EFTA01103666

Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) the Court dated January 10, 1973, certain secondary issues were severed for a later trial, and the Commissioner 65 T.C. 296 United States Tax Court has since conceded one of the remaining adjustments, leaving only the following issue for decision at this time: ESTATE OF CHARLES GILMAN, DECEASED, Whether the value of certain shares of stock transferred HOWARD GILMAN, CHARLES GILMAN, JR., by decedent to an irrevocable trust in 1948 is required to AND SYLVIA P. GILMAN, EXECUTORS, be included in decedent's *297 gross estate under section PETITIONERS 2036(a).' The answer depends upon whether decedent v. retained the enjoyment of the stock within the meaning of COMMISSIONER OF INTERNAL REVENUE, section 2036(a)( I) or the right to designate who shall RESPONDENT enjoy the stock or the income therefrom within the meaning of section 2036(a)(2). Docket No. 2730-72. I Filed November io, t975• Attorneys and Law Firms FINDINGS OF FACT *296 James B. Lewis and Maurice Austin, for the petitioners. Charles Gilman (hereinafter decedent or Charles) died testate on June 19, 1967. His wife, Sylvia P. Gilman, and Agatha L. Vorsanger, for the respondent. his two sons, Howard and Charles, Jr., are, respectively, the executrix and the executors of the will. At the time In 1948, decedent owned 60 percent of the common stock they filed the petition herein, each of them resided in the and a substantial block of the preferred stock of a State of New York. corporation. In that year he transferred the common stock to a trust of which he was one of three trustees. He Gilman Paper Co. (hereinafter Gilman Paper, the continued to serve as a trustee of that trust and as a corporation, or the company) was incorporated in New director and chief executive officer of the corporation Hampshire in 1897 under the name of Dalton Power Co. until he died in 1967. Held, decedent did not retain the and was reorganized under its present name in 1921. The enjoyment of the entrusted stock or the right to designate company is engaged in the manufacture of paper, the person or persons who would enjoy the stock of the paperboard, and paper products. Although its operations income therefrom within the meaning of sec. 2036(a)( I) were originally confined to Vermont, in 1940, the or 2036(aX2), I.R.C. 1954. company, through subsidiary corporations, began expanding into southern Georgia and northern Florida. Decedent's father, Isaac Gilman, was the company's Opinion principal stockholder and president until the time of his death in 1944. FEATHERSTON, Judge: In early 1940, the outstanding shares of the company's only class of stock were held entirely by Isaac Gilman's family as follows: The Commissioner determined a deficiency in the Federal estate tax due from the Estate of Charles Gilman, deceased, in the amount of $18,252,485.92. By order of Stockholder Number of shares ..414•P• Isaac Gilman 15,999 WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 1 EFTA01103666 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) Charles Gilman ._... 5,001 Leah Shapiro (decedent's 1,000 Sadie Collier (decedent's sister)... .. 1,000 Celia Frank (decedent's sister)._....__.__....__.__...._...__...._...__..._... 1,000 Pauline Bailin (decedent's sister) 1,000 Total. .. 25,000 and 4 to decedent. At that time, Isaac Gilman was about 75 years old. Charles, who had joined his father in the business in 1917 (2) Upon the death of Isaac Gilman, decedent would have the option of purchasing 2 shares of the common stock for and was himself approximately 42 years old, was the only $100 each from his father's estate. close family member (apart from his father) who played an important role in the operation of the company. (3) The above option was contingent upon decedent Because he had four sisters who would probably be entering into an agreement with the company that so long treated equally with him in the event of his father's *298 as he was employed by the company his salary would not death, Charles was worried about his future status in the exceed a ceiling amount computed by a specified formula. company as a minority stockholder. He was concerned also that his four sisters or their husbands might disrupt Pursuant to the latter provision, it was expressly stated the company, and his father shared that concern. As a that any compensation paid to Charles by the company result, during late 1939 and early 1940, Charles was and its affiliates in excess of $30,000 a year plus 10 making a serious investigation of other possible business percent of the net profits in excess of $200,000 (as opportunities. Isaac Gilman was concerned about the computed for Federal income taxes) was to be received by welfare of all of his children and was reluctant to put him as trustee for the benefit of all the stockholders of the Charles in a position where he could take advantage of his company, to be distributed to them immediately in four sisters by exploiting the company. The problem was proportion to their stockholdings. Charles was aware that solved by an agreement entered into on June 22, 1940, by the highest amount the company has ever earned up to Charles, his father, and the company. The agreement that time was approximately $150,000 or $160,000, and provided for the following arrangement: as a consequence of the agreement the $30,000 effective ceiling on his salary was likely to be less than the (I) The company's capital stock was reclassified and compensation he was then receiving from the affiliated increased to provide for the authorization of 25,000 group ($40,000 in 1940). He was nevertheless willing to nonvoting preferred shares, each of $100 par value, to be accept the terms of the contract. He wanted to control the exchanged share for share with the then-outstanding company because he felt he was the only one in the stock, and 10 shares of common stock, each of $100 par family that could run it successfully. value, which would have `the exclusive voting rights and powers,' 6 shares of which were issued to Isaac Gilman WestlawNext © 2013 Thomson Reuters. No claim to original U.S Government Works. 2 EFTA01103667 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) *299 On July 26, 1940, the company increased and daughters, and 100 preferred shares to his nephew, reclassified its capital stock in accordance with the June Herman Gilman. 22, 1940, agreement. The common stock of the company was voting and the preferred stock was nonvoting. The Isaac Gilman died on August 27, 1944. At that time he preferred stock was entitled to a 3-percent annual owned 15,099 shares of preferred and 6 shares of cumulative preference dividend, after payment of which common stock. Decedent thereupon exercised his option any further dividend way payable on both classes of stock pursuant to the June 22, 1940, agreement and purchased 2 share for share. Upon liquidation, the preferred stock was shares of common stock from his father's estate. The entitled to $100 per share plus arrearages in preference remaining 4 shares of common stock were distributed dividends; the common stock was then entitled to $100 equally among Isaac Gilman's four daughters as provided per share, and any further assets were to be distributed to by his will. The company redeemed the 15,099 shares of both classes of stock share for share. preferred stock. As a result of these transactions, the outstanding stock of the company was then held as Following the execution of this agreement and prior to his follows: death, Isaac Gilman transferred 240 preferred shares to his son, Charles, 140 preferred shares to each of his Shares of Shares of common preferred Stockholder stock stock Decedent 6 5,241 Leah Shapiro (and her family).. 1 1,140 Sadie Collier (and her family).. 