2000 Tax Ct. Memo LEXIS 465 | Tax Ct. | 2000
2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="1" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*465 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARR, JUDGE: Respondent determined a deficiency of $ 215,758 in the Federal estate tax due from the estate of Robert V. Schuler (decedent).
After concessions, 1 the sole issue for decision is whether decedent's transfers of stock in 1994 and 1995 to members of his brother's family were, in substance, indirect gifts of stock to members of his own family. We hold they were.
2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="2" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*466 FINDINGS OF FACT
Some of the facts have been stipulated and are so found, unless otherwise noted. The stipulation of facts and the accompanying exhibits are incorporated herein by this reference. Decedent died testate on October 4, 1995, in Wahpeton, North Dakota (Wahpeton). At the time the petition in this case was filed, the personal representatives of the estate, Jay Schuler and Thomas Schuler, resided in Wahpeton.
All section references are to the Internal Revenue Code in effect for the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.
THE SCHULER FAMILY BUSINESSES
MINN-KOTA AG PRODUCTS, INC.
At sometime during the late 1930's or early 1940's, the parents of decedent and decedent's brother, George M. Schuler, Jr. (decedent's brother or George), established Schuler Grain Co., a grain elevator business located in the Red River Valley region of west central Minnesota. Decedent and his brother expanded the grain elevator business into a full-service agricultural center by selling farmers seed and fertilizer in the spring and by buying grain from them at harvest time. When chemical supplements became2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="3" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*467 available for agricultural use, decedent and his brother sold the farmers the chemicals. Upon the demise of their parents, decedent and his brother became the owners of the business.
In 1986, Schuler Grain Co. reorganized into a corporation called Minn-Kota Ag Products, Inc. (Minn-Kota). Minn-Kota issued class A voting common stock, all of which was owned by an unrelated employee, and nonvoting noncumulative preferred stock. In 1989, all of the Minn-Kota voting common stock was acquired by George's son, George M. Schuler III (Jody), and the preferred stock converted into restricted class B common stock, which was owned by decedent, decedent's son, Jay Schuler (Jay), George, and Jody.
SIGCO SUNPLANT, INC.
In 1970, decedent, George, and their mother, Dorothy, formed Sigco Sunplant, Inc. (Sigco). Sigco is engaged in the sunflower seed business. Upon Dorothy's demise, Sigco was owned equally by decedent and his brother.
THE PLAN AND THE STOCK TRANSFERS
Decedent had heart disease, had undergone heart bypass surgery, and had suffered seven heart attacks, most of them before the transfers at issue. Decedent had seven children, his brother has six children, and many of both men's children2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="4" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*468 have children. In discussions with their insurance agent, Dave Middaugh (Mr. Middaugh), decedent and his brother made it clear that they wanted their families to succeed them in the businesses, and that they wanted decedent's family to control Sigco and George's family to control Minn-Kota.
After many discussions, decedent, his brother, and Mr. Middaugh devised a three-step plan to transfer divided ownership of Sigma and Minn-Kota to each other's family and to use
The first step to transfer the Sigco stock was for decedent and his wife to make joint gifts of Sigco stock equal to $ 20,000 of value to their children and grandchildren during December 1994 and January 1995. The second step was for George and his wife to duplicate the first step; that is, to make joint transfers of Sigco stock equal in value to $ 20,000 to each of decedent's children and grandchildren. The third step in their scheme was for certain of decedent's children to transfer the shares that they had received to four of their siblings, including to Jay and his children. 2
2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="5" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*469 The first step to transfer the Minn-Kota stock was for George and his wife to make joint gifts of Minn-Kota stock valued at $ 20,000 to each of their children and grandchildren in December 1994 and January 1995. The second step was for decedent and his wife to duplicate the first step; that is, to transfer in each year $ 20,000 of Minn-Kota stock to George and his wife and their children. The third step was for certain of George's children and their spouses to transfer the stock in amounts equal in value to $ 10,000 to Jody and his wife, Holly, and to their children, George M. Schuler IV (George IV) and William. 3
