Peterson Irrevocable Trust# 2 v. Commissioner

• Decision Date: 01 July 1986
• Docket Number: 29270-81,Docket No. 29263-81,29266-81,29265-81,29268-81,29269-81,29271-81.,29267-81,29264-81
• Citation: 1986 TC Memo 267,51 TCM (CCH) 1300
• Parties: Robert L. Peterson Irrevocable Trust #2 for the Benefit of Susan P. Peterson, Transferee, Union Bank and Trust Company, Trustee, et al. v. Commissioner.
• Court: U.S. Tax Court

51 T.C.M. (CCH) 1300 (1986)

T.C. Memo. 1986-267.

Robert L. Peterson Irrevocable Trust #2 for the Benefit of Susan P. Peterson, Transferee, Union Bank and Trust Company, Trustee, et al.¹ v. Commissioner.

Docket Nos. 29263-81, 29264-81, 29265-81, 29266-81, 29267-81, 29268-81, 29269-81, 29270-81, 29271-81.

United States Tax Court.

July 1, 1986.

T. Geoffrey Lieben, Nick R. Taylor, and James W.R. Brown, 1000 Woodmen Tower, Omaha, Neb., for the petitioners. J. Anthony Hoefer, for the respondent.

Memorandum Findings of Fact and Opinion

PARKER, Judge:

These consolidated cases arise from petitioner Robert L. Peterson's gifts of 50,000 shares of stock (or the sales proceeds thereof) to his two children and to trusts for their benefit. Before making the gifts, Peterson had entered into a contract to sell the stock for $13 per share. Peterson elected to "split" the gifts with his wife, petitioner G. Virginia Peterson, pursuant to section 2513.² These were "net gifts" in that the donees (children or trusts) were to pay the gift taxes, and the gifts were reported at a value of $4.50 per share.

This case involves both the income tax and gift tax consequences attaching to the Petersons' sale/gift of the 50,000 shares. In docket No. 29268-81, respondent determined a deficiency in the Petersons' 1976 Federal income tax in the amount of $236,711 on gain from the sale of the 50,000 shares of stock at $13.00 per share.³ In the remaining dockets, respondent determined that the other petitioners (children or trusts) were liable as transferees for the deficiencies in Mr. and Mrs. Peterson's federal gift taxes for the calendar quarter ended June 30, 1976. The deficiencies in gift tax were attributable solely to the difference in valuation ($13 versis $4.50 per share). Each notice of liability indicated a gift tax deficiency of $38,636, a section 6653(a) negligence addition thereto in the amount of $1,932, and interest thereon. respondent also determined, however, that the transferee liability of petitioners Mark R. Peterson and Susan P. Peterson for such amounts is limited to $35,750 each, the fair market value of the gifts they each received, as determined by respondent.⁴ See sec. 6324(b). Respondent's determinations in regard to the gift tax are duplicative in that payment of Mr. and Mrs. Peterson's respective gift taxes of $38,636 each, additions to tax of $1,932 each, and interest thereon by one or any combination of the transferee-petitioners will discharge the remaining transferee-petitioners from liability therefor.

The issues for decision are as follows:

(1) Whether petitioners Robert L. Peterson and G. Virginia Peterson are taxable on the gain reported by their children and the trusts on the sale of stock pursuant to a contract to sell such stock entered into before the gifts. This depends upon whether the rights under the contract were fixed so that the Petersons realized the gain before the transfer of the stock, as respondent contends, or whether the rights under the contract were so contingent and uncertain that the donees realized the gain on the sale, as petitioners contend;

(2) The fair market value of the gifts on the date thereof; and

(3) Whether Mr. and Mrs. Peterson, and therefore the transferee-petitioners, are liable for negligence additions to the gift tax under section 6653(a).

Findings of Fact

Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

Petitioners Robert L. Peterson (Peterson), G. Virginia Peterson (Mrs. Peterson) (collectively, the Petersons), Mark R. Peterson, and Susan P. Peterson resided in Sioux City, Iowa at the time they filed their petitions in this case. Mark R. Peterson and Susan P. Peterson (the children) are the children of Mr. and Mrs. Peterson. Union Bank and Trust Company (the trustee) is the corporate trustee of petitioner Robert L. Peterson Irrevocable Trust #1 for the benefit of Mark R. Peterson (Trust No. 1), and petitioner Robert L. Peterson Irrevocable Trust #2 for the benefit of Susan P. Peterson (Trust No. 2). The trustee's principal office was in Lincoln, Nebraska at the time it filed its petitions in this case.

