Furman v. Commissioner
| Decision Date | 30 April 1998 |
| Docket Number | Docket No. 11568-96.,Docket No. 11569-96. |
| Citation | 75 T.C.M. 2206 |
| Parties | Maude G. Furman, Donor, Deceased, and Estate of Maude G. Furman, Deceased, Robert G. Furman, Executor v. Commissioner. Royal G. Furman, Donor, Deceased, and Estate of Royal G. Furman, Deceased, Robert G. Furman, Executor v. Commissioner. |
| Court | U.S. Tax Court |
Stanley W. Rosenkranz, Tampa, Fla., and James R. Freeman, for the petitioners. James F. Kearney, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in petitioners' Federal gift taxes and Federal estate tax and additions to tax as follows:
Estate of Maude G. Furman
Additions to Tax
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Deficiency Sec. 6651(a) Sec. 6653(a)
Gift tax—1981 ........................... $ 75.460 $18,865 $3,773
Estate Tax .............................. 115,649 -- --
Estate of Royal G. Furman
Additions to Tax
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Deficiency Sec. 6651(a) Sec. 6653(a)
Gift tax—1981 .............................. $75,460 $18,865 $3,773
After concessions regarding the estate tax deficiency, the issues for decision are:
1. Whether for purposes of computing the taxable gifts of Royal G. Furman (Royal) and the taxable gifts and taxable estate of Maude G. Furman (Maude), the fair market value of 24 shares of Furman's, Inc. (FIC) common stock exchanged by each of Royal and Maude in 1981 for preferred stock of FIC was $300,000 ($12,500 per share) as petitioners contend, $540,540 ($22,522 per share) as respondent contends, or some other amount. We hold that the fair market value was $424,552 ($17,690 per share).
2. Whether for purposes of computing Maude's taxable estate, the fair market value of six shares of FIC common stock that she transferred to Robert G. Furman (Robert) in 1980 was $62,016 ($10,336 per share), as petitioners contend, $147,600 ($24,600 per share), as respondent contends, or some other amount. We hold that the fair market value was $82,859 ($13,810 per share).
3. Whether Royal and Maude had reasonable cause for failing to file gift tax returns for the period ending September 30, 1981, and whether their failures to pay gift taxes for that period were due to negligence or intentional disregard of rules and regulations. We hold that Royal and Maude had reasonable cause for failing to file gift tax returns and were not negligent in failing to pay gift taxes.
Some of the facts have been stipulated and are incorporated herein by this reference. Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice & Procedure. All amounts have been rounded to the nearest dollar.
Royal died testate on June 29, 1990. His wife Maude died testate on June 12, 1992 (collectively decedents). Royal and Maude were residents of Florida at the times of their deaths. Robert, the personal representative of decedents' estates, resided in Florida at the time of filing the petitions.1 Decedents were survived by five children, including Robert, their son.
FIC is a Florida corporation that was organized in 1959. The principal place of business of FIC is Florida. Throughout its existence FIC has been a C corporation, and the stock of FIC has never been publicly traded. FIC was founded by Maude, Royal, and Robert for the purpose of acquiring and operating a Burger King2 restaurant franchise after Royal had retired from a 35-year career as a mail carrier. Until the founding of FIC, Maude, Royal, and Robert resided in Chicago, Illinois.
From its organization in 1959 until February 1980, FIC was capitalized with 100 shares of no-par common stock issued and outstanding, held as follows:
Maude ............. 30 shares
Royal ............. 30 shares
Robert ............ 40 shares
Although Royal and Maude had five children, Robert is their only child who has ever had a common stock ownership interest in FIC or been active in its management.
Burger King Corp. (BKC), a Florida corporation headquartered in Miami, Florida, is the franchisor of the second largest restaurant chain in the world, after McDonald's. Since 1967, BKC has been a wholly owned subsidiary of Pillsbury, Inc. Pillsbury was acquired by Grand Metropolitan PLC in 1989.
FIC, since its formation, has been engaged solely in the business of owning and operating franchised Burger King restaurants. At the date of trial, FIC operated 27 Burger King restaurants, primarily in Manatee, Sarasota, Charlotte, and Lee Counties, on the west coast of Florida.
