Pullman v. Commissioner, Docket No. 2481-62

• Citation: 1964 TC Memo 218,23 TCM (CCH) 1310
• Decision Date: 18 August 1964
• Docket Number: Docket No. 2481-62,2482-62.
• Parties: Henry and Helen Pullman v. Commissioner. Jack and Victoria Pullman v. Commissioner.
• Court: United States Tax Court

23 T.C.M. (CCH) 1310 (1964)

T.C. Memo. 1964-218.

Henry and Helen Pullman v. Commissioner.

Jack and Victoria Pullman v. Commissioner.

Docket Nos. 2481-62, 2482-62.

United States Tax Court.

Filed August 18, 1964.

Alonzo W. Watson, Jr., and C. Preston Allen, Deseret Bldg., Salt Lake City, Utah, for the petitioners. James Booher, for the respondent.

Memorandum Findings of Fact and Opinion

WITHEY, Judge:

The respondent has determined deficiencies in petitioners' income tax for the years and in the amounts as follows:

                  Petitioner    Docket No.    Year    Deficiency
                  Henry and Helen Pullman..................    2481-62    1958    $10,757.72
                          1959    11,551.02
                          1960    10,257.96
                  Jack and Victoria Pullman................    2482-62    1958    3,398.53
                          1959    2,464.82
                          1960    1,645.80
                

The cases were consolidated for trial and decision.

The issues presented for our decision are (1) whether petitioners transferred certain shares of the nonvoting common stock of Pullman Wholesale Tailors, Inc., to the Henry Pullman Foundation during 1958, 1959, and 1960 as completed gifts within the purview of section 170 of the Internal Revenue Code of 1954; (2) whether petitioner Henry Pullman transferred 1,670 shares of the nonvoting common stock of Pullman Wholesale Tailors, Inc., to the Salt Lake Jewish Welfare Fund during 1958 as a completed gift under section 170 of the 1954 Code; (3) in the alternative, in the event we find that either of such transfers of the nonvoting common stock of Pullman Wholesale Tailors, Inc., constituted a completed gift, whether the fair market value of the shares so transferred was 51 cents, 48 cents, and 47 cents at the time of transfer during 1958, 1959, and 1960, respectively.

Findings of Fact

The stipulated facts have been found as stipulated.

Petitioners Henry and Helen Pullman are husband and wife residing at Salt Lake City, Utah. They filed their joint income tax returns for 1958, 1959, and 1960 with the director at Salt Lake City. Petitioner Henry Pullman is sometimes hereinafter referred to as petitioner.

Petitioners Jack and Victoria Pullman also are husband and wife residing at Salt Lake City. They likewise filed joint income tax returns for 1958, 1959, and 1960 with the director at Salt Lake City.

Pullman Wholesale Tailors, Inc., sometimes hereinafter referred to as Tailors or the corporation, is a corporation which was organized under the laws of the State of Utah on or about July 9, 1930. Its initial capital was $2,000.

The corporation was at all times here material engaged in the business of manufacturing and selling men's clothing. It operates through wholesale and controlled retail stores and salesmen primarily in Salt Lake City and Ogden, Utah, areas. It also sells men's clothing from its factory outlet which is located at Salt Lake City. Its controlled retail outlets maintain cash balances sufficient to pay in full for all merchandise owned by the corporation.

Tailors maintains an excellent credit position and thereby is able to purchase articles on extremely favorable terms. Its assets consist primarily of its clothing inventory and cash. The corporation during the years here involved could have liquidated its entire inventory in any of its controlled retail outlets at a profit at any time.

Henry Pullman has at all times here material served as president of Tailors and Jack Pullman is its treasurer. Since its inception Tailors has been managed by Henry Pullman and has been controlled by members of the Pullman family.

