APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 76-2990)
Before Adams, Van Dusen and Rosenn, Circuit Judges.
This case concerns the proper federal estate tax treatment of the testamentary disposition of a decedent's controlling equity interest in a family-held closed corporation. More particularly, this appeal results from a tax refund suit which put in issue the allowance and valuation of a marital deduction from the value of a gross estate under I.R.C. § 2056. An appeal has been taken from a district court order granting the Government's motion for summary judgment and denying the taxpayer's motion for summary judgment. We believe neither motion for summary judgment should have been granted and, accordingly, we remand for further proceedings consistent with this opinion.
Abram L. Spector died testate on May 11, 1966, survived by his widow, Ruth Spector, and four children. At the time of his death, the decedent was the controlling shareholder and chief operating officer of Dial Shoe Company (Dial), a closed, family-held, Pennsylvania corporation. Dial had outstanding 2,305 shares of common voting stock and 4,610 shares of common non-voting stock denominated Class A stock. The decedent owned in his name 1,380 shares of common voting stock and 2,196 shares of Class A stock. The decedent also was the sole shareholder of 4601 Frankford Avenue Corp., which owned, Inter alia, 585 shares of Dial common voting stock and 1,170 shares of Class A stock. In total the decedent owned or controlled approximately 85% Of Dial common voting stock and 73% Of Dial Class A stock. The remaining outstanding shares of Dial were divided equally among the decedent's four children. Each child owned 85 shares of common voting stock and 311 shares of Class A stock. Stipulation of the parties filed Feb. 3, 1977 (118a).*fn1
Paragraph 4 of decedent's probated will dated June 16, 1964, appointed Ruth Spector and the Provident Tradesmens Bank and Trust Company as trustees for a marital trust referred to as Trust # 1. Subparagraph 4(a) bequeathed to Trust # 1 "All Class A Common Stock of Dial Shoe Company, Inc. in my name (to be exchanged for Preferred Stock of Dial Shoe Company, Inc. as hereinafter provided)."*fn2 The primary beneficiary with respect to distribution of income and principal of Trust # 1 was decedent's wife, Ruth Spector. Paragraph 5 of decedent's will bequeathed to his adult son, Edward M. Spector, and adult daughter, Renee Silberman, and the Provident Tradesmens Bank and Trust Company as trustees to hold in a trust referred to as Trust # 2:
"(a) All Common Stock of Dial Shoe Company, Inc., in my name.
"(b) All Class A Common Stock and Common Stock of Dial Shoe Company, Inc., owned at the time of my death by 4601 Frankford Ave. Co., to be received in the liquidation of that corporation as hereinafter provided."*fn3
Paragraph 6 of the will directed that the trustees of Trust # 2 shall manage and operate Dial and that the common stock held in Trust # 2 could not be disposed of without first offering to redeem at 105% Of par the preferred stock issued in the recapitalization.*fn4 The primary beneficiaries entitled to distribution of income and principal from Trust # 2 were Edward M. Spector and Renee Silberman. Paragraph 7 of the will directed the executor to effectuate the recapitalization of Dial, which would provide that:
". . . Five Percent (5%) Preferred Stock be created and issued in exchange for the Class A Common Stock which has been bequeathed under Paragraph 4(a) hereof to the Trustees of Trust # 1; said Preferred Stock shall have a par value equal to the book value of the Class A Common Stock exchanged therefor, . . .."*fn5
The executor paid the estate tax on the basis of a tax return adjusted after administrative audit. The Commissioner after audit valued decedent's holdings of both Dial's common voting and Class A non-voting stock for inclusion in the adjusted gross estate at $157.00 per share as of the date of death.*fn6 The Commissioner allowed as a marital deduction decedent's bequest of the block of 2,196 shares of Class A non-voting common stock to Trust # 1 for the benefit of his wife. The Commissioner valued the stock comprising such marital bequest at $157.00 per share and limited the marital deduction to that amount.*fn7
The executor filed a refund claim with the Commissioner and subsequently instituted a suit for refund in the United States District Court for the Eastern District of Pennsylvania on the ground that the Commissioner's assessment of the marital deduction was incorrect as a matter of law. The executor contended that the correct value for estate tax purposes of the equity interest bequeathed to the marital trust, Trust # 1, and eligible for the marital deduction was not $157.00 per share but, rather, $214.75 per share. This higher figure represented the book value of decedent's 2,196 shares of Class A common stock, which was directed in the will to be the exchange rate for the recapitalization of the 2,196 shares of Class A stock into a like number of 5% Preferred shares with a par value of $214.75.*fn8 The executor did not seek a readjustment of values of any components of the adjusted gross estate.*fn9 Consequently, the executor asserted that the higher per share valuation of the marital bequest increased the amount of the allowable marital deduction, and correspondingly decreased the value of the taxable estate entitling the taxpayer to a refund of $33,430.14.*fn10
Both the executor and the Commissioner filed motions for summary judgment. In a memorandum opinion (186a) and order (190a) dated June 24, 1977, the district court granted the Commissioner's motion for summary judgment and denied the executor's similar motion. An appeal was taken from this order and, as noted above, we reverse the grant of ...