Estate of Frank v. Commissioner
| Decision Date | 28 March 1995 |
| Docket Number | Docket No. 15104-92.,Docket No. 15103-92. |
| Citation | 69 T.C.M. 2255 |
| Parties | Estate of Anthony J. Frank, Sr., Deceased, Anthony Jeffrey Frank, Executor v. Commissioner. Estate of Margaret E. Frank, Deceased, Anthony Jeffrey Frank, Executor v. Commissioner. |
| Court | U.S. Tax Court |
Douglas G. Dye, 1608 Walnut St., Philadelphia, Pa., for the petitioner. Lisa Primavera-Femia,1 for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $274,120 in the estate tax of petitioner Estate of Anthony J. Frank, Sr. (hereafter referred to as petitioner Anthony's estate). Respondent determined a deficiency of $390,461 in the estate tax of petitioner Estate of Margaret E. Frank (hereafter referred to as petitioner Margaret's estate).
The issues for decision are: (1) Whether 91 shares of common stock of Magton, Inc., transferred shortly before decedent Anthony's death are includable in petitioner Anthony's gross estate pursuant to sections 2038(a)(1) and 2035(d)(2).2 We hold that they are not. (2) The second issue is one of valuation and is divided into two subparts: (a) Whether the value of petitioner Anthony's estate's interest in the stock of Magton, Inc., is $6,574 per share as determined by respondent. We hold that the per-share value is $5,528. (b) Whether the value of petitioner Margaret's estate's interest in the stock of Magton, Inc., is $5,976 per share as determined by respondent. We hold that the per-share value is $5,528.
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. At the time the petitions herein were filed, executor Anthony J. Frank resided in Ocean City, New Jersey.
Decedents Anthony and Margaret were husband and wife. Anthony died on October 26, 1988; Margaret died on November 10, 1988. At the time of their deaths decedents owned shares in Magton, Inc. (Magton).
Magton is a closely held New Jersey corporation incorporated in 1964. Magton was authorized to issue 1,000 shares of common stock, par value $100 per share. As of June 1, 1988, a total of 501 shares of Magton common stock was issued and outstanding. The shares were owned as follows:
Anthony J. Frank, Sr. ..................... 252 shares
Margaret E. Frank ......................... 68 shares
Anthony J. Frank (decedent's son
hereafter referred to as Anthony Jr.) ... 80 shares
David E. Frank (decedents' son) ........... 80 shares
Margaret F. Frank (decedents'
daughter) ............................... 21 shares
Magton was a family-run business. Decedent Anthony was the president of Magton. He made all of the most important decisions and directed corporate policy. Decedent Margaret was the secretary of Magton. She had minimal involvement in running the business. Their daughter Margaret, prior to her death, was the executive housekeeper. Anthony Jr. handled the day-to-day operations as the general manager and vice president. David was also a vice president and corporate controller. In addition, Anthony Jr.'s and David's wives worked in the business.
At the time of decedents' deaths, among the assets of Magton were three motels: The Beach Club (formerly named the Sting Ray), the Impala, and the Tahiti. All three motels were located in Ocean City, New Jersey, a family-oriented seashore resort. The three motels were appraised by Carroll-McIlhinney, Inc. (real estate appraisers and consultants), as follows:
3/20/84 2/13/86 11/10/88
Beach Club $3,500,000 $4,000,000 $4,400,000
Tahiti Motel 1,350,000 1,500,000 1,800,000
Impala Motel 3,000,000 3,400,000 3,150,000
The Impala is located near the ocean; it consists of 109 units, a 110-seat restaurant, and two swimming pools. The Tahiti is closer to the ocean than the Impala. It consists of 54 units, a 64-seat restaurant, and a swimming pool. The Tahiti was sold by Magton to an unrelated party in an arm's-length sale on April 10, 1989, for $2,100,000. The Beach Club consists of 82 units, a 76-seat restaurant, and a swimming pool. Between October 1987 and May 1988, renovations costing approximately $1 million were made to the Beach Club. At or about the dates of death, the aggregate number of rooms of the motels owned by Magton was 15-20 percent of the total rooms in Ocean City.
In 1986, Magton sold an undeveloped parcel of land which adjoined the Impala to PDT Enterprises (PDT), a corporation owned by the children and decedent Anthony. PDT developed a 28-unit condominium development on that parcel, the Wild Dunes. All but one of the condominium owners rent their units to vacationers. Magton had leasing, housekeeping, and maintenance contracts with these owners. Pursuant to the leasing contracts, Magton acted as rental agent for the condominium owners. The contracts were for terms of 1 year. Since 1986, Magton has entered into these contracts and has generated revenue from such contracts.
