Estate of Noland v. Commissioner
| Decision Date | 24 April 1984 |
| Docket Number | Docket No. 29191-81,29192-81. |
| Citation | 1984 TC Memo 209,47 TCM (CCH) 1640 |
| Parties | Estate of Augusta C. Noland, deceased, Mildred N. Peake, Executrix v. Commissioner. |
| Court | U.S. Tax Court |
Lee C. Bradley, Jr., for the petitioner. Jillena A. Warner, for the respondent.
Memorandum Findings of Fact and Opinion
The respondent determined that in Docket Number 29192-81 there was a deficiency in the gift tax due from Augusta C. Noland, deceased, for the year 1973 in the amount of $34,067.75 and that in Docket Number 29191-81 there was a deficiency in the estate tax due from the Estate of Augusta C. Noland in the amount of $13,062.26. The cases have been consolidated for trial, briefing, and opinion. The issues for decision are: (1) whether the transfer of 714 shares of stock in Commercial Realty Company by Augusta C. Noland to her four daughters constituted taxable gifts; (2) whether 285 shares of stock in Realty Investment Planning, Inc., are includible in the gross estate of the decedent; and (3) whether the gross estate of the decedent includes $18,674.50 in accumulated amounts which the decedent could have withdrawn from a trust, but which were not withdrawn at the date of her death.
Some of the facts have been stipulated. The stipulations together with the attached exhibits are incorporated herein by reference.
Augusta C. Noland, a resident of Birmingham, Alabama, died testate on January 19, 1978. She was survived by four daughters, Mildred N. Peake, Rosalie N. Gambrill, Augusta N. Bell, and Louis N. Townsend. One of the daughters, Mildred N. Peake, qualified as the executrix of her estate. The executrix was also a resident of Birmingham when the petitions were filed in these cases.
Augusta C. Noland was the daughter of General Louis V. Clark. During his life, he transferred to her all 5,000 shares of the stock outstanding in Commerical Realty Company, an Alabama corporation, which owned several parcels of real property. At his death, his will, which was probated on March 27, 1964, gave all of his assets both real and personal to Augusta C. Noland "for life and at her death, share and share alike to her children." Mrs. Noland was the executor of his estate, which also contained several parcels of real estate.
Over a period of years Mrs. Noland gave stock in Commerical Realty Company to each of her four daughters until by September 13, 1971, the date upon which the litigation described hereinafter was commenced, the stock was held as follows:
Percentage
Name Shares of Ownership
Mrs. Peake ......... 1,073 21.46%
Mrs. Gambrill ...... 1,071 21.42%
Mrs. Townsend ...... 1,071 21.42%
Mrs. Bell .......... 1,071 21.42%
Mrs. Noland ........ 714 14.28%
_______ _______
TOTALS ............. 5,000 100.00%
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For several years prior to the commencement of such litigation, Mrs. Noland served as the president and chief executive officer and as a director of Commercial Realty Company. B. Wayne Peake, the husband of Mildred N. Peake, was the vice-president and general manager of the company. Each of the daughters and their respective husbands were also directors thereby constituting a board of nine members. During the same period, Mrs. Noland, as executor and life tenant of her father's estate, used, controlled, and looked after its assets in-including the real properties contained therein.
The stock of Commercial Realty Company was subject to an agreement entered into in 1954 by Mrs. Noland, the four daughters, and the corporation. In the agreement (1) each daughter agreed that she would not sell, hypothecate, or otherwise encumber her stock in the corporation except as provided in the agreement; (2) each daughter agreed that if she ever desired to sell her stock she would first offer it to the corporation at its book value and give the corporation 30 days within which to accept or reject the offer; and (3) each daughter also agreed that at her death the corporation would have the right and option to buy her stock at its book value.