1 1,140 Celia Frank (and her 1 1,140 Pauline Bailin (and her family) 1 1,140 Herman Gilman 0 100 Total 10 9,901 WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. EFTA01103668 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) decedent transferred to the trust his 6 shares of the On October 31, 1944, the directors elected decedent company's common stock. The trust indenture provided president and treasurer of the company. At that time, the that there should always be three trustees and that acts and directors of the company were decedent, Charles Bailin decisions of the trustees should be by majority vote. (decedent's brother-in-law), and Morris Gintzler. On Although decedent retained the right and authority during February 19, 1945, the company's bylaws were amended his lifetime to appoint successor trustees, this power to provide that a director could be removed by the remained unexercised. shareholders with or without cause. The trustees were given broad management and At a special meeting of the board of directors held on investment powers, including lull power and authority to October 5, 1945, the formula for the computation of grant, bargain, sell, assign, transfer and convey all or any decedent's salary in *300 accordance with the agreement part of the trust estate.' Included among these of June 22, 1940, was abandoned, and the board approved management powers was the right to vote the stock held a salary for decedent of 10 percent of the company's net in trust. The trust indenture further provided (a) that the profits in excess of $200,000, computed before the trust should endure until the death of the survivor of deduction for the compensation itself and before decedent's two sons, Howard and Charles, Jr., (b) that the provision for Federal income taxes. In 1947, decedent's trust income should be paid semiannually in equal shares older son, Howard, who was then about 23 years old, to decedent's sons with various contingent payment replaced Morris Gintzler as one of the company's throe provisions in the event of their deaths and the failure of directors. issue, and (c) that the corpus would be distributed upon the death of the survivor of the income beneficiaries to the On April 27, 1945, Gilman Foundation, Inc. (hereinafter issue per stirpes of Charles Gilman, Jr., and Howard the foundation), a New York membership charitable Gilman. Decedent retained no possibility of reverter. corporation, was created. At all times since its creation, only members of decedent's immediate family and I. *301 Following the creation of the trust and prior to Alfred Levy, decedent's and the company's counsel, have decedent's death, the following transfers of the served as directors and officers, none of whom have company's outstanding stock occurred: received any compensation from the foundation. At all (a) From time to time decedent gave a total of 28 times until his death, decedent was both president and a preferred shares to Howard Gilman and 27 preferred director of the foundation. During the years 1946 through 1968, the company and its subsidiaries made substantial shares to Charles Gilman, Jr. contributions to the foundation, aggregating $4,927,653. (b) From time to time the foundation received a total of On June 30, 1948, decedent created a trust by an 260 preferred shares as contributions as follows: indenture between himself as settlor and himself, Howard Gilman, and I. Alfred Levy as trustees. On that date, Number ofpreferred Donor shares contributed ••••••••••• Decedent.. 186 WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 4 EFTA01103669 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) Howard Gilman. 28 Charles Gilman, Jr. 25 Leah Shapiro. 6 Sadie Collier 12 Pauline Bailin,,,,__,_ 3 Total 260 Gilman, the company purchased his 100 preferred shares (c) On December 17, 1957, the company purchased all of from his estate. As a result of the foregoing, the the remaining stockholdings of decedent's four sisters and outstanding stock of the company from January 22, 1962, their families, consisting of 4,539 preferred and 4 until decedent's death consisted of 5,262 preferred shares common shares. and 6 common shares, which were held as follows: (d) On January 22, 1962, following the death of Herman Shares of Shares of Stockholder common stock preferred stock Decedent.. 0 5,000 Trust .. 6 0 Foundation.. 0 260 WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 5 EFTA01103670 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) Charles Gilman, Jr._ 0 2 Total 6 5,262 Howard was about 6 years older. From the creation of the trust on June 30, 1948, to the date of his death on June 19, 1967, decedent was a trustee The company was profitable in every year from 1947 to 1967, inclusive. During that period the company's annual of that trust, a director of the company, and the net earnings (after provision for Federal income taxes) company's chief executive officer. The bylaws of the company provide that the directors `shall be elected at the ranged from a low of about $530,000 to a high of about $4,900,000. Its consolidated net worth grew to annual meeting of the stockholders and each director shall approximately $44 million with earned surplus over $43 be elected to serve for one year and until his successor shall be elected and shall qualify.' The bylaws further million. At the end of 1947, the company had $2,220,417 in cash on hand; as of December 31, 1967, the company's provide that the president and other officers of the consolidated balance sheet showed $27,250,597 in cash. company 'shall be elected by the directors at their regular annual *302 meeting.' In 1957, decedentS younger son, During 1944 through 1967, the company declared and Charles, Jr., replaced Charles Bailin as a company paid dividends as follows: director, with the result that decedent and his two sons comprised the board of directors until decedent's death. Charles, Jr., was then about 26 or 27 years old, and Preferred stock Common stock Year dividend per share dividend per share 1944-46 0 0 1947 $6 0 1948 6 0 1949 6 0 1950 11 0 WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 6 EFTA01103671 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) 28 0 12 0 1953 17 $6 1954 20 20 12 12 1956 12 12 0 0 The only income received by the trust from the time of its In 1951, 1953, and 1954, decedent opposed payment of additional dividends of $22 per share, $8 per share, and creation until decedent's death was the dividends paid by the company in respect of its common stock, a total of $11 per share, respectively, on the preferred shares. Charles Bain, stating that he represented the views of the $300. other shareholders, insisted upon an additional dividend. *303 During 1947 through 1967, decedent received The additional dividends were declared by a vote of 2 to salaries and director's fees from the company and its I. Decedent waived the 1951 and 1953 dividends on his subsidiaries in the following total amounts: preferred stock. Year Amount 1947 $130,820 1948 131,225 WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. EFTA01103672 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) 1949. 101,764 1950 141,145 1951. 280,920 1952. 103,065 1953. 192,581 1954 102,700 1955 78,728 1956. 108,579 1957. 66,327 1958 36,087 110,000 1960. 110,000 1961. 110,000 1962. 109,750 1963. 109,640 WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. EFTA01103673 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) 1964 136,667 ....... ....... ....... 150,000 ....... ....... ....... 150,000 1967. 75,000 Alfred Levy) took action to compel decedent to repay the On January 31, 1956, the Commissioner issued a money. The attorney general of the State of New York did statutory notice to the company disallowing as excessive not intervene. $140,000 of the $250,000 deduction taken by the On October I, 1961, decedent and the company executed company in 1951 for decedent's compensation. The dividend which decedent waived on his preferred stock in a new employment agreement purporting to cancel the employment agreement previously entered into. Under the 1951 amounted to $115,302. The company filed a petition new agreement— stated to be in effect for a term of 5 in this Court, the outcome of which was a decision in favor of the Commissioner. Gilman Paper Co., T.C. years—decedent's annual salary was fixed at $110,000, with payments of $50,000 a year for life upon retirement, Memo. 1960.13, affd. 284 F.2d 697 (2d Cir. 1960). The and if survived by his wife $50,000 a year to her during Court was of the opinion that decedent's compensation agreement with the company was not the product of her lifetime. In May 1964, the October 1, 1961, employment agreement was amended to provide for a 10- arm's-length dealing and that his compensation in excess year term of employment and an annual compensation of of $110,000 'was, in fact, a disguised dividend.' $150,000. Decedent did not repay to the company the amount which *304 For the calendar years 1965, 1966, and 1967, the was determined to have been excessive for income tax purposes. Neither the company's other shareholders nor District Director of Internal Revenue issued 30-day letters transmitting revenue agents' reports proposing liabilities its other two directors (Howard and Charles Gilman, Jr.) for accumulated earnings tax under section 531 against nor the other two trustees of the trust (Howard Gilman and I. Alfred Levy) nor the other directors of the the company as follows: foundation (Howard and Charles Gilman, Jr., and I. Year Date of30-day letter Proposed liability 1965 May 24,1968 $1,350,500.57 1966 May 24,1968 1,674,181.07 1967______ _ Feb. 19,1970 1,839,498.77 WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 9 EFTA01103674 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) settled with the Appellate Division of the Internal The company filed protests against the proposed Revenue Service as follows: liabilities in which it asserted business needs for the retention of its earnings. The proposed liabilities were Accumulated earnings Year Date of settlement tax per settlement Jan. 26, 1970 None Jan. 26, 1970 $374,000 July 30, 1971 565,000 Under section 2036(a),' property transferred by a No effort was made on behalf of any of the shareholders decedent is •305 included in his gross estate if, under the or by the company's