Matter of Katz
Annotate this CaseDecided on March 29, 2013
Sur Ct, Nassau County
In the Matter of the Petition for Authorization Pursuant to SCPA 2107 by Alexander S. Katz, as Executor of the Estate of Abraham Katz, a/k/a ABRAHAM J. KATZ. Deceased.
344079/H
Eric T. Schneiderman (Attorney General)
Charities Bureau
120 Broadway
New York, NY 10271
Nicole Sanci, Esq. (for petitioner)
Simpson Thacher & Bartlett
425 Lexington Ave.
New York, NY 10017
Wendy H. Scheinberg, Esq. (attorney for Monica Katz)
1050 Old Nichols Rd., Ste. 100
Islandia, NY 11749
Edward W. McCarty, J.
In this proceeding, the executor, Alexander S. Katz, seeks advice and direction pursuant to SCPA 2107 with respect to the sale of estate property.
The decedent, Abraham J. Katz died on September 3, 2006. The decedent was survived by his three children from previous marriages, the petitioner, Alexander S. Katz, ("Alexander"), David A. Katz ("David"), and Peter A. Katz ("Peter"), and by his second wife, Monica Katz ("Monica"). The decedent's Last Will and Testament, dated May 31, 2006, (the "Will") was admitted to probate by this Court on November 7, 2007. Letters testamentary and letters of trusteeship issued on November 7, 2007 to Peter. Thereafter Peter petitioned the court to resign as executor and trustee and designated Alexander as successor executor and successor trustee on May 19, 2010. United State Trust Company, National Association, the nominated successor executor and successor trustee under Article EIGHTH of the Will, had renounced its appointment as successor executor and successor trustee to Peter on April 22, 2010. Letters testamentary and letters of trusteeship previously issued to Peter were revoked, and letters testamentary and letters of trusteeship were issued by this court to Alexander on October 5, 2010.
The estate owns three thousand (3,000) shares of voting stock (the "Voting Stock") and nine thousand (9,000) shares of non-voting stock (the "Non-Voting Stock") in Kason Industries, Inc. ("Kason"), which represents of 100% of the voting stock and 4% of the non-voting stock of [*2]Kason. The remaining non-voting stock is currently owned equally by the decedent's sons, Alexander, David and Peter. Kason is a privately-owned metal parts and products manufacturing company that was founded in December of 1926 by the decedent's father. Alexander is currently serving as President of Kason. Kason is taxed as an S corporation.
Pursuant to Subdivision D of Article THIRD of the Will, the decedent bequeathed the Voting Stock and Non-Voting Stock to a marital trust created under Article THIRD of the Will (the "Marital Trust"), for the benefit of his spouse, Monica. Under the terms of the Marital Trust, Monica is to receive the net income of the Marital Trust at least quarter-annually, and upon her death, the principal of the Marital Trust is distributed to the trustees of the Abraham J. and Phyllis Katz Foundation (the "Foundation"), a foundation created by the decedent and his then spouse in 1994, to be added to and become part of the assets of the Foundation. Alexander is the current trustee of the Marital Trust. The current trustees of the Foundation are Alexander, David, Ellen B. Doft, and Esther E. Katz.
Pursuant to Article FIFTH of the Will, decedent bequeathed the rest, residue, and remainder of his property and estate to the Foundation. To date, distributions totaling Fifty One
Million Six Hundred Eighty Thousand Seven Hundred Three Dollars ($51,680,703) have been made from the estate to the Foundation. The Foundation has been recognized as exempt pursuant to Section 501(c) (3) of the Internal Revenue Code of 1986, as amended (the "Code") and is subject to the private foundation excise taxes under Chapter 42 of the Code.