On September 13, 1971, Rosalie N. Gambrill and Augusta N. Bell filed a complaint in the Circuit Court for the Tenth Judicial Circuit of Alabama, against Commercial Realty Company, Mildred N. Peake, B. Wayne Peake, and Louis N. Townsend. Subsequently, the Circuit Court found that Augusta C. Noland was an essential party to the suit and thereupon the complaint was amended to name her as an additional defendant.
The complaint1 alleged that on or before June 6, 1971, Mrs. Noland, while under undue influence from the Peakes, entered into a voting trust agreement with Mildred N. Peake and Louis N. Townsend under the terms of which actual control of Commercial Realty Company had been given to Mildred N. Peake by allowing her to vote all of the shares in the company owned by Mrs. Peake, Mrs. Townsend, and Mrs. Noland. It also alleged that through the exercise of the voting trust agreement, Commerical Realty Company was then in the process of guaranteeing certain debts totaling more than $160,000 of Louis N. Townsend to The First National Bank of Birmingham and other creditors and that Commerical Realty Company was being empowered to guarantee loans made to Mrs. Noland.
The complaint further alleged that through the exercise of the voting trust agreement at a meeting of the stockholders which was held on June 6, 1971, the defendants had caused George T. Gambrill and Frederick Bell to be removed from the board of directors of Commercial Realty Company; that certain stock certificates had been reissued to Louis N. Townsend and pledged by her to The First National Bank of Birmingham in violation of the restrictions set out in the 1954 agreement between the parties; that loans totaling $33,000 to $40,000 had been improperly made by Commercial Realty Company to Louis N. Townsend; and that through the exercise of the voting trust agreement, very broad authority over the business of the corporation had been granted to B. Wayne Peake including the unrestricted power to dispose of the corporation's real estate.
On the same day that the complaint was filed, the Circuit Court enjoined the defendants from carrying out any of the alleged actions including the guaranteeing of stockholder debts, the selling of corporate real estate, the implementation of the voting trust agreement, and the granting of any special authority to B. Wayne Peake. This injunction remained in effect until the litigation was finally settled.
Shortly after the lawsuit was filed, Augusta C. Noland by letter2 advised Rosalie N. Gambrill and Augusta N. Bell, the complainants, that she was revising her will in such a manner as to disinherit them. In an attempt to dispose of the bitter stalemate which had developed, protracted negotiations were conducted among the parties, each of whom was separately represented by independent and competent counsel. Finally, on December 6, 1972, each of the parties and their separate counsel executed a document entitled Memorandum of Understanding which, among other things, provided that if the settlement of their differences as set forth therein was approved by the Circuit Court, the parties would exchange releases containing the following provision:
Each of the parties hereto, separately, severally and jointly, releases each of the parties hereto and the parties hereto, separately, severally and in all fiduciary capacities (including the Clark Estate), release each other of and from all claims, actions, causes of action and demands of all kinds and natures whatsoever, presently and heretofore existing and hereby settles, compromises and disposes of all claims, actions, causes of actions and demands and all differences have been fully and finally settled and disposed of in all respects.
The Memorandum of Understanding was approved by the Circuit Court in a preliminary decree3 which included the following findings:
Briefly stated, the pertinent provisions of the settlement as set forth in the Memorandum of Understanding and as carried out by the parties, were as follows:
(1) Mrs. Noland transferred her remaining 714 shares of Commercial Realty Company to the four daughters in equal shares so that immediately thereafter Mrs. Noland held no stock in Commercial Realty Company and each of the four daughters held 1,250 shares;
(2) Commercial Realty Company was then divided into three separate corporations in the following manner: (a) 25 percent of the assets of Commercial Realty Company were transferred to a new corporation known as Townco, all of the stock in Townco was issued to Louis N. Townsend, and all of her outstanding stock in Commercial Realty Company was surrendered and cancelled; (b) 25 percent of the assets of Commercial Realty Company were transferred to a second corporation known as Realty Investment Planning, all of the stock in Realty Investment Planning was issued to Mildred N. Peake, and all of her stock in Commercial Realty Company was...
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