FIC entered the fast-food business in May 1959 by opening Burger King Store No. 12 (Store No. 12) in North Miami Beach, Florida, one of the original restaurants in the Burger King chain. Royal and Maude relocated to Florida to operate the new restaurant, while Robert had intended to stay in Chicago, where he was employed as a special agent for an insurance company.
Just 2 weeks after the opening of Store No. 12, Robert received a call from James McLamore, one of the cofounders of BKC, informing him that Royal had been hospitalized. Robert traveled to Florida and immediately went to work in Store No. 12. After Royal's recuperation, Robert decided to stay in Florida and help manage FIC. Robert has remained in the fast-food business ever since.
In 1961, FIC purchased a 20-percent interest at a cost of $15,000 in three corporations that were opening Burger King restaurants in the greater Chicago area (the Chicago Operation). In 1962, at the request of Mr. McLamore, Robert moved back to Chicago to participate in the management and operation of the Chicago Operation of which he ultimately became executive vice president and a member of the board of directors. Robert's management duties in the Chicago Operation included the approval of new restaurant locations, supervising the construction of new restaurants, and the hiring and training of their employees. As of November 1969, the Chicago Operation directly operated 37 Burger King restaurants and was subfranchisor of 29 other Chicago-area Burger King restaurants.
In 1970, after a corporate reorganization of the Chicago Operation, FIC sold its interest in the Chicago Operation to Self-Service Restaurants (Self-Service), a publicly traded Burger King franchisee. In exchange for all of FIC's shares in the Chicago Operation, FIC received shares of Self-Service common stock that FIC later sold for approximately $222,000, as well as Self-Service's promissory note in the principal amount of $868,500. Following the sale, Robert was employed by Self-Service to assist during the period of transition to Self-Service management.
In 1971, Robert terminated his employment with Self-Service. Robert remained in Chicago, where he managed five Burger King restaurants that he owned directly, and participated in the management of six Burger King restaurants in Milwaukee, Wisconsin, in whose corporate franchisee he had acquired a 27-percent stock interest.
In 1973, FIC purchased an existing Burger King restaurant in Fort Myers, Florida. Thereafter, in 1976, after Robert returned to Florida, FIC acquired three existing Burger King restaurants, in Sarasota, Bradenton, and Port Charlotte on the west coast of Florida (the 1976 Purchase), with an exclusive territorial agreement (the Territorial Agreement). The purchase price for the 1976 Purchase was $500,000, payable $300,000 in cash and $200,000 over 5 years. FIC allocated $200,000 of the $500,000 purchase price to the Territorial Agreement.
The Territorial Agreement granted FIC, for a period of 5 years, an exclusive territorial right to build, own, and operate Burger King restaurants in Manatee, Sarasota, and Charlotte Counties in Florida (the Exclusive Territories) and a right of first refusal to build, own, and operate Burger King restaurants in Lee County, Florida (collectively, the Protected Territories). The Territorial Agreement also provided that if FIC had six Burger King restaurants open and in operation on or before August 26, 1981, it would be entitled to a right of first refusal on all Burger King restaurants to be subsequently franchised in the Exclusive Territories through August 1986.
After his return to Florida, Robert moved to Sarasota, Florida, and worked full time for FIC selecting and developing real estate sites, securing financing, and supervising the construction of new restaurants, while continuing to supervise the operations of existing FIC-owned restaurants.
As of February 2, 1980, FIC had seven Burger King restaurants in operation in the Exclusive Territories. As of August 24, 1981, FIC had a total of nine Burger King restaurants. Inasmuch as FIC had more than six Burger King restaurants in operation before August 26, 1981, FIC became entitled to the right of first refusal in the Exclusive Territories through August 1986.
After opening Store No. 12 in 1959, FIC retained Hugh B. Shillington, C.P.A. (Mr. Shillington), as its outside accountant, to assist in tax and financial accounting matters. Mr. Shillington was a principal of Shillington & Fay (S&F), a Coral Gables, Florida, accounting firm. Mr. Shillington served as outside accountant to other Burger King franchisees and had been recommended to FIC by BKC. S&F reviewed3 FIC's annual financial statements, including financial statements for FIC's fiscal years ending September 30, 1979, 1980, and 1981 (FY 1979, FY 1980, and FY 1981). Mr. Shillington, who advised FIC to retain its financial records for 7 years, died in 1995.
Louis B. Tishler, Jr. ...
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