directors or officers to secure transfer, the decedent retained for his life or a period repayment of the tax from decedent's estate. which did not in fact end before his death (I) the 'enjoyment' of the property or (2) the right, either alone On decedent's estate tax return, petitioners did not include or in conjunction with any person, to designate the in the gross estate the value of the company's common persons who shall enjoy the property or the income stock which was held by the trust. In the notice of therefrom. Respondent relies upon these provisions to deficiency, the Commissioner 'determined that the value include the transferred Gilman Paper stock in decedent's of the assets of an inter vivos trust created by the decedent gross estate.' purportedly on June 30, 1948 is includible in his gross estate, under section 2036 and 2038 of the Internal Section 2036(a) reflects a 'legislative policy of subjecting Revenue Code of 1954.' He also determined that the to tax all property which has been the subject of an value of the 6 shares of common stock was $24,500,000. incomplete inter vivos transfer.' United States v. The question of valuation, which is also in controversy, O'Malley, 383 U.S. 627, 631 (1966). The policy is to has been severed from the instant proceeding, and the include in a decedent's gross estate transfers which are in only issue to be decided at this time is the includability of substance testamentary, i.e., 'transfers which leave the the 6 shares in the decedent's gross estate. transferor a significant interest in or control over the property transferred during his lifetime.' United States v. Estate of Grace, 395 U.S. 316, 320 (1969). OPINION As stated in Commissioner v. Estate of Church, 335 U.S. 632, 645 (1949): WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 10 EFTA01103675 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) an estate tax cannot be avoided by any trust transfer is not includable in his gross estate. except by a bona fide transfer in which the senior, absolutely, unequivocally, irrevocably, and without possible reservations, parts with all of his title and all of his possession and all of his enjoyment of the transferred 1. RETENTION OF ENJOYMENT property. At the center of the present controversy is United States v. The Gilman Paper Co. stock may not be included in Byrum, 408 U.S. 125 (1972), the most recent Supreme decedent's gross estate under the portion of section Court pronouncement on the breadth and reach of section 2036(a)(1) relied upon by respondent— that decedent 2036(a). In that case, Byrum transferred stock in three retained the 'enjoyment' of the stock— for two closely unlisted corporations, in which he was the majority related reasons: (I) Decedent did not retain enjoyment of stockholder, to an irrevocable trust for the benefit of his the stock 'under' the transfer; and (2) the rights that he children. He retained the right to vote the transferred retained with respect to the stock did not constitute stock, to veto any transfer by the trustee (a bank) of any 'enjoyment' within the meaning of that term as it is used stock, and to remove the trustee and appoint another in section 2036(a)(1). corporate trustee as a successor. The retained right to vote Section 2036(a)(1) applies only where the decedent has the transferred stock, together with the vote of the stock 'retained' enjoyment 'under' the 'transfer.' This means decedent owned at the time of his death, gave him a that the enjoyment of the transferred property must be majority vote in each of the corporations. The Supreme reserved 'in connection with or as an incident to the Court held that the rights the decedent reserved in respect transfer.' McNichol's Estate v. Commissioner, 265 F.2d of the transferred stock did not constitute retained 667, 670 (3d Cir. 1959), affg. 29 T.C. 1179 (1958), cert. enjoyment thereof or the right to designate the *306 denied 361 U.S. 829 (1959). The *307 section applies person or persons who would enjoy the income therefrom, only where a prearrangement, embodied in an express or stating, inter alia, that (408 U.S.AT 149): implied agreement, permits the transferor to enjoy the The statutory language (of sec. 2036(a)) plainly benefits of the property or its income. Estate of Roy D. contemplates retention of an attribute of the property Barlow, 55 T.C. 666. 670 (1971); Estate of Harry H. transferred— such as a right to income, use of the Beckwith, 55 T.C. 242, 247 (1970); Stephens, Maxfield, property itself, or a power of appointment with respect & Lind, Federal Estate and Gift Taxation, pp. 4-81— 4.83 either to income or principal. (3d ed. 1974); see also Fabian v. United States, 127 F.Supp. 726, 728 (D. Conn. 1954). Thus, for example, the Even if Byrum had transferred a majority of the stock, but section does not apply where a husband transfers his had retained voting control, he would not have retained interest in a residence to his wife and they continue to 'substantial present economic benefit,' * * * (Fn. ref. occupy it as the family home unless, by agreement he omitted.) reserves the right of occupancy as an incident to the transfer. Union Planters National Bank v. United States, In support of its conclusion, the Court repeatedly 361 F.2d 662 (6th Cir. 1966); Estate of Binkley v. United emphasized the fiduciary duty of a majority shareholder States, 358 F.2d 639 (3d Cir. 1966); Estate of Allen D. not to misuse his power by promoting his personal Gutchess, 46 T.C. 554 (1966); Estate of Robert W. Wier, interests at the expense of corporate interests and the 17 T.C. 409, 422 (1951); Stephenson v. United States, fiduciary duty of the directors of a corporation not to play 238 F.Supp. 660 (W.D. Va. 1965); compare Estate of favorites among the shareholders but to promote the Emil Linderme, Sr., 52 T.C. 305 (1969). interests of the corporation as a whole. These duties so qualified the retained rights of the decedent that, the Court The inquiry must be focused, therefore, on the agreements held, they were insufficient to cause inclusion of the stock made by the parties on June 30, 1948, when the in decedent's gross estate under section 2036(a). decedent's Gilman Paper common stock was transferred to the trust. The question is whether there was an express Petitioners contend that the Byrum case is dispositive of or implied agreement at the time of the transfer that the instant one. Respondent seeks to distinguish the case decedent would continue to enjoy that stock or that the on its facts. There are factual differences between the two right to enjoy the stock would later be conferred upon cases, but we think that most of those differences add him' The evidence relating to events subsequent to the strength to petitioners' case. We hold that decedent's June transfer is relevant only to the extent that it helps answer 30, 1948, transfer of the Gilman Paper common stock in that question. trust was a completed one and that the value of the stock In analyzing the evidence on that crucial question, it is WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 11 EFTA01103676 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) important that the term 'enjoyment' refers to the respondent has valued the common shares at $24,500,000, economic benefits obtainable from the transferred respondent cannot be heard to say they were without property. As stated in United States v. Byrum, 408 independent value. Nor does it matter that Isaac Gilman's U.S.AT 147, the term is 'used to deal with situations in objective in so structuring the corporation's stock, and which the owner of property divested himself of title but decedent's purpose in creating the trust, was to keep the retained an income interest or, in the case of real property, voting control of Gilman Paper in the Gilman family. The the lifetime use of the property.' Enjoyment as used in applicability of section 2036(a) turns not on the senior's the death tax statute is not a term of art, but is motives in creating the trust, but on the nature and synonymous with substantial present economic benefit.' operative effect of the trust transfer.' McNichol's Estate v. Commissioner, 265 F.2d at 671; see In terms of the operation and effect of decedent's June 30, also *308 Commissioner v. Estate of Holmes, 326 U.S. 1048, transfer, we do not think decedent had such control 480, 486 (1946); Commissioner v. Estate of Church, 335 over Gilman Paper as to give him a substantial present U.S.AT 645.5 economic benefit. Respondent at least implicitly concedes that managerial and administrative powers vested in a A. The terms of the June 30, 1948, transfer in trust.— The settlor-trustee, including the right to vote stock held in the transfer under the agreement of June 30, 1948, whereby trust estate, do not trigger the applicability of section decedent placed his Gilman Paper common stock in trust, 2036(a). Old Colony Trust Co. v. United States, 423 F.2d was not qualified in any way. Under that agreement, 601, 602 (1st Cir. 1970)? Estate of Edward E. *310 Ford, decedent transferred the stock irrevocably to himself, his 53 T.C. 114, 127-129 (1969), affd. per curiam 450 F.2d son, Howard, and his attorney, I. Alfred Levy, as trustees. 