United States v. Gates

• Decision Date: 10 March 1967
• Docket Number: No. 8618,8619.,8618
• Citation: 376 F.2d 65
• Parties: UNITED STATES of America, Appellant, v. Charles C. GATES, Jr., June S. Gates, Brown W. Cannon and Charla Gates Cannon, Appellees. UNITED STATES of America, Appellant, v. Brown W. CANNON and Charla Gates Cannon, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

376 F.2d 65 (1967)

UNITED STATES of America, Appellant, v. Charles C. GATES, Jr., June S. Gates, Brown W. Cannon and Charla Gates Cannon, Appellees.

UNITED STATES of America, Appellant, v. Brown W. CANNON and Charla Gates Cannon, Appellees.

Nos. 8618, 8619.

United States Court of Appeals Tenth Circuit.

March 10, 1967.

COPYRIGHT MATERIAL OMITTED

Solomon L. Warhaftig, Atty., Dept. of Justice (Mitchell Rogovin, Asst. Atty. Gen., Richard C. Pugh, Acting Asst. Atty. Gen., Lee A. Jackson, Melva M. Graney and Loring W. Post, Attys., Dept. of Justice, Lawrence M. Henry, U. S. Atty., and David I. Shedroff, Asst. U. S. Atty., of counsel, on the briefs), for the United States.

Dayton Denious, Denver, Colo., for appellees.

Before PHILLIPS and HICKEY, Circuit Judges, and BRATTON, District Judge.

ORIE L. PHILLIPS, Circuit Judge.

The United States, claiming that certain refunds of income tax had been made erroneously, by these actions sought to recover the amounts thereof, with interest. The actions were consolidated for trial and from an adverse consolidated judgment, the United States has appealed. The facts out of which the controversies arose are these:

The Gates Rubber Company¹ is a Colorado corporation. On January 1, 1956, 97.6 per cent of its stock was owned by members of the Gates family of Denver, Colorado, and by trusts certain of such members had created. The remainder of such stock was owned by employees of the Corporation, each of whom had agreed to resell his stock to it at a certain stipulated percentage of its book value on his retirement from employment with the Corporation. During 1957 and 1958, the Corporation repurchased stock of three of its employees.

In the year 1956, Charles C. Gates, Jr., created a trust to which he irrevocably transferred 90 shares of stock of the Corporation. In 1957, he created a trust to which he irrevocably transferred 100 shares of stock of the Corporation. In 1957, Charla Gates Cannon created a trust to which she irrevocably transferred 111 shares of stock of the Corporation, and in 1958 she created a trust to which she irrevocably transferred 81 shares of stock of the Corporation.² The trusts are similar in all material respects. By the provisions of each trust, the trustees are to pay to the Gates Foundation,³ a charitable corporation, in annual or more frequent installments the entire net income from the trust estate, during a designated term, being 20 years under each of the Gates, Jr., trusts and 18 years under each of the Cannon trusts.

Each of the Gates, Jr., trusts provides that from and after the expiration of the term during which such income is to be paid to the Foundation, the trustees shall distribute the entire net income of the trust estate in annual or more frequent installments among the settlor's lineal descendants surviving at the time of each distribution, in equal shares per stirpes, and if none of the settlor's lineal descendants so survive, then to the settlor's wife, June S. Gates, if living, and if not, among the settlor's sisters and their lineal descendants surviving at the time of each distribution, in equal shares per stirpes.

Each of the Cannon trusts provides that from and after the expiration of the term during which the net income is to be paid to the Foundation, the trustees shall distribute the entire net income of the trust estate in annual or more frequent installments among the settlor's lineal descendants surviving at the time of each distribution, in equal shares per stirpes, and if none of the settlor's lineal descendants so survive, then among the settlor's sisters and her brother, Charles C. Gates, Jr., and their lineal descendants surviving at the time of each distribution, in equal shares per stirpes.

Each of the Gates, Jr., trusts provides that upon its termination, as provided for therein, the trustees shall distribute the principal and undistributed income thereof among the settlor's lineal descendants then surviving in equal shares per stirpes, and if none of such descendants of the settlor then survive, then among the surviving lineal descendants of the settlor's sisters, in equal shares per stirpes.

Each of the Cannon trusts provides that upon its termination, as provided for therein, the trustees shall distribute the principal and undistributed income thereof among the settlor's lineal descendants then surviving, in equal shares per stirpes, and if none of the settlor's lineal descendants then survive, then among the surviving lineal descendants of the settlor's brother, Charles C. Gates, Jr., and the settlor's sisters, in equal shares per stirpes.

