Estate of Friedberg v. Commissioner
| Decision Date | 01 June 1992 |
| Docket Number | Docket No. 2015-89. |
| Citation | 63 T.C.M. 3080 |
| Parties | Estate of Sidney M. Friedberg, Deceased, David P. Gordon and Laura Rachel Burrows, Personal Representatives v. Commissioner. |
| Court | U.S. Tax Court |
Marc P. Blum, J. Ronald Shiff and Jefrey S. Weingrow, 233 E. Redwood St., Baltimore, Md., for the petitioner. Sandra M. Jefferson, for the respondent.
Memorandum Findings of Fact and Opinion
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.
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 (). 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 receivable .................................................. 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 ............ 91,294
Excess cost of business acquired ................................................. 1,114
Other assets and deferred charges ................................................ 1,233
Total assets .................................................................... $117,798
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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
Long-term debt, less current maturities 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
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Year ending June 30
Other Financial Date 1983 1984 1985
Gross revenues ................................................. $76,053 $84,281 $93,120
Operating profit ............................................... 16,247 17,895 18,110
Income before extraordinary items .............................. 5,926 6,115 6,095
Depreciation/amortization of property and equip ................ 4,448 5,015 5,984
Capital expenditures for property and equip .................... 12,235 18,767 21,033
Operating Margin1 .............................................. 21.4% 21.2% 19.4%
1 These are our calculations, which differ from those of
one of petitioner's experts
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 shares2 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 Note).
According to the Redemption Agreement, decedent was willing to sell the stock in order to provide his estate with sufficient liquidity to pay estate taxes and Fair Lanes was willing to purchase the shares: (1) Because such shares could be obtained at a discount and (2) in order to maintain stability in the market price of Fair Lanes' stock, by avoiding the introduction of decedent's significant block of shares into the public market.
The Redemption Agreement contained several provisions to ensure that the redemption of decedent's shares would not result in an undue financial burden on Fair Lanes. Those provisions include: (1) A dollar limit on the number of shares Fair Lanes would be required to purchase at the agreed per share price (total cost to Fair Lanes not to exceed $5 million plus 10 percent of Fair Lanes' net worth in excess...
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