878 (2d Cir. 1971); Estate of Willard V. King, 37 T.C. The income of the trust was payable to decedent's two 973, 978 (1962). Insofar as the voting of stock entails the sons for life, with the remainder to their issue. All acts control of a corporation, the Supreme Court in United and decisions of the trustees were to be by a majority States v. Byrum, 408 U.S.AT 150, held that retention by a vote. The trustees undertook to execute the agreement decedent in his individual capacity of voting control of a 'with all due fidelity and (to) account for all the moneys corporation 'was not the retention of the enjoyment of the and things received by them hereunder to the transferred property within the meaning of the statute.' beneficiaries.' In his individual capacity, decedent Surely, then, the retention by decedent of the right in his retained certain powers— e.g., to appoint a successor capacity as a trustee to cast one of three votes as to how trustee in case one of the other trustees should resign, die, the stock should be voted does not constitute retention of or otherwise be unable to continue to serve, and, with the the enjoyment of the property? approval of the other trustees, to amend the administrative provisions of the instrument. But none of the powers It is true, as emphasized by respondent, that the Court in expressly retained are sufficient to constitute enjoyment United States v. Byrum, supra at 150, pointed out that of the stock within the meaning of section 2036(a)(1), and there were 'unrelated minority interests' who could see we do not understand respondent to contend otherwise. that Byrum and the other officers did not violate their fiduciary duty to all of the stockholders. But the express B. 'Control' of the corporation.— Respondent contends trust created by decedent constrained him from using his that the only reason for the existence of the transferred influence on the voting of the Gilman Paper common stock was the right of its owner to 'control' the destiny of stock for his personal economic benefit. Moreover, the Gilman Paper. Respondent argues that the agreement plain fact is that when the June 30, 1948, trust agreement creating the trust was so structured as to enable decedent was signed, decedent's four sisters owned 40 percent of to continue to 'control' the corporation and the transfer, the common and 47 percent of the preferred stock)* The therefore, was not a completed one!. In making this sisters' interests and those of their husbands were argument, respondent in effect throws an *309 umbrella decidedly adverse to those of decedent or the trust. over all that decedent did and might have done as trustee, Indeed, one of the main reasons for Isaac Gilman's 1940 director, and chief executive officer, and maintains that all agreement with decedent was to avoid conflicts between those actions and possible actions, viewed in their totality, his sons-in-law and decedent which would *311 adversely show that decedent retained the enjoyment of the stock. affect the company." Also, the remaindermen of the trust, We do not agree. decedent's grandchildren, represented another adverse Gilman Paper's stock structure in 1948— only 10 shares interest. of common and nearly 10,000 shares of preferred stock— was highly unusual, but the practical and legal effect of The adverse interests of decedent's sisters were the transfer would have been the same if the voting, terminated in 1957, when the corporation purchased their dividend, and liquidation rights of the 10 common shares shares, but there is no evidence of an express or implied had been scattered among 10,000 common shares. Since agreement in 1948, when the trust was created, that the WestlawNext' © 2013 Thomson Reuters. No claim to original U.S. Government Works. 12 EFTA01103677 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) sisters would sell their common and preferred shares. The continued employment enabled him to benefit himself inference is to the contrary. The relevant corporate economically in other ways, citing the decision of this minutes indicate that negotiations to that end were not Court that in 1951 decedent's salary was excessive. begun until a short time before January 1957; that Gilman Paper Co., T.C. Memo. 1960.13, affd. 284 F.2d relationships within the family were not harmonious; and 697 (2d Cir. 1960)." For that year, decedent drew a salary that a controversy over the transaction persisted even after of $250,000 from Gilman Paper, compared with $110,000 the sale was completed. Thus, the 1948 transfer in trust for the immediately preceding year and compared with left the Gilman sisters with a substantial block of the the compensation of $370,000 he could have drawn under Gilman Paper stock and their interests were adverse to the October 5, 1945, resolution of the board of directors. those of both the trust and decedent. This Court sustained the Commissioner's determination that all except $110,000 of the $250,000 salary exceeded Similar practical constraints effectively denied decedent the 'reasonable compensation' allowable as a deduction unimpeded control of the board of directors. The bylaws by section 23(a), I.R.C. 1939. of Gilman Paper, in accordance with State law, provided *313 Gilman Paper contended in that case that decedent's that the board of directors shall be elected annually. A salary was paid pursuant to a contingent compensation majority vote of the trustees, who voted all the common contract embodied in the June 22, 1940, agreement with stock, was required for election, and from 1948 to 1957 Isaac Gilman and the 1945 resolution of Gilman Paper's the board always included Charles Bailin, decedent's board of directors. This Court held that the June 22, 1940, brother-in-law. The minutes describe him as a agreement was not a contingent compensation agreement representative or spokesman for the 'other shareholders.' but merely fixed a limitation on the amount payable as On three occasions (in 1951, 1953, and 1954), Bailin and compensation. As to the corporate resolution, there was Howard Gilman outvoted decedent and declared no showing that it reflected arm's-length bargaining, the dividends over decedent's strong opposition. I. Alfred 'only material fact of record respecting its adoption' being Levy's testimony describes other instances in which 'the bare action of the board of directors.' Othenvise, the Bailin and Howard Gilman were able to persuade Court's opinion is based largely upon a failure of proof, decedent to retreat from an initially taken position and but one crucial factor was that decedent 'waived' a agree with them. Thus, as a matter of fact, the record preferred stock dividend of $115,302 in that year. This shows that decedent did not dominate the board. Court concluded that the 'disallowed salary payment was, Moreover, as a matter of law, the trustees in selecting in fact, a disguised dividend." directors and the directors in managing the corporation were restrained by their fiduciary duties and obligations to Respondent claims that this Court's opinion shows that the corporation and all its shareholders. See United States decedent was able to exploit the corporation at will and v. Byrum, 408 U.S.AT 138. that the failure of the corporation to seek reimbursement of the excessive portion shows that the exploitation was *312 C. Decedent's employment as chief executive.— As consistently unopposed or unrestrained. We think to decedent's executive position with the company, no respondent tries to squeeze entirely too much from that doubt he, as well as the other two trustees, anticipated at opinion. The Commissioner challenged the the time the trust was created that decedent would reasonableness of decedent's salary in only 1 of the 20 continue to serve as the chief executive officer of Gilman years following the creation of the trust. The Court stated Paper. The company was experiencing dramatic growth, that decedent's salary was fixed 'from time to time and a corporate executive who is making money for his primarily as his own needs dictated,' but that statement employer usually keeps his job. But decedent did not was part of the Court's rejection of Gilman Paper's reserve the right to remain as chief executive of the contingent compensation argument, not a holding that that company. Indeed, the direct testimony, elicited by decedent did or could pillage the assets of the corporation. respondent, is that there was no express or implied As far as we can tell, he never drew more as a salary than agreement that he would continue to serve:2 and Levy the amount to which he was entitled under the 1945 further testified that 'we could have thrown him out.' The resolution. Thus, the excessive salary in 1951, if it was mere 'probability of continued employment and excessive *314 by business standards, was aberrational compensation' does not constitute the substantial and does not support respondent's argument. 