Estate of O'Neal v. U.S., CV-97-J-2190-S.

• Decision Date: 12 November 1999
• Docket Number: No. CV-97-J-2190-S.,CV-97-J-2190-S.
• Citation: 81 F.Supp.2d 1205
• Parties: ESTATE OF Elizabeth Paramore O'NEAL, deceased, et al., Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Alabama

81 F.Supp.2d 1205

ESTATE OF Elizabeth Paramore O'NEAL, deceased, et al., Plaintiffs, v. UNITED STATES of America, Defendant.

No. CV-97-J-2190-S.

United States District Court, N.D. Alabama, Southern Division.

November 12, 1999.

Order Amending Opinion February 3, 2000.

COPYRIGHT MATERIAL OMITTED

C. Fred Daniels, Cabaniss Johnston Gardner Dumas & O'Neal, Birmingham, AL, for Plaintiffs.

G. Douglas Jones, U.S. Attorney's Office, Birmingham, AL, Lynne M Murphy, U.S. Dept. of Justice, Tax Div., Washington, DC, for Defendant.

MEMORANDUM OPINION

JOHNSON, District Judge.

Currently before the Court are crossmotions for summary judgment as to the claims asserted by plaintiffs and the counterclaims asserted by defendant (docs. 24 and 26). This court heard oral argument on the motions and has reviewed the memoranda of law and evidence submitted by the parties. The facts before this court are as follows:

Plaintiffs filed this lawsuit to obtain a refund of $1,883,762.00 in federal estate taxes and interest collected from the Estate of Elizabeth P. O'Neal, deceased. The refund is based upon claims made against plaintiffs for transferee gift tax and generation-skipping transfer tax liabilities asserted against the donees of certain gifts made by Elizabeth P. O'Neal ("Mrs. O'Neal").

Four issues are raised by the plaintiffs: (1) whether Mrs. O'Neal's estate is entitled to claim a deduction for certain claims made against her estate by her children and grandchildren, in which such family members seek reimbursement of their donee/transferee liabilities arising from the gift of stock made by Mrs. O'Neal to them during her lifetime; (2) whether Mrs. O'Neal's estate is entitled to deduct certain expenses, such as attorneys' fees and interest as administrative expenses; (3) whether Mrs. O'Neal's gross estate should be increased to reflect a claim to recover certain unauthorized transfers of funds made by her son, Emmet O'Neal, II, as payment of attorney's fees; and (4) whether 26 U.S.C. § 2504(c) precludes the revaluation of gifts of shares of stock made by Mrs. O'Neal during her lifetime for federal estate tax purposes.

Defendant originally responded with six counterclaims asserting that plaintiffs are indebted to defendant in the amount of $684,631.00, plus interest. Remaining of those counterclaims are: (1) certain payments by Mrs. O'Neal's attorney-in-fact prior to her death were not for her benefit and therefore her estate had a claim against said attorney-in-fact; (2) certain attorneys' fees paid by plaintiffs were not for the benefit of the estate and therefore not deductible as administrative expenses; (3) certain interest was not deductible; (4) claims against the estate by the donees of gifts by Mrs. O'Neal were not deductible; and (5) the estate's "adjusted taxable gifts" and "gift tax payable" must be increased to reflect revalued gifts.

Upon consideration of the record, the submissions of the parties, the argument of counsel, and the relevant law, the Court is of the opinion that plaintiffs' motion for summary judgment is due to be granted in part and denied in part and that defendant's motion for summary judgment is due to be granted in part and denied in part.

I. FACTUAL BACKGROUND

The facts of the case are undisputed. Mrs. O'Neal died in Birmingham, Alabama on July 23, 1994. At the time of her death, she was a resident of Jefferson County, Alabama. Mrs. O'Neal and her husband, Kirkman O'Neal ("Mr.O'Neal") had two children, Emmet O'Neal, II and Elizabeth Shannon, and seven grandchildren, three by Mr. O'Neal, II and four by Elizabeth Shannon. On November 3, 1987, Mrs. O'Neal made gifts ("1987 Gifts") of voting and non-voting common stock in O'Neal Steel, Inc. (the "Company") to her children and grandchildren ("donees").¹ Plaintiffs' exhibit 2, affidavit of Emmet O'Neal, II at 1-3 ("O'Neal affidavit"). Each of Mrs. O'Neal's children received 19 shares of O'Neal Steel voting ("Class B") common stock. The three children of Mr. O'Neal, II received 6,058 shares of O'Neal Steel nonvoting ("Class A") stock. The four children of Elizabeth Shannon each received 4,544 shares of Class A stock. On the same date, November 3, 1987, Mr. O'Neal made similar gifts of stock to each of his children and grandchildren.²

Mr. and Mrs. O'Neal's United States Gift (and Generation-Skipping Transfer) Tax Returns (Forms 709) ("Gift Tax Returns") were filed timely. See plaintiffs' exhibit 4. The Gift Tax Returns reported that the non-voting stock was worth $54.00 per share and the voting stock was worth $61.00 per share — the values established under an amended 1951 Buy-Sell Agreement. Plaintiffs' exhibit 4. $810,186.00 in gift taxes were paid by Mrs. O'Neal with her Gift Tax Return. Plaintiffs' exhibit 4; see also plaintiffs' exhibit 3, affidavit of Dilmus R. Richey at 2 ("Richey affidavit").

