Palmer v. Comm'r of Internal Revenue , Docket No. 2557-71.

CourtUnited States Tax Court
Writing for the CourtSIMPSON
Citation62 T.C. 684
PartiesDANIEL D. PALMER AND AGNES H. PALMER, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket NumberDocket No. 2557-71.
Decision Date27 August 1974

62 T.C. 684

DANIEL D. PALMER AND AGNES H. PALMER, PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2557-71.

United States Tax Court

Filed August 27, 1974.


[62 T.C. 685]

Bernard J. Long, Jr., and James A. Treanor III, for the petitioners.

Robert D. Grossman, Jr., and Ava D. Poe, for the respondent.

1. Palmer College was owned and operated by a profit-making corporation. The assets of the college comprised approximately 80 percent of the assets of the corporation. Approximately 70 percent of the outstanding shares of the corporation stock was owned by a trust of which the petitioner was trustee and income beneficiary. The remaining share were owned outright by the petitioner. On Aug. 31, 1966, a charitable organization, of which the petitioner was controlling trustee, purchased the shares owned by the trust, On the same day, the petitioner contributed enough shares to the foundation so that it thereafter owned 80 percent of the outstanding shares. On the next day, the corporation redeemed all the shares held by the foundation in return for the college assets. Held, in substance and form, the contribution was of stock and not the proceeds of the redemption.

2. In 1961, the estate of the petitioner's father demanded that the corporation redeem shares of its stock in accordance with an agreement between the petitioner's father and the corporation which set forth the formula for determining the redemption price. In 1964, after vigorous negotiations concerning the validity of the agreement, the stock was redeemed. Held, the corporation was not a willing buyer of the stock, and therefore, the redemption is not a comparable sale from which the fair market value of the stock in 1966 can be determined.

SIMPSON, Judge:

The respondent determined a deficiency of $178,309.72 in the Federal income tax of the petitioners for the year 1966. Two issues are presented for decision. The first is whether in substance, as well as in form, a contribution of stock by the petitioners preceded the redemption of such stock, when the redemption took place the very next day; In the event we find that the contribution, in substance, preceded the redemption, we must determine whether the fair market value of the stock was less than claimed by the petitioners in their return.

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

The petitioners, Daniel D. Palmer and Agnes H. Palmer, are husband and wife, who maintained their residence in Davenport, Iowa, at the time their petition was filed in this case. They filed their joint Federal income tax return for the year 1966 with the district director of internal revenue, Des Moines, Iowa. Dr. Daniel D. Palmer will be referred to as the petitioner.

The petitioner's grandfather, Daniel David Palmer, was the creator and founder of what is now the nonmedical profession of chiropractic. In 1895, he established the first school of chiropractic in Davenport, Iowa, and was its owner and president until his death in 1913. In about 1906, the school was incorporated under Iowa law as a corporation operated for profit, and in 1947, its corporate charter was renewed for a perpetual term.

In 1961, the school changed its name from ‘The Palmer School of Chiropractic’ to ‘Palmer College of Chiropractic.’ The Palmer College of Chiropractic as a corporate entity was empowered to, and actually did, engage in the sale, leasing, and ownership of real estate. It will be referred to as the corporation, as will its predecessor corporation, the Palmer School of Chiropractic, The educational facilities operated by the corporation will be referred to as the college.

Upon the death of the petitioner's grandfather, the petitioner's father, Dr. Bartlett Joshua (B. J.) Palmer, succeeded to the presidency of the college and the corporation. On November 7, 1959, an agreement

[62 T.C. 686]

between the corporation and Dr. B. J. Palmer was executed. That agreement granted cross-options to his estate (the estate) and the corporation—the estate could require that the corporation purchase all its stock in the corporation, and the corporation could require that the estate sell all of such stock to it. The purchase price for such sale was to be the book value of the shares as of the last day of the month preceding the month in which Dr. B. J. Palmer died.

The petitioner's father died in May 1961, and the relationships which developed between the petitioner and the executors of the estate were marked by disagreement, hostility, and ill will.

