T.C. Memo. 1997-431
UNITED STATES TAX COURT
ESTATE OF MARY D. MAGGOS, DECEASED, CATHERINE M. ADKINS,
SPECIAL ADMINISTRATOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20877-93. Filed September 23, 1997.
Stanley Y. Mukai, Carmen J. SantaMaria, R. John Seibert,
Kimberly R. McCorkle, and William C. McCorriston, for
petitioner.1
Henry E. O'Neill, for respondent.
1
The petition was prepared by Messrs. Victor H. Bezman and
Rex A. Guest, who withdrew from the case on Aug. 26, 1994.
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MEMORANDUM OPINION
LARO, Judge: Petitioner moves for summary adjudication
under Rule 121(a),2 arguing that the Court may enter a decision
in its favor as a matter of law. Respondent objects thereto,
arguing that the Court must still decide questions of material
fact in order to decide this case. We agree with respondent. We
will deny petitioner's motion. This case is not ripe for summary
adjudication because material facts remain in dispute.
Background
While residing in Honolulu, Hawaii, Mary D. Maggos (Ms.
Maggos) petitioned the Court on September 27, 1993, to
redetermine respondent's determination of a $2,229,350 deficiency
in her 1987 Federal gift tax. Respondent determined that Ms.
Maggos' sale of 56.7 percent of the outstanding stock of
Pepsi-Cola Alton Bottling, Inc. (PCAB), to PCAB in exchange for a
$3 million promissory note was a transfer for less than adequate
and full consideration. Respondent determined that the fair
market value of the transferred stock was $8,056,000 on the date
of transfer and, accordingly, that Ms. Maggos had made a gift of
$5,056,000 to her son, Nikita Maggos, who was PCAB's sole
remaining shareholder. Ms. Maggos had filed a 1987 Federal gift
2
Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the year in issue.
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tax return reporting an $11,000 gift that she made to her
daughter, Catherine Maggos Adkins. After taking into account the
$10,000 exclusion that applied to this gift, respondent
determined that Ms. Maggos' taxable gifts in 1987 totaled
$5,057,000, rather than the $1,000 amount shown on her 1987
return. Respondent increased Ms. Maggos' taxable gifts by
$5,056,000 to reflect this determination.
Ms. Maggos alleged in her petition that the value of her
redeemed stock was not more than $3 million, and that the value
of the promissory note was $3 million. On October 5, 1995, with
leave of the Court, Ms. Maggos amended her petition to allege new
facts. According to the amended petition, Ms. Maggos' stock was
worth substantially more than $3 million at the time of the
redemption, but Nikita Maggos and certain other persons who were
close confidants of Ms. Maggos fraudulently induced her to sell
her stock to PCAB for less than its full worth. Ms. Maggos
alleges in her amended petition that she did not make a gift to
Nikita Maggos because of this fraudulent inducement. Ms. Maggos
alleges alternatively in her amended petition that her sale of
the stock to PCAB was not a gift because the redemption was a
"bona fide, arm's length transaction which proved to be a bad
bargain" for her.
Ms. Maggos was born in 1906. She and her former husband,
Gust Maggos, developed PCAB over the course of several decades.
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PCAB, which is based in Alton, Illinois, is a regional bottler of
Pepsi-Cola products in the Midwest. At all relevant times prior
to May 1987, Ms. Maggos owned 56.7 percent of PCAB's stock, and
her only son, Nikita Maggos, owned the remaining stock. Nikita
Maggos was the president and a director of PCAB, and he oversaw
the daily operation and management of the company. Ms. Maggos
had little, if any, participation in the operation or management
of PCAB after the mid-1960's, having moved to Honolulu, Hawaii,
from Alton, Illinois, at that time.
Following her move to Honolulu, Ms. Maggos retained Robert
Hite, a lawyer in Hawaii, to update her estate tax plan. The
estate plan included Ms. Maggos' transfer of complete ownership
of PCAB to her son, Nikita Maggos, which it sought to accomplish
with minimal tax consequences. Effective May 1, 1987, upon
consultation with Mr. Hite and certain other advisers, Ms. Maggos
entered into the redemption transaction with PCAB under which she
received a promissory note from PCAB in exchange for her stock.
The note provided for annual payments of interest at a rate of
8 percent per year and the payment of the $3 million face amount
at the end of 10 years. The note was structured so that Ms.
