Opinion
10878-21 10879-21
07-20-2023
CHARLES E. ROSS, et al., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch Judge
Pending before the Court is Charles E. Ross and Catherine Ross's Motion for Summary Judgment, which the Commissioner opposes. Mr. and Mrs. Ross claim that they made gifts of stock to Mr. Ross's children in 2016. A portion of those gifts were reported as going from Mr. Ross to Mrs. Ross, and in turn, from Mrs. Ross to Mr. Ross's children. But some of the documents effectuating these transfers are inconsistent with the position the Rosses' take in their motion, and some of those documents are inconsistent with each other.
All shareholders and transferees other than Mrs. Ross owned or received their shares through their respective trusts. We will refer to the person, rather than his or her trust, as the owner, transferor, or recipient of any shares.
The Court may grant summary judgment only when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Because there are genuine disputes as to material facts, we must deny the Rosses' motion for summary judgment.
On July 10, 2023, the Rosses filed duplicate Motions for Leave to File Brief in Support of Motion for Summary Judgment. The motions for leave expressly state that the Commissioner "has made factual allegations and legal allegations in his objection that Petitioner wants to make clear are not true or disputed." Because the Court has already concluded that factual disputes exist, a point the proposed briefs in support merely reinforce, we will separately stamp-deny those motions.
Background
The Howard Ternes Packaging Company (HTPC) is an S corporation that has its principal place of business in Michigan. HTPC primarily provides packaging and distribution services to the automotive industry. During 2016, Mr. Ross was its president, and through his trust, he was also a shareholder.
Buy-Sell Agreement (2003)
HTPC has a Buy-Sell Agreement regarding transfer and ownership of HTPC stock. The original Buy-Sell Agreement was entered into on November 11, 2003. Parties to the agreement included Mr. Ross on behalf of HTPC, its escrow agent, and the shareholders. The shareholders were Mr. Ross, Howard A. Ternes, III, Mary Susan Creswell, and Karen A. Rybicki (as trustees of the trusts that held their stock).
The 2003 Buy-Sell Agreement restricts the transfer of shares. "Transfer" is defined to include "any assignment, transfer, sale, . . . gift, . . .or any other complete or partial relinquishment of . . . ownership." The Buy-Sell Agreement permits the shareholders to transfer shares in two limited circumstances. Section 3.2 permits a shareholder to transfer shares after first obtaining written consent of "all parties who then have the right to amend the terms of this Agreement." And Section 3.3 permits a shareholder to transfer shares to a trust established for its benefit or the benefit of its family, and of which it is the sole trustee, after notifying HTPC and the other shareholders in writing. Additionally, the Buy-Sell Agreement requires any transferee to sign a written agreement to be bound by the terms of the Buy-Sell Agreement before or simultaneous with acquiring any shares (lest the transfer be voided).
Amendment to Buy-Sell Agreement (2016)
The Buy-Sell agreement was amended on October 31, 2016 (Amended Agreement). The parties to the Amended Agreement were the same, except for Mary Susan Creswell, who was no longer a shareholder. The Amended Agreement states the parties' reason for modifying the Buy-Sell Agreement:
[HTPC] is at a generational crossroads with respect to the ownership and management of [HTPC] and in order to ensure [HTPC]'s long-term viability the buyout provisions set forth in the Buy-Sell Agreement require modification to provide for inter-generational gifts among the Charles E. Ross family and to provide for continuity of ownership by members of the Charles E. Ross family.
The Amended Agreement leaves the provisions above intact, but it also permits an additional type of transfer. Namely, Section 3.4 permits Mr. Ross, after notifying HTPC and the shareholders in writing, to transfer his shares to: (A) a member of the Ross Family; (B) an inter vivos trust established for the benefit of any member of the Ross Family; or (C) an LLC, all membership units of which are owned by Mr. Ross, his trust, or a member of the Ross Family. The term "Ross Family" means Mr. Ross's issue or lineal descendants. Like any transferee, a transferee under Section 3.4 must sign a written agreement to be bound by the terms of the Amended Agreement before or simultaneous with acquiring any shares. And if any transferee fails to do so, or a transfer is made in violation of the agreement, the transfer shall be void, the transferee shall not own the shares, and HTPC shall not transfer the shares to the transferee "on its stock ledger books."
