Opinion ID: 590008
Heading Depth: 1
Heading Rank: 1

Heading: facts and tax court decision

Text: 2 This is a gift tax case. On January 2, 1981, Joseph A. Vak (Joseph A.) created an irrevocable trust with 2,757 shares of stock in Joe Vak Farms, Inc. Vak's son, Joseph R. Vak (Joseph R.), and daughter-in-law, Julie A. Vak (Julie), were named joint trustees. Joseph A. retained the power to remove any trustee at any time, with or without cause, and to appoint a successor trustee, provided that any successor trustee was independent, i.e., not related or subordinate to Joseph A. within the meaning of § 672(c) of the Internal Revenue Code. The total beneficial interest in the trust was represented by 100 beneficial certificates (each representing a one percent pro rata interest in income and corpus), all of which were initially issued to Joseph A. No beneficiaries other than Joseph A. were specifically named in the trust agreement. 3 The trustees could elect to distribute or accumulate current income, in whole or in part, in their discretion. The trustees also had an unrestricted sprinkling power among the holders of the beneficial certificates for both corpus and income. No beneficiary was entitled to any distribution of income or corpus as a matter of right until the termination of the trust. Upon termination, the corpus and accumulated income was to be distributed to the holders of the beneficial certificates according to their respective proportionate shares of the certificates. The trust term was for 25 years unless shortened or lengthened by the trustees. 4 On the same day the trust was created, January 2, 1981, Joseph A. transferred 50 of the 100 total beneficial certificates to his three grandchildren (James, Jarwyn, and Joseph Adam), 16 2/3 certificates to each, to be held jointly with their father Joseph R. On January 2, 1982, Joseph A. transferred an additional 23 beneficial certificates (5 to Joseph R. and Julie as tenants in common and 6 each to James, Jarwyn, and Joseph Adam individually). There is no suggestion by the parties or in the trust agreement that Joseph A. had the power to recall a beneficial certificate once transferred. 5 Joseph A. filed a gift tax return for the calendar quarter ending in March of 1981 for the January 1981 transfer of the 50 certificates. The return valued those certificates at $193,560 and remitted $2,859 in tax due. Joseph A. also filed a gift tax return for the calendar quarter ending in March of 1982 for the January 1982 transfer of the 23 certificates. The return valued those 23 certificates at $89,038 and asserted that no tax was due. Subsequently, Joseph A. and the IRS filed stipulations with the United States Tax Court regarding these tax returns. With respect to the 1981 transfer the parties stipulated that an overpayment of $2,859 had been made. Further, the following language originally contained in that stipulation was deleted by the parties: It is further stipulated that the purported gift by the petitioner to James Vak, Jarwyn Vak and Joseph Adam Vak of 50% interest in the Joseph A. Vak Trust is an incomplete lifetime transfer for gift and estate tax purposes. With respect to the 1982 transfer the parties stipulated that there was no deficiency or overpayment for the tax year 1982. The tax court entered decisions in accordance with the stipulations. 6 On January 16, 1984, Joseph R. was named conservator and guardian for Joseph A. On February 18, 1985, the Perkins County Court, Nebraska, granted Joseph R.'s petition to amend the trust to prohibit Joseph A. from removing any trustee and appointing a successor trustee and to limit the sprinkling power to exclude Joseph A. as an eligible distributee. The court also authorized Joseph R. to make and execute gifts to Joseph R. and his family of all or part of the remaining 27 beneficial certificates held by Joseph A. 7 On February 18, 1985, and again on November 1, 1985, the trustees purported to cancel Joseph A.'s 1981 and 1982 transfers of the beneficial certificates. On November 1, 1985, Joseph R. assigned 25 certificates to Joseph R. and Julie as tenants in common and 25 certificates each to James, Jarwyn, and Joseph Adam. 8 The tax court found that the gift of the stock became complete on February 18, 1985, when, in the tax court's view, the county court approved the termination of all of Joseph A.'s power over and beneficial interest in the trust. The tax court also found that the cancellation of the 1981 and 1982 beneficial certificates was ineffectual because the state court had given Joseph R. the power only to transfer the 27 certificates retained by Joseph A. The tax court valued the stock at its full fair market value for 2,757 shares, which was a controlling interest in the corporation, as of February 18, 1985, and rejected the taxpayer's argument that the stock's fair market value should be discounted as the portions assignable to each trust beneficiary were not controlling interests. Finally, the tax court assessed an addition to tax pursuant to 26 U.S.C. § 6660 because of the understatement of the value of the gift. 9 We review the tax court's findings of fact for clear error. Musco Sports Lighting, Inc. v. Commissioner, 943 F.2d 906, 907 (8th Cir.1991). The tax court's conclusions of law and its application of the relevant law to the facts are reviewed de novo. Id.