Estate of Maxcy v. C.I.R., 073169 FEDTAX, 376-65

Docket Nº:376-65, 5869-67.
Opinion Judge:FORRESTER, Judge.
Party Name:ESTATE OF GREGG MAXCY, JESSIE L. MAXCY and REVEREND GEORGE C. STULTING, Co-Administrators, petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent ESTATE OF HUGH G. MAXCY, JESSIE L. MAXCY and REVEREND GEORGE C. STULTING,Co-Executors, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Robert O. Rogers, for the petitioners. Marshall H. Barkin, for the respondent.
Case Date:July 31, 1969
Court:United States Tax Court
 
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28 T.C.M. (CCH) 783 (1969)

T.C. Memo. 1969-158

ESTATE OF GREGG MAXCY, JESSIE L. MAXCY and REVEREND GEORGE C. STULTING, Co-Administrators, petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

ESTATE OF HUGH G. MAXCY, JESSIE L. MAXCY and REVEREND GEORGE C. STULTING,Co-Executors, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 376-65, 5869-67.

United States Tax Court.

July 31, 1969

Robert O. Rogers, for the petitioners.

Marshall H. Barkin, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

FORRESTER, Judge.

In these consolidated cases, respondent has determined deficiencies in petitioners' estate taxes as follows:

Docket No. Name Deficiency

376-65 Estate of Gregg Maxcy, Jessie L. Maxcy and Reverend $385,696.05

George C. Stulting, Co-Administrators

5869-67 Estate of Hugh G. Maxcy, Jessie L. Maxcy and Reverend 68,109.22

George C. Stulting, Co-Executors

Concessions having been made by both parties, the only issues remaining for decision are:

1. The number of Maxcy Securities, Inc. shares owned by Gregg Maxcy (hereinafter sometimes referred to as Gregg) and Hugh Maxcy (hereinafter sometimes referred to as Hugh) at the times of their deaths (the parties agree that our decision in regard to Gregg's ownership will determine Hugh's ownership); 2. The fair market value of Gregg Maxcy's and Hugh Maxcy's Maxcy Securities shares on the valuation dates of their respective estates; 3. The amount of life insurance proceeds which qualify for the marital deduction from Gregg's gross estate.