'enjoyment of • • • (the transferred) property' within the meaning of the statute.' United States v. Byrum, supra at True, after the 1960 decision of the Court of Appeals, the 150; see also Estate of William F. Hofford, 4 T.C. 790, corporation and the trustees did not seek to recoup the 794(1945). allegedly excessive salary paid decedent in 1951. But their failure to compel decedent to restore the amounts Respondent attempts to demonstrate that decedent's determined to have been excessive does not show WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 13 EFTA01103678 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) decedent retained the right to a present economic benefit A recoupment claim for an accumulated earnings tax is a from the transferred stock. Petitioners' reply brief highly unusual one." Of necessity, such a claim would provides this effective answer to respondent's argument: take the form of a stockholder's derivative suit and would challenge the action of the board of directors in failing to In asserting that the decedent should have been asked to declare adequate dividends. The amount recoverable by repay the $140,000 disallowed as a deduction, the the stockholders who might have sued decedent's estate Commissioner has misunderstood the significance of the (the trust, the foundation, and Charles Gilman, Jr.) was facts. The decedent waived a 1951 dividend and received too small to justify the expense of litigation. Since the increased 1951 compensation. The Treasury, corporate minutes do not reflect that the other directors understandably, complained that, by attempting to made any effort to change the corporation's conservative disguise a dividend as compensation, the corporation was dividend policy (except in 1951, 1953, and 1954, when seeking an unauthorized deduction. However, that attempt they outvoted decedent), they would be liable, as a matter was not unfair to stockholders; to the contrary, *316 of law, equally with decedent. We can find no transmutation of a dividend into deductible compensation ground, as a practical matter, for holding that decedent can only benefit the corporation and, therefore, its retained the enjoyment of the stock in any of the facts stockholders. Such an attempt, successful or otherwise, is relating to the corporation's failure to assert against not unfair to stockholders. What the decedent had decedent's accepted with one hand he had relinquished with the other. ESTATE A CLAIM FOR THE RESTORATION OF THE 1966 ACCUMULATED EARNINGS TAX. 2. Gilman Paper's failure of proof in this Court would not RETENTION OF THE RIGHT TO DESIGNATE have aided it, with the tables turned, in proving a claim THE RECIPIENT OF THE PROPERTY OR THE for recoupment against decedent. Its claim would have INCOME THEREFROM UNDER SECTION been faced with the 1945 resolution under which decedent 2036(A)(2) was entitled to a salary of $370,000 and with the dramatic financial success of the corporation under his executive Respondent's second contention is that decedent retained leadership. the `right,' either alone or in conjunction with other Finally, the testimony included in the record of that case" persons, to designate the persons who shall enjoy the must be read in its context in the light of the issue being property or the income therefrom. In making this litigated. Some of that testimony, relied upon most argument, respondent again ignores the language of the heavily by respondent, was evidently discounted or statute and the terms of the trust and lumps decedent's disbelieved by the trial judge who heard it.'" powers as trustee with his powers as a director and as chief executive officer. He argues: 'The decedent in *315 D. The 1965, 1966, and 1967 accumulated earnings conjunction with another trustee, had the right to vote the tax.— Our Findings describe the Commissioner's shares and select the corporate directors and thereby determinations, made after decedent's death, of control the dividend policy of Gilman.' In this connection, accumulated earnings tax liabilities for 1965, 1966, and respondent points out that the trust instrument required 1967. Respondent cites the failure of anyone on behalf of the trustee to distribute its income currently and argues Gilman Paper or the trust to recoup the accumulated that, consequently, the power to declare dividends earnings tax from decedent's estate as evidence that enabled decedent to regulate 'not only the flow of income nothing and no one restrained decedent's activities with to the trust, but also the flow of income from the trust to respect to the company. the beneficiaries.' For 1965, since the matter was settled without any Section 2036(a)(2) is cast in the terms of a retained liability, no claim could have been asserted against 'right.' As explained in United States v. Byrum, 408 decedent. Since decedent died on June 19, 1967, he could U.S.AT 136-137, in rejecting a similar argument: hardly be charged with the responsibility for the corporation's failure to distribute a larger portion of its The term 'right,' certainly when used in a tax statute, earnings for that year. Indeed, the assertion of the liability must be given its normal and customary meaning. It for 1967 indicates that decedent was not responsible for connotes an ascertainable and legally enforceable power ■ Gilman Paper's conservative dividend policy since that * •. Here, the right ascribed to Byrum was the power to policy was continued after his death. Settlement of the use his majority position and influence over the corporate 1966 claim for only about 22 percent thereof, nearly 4 directors to 'regulate the flow of dividends' to the trust. years after decedent died, suggests that the Commissioner That 'right' was neither ascertainable nor legally regarded his claim as a weak one. enforceable and hence was not a right in any normal sense WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 14 EFTA01103679 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) of that term. Throughout this litigation, respondent has consistently conceded that the trust created by decedent in 1948 was a The Court added (408 U.S.AT 137): `The power to elect valid one. After the transfer to the trust, all powers the directors conferred no legal right to command them to decedent held with respect to the Gilman Paper common pay or not to pay dividends.' The Court rejected the stock were fiduciary powers. If anything is clear from the Government's argument that Byrum's de facto powers, as Byrum opinion, it is that the exercise of fiduciary powers distinguished from his legal rights, placed the entrusted to vote the stock of a corporation does not constitute the stock within the reach of section 2036(a)(2) stating (408 'enjoyment' of that stock within the meaning of section U.S.AT 138, 142-143): 2036(a) (I), and it does not matter whether those powers are exercised by a sole trustee, one of three trustees *318 The Government seeks to equate the de facto position of a (as here), or even, as in Byrum, one who has transferred controlling stockholder with the legally enforceable his stock to a trust but retained the right in his individual 'right' specified by the statute. * * * capacity to vote it. The personal satisfactions or the psychic benefits derived from voting the stock do not *317 Byrum was ■ • • inhibited by a fiduciary duty from constitute the kind of retained economic benefits which abusing his position as majority shareholder for personal constitute 'enjoyment' within the meaning of section or family advantage to the detriment of the corporation or 2036(a)(1). other stockholders. * * * The dissent scorns the veracity of one of the witnesses. We conclude that Byrum did not have an unconstrained However, after decedent submitted his common stock to de facto power to regulate the flow of dividends to the the restraints of a fiduciary, he became only one of three trust, much less the 'right' to designate who was to enjoy trustees in deciding how the stock would be voted. His the income from trust property. ■ ■ ■ powers thereafter were subject not only to fiduciary obligations to the other shareholders, whose interests were A comparison of the facts of the two cases shows that sharply adverse, but the fiduciary restrictions flowing Byrum had greater power to affect dividend policy than from the express trust. The corporate bylaws required decedent in the instant case. Byrum's powers were held annual elections of the corporation's directors and the individually while decedent's powers were held in trust. president. The directors were not figureheads. They could By simply outvoting him in electing the board, decedent's have elected someone else as president. Indeed, on three cotrustees could have indirectly thwarted his desires. occasions (in 1951, 1953, and 1954), the corporate Similarly, by outvoting him as a member of the board (as minutes reflect that the directors outvoted decedent 2 to I it did three times, in 1951, 1953, and 1954), the board on the payment of dividends. The testimony of Gilman's could have directly defeated decedent's