Each of the Gates, Jr., trusts contains the following provision:

"No stock in The Gates Rubber Company shall be sold to any purchaser whomsoever until after a written offer to sell such stock on the same price and terms has been made and communicated to each of the Settlor\'s sisters named in paragraph 4 then surviving, to each Gates Family Trust then in existence, to the Gates Rubber Company and to Gates Foundation, and not until such offer has remained in force and unaccepted for a continuous period of thirty days."

Each of the Cannon trusts contains the same provision, except that they also include with the settlor's sisters, her brother, Charles C. Gates, Jr.

In defining the powers of the trustees, each of the Gates, Jr. trusts in part provides:

"To litigate, compromise, adjust and settle all claims arising out of or in connection with the Trust Estate or its administration."

Each of the Cannon trusts gives the same powers to its trustees.

Charles C. Gates, Jr., made a gift tax return for the shares transferred by him to the trust created in 1956. In such return, he stated what he considered to be the total value of the 90 shares transferred and apportioned 49.734 per cent thereof to the income interest of the Foundation, as directed in Table II of Treasury Regulations 20.2031-7(c). He apportioned the balance to the remainder interests of the persons designated as remaindermen in the trust and reported that balance as a taxable gift and paid a gift tax thereon.

The 49.734 per cent apportioned to the income interest of the Foundation was deducted as a charitable contribution in the 1956 joint income tax return of Charles C. Gates, Jr., and June S. Gates, his wife.

The Commissioner of Internal Revenue determined that the value of the shares transferred was greater than that reported in the gift tax return. This increased the value of the remainder interests, resulting in an additional gift tax, which Charles C. Gates, Jr., paid. The additional gift tax was assessed only on the remainder interests and no gift tax was asserted on the value of the income interest of the Foundation.

Charles C. Gates, Jr., and June S. Gates, his wife, filed a claim for an income tax refund, asserting that because of the increase in the value of the stock transferred, made by the Commissioner of Internal Revenue, the value of the income interest of the Foundation should be increased proportionately, and that their deduction for contributions in the 1956 return should be increased accordingly.

The claim for refund was audited by the Internal Revenue Service. It increased the amount of the charitable contribution based on 49.734 per cent of the increased value of the 90 shares and ordered a refund, which was paid, and is now attacked as erroneous.

The facts with respect to a gift tax return made by Charles C. Gates, Jr., for the 1957 transfer; a joint income tax return for 1957, made by Charles C. Gates, Jr., and June S. Gates, his wife; an action of the Commissioner of Internal Revenue in increasing the value of the shares transferred in 1957; a resulting claim for refund; an audit thereof by the Internal Revenue Service, and a refund ordered and paid, differ in no material particular from the facts stated in the preceding five paragraphs, except as to the tax year involved, and except the differences resulting from the fact that the number of shares transferred in 1957 was 100, instead of 90.

Mrs. Charla Gates Cannon made a gift tax return for the shares transferred by her to the trust created by her in 1957. In such return she stated what she considered to be the total value of the 111 shares transferred and apportioned 46.1639 per cent thereof to the income interest of the Foundation, as directed in Table II of Treasury Regulations 20.2031-7(c). She apportioned the balance to the remainder interests of the persons designated as remaindermen in the trust and reported such balance as a taxable gift and paid the gift tax thereon.

Charla Gates Cannon and Brown W. Cannon made a joint income tax return for 1957 and deducted as a charitable contribution the 46.1639 per cent apportioned to the income interest of the Foundation. The Commissioner of Internal Revenue found that the value of the shares transferred was greater than the value reported in the gift tax return of Charla Gates Cannon and determined an additional gift tax, which was paid by Charla Gates Cannon. The additional gift tax was levied only on the remainder interests and no tax was asserted on the value of the income interest of the Foundation.

Charla Gates Cannon and Brown W. Cannon filed a claim for an income tax refund, asserting that because of the increase in the value of the stock transferred, made by the Commissioner of Internal Revenue, the value of the income interest of the Foundation should be increased proportionately, and that their deductions for contributions in their 1957 return should be increased accordingly.

The claim for refund was audited by the Internal Revenue Service. It increased the amount of the charitable contribution on the basis of 46.1639 per cent of the increased value of the 111 shares and ordered a refund, which was paid, and is now attacked as erroneous.

The facts with respect to a gift tax return made by Charla Gates Cannon for the year 1958 transfer; a joint income tax...