FINDINGS OF FACT Some of the facts are stipulated and they are so found. Those facts relevant to an understanding of the issues remaining in dispute are set forth below. Petitioner, Estate of Gregg Maxcy, Jessie L. Maxcy and Reverend George C. Stulting, Co-Administrators, had its principal office in Sebring, Florida at the time its petition in the instant case was filed. Gregg Maxcy died on August 10, 1960, and his United States Estate Tax Return, electing valuation of his estate at the alternate valuation date of August 10, 1961, was filed with the district director of internal revenue, Jacksonville, Florida. Petitioner, Estate of Hugh G. Maxcy, Jessie L. Maxcy and Reverend George C. Stulting, Co-Executors, had its principal residence in Sebring, Florida at the time its petition in the instant case was filed. Hugh Maxcy, Gregg's son, died on May 24, 1963, and his United States Estate Tax Return, valuing his gross estate as of the date of his death, was filed with the district director of internal revenue at Jacksonville, Florida. At the date of trial Gregg's wife, Jessie Maxcy (hereinafter sometimes referred to as Jessie), had title to all assets in Gregg's and Hugh's estates remaining at Hugh's death. Gregg died intestate and under Florida law Jessie was entitled to one-half of his assets subject to probate and Hugh was entitled to the other half. Hugh died testate[1] and under his will Jessie received all of his assets. Hugh's wife, Lafaye Maxcy, was granted a dower interest under section 731.34 of the Florida statutes, but her interest was subsequently purchased by Jessie. At the times of their deaths, both Gregg and Hugh owned stock in Maxcy Securities, Inc., a Florida corporation. The corporation was organized on July 14, 1933, with a total authorized capital stock of 250 shares having no nominal or stated value. In August, 1933 the corporation's secretary, Charlotte Varena, issued stock certificates to the subscribing shareholders in Maxcy; Certificate No. 1 for three shares of Maxcy Securities, Inc. stock was issued to Gregg, Certificate No. 3 for one share to Gregg's wife, Jessie, and Certificate No. 2 for one share to herself. Varena recorded the issuance of the shares in the corporation's stock record book the only record of the corporation's outstanding shares. At a special meeting of the newly formed corporation, held August 1, 1933, the corporation authorized an additional 245 shares of Maxcy stock to be issued to Gregg in return for various assets. Varena then issued Certificate No. 4 for 245 Maxcy shares in October, 1933 to Gregg, recorded its issuance in the corporation's stock record book, but dated the date of issuance back to August 1, 1933. Sometime thereafter, in either 1933 or 1934, Gregg endorsed Certificate No. 4 and turned it over to Varena, stating that he wished to transfer the 245 shares into three certificates calling for 80 shares to Hugh, 79 to Jessie, 82 shares to himself, and 4 shares to Varena. Varena then issued Certificates Nos. 5, 6, 7 and 8, respectively, in the above names and recorded the issuance in the corporation's stock record book as a transfer of the 245 shares dated August 15, 1933. At the time, Gregg told Jessie that he was making a gift of 80 shares of Maxcy stock to Hugh and 79 shares to her. When the transfer of the 245 Maxcy shares was completed, Varena considered Certificate No. 4 canceled, though she made no marks on the certificate indicating that it was canceled. In 1949 Gregg and the corporation's accountants, Thomas and J. P. Cochran, had a conference in regard to Maxcy's capitalization. At that conference Gregg either stated or affirmed that he was the owner of 82 out of 245 outstanding Maxcy shares. Based on those figures Thomas Cochran recommended that the corporation's authorized capital stock be increased to 500 shares and that stock be issued in exchange for the corporation's liabilities to the then current shareholders. Pursuant to his suggestion Maxcy Securities' certificate of incorporation was amended on October 8, 1949, to increase its authorized capital stock to 500 shares. No stock, however, was subsequently issued in satisfaction of those liabilities. In 1951 Hugh surrendered to Varena Certificate No. 5 representing 80 shares in satisfaction of certain debts which he owed to the corporation. The certificate was endorsed by Hugh and when he turned the certificate over to Varena she considered it canceled. In 1953 Varena issued Certificate No. 9 for four shares of Maxcy Securities to Hugh and recorded the issuance in the corporation's stock record book. The record is silent as to the reason for this transaction. At the time certificates were issued, Florida law required the purchase of documentary stamps and Varena purchased stamps for all certificates issued, though not all were placed in the corporation's stock record book. At the time of Gregg's death, all certificates (with the exception of No. 9 which had been pledged as security with a bank) in the names of Gregg, Hugh and Jessie were in Maxcy Securities' vault. Included were canceled Certificates Nos. 4 and 5. The only individuals having access to the vault were Gregg, Hugh and Varena. Jessie did not know the combination to the vault and had never had any Maxcy certificates in her possession. At the date of Gregg's death there were 174 shares of Maxcy Securities outstanding, consisting of Certificates Nos. 1, 2, 3, 6, 7, 8 and 9. However, due to lapse of memory, inefficiency, carelessness, or confusion (on the part of Maxcy's officers, its attorneys and accountants, and internal revenue service agents), inconsistent amounts of outstanding Maxcy shares or their ownership were reported on various documents. Maxcy Securities' minutes prepared by Varena for August 31, 1940, subsequent to the transfer of 80 Maxcy Securities shares to Hugh, stated the following:

The following Directors and Officers, constituting all of the Stockholders were present: Gregg Maxcy, J. L. Maxcy, and C. M. Varena.

Similar statements appeared in the minutes for January 14, 1939, and January 12, 1940, also prepared by Varena. The statements were in error, as Hugh was a shareholder but not a director. The minutes for September 15, 1941 and thereafter show that Hugh was elected as a member of the board of directors and was a shareholder of Maxcy Securities. After Gregg's death, the attorney for his estate, M. L. Esarey (hereinafter sometimes referred to as Esarey), obtained all of the stock certificates in Gregg Maxcy's name from Varena. Included was the certificate for 245 Maxcy Securities shares which had been turned into the corporation by Gregg. Though the certificate had been endorsed by Gregg, Esarey did not examine the corporation's stock record book and consequently she was unaware that the certificate no longer represented outstanding Maxcy Securities shares. When she prepared the inventory of assets for probate, she reported Gregg as owning 330 Maxcy Securities shares. Varena, as administrator, signed the report. The inventory was subsequently used as the basis for Hugh's inventory, Jessie's purchase of LaFaye Maxcy's dower interest, and certain Maxcy Securities' minutes which were prepared by Esarey. Though Esarey subsequently became aware that Gregg might not have owned as many as 330 Maxcy shares, she did not paise the issue in subsequent proceedings due to pending family disputes and the possibility of litigation. For the years 1934 through 1967, Maxcy Securities filed documents titled ‘ Corporate Report and Tax Return for Foreign and Domestic Corporations' with the Secretary of State of the State of Florida. On those returns a question was asked pertaining to the number of shares of the corporation's outstanding stock. The following shows the number of shares which Maxcy reported during those years:

No. of Shares

Year Outstanding

1934 250

1935 250

1936 250

1937 250

1938 250

1939 250

...

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