The Petersons filed their joint 1976 Federal income tax return (Form 1040) with the Internal Revenue Service Center in Kansas City, Missouri. They filed their respective quarterly gift tax returns (Forms 709) for the calendar quarter ending June 30, 1976, with the Internal Revenue Service Center in Ogden, Utah. The children filed their respective Federal income tax returns (Forms 1040) with the Internal Revenue Service. The trustee filed its Federal fiduciary income tax returns (Forms 1041) for the taxable year beginning April 9, 1976, and ending December 31, 1976, with the Internal Revenue Service.

After graduating from high school and completing one year of college, Peterson worked for several years during the late 1950's as a cattle buyer for a number of companies. In 1960, Peterson became a cattle buyer for Iowa Beef Processors, Inc. (IBP), a beef processing company that was founded by A.D. Anderson (Anderson) and Currier J. Holman (Holman) in Dennison, Iowa during the late 1950's.

After working at IBP as a cattle buyer for awhile, Mr. Peterson decided to learn the "inside" of the business by working in IBP packing plant. He started out as a superintendent in the plant, and then became a salesman. Later, he became the manager of IBP's plant in Fort Dodge, Iowa. Peterson managed that plant between six and eight months, and in 1966, he became the vice president of production and was transferred to Dakota City, Nebraska to start up IBP's Dakota City plant, one of the largest packing plants in the world. In late 1968, Peterson became group vice president of all operations of IBP.

While Peterson was managing the Fort Dodge, Iowa plant, IBP acquired a pork packing plant in Perry, Iowa. After Peterson became vice president of production and after the Dakota City, Iowa plant was in operation, IBP began to acquire other plants. IBP acquired two related plants, one a pork packing plant in Sioux City, Iowa, and the other a beef packing plant in Luverne, Minnesota. In late 1967 or early 1968, IBP traded the Sioux City, Iowa pork plant for beef plants in West Point, Nebraska and Emporia, Kansas. Then IBP acquired Blue Bibbon Beef Pack, Inc., which owned two beef plants (the Blue Ribbon plants), one located in LeMars, Iowa, the other in Mason City, Iowa. After IBP acquired the Blue Ribbon plants, the United States Department of Justice sued IBP, alleging that IBP violated section 7 of the Clayton Act (15 U.S.C. sec. 18) by attempting to monopolize the beef packing industry. On March 20, 1970, the United States District Court for the Northern District of Iowa entered a final judgment upon the parties' consent (the consent decree) that (1) required IBP to sell the Blue Ribbon plants and (2) enjoined IBP from acquiring the assets or stock of any organization engaged in the business of slaughtering or processing fed cattle in Iowa, Nebraska, Minnesota, or South Dakota for a period of 10 years. Later, IBP purchased packing plants in Boise, Idaho and Pascal, Washington. Shortly before the trial in this case, IBP purchased packing plants in Gennicile, Illinois and Storm Lake, Iowa. Peterson was involved in all of these plant acquisitions other than the Perry, Iowa plant. His role included determining whether IBP should acquire the plants, and the price it should pay for them.

By 1976, IBP was the largest meat packing company in the United States. By its fiscal year ended November 1, 1975, IBP had sales of over $1.8 billion and net earnings of over $23 million. IBP's tremendous success resulted from a number of factors. Before IBP was organized in the late 1950's, most large meat packing plants were located in big cities like Chicago, Illinois; Omaha, Nebraska; Kansas City, Missouri; Sioux City, Iowa; and Sioux Falls, Iowa. These plants had been built in the 1920's and 1930's, and were located in bigger cities because at that time refrigeration was poor and packing plants had to be close to the final destination of the product or else the meat might spoil enroute. After World War II, refrigeration and transportation improved considerably. IBP was one of the first meat packing companies to build its plants close to the supply source. The farther cattle and other meat producing animals are shipped before slaughter, the more the animals "shrink," i.e., lose weight. The more the animals shrink, the less the farmers receive for them because they are paid on the basis of the animals' live weight. For these reasons, farmers preferred to sell their cattle to IBP. Because IBP had first choice of cattle and because its cattle shrank less, IBP's products graded better. IBP also had better yields from its cattle because its personnel, including management, paid more attention to detail.

In addition, IBP managed to reduce its costs compared to other meat packers. Its employees lived in smaller towns where the cost of living was not as high; they were therefore willing to work for less than employees in bigger cities. IBP was also able, for the most part, to avoid unionization, which helped further reduce its labor costs. Even in its unionized plants, IBP avoided a master contract, i.e., a contract used by the union with other meat packing companies. The problem with a master contract from IBP's perspective was that if one packer capitulated to the union, then all other companies followed suit.

IBP also used far more automation and made a number of innovations in its packing procedures. A major innovation IBP introduced was boxing its product. Instead of shipping the whole carcass, including bone and fat, IBP cut the carcass into the usual cuts of beef, put them in bags, and then boxed them. This enabled IBP to reduce its shipping costs because it was not paying freight for...