The shares of common stock of Magton were valued on the Federal estate tax returns for Anthony's and Margaret's estates at $5,000 per share. The valuation was based upon a buy and sell agreement dated July 20, 1983, entered into by the Magton shareholders.
Decedent Anthony created a revocable trust dated June 1, 1988, appointing decedent Margaret and himself as trustees. Relevant terms of the trust agreement follow. The beneficiaries of the trust were decedent Anthony's wife (i.e., decedent Margaret), his children, and his grandchildren. Distributions from the trust could be effected in one of two ways: (1) Upon written request of decedent Anthony; or (2) at the trustees discretion for the welfare, comfort, or support of decedent Anthony or any of his dependents. Decedent Anthony as grantor, alone, retained the power to alter, amend, or revoke all or any part of the trust.
On July 1, 1988, decedent Anthony created a power of attorney appointing his son, Anthony J. Frank, as attorney in fact to, inter alia, "withdraw and receive the income or corpus of a trust" for decedent Anthony's benefit. Further, the power of attorney granted decedent Anthony's attorney in fact the power "to make gifts, without consideration in any amount to anyone, including my attorney, outright or in trust."
On October 24, 1988, Anthony Jr., acting on his father's behalf pursuant to the power of attorney, withdrew 91 shares of Magton stock from the revocable trust, which were placed in his father's name, as evidenced by share certificate No. 21. Those shares were then transferred to decedent Margaret, as reflected in share certificate No. 22, issued to her on the same date.
Decedent Anthony died on October 26, 1988. The executor filed Form 706, United States Estate Tax Return, including 161 shares of Magton in decedent Anthony's gross estate. The executor did not include the stock transfer from the revocable trust as part of Schedule G, which requests a listing of transfers made within 3 years of death.
Decedent Margaret died on November 10, 1988. The executor filed Form 706, including 159 shares of Magton in decedent Margaret's gross estate. The 159 shares include the 91 shares transferred from decedent Anthony through his attorney in fact.
In the statutory notices of deficiency respondent determined deficiencies in petitioners' Federal estate tax. The greater part of the deficiencies, and the only parts here in issue, result from respondent's determination that shares of corporate stock were undervalued on petitioners' Federal estate tax returns, and that the amount of such shares includable in petitioner Anthony's estate was understated. Furthermore, respondent disallowed petitioners' claim for refund of estate tax attributable to the payment of additional State death taxes. However, this item was subsequently conceded by respondent upon substantiation by petitioners.
OpinionIssue 1. Transfer of the 91 Shares
Respondent contends that the transfer of the 91 shares of Magton from the revocable trust to decedent Margaret constitutes a relinquishment by decedent Anthony, through his attorney in fact, of his power to alter, amend, or revoke the trust with respect to those shares and, therefore, the shares are includable in petitioner Anthony's estate. Petitioner Anthony's estate argues that the transfer was a gift made by Anthony, through his attorney in fact, to his wife decedent Margaret and not a transfer from the trust. Petitioner Anthony's estate maintains that Anthony did not relinquish a power over the trust, but rather exercised a power to withdraw the shares from the trust and then made a gift of them to decedent Margaret. Therefore, it is contended that the shares are not includable in petitioner Anthony's estate.
The Federal estate tax imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Sec. 2001; U.S. Trust Co. v. Helvering [39-1 USTC ¶ 9466], 307 U.S. 57, 60 (1939). The taxable estate is defined as the decedent's gross estate, less specified deductions. Sec. 2051. Pursuant to sections 2031 and 2033, the value of the gross estate includes the value of all property to the extent of the interest therein of the decedent at the time of his death. Further, the gross estate also may include property in which the decedent did not have an interest at the time of his or her death. Estate of Levin v. Commissioner [Dec. 44,706], 90 T.C. 723, 727 (1988), affd. without published opinion 891 F.2d 281 (3d Cir. 1989); sec. 20.0-2(b)(2), Estate Tax Regs. Sections 2035 through 2038 address interests in property transferred by the decedent during his lifetime under such circumstances as to bring the interests within the decedent's gross estate. Sec. 20.2031-1(a)(2), Estate Tax Regs. The provisions on which respondent relies in the case at bar are sections 2035(a) and 2038(a)(1).
Section 2035(a) generally provides for the inclusion in...
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