Gilman v. Comm'r of Internal Revenue (In re Estate of Gilman)
| Citation | 65 T.C. 296 |
| Decision Date | 10 November 1975 |
| Docket Number | Docket No. 2730-72. |
| Parties | ESTATE OF CHARLES GILMAN, DECEASED, HOWARD GILMAN, CHARLES GILMAN, JR., AND SYLVIA P. GILMAN, EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
James B. Lewis and Maurice Austin, for the petitioners.
Agatha L. Vorsanger, for the respondent.
In 1948, decedent owned 60 percent of the common stock and a substantial block of the preferred stock of a corporation. In that year he transferred the common stock to a trust of which he was one of three trustees. He continued to serve as a trustee of that trust and as a director and chief executive officer of the corporation until he died in 1967. Held, decedent did not retain the enjoyment of the entrusted stock or the right to designate the person or persons who would enjoy the stock of the income therefrom within the meaning of sec. 2036(a)(1) or 2036(a)(2), I.R.C. 1954.
The Commissioner determined a deficiency in the Federal estate tax due from the Estate of Charles Gilman, deceased, in the amount of $18,252,485.92. By order of the Court dated January 10, 1973, certain secondary issues were severed for a later trial, and the Commissioner has since conceded one of the remaining adjustments, leaving only the following issue for decision at this time: Whether the value of certain shares of stock transferred by decedent to an irrevocable trust in 1948 is required to be included in decedent's gross estate under section 2036(a).1 The answer depends upon whether decedent retained the enjoyment of the stock within the meaning of section 2036(a)(1) or the right to designate who shall enjoy the stock or the income therefrom within the meaning of section 2036(a)(2).
Charles Gilman (hereinafter decedent or Charles) died testate on June 19, 1967. His wife, Sylvia P. Gilman, and his two sons, Howard and Charles, Jr., are, respectively, the executrix and the executors of the will. At the time they filed the petition herein, each of them resided in the State of New York.
Gilman Paper Co. (hereinafter Gilman Paper, the corporation, or the company) was incorporated in New Hampshire in 1897 under the name of Dalton Power Co. and was reorganized under its present name in 1921. The company is engaged in the manufacture of paper, paperboard, and paper products. Although its operations were originally confined to Vermont, in 1940, the company, through subsidiary corporations, began expanding into southern Georgia and northern Florida. Decedent's father, Isaac Gilman, was the company's principal stockholder and president until the time of his death in 1944.
In early 1940, the outstanding shares of the company's only class of stock were held entirely by Isaac Gilman's family as follows:
+-----------------------------------------------------+
¦Stockholder ¦Number of shares ¦
+----------------------------------+------------------¦
¦ ¦ ¦
+----------------------------------+------------------¦
¦Isaac Gilman ¦15,999 ¦
+----------------------------------+------------------¦
¦Charles Gilman (decedent) ¦5,001 ¦
+----------------------------------+------------------¦
¦Leah Shapiro (decedent's sister) ¦1,000 ¦
+----------------------------------+------------------¦
¦Sadie Collier (decedent's sister) ¦1,000 ¦
+----------------------------------+------------------¦
¦Celia Frank (decedent's sister) ¦1,000 ¦
+----------------------------------+------------------¦
¦Pauline Ballin (decedent's sister)¦1,000 ¦
+----------------------------------+------------------¦
¦Total ¦25,000 ¦
+-----------------------------------------------------+
At that time, Isaac Gilman was about 75 years old. Charles, who had joined his father in the business in 1917 and was himself approximately 42 years old, was the only close family member (apart from his father) who played an important role in the operation of the company. Because he had four sisters who would probably be treated equally with him in the event of his father's death, Charles was worried about his future status in the company as a minority stockholder. He was concerned also that his four sisters or their husbands might disrupt the company, and his father shared that concern. As a result, during late 1939 and early 1940, Charles was making a serious investigation of other possible business opportunities. Isaac Gilman was concerned about the welfare of all of his children and was reluctant to put Charles in a position where he could take advantage of his four sisters by exploiting the company. The problem was solved by an agreement entered into on June 22, 1940, by Charles, his father, and the company. The agreement provided for the following arrangement:
(1) The company's capital stock was reclassified and increased to provide for the authorization of 25,000 nonvoting preferred shares, each of $100 par value, to be exchanged share for share with the then-outstanding stock, and 10 shares of common stock, each of $100 par value, which would have ‘the exclusive voting rights and powers,‘ 6 shares of which were issued to Isaac Gilman and 4 to decedent.