wishes as to the attorney that there was no express or implied agreement payment of dividends. Byrum could have removed and in 1948 that decedent would continue to serve as replaced a trustee whereas decedent in this case had no president, the only specific testimony on the point, is thus such power. Thus, not only were all of decedent's powers wholly consistent with the undisputed documentary fiduciary ones, they were less extensive than those of evidence. But it would make no difference, even if there Byrum. had been an agreement that decedent would be the most We conclude that decedent retained neither the enjoyment influential one of the three trustees, because whatever of the transferred stock within the meaning of section powers decedent retained were fiduciary ones, and Byrum 2036(a)( I) nor the right, alone or in conjunction with makes it clear that the exercise of fiduciary powers does others, to designate the person or persons who would not constitute enjoyment under section 2036(a)(1). enjoy the stock or the income therefrom within the meaning of section 2036(a)(2). IRWIN and STERRETT, JJ., agree with this concurring Decision will be entered for the petitioners. opinion. Reviewed by the Court. RAUM, J., dissenting: I have no doubt on the record GOFFE, J., concurring: I agree with the conclusion before us that the decedent, Charles Gilman, retained until reached by the majority. The case in controlled by United his death the 'enjoyment' of the 6 shares of common States v. Byrum, 408 U.S. 125 (1972), and this is not the stock within the meaning of section 2036(a)(1) of the Court to reconsider or rewrite that opinion. Code. An understanding of the history and significance of these 6 shares is necessary for a proper consideration of WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 15 EFTA01103680 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) the matter. and that was, as I explained before, the control of the business after my father died, that I would be assured of In late 1939 and early 1940, a serious conflict had the control of the business, and when I accomplished that, developed between Charles Gilman and his father (Isaac or if I could accomplish that, that meant to me more than Gilman) in respect of the Gilman Paper Co. Only one salary or anything else.= class of stock was then outstanding, consisting of 25,000 shares of voting common. Isaac *319 owned nearly Upon Isaac's death in 1944, Charles exercised his right to 16,000 shares, Charles about 5,000 shares, and Charles' purchase 2 shares of the common from his father's estate, four sisters 1,000 shares each. Isaac, who was then about which together with the 4 shares already owned by him 75 years old, dominated the company, and Charles, who comprised the 6 shares here in controversy} It was these 6 was then about 42 years old, was the only other member shares that Charles in 1948 placed in trust, naming of the family who was engaged to any significant degree himself, his attorney, and older son as trustees, and in the conduct of the company's business. To the extent providing for distributions of income to his two sons. The that Charles' sisters' husbands were also engaged in the trust had no other assets. Over the entire period from the company's affairs they were 'there as a sinecure' and creation of the trust in 1948 up to the date of Charles' added very little to the operation of the enterprise. Charles death in 1967—and indeed up through 1970— the total was fearful that upon his father's death, his 16,000 shares amount of dividends received by the trust in respect of the would be divided equally among all five children, with 6 shares was only $300. In contrast, the company paid the consequence that Charles, as a minority stockholder, dividends in the amount of $1,129,900 with respect to the could be ousted from a position of control over the preferred up to the date of Charles' death. company. He importuned his father for some arrangement that would prevent any such result from occurring. Can there be any doubt that the only purpose of the 6 Indeed, when no such arrangement appeared on the shares was to provide Charles with the sought-after horizon, he not only threatened to quit his association control over the company? These shares were conceived with the company, but undertook to implement that threat and issued solely for that purpose. It was that control that by carrying on extensive negotiations looking towards the was central to their very life! Plainly, the continued establishment of other business connections for himself. existence of such control in Charles' hands for the He make it clear to his father that he 'wanted first and remainder of his life constituted his 'enjoyment' thereof uppermost to be put in a position where I would run that within the meaning of section 2036(a)( I ). company, because I felt I was the only one that could run that company— when I say 'run it,' have control of it • ■ To be sure, as is indicated in United States v. Byrum, 408 * to control the Gilman Paper Company, should anything U.S. 125, it is the income from property that is ordinarily happen to him!, regarded as the 'enjoyment' contemplated by section 2036(a)(1). But that is not universally so, for, as The solution to the problem was finally found in an recognized in Byrum, 'enjoyment' in respect of real agreement dated June 22, 1940, which provided for the property may consist of its occupancy. See also *321 reorganization of the company, whereby the entire Estate of Emil Linderme, Sr., 52 T.C. 305. Obviously, the outstanding 25,000 shares of voting common were nature and character of the property must be taken into exchanged for 25,000 shares of new nonvoting preferred, account. In the case of a valuable oil and the control of the company was concentrated in 10 'enjoyment' may clearly be its availability for viewing on new shares of $100 par value voting common, of which 6 the transferor's walls. As to the 6 shares involved herein, shares were issued to Isaac and 4 to Charles. The the control which they embodied was their very raison agreement also provided that on Isaac's death, Charles d'etre. It is that feature of those shares that must be was to have the right to purchase 2 shares of the new predominantly associated with their 'enjoyment,' rather common from his father's estate at par, upon condition, than their equity interest' in the corporation or their however, that Charles enter into a further agreement with income-producing potential— features which were only the company that his compensation would not exceed an of relatively minor consequence in the context of this amount determined in accordance with a certain formula. case. As already noted, the total income received by the Under conditions which then prevailed, that formula trust from these shares for a period of nearly 20 years was placed an effective ceiling of $30,000 a year on Charles' only the comparatively miniscule amount of $300. Had salary, in contrast to the $40,000 that he was then Charles reserved the right to that income, there could be receiving from the company and its affiliates. Distasteful no question that the value of the 6 shares would have been as these latter provisions were to Charles, he was includable in his gross estate. How much more nevertheless willing to accept these terms because— meaningful to him was the control that was concentrated I had one idea in mind, which was uppermost in my mind, in these shares. And how bizarre it is to attribute to WestlawNext' © 2013 Thomson Reuters. No claim to original U.S. Government Works. 16 EFTA01103681 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) Congress an intention that would require the inclusion of control. I heard that testimony— indeed I was the only the 6 shares in the decedent's gross estate in the first member of this Court that did hear it— and it is my situation but would call for their exclusion in the second. unpleasant duty to say that I did not find his testimony Clearly, when Congress used the word 'enjoyment,' it credible. I had ample opportunity to observe him, and I manifested a purpose to treat both situations alike. paid most careful attention to him and his words as he spoke. I had no confidence whatever in that testimony to The circumstances surrounding these 6 shares were so the extent that *323 it expressly denied, or merely different from those involved in Byrum, that I cannot suggested the absence of, an implied agreement or tacit believe that Byrum is of controlling authority in support understanding that Charles would continue to remain in of the majority's position. Similarly, there is only a control of the company's affairs. I have no doubt in the superficial similarity between this case and that line of circumstances of this case that there was at least such a cases,^ relied upon by the petitioners, in which broad tacit understanding. I am unwilling to indulge in the child- administrative and managerial powers reserved to the like innocence that is necessary to reach the opposite grantor of a trust have