A recitation in the will of Dr. B. J. Palmer stated that he and his wife had amply endowed their son during their lifetimes, and therefore, no provision was made for the petitioner. As a result, the petitioner brought a legal action against the executors and trustees to invalidate his father's will. Judgment was entered for the estate, an appeal was taken, and the Supreme Court of Iowa affirmed. Palmer v. Evans, 255 Iowa 1176, 124 N.W.2d 856 (1963).

Another area of controversy involved the cross-option agreement between the corporation and the estate. By letter dated July 20, 1961, the executors of the estate notified the corporation that it desired to exercise its option and require redemption of the 649.01 shares of the corporation stock owned by the estate. The book value of such stock as of April 30, 1961, the last day of the month preceding the death of the petitioner's father, was $286.35 per share. The petitioner objected to the redemption and thought the terms of payment called for in the cross-option agreement were too costly. Eventually, after final judgment had been entered in the litigation between the estate and the petitioner concerning the validity of the will, a negotiated settlement was agreed upon. Such settlement, which was embodied in an agreement dated July 24, 1964, resolved not only the controversy surrounding the redemption agreement, but also resolved other controversies outstanding at that time, and not relevant to the issue herein. Under the terms of the settlement agreement, the shares of the corporation were redeemed from the estate at the 1964 book value of $264.74 per share, rather than at the date-of-death value. Such amount was paid for the estate's shares without interest, The negotiations which led to the final settlement were hostile, vigorously contested, and arm's length.

As early as before the death of his father, the petitioner contemplated the possibility of making the college into a nonprofit institution. It was felt that alumni financial support in the form of gifts and bequests was being withheld principally because would-be donors were reluctant to contribute and thereby enrich the holdings of the Palmer family. In addition, it was felt that contributions were not made because they were not deductible for purposes of the Federal income

[62 T.C. 687]

and estate taxes, and that participation in certain Federal funding programs was denied the college because it was not a nonprofit institution. Moreover, because the corporation was operated for profit, graduates of the college encountered difficulty obtaining licenses to practice chiropractic in at least one State. Accordingly, the petitioner caused the Palmer College Foundation (the foundation) to be organized in 1964 as a corporation not for pecuniary profit.

In general, the foundation was organized to engage in religious, charitable, educational, and scientific activities. Specifically, it was intended and empowered to take over ownership of the college from the corporation. In addition, the foundation was empowered to accept gifts, to make loans to students, and to award scholarships, research grants, and prizes for meritorious essays.

By letter dated January 13, 1965, IRS determined that the foundation qualified as a tax-exempt organization pursuant to section 501(c)(3) of the Internal Revenue Code of 1954.1

The bylaws of the foundation provided for two distinct series of certificates to be issued to the trustees of the foundation. The first group of certificates, series A, were transferable only by gift, bequest, or devise, and were limited in number to nine. The bylaws provided that six such certificates were to be issued to the petitioner, and that the remaining three certificates were to be issued to Mrs. Palmer. The second group of certificates, series B, were not transferable and were limited in number to two certificates. The bylaws of the foundation provided that such certificates were to be held only by the treasurer of the corporation. The bylaws also provided that each certificate, regardless of its classification, was entitled to one vote for each vacancy on the board of directors, and that at a meeting of the trustees, the presence of the trustees entitled to vote a majority of the total votes constituted a quorum.

During the entire year in issue, 1966, the certificates were held as specified in the bylaws. As a result, the petitioner controlled the foundation. Not only was he the controlling trustee by virtue of having personal control over the majority of the certificates, but he was also its president and a director. Moreover, Mrs. Palmer was a trustee and director, and the other directors and officers of the foundation were personally chosen by the petitioner and were the same individuals as the officers and directors of the corporation.

In 1966, the corporation had outstanding 2,896.97 shares of common stock, par value $100, prior to September 1 of that year. Of those shares 2,078.97 shares were owned by a trust (the trust) created under

[62 T.C. 688]

the last will and testament (the will) of Mabel H. Palmer, the petitioner's mother, and the remaining 818 shares were owned by the petitioner. Under the terms of the will, the petitioner was trustee and income beneficiary of the trust, Mrs. Agnes H. Palmer was a contingent income beneficiary, and the three minor daughters of the petitioner were the ultimate remaindermen.

The...

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