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FEB 7 2020 * FEB 7 2020
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ESTATE OF JOE E. SHARP, DECEASED, ZAN SHARP

PRINCE, SOLE REMAINING INDEPENDENT
EXECUTOR,
Petitioners,
ELECTRONICALLY FILED

v. Docket No. 7671-19

COMMISSIONER OF INTERNAL REVENUE,

Respondent

RESPONDENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

 UNITED STATES TAX COURT

ESTATE OF JOE E. SHARP, DECEASED,

ZAN SHARP PRINCE, SOLE REMAINING
INDEPENDENT EXECUTOR,

Petitioner,

v. ) Docket No. 7671-19

COMMISSIONER OF INTERNAL REVENUE, ) Filed Electronically

Respondent.

RESPONDENT' S MOTION FOR

PARTIAL SUMMARY JUDGMENT

RESPONDENT MOVES, pursuant to the provisions of Tax Court

Rule 121, for summary judgment in respondent's favor in this

case on the issues of (1) whether 300,000 common shares in First

Baird Bancshares, Inc. (FBBI) subject to an option to purchase

are includible in the gross estate of Joe E. Sharp (decedent)

pursuant to I.R.C. §§ 2033(a), 2036(a)(1) and/or 2038(a)(1); and

(2) if so, whether the FBBI shares to be valued for purposes of

determining the value of decedent's gross estate for federal tax

purposes constitute a controlling interest in FBBI. In

addition, respondent moves for summary judgment on the issue of

whether decedent made an adjustable taxable gift of an option to

purchase FBBI shares in 2007.

IN SUPPORT THEREOF, respondent respectfully provides the

following summary of the relevant facts, as well as the

Declaration of Carina J. Campobasso, along with Exhibits 1

Docket No. 7671-19 - 2 -

through 18, which respondent is filing contemporaneously

herewith, and which respondent incorporates herein by reference.

FACTS

1. Decedent had five children, including Zan Sharp

Prince, f/k/a Zan S. Hagains and Zan Statham (Zan). Exhibits 1

and 2.

2. Decedent was married to Linda Sharp from approximately

1973 through 2011. Exhibit 1.

3. The Pop's Family Irrevocable Trust (the Pop's Trust)

was created by a document bearing the date November 24, 1991.

Exhibit 3.

4. Zan was named as both the Settlor and the Trustee in

the Pop's Trust Agreement. Exhibit 3, p. 1.

5. Decedent was the "primary beneficiary" of the Pop's

Trust, and as such was entitled to "so much of the trust income

and principal as Trustee shall from time to time direct in

writing." Exhibit 3, pp. 1-2.

6. In 1994, decedent owned 680 FBBI shares, representing

an 8.72% interest. Exhibit 4, IRS001415.

7. On July 1, 1994, FBBI's Board of Directors granted

decedent an option to purchase 3,000 shares of FBBI stock at

$295.00/share (the July 1, 1994 Option). The July 1, 1994

Option expired on July 1, 2004. Exhibit 5.

Docket No. 7671-19 - 3 -

8. Specifically, the Board of Directors' resolution

granting the July 1, 1994 Option stated:

RESOLVED, that Joe E. Sharp is hereby granted an

option to purchase 3,000 shares of First Baird
Bancshares, Inc. Common shares at $295.00 per share.
The option may be exercised by Mr. Sharp or his heirs
until July 1, 2004,

9. At the time the July 1, 1994 Option was granted,

FBBI's Board of Directors consisted of decedent, Zan, Sammy

Edington, Fred Goble, Lee Nodwell and Doyle Robertson. Exhibit

5.

10. On February 8, 1996, decedent was elected Chairman of

the Board of FBBI. Exhibit 6.

11. On November 7, 1996, decedent was named President of

FBBI. Exhibit 7.

12. From at least December 31, 1996, decedent was the

principal shareholder of FBBI, owning 32.30% of the outstanding

shares on that date. Exhibit 4, IRS001419.

13. Decedent's ownership percentage increased to 41.82% by

December 31, 2003. In addition, decedent controlled another

23.77% of the FBBI stock as the general partner of the J. Sharp

Children Limited Partnership. Exhibit 4, IRS001430.

14. From at least December 31, 1999, FBBI reported to the

Federal Reserve that decedent was its principal shareholder, as

well as a director, Chairman and President. Exhibit 8, p.

Docket No. 7671-19 - 4 -

EstJSharp_000009.

15. In a Unanimous Written Consent of the Directors of

First Baird Bancshares, Inc. dated June 30, 2004 (the June 30,

2004 Unanimous Written Consent), FBBI's Board of Directors

granted decedent what it termed "an extension on" the July 1,

1994 Option (the June 30, 2004 Option). Exhibit 9.

16. Specifically, the June 30, 2004 Unanimous Written

Consent stated:

RESOLVED, that Joe E. Sharp is hereby granted an

extension on the option, originally granted July 1,
1994, to purchase 3,000 shares of First Baird
Bancshares, Inc. Common shares at $295.00 per share.
_ _-__The_option_ma y_be_exercised-by-Mr---Sharp-or-hi s-hei-r s--
until July 1, 2014.

Exhibit 9.

17. At the time the June 30, 2004 Unanimous Written

Consent was executed, decedent and Zan were the sole members of

FBBI's Board of Directors. Exhibit 9.

18. In a Written Consent of Board of Directors" dated

February 3, 2014 (the February 3, 2014 Written Consent), FBBI's

Board--of Directors "converted" the June 30, 2014-Optiorr to

300,000 shares of FBBI common shares at $2.95 per share (the

February 3, 2014 Option). Exhibit 10, IRS000911.

19. The February 3, 2014 Written Consent stated:

Docket No. 7671-19 - 5 -

Clarification and Extension of Options:

WHEREAS, the company granted an option to Joe E. Sharp

to purchase 3,000 shares of First Baird Bancshares,
Inc. Common shares at $295.00 per share that may be
exercised until July 1, 2014, the option is converted
to 300,000 shares of First Baird Bancshares, Inc.
Common shares at $2.95 per share. The option may be
exercised by Mr. Sharp or assignees until July 1,
2016.

Exhibit 10, IRS000911.

20. Each year from 1994 through 2015, FBBI filed Form FR

Y-6, Annual Report of Bank Holding Companies, with the Federal

Reserve. This Form includes a table titled variously,

"Principal Shareholders", "Shareholders", or "Securities

Holders". Exhibit 4.

21. The Forms FR Y-6 filed for the years ending December

31, 1994, and December 31, 1995, make no mention of the July 1,

1994 Option. Exhibit 4.

22. The Forms FR Y-6 for the years ending December 31,

1996, and December 31, 1997, which were signed by decedent, also

make no mention of the July 1, 1994 Option. Exhibit 4.

23. The Form FR Y-6 for the year ending December 31, 1998,

signed by decedent, show decedent as holding an option on 2,320

shares of common stock. Exhibit 4.

24. There is no evidence showing that FBBI issued an

option to purchase 2,320 shares to decedent.

Docket No. 7671-19 - 6 -

25. The Form FR Y-6 for the year ending December 31, 1999,

signed by Vice President Sammy D. Edington, shows decedent as

holding an option on 2,320 shares of common stock. Exhibit 4.

26. The Forms FR Y-6 for the years ending December 31,

2000, and December 31, 2001, signed by decedent, show decedent

as holding an option on 3,000 shares of common stock. Exhibit

4.

27. Petitioner did not provide the complete original Form

FR Y-6 for the year ending December 31, 2002. Rather,

petitioner provided an incomplete "amended" Form FR Y-6 for this

period, which did not include the table entitled "Shareholders".

Exhibit 11.

28. The Forms FR Y-6 for the years ending December 31,

2003, through December 31, 2006, signed by decedent, show

decedent "and/or Linda Sharp" as holding an option on 3,000

shares of common stock. Exhibit 4.

29. The Forms FR Y-6 for the years ending December 31,

2007, through December 31, 2010, and ending June 30, 2011,

through June 30, 2012, signed by decedent, show Zan "As Trustee

for trust to which options are assigned" as holding an option on

3,000 shares of common stock. Exhibit 4.

30. The Form FR Y-6 for the year ending June 30, 2013,

signed by decedent, show Zan "As Trustee for trust to which

Docket No. 7671-19 - 7 -

options are assigned" as holding an option on 300,000 shares of

common stock, reflecting a 100-1 split in the stock that took

place during that period. Exhibit 4.

31. Decedent remained the Chairman of the Board and

President of FBBI until his death. Exhibit 12.

32. Decedent also remained the principal shareholder of

FBBI until his death, owning 191,000 shares representing a

37.10% interest outright, and controlling 28.05% of the stock as

the general partner of the J. Sharp Children Limited

Partnership. Exhibit 4, IRS001452, IRS001454.

33. Decedent died on March 9, 2015. Exhibit 1.

34. On July 31, 2015, the Estate of Joe E. Sharp, J. Sharp

Children's Limited Partnership, Pop's Trust, Zan Sharp Prince,

Matthew Scott Sharp, Robert Justin Sharp and Keleigh Sharp

Greenwood submitted to the Federal Reserve a document titled

Interagency Notice of Change in Control with respect to FBBI

(Interagency Notice). This Interagency Notice included a

"Confidential Section". Exhibit 13,

35. The Interagency Notice states:

After the creation of Pop's Trust in 1991, Joe Sharp

transferred his vested options to the [Pop's] Trust.
Notwithstanding the foregoing, and due to unresolved
questions about the creation and management of the
trust, no beneficiary of Pop's Trust, by executing
this Notice, waives any right he or she may have to
dispute the existence, validity or administration of
Docket No. 7671-19 - 8 -

the trust or the ownership of the stock options held

by said trust as of March 31, 2015.

Exhibit 13, IRS001215 (n. 4).

36. During respondent's examination, petitioner produced a

copy of a document entitled "Assignment" (purported Assignment).

This document states:

For value received, Joe E. Sharp, being of legal age,

hereby assign unto "Pop's Family Irrevocable Trust"
dated November 24, 1991, Zan S. Statham, Trustee the
following stock options granted by First Baird
Bancshares, Inc.

Option granted on July 1, 1994 to Joe E. Sharp

from First Baird Bancshares, Inc. for 3000
shares at $295.00 per share.

