Estate of Paxton v. Comm'r of Internal Revenue
| Citation | 86 T.C. 785,86 T.C. No. 51 |
| Decision Date | 28 April 1986 |
| Docket Number | 17728-83.,17718-83,Docket Nos. 5044-82 |
| Parties | ESTATE OF FLOYD G. PAXTON, JERRE PAXTON, PERSONAL REPRESENTATIVE; F.G. PAXTON FAMILY ORGANIZATION TRUST, JERRE PAXTON, TRUSTEE; INTERNATIONAL DEVELOPMENT TRUST, JERRE PAXTON, TRUSTEE, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
During his lifetime, decedent created two trusts to which he and his spouse transferred, in exchange for certificates of beneficial interest in the trusts, their residence, stock in several corporations, patents, and virtually all other property they owned except a patent royalty agreement with one of their corporations. They later transferred some of their certificates to other family members. Decedent's son, his accountant, his attorney, and other close associates served as trustees. Under the terms of the trust instruments, the trustees were given full discretionary power to distribute the income and corpus of the trusts to the holders of certificates of interest, and the distributions were not required to be proportionate among the holders of such certificates.
Wayne R. Appleman and Peter R. Hochman, for the respondent.
Respondent determined a deficiency in the amount of $11,738,717 in the estate tax for the estate of Floyd G. Paxton and an addition to tax under section 6651(a)(1) 2 in the amount of $2,934,679. Also, respondent determined that the trustees of two trusts, the F.G. Paxton Family Organization Trust and the International Development Trust, are liable as transferees for the estate tax and additions to tax under sections 6324 and 6901.
The following issues have been severed for separate trial and decision:
1. Whether the gross estate of Floyd G. Paxton includes, under sections 2033, 2036, 2037, or 2038, certain property with respect to which he transferred legal title to the F.G. Paxton Family Organization Trust and to the International Development Trust.
2. Whether petitioners' failure to file an estate tax return was due to reasonable cause and not willful neglect within the meaning of section 6651(a).
Floyd G. Paxton (hereinafter Mr. Paxton or decedent) died on December 10, 1975. His son, Jerre Paxton (Jerre), qualified in the Superior Court of Yakima County, Washington, as personal representative of decedent's estate. Jerre was a legal resident of Washington when the petitions were filed.
During his lifetime, decedent created two trusts, the F.G. Paxton Family Organization Trust (PFO) and the International Development Trust (IDT), to which he conveyed legal title to most of his property. The principal office of each of these trusts and the legal residence of each of the individuals designated as trustees of the trusts were in the State of Washington when the petitions in these cases were filed.
Decedent was born on March 7, 1918, in Redlands, California, and was married to Eleanor Leighy (Eleanor Paxton) on March 7, 1936. They had four children:
+-----------------------------------+
¦Name ¦Date of birth ¦
+--------------------+--------------¦
¦Jerre Paxton ¦Nov. 24, 1938 ¦
+--------------------+--------------¦
¦Ted Paxton ¦Sept. 26, 1940¦
+--------------------+--------------¦
¦Floyd G. Paxton, Jr.¦Feb. 23, 1950 ¦
+--------------------+--------------¦
¦Cheryl Paxton ¦Mar. 14, 1952 ¦
+-----------------------------------+
In 1954, decedent and Eleanor were divorced, and he moved from California to the State of Washington. In July 1954, decedent married Grace Douglas (Grace Paxton). At that time, Grace Paxton, who was born on July 19, 1916, had a teenage daughter named Diane, who later married Jere Irwin. Decedent and Grace had one child, a son named Ande Paxton, who was born December 7, 1956.
On November 12, 1954, decedent and Kenneth and Dorothy Paxton organized a corporation named Kwik Lok Corporation of Yakima (Kwik Lok). By early 1965, all of the corporation's outstanding stock was held in the name of decedent. Kwik Lok was engaged in the business of manufacturing, selling, and distributing packaging products such as closures for plastic bags and containers, closure labels and equipment for applying them.
