Estate of Magnin v. Commissioner
| Decision Date | 24 January 1996 |
| Docket Number | Docket No. 24883-92. |
| Parties | Estate of Cyril I. Magnin, Deceased, Donald Isaac Magnin, Executor v. Commissioner. |
| Court | U.S. Tax Court |
Donald L. Feurzeig, Derek T. Knudsen, and John M. Youngquist, San Francisco, Calif., for the petitioner. Susan J. Adler and Rebecca T. Hill, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency of $1,921,528 in petitioner's Federal estate tax. By amended answer, respondent has asserted an increase in the deficiency in petitioner's Federal estate tax in the amount of $157,685.
After concessions, the issues for decision are: (1) Whether decedent's 1971 transfers in trust with retained life estates are includable in decedent's gross estate, or whether they are excluded from the estate because they were bona fide sales for adequate and full consideration under section 2036(a);1 and (2) whether the fair market value of certain real property owned by decedent and subject to a lease is $170,000, as determined by petitioner's appraiser, or is $228,000, as determined by respondent in the notice of deficiency.2 For convenience, the facts with respect to the second issue will be set forth with our opinion on that issue.
Some of the facts have been stipulated and are so found. The stipulation of facts, the first, second, and third supplemental stipulations of facts, and the attached exhibits are incorporated herein by this reference.
Petitioner is the Estate of Cyril I. Magnin (Cyril). Cyril was born in San Francisco, California, on July 6, 1899, and died testate on June 8 1988, in San Francisco. Donald Isaac Magnin, decedent's oldest son, is the executor of his estate. Donald Magnin filed a timely Federal estate tax return on behalf of petitioner wherein he elected the alternate valuation date, December 8, 1988. Donald Magnin resided in San Francisco, California, at the time he filed the estate tax return.
Cyril's father, Joseph Magnin (Joseph), was born in London, England, on December 27, 1868. Joseph was the third child of Isaac and Mary Ann Cohen Magnin (Mary Ann), who emigrated from England to San Francisco in 1875. In 1877, Mary Ann established I. Magnin, a fine clothing store for women.
Joseph started working for I. Magnin when he was a teenager. In 1898, he married Charlotte Davis (Charlotte), the head milliner at I. Magnin. This caused family tensions between Joseph and his mother. Mary Ann ran I. Magnin with an iron hand and had a strict rule against family members' fraternizing with employees. Cyril was born the next year on July 6, 1899. During the years 1893 to 1913, Joseph was being passed over by Mary Ann for responsible management positions with I. Magnin in favor of his younger brothers.
Joseph left I. Magnin in 1913 and invested in a store, which was organized as a corporation by the name of "Newman, Magnin & Co." (Newman-Magnin). Similar to I. Magnin, Newman-Magnin specialized in the sale of women's clothing. In 1918, Joseph bought out the other owners, and in 1919, changed the name of the corporation to "Joseph Magnin Co., Inc." (JM). JM has been in continuous existence as a California corporation from 1919 through at least 1988. Starting a rival women's clothing store using the Magnin name caused a rift between Joseph and the rest of his family, which lasted for many years.
Joseph led JM to compete directly in I. Magnin's retail market for the same customers and the same suppliers. Because I. Magnin had all its finest suppliers tied up in exclusive contracts, JM had a difficult time finding suppliers. In the early years of JM, the store thrived on the strength of Charlotte's millinery business, which had followed her from I. Magnin to JM. Until the late 1930's, JM was known in the trade as the second-rate I. Magnin.
Cyril began working for JM as a child, and at the time of World War I, he was involved in management. In 1925, Cyril married Anna Smithline (Anna), and they remained married until Anna's death on July 12, 1948. Cyril and Anna had three children: Donald Isaac Magnin (Donald), born November 17, 1926; Ellen Lois Magnin (Ellen), born April 19, 1928; and Jerry Allen Magnin (Jerry), born July 30, 1938. Cyril's children also began working for JM at early ages.
Anna was a skilled designer and buyer of women's apparel when she and Cyril married, and she became an important designer and chief buyer of JM's women's apparel. Although everyone at JM worked as a team, Anna and Cyril's mother, Charlotte, were the key persons in setting the merchandising pace of the store, and Cyril was more or less the key idea man.
JM did not do well financially during the Great Depression. Joseph started a factoring business, Donner Factors, which advanced money to companies against their accounts receivable. Donner Factors was a successful company and, for a long time, made more money than JM.
