Gibbs v. C.I.R., 022759 FEDTAX, 57430

Docket Nº:57430, 57431.
Opinion Judge:KERN, Judge:
Party Name:KATHLEEN I. GIBBS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. GEORGE W. GIBBS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Attorney:Paul R. Scott, Esq., and Marshall S. Scott, Esq., for the petitioners. Robert O. Rogers, Esq., for the respondent.
Case Date:February 27, 1959
Court:United States Tax Court
 
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18 T.C.M. (CCH) 178 (1959)

T.C. Memo. 1959-38

KATHLEEN I. GIBBS, Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

GEORGE W. GIBBS, Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 57430, 57431.

United States Tax Court.

February 27, 1959

Paul R. Scott, Esq., and Marshall S. Scott, Esq., for the petitioners.

Robert O. Rogers, Esq., for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION.

In these two cases (Docket Nos. 57430 and 57431), which are consolidated for hearing and opinion, respondent has determined deficiencies in Federal gift taxes for the year 1951 in the respective amounts of $23,231.25 and $24,131.25. The deficiencies result from respondent's determination that common stock of Gibbs Corporation, the subject matter of the gifts here in question, had a value at the date of gift of $2,500 a share instead of the value of $1,000 a share placed upon them in petitioners' gift tax returns.

FINDINGS OF FACT.

Those facts stipulated and the exhibits attached thereto are made a part of our findings by this reference.

Petitioners George W. and Kathleen I. Gibbs, husband and wife hereinafter sometimes referred to as ‘ George’ and ‘ Kathleen,‘ are individuals residing in Jacksonville, Florida. They filed their Federal gift tax returns for the taxable year 1951 with the district director of internal revenue for the State of Florida.

On June 5, 1951, George and Kathleen made individual separate gifts to their son George W. Gibbs, Jr., hereinafter sometimes referred to as ‘ George, Jr.,’ of 75 and 68 shares, respectively, of the common stock of the Gibbs Corporation, hereinafter sometimes referred to as ‘ the corporation.’ They reported these gifts and paid a gift tax based upon a value of $1,000 per share.

The corporation is a closely held one, incorporated in Florida. It has its principal place of business in Jacksonville. It was originally incorporated in 1911 as the Gibbs Gas Engine Company and changed its name in 1945 to the Gibbs Corporation.

Originally the corporation made marine motors but later expanded its business to the building and repairing of small vessels.

George W. Gibbs and J. D. Weed, hereinafter sometimes referred to as ‘ Weed,’ originally organized the corporation. The stock of the corporation is not listed on any exchange and is not traded over the counter. The outstanding common stock of the corporation consisted, at all times relevant to these proceedings, of 445 shares of $100 par, held by the following shareholders as of the dates indicated:

Common

Stock Held

as of: George Kathleen George, Jr. Weed Others

12-26-41 228 0 0 202 15

12-30-41 100 83 105 157 0

12-30-48 78 68 142 157 0

6- 6-51 3 0 285 157 0

From the beginning of the corporation to 1941 George and Weed (George's brother-in-law) were its principal executives, George being president. George, Jr., had worked for the corporation when he was a boy. In 1941 George, Jr., was made secretary-treasurer of the corporation and a member of its board of directors. He quickly demonstrated his capacity as an executive to George and Weed. At the same time he was offered positions outside of the company paying higher salaries than he was receiving from the company. In order to retain his services to the corporation George and Weed agreed to and did give George, Jr., a substantial stock interest in the corporation, George giving him 48 shares and Weed giving him 45 shares, both gifts being made on December 27, 1941. At or about the same time, George, Jr., purchased 11 shares from one of the minority stockholders listed as ‘ Others' in the above table at $90.91 a share and 1 share from another for $100. On December 29, 1941, George gave Kathleen 83 shares of the corporation's common stock. In 1941 the company authorized and issued 1,490 shares of 6 per cent cumulative $100 par preferred stock, redeemable at $105 per share. From 1941 to June 6, 1951, this preferred stock was held as follows:

George 200 shares

Kathleen 466 shares

George, Jr. 360 shares

Weed 464 shares

On December 31, 1941, a dividend of $200 per share was paid on the common stock. The stockholders simultaneously purchased preferred stock at par. This was the only dividend paid on the common stock during the period relevant to these proceedings In 1942 a $9,000 dividend was paid on the preferred stock, being the only dividend paid on the preferred stock during the period relevant to these proceedings. As of May 27, 1951, there were arrearages of the cumulative dividend on the preferred stock amounting to $75,245, or $50.50 per share. Officers' salaries, including incentive bonuses, paid by the Gibbs Corporation for 1947 to 1950, inclusive, as shown by the books and records of the corporation, are as set forth in the following schedule:

Year Total For Joseph D. Weed

Salaries George George W. Family Holding Minority

Paid W. Gibbs Gibbs, Jr. Stock Control Stockholder Total

1947 $35,000 $25,000 $ 60,000 $10,000 $ 70,000

1948 42,750 32,750 75,500 10,000 85,000

1949 20,000 15,000 35,000 10,000 45,000

1950 77,500 72,500 150,000 10,000 160,000

In 1950 a salary base of $35,000 each to George W. Gibbs and George W. Gibbs, Jr., was restored by the corporation, and said two officers were reimbursed for a total of $35,000 cut from their 1949 salaries, and each received an incentive bonus of $22,500 additional. The 1951 base salary was also $35,000 each for George W. Gibbs and George W. Gibbs, Jr., and $10,000 for Joseph D. Weed. Provision for an incentive bonus by the corporation was made on January 30, 1948, providing for 9 1/2 per cent of net profit before tax to be distributed as follows:

Per cent

President 2 1/2

Chairman 2 1/2

Vice President, Marine Division 1 1/2

Vice President, Equipment Division 1 1/2

Vice President, Comptroller 1 1/2

An additional 2 1/2 per cent incentive bonus as to be distributed to other key employees selected at the time the annual bonus was declared.[1] lsettlement of their estates. Jr., became concerned over the possible effect of the death of his parents and Weed on his position in and control of the corporation. His parents had two children, himself and a sister. Weed had four children and eight grandchildren. George, Jr., did not want to devote his entire life to the corporation if there was a possibility of finding himself in the position of a minority stockholder upon the death of his parents and Weed and the settlement of their estates. George and Kathleen were interested in effecting an approximately mately equal division of their estates between George, Jr., and his sister, but with their common stock interests in the corporation going to George, Jr. In 1948 George, Jr., proposed that he purchase some additional shares of the stock of the corporation and obtain an option on other shares owned by his parents at a fair value such as would be satisfactory to his parents and sister. At his suggestion an appraisal of the stock made by an independent appraiser, Standard Research Consultants, was used for the purpose of determining what its fair market value was as of December 30, 1948. The appraisal made earlier in 1948 by Standard Research Consultants in connection with the possible sale of the corporation's stock to outside interests was tentative in that it was subject to revision upon an examination of the corporation's audit reports for 1948 when they became available in 1949. The tentative appraisal was an ‘ outside figure’ of $1,100 a share. The revised appraisal made in 1949 was $800 a share. The fair market value of the common stock of the corporation as of December 30, 1948, was not in excess of $1,100 a share. On December 30, 1948, George sold 19 shares of common stock to George, Jr., at a price of $1,100 per share. In payment George, Jr., gave his father $900 in cash and transferred to him a note in the amount of $20,000. On that date George, Jr., signed the following letter to his father: I hereby offer to purchase from you 19 shares of Gibbs Corporation common stock at the price of $1,100 per share (being the price fixed by independent appraisers) provided you will grant me an option for ten years on your remaining 78 shares at the same price per share and provided that Mother will grant me an option on her 68 shares for the same period and at the same price per share. And on same day George executed the following option: I, GEORGE W. GIBBS, of Jacksonville, Duval County, Florida, for myself and my personal representatives, being the record holder and owner of 78 shares of the capital stock of Gibbs Corporation, a Florida corporation, for and in consideration of the sum of Ten Dollars ($10.00) to me paid by George W. Gibbs, Jr., receipt of which is hereby acknowledged, hereby grant to the said George W. Gibbs, Jr. an option for the period of ten years from the date hereof to purchase any number of the shares of the capital stock owned by me in the Gibbs Corporation not exceeding 78 shares, at the price of Eleven Hundred Dollars ($1100.00) a share, exercisable by signifying his intention to purchase the same by notice in writing to me or my personal representatives, and a failure to serve such notice in writing within the period of ten years shall terminate this option without further action, time...

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