Exhibit 14,

37. The purported Assignment bears decedent's signature

and the date July 1, 1994. Exhibit 14.

38. Despite the fact that the purported Assignment states

that the assignment of the July 1, 1994 Option is for "value

received", petitioner has not alleged that the Pop's Trust

provided any consideration in exchange for the July 1, 1994

Option See Petition, ¶ 6.d.

39. Also, during the examination, petitioner produced a

copy of a document entitled "Disclaimer of Interest" (purported

Disclaimer). This document states:

I, Joe E. Sharp, being of legal age, hereby disclaim

any and all interest past, present or future in "Pop's
Docket No. 7671-19 - 9 -

Family Irrevocable Trust" dated November 24, 1991, Zan

S. Statham, Trustee.
Exhibit 15.

40. The purported Disclaimer bears decedent's signature

and the date July 1, 1994.

41. Prior to the divorce proceedings instituted by Linda

Sharp against decedent in 2007, Linda Sharp had no knowledge of

the July 1, 1994 Option or the June 30, 2004 Option or the

alleged assignment of the July 1, 1994 Option to the Pop's

Trust. Exhibit 16, pp. 28-29.¹

42. Petitioner filed a Form 706, United States Estate (and

Generation Skipping Transfer) Tax Return, on June 3, 2016.

Exhibit 17.

43. Petitioner reported $0 Adjusted taxable gifts (line 4)

on the Form 706. Exhibit 17, IRS000014.

44. Petitioner did not include the value of the February

3, 2014 Option on the Form 706. Exhibit 17.

45. The statutory notice of deficiency that forms the

basis of this case was issued on February 14, 2019. Exhibit 18.

¹ Based on the Forms FR Y-6 filed with the Federal Reserve,

showing an option on 3,000 shares as being owned by decedent (or
decedent and/or Linda Sharp) through the end of 2006, and Linda
Sharp's lack of knowledge of the existence of the July 1, 1994
and June 30, 2004 Options and her lack of knowledge of the July
1, 1994 Option's purported assignment to the Pop's Trust, it
appears that the Assignment and the Disclaimer were executed
some time in 2007 and backdated to July 1, 1994.
Docket No. 7671-19 - 10 -

46. Petitioner objects to the granting of this motion.

DISCUSSION

I. SUMMARY JUDGMENT IS APPROPRIATE AND SHOULD BE ENTERED IN

RESPONDENT' S FAVOR.

This Court may grant summary judgment·where there is no

genuine issue of material fact and a decision may be rendered as

a matter of law. Tax Court Rule 121(b); Sundstrand Corp. v.

Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th

Cir. 1994). Disputes over facts that are not outcome-

determinative will not preclude the entry of summary judgment.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When

ruling on a motion for summary judgment, the Court does not

weigh the evidence, but determines "whether there is a genuine

issue for trial." Id. at 249. In making this determination,

the Court construes all facts in a light most favorable to the

nonmoving party and views all inferences drawn from the evidence

in the light most favorable to the party opposing the motion.

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

587-88 (-1986t,-citing-United-States v.-Diebold, Inc , 369 U.S.

654, 655 (1962); see also Lockheed Martin Corp. v. United

States, 70 Fed. C1. 745, 749 (2006); L.P. Consulting Group, Inc.

v. United States, 66 Fed. Cl. 238, 240 (2005).

Docket No. 7671-19 - 11 -

II. THE FBBI SHARES SUBJECT TO THE OPTION ARE INCLUDIBLE IN

DECEDENT'S GROSS ESTATE PURSUANT TO I.R.C. § 2033 BECAUSE
THE PURPORTED "EXTENSION" OF THE JUNE 30, 2004 OPTION ON
FEBRUARY 3, 2014, WAS IN FACT THE GRANT OF A NEW OPTION
THAT WAS NEVER ASSIGNED TO THE POP' S TRUST.

I.R.C. § 2033 provides that the value of a decedent's gross

estate includes the value of all property to the extent of the

decedent's interest in the property.

As stated above, the February 3, 2014 Written Consent

(Exhibit 10) states:

Clarification and Extension of Options:

WHEREAS, the company granted an option to Joe E. Sharp

to purchase 3,000 shares of First Baird Bancshares,
Inc. Common shares at $295.00 per share that may be
exercised until July 1, 2014, the option is converted
to 300,000 shares of First Baird Bancshares, Inc.
Common shares at $2.95 per share. The option may be
exercised by Mr. Sharp or assignees until July 1,
2016.

Although the heading of this statement includes the term

"Extension", the terms of the July 1, 1994 Option did not

provide for the possibility of extending the option beyond its

July 1, 2004 expiration date. Similarly, the terms of the June

30, 2004 Option did not provide for the possibility of extending

the option beyond its July 1, 2014 expiration date. Moreover,

the February 3, 2014 Written Consent makes no mention of the

purported owner of the July 1, 1994 Option, the Pop's Trust, as

the owner of the Option having the right to exercise the option
Docket No. 7671-19 - 12 -

until July 1, 2016. Rather, the February 3, 2014 Written

Consent provides that the February 3, 2014 Option "may be

exercised by Mr. Sharp or assignees until July 1, 2016"

(emphasis added); that is, it explicitly does not grant to the

Trustee of the Pop's Trust, Zan, the power to exercise the

option and instead explicitly grants this power to decedent.

In short, the February 3, 2014 Option, notwithstanding its

labeling as an "extension", is a new option giving Mr. Sharp, or

someone to whom he might potentially (but did not) assign it,

the right to exercise it until July 1, 2016. See Estate of

McKelvey v. Commissioner, 906 F.3d 26, 35-36 (3d Cir. 2018),

rev'g 148 T.C. 312 (2017)(the extension of the exercise date of

an option contract is a fundamental change to the original

contract and results in a new contract); I.R.C. § 424(h) (1) (if

the terms of any option .to purchase. st.ock are -modified,

extended, or renewed, such modification extension, or renewal

shall be considered as the granting of a new option); Statement

of Financial Accounting Standards No. 123 (revised 2004),

Financial Accounting Standards Board, 2004 Financial Accounting

Series, No. 263-C (December 2004), ¶ 51, p. 18 ("A modification

of the terms or conditions of an equity award shall be treated

Docket No. 7671-19 - 13 -

as an exchange of the original award for a new award;").2

Because at the date of his death, decedent owned the

February 3, 2014 Option granting him or his assignees the right

to purchase 300,000 shares of FBBI stock at $2.95 per share, the

February 3, 2014 Option is includible in decedent's gross estate

under I.R.C. § 2033.

III. EVEN IF THE JUNE 30, 2004 OPTION AND THE FEBRUARY 3, 2014
OPTION ARE NOT CONSIDERED NEW OPTIONS, BUT RATHER
"EXTENSIONS" OF THE JULY 1, 1994 OPTION, AND DECEDENT IN
FACT ASSIGNED THE JULY 1, 1994 OPTION TO THE POP' S TRUST,
THE OPTION IS INCLUDIBLE IN THE DECEDENT'S GROSS ESTATE
PURSUANT TO I.R.C. §§ 2036(a) and/or 2038(a).

As shown above, the February 3, 2014 Option was a new

option, with a different owner, decedent, from the purported

owner of the July 1, 1994 Option, the Pop's Trust. However,

even if the Court were to find that the June 30, 2004 Option and

the February 3, 2014 Option were "extensions" of the July 1,

1994 Option (collectively referred to hereinafter as "the

Option") and decedent in fact assigned the July 1, 1994 Option

to the Pop's Trust on July 1, 1994 (see footnote 1 above and

Part IV below), the option is nevertheless includible in

decedent's gross estate pursuant to I.R.C. § 2036(a) and/or

2038(a).

2 Statement of Financial Accounting Standards No. 123 (without

appendices) , https: //www. fasb. org/ jsp/FASB/Document C/
DocumentPage?cid=1218220124271&acceptedDisclaimer=true, is
attached as Appendix A.
Docket No. 7671-19 - 14 -

I.R.C. § 2036(a) provides, in pertinent part, that the

value of the gross estate shall include the value of all

property to the extent of any interest therein of which the

decedent has at any time made a transfer (except in case of a

bona fide sale for an adequate and full consideration in money

or money's worth), by trust or otherwise, under which he has

retained for his life or for any period not ascertainable

without reference to his death or for any period which does not

in fact end before his death, the possession or enjoyment of, or

the right to the income from, the property, or the right, either

alone or in conjunction with any person, to designate the

persons who shall possess or enjoy the property or the income

therefrom.

I.R.C. § 2038(a)(1) provides, in pertinent part, that the

value of the gross estate shall include the value of all

property to the extent of any interest therein of which the

decedent has at any time made a transfer (except in case of a

bona fide sale for an adequate and full consideration in money

or money's worth), by trust or otherwise, where the enjoyment

thereof was subject at the date of his death to any change

through the exercise of a power (in whatever capacity

exercisable) by the decedent alone or by the decedent in

conjunction with any other person (without regard to when or

Docket No. 7671-19 - 15 -

from what source the decedent acquired such power), to alter,

amend, revoke, or terminate, or where any such power is

relinquished during the 3 year period ending on the date of the

decedent's death.

In Estate of Cahill v. Commissioner, T.C. Memo. 2018-84,

the decedent transferred $10 million to the trustee of an

irrevocable life insurance trust (ILIT) for the purpose of

purchasing single-premium life insurance policies on the lives

of his son and daughter-in-law. The decedent and the ILIT

trustee entered into a split-dollar arrangement whereby the

decedent retained the right to repayment on either the

termination of the arrangement, the surrender of the policies,

or the death of the insured, of the greater of the premiums paid

or the cash surrender value of the policies. The termination of

the arrangement or the surrender of the policies could occur

only with the consent of both parties.

The court held that the right to terminate the split-dollar

arrangement and recover at least the cash surrender value of the

policies, was a right, held in conjunction with another person

(the ILIT trustee), both to designate the persons who would

possess or enjoy the transferred property within the meaning of

I.R.C. § 2036(a)(2) and to alter, amend, revoke, or terminate

the transfer within the meaning of I.R.C. § 2038(a)(1). Estate

Docket No. 7671-19 - 16 -

of Cahill v. Commissioner, slip op, at 15, citing Estate of

Powell v. Commissioner, 148 T.C. 392, 399 (2017) ("[D]ecedent's

ability to dissolve . . . [her limited partnership] with the

cooperation of her sons constituted a 'right . . . in

conjunction with . . . [others], to designate the persons who

shall possess or enjoy the property [she transferred to the

partnership] or the income therefrom', within the meaning of

section 2036(a)(2)"). See also Estate of Strangi v.

