Estate of Murphy v. Commissioner
| Decision Date | 30 August 1990 |
| Docket Number | Docket No. 32730-86.,Docket No. 32731-86. |
| Parties | Estate of Elizabeth B. Murphy, Deceased, First Bank (National Association)-Duluth and Richard R. Burns, as Co-Personal Representatives and Co-Trustees under Agreement with Elizabeth B. Murphy, Dated February 3, 1981 v. Commissioner. |
| Court | U.S. Tax Court |
Raymond L. Erickson and Richard R. Burns, 1000 First Bank Place, Duluth, Minn., for the petitioner. Jack Forsberg, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in decedent's Federal estate tax of $8,133,984 and a deficiency in gift tax for the calendar year 1982 of $10,248,403.
Both deficiency notices result from a dispute concerning the valuation of a 51.41 percent block of stock over which the decedent had a general power of appointment during her life. The gift tax deficiency notice results from the decedent's gift of .88 percent of that stock to each of her two children shortly before her death. The estate tax deficiency results from the decedent's testamentary bequest of her remaining 49.65 percent to trusts established for her two children.
These cases were consolidated for trial, briefing, and opinion. After concessions the primary issues for decision are:
(1) Determination of the fair market value of stock in a closely held corporation. Before consideration of discounts, we hold that the per-share value of the stock was $825.
(2) Whether to allow discounts for lack of marketability and because Wisconsin State law limits sales of substantially all of the assets of the corporation. We hold that a 20-percent discount for these factors is appropriate, reducing the per-share value to $660.
(3) Whether to allow a minority discount. We hold that petitioner is not entitled to a minority discount.
The decedent was president of the corporation until 1980. She was chairman of the board from 1980 until her death. Her son became president in 1980. Her daughter became vice president in 1980 and president of the broadcast subsidiaries in 1981.
During her life, the decedent had a general power of appointment over shares representing a controlling interest in the corporation. For the sake of convenience, and because a general power of appointment is the functional equivalent of ownership, the decedent will sometimes be treated as owning the block of stock at issue here. Before her death, her tax adviser advised her to transfer a small amount of stock to her children. As a result, the decedent transferred .88 percent of the stock to each of her children (leaving her with 49.65 percent) 18 days before her death. The decedent made a testamentary gift of the remaining 49.65 percent of the stock in trust to them.
The sole purpose of bifurcating the transfer of control to her children was to obtain a minority discount for the stock. Transfer of the gift fragments did not appreciably affect the decedent's beneficial interest except to avoid Federal transfer taxes on the control premium.
Petitioner relies on Estate of Bright v. United States [81-2 USTC ¶ 13,436], 658 F.2d 999 (5th Cir. 1981) (en banc) and its progeny. We conclude that such reliance is misplaced.
Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect as of the date of the decedent's gift and decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.
In Estate of Murphy v. Commissioner [Dec. 46,707(M)], T.C. Memo. 1990-346, we denied petitioner's motion to seal various documents which were admitted into evidence at trial. In that opinion we indicated that those documents requested to be sealed would remain under seal to preserve petitioner's rights pending appeal. In this opinion, to the extent possible, we have minimized specific findings concerning the Evening Telegram Company's financial condition. We have nevertheless, considered the entire record, and our general findings are consistent therewith. E.g., Estate of Hall v. Commissioner [Dec. 45,484], 92 T.C. 312, 322 n. 1 (1989); Estate of Gallo v. Commissioner [Dec. 42,241(M)], T.C. Memo. 1985-363 at n. 1, 54 P-H Memo T.C. par. 85,363 at 1594, 50 T.C.M. 470, 474 n. 1. However, some facts about the businesses, and portions of decedent's tax planning memoranda, which petitioner sought to have sealed have been made a part of this opinion because they form the basis for the Court's decision, and because they are required to be included for proper evaluation of the decision. Joy v. North, 692 F.2d 880, 893-894, 897 (2d Cir. 1982); Zenith Radio Corp. v. Matsushita Elec. Indus. Co., 529 F.Supp. 866, 901 (E.D. Pa. 1981). See Public Service Commission v. Wisconsin Telephone Co., 289 U.S. 67, 69 (1933); Virginia Railway v. United States, 272 U.S. 658, 675 (1926).