The Amended Agreement also permits Mr. Ross to "adopt a plan of reorganization whereby" a portion of his Series A shares are converted to an equal number of Series B shares without further approval from the shareholders. At that time, Mr. Ross owned all Series A voting shares, and he and the other two shareholders owned all Series B non-voting shares.
Stock Transfers
Within two months, on December 19, 2016, Mr. Ross converted some of his shares and gifted Series B shares to Charles and Brittain. As HTPC's sole director and voting shareholder, he adopted a plan "by unanimous written consent" whereby he converted 2,182 Series A shares to Series B shares. After doing so, he owned 699 Series A shares and 4,919.50 series B shares. That same day, he transferred a portion of the Series B shares to trusts established for the benefit of Charles and Brittain.The record is unclear, and the parties disagree, as to the exact number of shares Mr. Ross transferred directly to his children, and as to whether all the transfers at issue in these cases occurred on December 19, 2016.
The trusts are the Charles E. Ross, Jr. Small Business Trust and the Brittain L. Sobey Small Business Trust. Both trusts have effective dates of December 19, 2016, and Gregory L. Wysocki (of Kotz, Sangster, Wysocki, and Berg, P.C., HTPC's escrow agent) is their trustee.
Gift Tax Returns
Mr. and Mrs. Ross filed separate Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Return for 2016. On those returns, they both reported gifts of Series B non-voting shares to Charles and Brittain. On his return, Mr. Ross reported gifts of 1,301.11 shares to each Charles and Brittain. On her return, Mrs. Ross reported gifts of 588.56 shares to each Charles and Brittain. On their returns, neither of the Rosses consented to gift-splitting.
Mr. Ross did not report any transfers to Mrs. Ross. However, otherwise consistent with their reporting, the Rosses claim that the transfers took following form: (1) Mr. Ross transferred 1,301.11 shares to each Charles and Brittain and 1,177.12 shares to Mrs. Ross; and (2) Mrs. Ross transferred 588.56 shares to each Charles and Brittain. Thus, at the end of the day on December 19, 2016, Mr. Ross would have 1,140.16 shares (4,919.50 - 2(1,301.11) - 1,177.12), Charles and Brittain would each have 1,889.67 shares (1301.11 + 588.56), and Mrs. Ross would have none.
Notices of Deficiency
The Commissioner mailed Mr. Ross a notice of deficiency for 2016 on March 18, 2021. The Commissioner determined that the substance of the gifts did not match their reported form and that the substance of the transactions resulted in a deficiency in gift tax of $2,523,598. The Commissioner determined that, in substance, Mr. Ross had made indirect gifts to Charles and Brittain through Mrs. Ross because the Rosses had a prearranged understanding that Mr. Ross would transfer stock to his wife on the condition that she would transfer it to his children. Accordingly, the Commissioner determined that no marital deduction pursuant section 2523 is allowed for the transfer to Mrs. Ross, and that Mr. Ross had made gifts of 588.56 shares to each Charles and Brittain that are taxable pursuant to section 2511. Additionally, the Commissioner determined that Mr. Ross transferred 13.30 shares to each of his children on December 19, 2016. The Commissioner also determined a greater value for the shares.
The Commissioner mailed Mrs. Ross a notice of deficiency for 2016 on March 18, 2021. In that notice, the Commissioner determined a deficiency in gift tax of $467,015.00. This deficiency stems from the Commissioner's determination that, "in the event it is determined that [Mrs. Ross made] the reported transfers," the transferred shares had a greater value than she had reported.
