Estate of Bies v. Commissioner

T.C. Memo. 2000-338

UNITED STATES TAX COURT

ESTATE OF MARIE A. BIES, DECEASED, LARRY D. DUNN, PERSONAL
REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3159-99. Filed November 2, 2000.

Raymond D. Rossini, for petitioner.

Jack M. Forsberg, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARR, Judge: Respondent determined a deficiency of $129,866

in the estate's Federal estate tax.

The sole issue for decision1 is whether annual transfers of

1
In the notice of deficiency, respondent disallowed certain
funeral and administrative expenses and determined values for the
Mueller-Bies Funeral Home, Inc. stock and other property that
(continued...)
 - 2 -

closely held corporation stock made by Marie A. Bies (decedent)

to two daughters-in-law during the years 1985 through 1995, and

to a granddaughter-in-law during the years 1991 through 1995,

were, in substance, indirect transfers of stock to decedent's

sons and grandson. We hold they were.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference. Decedent died testate on

July 9, 1995, in Roseville, Minnesota (Roseville). At the time

the petition in this case was filed, the personal representative

of the estate, Larry D. Dunn, resided in St. Paul, Minnesota (St.

Paul).

The Bies Family

Decedent married Albert N. Bies (Albert Sr. or her husband;

collectively, when referring to them both, the Bieses) in 1938

and remained married to him until his death on May 12, 1990. The

Bieses had four children, Joanne, Albert, Barbara, and Gregory

(collectively, the Bies children).

James C. Nielsen, Sr. (James Sr.), and Joanne married in

1
(...continued)
increased the value of the gross estate reported on the estate
tax return. Petitioner assigned error to all these
determinations.
The parties have agreed that any issues they are unable to
settle will be tried later.
 - 3 -

1963; Albert and Gayle Bies (Gayle) married in 1961; Richard

Bloechl and Barbara married in 1971; and Gregory and Loretta Bies

(Loretta) married in 1973. At the time of decedent's death, each

Bies child was married. However, approximately 1 year after

decedent's death, Gregory died unexpectedly.

At the time of her death, decedent had nine grandchildren,

including James C. Nielsen, Jr. (James), the son of Joanne and

James Sr. James and Cheryl L. Nielsen (Cheryl) married in 1990,

and were married at the time of decedent's death.

The Family Business

Mueller-Bies Funeral Home was founded in 1906 by decedent's

father, Charles Mueller. Decedent's father was succeeded in the

business by decedent's husband, Albert Sr. In 1962, Albert Sr.

incorporated the business as Mueller-Bies Funeral Home, Inc.

(MBI). Decedent was a member of the MBI board of directors and

treasurer of the corporation from 1985 until the year of her

death.

At all times since its incorporation, MBI has had a single

class of stock and 150 shares issued and outstanding. Albert Sr.

owned 100 shares and decedent owned 50 shares until December 26,

1985; on that date, Albert Sr. transferred 25 shares to decedent.

Throughout the period from December 1, 1985, until the date

of decedent's death, MBI operated funeral homes in St. Paul and

Roseville. During this time, Albert, Gregory, and James were
 - 4 -

licensed funeral directors, and all were employed by MBI in that

capacity. Joanne and Loretta were employed by MBI as

secretary/receptionists. None of decedent's other descendants

was employed by MBI.

Decedent's Estate Plan and Transfers of MBI Stock

Richard A. Grayson (Mr. Grayson) is an attorney, consultant,

and appraiser who specializes in mortuary matters. Mr. Grayson

represented MBI from some time in the 1970's until decedent's

death in 1995. Mr. Grayson also drafted the wills of decedent

and her husband and advised them on estate planning matters.

As a result of consolidation of the funeral home business by

national companies during the early 1980's, Mr. Grayson believed

that the value of MBI had increased. Mr. Grayson advised the

Bieses to begin making gifts of stock to family members to save

estate taxes and to ensure family succession of the business.