OUTLINE OF OPINION
The opinion is organized as follows
I. GENERAL FINDINGS OF FACT
A. GENERAL ........................................................................ 647
1. The Estate and the Transfer Tax Returns ................................... 647
2. The Family ................................................................ 647
3. The Plan to Transfer Decedent's Control of the Business to Her Children ... 647
4. The Evening Telegram Company and its Subsidiaries ......................... 649
5. Television Wisconsin, Inc. (WISC-TV) Stock ................................ 650
6. Summary of General Findings of Fact ....................................... 651
II. FINDINGS OF FACT AND OPINION REGARDING VALUATION
A. VALUE OF THE EVENING TELEGRAM COMPANY STOCK BEFORE
DISCOUNTS ...................................................................... 651
1. Introduction .............................................................. 651
2. Petitioner's Experts ...................................................... 652
3. Respondent's Experts ...................................................... 654
4. Value Before Discounts—Conclusions ....................................... 654
B. VALUATION OF TELEVISION WISCONSIN, INC. STOCK .................................. 655
1. Discounts ................................................................. 655
2. Valuation of Television Wisconsin, Inc. Stock Before Consideration of
Discounts ................................................................ 656
III. OPINION—DISCOUNTS AND RELATED ISSUES
A. DISCOUNT BASED ON LACK OF MARKETABILITY AND THE WISCONSIN
STATUTE LIMITING ASSET SALES ................................................... 656
B. MINORITY DISCOUNTS ............................................................. 657
1. Introduction .............................................................. 657
2. Decedent and Her Children Had Continuous Control Powers ................... 658
3. Application of a Minority Discount Where a Control Block is Briefly
Fragmented for Tax Avoidance Purposes ................................... 659
4. Minority Discount Cases Distinguished ..................................... 661
5. Legislative History of the Gift and Estate Tax ............................ 664
6. Valuation of Nonvoting Stock .............................................. 666
Some of the facts have been stipulated and are so found. Those facts and exhibits are incorporated in our findings by this reference.
A. GENERAL
Elizabeth B. Murphy (decedent) died testate on August 16, 1982. Under the will, First Bank-Duluth and Richard R. Burns were the personal representatives of decedent's estate. First Bank-North is now the successor in interest to First Bank-Duluth and Northern City National Bank of Duluth. At the time these petitions were filed, Richard R. Burns resided in Duluth, Minnesota, and First Bank-North was a corporation with its principal place of business at Duluth, Minnesota.
Decedent's Federal estate and 1982 gift tax returns were prepared by Mr. Warren Randy and timely filed in Duluth, Minnesota.
The 5,610 voting shares of Evening Telegram Company stock held by decedent on her date of death were valued on the estate tax return at $423 per share. The 16,240 shares of nonvoting common stock were valued at $381 per share. The total value stated on the estate tax return was $8,560,470. The 17.6 common stock shares of Television Wisconsin, Inc., held by decedent on her date of death were valued at $1,965 per share, for a total value of $34,584. The gift tax return also valued the voting shares of Evening Telegram Company stock at $423 per share.
The Evening Telegram Company (ETC) was incorporated in Wisconsin in 1897 by J.T. Murphy, decedent's father-in-law. It published the Evening Telegram and conducted a general printing business. The Evening Telegram Company is authorized to acquire, own, sell, lease, or operate radio and television stations, and related property.
Decedent's husband, Morgan Murphy, followed his father as president of the Evening Telegram Company. He became involved in radio broadcasting and later in television broadcasting. The Evening Telegram Company brought radio to Duluth, Minnesota, and Superior, Wisconsin in 1926. He developed or acquired all of the Evening Telegram Company's current broadcast and newspaper facilities prior to his death on February 6, 1971. Morgan Murphy died testate. Prior to his death, he held all of the outstanding shares of Evening Telegram Company. His will established a marital trust for decedent and a residuary trust for their two children. The Evening Telegram Company shares held by Morgan Murphy were passed to the trusts under the terms...
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