The estate proposes to sell 1,000 shares of the Voting Stock to each of (i) the David J. Katz-Doft Voting Stock Trust, under agreement dated as of August 8, 2012, between Alexander S. Katz, as Grantor, and Alexander S. Katz and David J. Katz-Doft, as Trustees ("Alex's Trust"), (ii) the David A. Katz Children Voting Stock Trust, under agreement dated as of August 16, 2012, between David A. Katz, as Grantor and Trustee ("David's Trust"), and (iii) the C. Scott Katz Voting Stock Trust, under agreement dated as of August 8, 2012, between Peter Katz, as Grantor, and Alexander S. Katz and C. Scott Katz, as Trustees ("Peter's Trust").Alex's Trust was created by Alexander and is for the benefit of his descendants. David's Trust was created by David and is for the benefit of his descendants. Peter's Trust was created by Peter and is for the benefit of his descendants. The estate also proposes to sell 3,000 shares of the Non-Voting Stock to each of Alexander, David, and Peter. Alexander seeks authorization of this court under Section 2107 of the Surrogate's Court Procedure Act to effect the sale because: (1) he has an interest in his individual capacity as a purchaser, and (2) the authorization of this court is needed to qualify the sale transactions for an exception to the self-dealing excise tax imposed by IRC §4941 (the "Self-Dealing Excise Tax").
The estate, Alex's Trust, David's Trust, and Peter's Trust propose to enter into a contract of sale (the "Sale Agreement") pursuant to which the estate will sell 1,000 shares of the Voting Stock to each of Alex's Trust, David's Trust, and Peter's Trust. The purchase price will be equal to the greater of (i) the value of the Voting Stock appraised as of June 30, 2012 (the "June Appraised Value of the Voting Stock" or (ii) the value of the Voting Stock appraised as of the date of the sale. As of June 30, 2012, the value of the Voting stock as determined by Willamette Management Associates was Ninety-Two Dollars and 34/100 ($92.34) per share (the "June 2012 Appraisal"), or Ninety-Two Thousand Three Hundred Forty Dollars ($92,340) for each one thousand (1,000) shares of Voting Stock. The estate will have Willamette update the June 2012 [*3]Appraisal so that it is current as of the date of sale, and the Estate will sell the Voting Stock to the Trusts at the greater of (i) the June Appraised Value of the Voting Stock or (ii) the then appraised value, pursuant to the Sale Agreement. Each Trust will pay cash for its share of the Voting Stock.
The estate, Alexander, David, and Peter propose to enter into a contract of sale (the "Second Sale Agreement") pursuant to which the estate will sell three thousand (3,000) shares of Non-Voting Stock to each of Alexander, David, and Peter. The purchase price will be equal to the greater of (i) the value of the Non-Voting Stock appraised as of June 30, 2012 (the "June Appraised Value of the Non-Voting Stock") or (ii) the value of the Non-Voting Stock appraised as of the date of the sale. Pursuant to the June 2012 Appraisal, the value of the Non-Voting Stock was Fifty-Eight Dollars and 33/100 ($58.33) per share, or One Hundred Seventy-Four Thousand Nine Hundred Ninety Dollars ($174,990) for each three thousand (3,000) shares of the Non-Voting Stock. The estate will have Willamette update the June 2012 Appraisal so that it is current as of the date of sale and the estate will sell three thousand (3,000) shares of the Non-Voting Stock to each of Alexander, David, and Peter at the greater of (i) the June Appraised Value of the Non-Voting Stock or (ii) the then appraised value, pursuant to the Second Sale Agreement. Each of the petitioner, David, and Peter will pay cash for the Non-Voting Stock. The New York State Attorney General received service of citation and has filed an Affidavit of No Objection to the relief sought.