Maggos would have an improved income stream to meet her extensive
nursing care needs. As of May 1, 1987, Ms. Maggos' stock in PCAB
was worth substantially more than $3 million.
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Following PCAB's redemption of Ms. Maggos' stock, Nikita
Maggos investigated the possibility of selling PCAB and informed
various bottling industry companies that his stock was available
for sale. On April 28, 1989, Nikita Maggos sold all of PCAB's
stock for cash and other consideration totaling more than $22
million; this consideration included the purchase price, the
purchaser's assumption of PCAB's debt, PCAB's forgiveness of
loans to Nikita Maggos, the receipt by Nikita Maggos of certain
assets which had previously belonged to PCAB, and a
noncompetition agreement between Nikita Maggos and the purchaser.
On August 23, 1994, Ms. Maggos commenced suit in the U.S.
District Court for the District of Hawaii against Nikita Maggos
and PCAB to recover damages for, among other things, fraud with
respect to the redemption. On August 7, 1995, Ms. Maggos
commenced suit in the First Circuit Court in Hawaii against
Victor H. Bezman and E. Lawrence Helm, Jr., and their respective
firms, alleging fraud and professional negligence. Mr. Helm, a
certified public accountant, and Mr. Bezman, an attorney, advised
Ms. Maggos on financial and tax matters, including the
disposition of her PCAB stock. Mr. Helm had been Ms. Maggos'
personal accountant since at least 1960.
Ms. Maggos died on September 3, 1996, and her daughter,
Catherine Maggos Adkins, was appointed special administrator of
Ms. Maggos' estate on October 24, 1996. Ms. Maggos' last will
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and testament bequeathed the $3 million promissory note to Nikita
Maggos.
Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials of phantom factual issues.
A decision on the merits of a taxpayer's claim can be made
through summary judgment "if the pleadings, answers to
interrogatories, depositions, admissions, and any other
acceptable materials, together with the affidavits, if any, show
there is no genuine issue as to any material fact and that a
decision may be rendered as a matter of law." Rule 121(b).
Because summary judgment decides against a party before trial, we
grant such a remedy cautiously and sparingly, and only after
carefully ascertaining that the moving party has met all
requirements for summary adjudication. Associated Press v.
United States, 326 U.S. 1, 6 (1945); P & X Mkts., Inc. v.
Commissioner, 106 T.C. 441, 443 (1996); Boyd Gaming Corp. v.
Commissioner, 106 T.C. 343, 346-347 (1996).
The Court will not resolve disagreements over material
factual issues in a summary judgment proceeding. A fact is
material if it "'tends to resolve any of the issues that have
been properly raised by the parties.'" Boyd Gaming Corp. v.
Commissioner, supra at 347 (quoting 10A Wright et al., Federal
Practice and Procedure: Civil, sec. 2725, at 93 (2d ed. 1983)).
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The burden of proving the absence of any genuine issue of
material fact is on the moving party, and factual inferences are
viewed in the light most favorable to the nonmoving party.
United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); Boyd
Gaming Corp. v. Commissioner, supra at 347; Kroh v. Commissioner,
98 T.C. 383, 390 (1992); Preece v. Commissioner, 95 T.C. 594, 597
(1990).
Petitioner argues that its motion should be granted given
that it is indisputable that Ms. Maggos did not make a gift of
her stock to Nikita Maggos because she lacked a donative intent
when she sold her stock to PCAB. We disagree. Property
transferred by gift is subject to the Federal gift tax, sec.
2501(a); see also sec. 2511(a), and "Where property is
transferred for less than an adequate and full consideration in
money or money's worth, then the amount by which the value of the
property exceeded the value of the consideration shall be deemed
a gift", sec. 2512(b). The transfers reached by the Federal gift
tax spans are not confined to those that would be termed "gifts"
under the common law. Whereas a gift in the common law sense
requires a donative intent, delivery by the donor, and acceptance
by the donee, 38 Am. Jur. 2d, Gifts, sec. 18, at 820 (1968), a
gift for Federal gift tax purposes encompasses sales and other
exchanges of property in which the value of the property
transferred is more than the value of the consideration received.
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Sec. 25.2512-8, Gift Tax Regs.; see also Estate of Trenchard v.
Commissioner, T.C. Memo. 1995-121. As stated by the Supreme
Court, the "Congress intended to use the term 'gifts' in its
broadest and most comprehensive sense" and "dispensed with the
test of 'donative intent'" in lieu of "a much more workable
external test, that where 'property is transferred for less than
an adequate and full consideration in money or money's worth,'
the excess in such money value 'shall, for purposes of the tax
imposed by this title, be deemed a gift'". Commissioner v.
