Merritt v. Comm'r of Internal Revenue, Docket Nos. 54563-54565.
| Decision Date | 29 October 1957 |
| Docket Number | Docket Nos. 54563-54565. |
| Citation | 29 T.C. 149 |
| Parties | MARJORIE M. MERRITT ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Benjamin Wiener, Esq., and Elias Rosenzweig, Esq., for the petitioners.
John M. Doukas, Esq., for the respondent.
Petitioners (two sisters and a brother) plus their mother and another brother owned all the stock of B corporation. With a view towards restricting ownership of stock in B to members of their family, the stockholders on June 18, 1932, entered into an agreement reserving to each a life interest in the stock owned by each, with provisions for devolution of the remaining in the stock of each of his or her children or descendants or, in the case of petitioners and their brother, to their brothers and sisters, in the absence of children or descendants. They reserved the right to receive all dividends in money whether paid out of earnings or capital. Held, the agreement did not result in completed transfers subject to gift tax. Sec. 501, Rev.Act 1932.
The Commissioner determined deficiencies in gift tax and additions to tax for failure to file gift tax returns for 1932 as follows:
+----------------------------------------------------+
¦Petitioner ¦Deficiency¦Addition to¦
+-----------------------------+----------+-----------¦
¦ ¦ ¦tax ¦
+-----------------------------+----------+-----------¦
¦Marjorie M. Merritt ¦$9,548.89 ¦$2,387.22 ¦
+-----------------------------+----------+-----------¦
¦Lula Marion McElroy Pendleton¦6,044.59 ¦1,511.15 ¦
+-----------------------------+----------+-----------¦
¦William R. McElroy ¦6,758.83 ¦1,689.71 ¦
+----------------------------------------------------+
The principal issue is whether an agreement entered into by petitioners on June 18, 1932, resulted in the making of transfers subject to gift tax.
A stipulation of facts filed by the parties is incorporated herein by reference as part of these findings.
Petitioners and Edwin M. McElroy, their deceased brother, are the children of Robert L. and Lula McElroy. Each petitioner maintains his or her office in New York, New York. Marjorie M. Merritt and William R. McElroy are residents of Daytona Beach, Florida, and Lula Marion McElroy Pendleton is a resident of Charlottesville, Virginia.
Bellemead Development Corporation (hereinafter referred to as Bellemead) was on June 18, 1932, and still is, a Delaware corporation.
On June 18, 1932, there were issued and outstanding 800 shares of the capital stock of Bellemead which were owned as follows:
+----------------------------------------+
¦ ¦Shares ¦
+-------------------------------+--------¦
¦Lula McElroy ¦100 ¦
+-------------------------------+--------¦
¦Marjorie M. Merritt ¦175 ¦
+-------------------------------+--------¦
¦Edwin M. McElroy ¦175 ¦
+-------------------------------+--------¦
¦William R. McElroy ¦175 ¦
+-------------------------------+--------¦
¦Lula Marion McElroy [Pendleton]¦175 ¦
+----------------------------------------+
Bellemead was in 1932, and is at the present time, a family personal holding company. It owns real estate, both improved and unimproved, and also stocks and bonds of other corporations. On June 17, 1932, the day before the marriage of Lula Marion McElroy Pendleton, William R. McElroy and Marjorie M. Merritt discussed among themselves and with their father the advisability of taking some action to prevent persons who were not members of the McElroy family from becoming owners of stock of the corporation and interfering in its management. An attorney was consulted and asked to prepare an agreement which would restrict ownership of the stock to the present owners and their descendants. A draft agreement was submitted by the attorney to William R. McElroy and his father the following morning. At their suggestion some changes were made, one of which was to provide in paragraph (7) that the owners of the stock would be entitled to dividends paid in money out of capital. The attorney told William R. McElroy that the parties to the agreement would not be liable for any gift tax and that no gift tax returns need be filed; William informed the other stockholders of the attorney's advice. No gift tax returns were filed.
The agreement, which was executed by the parties thereto on June 18, 1932, at Charlottesville, Virginia, provided as follows:
AGREEMENT made this 18th day of June, 1932, by and between (Mrs.) Lula McElroy, (Mrs.) Marjorie M. Merritt, Edwin M. McElroy, William R. McElroy and Lula Marian (sic) McElroy, each severally with each other:
NOW, THEREFORE, in consideration of the premises and of the mutual promises by each herein contained and of the provisions hereof and benefits to each from the others respectively moving, as well as in consideration of natural love and affection, said parties mutually promise and agree with each other as follows:
That each of said parties respectively severally declares himself or herself trustee of said shares of stock so owned by each and agrees to hold said stock for the following uses and purposes:
(1) That upon the death of Lula McElroy said stock standing in her name shall pass to the other parties hereto, who are her children, and descendants living at her death of any of the others who may have died, such descendants to take per stirpes the share their parent would have taken if living;
(2) That upon the death of either Marjorie M. Merritt, Edwin M. McElroy, William R. McElroy or Lula Marian McElroy, stock standing in his or her name, and any of said stock which shall have passed to him or to her hereunder, shall pass to his or her children and descendants then living of any child or children who may have predeceased him or her, such descendants to take per stirpes the share their parents would have taken if living, or if he or she shall die leaving no child or children surviving him or her, said stock shall pass to his or her surviving brothers and sisters and descendants of any of them who may have predeceased him or her so dying, such descendants to take per stirpes the share their parent would have taken if living.
(3) That likewise upon the death, occurring within the period hereinafter stated, of any person to whom said stock shall pass under the provisions of paragraph (2) or under the provisions of this paragraph (3) hereof, the stock so owned by the person so dying shall pass to his or her children and descendants of any of his or her children who may have predeceased such owner, such descendants taking, per stirpes, the share their parent would have taken if living, or in the event of death leaving no such issue surviving,...
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Pullman v. Commissioner, Docket No. 2481-62
...petitioners is so unlikely as to be of no consequence. In further support of his position here, the respondent relies on Marjorie M. Merritt Dec. 22,639, 29 T. C. 149, and Overton v. Commissioner 47-1 USTC ¶ 9292, 162 F. 2d 155, affirming Dec. 15,002 6 T. C. In Marjorie M. Merritt, supra, t......