The Bieses were concerned that their children who were not

committed to the funeral home business would sell the shares, and

MBI would no longer be a family owned and operated business.

Because neither Joanne nor Barbara was committed to the business,

Albert Sr. and decedent did not intend and did not make gifts of

MBI stock to either of them. Therefore, the Bieses intended

initially to make gifts of MBI stock to only Albert and Gregory,

who were both licensed funeral directors. However, upon Mr.

Grayson's recommendation, the Bieses transferred shares to Gayle
 - 5 -

and Loretta as well as to Albert and Gregory. Shares were

transferred to Gayle even though she told the Bieses that she did

not want to be in the funeral home business.

Beginning in 1985, and each year until her death, decedent

transferred shares of MBI stock to Albert, Gayle, Gregory, and

Loretta. Beginning in 1991, and each year until her death,

decedent transferred shares of MBI stock to James and his wife

Cheryl. Each transfer was to an individual, and each transfer

was the number of shares or fraction of a share calculated by Mr.

Grayson to be equal in value to $10,000.

The procedure was the same for each of the 27 transfers at

issue: Mr. Grayson would prepare the certificates to transfer

MBI shares to Albert, Gayle, Gregory, and Loretta, and at the

same time, he would prepare the certificates for the shares

transferred from Gayle to Albert, and from Loretta to Gregory.

After Mr. Grayson had prepared all transfer documents, he would

deliver them to the funeral home for endorsement. Albert, as

president of MBI, endorsed all the certificates before delivery

to the donees, including the shares that would be issued to

Albert and Gregory once Gayle and Loretta endorsed the

certificates for transfer. Gayle and Loretta transferred the

shares received from decedent to their husbands upon receipt.2

2
The stock transfers from Gayle and Loretta to Albert and
Gregory, respectively, were dated the day after decedent's
(continued...)
 - 6 -

Mr. Grayson would retrieve the documents after they were signed,

and the transfers were then recorded in the corporate stock

ledger. After their marriage, the transfers of shares from

decedent to James and Cheryl, and from Cheryl to James, were made

according to this same procedure.

Decedent did not file a Form 709, United States Gift Tax

Return, with respect to any of these transfers, nor were any

taxable gifts reported on Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return.

Decedent's Will

Decedent owned shares of MBI stock at the time of her

death,3 and her will, executed September 8, 1989, provided:

SECOND. After the payment of such funeral
expenses and debts, I hereby make the following
specific devises:

* * * * * * *

B. All capital stock in Mueller-Bies Funeral
Home, Inc., to my sons, Albert W. Bies and
Gregory J. Bies, or to the survivor of them;
* * *

2
(...continued)
transfers to them. However, the record shows that the documents
were prepared at the same time.
3
The personal representative reported on the estate tax
return that decedent owned 5.068 shares of MBI stock at the time
of her death. Petitioner represented in the petition that
decedent owned 5.9046 shares of MBI stock on the date of her
death. The exact number of shares that decedent owned at her
death is not now at issue.
 - 7 -

The Donees’ Buy/Sell Agreements

On January 10, 1986, Albert and Gregory, each in

anticipation of acquiring "through gift and/or inheritance" 50

percent of the shares of MBI, entered into an agreement with MBI

(the 1986 agreement), which provided in part that MBI would

obtain insurance on each of their lives and upon the death of

either shareholder, the estate of the deceased shareholder must

sell and MBI must purchase all of the deceased shareholder's MBI

shares.

The agreement also provided that in the event that at the

time MBI was required to purchase the deceased shareholder's

stock, MBI had insufficient surplus to fulfill its obligation,

the entire available surplus could be used to purchase a portion

of the deceased shareholder's MBI shares, and the remaining

shareholder and MBI were required to take other action necessary

for the redemption of the shares not purchased.

