Estate of Mitchell v. Commissioner of Internal Revenue

• Decision Date: 04 January 1938
• Docket Number: Docket No. 74805.
• Citation: 37 BTA 1
• Parties: ESTATE OF JOHN T. H. MITCHELL, DECEASED, ANNA L. W. MITCHELL, ADMINISTRATRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

37 B.T.A. 1 (1938)

ESTATE OF JOHN T. H. MITCHELL, DECEASED, ANNA L. W. MITCHELL, ADMINISTRATRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 74805.

Board of Tax Appeals.

Promulgated January 4, 1938.

E. L. Bono, Esq., and Brice Clagett, Esq., for the petitioner.

I. Graff, Esq., for the respondent.

OPINION.

TYSON:

The respondent has determined and asserted against the petitioner herein a Federal estate tax deficiency in the amount of $35,769.14, all of which is in controversy in this proceeding.

The petitioner assigns as errors in the respondent's determination (1) that 900 shares of capital stock of Lennen & Mitchell, Inc., owned by the decedent at date of his death, had a value of $313,771.93 on that date instead of $111,105.26 as reported on the return; (2) that the sum of $402,273.70, as the proceeds of certain insurance policies on the decedent's life, payable to decedent's business associate, is includable in the decedent's gross estate.

The petitioner, a resident of Greenwich, Connecticut, is the duly qualified and acting administratrix of the estate of John T. H. Mitchell, deceased, who died intestate on November 17, 1930, a resident of Greenwich, Connecticut.

1. In 1924 John T. H. Mitchell, now deceased, and Philip W. Lennen formed a corporation under the name of Lennen & Mitchell, Inc., for the purpose of engaging in the advertising business, with an office located in New York City. Each of those individuals acquired one-half or 900 shares of that corporation's capital stock and each continued to own such shares up to the time of the decedent's death. The advertising business conducted by Lennen & Mitchell, Inc., was of a highly personal service character and its success was dependent upon the efforts of those two individuals owning the stock.

In the spring of 1928 Lennen and Mitchell entered into an oral agreement, which was thereafter reduced to writing and signed by the parties on April 30, 1929. The agreement recites, inter alia, that the parties thereto "deem it to their mutual interest to make provision for the purchase and disposition * * * upon the death of either of them" of the 900 shares and any additional shares of the Lennen & Mitchell, Inc., stock acquired by them and that "it is their intention to provide for the purchase price or a part of the purchase price for such stock from the proceeds of life insurance which is or may be payable to the estate of either party, as hereinafter provided."

The agreement provided further, inter alia, that neither party should sell or dispose of his shares of such stock or any part thereof without first offering to sell same to the other party to the agreement at a price to be mutually agreed upon; that "for the purpose of carrying this agreement into effect as hereinafter set forth, and to provide for a part of the purchase price of the stock, the parties hereto have caused life insurance in the sum of $200,000 to be placed upon the life of each of the parties hereto as evidenced by" certain designated policies; that the premiums would be paid when due in a manner to be agreed upon between the parties; that the proceeds of the policies should be made payable to the estates of the respective parties "for the purpose of providing a part of the purchase price to be paid for the stock of the party who shall have predeceased the other, and the said sum of $200,000 is to be received on account of the purchase price as if the surviving party had paid the same, and it is agreed that the surviving party shall receive the stock held by the estate of such deceased party in the corporation of Lennen & Mitchell, Inc., as though a direct purchase had been made by such surviving party, it being the intention of the parties hereto and the parties hereto agree for their respective estates that the said sum of $200,000 received by the estate of either party shall be applied on account of the purchase price for the benefit of the surviving party"; that "the surviving party shall immediately receive and be entitled to the stock" upon payment of the $200,000 insurance proceeds to the estate of the deceased party unless the corporation's tangible assets, excluding book value and good will, show a value of the stock in excess of $200,000, in which event such excess should be paid either in cash or in certain specified installments at the option of the purchaser; that on each party's certificate of stock there be inscribed "Subject to written agreement dated April 30, 1929, between Philip W. Lennen and John T. H. Mitchell"; and that "this agreement shall be binding upon and shall inure to the benefit of the executors, administrators and assigns of the parties hereto."

The certificates of stock of Lennen & Mitchell, Inc., held by the decedent and Lennen were inscribed as provided for by the agreement.

Pursuant to this agreement, in April 1928 Lennen and Mitchell each applied for and secured the issuance of insurance policies in the amount of $200,000 on each of their respective lives. The $200,000 policy on Mitchell's (decedent's) life was made payable to his executors, administrators, or assigns and there was reserved to the insured, without the consent of any beneficiary, the exercise of all rights and privileges under the policy such as change of beneficiary, surrender options, loans, and the receipt of proceeds as endowment. The two policies aggregating $200,000 on the life of Lennen were made payable to his executors, administrators, or assigns, with the same reservation of rights to the insured as those contained in Mitchell's policy.

With regard to the premiums on the $200,000 life insurance policies, Mitchell and Lennen agreed that each would pay the premiums due on the other's insurance. However, that agreement required Lennen to pay a larger amount as premiums because Mitchell was several years older than Lennen and Mitchell voluntarily offered to pay half of that difference so that Lennen's cost for the same protection would be equalized. It having been the custom of Lennen and Mitchell to have Lennen & Mitchell, Inc., issue its checks in payment of many of their personal bills and charge such payments against their personal accounts, the insurance premiums were paid in the same manner. One-half of the total premiums paid on the policies was charged to the personal account of Mitchell and one-half thereof was charged to the personal account of Lennen. These charges to their accounts were offset by credits for salaries and dividends due them from time to time. The policy on Mitchell's life was delivered into the possession of Lennen and the policies on the latter's life were delivered to Mitchell.

The parties have agreed that the proceeds of the $200,000 policy on Mitchell's life, payable to his estate, amounted to $202,666.67.

At or about the time of Mitchell's death the books of Lennen & Mitchell, Inc., showed an indebtedness to it due from the decedent in the amount of $206,648.17. Subsequent to the decedent's death and in order to settle all questions as to the value of the decedent's 900 shares of Lennen & Mitchell, Inc., stock, the sale thereof to Lennen, pursuant to the contract of April 30, 1929, and the amount of Mitchell's indebtedness to the corporation and settlement thereof, Philip W. Lennen, as the party of the first part, and Anna L. W. Mitchell, administratrix of the estate of John T. H. Mitchell, deceased, as the party of the second part, and the decedent's sole heirs and next of kin, as parties of the third part, entered into an agreement dated December 31, 1930. By such agreement those parties mutually agreed, inter alia, that the said 900 shares...