder Outstanding of total
Frank M. DiSanto ................................. 186,177 53.50
Alfred R. DiSanto ................................ 86,752 24.93
Gloria Yates ..................................... 13,605 3.91
Byrnadette DiSanto ............................... 12,102 3.48
Roxanne DiSanto .................................. 12,102 3.48
Frank R. DiSanto ................................. 12,102 3.48
Robert E. Papuga ................................. 8,700 2.50
Rocco DiSanto .................................... 5,484 1.58
Donna Gooch ...................................... 5,484 1.58
Andrea DiSanto ................................... 5,484 1.58
Total .......................................... 347,992 100
On November 26, 1992, the officers of MD&F were: Mr. DiSanto, president and chief executive officer; Fred DiSanto, vice president; H.L. Browning, secretary-treasurer; Robert E. Papuga, vice president and plant manager; and Rocco DiSanto, assistant secretary-treasurer.
MD&'s net income and losses from 1988 to 1993 were as follows:
Year Year ending Net income or (loss)
1988 ....................................... 3/26 $ 106,054
1989 ....................................... 4/1 789,455
1990 ....................................... 3/31 1,042,548
1991 ....................................... 3/30 1,646,3841
1992 ....................................... 12/26 1,185,2162
1993 ....................................... 12/25 (585,775)
1 In 1991, MD&F switched from a fiscal year ending Mar. 30 to Dec. 26. MD&F's net income for the 9
months ending Dec. 31, 1991, was $1,362,684
2 Of MD&F's $1,185,216 net income for 1992, $790,012 was from a life insurance policy on Mr
DiSanto's life
In 1991 and earlier years, MD&F had net profit margins of 8 to 10 percent. After 1991, MD&F's net profit margins were less than 5 percent. Some of MD&F's customers were in financial trouble in the late 1980's and in 1991 and 1992, in part because of foreign competition.
Water is one of MD&F's primary raw materials. MD&F and the City of Morganton had disputes over water rates since the 1960's. In the early 1990's, the City of Morganton proposed doubling MD&F's water rates, which would have increased MD&F's water expenses by about $750,000 per year. The proposed increase would have been almost twice MD&F's operating income for 1992.
Before Mr. and Mrs. DiSanto died, MD&F had sued one of its customers, Leadertex, for nonpayment of $300,000. Leadertex then sued MD&F for damages of more than $2 million for improperly processing fabric. The parties settled the lawsuit, apparently after Mr. and Mrs. DiSanto died. In the settlement, MD&F agreed to pay an amount not stated in the record to press the fabric at issue and to waive the right to receive the $300,000 payment.
When he died, in addition to owning 186,177 shares of MD&F stock, Mr. DiSanto also had other probate assets worth $201,395.
In his will, Mr. DiSanto directed that the residue of his estate go to a trust for the benefit of his wife and children (Trust B). In his will, he directed that the residue include only assets that qualify for the marital deduction or proceeds from the sale of those assets, and that any unified credit be used against the estate tax. Mr. DiSanto's will gave discretion to his executor to sell or dispose of any property in his estate.
On May 14, 1993, Mrs. DiSanto disclaimed her right to inherit from her husband $1,325,000 worth of his MD&F stock based on per share values "as finally determined on the Federal estate tax return". She also disclaimed her right to withdraw the greater of 5 percent of the value or $5,000 from Trust B. As a result of the disclaimer, the only asset in the residuary of Mr. DiSanto's estate that Mrs. DiSanto could inherit was a minority interest in MD&F stock.
The following checks were written on Mrs. DiSanto's Wachovia Bank & Trust account before she died:
Check no. Date of check Date paid Amount Payee
792 ................... May 13, 1993 June 4 $ 2,500 Jon McCallum
796 ................... May 24, 1993 June 4 1,500 Cash
851 ................... June 2, 1993 June 4 10,000 Mary Heitman
852 ................... June 2, 1993 June 4 10,000 Lisa Melchioni
853 ................... June 2, 1993 June 4 10,000 Lewis Dorman, III
854 ................... June 2, 1993 June 4 10,000 Lewis Dorman, IV
855 ................... June 2, 1993 June 4 10,000 Eleanor Dorman
856 ................... June 2, 1993 June 4 2,500 Jean Sain
860 ................... June 3, 1993 June 11 2,500 Cash
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