Petitions
While residing in Michigan, Mr. and Mrs. Ross filed separate petitions. They dispute the notices of deficiency in their entirety and argue that the reported form and value of the gifts should be respected In Mr. Ross's petition, he contends that there was no prearranged agreement or understanding that would change the treatment of the gifts as reported. He further contends that he transferred 13.30 shares to each of his children in January 2017, as reported for 2017, and that he properly reported the value of the gifts. Likewise, in Mrs. Ross contends in her petition that she made gifts to Mr. Ross's children, and that she properly reported the value of the gifts She further contends that she is entitled to the Unified Credit which would reduce any tax she owes to zero. Alternatively, both Mr. and Mrs. Ross contend "that the gifts are void under Michigan law as made under a mistake of fact."
Motion for Summary Judgement
The Rosses filed a motion for summary judgment in these consolidated cases on January 11, 2023. In the motion, they "deny the Commissioner's allegation that there was a prearranged understanding" and claim that Mr. Ross did not make indirect gifts to Charles and Brittain. Alternatively, they contend that all the gifts were incomplete because each transfer at issue violated the Buy-Sell Agreement and Amended Agreement and was thus void. They contend that the transfers violated the agreements because: (1) the shareholders and parties to the agreements did not receive notice of the transfers and did not consent to them; (2) the corporation did not receive notice even though it transferred the stock on its books; and (3) the transferees did not sign agreements to be bound by the terms of the agreements. The Rosses thus contend that, because the transfers were void, there were no gifts and "the Court should determine that there are no deficiencies."
The Commissioner filed an objection to the Rosses' motion. While the Commissioner does not dispute the form of the gifts, he maintains that the form of the gifts is inconsistent with their substance, and he contends that Mr. Ross should be treated as the sole donor. Additionally, the Commissioner contends that the transfers are not void simply because the Rosses flouted ministerial provisions. Rather, the Commissioner contends that the evidence in these cases, including paperwork created to permit Mr. Ross "to transfer his shares to his lineal descendants, indicates that the transfers are not void." Accordingly, the Commissioner argues that summary judgment should not be granted for the Rosses.
Inconsistencies
Despite the Rosses' reporting and the Commissioner's determinations, the form of the gifts remains unclear. The parties provided documents related to the transfers at issue in these cases. These documents plainly show that Mr. Ross held 4,919.50 Series B shares represented by certificate 324 on December 19, 2016, and that he transferred a portion those shares that day. But it is unclear from the documents whether Mr. Ross transferred shares to his wife, to later be transferred to Charles and Brittain. And the exact number of shares he transferred directly to Charles and Brittain, and when he transferred them, is also unclear.
Several Assignments Separate from Certificate are inconsistent with certificate 324. The Assignments purport to assign and transfer shares from a shareholder to a transferee. In three separate Assignments, Mr. Ross purports to transfer 1,177.12, 1,889.67, and 1,889.67 of his Series B shares from certificate 324 to Mrs. Ross, Charles, and Brittain, respectively (4,956.46 total). But certificate 324 and the HTPC share ledger show that Mr. Ross did not have that many shares to transfer. And while Mr. Ross cannot have directly transferred that many shares, certificates 324A, 325, and 326 designate Mrs. Ross, Charles, and Brittain, respectively, as the owner of the number of shares assigned to them. Nevertheless, two additional assignments purportedly assign Mrs. Ross's shares from certificate 324A to Charles and Brittain in equal parts (588.56 shares each). These Assignments are consistent with the Rosses' returns, which show that the Rosses transferred 1,889.67 shares to Charles and Brittain in two separate blocks (1,301.11 from Mr. Ross and 588.56 from Mrs. Ross). But there are no certificates for blocks of 588.56 shares, and there are neither Assignments nor certificates for blocks of 1,301.11 shares, in the record. Additionally, the Assignments from Mrs. Ross are inconsistent with the Assignments from Mr. Ross (whereby he purportedly transfers the entire amount in a single block).
