Estate of Shlensky v. Commissioner
| Citation | 1977 TC Memo 148,36 TCM (CCH) 628 |
| Decision Date | 16 May 1977 |
| Docket Number | Docket No. 8843-74. |
| Parties | Estate of Max Shlensky, Deceased, Blanche Siegel, Co-Executor v. Commissioner. |
| Court | United States Tax Court |
Warren E. King, 228 N. La Salle St., Chicago, Ill., for the petitioner. David P. Fuller and James F. Hanley, Jr., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in the amount of $135,295.51 in petitioner's Federal estate tax. Other issues having been settled, the only ones remaining for decision are as follows:
1. What was the fair market value on September 7, 1970, the date of decedent's death, of the Morris Building of Joliet, an asset of decedent's wholly owned corporation?
2. Whether the estate is entitled to a deduction for a theft loss under section 20541 as the result of certain activities of Harold Shlensky, decedent's brother and co-executor of decedent's estate.
Decedent, Max Shlensky (hereinafter referred to as Max), died testate on September 7, 1970. Max's brother, Harold Shlensky (hereinafter referred to as Harold) of Chicago, Illinois, and one of his sisters, Blanche Siegel (hereinafter referred to as Blanche) were appointed co-executors of his estate and filed the Federal estate tax return with the District Director, Internal Revenue Service, Chicago, Illinois, on December 7, 1971. At the time the petition was filed, Blanche was a legal resident of Detroit, Michigan.
When Max died, he owned all of the outstanding shares of Morris Building of Joliet, Inc. (hereinafter referred to as the corporation). The value of the corporation's assets (other than the Morris Building of Joliet (hereinafter the Morris Building) and leaseholds relating thereto) on the date of Max's death, as well as the amount of the corporation's liabilities, were as follows:
Assets
Securities ................... $190,081.26
Cash ......................... 2,371.10
Loan rec.—H. Shlensky ........ 5,000.00
___________
$197,452.36
Liabilities
Debt due—Max Shlensky ........ $ 91,494.89
Mortgage ..................... 20,869.20
Accrued, Expenses (taxes) .... 20,099.06
Tenant's Security Deposit .... 2,000.00
___________
$134,463.15
The Morris Building, one of the corporation's principal assets, was situated on real estate not owned in fee by the corporation but, rather, was on a ground lease payable at the rate of $780 per month or $9,360 per year. On December 10, 1971, the Morris Building was sold for $130,000. There had been no material change in circumstances relating to the building between September 7, 1970, the date of Max's death, and December 10, 1971, the date of sale. Sometime prior to the date of sale, an investment group had offered $50,000 for the building, and such offer was rejected.
Unverified and unaudited financial statements relating to the building for the period August 1970 through December 1971 disclosed $83,034 of receipts and $137,537.76 of disbursements, producing a negative figure of $54,503.76. The disbursements, however, included certain expenditures, such as mortgage principal payments, which were capital in nature. James E. Larkin (hereinafter Larkin), petitioner's expert witness, used these statements as the basis for his appraisal that the Morris Building had no economic value on the date of decedent's death.
Because Blanche resided in Detroit, Michigan, and Harold was familiar with Max's business affairs, Harold, as co-executor, took primary responsibility for management of the assets and business of Max's estate. However, differences of opinion concerning the administration of the estate and the interpretation and construction of the will arose between Harold and his four sisters (including Blanche), all of whom were beneficiaries under a residuary trust created under Max's will. As a result of these differences, a settlement agreement was executed on August 8, 1972.
Under the terms of this settlement agreement, the residuary trust was to be terminated. Harold was to pay $41,000 to each of his four sisters (the remaining beneficiaries), and they, in turn, would assign him their interest in the estate. Additionally, Harold was to assume responsibility for the estate's tax liabilities and miscellaneous expenses of administration and was to assure that $50,000 was paid to certain charities. The estate's real estate was to be quitclaimed to Harold's nominee and the estate's assets distributed to Harold in his own right. Harold represented in the agreement that the value of the estate's assets was $265,118.97.
