Grieve v. Comm'r
| Decision Date | 02 March 2020 |
| Docket Number | T.C. Memo. 2020-28,Docket No. 8249-18. |
| Parties | PIERSON M. GRIEVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
PIERSON M. GRIEVE, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
T.C. Memo. 2020-28
Docket No. 8249-18.
UNITED STATES TAX COURT
March 2, 2020
William D. Thomson and James G. Bullard, for petitioner.
Randall L. Eager, Jr., and Christina L. Cook, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KERRIGAN, Judge: Respondent determined a deficiency in petitioner's 2013 Federal gift tax of $4,399,032 and an accuracy-related penalty pursuant to section 6662(a) and (b)(5) of $628,199 for a substantial gift tax valuation
Page 2
understatement. After concessions,1 the remaining issues for consideration are the fair market values of petitioner's 99.8% member interest in Rabbit 1, LLC (Rabbit), transferred to the Pierson M. Grieve 2013 Grantor Retained Annuity Trust (GRAT) on October 9, 2013,2 and his 99.8% member interest in Angus MacDonald, LLC (Angus), transferred to the Grieve 2012 Family Irrevocable Trust (Irrevocable Trust) on November 1, 2013.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated, and the stipulation of facts is incorporated in our findings by this reference. Petitioner resided in Florida when he timely filed his petition.
Page 3
I. Petitioner's Background
Petitioner was married to Florence Grieve, and they had three children. Florence died suddenly on October 1, 2012. Margaret Grieve was their eldest child, and she practiced law in the financial services industry and served as chair of the board of the Central Asia American Enterprise Fund.
At the end of petitioner's career he was the chairman and chief executive officer of Ecolab, Inc. (Ecolab), from 1983 to 1996. Ecolab is a public corporation listed on the New York Stock Exchange and headquartered in St. Paul, Minnesota. Throughout his career petitioner accumulated wealth. While at Ecolab he acquired the corporation's stock that he and his family continued to own.
In the late 1980s or early 1990s petitioner established the Grieve Family Limited Partnership. Pierson M. Grieve Management Corp. (PMG) was the general partner of the Grieve Family Limited Partnership. Petitioner consolidated management of his assets in PMG. These entities were created to preserve and manage petitioner's family wealth.
In the early 2000s Margaret became involved in helping petitioner manage the family wealth. In 2008 she purchased PMG from petitioner for $6,200 and became its president. Since 2008 Margaret has owned all of the outstanding
Page 4
shares of PMG. Additionally, she has managed the Grieve family office through PMG and has not been compensated.
Petitioner and Florence had engaged a law firm to handle their business and estate planning needs. In 2012 they decided to update their estate plan. Petitioner requested that the law firm perform a top-to-bottom analysis of his assets to address how best to achieve the family's wealth-management goals in a tax-efficient manner. Florence died before the updated estate plan was finalized. As part of their updated estate plan petitioner and Florence asked Margaret to assume full-time responsibility for managing the family wealth. Since 2012 Margaret has been responsible for investing and managing the family wealth.
PMG held a controlling ownership interest in closely held entities with approximately $70 million in assets. The portfolio of assets was held in an investment account at Goldman Sachs. Margaret selected the wealth management group at Goldman Sachs as PMG's investment adviser and asset manager.
Although the family's Ecolab stock was held in custody accounts at Goldman Sachs' San Francisco office, Margaret made the investment decisions pertaining to the Ecolab stock. Goldman Sachs neither managed nor charged a management fee on the Ecolab stock held in its custody accounts. Margaret
Page 5
decided to maintain a concentrated position in the Ecolab stock because of its low cost basis.
Margaret worked with the law firm to develop petitioner's updated estate plan. In order to accomplish petitioner's goal, two entities were created: Rabbit and Angus.