Commissioner, T.C. Memo. 2003-145, aff'd, 417 F.3d 468 (5th Cir.

2005); Estate of Turner v. Commissioner, T.C. Memo. 2011-209.

Thus I.R.C. §§ 2036 and 2038 pull the value of transferred

property back into a decedent's gross estate if (1) the decedent

made an inter vivos transfer of the property; (2) the decedent's

transfer was not a bona fide sale for adequate and full

consideration; and (3) the decedent had a power of the kind

listed in I.R.C. § 2036 or 2038 to affect the enjoyment of the

property, which power he did not give up before he died or which

he relinquished within the three-year period ending on the date

of his death pursuant to I.R.C. § 2035.

The "mere power to affect the timing of the enjoyment of

property is sufficient to attract a tax under sections

2036(a)(2) and 2038(a)(1)". Estate of Bischoff v. Commissioner,

69 T.C. 32, 46-47 (1977) (emphasis added, citing United States

Docket No. 7671-19 - 17 -

v. O'Malley, 383 U.S. 627 (1966); Lober v. United States, 346

U.S. 335 (1953)). See also Eichstedt v. United States, 354 F.

Supp. 484, 487-488 (N.D. Cal. 1972) ("Section 2038 extends to

property subject to a decedent's power to affect 'the time or

manner of enjoyment of property or its income, even though the

identity of the beneficiary is not affected'", citing Lober v.

United States, 346 U.S. 335 (1953) and Commissioner v. Estate of

Holmes, 326 U.S. 480 (1946)); Estate of Jacoby, T.C. Memo. 1970-

165 (same)).

Moreover, I.R.C. § 2038 is "applicable to any power

affecting the time or manner of enjoyment of the property, even

though the identity of the beneficiary is not affected." Treas.

Reg. § 20.2038-1(a). It is immaterial in what capacíty the

power was exercisable by the decedent or by another person or

persons in conjunction with the decedent; whether the power was

exercisable alone or only in conjunction with another person or

persons; or at what time or from what source the decedent

acquired his power to affect the enjoyment of the property. Id.

Here, all three requirements for inclusion under I.R.C. §§

2036(a) and 2038(a)(1) are satisfied. First (assuming the

Assignment and Disclaimer are valid), decedent made a transfer

of property, the July 1, 1994 Option, to the Pop's Trust.

Second, decedent received nothing in exchange for the transfer

Docket No. 7671-19 - 18 -

of the July 1, 1994 Option to the trust.

The third requirement, that the decedent had the power to

affect the enjoyment of the property is also satisfied for two

reasons, explained below.

A. The February 3, 2014 Option explicitly granted

decedent the power to exercise the Option.

By its terms, the February 3, 2014 Option gave the right to

exercise the Option to decedent or his assignees. Thus, even if

the February 3, 2014 Option is considered an extension of the

original July 1, 1994 Option assigned to the Pop's Trust, the

grantor of the Option, the FBBI Board, in the February 3, 2014

Written Consent, gave decedent, not the trustee of the Pop's

Trust, the power to exercise the Option at any time before the

expiration date. This is surely a "power to affect the timing

of the enjoyment of" the FBBI stock subject to the Option.

Estate of Bischoff, 69 T.C. at 46-47. Therefore, the Option is

includible in decedent's gross estate under I.R.C. §§ 2036 and

2038.

B As- a member of ~ the-FBBI-Board of Directors, -the

decedent had the power, in conjunction with others, to
affect the enjoyment of the Option and the underlying
FBBI stock.

Even if, somehow, the explicit grant of the power to

decedent to exercise the Option in the February 3, 2014 Written

Consent could be ignored, the Option is nevertheless includible

Docket No. 7671-19 - 19 -

in decedent's estate under I.R.C. §§ 2036 and 2038. This is so

because decedent, by virtue of his position as President and

Chairman of the Board of FBBI, had, at his death, the power, in

conjunction with the other members of the FBBI Board, to amend,

terminate, or change the enjoyment of the Option by extending

its exercise (as decedent and the Board had done on two previous

occasions prior to decedent' s death) . See EstatMv.

Commissioner, 90 T.C. 723 (1988), aff'd, 891 F.2d 281 (3" Cir.

1989).

The facts of Estate of Levin are very similar to those

here. In Estate of Levin, the decedent founded a company,

Marstan, and served as its president from the time of its

incorporation in 1952 until 1980, when his son was elected

president and the decedent became Chairman of the Board. The

decedent continued to serve as the Chairman of the Board until

his death. He controlled 83.3% of the Marstan voting stock and

13.5% of the Marstan non-voting stock. One month before his

death in December 1980, Marstan's board of directors adopted a

plan that provided for the payment of an annuity to the

surviving spouses of the Marstan officers who had completed

substantial periods of service and died while in the employ of

Marstan (the Plan). The Plan provided that it could be

terminated or amended by the Board of Directors at any time.

Docket No. 7671-19 - 20 -

Because of the age and service requirements, the decedent was

the only person who qualified at the time of the adoption of the

Plan for benefits under the Plan.

The Court in Estate of Levin held that the value of the

annuity payable to the decedent's widow was includible in the

decedent's gross estate under I.R.C. § 2038(a)(1) because the

decedent's power to amend or revoke the Plan in conjunction with

Marstan's other Board members was sufficient to "compel

inclusion of the value of the post-mortem annuity in the

decedent's estate." 90 T.C. at 730-731. Similarly, here,

decedent had the ability, in conjunction with the other FBBI

Board members, to alter the enjoyment of the Option, and thus

the 300,000 FBBI shares subject to it, by extending its exercise

(as had already been done twice previously), terminating it, or

otherwise changing its terms.

Because decedent had at the time of his death the power to

affect the enjoyment of the Option, the value of the underlying

FBBI stock is includible in his gross estate pursuant to I.R.C.

§§ 2036(a) and/or 2038(a)(1).

Docket No. 7671-19 - 21 -

IV. DECEDENT MADE A GIFT OF THE JUNE 30, 2004 OPTION WHEN HE
TRANSFERRED IT TO THE POP'S TRUST IN 2007.

Petitioner has claimed that decedent assigned the July 1,

1994 Option to the Pop's Trust on July 1, 1994. However,

petitioner has provided no reliable evidence that this is the

case. Rather, the extrinsic evidence suggests that the Option

was assigned to the Pop's Trust no earlier than January 1, 2007.

Specifically, decedent reported year after year in the Forms FR

Y-6 from December 31, 1994, through December 31, 2006, that he

owned the Option, and later that he and his then-wife Linda

Sharp owned it. Despite being reported as an owner of the

Option as early as December 31, 2003 (Exhibit 4, IRS001430),

Linda herself "never had knowledge or gave consent for [the]

transfer" of the Option to the Pop's Trust. Exhibit 16, p. 28.

That the FR Y-6 reports went from showing decedent as the

sole owner of the Option (see, e.g., Exhibit 4, IRS001428) to

showing the owner as "Joe E. Sharp and/or Linda Sharp" (Exhibit

4, IRS001428) reinforces the conclusion that the June 30, 2004

3 Although respondent has not yet issued a notice of deficiency

asserting a deficiency in gift tax for the 2007 tax year and the
Court thus has no jurisdiction to determine decedent's 2007 gift
tax liability, the issue of the correct amount of adjusted
taxable gifts to be reported on the Form 706 is before the
Court. See Exhibit 18, Explanation of Adjustments, p. 3.
Therefore, the Court has jurisdiction to determine whether the
decedent made a gift of the Option in 2007. Moreover, such a
determination is necessary to compute the correct estate tax
liability. I.R.C. § 2001(b).
Docket No. 7671-19 - 22 -

Option was not owned by the Trust before January 1, 2007: It

simply does not make sense that decedent, who went to the

trouble of updating the ownership of the Option on the Form FR

Y-6 for 2003 to reflect Linda's co-ownership, would have done so

had he believed the true owner to be the Pop's Trust.

Therefore, even if the Court were to find that the July 1,

1994 Option, the June 30, 2004 Option, and the February 3, 2014

Option were a single option, this Option was not transferred to

the Pop's Trust until sometime in 2007. At that point, the

value of FBBI shares was greater than the Option's $295.00 per

share strike price, and thus the Option was a valuable asset

owned by decedent.4 Its transfer to the Pop's Trust in 2007

therefore gives rise to an adjusted taxable gift within the

meaning of I.R.C. § 2001(b).

V. FOR PURPOSES OF VALUING DECEDENT'S INTEREST IN FBBI

INCLUDIBLE IN THE GROSS ESTATE, THE SHARES OWNED OUTRIGHT
AND THOSE REPRESENTED BY THE OPTION MUST BE AGGREGATED ,
RESULTING IN A CONTROLLING OWNERSHIP INTEREST.

Decedent owned 191,000 FBBI shares representing a 37.10%

interest at the~time-of-his death. Exhibit 4, TRS001454. The

total number of shares outstanding before exercise of the Option

was approximately 514,825 (191,000/.371). Assuming the exercise

For purposes of the notice of deficiency, respondent valued the

Option at $10,335,000 in 2007.
Docket No. 7671-19 - 23 -

of the Option to purchase 300,000 shares as of the date of

death, decedent's gross estate includes over 60.26% of the FBBI

shares (491,000/814,825).