The Assignments involving Mrs. Ross and certificate 324A are inconsistent with certificates 325 and 326 provided by the Commissioner. Although the Rosses also provided certificates 325 and 326, the versions they provided are different. Both parties' versions have matching front and back sides. However, the Commissioner's certificates also include attachments. Certificate 325 designates Charles as the owner of 1,889.67 shares, and the attachment states that those shares had been transferred from Mr. Ross (original certificate 324) and received by Charles (new certificate 325) on December 19, 2016. Likewise, certificate 326 designates Brittain as the owner of 1,889.67 shares, and the attachment states that those shares had been transferred from Mr. Ross (original certificate 324) and received by Brittain (new certificate 326) on December 19, 2016 These attachments indicate that only Mr. Ross transferred shares directly to his children, and are thus inconsistent with the documents that purport to show that Mrs. Ross owned and transferred shares.
The HTPC share ledger provided by the Commissioner is also inconsistent with the Rosses' position The ledger does not show any transfers to or from Mrs. Ross It shows that on December 19, 2016, Mr. Ross held 4,919.50 Series B shares on certificate 324. It also shows that he assigned 1,140.16 shares from certificate 324 to himself (new certificate 327), and transferred an additional 1,889.67 shares to each Charles and Brittain (4,919.50 total). This is inconsistent with the documents that show that Mrs. Ross was involved in the transfers.
Certificate 327 designates Mr. Ross as the owner of 1,140.16 shares. The part of the ledger related to Charles and Brittain refers to slightly different certificate numbers than the part of the ledger related to Mr. Ross (and the Assignments and certificates in the record). The only difference is the omission of a 3 in the hundreds place (e.g., 324 and 24, 325 and 25, 326 and 26, etc.). However, the ledger still supports the amount and date of the transfers; it shows that Mr. Ross transferred 1,889.67 shares to each his children on December 19, 2016.
Documents in the record also show that only Mr. Ross transferred an additional 13.30 shares each Charles and Brittain. The ledger shows that Mr. Ross transferred 1,113.56 shares (original certificate 327) to himself (new certificate 330) on January 1, 2017, leaving 26.6 shares on certificate 327. It also shows that, the same day, he transferred Charles and Brittain each an additional 13.3 shares. The ledger indicates that Mr. Ross did this in conjunction with Charles and Brittain transferring their 1,889.67 shares to new certificates, such that they each owned 1,902.97 shares represented by the new certificates. This is consistent with the attachments to certificates 325 and 326, which state that Charles and Brittain surrendered them and transferred the shares to new certificates on January 1, 2017. However, the Commissioner alleges that these transfers occurred on December 9, 2016, on the basis of documents that are not in the record.
Again, the part of the ledger related to Mr. Ross refers to certificate 327; the part of the ledger related to Charles and Brittain says that Mr. Ross transferred shares from certificate 27, not 327. But it still shows that Mr. Ross transferred 13.30 shares to each his children on January 1, 2017.
In sum, the documents tell two different stories. In one version, only Mr. Ross transferred stock to his children. This version is supported by several documents, including the multiple Assignments, certificates, and attachments thereto, and the HTPC share ledger. In a second version, Mr. and Mrs. Ross both transferred stock to Mr. Ross's children. This version is consistent with the Rosses' reporting and has some (but comparatively little) documentary support (i.e., the assignments involving Mrs. Ross and certificate 324A).
Discussion
Pending before us is the Rosses' motion for summary judgment. The Rosses contend that the reported form of the gifts should be respected. Alternatively, they argue that they are entitled to summary judgment in their favor because the stock transfers underlying the gifts were void.
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and make factual inferences in the light most favorable to the Commissioner, the nonmoving party. See Sundstrand Corp., 98 T.C. at 520.
Issues of material fact preclude us from granting summary judgment. Documents in the record support at least two different conclusions about the form of the gifts. Because we cannot determine the form of the gifts on the basis of the record before us, we cannot decide whether their reported form is consistent with their substance, and we cannot determine whether they are void. Accordingly, issues of material fact preclude us from granting summary judgment, and it is
ORDERED that the Rosses' motion for summary judgement filed January 11, 2023, is denied.