Estate of O'Neal v. U.S.
| Decision Date | 08 October 2003 |
| Docket Number | No. CIV.A. 94-PT-2493-S.,CIV.A. 94-PT-2493-S. |
| Citation | 291 F.Supp.2d 1253 |
| Parties | ESTATE OF Kirkman O'NEAL, deceased; Elizabeth O'Neal White Shannon, Emmet O'Neal, and Emmet O'Neal, III, Personal Representatives, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Northern District of Alabama |
Roy J. Crawford, C Fred Daniels, Cabaniss, Johnston, Gardner, Dumas & O'Neal, Birmingham, AL, J Fred Wood, Jr., Dominick, Fletcher, Yeilding, Wood & Lloyd, Birmingham, AL, for Plaintiffs.
Alice H. Martin, US Attorney, Birmingham, AL, Robert L. Welsh, Lynne M. Murphy, Us Department of Justice, Washington, DC, for Defendant.
This cause comes on to be heard upon cross-motions for partial summary judgment. Defendant United States of America ("the Government") filed its motion on May 8, 2003 (Doc. 29). Plaintiffs filed their motions on May 9, 2003 (Docs. 32-34).1
This case involves certain federal estate taxes on the estate of Kirkman O'Neal ("Mr. O'Neal"), deceased. Mr. O'Neal, founder of O'Neal Steel, Inc., died in Birmingham, Alabama on August 7, 1988. Prior to Mr. O'Neal's death, he was married to Elizabeth Paramore O'Neal ("Mrs. O'Neal"). Mr. And Mrs. O'Neal had two children: Emmet O'Neal, II, and Elizabeth P. O'Neal White Shannon ("Elizabeth Shannon"). They also had seven grandchildren: Emmet O'Neal, III, Kirkman O'Neal, II, Henry Craft O'Neal, who are the children of Emmet O'Neal, II, and Elizabeth White Reed, Margaret White Head, Virginia White Page, and David H. White, Jr., who are the children of Elizabeth Shannon. See, e.g., Def. Ex. 1 at IRS Form 706. Mr. O'Neal was survived by his wife, his children, and his grandchildren. See Pl.Ex. 4 at 1, 5.
On August 10, 1988, Letters Testamentary were granted to Mrs. O'Neal, Elizabeth Shannon, Emmet O'Neal, II, and Emmet O'Neal, III by the Probate Court of Jefferson County, Alabama. See Def. Ex. 2. After Mrs. O'Neal died on July 23, 1994, the Probate Court ordered that the Letters Testamentary be amended and reissued to Elizabeth Shannon, Emmet O'Neal, II, and Emmet O'Neal III. Id. On or around May 3, 1989, the then representatives filed an estate tax return for Mr. O'Neal's estate, reporting an estate tax liability of $1,632,128 and remitting payment in the same amount. See Def. Ex. 1, 3. On that tax return, Mr. O'Neal's estate chose to use the alternate valuation date. See Def. Ex. 1 at IRS From 706, page 2, Part 3, line 1.
In or around July 1990, Internal Revenue Service ("IRS") examiner Suzanne Paulson was assigned to examine Mr. O'Neal's estate tax return. See Def. Ex. 4. On April 28, 1992, the IRS issued a Statutory Notice of Estate Tax Deficiency to Mr. O'Neal's estate, proposing an estate tax deficiency in the amount of $951,587, plus interest. See Def. Ex. 5. On May 7, 1992, Mr. O'Neal's estate contested the Statutory Notice of Estate Tax Deficiency, paid the $951,587 plus $357,232 in interest, and filed a refund claim. See Def. Ex. 3, 6. In the refund claim, Mr. O'Neal's estate sought a refund of $2,941,487.38, plus interest and costs. See Def. Ex. 6. On October 20, 1992, the IRS issued a Notice of Disallowance, denying the refund sought by Mr. O'Neal's estate. See Def. Ex. 7. On October 14, 1994, plaintiffs filed this refund action, seeking the full refund plus interest and costs.3
In its motion, the Government has identified four issues which it argues govern the outcome of this case: (1) Whether Mr. O'Neal's estate is entitled to claim a deduction for any alleged restitution claims that his donees might have been able to assert against his estate; (2) Whether the adjusted taxable gifts and corresponding gift tax payable amounts reported on Mr. O'Neal's estate tax return must be revalued for federal estate tax purposes; (3) Whether Mr. O'Neal's estate must be increased by $700,000 in order to reflect that Mr. O'Neal's funds were used to pay a portion of the gift taxes due on gifts made by Mrs. O'Neal in 1987; and (4) Whether the deduction for the 1988 Alabama income tax liability claimed by Mr. O'Neal's estate must be reduced to properly reflect the correct amount of Mr. O'Neal's share of such liability.4 Plaintiffs have filed three separate motions for partial summary judgment. The First and Third Motions appear to relate to issues raised by the defendants. The Second Motion involves whether the estate can deduct unpaid gift taxes that plaintiffs argue are still due. The pertinent facts will be discussed in connection with the issue addressed.