The Court generally may entertain an application for such relief as requested herein where there are complex valuation issues, tax considerations and/or conflicts among the interested parties (SCPA 2107). In a case of the sale of estate assets where the possible accusation of self-dealing places a fiduciary in jeopardy, the Surrogate has jurisdiction to give advice and direction (SCPA 2107; Matter of Weinstein, 25AD2d 776 [2d Dept 1966]; 5 Cox, Arenson, Medina, NY Civil Practice- SCPA 2107.04, 2107.05 [b] [5]). In this instance, where the petitioner is the fiduciary seller and has a substantial interest in the transaction, the court's approval of the transaction is necessary. Furthermore, as the petitioner asserts, this court's approval for the transaction is necessary in order to avoid the Federal Excise Tax on Self-Dealing by a Private Foundation (IRC §4941, 4941 [d], 4947 [a] [2], 4941 [d] [1] [E]). Accordingly, this court will entertain the petition.
The petitioner believes it is in the best interests of the estate, the Marital Trust, and the Foundation for the estate to sell the Voting Stock to the Trusts and to sell the Non-Voting Stock to petitioner, David, and Peter, and thus seeks authorization from this Court in order to qualify the sale transactions for the exception to the "Self-Dealing Excise Tax."
Under Internal Revenue Code (26 USC §4941), the Self-Dealing Excise Tax is imposed on each act of self-dealing between a disqualified person and a private foundation. The initial tax is 10% of the amount involved per year until the act of self-dealing is corrected and is imposed on the disqualified person. If the act of self-dealing is not corrected within the taxable period, a tax of 200% is imposed. The Code defines self-dealing as any direct or indirect sale or exchange of property between a private foundation and a disqualified person (IRC §4941 [d] [1] [A]). With respect to a private foundation, a disqualified person includes:
(1) a person who is a substantial contributor to the foundation (i.e., someone whocontributes or bequeaths more than five thousand dollars ($5,000) to such foundation if such [*4]amount is greater than two percent (2%) of the total contributions or bequests received by the foundation in the taxable year such bequest is received);
(2) a foundation manager (the term "foundation manager") means (i) an officer, director or trustee of a foundation (or an individual having powers or responsibilities similar to those of officers, directors, or trustees of the foundation) and (ii) with respect to any act (or failure to act) the employees of the foundation having authority or responsibility with respect to such act (or failure to act));
(3) a family member of any individual described in (1)-(2) above, including such individual's spouse, children, ancestors, grandchildren, great-grandchildren, and the spouses of children, grandchildren and great-grandchildren (IRC §4946 (a) (1) (A) and (D) and § 4946 (d));
(4) a trust or estate in which persons who are described in (1)-(3) above own more than 35% of the beneficial interest (IRC §4941 [d] [1] [A], §4941 [d] [1] [E]).
An exception to the Self-Dealing Excise Tax is provided under Treasury Regulation Section 53.4941 (d)-1 (b) (3) which states that the term "indirect self-dealing" does not include a transaction with respect to a private foundation's interest or expectancy in property held by a trust or estate if the following requirements are met:
"i.The executor of the estate (a) has the power to (i) sell the property or (ii) reallocate the property to another beneficiary or (b) is required to sell the property under the terms of any option subject to which the property was acquired by the estate;
ii.The sale is approved by the probate court having jurisdiction over the estate or the private foundation;
iii.The sale occurs before the estate is considered terminated for Federal income tax purposes under Treas. Reg. Section 1.641(b)-3(a);
iv.The estate receives an amount equal or greater than the fair market value of the foundation's interest or expectancy in such property at the time of the sale, taking into account the terms of any option subject to which the property was acquired by the estate; and
v.As a result of the sale, the foundation receives an interest or expectancy at least as liquid as the one it gave up."