1994 TRANSFERS OF SIGCO STOCK
On December 28, 1994, in addition to transferring shares of Sigco stock to his children and their spouses and children, decedent transferred 4 shares to his brother's son and his family, as follows:
2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="6" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*470 Relationship of Number Value
Transferee Transferee to Decedent of Shares of Shares
___________ ______________________ _________ _________
Jody Nephew 2.22 $ 19,980
Holly Schuler (Holly) Niece by marriage 2.22 19,980
George IV Grandnephew 1.81 16,290
________
Total 56,250
On that same day, in addition to transferring shares of Sigco stock to Jody and his wife and their children, George transferred shares to decedent's children and their spouses, as follows:
Relationship of Number Value
Transferee Transferee to Decedent of Shares of Shares
___________ ______________________ _________ _________
Jay Son 2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="7" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*471 2.22 $ 19,980
Thomas Son 2.22 19,980
Jennifer Daughter-in-law 2.22 19,980
Cynthia Deal Daughter 2.16 19,440
Mike Deal Son-in-law 2.16 19,440
Constance Waibel Daughter 2.22 19,980
Christine Haire Daughter 2.22 19,980
Kathleen Deal Daughter 2.22 19,980
Karen Steinborn Daughter 2.16 19,440
Kyle Steinborn Son-in-law 2.16 19,440
_______
Total 197,640
1994 TRANSFERS OF MINN-KOTA STOCK
On December 28, 1994, decedent transferred shares of Minn- Kota stock to his brother and his brother's family, as follows:
2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="8" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*472 Relationship of Number Value
Transferee Transferee to Decedent of Shares of Shares
___________ ______________________ _________ __________
George Brother 542 $ 19,999.80
Barbara Sister-in-law 542 19,999.80
James Nephew 542 19,999.80
Jerome Nephew 542 19,999.80
Kim Nephew 542 19,999.80
Jan McCann Niece 542 19,999.80
Francine Cook Niece 542 19,999.80
George IV Grandnephew 325 11,992.50
William Grandnephew 325 11,992.50
___________
Total 2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="9" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*473 163,983.60
Although George transferred shares of Minn-Kota to his children and to his children's families on this same day, George did not transfer any shares of Minn-Kota to any members of decedent's family.
1995 TRANSFERS OF SIGCO STOCK
On January 3, 1995, in addition to transferring shares of Sigco to members of his own family, decedent made the following transfers 5 to members of his brother's family:
Relationship of Number Value
Transferee Transferee to Decedent of Shares of Shares
___________ ______________________ _________ _________
Jody Nephew 2.22 $ 19,980
Holly2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="10" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*474 Niece by marriage 2.22 19,980
William Grandnephew 1.81 16,290
_______
Total 56,250
On the same day, George made the following transfers of Sigco stock to decent's family:
Relationship of Number Value
Transferee Transferee to Decedent of Shares of Shares
___________ ______________________ _________ _________
Jay Son 2.22 $ 19,980
Thomas Son 2.22 19,980
Jennifer Daughter 2.22 19,980
Cynthia Deal Daughter 2.00 18,000
Mike Deal Son-in-law 2.00 18,000
Karen Steinborn Daughter2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="11" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*475 1.89 17,010
Kyle Steinborn Son-in-law 1.89 17,010
Constance Waibel Daughter 2.06 18,540
Christine Haire Daughter 2.00 18,000
Kathleen Deal Daughter 2.00 18,000
_______
Total 184,500
1995 TRANSFERS OF MINN-KOTA STOCK
On January 3, 1995, decedent made transfers of Minn-Kota to his brother's family, as follows:
Relationship of Number Value
Transferee Transferee to Decedent of Shares of Shares
___________ ______________________ _________ _________
George Brother 542 $ 19,999.80
Barbara Sister-in-law 542 19.999.80
James Nephew 2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="12" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*476 542 19.999.80
Jerome Nephew 542 19.999.80
Kim Nephew 542 19.999.80
Francine Cook Niece 542 19.999.80
Jan McCann Niece 542 19.999.80
George IV Grandnephew 325 11,992.50
William Grandnephew 325 11,992.50
__________
Total 163,983.60
On the same day, George made transfers of Minn-Kota stock to his own family; however, he transferred no shares of Minn-Kota to decedent's family.
