EFTA01103666.pdf

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