The 60.26% FBBI interest is the property to be included and

valued in the gross estate. As the Seventh Circuit explained:

[P]ermitting the estate's argued hypothetical

scenario of separate disposition of voting and non-
voting shares to form the basis of a proposed
valuation would defy common sense and the requirements
of the "fair market value" standard, at least in the
present case, where the stock of a small, closely held
corporation is at issue. The relevant Treasury
regulations provide that "fair market value" is the
"price at which the property would change hands
between a willing buyer and a willing seller . . .
both having reasonable knowledge of relevant facts."
It is well established that the willing buyer-willing
seller rule presumes that the potential transaction is
to be analyzed from the viewpoint of a hypothetical
buyer whose only goal is to maximize his advantage.
See, e.g., Revenue Ruling 59-60, 1959-1 C.B. 237;
Estate of Bright v. United States, 658 F.2d 999, 1006
(5th Cir.1981). And it does not comport with common
sense that a willing buyer would be likely to purchase
non-voting shares in a small, family-held business,
without concomitantly purchasing a controlling voting
interest. Such a purchase would put the outside
purchaser at the mercy of the voting insiders on
matters such as dividend declaration and other
important corporate policies, without affording, as in
the case of most publicly-traded corporate stock, a
ready "exit" remedy of disposing of the purchased
stock, or the "voice" remedy of joining with voting
non-insiders to protect the minority interest. In
applying the willing buyer-willing seller rule, courts
may not permit the positing of transactions which are
unlikely and plainly contrary to the economic interest
of a hypothetical buyer as a basis for the valuation.
Thus, even apart from considerations of estate tax
policy, there is logical reason to reject the estate's
Docket No. 7671-19 - 24 -

proposed separate fair market valuation of voting and

non-voting stock.

Estate_of_Curry v. United States, 706 F.2d 1424, 1428-29

(7'" Cir. 1983) . See also Estate of Strangi v.

Commissioner, 115 T.C. 478, 491 (2000) (aggregating limited

and general partnership interests for valuation purposes),

aff'd on this issue, 293 F.3d 279 (5th Cir. 2002).

CONCLUSION

At the time of his death, decedent owned the February 3,

2014 Option. Therefore, respondent requests that the Court

grant partial summary judgment in respondent's favor holding

that the February 3, 2014 Option is includible in decedent's

gross estate pursuant to I.R.C. § 2033(a).

In the alternative, if the Court finds that July 1, 1994

Option, the June 30, 1994 Option and the February 3, 2014 Option

are a single option and determines that decedent transferred the

Option to the Pop's Trust before his death, either in 1994 or in

2007, the option is nevertheless includible in decedent's gross

estate pursuant-to I. R.C. §§-2036 (a) and/or 2038 ( a) because-at

his death decedent either (1) directly had the power to affect

the possession or enjoyment of underlying FBBI shares by virtue

of the terms of the February 3, 2014 Option, or (2) as a member

of the FBBI Board of Directors had the power, in conjunction

Docket No. 7671-19 - 25 -

with the other Board members, to affect the enjoyment of the

shares.

In addition, decedent made an adjusted taxable gift of the

Option in 2007 and the Court should determine that petitioner

underreported adjusted taxable gifts by the value of the Option

in 2007.

Finally, the Court should hold that the shares owned

outright by decedent and those represented by the Option must be

aggregated, resulting in a controlling interest for valuation

purposes.

MICHAEL J. DESMOND
Chief Counsel
Internal Revenue Service

Date - 02O By:

CARINA J. CAMPOB SSO
Senior Counsel
(Small Business/Self-Employed)
Tax Court Bar No. CC0548
10 Causeway Street, Room 401
Boston, MA 02222-1061
Telephone: (617) 788-0813

OF COUNSEL:
JOSEPH W. SPIRES
Acting Division Counsel (Small Business/Self-Employed)
MICHAEL R. FIORE
Acting Area Counsel (Small Business/Self-Employed:Area 1)
NINA P. CHING
Associate Area Counsel (Small Business/Self-Employed)
 UNITED STATES TAX COURT

ESTATE OF JOE E. SHARP, DECEASED, )

ZAN SHARP PRINCE, SOLE REMAINING )
INDEPENDENT EXECUTOR, )
)
Petitioner, )
)
v. ) Docket No. 7671-19
)
COMMISSIONER OF INTERNAL REVENUE, ) Filed Electronically
)
Respondent. )

RESPONDENT’S REPLY TO PETITIONER’S

RESPONSE TO RESPONDENT'S MOTION FOR
PARTIAL SUMMARY JUDGMENT

RESPONDENT REPLIES to the Response to Respondent’s Motion for

Partial Summary Judgment (Petitioner’s Response) as follows:

INTRODUCTION

On February 3, 2014, the Board of Directors (the Board) of First Baird

Bancshares, Inc. (FBBI) made the following resolution (February 3, 2014

Resolution):

Clarification and Extension of Options:

WHEREAS, the company granted an option to Joe E. Sharp to

purchase 3,000 shares of First Baird Bancshares, Inc. Common shares
at $295.00 per share that may be exercised until July 1, 2014, the
option is converted to 300,000 shares of First Baird Bancshares, Inc.
Common shares at $2.95 per share. The option may be exercised by
Mr. Sharp or assignees until July 1, 2016.

Exhibit 10. The option as memorialized in the February 3, 2014 Resolution

Docket No. 7671-19 -2-

remained outstanding at the time of the death of Joe E. Sharp (decedent). Thus, at

the time of his death, under the plain terms of the February 3, 2014 Resolution,

decedent held the right, along with his assignees, to exercise an option to purchase

300,000 shares of FBBI at $2.95 per share (the Option). This fact alone is

sufficient to bring the Option into decedent’s gross estate for estate tax purposes,

either under I.R.C. § 2033 (because the option created by the February 3, 2014

Resolution is a new option belonging to decedent, which he did not assign) or

under I.R.C. § 2036(a)(2) and § 2038(a)(1) (because he had the power to exercise

it, whether or not he himself would enjoy the economic benefits upon exercise).

None of petitioner’s arguments in Petitioner’s Response meet and refute the

undeniable fact that decedent had the right at his death, under the explicit terms of

the February 3, 2014 Resolution, to exercise the option.

Rather, petitioner glosses over this inconvenient, but determinative, fact, and

instead raises objections to Respondent’s Motion that are based on cases that are

either easily distinguishable or plainly inapplicable.

Most notably, petitioner relies on United States v. Byrum, 408 U.S. 125

(1972). As discussed more fully below, Byrum is inapplicable to this case,

because unlike the decedent in Byrum, (1) decedent here had not just de facto

powers as a board director to affect the timing of the enjoyment of the option, but
Docket No. 7671-19 -3-

also an explicit, legally enforceable right at his death to exercise it; and (2)

decedent actually did exercise his de facto powers, consistent with his fiduciary

duties as a board member, to increase the fair market value of the option twice.

Rather than the facts in Byrum, the facts here more closely mirror those in Strangi

v. Commissioner, T.C. Memo. 2003-145, aff’d, 417 F.3d 468 (5th Cir. 2005), in

which the Tax Court limited the holding in Byrum to its very particular facts.

FACTS

Respondent set out the necessary facts supporting summary judgment in

respondent’s favor on the issue of the includability of the option in Respondent’s

Motion for Partial Summary Judgment (Motion for Partial Summary Judgment).

Petitioner did not object to or dispute those facts. Respondent contends that those

facts alone are sufficient to support and indeed to require a conclusion that the

option granted to petitioner by the February 3, 2014 Resolution, whether labeled a

new option or an extension of an option previously granted, is includible in

decedent’s gross estate under I.R.C. §§ 2033(a), 2036(a)(2) and/or 2038(a)(1).

Respondent restates the necessary facts from the Motion for Partial Summary

Judgment for the Court’s convenience, and offers additional undisputed facts

below to rebut petitioner’s contentions that the option is not includible in

decedent’s gross estate.

Docket No. 7671-19 -4-

1. The FBBI Board made the following resolution on July 1, 1994 (the July

1, 1994 Resolution):

RESOLVED, that Joe E. Sharp is hereby granted an option to purchase

3,000 shares of First Baird Bancshares, Inc. Common shares at
$295.00 per share. The option may be exercised by Mr. Sharp or his
heirs until July 1, 2004.

Exhibit 5.1

2. During respondent’s examination, petitioner produced a copy of a

document entitled “Assignment” purporting to assign the option created by the July

1, 1994 Resolution to the Pop’s Family Irrevocable Trust (the Pop’s Trust)

(purported Assignment). Exhibit 14.

3. Also, during the examination, petitioner produced a copy of a document

entitled “Disclaimer of Interest” in which decedent purported to disclaim any

interest in the Pop’s Trust (purported Disclaimer). Exhibit 15.

4. On February 8, 1996, decedent was elected Chairman of the Board of

FBBI. Exhibit 6.

5. On November 7, 1996, decedent was named President of FBBI. Exhibit

7.

1
References to Exhibits 1 through 18 are to the exhibits attached to the Declaration
of Carina J. Campobasso filed on February 7, 2020. Exhibits 19 through 24 are
attached to the Second Declaration of Carina J. Campobasso, filed herewith.
Docket No. 7671-19 -5-

6. From at least December 31, 1996, decedent was the principal shareholder

of FBBI, owning 32.30% of the outstanding shares on that date. Exhibit 4,

IRS001419.

7. Decedent controlled at least 65.15% of the FBBI stock from at least

December 2003 through his death, 37.10% directly and 28.05% as the general

partner of the J. Sharp Children Limited Partnership. Exhibit 4, IRS 001430,

001432, 001434, 001436, 001438, 001440, 001442, 001444, 001446, 001448,

001450, 001452, 001454.

8. From at least December 31, 1999, FBBI reported to the Federal Reserve

that decedent was its principal shareholder, as well as a director, chairman and

president. Exhibit 8, p. EstJSharp_000009.

9. The FBBI Board entered into a Unanimous Written Consent of the

Directors of First Baird Bancshares, Inc. on June 30, 2004. The Unanimous

Written Consent contained the following resolution (the June 30, 2004 Resolution):

RESOLVED, that Joe E. Sharp is hereby granted an extension on the

option, originally granted July 1, 1994, to purchase 3,000 shares of
First Baird Bancshares, Inc. Common shares at $295.00 per share.
The option may be exercised by Mr. Sharp or his heirs until July 1,
2014.

Exhibit 9.

10. At the time the June 30, 2004 Resolution was executed, decedent and
Docket No. 7671-19 -6-

Zan were the sole members of the FBBI Board. Exhibit 9.

11. In a Written Consent of Board of Directors dated February 3, 2014, the

FBBI Board “converted” the option described in the June 30, 2004 Resolution to

300,000 shares of FBBI common shares at $2.95 per share. Exhibit 10,

IRS000911.

12. In the Written Consent of Board of Directors dated February 3, 2014,

the FBBI Board made the February 3, 2014 Resolution:

Clarification and Extension of Options:

WHEREAS, the company granted an option to Joe E. Sharp to

purchase 3,000 shares of First Baird Bancshares, Inc. Common shares
at $295.00 per share that may be exercised until July 1, 2014, the
option is converted to 300,000 shares of First Baird Bancshares, Inc.
Common shares at $2.95 per share. The option may be exercised by
Mr. Sharp or assignees until July 1, 2016.

