To reflect respondent's concession (note 3, supra),

Decision will be entered under Rule 155.

CHARLES W. WARD AND VIRGINIA P. WARD, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 30068-83.

Filed July 16, 1986.

In 1940, H entered into a land contract to purchase ranch land in Florida. Over the next 4 years, H and his wife, W, each contributed indeterminate amounts of money to pay the installments of the purchase price of the ranch land and to acquire an adjacent parcel of ranch land. H took title to both parcels in his name alone. In 1978, H and W deeded the ranch land to a newly formed corporation, J, except for three small plots deeded as gifts to their sons and their wives. In return for the ranch, H and W each received 43.7 percent of the stock in J. The three sons of H and W contributed cattle and depreciable assets to J, and in return, each son received 4.2 percent of the corporate stock. In 1979, 1980, and 1981, H and W made gifts of minority stock interests in J to each of their sons. At the time of each gift of stock, the parties to the gift executed a gift adjustment agreement which provided that if it were finally determined for Federal gift tax purposes that the fair market value of the stock exceeded or was less than the value ascribed to the stock in the agreement, the number of shares given would be decreased or increased so that the total value of the gift would equal the amount fixed in the agreement. Held:

1. H did not make a gift to W of the J stock that she received upon the contribution of the ranch to the corporation because W was the beneficial owner of an undivided one-half interest in the ranch by virtue of a resulting trust. 2. The number of acres of land given to the sons and their wives is determined.

3. The fair market value of the gifts of J stock as of the date of each gift in 1979 through 1981 is determined. In valuing the gifts of stock, discounts for lack of control and lack of marketability are warranted, even though all of the corporation's stock is owned by members of a single family. 4. The gift adjustment agreements do not affect the gift taxes otherwise due on the gifts of stock.

Joseph D. Edwards, Olin G. Shivers, and Jeffrey M. Dean, for the petitioners.

Francis C. Mucciolo, for the respondent.

SIMPSON, Judge: The Commissioner determined deficiencies in the petitioners' Federal gift taxes as follows:

The issues for decision are: (1) Whether Charles W. Ward made a gift to his wife, Virginia P. Ward, of 437 shares of stock in J-Seven Ranch, Inc. (J-Seven), in 1978, and if so, the value of such shares; (2) the number of acres of land given to the petitioners' sons and their wives in 1978; (3) the fair market values of gifts of stock in J-Seven made by the petitioners to their sons in 1979, 1980, and 1981; and (4) if the fair market values of such gifts of stock are greater than was reported on the petitioners' gift tax returns, whether agreements executed by the petitioners and their sons at the time of the gifts providing in such event for a reduction of the number of shares given, so as to avoid gift tax liability, are effective for Federal gift tax purposes.

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

The petitioners, Charles W. and Virginia P. Ward, husband and wife, maintained their residence in Florida1 at the time they filed their petition in this case. Mr. and Mrs. Ward each filed Federal gift tax returns for the calendar quarters ending December 31, 1978, December 31, 1979, December 31, 1980, and March 31, 1981, with the Internal Revenue Service Center, Atlanta, Georgia. We shall refer to a calendar quarter by the calendar year of which it is a part.

Mr. and Mrs. Ward were married on September 13, 1939. They have five children: Virginia, Charles, Jr., Mary, William, and John.

'The parties have stipulated that the petitioners resided in Clewiston, Flordia, the mailing address of J-Seven and the address stated on their gift tax returns. However, other evidence indicates that the petitioners actually resided in Fort Myers, Flordia, at the time they filed their petition.

When they were first married, the petitioners rented a home in Fort Myers, Florida, for $35 per month. Since then, they have always resided in Fort Myers, eventually buying a home sometime after 1944. Fort Myers is located in Lee County.

Mr. Ward, an attorney, was appointed County Judge of Lee County on March 1, 1939, and he remained in that office through at least 1944. The judicial appointment was a full-time position, requiring that Mr. Ward be at the county courthouse from 9 a.m. to 5 p.m. on weekdays and from 9 a.m. to 1 p.m. on Saturdays. Mr. Ward's income from his position as County Judge ranged from about $3,000 to $4,000 per year. Mrs. Ward was unemployed at the time of the petitioners' marriage in September 1939. Sometime after the Japanese attack on Pearl Harbor in December 1941, she went to work for her father. Her father had been awarded a contract to build a railroad from Fort Myers to the Buckingham Gunnery School east of Fort Myers, and he employed Mrs. Ward to prepare his payroll and to perform other bookkeeping tasks. The record does not establish how much her father paid Mrs. Ward, but it was more than was customary for the type of work because Mrs. Ward worked long hours and on weekends when necessary and because he knew that Mr. and Mrs. Ward were in need of the extra income. Mrs. Ward stopped working for her father sometime before the birth of her son Charles, Jr., on February 14, 1944.