In 1991, Albert, Gregory, and James entered into an

agreement with MBI (the 1991 agreement), identical in relevant

part to the 1986 agreement, except that all three collectively

anticipated they would become the "sole Stockholders" of MBI

through gifts and/or inheritance and that MBI would obtain

insurance on each of their lives.

Upon the death of Gregory in 1996, Loretta inherited the

69.25 shares of MBI stock that Gregory owned at the time of his
 - 8 -

death. At some time during September 1996, Albert and Loretta

entered into an option contract, which provided in part that

Albert agreed that Loretta may purchase sufficient shares of MBI

from Albert to make Loretta and Albert equal shareholders if any

of Loretta's children obtain a license to practice mortuary

science within 6 years from the date of the agreement. On or

about December 31, 1996, MBI redeemed 41 shares from Loretta, and

she retained 28.5 shares.

OPINION

Respondent determined that decedent's transfers of MBI stock

to Gayle, Loretta, and Cheryl were, in substance, indirect

transfers of additional shares to Albert, Gregory, and James,

respectively. Respondent contends that decedent transferred the

MBI stock through Gayle, Loretta, and Cheryl to Albert, Gregory,

and James, respectively, for the purpose of obtaining additional

annual gift tax exclusions.

Petitioner asserts that decedent's transfers of MBI stock to

Gayle, Loretta, and Cheryl were, both in form and substance,

transfers only to Gayle, Loretta, and Cheryl.

Respondent's determinations of fact are presumptively

correct, and petitioner bears the burden of proving by a

preponderance of the evidence that those determinations are
 - 9 -

erroneous. See Rule 142(a);4 Welch v. Helvering, 290 U.S. 111,

115 (1933).

Section 2001(a) provides that a tax is imposed on the

transfer of the taxable estate of every decedent who is a citizen

or resident of the United States. The tax imposed is equal to

the excess of a tentative tax computed on the sum of the taxable

estate and the adjusted taxable gifts over the aggregate amount

of tax that would have been payable with respect to gifts made by

the decedent after December 31, 1976, using the unified rate

schedule in effect at the date of death. See sec. 2001(b). The

term "adjusted taxable gifts" means the total amount of the

taxable gifts (within the meaning of section 2503) made by the

decedent after December 31, 1976, other than gifts which are

includable in the gross estate. See id.

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 secs. 2501(a), 2511(a). The

term "taxable gifts" means the total amount of gifts made during

the calendar year, less certain deductions. See sec. 2503(a).

However, the first $10,000 of gifts of a present interest in

4
Rule references are to the Tax Court Rules of Practice and
Procedure. All section references are to the Internal Revenue
Code in effect for the date of decedent's death, unless otherwise
indicated.
 - 10 -

property made by a donor to any person in a calendar year is

excluded from taxable gifts. See sec. 2503(b).

As a general rule, we will respect the form of a

transaction. We will not apply the substance over form

principles unless the circumstances so warrant. See Gregory v.

Helvering, 293 U.S. 465 (1935); Estate of Jalkut v. Commissioner,

96 T.C. 675, 686 (1991). Courts have applied the substance over

form principles in gift tax cases to determine the real donee and

value of the property transferred. See, e.g., Heyen v. United

States, 945 F.2d 359, 363 (10th Cir. 1991); Estate of Cidulka v.

Commissioner, T.C. Memo. 1996-149. In these cases, the indirect

transfers of the property to the intended donees were the result

of a prearranged plan. See, e.g., Heyen v. United States, supra

at 361 (donor transferred stock to 29 straws who either did not

know they were receiving stock or believed that they were

participating in stock transfers or had agreed before receiving

the stock to its retransfer, 27 of whom then retransferred the

stock to the donor's intended donees); Estate of Cidulka v.

