Comm'r of Internal Revenue

Tax Court of the United States.Jan 26, 1954
21 T.C. 607 (U.S.T.C. 1954)

Docket Nos. 40018 40019 40020 40021.



R. E. H. Julien, Esq., for the petitioners. T. M. Mather, Esq., for the respondent

R. E. H. Julien, Esq., for the petitioners. T. M. Mather, Esq., for the respondent

Transfers of real property in 2 successive years to corporation whose stock was owned 10 per cent by each of four petitioners and 30 per cent by the children of each petitioner-couple held taxable as gifts. Each transferor, held further, entitled to one exclusion for each taxable year. Frank B. Thompson, 42 B.T.A. 121, followed.

The respondent determined deficiencies in gift tax for the years ended December 31, 1948 and 1949, as follows:

+----------------------------------------------+ ¦Petitioner ¦Docket No.¦Year¦Deficiency¦ +-------------------+----------+----+----------¦ ¦Stephen F. Heringer¦40018 ¦1948¦$18,261.52¦ +-------------------+----------+----+----------¦ ¦Stephen F. Heringer¦40018 ¦1949¦20,273.82 ¦ +-------------------+----------+----+----------¦ ¦Mabel H. Heringer ¦40019 ¦1948¦7,147.23 ¦ +-------------------+----------+----+----------¦ ¦Mabel H. Heringer ¦40019 ¦1949¦19,675.42 ¦ +-------------------+----------+----+----------¦ ¦John F. Heringer ¦40020 ¦1948¦18,261.52 ¦ +-------------------+----------+----+----------¦ ¦John F. Heringer ¦40020 ¦1949¦20,273.82 ¦ +-------------------+----------+----+----------¦ ¦Alta G. Heringer ¦40021 ¦1948¦7,147.23 ¦ +-------------------+----------+----+----------¦ ¦Alta G. Heringer ¦40021 ¦1949¦19,675.42 ¦ +----------------------------------------------+

The basic issue presented in these proceedings is whether the petitioners made taxable gifts to a corporation in which they owned 40 per cent of the stock. Further issues are presented with regard to the extent of such gifts and the number of exclusions to be granted the petitioners if taxable gifts are determined.


Part of the facts were stipulated and are found accordingly. Other facts were established by oral testimony.

John F. Heringer and Stephen F. Heringer are brothers. Stephen F. Heringer is the husband of Mabel H. Heringer and John F. Heringer is married to Alta G. Heringer and together these four persons, the petitioners herein, owned approximately 2,074 acres of farm land in Sacramento County, California.

On or about January 5, 1948, Vorden Farms, Inc., hereinafter sometimes referred to as the corporation, was incorporated under the laws of California for purposes of conducting a farming and agricultural business. On or about December 8, 1948, the corporation issued 50,000 shares of stock at $1 per share to the petitioners and members of their two families in exchange for $50,000 in cash. The two families consisted of petitioners and their eleven children. The stockholdings of the two families after this issuance were as follows:

+-------------------------------------+ ¦ ¦No. of Shares ¦ +---------------------+---------------¦ ¦Stephen F. Heringer ¦5,000 ¦ +---------------------+---------------¦ ¦Mabel H. Heringer ¦5,000 ¦ +---------------------+---------------¦ ¦Frederick J. Heringer¦2,500 ¦ +---------------------+---------------¦ ¦Wilfred R. Heringer ¦2,500 ¦ +---------------------+---------------¦ ¦Lester S. Heringer ¦2,500 ¦ +---------------------+---------------¦ ¦James T. Heringer ¦2,500 ¦ +---------------------+---------------¦ ¦Robert P. Heringer ¦2,500 ¦ +---------------------+---------------¦ ¦Richard T. Heringer ¦2,500 ¦ +---------------------+---------------¦ ¦John F. Heringer ¦5,000 ¦ +---------------------+---------------¦ ¦Alta G. Heringer ¦5,000 ¦ +---------------------+---------------¦ ¦Donald S. Heringer ¦3,000 ¦ +---------------------+---------------¦ ¦John F. Heringer, Jr ¦3,000 ¦ +---------------------+---------------¦ ¦Genette Heringer ¦3,000 ¦ +---------------------+---------------¦ ¦George Heringer ¦3,000 ¦ +---------------------+---------------¦ ¦Ned Heringer ¦3,000 ¦ +-------------------------------------+

Each of the 15 stockholders separately purchased his shares for cash from the corporation.

On or about December 14, 1948, a directors' meeting was held and Wilfred R. Heringer was elected president; Donald S. Heringer and Frederick J. Heringer vice presidents; and Genette Heringer was elected secretary-treasurer of the corporation. On December 28, 1948, the corporation received a deed from the four petitioners conveying an aggregate undivided one-half interest in the 2,074 acres owned by them. On January 5, 1949, the corporation received a second deed from the petitioners conveying the remaining aggregate undivided one-half interest in the 2,074 acres. The fair market value of the entire 2,074 acres was $641,443. At special meetings of the board of directors of the corporation held on December 24, 1948, and January 3, 1949, resolutions were adopted accepting the contributions made by the petitioners. The explanation of the transaction which was given at these meetings stated that the effect of the contribution would be to benefit the 11 noncontributing shareholders to the extent of their proportionate interests in the corporation.

Vorden Farms, Inc., leased the land contributed by the petitioners to Vorden Farms, a partnership, comprised of 9 of the 11 children of the petitioners. This partnership engaged in the actual operation of farming land. Prior to the incorporation of Vorden Farms, Inc., the petitioners had leased this land to the partnership of Vorden Farms. The corporation held title to the land in question, collected the rents payable, paid taxes and reclamation assessments, and distributed dividends. No salaries were paid to corporate officers.

Gift tax returns were filed by each of the four petitioners for the years 1948 and 1949, respectively. Each of the petitioners stated in his gift tax return that he took the position that no taxable gift was involved. The returns further stated that if there was a taxable gift the donors retained a 40 per cent interest in the property transferred and each donor was entitled to 11 exclusions for gift tax purposes which was the number of the noncontributing stockholders. The respondent determined that a gift of the entire value of the land was made to the corporation and that each of the petitioners was entitled to one exclusion for each year.


OPPER, Judge:

These circumstances are indistinguishable from Frank B. Thompson, 42 B.T.A. 121, which has now stood undisturbed by legislative, judicial, or administrative action for upward of 13 years. On the authority of that case, the real property transferred by petitioners to the corporation in which they and their children owned stock is a taxable gift to its full extent.

Robert H. Scanlon, 42 B.T.A. 997, which dealt with the transfer to a corporation wholly owned by the transfer is distinguishable from these proceedings on the same grounds as those on which that opinion itself distinguishes the Thompson case. And the transfer to their corporation by petitioners of valuable property is an entirely different thing from the renunciation of the undeclared dividend which occurred in Emily Coles Collins, 1 T.C. 605.

From Frank B. Thompson, supra, it also follows that each petitioner is entitled to but one exclusion for gift tax purposes for each year.

Reviewed by the Court.

Decisions will be entered under Rule 50.

VAN FOSSAN, J., dissenting:

Despite the statement in the opinion in Robert H. Scanlon, 42 B.T.A. 997, that it is distinguishable on its facts from Frank B. Thompson, 42 B.T.A. 121, I have never been able to perceive a valid distinction in principle between the two cases.

Accordingly, I cannot agree with the holding of the majority that the Thompson case governs here, and that the transfers were taxable to the donors as gifts, nor can I agree that each donor is entitled to but one exclusion.