been held insufficient to bring conclusion; certainly, no such credulity is required of a section 2036(a)( I ) or like provisions into play. It is clear trial judge. to me that 'enjoyment' of the 6 shares here in issue means the continued control embodied therein. *322 I fully recognize that under the decided cases the SIMPSON and WILBUR, JJ., agree with this dissent. mere continuance of 'enjoyment' by the transferor until TANNENWALD, l., dissenting: What bothers me most his death is not sufficient, and it is essential in addition about the majority apprach is that it appears to escalate that such enjoyment be 'retained.' However, it has also the rationale of United States v. Byrum, 408 U.S.I25 been established that such retention need not be based (1972),which was developed in light of the particular upon a legally enforceable right' and may be predicated facts of that case, into a mandated rigid doctrine of wide upon an informal arrangement or even a mere tacit or application. In other words, the majority opinion may be implied understanding. Estate of McCabe v. United interpreted as concretizing Byrum, thus opening up the States, 475 F.2d 1142, 1146 (Ct. CI.); McNichol's Estate possibility that future decisions will permit trust v. Commissioner, 265 F.2d 667, 670-671 (3d Cir.), arrangements to avoid estate tax consequences contrary to affirming 29 T.C. 1179, certiorari denied 361 U.S. 829; the clear intent of Congress as expressed in section 2036. see also Skinner's Estate v.United States, 316 F.2d 517 If this is not the intended consequence of our decision (3d Cir.), affirming 197 F.Supp. 726 (E.D. Pa.); Estate of herein— and I am confident that it is not— then the Harry H. Beckwith, 55 T.C. 242, 247; cf. Estate of Ethel approach of the majority contains an even more difficult R. Kerdolff, 57 T.C. 643, 648; Estate of Emil Linderme, and dangerous element, namely, the substitution of the Sr., 52 T.C. 305, 308. judgment of those who did not hear the evidence for that of the trier of the facts. Judge Raum conducted the trial Was there such an understanding here? In my judgment, and saw and heard the witnesses. He did not merely unless one were to be hopelessly naive, the existence of conclude that the petitioner had failed to carry its burden such understanding must be inferred from this record. In of proof. On the contrary, he reached the affirmative the absence of any explanation to the contrary, it is clear ultimate factual conclusion that there was an beyond any reasonable doubt that Charles who had fought understanding between the settlor and the trustees which so hard to obtain the control inherent in the 6 shares resulted in the settlor retaining 'enjoyment of * * * the would not have parted so readily with that control only a property' within the meaning of section 2036(a)(1). Under few years after he had attained his objective. Nor can it these circumstances, I do not believe that Judge Raum's fairly be inferred that the establishment of the trust was evaluation of the testimony and the record as a whole intended in any manner to provide income of any should be disregarded, particularly where we are faced consequence to Charles' two grown-up sons. Plainly, the with such a unique situation, namely, that the trusteed trust was merely a device through which Charles could shares were so structured that, given the pliability of the continue to exercise control until his death, and which other trustees and the holders of the other classes of stock, provided a mechanism for its exercise thereafter. To be those shares had no meaningful attributes apart from the sure, there were two other trustees, his attorney and older right to vote and thus control the destiny of the son, and the votes of two of the three were necessary in corporation. In my opinion, this case is *324 sui generis order to take effective action. The majority herein relies and situations where the trusteed shams of a closely held upon the testimony of the attorney which indicates that corporation have a relatively significant actual or there was never any agreement, express or implied, potential value apart from the right to vote are to be between them in respect of the continuance of Charles' clearly distinguished, thereby avoiding, in very large WestlawNext" © 2013 Thomson Reuters. No claim to original U.S. Government Works 17 EFTA01103682 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) degree, the implications of applying the Government's WILBUR, J., agrees with this dissent. position in Byrum which so obviously troubled the majority of the Supreme Court in that case. See 408 U.S.AT 146-150, and particularly n. 34.2 Footnotes All section references are to the Internal Revenue Code of 1954, as in effect at the time of decedent's death, unless otherwise noted. 2 SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE. (a) GENERAL RULE.— The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death— (I) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. 3 Sec. 2036(a) also applies where the decedent, under the transfer, retains 'possession' of the property or the 'right to the income' from the property. Respondent does not rely upon those provisions. Respondent has also waived reliance on sec. 2038, which was refernd to in the notice of deficiency. 4 Sec. 20.2036-1(aXii), Estate Tax Regs., provides: An interest or right is treated as having been retained or reserved if at the time of the transfer there was an understanding, express or implied, that the interest or right would later be conferred. See Skinner's Estate v. United States, 316 F.2d 517 (3d Cir. 1963). 5 Sec. 20.2036-1(bX2), Estate Tax Regs., provides: The 'use, possession, right to the income or other enjoyment of the transferred property' is considered as having been retained by or reserved to the decedent to the extent that the use, possession, right to the income, or other enjoyment is to be applied toward the discharge of a legal obligation of the decedent, or otherwise for his pecuniary benefit. 6 Respondent never actually tells us what he means by 'control.' In United States v. Byrum, 408 U.S. 125, 137 n. 10 (1972), the Supreme Court stated its concern with the vagueness of the term 'control': 'The 'control' rationale, urged by the Government and adopted by the dissenting opinion, would create a standard— not specified in the statute— so vague and amorphous as to be impossible of ascertainment in many instances. See n. 13, infra. Neither the Government nor the dissent sheds light on the absence of an ascertainable standard." " "' The Court added (408 U.S.AT 138 n. 13): The Government uses the terms 'control' and controlling stockholder' as if they were words of art with a fixed and ascertainable meaning. In fact, the concept of Control' is a nebulous one. * * * ' 7 In United States v. Estate of Grace, 395 U.S. 316, 323 (1969), the Supreme Court said: 'Emphasis on the subjective intent of the parties in creating the trusts, particularly when those parties are members of the same family unit, creates substantial obstacles to the proper application of the federal estate tax laws. As this Court said in Estate of Spiegel v. Commissioner of Internal Revenue, 335 U.S. 701, 705-706, 69 S.Ct. 301, 303, 93 L.Ed. 330 (1949): 'Any requirement • " * (of) a post-death attempt to probe the settlor's thoughts in regard to the transfer, would partially impair the effectiveness of * * * (sec. 811(c)) as an instrument to frustrate estate tax evasions.' 'We agree that 'the taxability of a trust corpus • • * does not hinge on a senior's motives, but depends on the nature and operative effect of the trust transfer.' Id., at 705, 69 S.Ct.,at 303. See also Commissioner v. Estate of Church, supra.' 8 In Old Colony Trust Co. v. United States, 423 F.2d 601, 602 (1st Cir. 1970), the court said: 'It is common ground that a settlor will not find the corpus of the trust included in his estate merely because he named himself a trustee. Jennings v. Smith, 2 Cir., 1947, 161 F.2d 74. He must have reserved a power to himself that is inconsistent witlt the full termination of ownership. The government's brief defines this as 'sufficient dominion and control until Itis death.' Trustee powers given for the administration or management of the trust must be equitably exercised, however, for the benefit of the trust as a whole. " * " (Fn. ref. omitted.)' 