Before November 3, 1987, Mr. O'Neal was a minority shareholder in O'Neal Steel, a closely held corporation that engaged in the steel service/distribution business. O'Neal Steel had two classes of common stock. The first class was Class A nonvoting common stock, of which 171,859 of the 200,000 shares were outstanding as of June 30, 1987. The second class was Class B voting common stock, of which 223 of the 1,500 authorized shares were outstanding as of June 30, 1987. As of the close of business on November 2, 1987, Mr O'Neal owned 42,262 shares of Class A stock and 35 shares of Class B stock.
On November 3, 1987, Mr. O'Neal made gifts of Class A and Class B stock to his two children and seven grandchildren ("the donees").5 See Def. Ex. 8; Pl.Ex. 4 at 1-4, Exs. 7-8. Specifically, Mr. O'Neal made the following gifts to the donees:
Donee Gift
Emmet O'Neal, II 1 share of Class A stock
18 shares of Class B stock
Elizabeth Shannon 17 shares of Class B stock
Emmet O'Neal, III 7,043 shares of Class A stock
Kirkman O'Neal, II 7,043 shares of Class A stock
Henry Craft O'Neal 7,043 shares of Class A stock
Virginia White Page 5,283 shares of Class A stock
Elizabeth White Reed 5,283 shares of Class A stock
Margaret White Head 5,283 shares of Class A stock
David H. White, Jr. 5,283 shares of Class A stock
Before the gifts of stock were completed, three agreements had been entered into: (a) an agreement dated November 3, 1987 ("Consent Agreement") in which all shareholders consented to the transfer of the stock pursuant to a June 28, 1951 buy-sell agreement, see Def. Ex. 10; Pl.Ex. 9; (b) the Supplemental Stock Purchase Agreement dated November 3, 1987 which was entered into by the grandchildren only, see Def. Ex. 11; and (c) the Escrow Agreement dated November 3, 1987 which was entered into by Mr. and Mrs. O'Neal, as donors, and Emmet O'Neal, II, as escrow agent. See Def. Ex. 12. Pursuant to the Escrow Agreement, Mr. and Mrs. O'Neal, as donors, delivered to Emmet O'Neal, as escrow agent, the shares of stock for safekeeping until all the donees signed the Consent Agreement and the Supplemental Stock Purchase Agreement. See Def. Ex. 12. The Consent Agreement provided, inter alia, that the stock be transferred under a buy-sell agreement (see below). See Def. Ex. 10. The Supplemental Stock Purchase Agreement provided, inter alia, that the grandchildren donees would contribute, on a pro rata basis, toward the payment of any transferee gift tax liability imposed upon any one of them. See Def. Ex. 11 at § 7. Upon completion of the conditions for the gifts, the donees received stock certificates conveying ownership in the numbers of shares set forth above.
Both the Class A and Class B stock certificates contained a legend on their face indicating that they were "transferable on the books of the Company 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...." See Def. Ex. 13. The backs of the stock certificates stated: "The shares of stock evidence 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 By-Laws of the Corporation, as amended." Id. The 1951 agreement was a restrictive buy-sell agreement. See Def. Exs. 14-15; Pl.Ex. 9. Specifically, the buy-sell agreement restricted the transferability of the O'Neal Steel stock during the lifetime and upon the death of the shareholder and provided a procedure by which O'Neal family members could purchase the stock at fixed prices only. Id. When the gifts were made in 1987, the fixed option prices for Class A and Class B stock were $54 and $61, respectively. See Def. Exs. 19-20; Pl. Exs. 17-18. Plaintiffs assert that previous valuations of the stock had been computed by Management Planning, Inc. ("MPI"), but this particular valuation was computed by the directors of O'Neal Steel, not MPI. See Pl. Exs. 19-25.
In addition to the fixed option price restriction, the buy-sell agreement further restricted transfers of O'Neal Steel stock by limiting the shareholders who were entitled to exercise the options being offered under the agreement. Specifically, only shareholders "who were designated as shareholders that were entitled to benefit under the agreement" were allowed to exercise the option to purchase the stock of another shareholder. See Def. Exs. 14-15, 20. Only shareholders who are members of the O'Neal family have been granted entitlement to the rights and benefits arising under the agreement. Id.
On or around April 15, 1988, Mr. and Mrs. O'Neal filed separate Forms 709, the gift tax return form, with the IRS. See Def. Exs. 8-9; Pl. Exs. 7-8. On these returns, Mr. and Mrs. O'Neal elected to split their gifts pursuant to IRS Code § 2513. They reported the gifts of stock made to the donees, at the value at which the stock could be sold under the buy-sell agreement, i.e., $54 for Class A stock and $61 for Class B stock. Attached to the tax returns were copies of the buy-sell agreement and copies of the financial...
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...possess any incidents of ownership in the policy.G. Expenses, Indebtedness and Taxes (I.R.C. § 2053)Estate of O'Neal v. United States, 291 F. Supp. 2d 1253 (N.D. Ala. 2003)A decedent's gross estate was increased to include the amount of funds he used to pay a portion of his wife's gift tax ......