Commissioner, supra (father's 14 transfers of stock to daughter-

in-law, who, on the same day, transferred the stock to her

husband, provided "inference" of an "understanding" between

father and daughter-in-law that her shares would be merely a

pass-through of shares to her husband).
 - 11 -

Section 2511(a) requires consideration of whether decedent

made indirect transfers. Accordingly, we must decide whether

Gayle, Loretta, and Cheryl were merely intermediate recipients of

decedent's indirect transfers of stock to Albert, Gregory, and

James, respectively, or were the intended beneficiaries of

decedent's bounty. See Heyen v. United States, supra at 362;

Estate of Cidulka v. Commissioner, supra.

We consider the objective facts of the transfers and the

circumstances under which they were made evidence of decedent's

actual intent in making the stock transfers. See United States

v. Estate of Grace, 395 U.S. 316, 323 (1969); Heyen v. United

States, supra at 362-363; sec. 25.2511-1(g)(1), Gift Tax Regs.

The evidence shows that the simultaneous transfers were all part

of a prearranged single transaction.

It is clear that decedent arranged to give annually to each

recipient the number of MBI shares that would avoid imposition of

the gift tax. This fact, by itself, is not evidence of an

ulterior purpose in making the stock transfers to Gayle, Loretta,

and Cheryl. See Gregory v. Helvering, supra at 469 ("The legal

right of a taxpayer to decrease the amount of what otherwise

would be his taxes, or altogether avoid them, by means which the

law permits, cannot be doubted."). However, it is also clear

from the record that Gayle, Loretta, and Cheryl had preexisting

agreements to transfer the shares to their husbands. Mr. Grayson
 - 12 -

testified that he knew before decedent made the gifts that the

wives had agreed to transfer the shares to their husbands.

Moreover, decedent was treasurer of MBI and a member of its board

of directors; therefore, it cannot be denied that she knew Gayle,

Loretta, and Cheryl made immediate transfers of the shares to

Albert, Gregory, and James, respectively.

Decedent executed her will in 1989. The will provided for

the bequest of the MBI stock that decedent held at death to her

sons, or to the survivor of them. Thus, in the event either of

her sons had predeceased decedent, decedent did not intend for

the surviving spouse of the deceased son to take any shares.

This provision is evidence of decedent's intentions regarding

ownership of MBI stock by her daughters-in-law.

Furthermore, decedent made no inter vivos or testamentary

transfers of MBI stock to either Joanne or Barbara, because

neither daughter was committed to the funeral home business.

However, decedent made transfers of stock to Gayle even though

she knew that Gayle did not want to be in the funeral home

business. This is strong evidence that the stock transfers to

the daughters-in-law actually were indirect transfers to her

sons.

The 1986 and 1991 agreements show that Albert, Gregory, and

James anticipated owning collectively all the MBI shares. Mr.

Grayson, Albert, Loretta, Gayle, James, and Cheryl testified that
 - 13 -

the shares in the closely held corporation were transferred to

the husbands so that in the event Albert, Gregory, or James

predeceased his wife, MBI would purchase the shares and provide

the surviving spouse liquidity. This testimony is not supported

by the facts.

Upon the death of Gregory, MBI did not redeem all his

shares. Rather, Loretta inherited the shares, and none of those

shares was sold to MBI until after Loretta reached a conditional

agreement with Albert for the purchase of enough of his shares to

equalize their ownership interests. Although Loretta testified

that the MBI shares "had absolutely no value" to her, it is

evident from Loretta's retention of almost twice the amount of

shares initially transferred through her by decedent, and by

Loretta's agreement with Albert for the purchase of more shares,

that, contrary to her testimony, Loretta preferred owning MBI

stock to cash. The objective evidence does not support the

purported reason for the stock transfers between the spouses.

Viewed as a whole, the evidence shows the daughters-in-law

were merely intermediate recipients, and that decedent intended

to transfer the stock to her lineal descendants who were

committed to continuing the operation of the funeral home

business.
 - 14 -

We conclude that the inter vivos transfers of the MBI shares to

Gayle, Loretta, and Cheryl were, in fact, indirect transfers of

additional shares to decedent's sons and grandson.

Accordingly, to reflect the foregoing,

An appropriate order will be

issued.