Estate of Murphy v. Commissioner
60 T.C.M. 645, 1990 Tax Ct. Memo LEXIS 520, 1990 T.C. Memo. 472 (1990)
Rule of Law:
A minority discount is not allowed for federal estate and gift tax valuation purposes when a control block of stock in a closely held corporation is fragmented into smaller interests and transferred to family members as part of a prearranged plan with the sole purpose of avoiding federal transfer taxes, and the family retains continuous de facto control over the corporation.
Facts:
- Elizabeth B. Murphy (decedent) had a general power of appointment over a controlling interest (initially 65%, later reduced to 51.41%) in Evening Telegram Company (ETC), a family-run, closely held corporation that owned publishing and broadcast subsidiaries.
- Decedent served as president of ETC until 1980 and then as chairman of the board from 1980 until her death in 1982, while her son, John Murphy, became president in 1980, and her daughter, Elizabeth Burns, became vice president in 1980 and president of broadcast subsidiaries in 1981.
- The Murphy family, including decedent, her children, and the trustee of family trusts, had a clear and continuous intention and understanding to keep control of the business within the family.
- From 1979 to 1982, decedent's tax adviser, Warren Randy, repeatedly recommended that she transfer a small amount of stock to her children to formally reduce her ownership below 50% to obtain a minority discount for federal transfer taxes, while ensuring the family maintained overall control.
- On July 29, 1982, 18 days before her death, decedent exercised her power of appointment and transferred 0.88% of ETC voting stock from her marital trust directly to each of her two children, thereby reducing the marital trust's voting interest from 51.41% to 49.65%.
- The sole purpose of these pre-death transfers was to obtain a minority discount for federal transfer taxes on the control premium; these transfers did not substantially affect decedent's beneficial interest or the family's continuous exercise of control.
- Upon her death on August 16, 1982, decedent exercised her general power of appointment over the remaining 49.65% block of ETC stock, transferring it to trusts established for her children's benefit.
Procedural Posture:
- Elizabeth B. Murphy died testate on August 16, 1982.
- First Bank-Duluth and Richard R. Burns, as co-personal representatives, prepared and timely filed decedent's Federal estate and 1982 gift tax returns in Duluth, Minnesota.
- The Commissioner of Internal Revenue determined a deficiency in decedent's Federal estate tax of $8,133,984 and a deficiency in gift tax for the calendar year 1982 of $10,248,403, both resulting from a dispute over the valuation of Evening Telegram Company stock.
- The cases were consolidated for trial, briefing, and opinion before the United States Tax Court.
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Issue:
Does a decedent's estate qualify for a minority discount in valuing shares of a closely held corporation for federal transfer tax purposes when the decedent, having a general power of appointment over a controlling interest, fragments that interest into smaller blocks and transfers them to her children shortly before death with the explicit and sole purpose of obtaining a minority discount, and the family retains continuous de facto control over the corporation?
Opinions:
Majority - Colvin, Judge
No, a minority discount is not applicable to the Evening Telegram Company and Television Wisconsin, Inc. stock in these cases. The court disallowed the discount because the fragmentation of the control block of stock was part of a clear plan with the explicit and sole purpose of tax avoidance, and the decedent and her children continuously exercised control powers, rendering the appearance of relinquishing control unsubstantial. The court reasoned that transactions with no purpose or effect other than to reduce taxes are disregarded for Federal tax purposes, citing Knetsch v. United States and Gregory v. Helvering. It found that the decedent's two small lifetime gifts of stock did not appreciably affect her beneficial interest except to reduce Federal transfer taxes. The court distinguished Estate of Bright v. United States and similar cases by noting that they involved true minority interests before transfer, often preceded the unification of gift and estate taxes, and lacked a clear tax avoidance purpose through the fragmentation of a control block. Here, the decedent had control up until 18 days before her death, and the transfer of control to her children in two steps was, in substance, one transaction designed to avoid taxation of the control premium. The court emphasized that this outcome is consistent with the legislative intent behind the 1976 unification of estate and gift taxes to prevent tax avoidance through special property transfer patterns. While a 20% discount for lack of marketability and state law liquidation restrictions was allowed, a minority discount was explicitly denied. The voting and nonvoting common stock were valued the same because they were part of an aggregated control block, consistent with Estate of Curry v. United States.
Analysis:
This case establishes a significant limitation on the application of minority discounts for federal transfer tax purposes, particularly in the context of family-owned businesses. It reinforces the 'substance over form' doctrine, preventing taxpayers from artificially fragmenting a controlling interest into multiple minority interests solely to minimize tax liability when de facto control remains within the family unit. Future cases will likely scrutinize the intent and actual economic effect of pre-death transfers of stock, especially when they occur between related parties and appear to divest the decedent of formal control shortly before death without altering the family's practical control over the business. This decision discourages aggressive tax planning strategies that lack genuine business purpose beyond tax reduction.