Exhibit 10, IRS000911.

13. In its Form FR Y-6 filed June 30, 2016, FBBI noted:

In 1994, upon shareholder approval, the Company approved and

granted a stock option to purchase 3,000 shares at a strike price of
$295 with an exercise period of 10 years and a vesting period of 5
years to the chairman of the Company. In 2004, prior to expiration of
the option, the Company extended the option to June 30, 2014. In
20l4, the option was modified after a l00:1 stock split, to increase the
amount of shares to 300,000, modify the exercise price to $2.95, and
extend the maturity to 2016. As a result of the 2014 modifications,
incremental costs of approximately $409,000 were recorded.

Exhibit 19, page 39 of 53.

Docket No. 7671-19 -7-

14. FBBI calculated the $409,000 increase in value resulting from the

February 3, 2014 Resolution by subtracting the value of the option before the

extension under the Black-Scholes valuation method from the value of the option

after the extension under the Black-Scholes method (the Black-Scholes

calculation). Exhibit 20, p. 1 of 11. 2

15. Petitioner reported income under I.R.C. § 83 in the amount of

$12,885,000 from the exercise of the option for the 2015 tax year. Exhibit 21, p. 3,

and Exhibit 22.

16. In a letter dated June 29, 2018, petitioner’s power-of-attorney Russell

Guthrie wrote to respondent’s agent, Estate Tax Attorney Nicholas Ernick, stating:

The executrix was advised that the stock options were awarded to Mr.
Sharp as an incident of employment and the resulting tax from the
exercise of the stock would need to be paid by the estate on the related
income.

2
This Black-Scholes calculation was provided by petitioner’s representative during
the examination. It uses December 31, 2015, as the maturity date of the option.
Respondent notes that this maturity date does not match the expiration date of July
1, 2016, in the February 3, 2014 Resolution. If the July 1, 2016 date had been used,
the increase in value as a result of the February 3, 2014 Resolution would have been
even greater. As a general rule, “the more time that remains until the option
expires, the greater the time value of the option.” See Investopedia, Options
Trading Strategy & Education, Time Value Definition,
https://www.Investopedia.com/terms/t/timevalue.asp. The underlying rationale is
that investors are willing to pay a higher premium for more time since the contract
will have longer to potentially become profitable. Id.
Docket No. 7671-19 -8-

Exhibit 23.

17. Other than parties who had an interest in the option (Mr. Sharp and his

children as the beneficiaries of the Pop’s Trust), there were three small

shareholders of FBBI at the time the FBBI Board made the February 3, 2014

Resolution and at the time of decedent’s death – the William and Karen Vincent

Family Limited Partnership (29,000 shares or 5.63% ownership), Burnett Ranch

Family Limited Partnership (261 shares or 0.05% ownership), and Don Bowman

(209 shares or 0.04% ownership). Exhibit 24. There has been no allegation in this

case that the February 3, 2014 Resolution’s grant or extension of the option, at a

cost of $409,000 to FBBI, constituted a breach of fiduciary duty to these minority

shareholders.

ARGUMENTS AND AUTHORITIES

A. Extending the option period created a new option that is includible in

decedent’s gross estate under I.R.C. § 2033.

Petitioner makes two arguments that no new option was created on February

3, 2014, when the FBBI Board issued the February 3, 2014 Resolution. First,

petitioner contends that decedent and FBBI did not execute a binding option

contract in 1994, and therefore the extension of the option period in 2004 and 2014

could not have created a contract. To support this argument, petitioner makes the

surprising claim that the option was not supported by consideration. Second,
Docket No. 7671-19 -9-

petitioner argues that, under Texas law, the extension of an option does not amount

to a significant contractual modification, and therefore the extensions granted by

the FBBI Board did not constitute new options. Each of these arguments is

addressed below.

1. If no binding contract existed between decedent and FBBI,

then the options granted by the FBBI Board’s resolutions in
1994, 2004 and 2014, were nothing more than offers that
could be withdrawn at any time and were in fact withdrawn
each time the Board made a new offer with different terms.

Petitioner claims that decedent did not provide any consideration in

exchange for the granting of the option in 1994. Petitioner then argues that

“[u]nder Texas law, an option without consideration is merely an offer, not a

binding contract.” Petitioner’s Response, p. 5.

First, the notion that the FBBI Board made a gift of an option without the

expectation of any consideration, such as further services, from decedent is absurd

on its face (and would be a gross violation of the fiduciary duties that petitioner

elsewhere in Petitioner’s Response takes such pains to claim served as a restraint

on the de facto powers of decedent as a member of the FBBI Board).

However, there is no need to rely only on the absurdity of this claim by

itself; the claim that the option was not granted in exchange for decedent’s future

services is contradicted by the facts. First, this claim is contradicted by the fact
Docket No. 7671-19 - 10 -

that FBBI reported additional compensation expense when the option was

extended in 2014. See Exhibits 19 and 20. This claim is also contradicted by the

fact that petitioner reported $12,885,000 in income under I.R.C. § 83 on its 2015

Form 1041, the year the option was exercised. See Exhibits 21 and 22. Finally,

the claim is contradicted by petitioner’s own admission in a letter from petitioner’s

power-of-attorney Russell Guthrie to respondent’s agent, Estate Tax Attorney

Nicholas Ernick, in which Mr. Guthrie states:

The executrix was advised that the stock options were awarded to Mr.
Sharp as an incident of employment and the resulting tax from the
exercise of the stock would need to be paid by the estate on the related
income.

Exhibit 23. Thus petitioner’s assertion that “Mr. Sharp did not pay for, or

otherwise agree to perform services in exchange for, the option”, Petitioner’s

Response, p. 5, is simply false.

However, even if petitioner’s premise that the option was granted to

decedent without consideration were accepted, it would not advance petitioner’s

argument that the February 3, 2014 Resolution did not grant a new option to

decedent. Under Texas law, as elsewhere, a subsequent offer that contains terms

different from a prior offer acts as a revocation of the prior offer. Gasmark, Ltd. v.

Kimball Energy Corp., 868 S.W.2d 925, 928 (Tex.App.-Ft. Worth 1994); see also

Restatement (Second) of Contracts, § 43 (1981). If, as petitioner argues, the July

Docket No. 7671-19 - 11 -

1, 1994 Resolution granting an option to decedent was nothing more than an offer

by FBBI to decedent, as opposed to a binding contract, such an offer could be

withdrawn at any time. The option granted by the July 1, 1994 Resolution, under

petitioner’s logic, was withdrawn on June 30, 2004, when the FBBI Board made a

new “offer” to decedent with different terms (the June 30, 2014 Resolution),

including the term that “the option may be exercised by Mr. Sharp or his heirs until

July 1, 2014”, which, as discussed below, increased the value of the option.

Similarly, the offer represented by the FBBI Board’s June 30, 2004 resolution was

withdrawn on February 3, 2014, when the FBBI Board made yet a third “offer”

with new terms to decedent, stating that the option could “be exercised by Mr.

Sharp or assignees until July 1, 2016”, again substantially increasing the value of

the option, as discussed below.

In short, decedent had at the time of his death, by the terms of the February

3, 2014 Resolution, the right to exercise an option to purchase 300,000 shares in

FBBI at $2.95 per share. This right is includible in decedent’s gross estate for

federal tax purposes under I.R.C. § 2033.

2. The Texas law cited by petitioner supports the contention that the
June 30, 2004 and the February 3, 2014 Resolutions constitute
new contracts, because the extensions of the options were
significant modifications.

Petitioner alternatively contends that the FBBI Board’s extension of the

Docket No. 7671-19 - 12 -

option period was not a significant contractual modification and therefore no new

contract was created. However, under Texas law, consistent with Estate of

McKelvey v. Commissioner, 906 F.3d 26 (3rd Cir. 2018), cited in the Motion for

Partial Summary Judgment, the general rule is that “ ‘[a] modification to a contract

creates a new contract that includes the new modified provisions and the

unchanged old provisions.’” Union Pacific Railroad Company v. Brown, 2018 BL

469077, *4 (Tex. App-San Antonio 2018) (citations omitted).

Petitioner cites Triton Commercial Properties v. Norwest Bank, 1 S.W.3d

816 (Tex. App. Corpus Christi 1999), holding, based on the facts before it, that

“the mere extension of time for performance does not, by itself, materially alter the

nature of the underlying contract, even if the contract would otherwise have

terminated.” However, unlike the extension in Triton Commercial Properties,

here, the extension of the option was a substantial modification, as shown by

FBBI’s own reporting to the Federal Reserve. In Triton, the option could be

extended for one month for a payment of $500. Here, in contrast, the February 3,

2014 Resolution extended the option, not for a short period, but for over two years,

resulting in a substantial change in value of the option. Specifically, FBBI

reported $409,000 in additional compensation expense representing the increase in

the value of the Option as a result of the two-year extension. In its Form FR Y-6
Docket No. 7671-19 - 13 -

filed June 30, 2016, FBBI noted:

In 1994, upon shareholder approval, the Company approved and

granted a stock option to purchase 3,000 shares at a strike price of
$295 with an exercise period of 10 years and a vesting period of 5
years to the chairman of the Company. In 2004, prior to expiration of
the option, the Company extended the option to June 30, 2014. In
20l4, the option was modified after a l00:1 stock split, to increase the
amount of shares to 300,000, modify the exercise price to $2.95, and
extend the maturity to 2016. As a result of the 2014 modifications,
incremental costs of approximately $409,000 were recorded.

Exhibit 19, page 39 of 53.3

Thus, unlike the 31-day extension at issue in Triton, which the parties agreed

was worth $500, the modification of the option here resulted in a material

alteration—that is, a substantial change in value of at least $409,000. Therefore,

under Texas law, the February 3, 2014 Resolution substantially modifying the

terms of the option resulted in the creation of a new option. Union Pacific

Railroad Company v. Brown, 2018 BL 469077, *4 (“A modification to a contract

creates a new contract”). Decedent, under the plain terms of the February 3, 2014

Resolution, owned this valuable asset at the time of his death.