Before making the December 28, 1994, and January 3, 1995, transfers at issue, decedent and his son owned 75 percent of the Sigco shares outstanding (decedent owned 25 percent and Jay owned 50 percent) and George owned the other 25 percent. Additionally, decedent2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="13" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*477 and his family collectively owned 50 percent of the Minn- Kota class B common shares (decedent owned 49.6 percent and his family owned 0.4 percent), and George and his family owned the other 50 percent. Jody owned 100 percent of the Minn-Kota class A voting common stock.
After the transfers, decedent's family owned almost 80 percent of Sigco, and George's family owned almost 68 percent of Minn-Kota. Jody continued to own all of the Minn-Kota voting common stock.
Before making these transfers, in which decedent transferred stock valued at $ 440,467.20 to his brother's family and George transferred stock valued at $ 382,140 to decedent's family, neither brother had ever transferred any Sigco or Minn-Kota stock to the other's family. George transferred 540 shares of Minn-Kota stock to decedent's son, Jay, on December 18, 1996, January 2, 1997, and January 2, 1998. 6 The value of the stock in each of these transfers was $ 19,926. George made no transfers of stock to any other members of decedent's family during this time.
2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="14" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*478 OPINION
Respondent determined that decedent's transfers of Sigco and Minn-Kota stock during 1994 and 1995 to his brother's family were reciprocated or "crossed" and, in substance, gifts to decedent's own children and their families. Accordingly, respondent disallowed the annual exclusions for gifts of a present interest for decedent's transfers of stock to his brother's family and increased the amount of taxable gifts reported on decedent's estate tax return.
The estate contends that respondent's determination is erroneous because the transfers at issue were made for a business purpose, and decedent's intent in making the transfers was donative.
In general, a tax is imposed for each calendar year on the transfer of property by gift by any individual, whether the gift is made directly or indirectly. See
As a general rule, we respect the form of a transaction. We do not apply the substance over form principles unless the circumstances so warrant. See
The reciprocal trust doctrine, an application of substance over form, has been used in the estate and gift tax area to determine who is the transferor of property for the purposes of inclusion in the gross estate. See
In
It is undisputed that the two trusts are interrelated. They are
substantially identical in terms and were created at
approximately the same time. Indeed, they were part of a single
transaction designed and carried out by decedent. It is also
clear that the transfers in trust left each party, to the extent
of mutual value, in the same objective position as before.
Indeed, it appears, as would be expected in transfers between
husband and wife, that the effective position of each party vis-
a-vis the property did not change at all. It is no answer2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="17" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*481 that
the transferred properties were different in character. For
purposes of the estate tax, we think that economic value is the
only workable criterion. [
In the instant case, the transfers were not made in trust; however, that is a distinction without a difference. "The law searches out the reality and is not concerned with the form."
For instance, in
Moreover, in
The facts of the instant case prove conclusively that the transfers at issue were reciprocal; that is, decedent's transfers to his brother's family were made in exchange for George's transfers to decedent's family members.
The parties stipulated2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="19" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*483 that the brothers' motivations in making the transfers included the desire to separate ownership of Sigco and Minn-Kota between the two families and to minimize estate taxes. Clearly, as both decedent and his brother owned stock of both corporations, separation of ownership by exchanging the stock through transfers to each other's family members at least implies reciprocity. The estate asserts, however, that the business purpose for exchanging the stock excepts these transactions from the reciprocal transaction doctrine. We disagree.
The estate contends that the business purpose was to divide the companies and place Jay in control of Sigco and Jody in control of Minn-Kota. Separation of the families' ownership of Sigco and Minn-Kota, insofar as it was accomplished, was not the main purpose of the transfers. Before the transfers, decedent's family owned 75 percent of Sigco; after the transfers, it owned almost 80 percent. Thus, the transfers resulted in little of the Sigco ownership shifting from George's family to decedent's family. Moreover, the estate's contention is proved false by the facts that decedent transferred shares of Sigco in 1994 and 1995 to George's son Jody, and other2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="20" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*484 members of George's family, and George transferred more than 1,600 Minn-Kota shares to decedent's son, Jay, after decedent's death.