The valuation of the stock was a source of great dispute between the parties. That valuation was based on the option price at which Mrs. O'Neal could sell the stock. On June 28, 1951, the shareholders of O'Neal Steel adopted buy-sell restrictions that were incorporated into the company's Bylaws at § 17 (later changed to § 23). The 1951 Buy-Sell Agreement gave a right of first refusal to certain O'Neal family members and bound all stock in the company "by whomsoever held." As amended from time to time, the buy-sell restrictions have continued as part of the company's Bylaws.

On November 24, 1976, the Class A stock was valued by the company and its directors using prior appraisal reports and other data. This valuation was the basis for an amendment to the 1951 Buy-Sell Agreement on November 24, 1976, and a more detailed amendment on December 10, 1976, setting the option prices at $54.00 per share for Class A stock and $61.00 per share for Class B stock. The December 10, 1976 amendment also extended the rights and obligations under the 1951 Buy-Sell Agreement to additional members of the O'Neal family. See plaintiffs' exhibit 4; defendant's exhibit 9.

The 1951 Buy-Sell Agreement, as amended, provides that the option price for each share of stock may be amended and changed only with the consent of the holders of seventy-five percent of the outstanding shares of stock affected thereby and that such consent had to be evidenced by an amendment to the 1951 Buy-Sell Agreement signed by the stockholders so consenting. Defendant's exhibit 5.

Prior to the 1987 gifts, Mrs. O'Neal owned 21.2% of the Class A stock and 17% of the Class B stock, Mr. O'Neal owned 24.6% of the class A stock and 15.7% of the Class B stock.³ After their 1987 gifts, neither Mr. or Mrs. O'Neal held any stock in O'Neal Steel. On the same date as the transfer of stock, the donees (the children and grandchildren of the O'Neals) entered into a Supplemental Stock Purchase Agreement. The agreement stated that each of the donees agreed to contribute, on a pro rata basis, toward the payment of any transferee gift tax liability imposed upon any one of them pursuant to the Internal Revenue Code. See defendant's exhibit 12, Supplemental Stock Purchase Agreement at § 7 ("Contribution with Respect to Transferee Liability").⁴ Also on November 3, 1987, Mr. and Mrs. O'Neal, as donors, and Emmet O'Neal, II, as escrow agent, entered into an Escrow Agreement whereby Emmet O'Neal, II, as escrow agent, received the shares of stock from Mr. and Mrs. O'Neal, duly endorsed for transfer to the donees, to hold until such time as each of the donees signed the Consent and Supplemental Stock Purchase Agreement. Defendant's exhibit 13. The donees then received the stock certificates conveying ownership of the stock. As with all stock certificates of O'Neal Steel, the certificates in question contained the following legend on their face:

transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, on surrender of this certificate, properly endorsed, subject, however, to the restrictions referred to on the reverse hereof. The Corporation will furnish without charge to each stockholder who so requests, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

The back of the stock certificate bore the following legend:

The shares of stock evidenced by this certificate are held and may be transferred only subject to the terms, provisions and options contained in an agreement dated June 28, 1951, as amended, and as recorded in Section 17 of the ByLaws of the Corporation, as amended.

Defendant's exhibit 14. On or about April 15, 1988, Mr. and Mrs. O'Neal filed separate Forms 709, "United States Gift (and Generation-Skipping Transfer) Tax Returns" for the calendar year 1987, with the Internal Revenue Service ("IRS"). On the 1987 Gift Tax Returns, Mr. and Mrs. O'Neal reported the gifts of O'Neal Steel stock made to each donee, at the value at which the stock could be optioned for under the 1951 Buy-Sell Agreement, as amended by the 1976 revaluation. Plaintiffs' exhibit 4; defendant's exhibits 5 and 9. Thus, the gifts of the O'Neal Steel common stock were valued at $54.00 per share for the Class A stock and $61.00 per share for the Class B stock. Attached to the Gift Tax Returns were copies of the 1951 Buy-Sell Agreement, with the amendments in effect at the time the gifts were made, and copies of the financial statements of O'Neal Steel.

When Mrs. O'Neal filed her 1987 Gift Tax Returns, she paid the gifts taxes shown on those returns. Mrs. O'Neal paid a total of $810,186.00 with her 1987 Gift Tax Returns. Plaintiffs' exhibit 4. Mr. O'Neal's Gift Tax return reflected a similar amount of taxes paid. Defendant's exhibit 4.

After Mr. O'Neal died on August 7, 1988, Mr. O'Neal's estate, through his personal representatives,⁵ filed a Form 706, "United States Estate (and Generation-Skipping Transfer) Tax Return"...