3. Petitioner’s arguments that the February 3, 2014 Resolution did

not create a new option owned by decedent fail and the Option is
includible in decedent’s gross estate under I.R.C. § 2033.

3
FBBI calculated the increase in value resulting from the February 3, 2014
Resolution by subtracting the value of the option before the extension under the
Black-Scholes valuation method, from the value of the option after the extension
under the Black-Scholes method. Exhibit 20.
Docket No. 7671-19 - 14 -

Petitioner’s arguments that the option granted to decedent or his assignees in

the February 3, 2014 Resolution is simply a continuation of the original option

granted on July 1, 1994, fail to take into account in the first instance that neither

the option granted on July 1, 1994, nor the option granted on June 30, 2004,

included a term permitting the extension of the option beyond its stated term. That

fact alone should result in a determination as a matter of law that the option created

by the February 3, 2014 Resolution was a new option under Texas law, owned, by

its terms, by decedent. Cf. Union Pacific Railroad Company v. Brown, 2018 BL

469077, *4 (the addition of new terms creates a new contract). However, if that is

not sufficient in and of itself, the fact that FBBI determined that the extension of

the option increased its value by at least $409,000 shows that the February 3, 2014

Resolution effected a significant modification and should be considered a new

option under Texas law, exercisable by decedent, and thus includible by its terms

in decedent’s gross estate.

B. The option created by the February 3, 2014 Resolution is includible

in decedent’s gross estate under I.R.C. §§ 2036 and 2038.

1. The terms of the February 3, 2014 Resolution gave decedent

the power to exercise the option--a power to affect the
enjoyment of the shares that were the subject of the option
within the meaning of I.R.C. § 2038(a)(1).

Contrary to the plain terms of the February 3, 2014 Resolution, petitioner

Docket No. 7671-19 - 15 -

states that decedent “could not on his own exercise any power or control over the

option.” Petitioner’s Response, p. 10. In fact, as noted above, the February 3,

2014 Resolution by its plain terms gave decedent or his assignees the right to

exercise the option until July 1, 2016. Even if the Court concludes that the

purported assignment of the option created by the July 1, 1994 Resolution carries

over to the option created by the February 3, 2014 Resolution, and thus the

economic benefits of the exercise of the option flow to the Pop’s Trust, this does

not change the fact that as of February 3, 2014, and until his death, decedent

himself held the right to exercise the option. This is enough to render the option

includible under I.R.C. § 2038(a)(1).

Under Texas law, as in most states, an option must be exercised in strict

conformance with its terms. See Besteman v. Pitcock, 272 S.W.3d 777, 784 (Tex.

App.-Texarkana 2008) (“It is a well-settled principle that strict compliance with

the provisions of an option contract is required . . . Except in rare cases of equity,

acceptance of an option must be unqualified, unambiguous, and strictly in

accordance with the terms of the agreement.”) (citations omitted). See also

Atterbury v. Brison, 871 S.W.2d 824, 829 (Tex. App.-Texarkana 1994, writ

denied) (Cornelius, C.J., concurring) (“Acceptance of an option, unless excused on

equitable grounds, must be unqualified, unambiguous, and strictly in accordance

Docket No. 7671-19 - 16 -

with its terms.”).

Notwithstanding Mr. Sharp’s prior purported assignment of the option

created by the July 1, 1994 Resolution to the Pop’s Trust, the FBBI Board chose in

the February 3, 2014 Resolution to grant Mr. Sharp “or” his assignees the power to

exercise the option, rather than grant that power to the trustee of the Pop’s Trust

alone.

The February 3, 2014 Option must be exercised strictly in accordance with

its terms. The use of the disjunctive “or” means that either Mr. Sharp or his

assignees, acting unilaterally, could have exercised the option at any time until July

1, 2016. See Zuniga v. State, 551 S.W.3d 729, 735 n.6 (Tex. Crim. App. 2018)

(“[T]he disjunctive 'or' usually, but not always, separates words or phrases in the

alternate relationship, indicating that either of the separated words or phrases may

be employed without the other. The use of the disjunctive usually indicates

alternatives and requires that those alternatives be treated separately.”); Leteff v.

Roberts, 555 S.W.3d 133, 138 (Tex. App.-Houston, 2018) (“The key is the

disjunctive ‘or.’ Either of the two acts connected by the ‘or’ – (1) contracting for

usurious interest or (2) receiving usurious interest – by itself is sufficient to trigger

liability.”).

Accordingly, under the February 3, 2014 Resolution, Mr. Sharp and any
Docket No. 7671-19 - 17 -

“assignees” he might designate were “co-optionees”. If, based on the purported

assignment of the option created by the July 1, 1994 Resolution, the Pop’s Trust is

considered an assignee for purposes of the February 3, 2014 Option, either

decedent or the trustee of the Pop’s Trust, acting unilaterally, could have exercised

the option. If Mr. Sharp had chosen to exercise the option, FBBI would be

required to tender its agreed performance. See R. H. Pierce Manufacturing Corp.

v. Continental Manufacturing Co., Inc., 679 P.2d 142 (Idaho 1984) (holding that

either one of two co-optionees has the power to accept the offer embodied in an

option).

When Mr. Sharp died on March 9, 2015, before the expiration of the term set

forth in the February 3, 2014 Resolution, it is clear that he had the unilateral

power, as co-optionee, to exercise the option according to its strict terms. Even if

the economic benefits of decedent’s exercise of the option flowed to the Pop’s

Trust as assignee of the option, decedent had the power to affect the timing of the

enjoyment of the option or the income therefrom within the meaning of I.R.C. §

2038(a)(1).

2. The facts of this case are distinguishable from those of United

States v. Byrum and the Byrum holding has no application here.

Petitioner’s primary argument that the option is not includible in decedent’s

gross estate under either I.R.C. § 2036(a)(2) or § 2038(a)(1) is that this case is
Docket No. 7671-19 - 18 -

controlled by United States v. Byrum, 408 U.S. 125 (1972). Under Byrum,

petitioner argues, because decedent as an FBBI Board member only had so-called

“de facto” powers, constrained by fiduciary duty, to control the enjoyment of the

option, I.R.C. §§ 2036(a)(2) and 2038(a)(1) are not applicable to pull the option

into decedent’s gross estate. However, as noted by the Tax Court in Estate of

Powell, 148 T.C. 392 (2017), Byrum does not establish a “‘bright-line test’ under

which control rights circumscribed by fiduciary duties owed to minority owners . .

. prevent the rights from triggering the application of sec. 2036.” 148 T.C. at 403,

n. 5. Rather, in determining the applicability of I.R.C. § 2036(a)(2) and/or I.R.C. §

2038(a)(1), the facts of each case must be closely examined. The Court here

should follow its own lead in Powell and Strangi v. Commissioner, T.C. Memo.

2003-145, aff’d, 417 F.3d 468 (5th Cir. 2005), and carefully examine the facts

before it before applying Byrum. As in Strangi and Powell, the relevant facts

clearly distinguish this case from Byrum, rendering Byrum holding irrelevant in

this case.

In Byrum, the decedent, Milliken Byrum, owned majority stock interests in

three closely-held corporations through which he conducted his lithography

business. He created an irrevocable trust for the benefit of his children and funded

the trust with portions of his corporate holdings and designated an independent
Docket No. 7671-19 - 19 -

corporation as sole trustee of the trust. After the transfers, Byrum owned minority

interests in two of the corporations, but continued to hold the right to vote a

majority of the stock of all three corporations. Respondent argued that the stock

Byrum transferred to the trust was includible in his gross estate under I.R.C.

§ 2036(a)(2), arguing that his ability as majority voting shareholder to elect

corporate directors afforded him de facto control over the corporations’ dividend

policies, and that he had thus retained “the right . . . to designate the persons who

shall possess or enjoy the property or income therefrom” with respect to the

transferred stock within the meaning of section 2036(a)(2). The Supreme Court

rejected this argument, accepting the estate's characterization of Byrum's reserved

rights over the transferred stock as “managerial” powers exempt from the

application of I.R.C. § 2036. 408 U.S. at 134.

The Supreme Court held that the term “right” as used in I.R.C. § 2036(a)(2)

“connotes an ascertainable and legally enforceable power”, 408 U.S. at 136, and

determined on the facts before it that the influence that the decedent possessed as

majority voting shareholder over the corporations' dividend policies did not meet

this standard. The Court noted that Byrum's ability to elect the corporate directors

conferred upon him no legal right to command them to pay or not pay dividends.

Rather, it determined, the directors owed a duty to all shareholders to promote the
Docket No. 7671-19 - 20 -

best interests of the corporation. In addition, the Court determined that Byrum

himself owed a fiduciary duty as majority shareholder not to promote his personal

goals at the expense of corporate interests. Given these facts, the Court concluded

that whatever influence Byrum held over the dividend policies of the corporations

was neither ascertainable nor legally enforceable, and therefore not a “right” within

the meaning of I.R.C. § 2036(a)(2).

The Supreme Court further found that any de facto powers possessed by

Byrum due to his practical influence over the corporations’ dividend policies were

constrained by his fiduciary duty, as a majority shareholder and director, to the

corporations and that the corporations had a substantial number of minority

shareholders unrelated to the decedent to whom he owed a fiduciary duty. 408

U.S. at 142 & n. 20.

In short, based on the facts before it -- the presence of an operating business,

the absence of legally enforceable rights, and the presence of a substantial number

of shareholders unrelated to Byrum to whom he owed a fiduciary duty -- the Court

held that Byrum did not possess the requisite “rights” required for application of

I.R.C. § 2036(a)(2).

Here, in contrast, we have a federally regulated business, an employment

relationship, legally enforceable rights in the employment option, two separate

Docket No. 7671-19 - 21 -

extensions of the option, and no violation of the fiduciary duties owed to the

minority shareholders. Decedent’s fiduciary duties were enforceable under local

law, and there was an objective business environment in which to evaluate any

breach. Moreover, there have been no allegations that decedent and the other

board members violated their fiduciary duties to FBBI or its shareholders in

granting or extending the option.

First and foremost, unlike in Byrum, as discussed above, decedent, in his

capacity as an FBBI employee or retiree, did have a legally enforceable right to

exercise the option, a right explicitly granted by the FBBI Board in the February 3,

2014 Resolution. This right was independent of any de facto powers that decedent

had as president, chairman of the FBBI Board, and the person who controlled

65.15% of the stock in FBBI.

