Messing v. Comm'r of Internal Revenue
| Decision Date | 29 June 1967 |
| Docket Number | 6295-65.,Docket Nos. 5865-65 |
| Citation | 48 T.C. 502 |
| Parties | MORRIS M. MESSING, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTESTATE OF HELEN F. MESSING, DECEASED, MORRIS M. MESSING, EXECUTOR, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
48 T.C. 502
MORRIS M. MESSING, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENTESTATE OF HELEN F. MESSING, DECEASED, MORRIS M. MESSING, EXECUTOR, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket Nos. 5865-65
6295-65.
Tax Court of the United States.
Filed June 29, 1967.
[48 T.C. 503]
Herbert Burstein and Arthur Liberstein, for the petitioners.
Eugene S. Linett, for the respondent.
Petitioners made gifts of shares of stock representing a minority interest in a closely held corporation in September 1961, at which time the stock was not publicly traded. Petitioners valued the gifted shares at $10 per share, based principally on sales to third parties at the same price in the summer of 1961. In January 1962, the stock of the corporation was offered to the public at $36.66 per share. Respondent valued the gifted shares at $30 per share, using the public offering price as a starting point and applying certain discount factors. On that basis, respondent also claimed, in an amended answer, that a sale of shares to petitioners' son in September 1961 at $10 per share constituted a partial gift to the extent of the excess of $30 per share over that price. Petitioners made gifts to a son and daughter-in-law ‘I/T/F’ (in trust for) their grandchildren and gifts to trusts for their minor children. The trust instrument provided that, in the event that a child died before attaining the age of 21, the principal and accumulated income were to be paid to the child's surviving issue or, if none, to the child's estate. Held:
1. Although the subsequent public offering price is not the proper starting point for computing the value of the shares and, under the circumstances, is of marginal significance, petitioners have not sustained their burden of proof that the gifted shares had a value of less than $13 per share; and
2. Further held, respondent has not sustained his burden of proof that any part of the shares sold to petitioners' son constituted a gift; and
3. Further held, the gifts ‘I/T/F/’ (in trust for) petitioners' grandchildren constituted gifts of present interests; and
4. Further held, the gifts to the trusts for petitioners' children constituted gifts of future interests.
TANNENWALD, Judge:Respondent determined gift tax deficiencies for 1961 in the amounts of $125,029.47 and $56,435.30, respectively, for Morris M. Messing (hereinafter referred to as petitioner) in docket No. 5865-65 and Helen F. Messing, deceased, in docket No. 6295-65.
After concessions made by petitioners, there remain for our decision the following issues:
(1) What was the value of 26,400 shares of common stock of Sel-Rex Corp. gifted by petitioner on September 13, and 16, 1961?
(2) Did petitioner make a taxable gift under section 2512(b)1 to his son Robert on September 13, 1961, when he sold 10,000 shares of common stock of Sel-Rex Corp. to Robert for $100,000?
(3) Were gifts by petitioner to his grandchildren in 1961 entitled to the $3,000 annual exclusion as gifts of present interests under section 2503?
(4) Were gifts made by petitioner to his minor children in 1958 and 1959 entitled to the $3,000 annual exclusion as gifts of present interests under section 2503?
Some of the facts are stipulated and are found accordingly.
Morris M. Messing and Helen F. Messing, deceased, the individual petitioners in the two dockets here involved, were husband and wife with their legal residence in South Orange, N.J., at the time of the filing of the petitions herein.2 The Federal gift tax returns for the calendar year 1961 and the prior years 1958 and 1959, together with the consents as required by section 2513, were filed with the district director of internal revenue at Newark, N.J.
Sel-Rex Corp. (hereinafter referred to as Sel-Rex) was organized on January 2, 1951, as a New Jersey corporation under the name of Sel-Rex Precious Metals, Inc. Its name was changed to Sel-Rex Corp. on November 7, 1956.