Wemyss, 324 U.S. 303, 306 (1945); see also Crown v. Commissioner,
585 F.2d 234, 238 (7th Cir. 1978), affg. 67 T.C. 1060 (1977).
The Federal gift tax provisions, however, do not reach all
transfers of property the value of which exceeds the
consideration received in exchange. The Federal gift tax does
not attach to a transfer of property which is made in the
ordinary course of business. Sec. 25.2512-8, Gift Tax Regs. For
this purpose, a transfer is in the ordinary course of business
only when it is bona fide, at arm's length, and free from
donative intent. Id.
This and other Courts look to a number of factors to help
ascertain whether a transfer is a gift under section 25.2512-8,
Gift Tax Regs. See Saltzman v. Commissioner, T.C. Memo. 1994-
641. For example, disparities in value evidence a gift, Fehrs v.
United States, 223 Ct. Cl. 488, 620 F.2d 255 (1980); see Kincaid
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v. United States, 682 F.2d 1220, 1224 (5th Cir. 1982), as does a
transfer that is made without an independent appraisal of the
underlying property, Bergeron v. Commissioner, T.C. Memo.
1986-587. A gift also may arise from a transfer without an
arm's-length negotiation over the purchase price, see Righter v.
United States, 258 F. Supp. 763, 767-768 (W.D. Mo. 1966), revd.
and remanded on another issue 400 F.2d 344 (8th Cir. 1968), when
the effect of a transfer is to remove the donor from a business
that he or she created, Galluzzo v. Commissioner, T.C. Memo.
1981-733, or when the moving impulse for a transfer is the desire
to pass assets on to a family member, Robinette v. Helvering,
318 U.S. 184, 187-188 (1943). Transfers between family members
are subject to strict scrutiny, and the presumption is that such
transfers are gifts. Harwood v. Commissioner, 82 T.C. 239
(1984), affd. without published opinion 786 F.2d 1174 (9th Cir.
1986); Estate of Reynolds v. Commissioner, 55 T.C. 172, 201
(1970); Mercil v. Commissioner, 24 T.C. 1150, 1153 (1955); see
Muserlian v. Commissioner, 932 F.2d 109, 112 (2d Cir. 1991),
affg. T.C. Memo. 1989-493.
Our review of the record in the light most favorable to the
nonmoving party (i.e., respondent) convinces us that genuine
issues as to material fact remain to be decided by the Court.
Petitioner claims that the record shows clearly that Ms. Maggos
was defrauded because she transferred her PCAB shares for less
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than adequate consideration, or, alternatively, that Ms. Maggos
entered into a bad business deal when she agreed to the
redemption. We disagree. The mere fact that Ms. Maggos filed
two lawsuits against parties connected to the redemption is not
enough to persuade us that she was defrauded in connection with
the redemption, or that she entered into a bad business deal with
respect thereto. Nor is it enough that Ms. Maggos received less
than fair market value for her shares. Ms. Maggos sold her
shares to PCAB without an independent appraisal of PCAB's value,
and she bequeathed the promissory note to her son. The value of
the note was substantially less than the value of her stock, and
the price for the stock was not set through arm's-length
negotiations. The effect of Ms. Maggos' transfer was to remove
her from a family business that she helped build, passing total
ownership of the business to her family's next generation with a
conscious attempt on the part of Ms. Maggos to minimize the
payment of tax that would be due on the passage. Bearing in mind
that Ms. Maggos also was astute enough to file a 1987 gift tax
return reporting a minimal gift, which, from a practical point of
view, served to start the running of the period of limitations
with respect to an assessment of a deficiency in gift tax for the
year of redemption, we simply do not believe that petitioner
prevails in this proceeding as a matter of law. Inferences may
be drawn from the facts of this case which are consistent with
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donative intent on the part of Ms. Maggos in effectuating the
redemption, as well as the absence of an arm's-length transaction
with respect thereto. We defer our opinion on whether we will
draw these inferences until the conclusion of a trial, after we
have heard and viewed the persons connected with the redemption
as they testify to their understanding of the surrounding facts.
These witnesses, we are told, will include Ms. Maggos, whose
testimony has been preserved through a videotaped deposition. We
will deny petitioner's motion.
To reflect the foregoing,
An appropriate order
will be issued.