UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
June 20, 1966
Jonathan Slocum, as Executor of the Estate of Elvira E. Slocum, Deceased, Plaintiff
The United States of America, Defendant
Levet, District Judge.
The opinion of the court was delivered by: LEVET
LEVET, District Judge
The plaintiff moves for summary judgment in this action for refund of federal estate taxes paid pursuant to a determination of the Commissioner of Internal Revenue that the values of the stock of two corporations, Tioronda Company, Inc. (hereinafter "Tioronda") and Craig House Corporation (hereinafter "Craig House"), comprising part of the estate of Elvira E. Slocum (hereinafter "decedent"), were greater than the values at which they were reported in her federal estate tax return. The stock of both corporations was subject to restrictive agreements. The plaintiff contends that the agreements fix the respective values of the stock for estate tax purposes. The government denies this assertion.
The question of the effect of a restrictive agreement on the valuation of corporate stock for estate tax purposes has been passed on by the courts of this circuit. In three cases, Wilson v. Bowers, 57 F.2d 682 (2nd Cir. 1932), Lomb v. Sugden, 82 F.2d 166 (2nd Cir. 1936), and May v. McGowan, 194 F.2d 396 (2nd Cir. 1952), the Second Circuit has held that restrictive agreements, enforceable both at death and during a person's lifetime against stock held by such person, establish the value of that stock for estate tax purposes. Accord Brodrick v. Gore, 224 F.2d 892 (10th Cir. 1955). Implicit in those rulings and necessary for effective tax administration is the rule stated in Treas. Reg. § 20.2031-2(h) that "[even] if the decedent is not free to dispose of the underlying securities at other than the option or contract price, such price will be disregarded in determining the value of the securities unless it is determined under the circumstances of the particular case that the agreement represents a bona fide business arrangement and not a device to pass the decedent's shares to the natural objects of his bounty for less than an adequate and full consideration in money or money's worth." In May v. McGowan, supra, the court specifically noted that the trial judge had found no tax avoidance motive in the agreement.
The question now is whether, upon application of the above principles to the agreements and facts of this case, general issues of material fact exist which must be tried and which preclude summary judgment for the plaintiff.
The decedent held 152 shares of Tioronda at her death. This stock was subject to an agreement, dated January 26, 1945, between the owners of all the stock of Tioronda at that time, that is, the decedent, her husband, her son, her daughter, and one Thomas H. DeLaire. Under that agreement if one of the parties chose to sell his stock or died, his stock had to be offered to the other parties in an order specified by the agreement at $100 per share. There is no doubt that the agreement was binding among the parties both during their lives and at death and that it gave the surviving optionees the right to purchase the decedent's shares at $100 per share in accordance with the agreement. See Scruggs v. Cotterill, 67 App. Div. 583, 73 N.Y. Supp. 882 (1st Dept. 1902). Pursuant to the agreement, the Tioronda stock was valued at $100 per share on decedent's estate tax return; the Commissioner set its value at $572.92 per share.
In 1945, when the agreement was made, it appears that the decedent's husband was attempting to interest his son, the plaintiff, in joining him in the operation of Craig House, a mental hospital. While this may provide a business purpose for the agreement, it also appears that in 1945 the health of the decedent's husband was failing. That situation and the family relationship among the parties in reference to the agreement may provide the basis for an inference that the agreement was actually testamentary in character and a device for the avoidance of federal estate taxes. Since varying inferences may be drawn from the facts surrounding the Tioronda agreement, the drawing of those inferences is for the trier of the facts at trial. Empire Electronics Co. v. United States, 311 F.2d 175 (2nd Cir. 1962). Thus, as to the value of Tioronda stock, I conclude that there are genuine issues of material fact which preclude summary judgment.
Craig House Stock
I have reached a different conclusion with respect to the Craig House Stock. The decedent held 15 shares of Craig House stock at her death. Under Article Tenth of Craig House's certificate of incorporation, adopted in 1915, no stockholder could sell, assign or in any way dispose of any of his holdings without giving the other then stockholders the right to acquire a proportionate share of such holdings by purchase at $100 per share. While Article Tenth is not crystal clear, it appears, and the government does not deny, that that provision in the certificate of incorporation was binding on the decedent and enforceable as to any transfer of the decedent's shares both before and after her death. See Bank of Attica v. Manufacturers' and Traders' Bank, 20 N.Y. 501 (1859); Cowles v. Cowles Realty Co., 201 App. Div. 460, 194 N.Y. Supp. 546 (1st Dept. 1922); Bloomingdale v. Bloomingdale, 107 Misc. 646, 177 N.Y. Supp. 873 (Sup. Ct. 1919). The taxpayer valued the Craig House stock at $100 per share; the Commissioner set its value at $1,108.62 per share.
The certificate of incorporation with Article Tenth thereof was adopted in 1915. At such date, no federal estate tax existed,
and that fact, as the government recognizes (Memorandum of Law, p. 21), negates any tax avoidance purpose. The government also does not seriously contend that Article Tenth was not a bona fide business arrangement; the government's memorandum states: "The restriction * * *, in all likelihood, served a business purpose at that time." (p. 21) In so stating, the government is, no doubt, referring to the purpose of keeping control of a business in its present management which is recognized as a business purpose. Estate of Littick, 31 T.C. 181, 187 (1958), acq., 1959-2 Cum. Bull. 5.
The government, however, contends that a tax avoidance motive on the part of the decedent and her husband is shown after 1945 by "keeping Article Tenth in the Certificate of Incorporation long after any original purpose for it evaporated." (Memorandum of Law, p. 23) The government, in effect, would place an affirmative duty on the decedent and her husband as majority shareholders of Craig House to delete a provision of the certificate of incorporation when, as the government contends, its purpose ceased to exist on the ground that the provision might reduce the potential estate tax liability of the decedent (or her husband). The government cites no authority for this novel proposition, and I find none. I do not see how, as a matter of law or fact, events thirty years after the adoption of a provision in a certificate of incorporation can affect either the bona fide nature of such provision or the non-existence of a tax avoidance purpose at its inception. To my mind, Article Tenth was a bona fide business arrangement and not a tax avoidance device and, therefore, meets the requirements of Treas. Reg. § 20.2031-2(h). I conclude that there is no genuine issue of material fact as to this.
The government also claims that there is a genuine issue of material fact as to whether the restrictions in Article Tenth of the Craig House certificate were actually followed by the shareholders. Neither the pleadings nor the affidavits nor other proofs submitted by the government on this motion set forth any facts showing that there is a genuine issue on this point as required by Rule 56(e) of the Federal Rules of Civil Procedure. Moreover, the reply affidavit of the plaintiff states affirmatively that the restrictions have been followed. Under such circumstances, it is proper to state that there is no genuine issue of material facts as to whether the restrictions in Article Tenth were followed.
I conclude, therefore, that plaintiff is entitled to summary judgment as to his claim for refund with respect to the Craig House stock. There is no just reason for delay in entering such judgment. In all other respects, plaintiff's motion for summary judgment is denied.
Settle order and judgment on notice.