9 The extent of the fiduciary duties of a trustee who directs the operations of a corporation was defined as follows in In Re Hubbell's WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 18 EFTA01103683 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) Will, 302 N.Y. 246, 254, 97 N.E.2d 888, 891 (1951): 'Where • * • the trustees own, in their individual and representative capacities, the entire outstanding stock of a corporation, • * • (the fiduciary) duty extends not only to the trust estate as such but also to the operations of the corporation. * • • 'It is well established that where a trustee holds a working control of the stock in an estate corporation * * • (h) is cestuis que trustent may require him to treat the corporate transactions as though they were his own transactions as trustee * • * ' (Citations omitted.)' IO These percentages are considerably greater than in United States v. Byrum, supra, where the minority shareholders held 29 percent, 17 percent, and 12 percent of the stock in the three corporations there involved. Under the law of New Hampshire, where Gilman Paper was incorporated, the approval of two-thirds of all shareholders is required for many actions, including mergers, consolidations, major recapitalizations, and the sale, lease, or exchange of all its assets. lilt. Rev. Stat. Ann. secs. 294:40, 294:41 (1966). Thus, contrary to one of respondent's arguments, the trust did not own sufficient shares to take these actions. It I. Alfred Levy, the attomey who drafted the 1940 agreement, testified: 'it was Mr. Isaac Gilman's desire to have this company remain in the hands of the family as long as they could and • • * he didn't want his in-law's sons (sic) to fight and disturb the company so he, in his wisdom, decided that he— wanted Charles Gilman who, incidentally, knew more about the paper industry and paper business than any of the others, he wanted him to have control— not control of the company— but to have— be in a position to run it and operate it without interference by the in-laws who were also working with the company • • • ' 12 Levy was called as a witness by respondent and testified as follows with respect to the creation of the trust: Q. To your knowledge, sir, were there any agreements either expressed or implied, that Mr. Gilman would continue in the same General Manager and executive of the company? A. There never was any agreement. The question never came up. There never was any discussion about Charles Gilman's leaving or staying or Charles Gilman's authority or anything. 13 Beginning in 1955, the year before the notice of deficiency in that case was issued, and continuing through 1964, decedent's salary in no year exceeded 4110,000, thus confirming the Supreme Court's view in United States v. Byrum, supra at 150, that the Commissioner's disallowance of deductions for unreasonable compensation paid to corporate executives serves as a deterrent in cases where the settlor of a trust of stock of a corporation remains an employee. 14 The minutes of the special meeting of the board of directors of Sept. 24, 1951, state that decedent vigorously opposed payment of the 1951 dividend, pointing to corporate needs for the funds and stating that he would not accept it. Nonetheless, the other directors authorized the dividend by a vote of 2 to 1, thus documenting petitioner's contention that decedent lacked a controlling voice in corporate affairs. The minutes of that meeting contain the following: 'Mr. Bailin (one of decedent's brothers-in-law) continued the discussion and suggested that if the Chairman (decedent) as shareholder does not want the declaration and payment of dividends on his stock that that is his business, but the other shareholders have asked him to bring the question before the Board and he as director believes that the shareholders should be given an additional dividend at this time, despite the advice of the Chairman and regardless of how the Chairman felt.' A motion was then made and adopted by a vote of 2 to 1, calling for a dividend of S22 per share. As noted previously, decedent's views on the declaration of dividends also failed to prevail in 1953 and 1954. 15 The parties stipulated: 'A copy of the record on appeal (of the Tax Court reasonable compensation case) is annexed hereto as Joint Exhibit 23-W.' Rule 91(c) of the Rules of Practice and Procedure of this Court provides that: 'A stipulation when filed need not be offered formally to be considered in evidence.' While the stipulation does not state what probative effect is to be given to the contents of that record, we do not interpret the stipulation to mean that the parties agree to the truthfulness of all statements in that record. We understand that it is to be weighed, in context, along with all the other evidence. 16 As to decedent's statement at that trial that he ran the business 'from top to bottom,' repeatedly referred to by respondent, the trial judge wrote (Gilman Paper Co., T.C. Memo. 1960-13): 'The evidence of Charles' actual services is sparse and dependent upon his own testimony. The petitioner's 1951 return labels his services as 'part-time.' Charles disputed this characterization but there is, in fact, no evidence of how much actual time he did devote to the business of the petitioner. Indeed, other than such statements as that he ran the business 'from top to bottom,' there is no persuasive evidence of the services performed by Charles for petitioner. His testimony in this regard was vague and in the form of generalities. No other officer or employee of petitioner testified as to the nature and extent of Charles' services.' Instead of finding that decedent was the domineering personality the respondent here contends that he was, the trial judge found that 'Charles Gilman was an agreeable but entirely unexceptional individual.' Our search of that record discloses nothing basically inconsistent with the testimony in the present case. We find nothing in that record, read in context, which supports an inference that decedent retained the right to any economic benefit from the transferred stock. 17 The only case cited by the parties (and we have located none other) is Mahler v. Trico Products Corp., 296 N.Y. 902, 72 N.E.2d 622 (1947), stemming from Trico Products Corp. v. Commissioner, 137 F.2d 424 (2d Cir. 1943), cert. denied 320 U.S. 799 (1943), WestlawNex! © 2013 Thomson Reuters. No claim to original U.S. Government Works. 19 EFTA01103684 Estate of Gilman v. Commissioner of Internal Revenue, 65 T.C. 296 (1975) and Trice Products Corp. v. McGowan, 169 F.2d 343 (2d Cir. 1948), cert. denied 335 U.S. 899 (1948). As far as we can tell, that case was not litigated to a conclusion. The quotation is from Charles' testimony in Gilman Paper Co., 19 T.C.N. 81, affirmed 284 F.2d 697 (2d Cir.), the entire record of which was made a part of the record in the present case. I do not understand that petitioners question the truthfulness of this testimony or of his statement appearing infra, which is also taken from that source. 2 See n. 1 supra. 3 The remaining 4 shares owned by Isaac were distributed to his daughters, and were redeemed at a later time— in 1957— prior to Charles' death. 4 The majority opinion concerns itself at some length with possible restraints that may have existed in respect of the control embodied in the 6 shares. Apart from the fact that as a practical matter such possible restraints were in general not very meaningful in the circumstances of this case, the critical consideration in this connection is that Charles bargained for such control (with whatever restraints may have been attached thereto) and it was the availability of that control (subject to such possible restraints) that may fairly be regarded as the 'enjoyment' of which the statute speaks. 5 The majority opinion refers to the Commissioner's determination that the 6 shares had a value of $24,500,000. But that valuation was obviously based primarily upon including the control feature as the principal component of value. Moreover, the question of value of these shares is vigorously contested by petitioners, and was severed for separate trial in the event that it should be held that the shares are includable in the gross estate. Without intending to prejudge their value, it does seem from the materials before the Court that the Commissioner's figure, as well as the deficiency itself, has been grossly overstated. 6 See, e.g., Old Colony Trust Co. v. United States, 423 F.2d 601 (1st Cir.); United States v. Powell, 307 F.2d 821 (10th Cir.); Estate of Edward E. Ford, 53 T.C. 114, affirmed per curiam 450 F.2d 878 (2d Cir.); Estate of Ralph Budd, 49 T.C. 468; Estate of Marvin L. Pardee, 49 T.C. 140; Estate of James II. Graham, 46 T.C. 415; Estate of Willard V. King, 37 T.C. 973. 7 The 'enjoyment' clause of sec. 2036(a)(1) is thus to be sharply distinguished from 2036(aX2) which was held in Byrum to turn upon a legally enforceable right, and which was the principal issue considered in Byrum. It is similarly to be distinguished from that portion of 2036(a)(1) relating to a retention of a 'right' to income from the transferred property. No such limiting language is present in respect of the 'enjoyment' clause. I I note that, in relative terms, the bulk of the participation of the common stock, upon liquidation of the corporation, was on a share- for-share basis with the preferred stock. The ratio was 10/9,911 at the time the trust was established and 6/5,268 at the time of the settlor's death. 2 Compare Estate of Hilton W. Goodwyn, T.C. Memo. 1973-153; Estate of Arthur A. Chalmers, T.C. Memo. 1972-158. End of Document Co 2013 Thomson Reuters. No claim to original U.S. Government Works. WestlawNext © 2013 Thomson Reuters. No claim to original U.S. Government Works. 20 EFTA01103685