Estate of Friedberg v. C.I.R., 060192 FEDTAX, 2015-89

Docket Nº:2015-89.
Opinion Judge:HALPERN, JUDGE:
Party Name:ESTATE OF SIDNEY M. FRIEDBERG, DECEASED, DAVID P. GORDON AND LAURA RACHEL BURROWS, PERSONAL REPRESENTATIVES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Marc P. Blum and Jefrey S. Weingrow, for petitioner. Sandra M. Jefferson, for respondent.
Case Date:June 01, 1992
Court:United States Tax Court

63 T.C.M. (CCH) 3080

ESTATE OF SIDNEY M. FRIEDBERG, DECEASED, DAVID P. GORDON AND LAURA RACHEL BURROWS, PERSONAL REPRESENTATIVES, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 2015-89.

United States Tax Court

June 1, 1992

Decedent owned shares in Fair Lanes, Inc. Certain of those shares were subject to a redemption agreement between decedent and Fair Lanes, Inc. Decedent transferred, within 3 years of death, certain life insurance policies to his daughter, who is named by his will as his personal representative. Decedent's will also provided for a $500,000 payment to decedent's wife, and provided that such bequest might, under certain circumstances, be delayed for up to 5 years. In that event, the bequest was to bear interest according to a formula set forth in decedent's will. On the estate tax return, petitioner estate claimed a deduction, as an administrative expense, for $375,000 in attorney's fees. Decedent's will provided for the establishment of two charitable lead trusts from which charitable contributions would be made.

1. HELD: The value, for estate tax purposes, under sec. 2032, I.R.C., of the shares subject to the redemption agreement is $2,650,362. HELD, FURTHER, the value, for estate tax purposes, under sec. 2032, I.R.C., of the shares not subject to any redemption agreement is $9,193,510.73.

2. HELD, FURTHER, under sec. 2035(a), I.R.C., the ratable portion of the proceeds of the life insurance policies attributable to payments of premiums made by decedent is includable in the gross estate. The entire proceeds are not, by virtue of the transferee's incidental status as decedent's personal representative, includable in the gross estate under secs. 2042(1) and 2035(d)(2), I.R.C.

3. HELD, FURTHER, the fair market value of the bequest to decedent's wife (which qualifies as marital deduction property) is $500,000. Present value analysis is appropriate. See sec. 20.2056(b)-4(a) and (b), Estate Tax Regs. However, respondent has offered no evidence reasonably suggesting that a discount would be appropriate in this case.

4. HELD, FURTHER, petitioner is entitled to deduct the $375,000 in attorney's fees claimed as an administrative expense on the estate tax return.

5. HELD, FURTHER, in determining the funding of certain charitable lead trusts, and the consequent extent of petitioner's charitable contribution deduction, respondent improperly subtracted $1 million for administration expenses that were neither incurred nor paid by petitioner.

Marc P. Blum and Jefrey S. Weingrow, for petitioner.

Sandra M. Jefferson, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, JUDGE:

Respondent determined a deficiency in petitioner's Federal estate tax liability of $1,501,428.02. The issues for decision are: (1) The value, for estate tax purposes, under section 2032, [1] of decedent's 942,471 shares of Fair Lanes, Inc. stock subject to a redemption agreement between decedent and Fair Lanes, Inc.; (2) the value, for estate tax purposes, under section 2032, of decedent's 2,443,458 shares of Fair Lanes, Inc. stock not subject to the redemption agreement; (3) whether this Court has jurisdiction for a claim of equitable recoupment and, if so, whether petitioner estate, under that doctrine, is entitled to an offset against any Federal estate tax due, as a result of an asserted overpayment of fiduciary income taxes; (4) whether section 2042(1) or section 2035, as amended by the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172, requires the inclusion of the entire proceeds of six life insurance policies transferred by decedent, within 3 years of death, to his daughter who also is named by his will as his personal representative; (5) the fair market value of a bequest to decedent's wife of $500,000, which qualifies as marital deduction property, when the will authorized a delay, under certain circumstances, of up to 5 years, in satisfying such bequest; (6) whether petitioner estate is entitled to deduct, as an administrative expense, an attorney's fee in excess of the $230,000 allowed in respondent's notice of deficiency; and (7) whether respondent properly subtracted $1 million from petitioner's probate estate for the purpose of determining the funding of two charitable lead trusts and, consequently, petitioner's charitable contribution deduction.