Since the date of its incorporation and at all relevant times, Sel-Rex has been engaged in developing and marketing patented precious
[48 T.C. 504]
metals electroplating compounds and processes. It has also conducted precious metals refining operations and developed, manufactured, and sold equipment for the electrodeposition of precious metals for use in industry. The principal industrial use of the Sel-Rex products and processes have been in the fields of data processing, missiles, spacecraft, aircraft, chemicals, and transistors and other semiconductors. Its products and services have been adopted for various applications in a reasonably wide range of electronic devices.
At all material times, Sel-Rex had a reputation of being a well-managed leader in its field.
The original authorized capital of Sel-Rex was 5,000 shares of common stock without par value but was changed to 2,100,000 shares on June 26, 1961. On October 26, 1956, petitioner acquired all of the issued and outstanding stock of Sel-Rex and became its principal executive officer. Between October 26, 1956, and June 29, 1961, the total issued and outstanding stock of Sel-Rex consisted of 1,200 shares, of which petitioner owned and held 1,195. The remaining 5 were held by three directors as qualifying shares.
As of the following dates and times, the following number of shares were issued and outstanding:
+---------------------------------------------------+
¦ ¦Total shares ¦
+------------------------------------+--------------¦
¦ ¦outstanding ¦
+------------------------------------+--------------¦
¦1951 to June 29, 1961 ¦1,200 ¦
+------------------------------------+--------------¦
¦June 29, 1961 (420 for 1 split) ¦504,000 ¦
+------------------------------------+--------------¦
¦June 30, 1961 (3,333 shares issued) ¦507,333 ¦
+------------------------------------+--------------¦
¦Sept. 21, 1961 (5 for 3 split) ¦845,555 ¦
+------------------------------------+--------------¦
¦Jan. 10, 1962 (33,000 shares issued)¦878,555 ¦
+---------------------------------------------------+
In 1961, approximately 36 customers provided 80 percent and 7 customers accounted for approximately 44 percent of the gross sales of Sel-Rex.
During 1960 and the first half of 1961, over 80 percent of Sel-Rex's net sales were attributable to sales of gold-electroplating products. For the same periods, more than three-fourths of the sales of gold-electroplating products consisted of compounds for use in ‘Sel-Rex Processes,‘ i.e., gold-electroplating processes developed and patented by Sel-Rex.
Based on 845,555 shares outstanding, the book value per share of Sel-Rex was $2,23 as of June 30, 1961 and $2.70 as at December 31, 1961. Its working capital ratio was 1.9 to 1 on June 30, 1961, and approximately 4.58 to 1 on December 31, 1961, the latter increase being attributed to the conversion of $1 million from short-term to long-term debt on September 13, 1961, at an interest rate increased from 4 3/4 percent to 5 3/4 percent.
[48 T.C. 505]
Consolidated net sales and net earnings of Sel-Rex and subsidiaries were as follows for the following years and periods:
+-------------------------------------------------------------------------+
¦ ¦ ¦ ¦Net earnings per¦
+---------------------------+--------------+-------------+----------------¦
¦Year ended Dec. 31-- ¦Net sales ¦Net earnings ¦share based on ¦
+---------------------------+--------------+-------------+----------------¦
¦ ¦ ¦(after taxes)¦845,555 shares ¦
+---------------------------+--------------+-------------+----------------¦
¦ ¦ ¦ ¦outstanding ¦
+---------------------------+--------------+-------------+----------------¦
¦1956 ¦$5,698,527 ¦$96,061 ¦$0.11 ¦
+---------------------------+--------------+-------------+----------------¦
¦1957 ¦7,095,525 ¦139,801 ¦.17 ¦
+---------------------------+--------------+-------------+----------------¦
¦1958 ¦6,197,732 ¦104,361 ¦.12 ¦
+---------------------------+--------------+-------------+----------------¦
¦1959 ¦9,684,867 ¦294,281 ¦.35 ¦
+---------------------------+--------------+-------------+----------------¦
¦1960 ¦3...To continue reading
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