At the time of their marriage, the petitioners had no assets other than some cattle owned by Mr. Ward. Mr. Ward was raised on a farm and has always been interested in cattle. Sometime before he married, Mr. Ward purchased 25 head of cattle, which he ran on open range land in Collier County, Florida, together with cattle owned by his brother, David Elmer Ward. In November 1940, Mr. Ward borrowed money from the Lee County Bank in order to buy an additional 200 head of cattle. These 200 head of cattle were kept on ranch land leased from the Florida Land & Timber Co. (FLT) and located in Hendry County, Florida.

On December 21, 1940, Mr. Ward (as Wilson Ward) entered into a contract with FLT for the purchase of the

Hendry County land (the land contract). Under the contract, FLT agreed to sell Mr. Ward:

Sections Nineteen (19), Twenty (20), Twenty-one (21), Twenty-eight (28), Twenty-nine (29), Thirty (30), Thirty-one (31) and Thirty-two (32), Township Forty-six (46) South, Range Thirty-three (33) East, totaling eight (8) sections, all in Hendry County, Florida, subject to existing roads and easements for roads.

The eight sections contained approximately 5,120 acres. Mr. Ward agreed to pay FLT $7,680 (plus interest) for the land, payable in installments of principal as follows:

The principal balance due was subject to interest at a rate of 5 percent per annum from February 24, 1941, payable on August 24, 1941, and semiannually thereafter, until the principal was fully paid.

The land contract entitled Mr. Ward to possession of the property on February 24, 1941, and thereafter so long as he performed the obligations of the contract. The land contract further provided that:

It is further agreed and understood that the party of the first part [FLT], under date of December 21, 1940, is to execute a deed to Wilson Ward and David Elmer Ward, and, subject to the conditions and reservations hereinbefore stated, deliver such deed promptly to the First National Bank in Fort Myers, Florida, in escrow.

But if all said sums of money, interest and taxes are paid, as aforesaid, promptly at the times aforesaid, and all agreements on the part of the said party of the second part [Wilson Ward] have been complied with, the party of the first part will, on receiving all said money and interest, and upon the surrender of the duplicate of this contract, execute and deliver or cause to be executed and delivered, to said second party, his heirs or assigns, a good and sufficient warranty deed, conveying said premises in fee simple

The land contract provided that David Elmer Ward was to be a grantee in the escrow deed because he was considering joining in the purchase so as to have a place to run his cattle; but shortly thereafter, he purchased land elsewhere

in Hendry County and decided not to join in the purchase from FLT. FLT never placed a deed in escrow.

Mr. Ward consulted his wife before he entered into the land contract with FLT. They agreed that the land ought to be purchased. Mr. Ward paid the $2,560 downpayment on the land. After Mrs. Ward began working in 1942, her wages and those of Mr. Ward were deposited in a joint bank account. Proceeds from the sale of cattle belonging to one or the other or both of them were also deposited into their joint bank account. The petitioners paid the installments of principal and interest payments due FLT with money drawn from their joint account. They did not keep a record of the amounts each contributed to the account or to the purchase from FLT.

After the petitioners paid the last installment of principal and interest due FLT, the president of FLT, on March 24, 1944, executed a deed conveying to Wilson Ward (the petitioner, Charles W. Ward) a fee simple interest in the eight sections of land described in the land contract. In such deed, FLT retained all oil, gas, and mineral rights to the land, contrary to the terms of the land contract. On November 24, 1944, the president of FLT executed a corrected deed wherein the provision concerning oil, gas, and mineral rights conformed to the land contract. In both deeds, Mr. Ward was the sole grantee. Mr. Ward had both deeds recorded in the public records of Hendry County.

On October 7, 1942, Marion C. and Helen M. Ryan (the Ryan sisters) conveyed section 33 of Township 46 South, Range 33 East, Hendry County, to Mr. Ward, as sole grantee. Section 33 was adjacent to the eight sections of land purchased from FLT. The deed was prepared at the direction of Mr. Ward and recorded on October 29, 1942. Mr. Ward paid $1,152 for the property, using funds drawn from the petitioners' joint bank account.

The nine sections of land purchased from FLT and the Ryan sisters (the ranch) contained a total of about 5,712 acres, or almost 9 square miles of land. The ranch was situated about 20 miles southwest of Clewiston and about 55 miles southeast of Fort Myers. The land was suitable primarily for cattle ranching. From 1941 until the incorporation of the ranch in 1978, the petitioners have maintained