Second, decedent actually exercised his de facto powers as an FBBI Board

member when he, along with other Board members, extended the option twice,

increasing its value substantially, each time for his personal benefit or for the

benefit of his children as beneficiaries of the Pop’s Trust. As discussed above, the

FBBI Board’s vote to extend the option by two years in the February 3, 2014

Resolution resulted in an increase in value of the option by at least $409,000. We

have no similar calculation of the increase in value of the option on June 30, 2004,
Docket No. 7671-19 - 22 -

when the FBBI Board (which at that time consisted only of decedent and his

daughter Zan Sharp Prince, see Exhibit 9) voted to extend the option for 10 years

to July 1, 2014. However, given that the two-year extension resulted in an increase

in value of $409,000, it seems likely that the 10-year extension could have resulted

in an even more substantial increase in value. 4 There has been no suggestion that

these extensions were inconsistent with the fiduciary duties owed to FBBI or its

shareholders. 5

In short, decedent exercised his de facto powers as majority shareholder and

president and member of the FBBI Board to extend the option that had been

previously granted to him as a result of his employment by FBBI. The extension

was consonant with his continued employment, was publicly reported, and was

consistent with the fiduciary duties owed to the minority shareholders. 6 As of his

4
As discussed above in footnote 2, generally, “the more time that remains until the
option expires, the greater the time value of the option.” See Investopedia, Options
Trading Strategy & Education, Time Value Definition,
https://www.Investopedia.com/terms/t/timevalue.asp.
5
It is worth noting the inconsistency of petitioner’s argument that decedent’s de
facto powers, like those of the decedent in Byrum, were constrained by his
fiduciary duties to other shareholders, with the fact that petitioner twice exercised
his power in conjunction with other FBBI Board members to increase the value of
the options to benefit himself and/or his children.
6
Decedent’s apparent lack of restraint may be due to the lower standard of
fiduciary duty imposed on corporate directors by Texas than other U.S.
Docket No. 7671-19 - 23 -

death on March 9, 2015, he remained an employee, and there was no constraint

preventing decedent and the other board members from exercising these powers a

third time. Unlike in Byrum, decedent’s de facto powers were not theoretical, nor

was the exercise of such powers in violation of the rights of the minority

shareholders.

3. The cases that petitioner relies on, Estate of Tully v. United States,
and Hinze v. United States, are not apposite.

Petitioner relies on two cases, Estate of Tully v. United States, 528 F.2d

1401 (Ct. Cl. 1976), and Hinze v. United States, 72-1 USTC 84740 (C.D. Cal.

1972), to support its argument that decedent did not possess a § 2036 or § 2308

power. Both are distinguishable from the facts in this case.

In Estate of Tully, the decedent, Edward Tully, owned a 50% interest in a

closely-held corporation, which created a death benefit plan under which the

corporation promised to pay to his widow and the widow of the other 50% owner a

death benefit upon the owner’s death. Thus, unlike here, where decedent held

jurisdictions. See Elizabeth S. Miller, “Fiduciary Duties Exculpation, and

Indemnification in Texas Business Organizations,” ABA Business Law Section
2018 Spring Meeting (April 14, 2018) at pp. 2-3 (directors and officers of banks in
Texas will be held liable only if their actions amount to “gross negligence.”), at
https://www.jw.com/wp-content/uploads/2018/04/Entity-Selection-for-the-MA-
Lawyer-Sponsored-by-the-MA-Committee.pdf.
Docket No. 7671-19 - 24 -

65.15% of the voting interests,7 Mr. Tully did not have voting control over the

company because, as the court in Tully noted, “Tully’s every movement could

have been blocked by the other 50% shareholder.” 528 F.2d at 1404. Similarly, in

Hinze, the decedent, an executive and employee of two interrelated corporations,

also held only a non-controlling 38.28% interest in the parent corporation.

This case is also distinguishable from Estate of Tully and Estate of Hinze for

the same reasons it is distinguishable from Byrum: (1) decedent here had not just

“powers of persuasion” as a board member, but also a personal legally enforceable

right to exercise the option under the February 3, 2014 Resolution; and (2) he

actually exercised his de facto powers to his own benefit at least twice in voting,

with the other FBBI directors, on the June 30, 2004 Resolution and the February 3,

2014 Resolution.

The Court of Claims itself distinguished Estate of Tully (and Byrum) in a

later case in which the decedent, as here, had more than a “de facto” power (she

had a power expressly set forth in the instrument), and where she, also as here, had

7
Repeatedly asserting that Mr. Sharp was a noncontrolling shareholder, see
Petitioner’s Response, pp. 1, 16, 20, does not make it true. There is simply no
dispute that decedent controlled at least 65.15% of the FBBI stock from at least
December 2003 through his death. Exhibit 4, IRS 001430, 001432, 001434,
001436, 001438, 001440, 001442, 001444, 001446, 001448, 001450, 001452,
001454.
Docket No. 7671-19 - 25 -

twice exercised this power before her death. See Estate of Farrel v. United States,

553 F.2d 637 (Ct. Cl. 1977). The Court of Claims stated:

We end by noting that the contingent right of Mrs. Farrel to make

herself a trustee in the event of a vacancy -- unlike the de facto
"powers" involved in United States v. Byrum, 408 U.S. 125 (1972) and
in Estate of Tully v. United States, 208 Ct. Cl. 596, 528 F.2d 1401
(1976) -- was a legally enforceable right, in effect imbedded in the
trust instrument, which bore directly on the designation of the persons
to possess or enjoy the trust property or income. That the exercise of
this right was foreseeable when the trust was created -- that it was a
real right, neither insignificant nor illusory -- is shown by the fact that
Mrs. Farrel had two opportunities to exercise it in eight years and, if
she had lived, may well have had more. (Emphasis added).

553 F.2d at 642-643. Likewise, the fact that Mr. Sharp had a “real right, neither

insignificant nor illusory,” to alter or amend the option is shown by the fact that he

had, and took, two opportunities to amend it during his lifetime, when he, as a

director of FBBI, voted to extend the exercise date in the June 30, 2004 Resolution

and the February 3, 2014 Resolution. Further, unlike the decedent in Byrum and

Estate of Tully, Mr. Sharp not only had de facto powers as a director to alter or

amend the option, but also had a “legally enforceable right, in effect imbedded in

the [option] instrument,” to exercise the option as co-optionee of the 2014 option.
Docket No. 7671-19 - 26 -

4. Petitioner’s attempts to distinguish Cahill and Levin are not

supported either by the language of I.R.C. §§ 2036(a)(2) and
2038(a)(1) or by the facts.

i. Petitioner’s interpretation of I.R.C. §§ 2036(a)(2) and

2038(a)(1) is contradicted by the plain language of these
statutes.

Petitioner attempts to distinguish Estate of Levin v. Commissioner, 90 T.C.

723 (1988), aff’d, 891 F.2d 281 (3rd Cir. 1989), and Estate of Cahill v.

Commissioner, T.C. Memo. 2018-84, by relying on Helvering v. City Bank

Farmers Trust Co., 296 U.S. 85 (1935), to argue that it is only when the decedent

“‘s[ees] fit to reserve a right to himself jointly with another person’” . . . “‘who he

believed would comply with his wishes’” that I.R.C. § 2036(a)(2) and I.R.C. §

2038(a)(1) apply. Petitioner’s Response, p. 17 (quoting City Bank Farms Trust

Co., supra, at 90, 92).

First, this argument relies on gloss applied to a statute by a case that

petitioner had to reach back 85 years to find. There is no other case or authority

that so limits the language “in conjunction with any other person” language of

I.R.C. § 2036(a)(2) or § 2038(a)(1). In fact, the complete answer to petitioner’s

argument is found in Estate of Cahill’s counter to a related argument made by the

petitioner in that case:

But if the estate were correct, then the words “in conjunction with any
person” in section 2036(a)(2), and “in conjunction with any other
Docket No. 7671-19 - 27 -

person” in section 2038(a)(1), would have no force or meaning. The

estate also seems to suggest that, in order for section 2036(a)(2) to
apply, decedent would have had to be in complete control of MB
Trust. But the statute by its terms does not require unilateral control,
nor are we aware of any caselaw or other authority to support that
position.

T.C. Memo. 2018-84 at *15-16.

Second, even if petitioner’s argument that the “in conjunction with any other

person” language was limited to a decedent’s reserving a right to himself jointly

with another person “who he believed would comply with his wishes” were valid

with respect to I.R.C. § 2036(a)(2), whose predecessor City Bank Farmer’s Trust

was interpreting, it has no relevance to I.R.C. § 2038(a)(1). I.R.C. § 2036(a)(2)

applies to property in which the decedent “retains” a right to designate the person

who will enjoy it. In contrast, I.R.C. § 2038(a)(1) does not require that the “string”

causing inclusion in the gross estate be a power that the decedent “retained”

following the transfer of property. Rather, I.R.C. § 2038(a)(1) provides that the

value of the gross estate shall include the value of all property

to the extent of any interest therein of which the decedent has at any
time made a transfer (except in case of a bona fide sale for an
adequate and full consideration in money or money’s worth), by trust
or otherwise, where the enjoyment thereof was subject at the date of
his death to any change through the exercise of a power (in whatever
capacity exercisable) by the decedent alone or by the decedent in
conjunction with any other person (without regard to when or from
what source the decedent acquired such power), to alter, amend,
revoke, or terminate, or where any such power is relinquished during
Docket No. 7671-19 - 28 -

the 3 year period ending on the date of the decedent’s death.

Thus, all that is necessary for inclusion under I.R.C. § 2038(a)(1) is that a decedent

have the power, alone or in conjunction with any other person, to alter the

enjoyment of the property.

ii. Estate of Cahill supports the inclusion of the option in

decedent’s gross estate.

Petitioner attempts to use his own interpretation of City Bank Farmer’s

Trust’s gloss on the predecessor to I.R.C. § 2036(a)(2) to distinguish Estate of

Cahill, stating:

Mr. Sharp did not retain any power of the option when it was assigned
to the Pop’s Trust in 1994. Moreover, unlike in City Bank Farmers
Trust Co. and Estate of Cahill, the assignment document did not
expressly provide that Mr. Sharp could revoke the transfer – either on
his own or with the written consent of any person.

