Estate of Trompeter v. Commissioner
| Decision Date | 27 January 1998 |
| Docket Number | Docket No. 11170-95. |
| Citation | 75 T.C.M. 1653 |
| Parties | Estate of Emanuel Trompeter, Deceased, Robin Carol Trompeter Gonzalez and Janet Ilene Trompeter Polachek, Co-Executors v. Commissioner. |
| Court | U.S. Tax Court |
Robert A. Levinson, Encino, Calif., Avram Salkin, Bruce I. Hochman, Charles P. Rettig, and Frederic J. Adam, for the petitioner. Irene Carroll, Anne E. Daugharty, Linette Angelastro, and Donald E. Osteen, the for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
This case is before the Court pursuant to a petition filed on behalf of the Estate of Emanuel Trompeter (the estate) to redetermine respondent's determination of a $22,833,693 deficiency in Federal estate tax and a $14,875,909 fraud penalty under section 6663(a). Respondent determined, as an alternative to the fraud penalty, that the estate is liable for an accuracy-related penalty for negligence and gross valuation misstatement under section 6662.
Following concessions, the primary issue that the Court must decide is the September 18, 1992, fair market value of the following assets which the parties agree are included in the gross estate of Emanuel Trompeter (the decedent):
1. 1,533.482 shares of Sterling Holding Co. (Sterling) series A exchangeable preferred stock (Sterling preferred stock). We hold that the applicable value (including accrued dividends) is $1,974,845.
2. Two hundred twenty seven rare gold coins. We hold that the applicable value is $8,129,523.
The Court also must decide the following secondary issues:
1. Whether the decedent's gross estate includes $14 million of diamonds, jewels, gems, art, and artifacts that were not reported on his Federal estate tax return. We hold that his gross estate includes $4.5 million of these assets.
2. Whether certain other items determined by respondent to be included in the decedent's gross estate are so included. We hold they are to the extent and in the amounts stated herein.
3. Whether Sylvia Trompeter (Ms. Trompeter) had a bona fide claim against the estate because the decedent, her former husband, failed to disclose the value and extent of his coin holdings during their divorce proceeding. We hold she did not.
4. Whether the estate is liable for the fraud penalty determined by respondent under section 6663(a). We hold it is.1
Unless otherwise stated, all section references are to the applicable provisions of the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure. Dollar amounts are rounded to the nearest dollar. The term "co-executors" refers collectively to the estate's coexecutors, Robin Carol Trompeter Gonzalez (Ms. Gonzalez) and Janet Ilene Trompeter Polachek (Ms. Polachek).
Some of the facts have been stipulated and are so found. The stipulations and the exhibits submitted therewith are incorporated herein by this reference. The decedent was born in New York on February 22, 1919, and he resided in Thousand Oaks, California, when he died on March 18, 1992. At the time of the filing of the petition, Ms. Gonzalez resided in Florida, and Ms. Polachek resided in California.
The coexecutors are the decedent's sole beneficiaries and his only surviving children. Their mother is Ms. Trompeter. Each coexecutor is college educated, has extensive work experience, and knows about her obligation to file valid Federal tax returns. The coexecutors enjoy a close and friendly relationship with Ms. Trompeter.
The coexecutors are cotrustees of the Emanuel Trompeter Trust (the Trust), a trust that holds most of the decedent's assets. The Trust was revocable during the decedent's life, and the decedent was its sole trustee until Ms. Gonzalez became cotrustee with him in September 1991. Ms. Polachek became a cotrustee with Ms. Gonzalez following the decedent's death.
In 1960, the decedent and Ms. Trompeter formed TEI. TEI manufactured mainly electronic components which assisted in the guidance system of air to ground missiles. TEI also manufactured components used in the television industry.
In March 1989, Sterling, a private company with a calendar yearend, acquired all TEI stock in a leveraged transaction in which the decedent and Ms. Trompeter received approximately $14 million in cash and 3,000 shares of a newly issued Sterling preferred stock. These shares were the only shares of this type of preferred stock that Sterling issued, and holders of these shares were generally entitled to more rights than holders of Sterling's other preferred shares. Of the 3,000 shares of Sterling preferred stock received by them, the decedent received 1,533.482 shares and Ms. Trompeter received the rest. Holders of Sterling preferred stock were entitled to receive "preferential dividends" on the liquidation value of the stock, when and as the dividends were declared by Sterling's board of directors, and they were entitled to certain preferences in the event of liquidation. Preferential dividends accrued daily at the annual rate of 8.5 percent through the end of 1989, 9.83 percent during 1990, 11.17 percent during 1991, and 12.5 percent from the beginning of 1992 through the date on which the Sterling preferred stock was either redeemed or exchanged. To the extent that the dividends were not paid on January 15 of each year, beginning January 15, 1990, all dividends which had accrued on each share then outstanding would be added to the liquidation value of that share and would remain a part thereof until the dividends were paid. The decedent and Ms. Trompeter were entitled, subject to minimal restrictions, to exchange their Sterling preferred stock for Sterling's 8-½ percent/12-½ percent subordinated debentures due December 31, 1995.
At designated intervals, Sterling was required by the purchase agreement (the purchase agreement) underlying the Sterling preferred stock to redeem shares of the stock at $1,000 per share plus accrued dividends.2 Sterling had to use its "best efforts" to redeem 1,000 shares of the Sterling preferred stock on December 31, 1991, and another 1,000 shares on December 31, 1992. Sterling had a mandatory obligation to redeem 1,000 shares of the Sterling preferred stock on each December 31, 1993 through 1995. Redemptions and payments of dividends were prohibited during any period of default on Sterling's senior debt. Redemptions and payments of dividends were also prohibited by provisions set forth in Sterling's senior debt and senior subsidiary debt agreements. These provisions generally tied a redemption to Sterling's profitability as shown in its consolidated income statement. Sterling's 1990 through 1992 consolidated income statements, which were part of those years' financial statements which were audited and discussed without qualification by Sterling's independent auditor, listed the following information:
No dividends were paid on the Sterling preferred stock from its issuance through September 18, 1992, and no shares were redeemed during that time. Sterling had a positive cash-flow and was timely paying interest and principal on its senior debt. Sterling also was paying its monthly operating expenses. Sterling had postponed paying interest and/or principal on some of its liabilities which otherwise were due. These postponements were done with the consent of the relevant creditor(s).
When the decedent died, the Trust held 1,533.482 shares of Sterling preferred stock. On the decedent's Federal estate tax return, the estate reported the applicable value of each share at $10 and the total value at $15,335. Approximately 13 months after the date of valuation, Sterling informed its...
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