Decedent also participated in the organization of Kwik Lok Corporation of Indiana (Kwik Lok Indiana) in 1960 and Paxton Industries, Inc., in 1962. Kwik Lok Indiana operated a plant, similar to that of Kwik Lok, and it serviced the eastern part of the United States. Paxton Industries, Inc., produced the plastic sheets from which plastic closures were made. Kwik Lok held all of the stock of Kwik Lok Indiana except three shares which were held by decedent prior to August 1967. Decedent held all of the stock in Paxton Industries, Inc. up to that date.
Decedent was president of Kwik Lok until March 31, 1968, and was chairman of the board of directors from August 3, 1967, until his death on December 10, 1975. Jerre, who had worked for the company for several years and had become vice-president on July 6, 1965, succeeded to the presidency of Kwik Lok on March 31, 1968; he held that position at his father's death. Decedent was also president of Kwik Lok Indiana and Paxton Industries, Inc., until March 1968 and thereafter was chairman of the board of directors of both companies until his death.
On April 30, 1965, Mr. Paxton entered into a license agreement with Kwik Lok whereby he granted to Kwik Lok exclusive license under three patents, held in his name, related to packaging closure devices. The license was to expire on January 5, 1982, the date of the expiration of the patents. As consideration for the license, Kwik Lok was to pay Mr. Paxton 7- 1/2 percent of the first $1,000,000 in net sales, 6 percent of the second $1,000,000 in net sales, and 5 percent of all net sales in excess of $2,000,000 during each calendar year of the agreement, the first year to start May 1, 1965. The agreement called for minimum royalties of $10,000 for the first year, $15,000 for the second year, and $20,000 for each year thereafter. On April 11, 1969, Mr. Paxton and Kwik Lok executed a supplementary agreement whereby it was agreed that, if Mr. Paxton should die prior to January 5, 1982, Kwik Lok's liability for further royalty payments would cease. As consideration for this supplementary agreement, Kwik Lok agreed to pay Mr. Paxton $25,000.
In November 1966, decedent was hospitalized and at that time had advanced arteriosclerosis, and he was advised by a physician that he would require specific therapy and possibly by-pass surgery for that ailment. Thereafter, however, Mr. Paxton was active in politics. He ran for Congress in 1966, 1970, 1972, and 1974. During this period he also served as one of 20 members of the National Council of the John Birch Society.
On August 3, 1967, decedent as grantor and creator and Lorne House, officer/employee of Kwik Lok, and Jerre as acceptors and trustees signed a document entitled ‘Declaration of Trust of this Constitutional Trust to Be Administered by Natural Persons, Holding Title in Joint Tenancy, Acting under their Constitutional Rights as Citizens of the United States of America, ‘ providing for the formation of the F.G. Paxton Family Organization (PFO). The trustees agreed to accept the conveyances in trust of certain properties for the uses and purposes set forth in the instrument. As consideration for the conveyance in trust, the trustees simultaneously issued 5,000 ‘Certificates of Interest to evidence the equitable interest contributing to the Trust Estate. ‘ 3
The certificate of interest forms, attached to the declaration of trust, contained the following:
The units represented hereby are nonassessable, nontaxable and negotiable as described in the Declaration of Trust which exempts both the trustees and the holders of Certificates of Interest from personal liability for debts or obligations, contractual or tortious, beyond the assets comprising the Trust Estate. This Certificate and the units represented hereby convey no interest of any kind in the properties comprising the Trust Estate and no voice or power or authority of any kind in the management or control thereof or in the management or the control of the Trustees.
Benefits hereby conveyed consist solely of such emoluments as may be determined to be distributed by the actions of the Trustees and nothing more. The units, as represented by this Certificate, are transferable in accordance with the Declaration of Trust on file in the office of Secretary of the Trustees. At the death of the holder hereof this Certificate is null, void and of no force and effect, and no heirs or legal representatives of any deceased holder hereof shall have any right to any property of the Trust or to demand any partition or division of the property of the Trust or to any special accounting.
The trust was to continue for 20 years, unless earlier terminated by the trustees, but the trustees were authorized, at the expiration of the...
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