Finally, before the transfers at issue, decedent owned 25 percent of the Sigco shares outstanding and Jay owned 50 percent; collectively, a 75-percent majority. Therefore, the transfers at issue were not necessary for Jay to acquire control of Sigco. Both before and after the transfers, Jody owned 100 percent of the Minn- Kota voting stock and, therefore, controlled Minn-Kota; acquiring control of Minn-Kota for Jody was not the purpose of the transfers.
A business purpose, if any, was not the primary motivation for making the reciprocal transfers at issue. It is an inescapable conclusion that decedent and his brother made the circuitous transfers for the primary purpose of increasing the number of exclusions under
In
We do not mean to say that the existence of
"consideration," in the traditional legal sense of a bargained-
for exchange, can [n]ever be relevant. In certain cases,
inquiries into a settlor's reasons for creating the trusts may
be helpful in establishing the requisite link between the two
trusts. We only hold that a finding of a bargained-for
consideration is not necessary to establish reciprocity. [United
In this case, the transfers were interrelated. We have no doubt that decedent's transfers of stock to his brother's family were quid pro quo for George's transfers of stock to decedent's family; the exchanged stock was the bargained-for consideration. Furthermore, the brothers' plan to exchange the stock via transfers to each other's families on2000 Tax Ct. Memo LEXIS 465" label="2000 Tax Ct. Memo LEXIS 465" no-link"="" number="22" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 465">*486 the same days in 1994 and 1995 establishes that the transfers were reciprocal. See
The estate contends that decedent was not left in the same economic position after the transfers as his net worth was "severely depleted". The estate misconstrues the reciprocal transaction doctrine. The relevant inquiry in reciprocal indirect transfer cases is whether the transferees are in approximately the same economic position as they would be if the donor transferred the property directly to them. See
Finally, the estate asserts that the reciprocal transaction doctrine does not apply to this case because decedent would have made the transfers to his brother's family even if George had made no reciprocal transfers to decedent's family. We disagree.
We find implausible the estate's assertion that decedent would have transferred gratuitously assets sufficient to severely deplete his net worth. Moreover, it well settled that the Federal estate tax does not hinge upon the subjective intent of the decedent. See
The estate's position has no basis in either fact or law. Accordingly, respondent is sustained on this issue.
To reflect the foregoing,
Decision will be entered under Rule 155.
Footnotes
1. In the notice of deficiency, respondent determined values for certain real properties and a limited partnership interest owned by decedent at the time of his death that decreased the value of the gross estate. Respondent determined that the value of the taxable estate should be increased for the amount claimed as a charitable deduction which was in excess of the value of the properties contributed to qualified charities, for the unreported value of decedent's brokerage account, and for interest accrued on certain indebtedness owed to decedent. The estate concedes these adjustments.
The estate attached Schedule J to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, to claim deductions for $ 35,000 of attorney's fees, $ 7,500 of accountant's fees, and $ 4,400 of miscellaneous expenses. The parties have stipulated that the estate will incur additional administrative expenses which will further decrease the value of the taxable estate.↩
2. Mr. Middaugh's notes with respect to this plan stated that the "IRS could claim Step 3 is a step transaction -- would be highly likely if 1) there was a written agreement to do so, and 2) if it was done at the same time. Suggest it be VOLUNTARY and at the end of 1995 at earliest." The third step had not been executed at the time of trial.↩
3. Mr. Middaugh made a note similar to the one in supra note 2 with respect to this step of the scheme. At the time of trial, "Step 3" had not been executed.↩
4. Decedent's wife consented to have the transfers (including generation-skipping transfers) made by decedent during 1994 considered as made one-half by each. See sec. 2513(a). Kota stock to his brother and his brother's family, as follows:↩
5. Decedent's wife consented to have the transfers (including generation-skipping transfers) made by decedent during 1995 considered as made one-half by each. See sec. 2513(a). Sigco stock to decedent's family:↩
6. The parties stipulated that George made no transfers of stock to decedent's children after 1995. However, the parties agree that stipulation is incorrect and that George made these transfers to Jay at these times.↩