(2) Upon the death of Isaac Gilman, decedent would have the option of purchasing 2 shares of the common stock for $100 each from his father's estate.
(3) The above option was contingent upon decedent entering into an agreement with the company that so long as he was employed by the company his salary would not exceed a ceiling amount computed by a specified formula.
Pursuant to the latter provision, it was expressly stated that any compensation paid to Charles by the company and its affiliates in excess of $30,000 a year plus 10 percent of the net profits in excess of $200,000 (as computed for Federal income taxes) was to be received by him as trustee for the benefit of all the stockholders of the company, to be distributed to them immediately in proportion to their stockholdings. Charles was aware that the highest amount the company has ever earned up to that time was approximately $150,000 or $160,000, and as a consequence of the agreement the $30,000 effective ceiling on his salary was likely to be less than the compensation he was then receiving from the affiliated group ($40,000 in 1940). He was nevertheless willing to accept the terms of the contract. He wanted to control the company because he felt he was the only one in the family that could run it successfully.
On July 26, 1940, the company increased and reclassified its capital stock in accordance with the June 22, 1940, agreement. The common stock of the company was voting and the preferred stock was nonvoting. The preferred stock was entitled to a 3-percent annual cumulative preference dividend, after payment of which any further dividend way payable on both classes of stock share for share. Upon liquidation, the preferred stock was entitled to $100 per share plus arrearages in preference dividends; the common stock was then entitled to $100 per share, and any further assets were to be distributed to both classes of stock share for share.
Following the execution of this agreement and prior to his death, Isaac Gilman transferred 240 preferred shares to his son, Charles, 140 preferred shares to each of his daughters, and 100 preferred shares to his nephew, Herman Gilman.
Isaac Gilman died on August 27, 1944. At that time he owned 15,099 shares of preferred and 6 shares of common stock. Decedent thereupon exercised his option pursuant to the June 22, 1940, agreement and purchased 2 shares of common stock from his father's estate. The remaining 4 shares of common stock were distributed equally among Isaac Gilman's four daughters as provided by his will. The company redeemed the 15,099 shares of preferred stock. As a result of these transactions, the outstanding stock of the company was then held as follows:
+-------------------------------------------------------+
¦ ¦Shares of ¦Shares of ¦
+-------------------------------+-----------+-----------¦
¦ ¦common ¦preferred ¦
+-------------------------------+-----------+-----------¦
¦Stockholder ¦stock ¦stock ¦
+-------------------------------+-----------+-----------¦
¦ ¦ ¦ ¦
+-------------------------------+-----------+-----------¦
¦Decedent ¦6 ¦5,241 ¦
+-------------------------------+-----------+-----------¦
¦Leah Shapiro (and her family) ¦1 ¦1,140 ¦
+-------------------------------+-----------+-----------¦
¦Sadie Collier (and her family) ¦1 ¦1,140 ¦
+-------------------------------+-----------+-----------¦
¦Celia Frank (and her family) ¦1 ¦1,140 ¦
+-------------------------------+-----------+-----------¦
¦Pauline Ballin (and her family)¦1 ¦1,140 ¦
+-------------------------------+-----------+-----------¦
¦Herman Gilman ¦0 ¦100 ¦
+-------------------------------+-----------+-----------¦
¦Total ¦10 ¦9,901 ¦
+-------------------------------------------------------+
On October 31, 1944, the directors elected decedent president and treasurer of the company. At that time, the directors of the company were decedent, Charles Ballin (decedent's brother-in-law), and Morris Gintzler. On February 19, 1945, the company's bylaws were amended to provide that a director could be removed by the shareholders with or without cause.
At a special meeting of the board of directors held on October 5, 1945, the formula for the computation of decedent's salary in accordance with the agreement of June 22, 1940, was abandoned, and the board approved a salary for...
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