Immediately prior to December 14, 1955, the capital stock of Tailors consisted of 200,000 authorized and 172,181 outstanding shares of common voting stock. On or about December 14, 1955, the corporation's stockholders exchanged their old voting common stock for new voting and nonvoting common shares. The shares held by each of the stockholders of Tailors immediately before and immediately after this exchange were as follows:

                ---------------------------------------------------------------------------------------------
                                                                                         Shares of common
                                                          Shares of old common         held after transaction
                         Stockholder                    held before transaction   Voting      Nonvoting
                ---------------------------------------------------------------------------------------------
                  Henry Pullman...............................  79,419.00         794.19      78,624.81
                  Helen Pullman (wife of Henry)...............  69,384.25         693.8425    68,690.4075
                  Dave Pullman (brother of Henry).............   1,004.00          10.04         993.96
                  Jack Pullman (only child of Henry and Helen)  16,103.75         161.0375    15,942.7125
                  C. Rose.....................................   6,270.00          62.70       6,207.30
                                                               __________       __________   ____________
                                                               172,181.00       1,721.81     170,459.19
                                                             ============                      1,721.81
                                                                                             ____________
                                                                                             172,181.00
                                                                                             ============
                

On or about December 14, 1955, the stockholders of the corporation amended its articles of incorporation to read, in part, as follows:

The total authorized capital stock of the corporation shall be $400,000.00 and shall be comprised of 400,000 shares of stock having a par value of $1.00 each. Said shares shall be divided into the following classes:

                  Class of Shares    Number
                  Common Voting Stock..    2,000 Shares
                  Common Non-Voting
                   Stock...............  198,000 Shares
                  8% Preferred Stock
                   (Non-voting)  ......  200,000 Shares
                                         _______
                  Total................  400,000 Shares
                

The holders of preferred stock shall be entitled to receive, when and as declared by the board of directors, dividends from the surplus or net profits of the corporation at the rate of not to exceed 8% per year. Such right to dividends shall be non-cumulative. Said dividends shall be set aside and paid before any dividend shall be set aside or paid upon the shares of common stock of either class. The preferred stock shall have no voting right whatever.

The entire voting power of the corporation shall be vested in the common voting stockholders.

Holders of the common non-voting stock shall have the same rights as the common voting stockholders, excepting that they shall have no voting rights whatever.

The company may, by majority action of its voting common stockholders, retire any and all preferred stock at One Dollar ($1.00) per share upon due notice by mail to the last address of the preferred shareholders of record.

In the event of any liquidation or dissolution of the corporation, the holders of the preferred stock shall be entitled to be paid in full the par value thereof. After the payment to the holders of the preferred stock above provided, the remaining assets shall be divided and paid to the holders of the common shares proportionately to their respective shares.

As part of a plan for recapitalizing the corporation, Henry and Helen Pullman on or about April 8, 1956, transferred their voting common stock to Henry, Helen, and Jack Pullman as trustees of a voting trust. The trust instrument provided, in part, as follows:

During the time that one or more of the below named individuals are acting as cotrustees, they shall have the power to vote the stock of the Pullman Wholesale Tailors, Inc., which comprises part of the Trust Estate, in addition to all other purposes for the purpose of electing or appointing part or all of them as officers, directors or employees of the corporation and to establish salaries for said services in such amounts as they shall determine in their absolute discretion.

In event of dispute as to the manner of voting said stock, said power to vote shall be exercisable solely by Henry Pullman, during his lifetime. Upon his death Helen Pullman shall have said sole power to vote until such time as she may remarry. In event Helen Pullman should remarry, Jack Pullman shall have said sole power to vote during his lifetime, but upon his death Helen Pullman shall, if she survives him, resume said sole power to vote during the remainder of her lifetime. Upon the death of the survivor of the above named individuals, Dave Pullman shall have said sole power to vote during his lifetime.

* * *

Jack Pullman during the period or periods, when he as cotrustee has the sole power in event of dispute to vote said stock * * * may purchase the stock of the Pullman Wholesale Tailors, Inc., comprising all or part of the Trust Estate. * * *

As settlor of the above-mentioned trust, Henry reserved the right to amend, modify, and revoke the trust indenture and also the right to add or withdraw assets from the trust estate.

On December 23, 1955, the corporation issued 154,950 shares of preferred stock to its stockholders in the following amounts:

                  Stockholder    No. of shares acquired December 23, 1955
                  Henry Pullman........    71,475
                  Helen Pullman........    62,445
                  Jack Pullman.........    14,490
                  Dave Pullman.........       900
                  O. E. Rose...........     5,640
                                          _______
                      154,950
                

During 1955 and 1956 Henry and Helen Pullman transferred their preferred stock in the corporation to (or in trust for the benefit of) various relatives. After such transfers the preferred stock of Tailors was held by relatives of Henry (and by O. E. Rose) in the following amounts:

                -----------------------------------------------------------------------------------
                                                Relationship to
                  Stockholder                   Henry

...