Joseph, the president of JM, was very conservative. He and Cyril had differing philosophies as to JM's approach to retailing women's apparel. Joseph insisted on continuing to compete with I. Magnin for upscale, older customers, whereas Cyril wanted to tap the market of younger women. Cyril perceived in the late 1930's that the country was beginning to mobilize as a result of the war and that military personnel were moving West along with their spouses. The younger women moving West were increasingly entering the business world, and they had money to spend and no preconceived ideas of where to buy. These different philosophies led to arguments between Joseph and Cyril. Finally, in 1937, Joseph turned the operation of JM over to Cyril, predicting that he would fail with his "crazy ideas". Joseph remained president of JM but concentrated his efforts on Donner Factors.
In January 1940, Jean Blum, Joseph, and Cyril formed a Nevada corporation by the name of "Specialty Shops, Inc." (Specialty), for the purpose of operating a branch store under the Joseph Magnin name in Reno, Nevada. Mr. Blum, who was a close friend of Joseph's (and eventually of Cyril's), provided the funds to open Specialty's first store in Reno, because JM lacked the capital to do so. Mr. Blum purchased 50 percent of the stock initially issued and lent money to Joseph and Cyril to purchase the remainder. Prior to the creation of Specialty and the opening of its Reno store, JM had opened only one other branch store in Palo Alto, California, in 1928.
In July 1948, Anna died unexpectedly. Joseph and Anna had been very close. She had long been a mediator in the disputes between Cyril and Joseph. Cyril briefly thought of selling JM to I. Magnin, which upset Ellen. Ellen left school at age 20, moved back home, and took over Anna's position as buyer for JM.
In October 1950, Ellen married Walter S. Newman (Walter). Shortly after the wedding, Walter went to work for JM as a financial troubleshooter and was subsequently put in charge of store operations (i.e., all store activities except merchandising). Ellen reduced her day-to-day activities at JM immediately after the wedding.
Donald and Jerry were also active in operating JM. Donald began working full time for JM after his graduation from Stanford in 1949, first as a merchandise bookkeeper and then as a hosiery buyer. Donald entered the Navy during the Korean War in 1952. He returned to JM in about September of 1953. Jerry began working full time for JM after he left the Air Force in 1961.
In 1949, Cyril began dating Lillian Helwig (Lillian), who was the manager of one of the JM stores. Joseph strongly disliked Lillian, as did Cyril's children. They were not pleased when Cyril married Lillian on June 19, 1952.
In 1951, Joseph and Cyril were concerned about the future of the business. Cyril had begun dating women after Anna's death, and Joseph wanted to ensure that the business would remain in the family and that Cyril's shares of stock would not go to one of these women. Cyril, on the other hand, was concerned about control of the business upon Joseph's death. Control of the business was very important to Cyril; he saw control of the business as a means to enhance his social, political, and business position in the community. Cyril also feared that if he had to share control with his children, he might someday be fired by them.
On October 31, 1951, Joseph and Cyril executed a written document, which they labeled an "Agreement", concerning their JM and Specialty stock (the Agreement or the 1951 Agreement). As of October 31, 1951, JM had issued and outstanding 255,174 shares of stock, consisting of 72,717 shares of preferred stock and 182,457 shares of common stock, all of which had voting rights.3 The shareholdings of Joseph and Cyril in JM were as follows:
Joseph Cyril
Common stock ................ 50,648 75,044
Preferred stock ............. 21,464 11,035
______ ______
Total ..................... 72,112 86,079
Thus, Joseph held 28.26 percent of the voting power of JM, and Cyril held 33.73 percent of the voting power; together their shares represented 61.99 percent of the voting power.
As of October 31, 1951, Specialty had issued and outstanding 101,000 shares of stock, consisting of 1,000 shares of voting common stock and 100,000 shares of nonvoting preferred stock. The ownership of Specialty stock as of that date is unclear, but it appears that Mr. Blum owned 500 shares of the common stock and 50,000 shares of the preferred stock, and Cyril and Joseph together owned the remaining 500 shares of common stock and 50,000 shares of preferred stock.
On October 31, 1951, Cyril also held certain options to acquire JM stock. On October 31, 1945, Joseph had granted to Cyril and Anna (as joint tenants with the right of survivorship) an option to purchase 18,158 shares of Joseph's common stock in JM at $1 per share. The option could be...
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