The Foundation has an expectancy in the Voting Stock and Non-Voting Stock (collectively, the "Assets"). As Trustees of the Foundation, the petitioner and David are "foundation managers" and thus, are disqualified persons. In addition, the decedent was a substantial contributor to the Foundation. As descendants of the decedent, the petitioner, David, and Peter are family members of a substantial contributor, and thus, are disqualified persons. Finally, (i) Alex's Trust is for the benefit of his descendants, (ii) David's Trust is for the benefit of David's descendants, and (iii) Peter's Trust is for the benefit of Peter's descendants, who are all also descendants of the decedent. Therefore, Alex's Trust and David's Trust are for the benefit of family members of a foundation manager, and all three Trusts are for the benefit of family members of a substantial contributor, and thus, each Trust is a disqualified person. If this court, however, approves the sale as requested, the requirements for the exception to the Self-Dealing [*5]Excise Tax under Treas. Reg. Section 53.4941(d)-1 (b) (3) will be met since: (i) pursuant to Paragraph (9) of Article NINTH of the Will, the executors are authorized to sell property owned by the estate; (ii) the estate has not been terminated, and the executors will sell the Voting Stock to the Trusts and the Non-Voting Stock to the petitioner, David, and Peter before the estate is considered terminated for Federal income tax purposes under Treasury Regulation §1.641(b)-3 (a); (iii) the purchase price of the assets will be determined by a professional appraisal of the assets; and (iv) the cash received for the assets will be more liquid than the assets.
Thus, in accordance with Treasury Regulation §53.4941(d)-1(b) (3) (ii), the petitioner seeks approval from the Court for (i) the proposed sale transaction between the Trusts and the estate, and (ii) the proposed sale transaction between the petitioner, David, Peter and the estate.
The petitioner believes that selling the Voting Stock to the Trusts and the Non-Voting Stock to the petitioner, David, and Peter will be in the best interests of the estate, the Marital Trust, and the Foundation for many reasons. Under the terms of the Will, Monica is to receive the net income of the Marital Trust at least quarter-annually. Under Paragraph (2) of Article NINTH of the Will, Monica has the authority to require the Trustee of the Marital Trust to convert or make productive any property held by the Marital Trust that does not produce a reasonable income. The only assets that pass to the Marital Trust pursuant to the terms of the Will are the Kason assets. Kason has no specific dividend distribution policy and has, in the past, and expects in the future, only to pay dividends sufficient for each shareholder to pay income taxes associated with owning the stock. Thus, the Marital Trust will not produce a reasonable income for Monica. The sale of the assets in exchange for cash will regularize the income that is distributed to Monica pursuant to the terms of the Marital Trust. In addition, the receipt of cash will allow the trustee to diversify the assets in the Marital Trust.
The Marital Trust terminates upon Monica's death and the assets remaining in the Marital Trust pass to the Foundation. The sale of the assets will also be in the best interests of the Foundation and its charitable beneficiaries. In general, income received by the Foundation is exempt from federal income tax. However, all income taken into account by the Foundation from an S Corporation, such as Kason, is treated as unrelated business taxable income ("UBTI") under Internal Revenue Code (26 USC) §512 (e) (1) and is subject to tax at regular trust rates. In addition, pursuant to the excess business holdings rules, the Foundation would be required to dispose of at least 80% of the Voting Stock to persons who are not disqualified persons within five years after the date the stock is received by the Foundation. As Kason is a closely-held company, it is unclear whether there would be a market for the Voting Stock during this time period. Therefore, petitioner believes it would be in the Foundation's best interests for the estate to dispose of these assets now, in exchange for cash. Furthermore, Kason has been family owned, operated and controlled since 1926. It was founded by decedent's father. If the assets pass to the Marital Trust, Monica could exercise her power under Paragraph (2) of Article NINTH of the Will to require the Trustees of the Marital Trust to replace the assets with assets that produce a reasonable income. In the event that the Marital Trust is forced to dispose of the assets after the estate has terminated for Federal income tax purposes, the exception to the Self-Dealing Excise Tax will no longer be available, the Marital Trust will be forced to dispose of the assets to non-family members, and the family would no longer have substantial control over the company. [*6]
For all of the reasons stated above, the court agrees with petitioner that the sale is in the best interests of the estate. Accordingly, the court approves the sale of the assets as set forth herein.
Settle decree on notice to the Attorney General of the State of New York.
Dated: March 29, 2013
EDWARD W. McCARTY III
Judge of the
Surrogate's Court
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