On August 16, 1972, Harold petitioned the probate court for approval of the settlement agreement of August 8, 1972. In granting its approval, the probate court, in its order of August 25, 1972, recited in part:
* * * said Settlement Agreement * * * provides for payment and satisfaction to the beneficiaries of the value of their stipulated participatory interests in the residue * * *
On August 21, 1972 and August 22, 1972, Harold withdrew $50,000 and $114,439.94, respectively, from the estate's checking account. He used these funds to pay the other beneficiaries, his sisters, $41,000 each as provided for in the settlement agreement of August 8, 1972.
On March 15, 1973, Harold and his four sisters entered into a second agreement. Among other recitals, this agreement stated that certain representations and warranties made with respect to the estate's assets had induced the sisters to assign their interests to Harold under the August 8, 1972, settlement agreement and that such representations and warranties "contained material and significant understatements of numbers, amounts and values." The amendatory agreement further stated that while the understatements were "in all probability inadvertently made," they were misleading. The parties then agreed to settle their differences by reaffirming the prior settlement agreement and by Harold paying each of his sisters an additional sum of $25,000 and the attorney for three of his sisters the sum of $15,000.
Harold considered all of the estate's assets as his own as a result of the settlement agreement of August 8, 1972, and its subsequent modification under the March 15, 1973, agreement.
Among the assets of the estate was the stock of Bankers Finance Company, a corporation in which Max and Harold each had a 50-percent interest. One of the assets of Bankers Finance Company was a checking account at the Central National Bank in Chicago, which as of August 31, 1970, had a balance of $77,914.30. On September 16, 1970, Harold, as president of Bankers Finance Company, opened a corporate checking account at the same bank designating the account and transferred the $77,914.30 to that account. Harold then made four withdrawals totaling $75,000 from that account, beginning on October 2, 1970, and ending on October 25, 1970, and deposited the same amount in his personal account at Central National Bank in Chicago.
On May 18, 1975, Harold filed with the probate court the estate's revised current account for the period September 7, 1970 to February 28, 1975. On June 9, 1975, Blanche filed her objections to this account, reciting that an estate tax deficiency had been asserted by virtue of the issuance of the statutory notice of deficiency involved in the instant proceeding. She listed 117 objections, including allegations that Harold had wrongfully converted and failed to account for certain proceeds (one item of which was the net sale proceeds of the Morris Building), shares of stock, bonds, debentures, and notes (one of which was a $10,000 U.S. Treasury note).
Finally, Blanche objected to 55 disbursements made by Harold during the period of administration of the estate including the withdrawals from the estate that Harold made to pay Blanche and her sisters the $41,000 each under their August 8, 1972, agreement.
Believing he owned the entire estate, Harold refused to give a more complete accounting. On August 18, 1975, the probate court entered its order finding that Harold had converted the estate's assets and disbursed $172,433.40 of the estate's funds for his own use without lawful authority or order of the court. The order conformed with Blanche's objections in all respects.
OpinionSection 2031(a) provides as follows:
The value of the gross estate of the decedent shall be determined by including to the extent provided for in this part, the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.
For purposes of section 2031(a), "value" means "fair market value," i. e., "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." Sec. 20.2031-1(b), Estate Tax Regs.
On its Federal estate tax return, petitioner showed the fair market value of Max's wholly owned corporation as $100,000 on the date of decedent's death. Respondent determined its value to be $181,541.49. The difference is attributable to the value the parties have assigned to one of the corporation's principal assets — the Morris Building located in Joliet, Illinois.
Respondent valued the Morris Building as of the date of decedent's death at $130,000, basing his appraisal on a sale of the building at that price approximately 15 months after decedent's death.
Ordinarily, the price set by a freely negotiated agreement made reasonably close to the valuation date is, in the absence of more reliable evidence, persuasive evidence of fair market value. Ambassador...
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