II. Rabbit
Rabbit was formed as a limited liability company (LLC) under the laws of Delaware on July 31, 2013. At its inception Rabbit had two members: PMG and the Pierson M. Grieve Revocable Trust (Grieve Revocable Trust). On August 28, 2013, PMG contributed $2 and the Grieve Revocable Trust contributed $998 to a brokerage account in Rabbit's name. The following chart reflects member contributions and the ownership structure of Rabbit as of July 31, 2013:
| Member | Initial contribution | Class A voting units | Class B nonvoting units | Ownership interest |
| PMG | $2 | 20 | -0- | 0.2% |
| Grieve Revocable Trust | 998 | -0- | 9,980 | 99.8% |
On September 3, 2013, petitioner transferred to Rabbit's brokerage account 82,984 Ecolab shares with a fair market value of $7,682,659. Petitioner deposited $1 million in cash into Rabbit's brokerage account on September 18, 2013. As of
Page 6
October 9, 2013, Rabbit had no debt and its brokerage account had a fair market value of $9,102,757.3
On October 6, 2013, petitioner and Margaret, in her capacity as trustee of the Grieve Revocable Trust, executed the GRAT agreement. Petitioner structured the GRAT according to Internal Revenue Service guidance to avoid incurring gift tax liability.4 The GRAT agreement provided that the trustee shall pay to petitioner an annuity equal to the fair market value of assets transferred to the trust for Federal gift tax purposes as follows: (1) 47.14757% to be paid within 105 days of October 9, 2014, and (2) 56.57708% to be paid within 105 days of October 9, 2015.
On October 9, 2013, Margaret, as trustee of the Grieve Revocable Trust, assigned 9,980 class B nonvoting units of Rabbit to the GRAT. Petitioner determined that the fair market value of the 9,980 class B units of Rabbit was $5,903,769 as of October 9, 2013, resulting in annuity payments pursuant to terms of the GRAT of $2,783,485 and $3,340,180.
Page 7
III. Angus
Angus was formed as an LLC under the laws of Delaware on August 13, 2012.5 At its inception Angus had two members: PMG and Florence. On September 7, 2012, PMG contributed $200 and Florence contributed $99,800 to a brokerage account in Angus' name. Florence transferred her interest in Angus to petitioner on September 26, 2012. The following table reflects member contributions and the ownership structure of Angus as of September 7, 2012:
| Member | Initial contribution | Class A voting units | Class B nonvoting units | Ownership interest |
| PMG | $200 | 20 | -0- | 0.2% |
| F. Grieve | 99,800 | -0- | 9,980 | 99.8% |
As of November 1, 2013, Angus had no debt and its brokerage account held the following assets with the following fair market values:
Page 8
| Assets | Fair market value |
| Cash and short-term investments (brokerage account) | $20,665,824 |
| Limited partnership interests (Palladium Investments) | 7,316,882 |
| Investments in venture capital funds (Grossman Investments) | 406,406 |
| Promissory notes | 3,581,571 |
| Total | 31,970,683 |
On November 1, 2013, petitioner and South Dakota Trust Co., LLC, as trustee of the Irrevocable Trust, executed a single-life private annuity agreement. Petitioner created the Irrevocable Trust in 2012 for the benefit of the Grieve children. Under the terms of the single-life private annuity agreement petitioner assigned his 9,980 class B units in Angus to the Irrevocable Trust in exchange for a single-life annuity that paid an annual sum of $1,420,000. On November 1, 2013, the single-life private annuity had a fair market value of $8,043,675. Through this transaction petitioner intended to make a net taxable gift to the Irrevocable Trust to the extent that the fair market value of his interest in Angus exceeded the fair market value of the single-life private annuity.
IV. Operations of Rabbit and Angus
PMG owned the class A voting units, a 0.2% ownership interest, in both Rabbit and Angus. These entities were managed similarly. Margaret was the sole
Page 9
owner of PMG and was chief manager of both Rabbit and Angus. The LLC agreements of both Rabbit and Angus gave her a lifetime appointment as chief manager. The agreements allowed her to be removed for cause and also provided her with the right to designate a successor chief manager.
Pursuant to the agreements the chief manager was entitled to reasonable compensation; however, Margaret chose not to receive compensation. Members had the right to approve compensation, but if the chief manager was a member or an affiliate of a member, he or she could not participate in the compensation approval process. The agreements defined "member" as the holder or holders of the issued and outstanding membership units which were divided into class A voting membership units and class B nonvoting membership units. They defined "affiliate" to include a person who controls or is controlled by a member.
Holders of class A units possessed all of the voting powers for all purposes, whereas holders of class B units had no voting power. Class B units could not vote on or participate in any proceedings in which the entity or its members took action.
The LLC agreements contained provisions about transferring membership units to a person other than the initial members. They required the full consent of all members owning class A units before a member could transfer all or part of
Page 10
their units, unless the person to whom the units were being transferred was a "permitted transferee". "Permitted transferee" was defined to include any lineal descendant of petitioner or Florence, a trust created for the exclusive benefit of any one or more such lineal descendants and/or their spouses, and, in the case of Rabbit, a charitable organization.
Neither the Rabbit nor the Angus class B units have been sold since their assignment to...
To continue reading
Request your trial