FINDINGS OF FACT

Some facts have been stipulated and are so found. The stipulation of facts filed by the parties and accompanying exhibits are incorporated by this reference. Petitioner (the Estate) is the estate of Sidney M. Friedberg (decedent). Decedent was a resident of Baltimore, Maryland, when he died on February 9, 1985. Petitioner's personal representatives are David P. Gordon and Laura Rachel Burrows. At the time the petition in the instant case was filed, both of petitioner's personal representatives resided in Baltimore, Maryland.

Our findings of fact are by necessity extensive, due to the numerous valuation reports concerning the estate tax value of certain corporate shares of stock at issue.

I. VALUATION OF THE SHARES

A. FAIR LANES

At the time of decedent's death, Fair Lanes, Inc. (Fair Lanes), a Maryland corporation, was the largest independent operator of bowling centers in the United States, operating 105 centers in 19 States. In addition, Fair Lanes operated a chain of restaurants and owned 47 percent of the publicly traded common stock of BTR Realty, Inc. (BTR), a Maryland-based real estate developer. Until shortly before his death, decedent was chairman of the board of Fair Lanes. At the time of his death, decedent was the largest single shareholder of Fair Lanes common stock. Included in the value of decedent's gross estate were certain shares of Fair Lanes stock that were subject to a redemption agreement (the redemption shares) and certain other shares of Fair Lanes stock that were not subject to any redemption agreement (the nonredemption shares). Of the nonredemption shares, 394,736 had been beneficially owned by decedent (by way of a grantor trust) at the time of his death, while 2,048,722 shares had been owned directly by him at death (the nontrust, nonredemption shares). There were 2,443,458 nonredemption shares in total included in the value of the gross estate. Neither the redemption shares nor the nonredemption shares were " registered" within the meaning of the Securities Act of 1933, ch. 38, tit. I, 48 Stat. 74 (current version at 15 U.S.C. secs. 77a-77aa (1988)). Both the redemption shares and the nonredemption shares constituted " restricted securities" under Rule 144, as promulgated by the Securities & Exchange Commission, 17 C.F.R. sec. 230.144 (1991).

Fair Lanes common stock was traded on the over-the-counter (OTC) market. The mean between the closing high bid and low asked prices, as reported by National Association of Securities Dealers Automated Quotation System, on February 8, 1985 (the day before decedent's death), was $5.875. On August 8, 1985, Fair Lanes stock closed at a bid price of $5.25 and an asked price of $5.50, with a mean of $5.375.

Relevant financial data respecting Fair Lanes (and its subsidiaries) are as follows:

Balance Sheet as of June 30, 1985 (In Thousands of Dollars)
Assets:
Current assets
Cash and short term investments $ 12,119
Notes and accounts receiveable 1,132
Inventories 1,883
Prepaid expenses 1,553
Land held for sale 234
Deferred income taxes 952
Notes and accounts receivable 1,682
Investments 4,602
Property and equipment less accumulated
depreciation and amortization 92,294
Excess cost of business acquired 1,114
Other assets and deferred charges 1,233
Total assets $117,798
Liabilities and Stockholders' Equity:
Current liabilities
Current maturities of long-term debt &
capital lease obligations 2,035
Accounts payable 3,253
Accrued expenses 7,847
notes payable 47,225
Long-term capital lease obligations,
less current maturities 4,580
Deferred credits 5,808
Stockholders' equity
less common stock held in treasury 47,050
Total liabilities $117,798
Year ending June 30
Other Financial Data 1983 1984 1985
Gross revenues $76,053 $84,281 $93,120
Operating profit 16,247 17,895 18,110
Income before extra-
ordinary items 5,926 6,115 6,095
Depreciation/amortization 4,448 5,015 5,984
of property and equip.
Capital expenditures 12,235 18,767 21,033
for property and equip.
Operating Margin 1 21.4% 21.2% 19.4%
B. THE REDEMPTION AGREEMENT On August 22, 1984, Fair Lanes and decedent entered into an agreement for the redemption at death of certain of decedent's shares of Fair Lanes then owned by him. That agreement (the Redemption Agreement) was negotiated at arm's length between decedent and the independent directors on the Fair Lanes Board of Directors (the Board). The terms of the Redemption Agreement required decedent's personal representatives to sell, and Fair Lanes to purchase, 942,471 shares [2] of decedent's Fair Lanes stock at a price equal to 80 percent of the mean value between the closing high bid and low asked prices on the date before decedent's death. That resultant value is $4.70 (which is 80 percent of $5.875) a share. Under the Redemption Agreement, Fair Lanes was permitted to pay for the shares (1) in cash; (2) by issuing a promissory note; or (3) by a combination of the previous two methods. Fair Lanes elected to pay to petitioner $522,665.60 in cash (which payment was made on November 8, 1985) and to give to petitioner a note with a face value of $3,906,948.10 (the...

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