Petitioner’s Response, p. 19. This statement ignores the facts that (1) the February

3, 2014 Resolution (as well as the June 30, 2004 Resolution) explicitly gave

decedent the ability to exercise the option; and (2) if, as petitioner contends, the

option was merely an offer unsupported by consideration, this offer could be

revoked at any time by decedent acting in conjunction with the other members of

the FBBI Board. 8 The relevant fact is not whether the purported assignment gave

8
This does not even get to respondent’s argument that each grant of the option was
a new contract with new terms, including the term that it could be exercised by
Docket No. 7671-19 - 29 -

decedent the power to revoke it, but whether he had the power, either through the

grant of the option itself and/or through his status as a member of the FBBI Board,

to control the equitable enjoyment of the underlying stock.

iii. Estate of Levin supports the inclusion of the option in

decedent’s estate.

Petitioner attempts to distinguish Estate of Levin, on the grounds that Mr.

Levin was the controlling shareholder of the company, whereas here, decedent

“held just a 37% interest in FBBI.” Petitioner’s Response, p. 20. Once again, this

is simply untrue. As the general partner of the J. Sharp Children Limited

Partnership, decedent had the right to vote 28.05% of the stock, in addition to the

37.10% interest he held directly. Moreover, only 5.63% of the stock was held by

persons other than himself and his children. This fact, contrary to petitioner’s

claim, makes this case closely comparable to the facts in Estate of Levin, where the

decedent there was also a controlling shareholder.

Second, petitioner argues that unlike in Estate of Levin, decedent was

limited by his “fiduciary duties to a bank holding company operating under Federal

Reserve oversight.” Petitioner’s Response, p. 21. The complete answer to this

argument is that despite his fiduciary duties and the alleged oversight of the

decedent or his assignees.

Docket No. 7671-19 - 30 -

Federal Reserve, decedent, along with the other members of the FBBI Board, was

able to repeatedly grant himself valuable options. This was consistent with

decedent’s role as an employee and director of FBBI, and was not in violation of

the duties of the board to the minority shareholders.

Finally, petitioner makes the fallacious argument that, if the Court accepted

respondent’s position here, “no member of a corporation’s board of directors could

ever gift stock or a stock option without the transfer being brought back into the

transferor’s gross estate under Section 2036 or Section 2038.” Petitioner’s

Response, p. 21. However, respondent has never contended that if decedent had

simply transferred the FBBI stock to the Pop’s Trust outright, the stock would be

includible in his gross estate. It is because decedent had the right to exercise the

option and to extend or revoke it in conjunction with the other members of the

FBBI Board that it is includible under I.R.C. § 2033, § 2036(a)(2) and I.R.C. §

2038(a)(1).

C. Gift in 2007

Petitioner has offered the affidavit of Zan Prince in support of its claim that

the option was transferred to the Pop’s Trust in 1994, rather than in 2007, as the

independent extrinsic evidence suggests. Therefore, respondent agrees that this

issue is not ripe for summary judgment. Rather, the Court will need to judge Ms.
Docket No. 7671-19 - 31 -

Prince’s credibility and the credibility of the documents petitioner has offered in

support of its claim against the independent extrinsic evidence and the testimony of

third parties, including decedent’s ex-wife Linda Sharp and decedent’s son Steven

Sharp.

D. Controlling interest

Petitioner argues that the shares underlying the option should not be

aggregated with those owned outright by decedent at his death for purposes of

valuation, relying on Estate of Bonner v. United States, 84 F3d 196 (5th Cir. 1996)

and Estate of Mellinger v. Commissioner, 112 T.C. 26 (1999). In Estate of Bonner

and Estate of Mellinger, the Court declined to aggregate a minority interest held by

a decedent with that held by a marital trust includible in the decedent’s estate under

I.R.C. § 2044.

However, Estate of Bonner and Estate of Mellinger actually support

respondent’s position. The Court in Estate of Bonner states: “[A]t the time of

Bonner’s death, his estate did not have control over Mrs. Bonner’s interests in the

assets such that it could act as a hypothetical seller negotiating with willing buyers

free of the handicaps associated with fractional undivided interests.” 84 F.3d at

199. Here, in contrast, for the reasons described above, decedent at the time of his

death did have control over the shares represented by the option, as well as his own
Docket No. 7671-19 - 32 -

shares. The shares were not owned by a separate entity, such as the trusts in the

Estate of Bonner and Estate of Mellinger cases. Rather, there was “a unity of

ownership” in decedent himself. See Estate of Mellinger, 112 T.C. at 34. See also

Estate of Fontana v. Commissioner, 118 T.C. 318 (2002)(stock subject to power of

appointment aggregated with stock held outright for valuation purposes).

Therefore, the interest represented by the option must be aggregated with

decedent’s 37.10% interest.9

Applying the willing buyer-willing seller standard, it is inconceivable that

decedent or decedent’s estate would not maximize value when selling the 191,000

shares that decedent owned and the 300,0000 shares underlying the option, which

decedent had the right to exercise at the time of his death, by insisting that they be

valued as a controlling block. For this reason, the two interests must be aggregated

for purposes of valuing them for federal estate tax purposes.

CONCLUSION

For the foregoing reasons and the reasons stated in the Motion for Partial

9
Note that respondent does not argue that these interests must be aggregated with
the interest that decedent controlled as the general partner of the J. Sharp Children
Limited Partnership. As in Estate of Bonner, the shares held by the partnership are
held by an entity other than decedent.
Docket No. 7671-19 - 33 -

Summary, respondent respectfully requests that the Court grant the Motion for

Partial Summary Judgment.

MICHAEL J. DESMOND
Chief Counsel
Internal Revenue Service

October 14, 2020

Date: By:
CARINA J. CAMPOBASSO
Senior Counsel
(Small Business/Self-Employed)
Tax Court Bar No. CC0548
10 Causeway Street, Room 401
Boston, MA 02222-1061
Telephone: (617) 788-0813
Email: carina.j.campobasso@
irscounsel.treas.gov

OF COUNSEL:
JOSEPH W. SPIRES
Division Counsel (Small Business/Self-Employed)
MICHAEL R. FIORE
Area Counsel (Small Business/Self-Employed:Area 1)
NINA P. CHING
Associate Area Counsel (Small Business/Self-Employed)
 Received Lodged
01/05/21 04:30 pm 01/05/21

Estate of Joe E. Sharp, Deceased, Zan Sharp Prince,

Sole Remaining Independent Executor,
Petitioners
Electronically Filed
v. Docket No. 7671-19
Commissioner of Internal Revenue
Respondent

Sur-Reply to SUR-REPLY TO REPLY TO RESPONSE TO MOTION FOR

PARTIAL SUMMARY JUDGMENT by Petr. Estate of Joe E. Sharp, Deceased,
Zan Sharp Prince, Executor (ELODGED)

SERVED 01/05/21
 UNITED STATES TAX COURT

ESTATE OF JOE E. SHARP, DECEASED, )

ZAN SHARP PRINCE, SOLE REMAINING )
INDEPENDENT EXECUTOR, )
)
Petitioner, )
)
v. ) Docket No. 7671-19
)
COMMISSIONER OF INTERNAL REVENUE, ) Filed Electronically
)
Respondent. )

RESPONDENT’S FURTHER SUR-REPLY TO PETITIONER’S SUR-

REPLY TO RESPONDENT'S REPLY TO PETITIONER’S RESPONSE TO
RESPONDENT’S MOTION FOR PARTIAL SUMMARY JUDGMENT

RESPONDENT REPLIES to Petitioner’s Sur-Reply to Reply to Response to

Motion for Partial Summary Judgment (Petitioner’s Sur-Reply) as follows:

A. If Petitioner’s Argument in the Sur-Reply that the option granted by

the July 1, 1994 Resolution was merely an offer by FBBI, not a binding
option contract, is correct, then decedent’s attempted assignment of the
option to the Pop’s Trust has no effect and he owned the option outright
at his death.

Petitioner’s Sur-Reply states: “Mr. Sharp assigned his interest in the option

to Pop’s Trust in 1994, and therefore could not have possessed a Section 2033

interest in the assigned property interest when he died.” Petitioner’s Sur-Reply, p.

5. Petitioner bases this argument on the fact that “[u]nder Texas law, an option

without consideration is merely an offer, not a binding contract” (Petitioner’s Sur-

Reply, p. 4) and “FBBI did not require that Mr. Sharp pay for the option, nor did
Docket No. 7671-19 -2-

Mr. Sharp . . . provide any consideration or commitment to FBBI in exchange for

the option”. (Petitioner’s Sur-Reply, p. 5). Petitioner’s Sur-Reply underscores this

point by referring to the option as a “Mere Offer” in the Part III.A. title at p. 4.

However, if petitioner is correct that the option created by the July 1, 1994

Resolution was a “mere offer”, not a binding contract, then, as a matter of law, the

option was unassignable, Mr. Sharp’s purported assignment of the option to the

Pop’s Trust was void, and the option was a property interest owned outright by

decedent at his death and includible in his gross estate under I.R.C. § 2033.

It is well-settled that an offer may be accepted only by the person to whom it

is made. Restatement (Second) of Contracts § 48 (“Only the offeree can accept an

offer which is not also a contract”). Thus, an offer made to one person cannot be

accepted by another, even though the offeree purports to assign the offer. As a

result, an option to purchase property cannot be assigned by the offeree, unless and

until the option ripens into an enforceable, irrevocable contract. See 2 Williston on

Contracts § 6:27 (4th ed.) (“an offer made to one person cannot be accepted by

another, even though the offeree purports to assign the offer”); 29 Williston on

Contracts § 74:18 (4th ed.) (“it is a general rule that an offer can be accepted only

by the person to whom it is made”).

Only where an offer has ripened into a contract through the payment of
Docket No. 7671-19 -3-

consideration is the option contract assignable. 29 Williston on Contracts § 74:18

(“An option if given for consideration or under seal is a contract and the right of

the promise might be supposed to be as assignable as any other contractual right.”).

Here, however, petitioner contends that Mr. Sharp provided no consideration in

exchange for the option granted in the July 1, 1994 Resolution and that “Mr. Sharp

and FBBI did not execute a binding option contract in 1994”. If so, the option was

merely an offer and, as such, unassignable.

Texas follows the black-letter law summarized in the Williston treatise and

other contracts hornbooks. In Texas, an option without consideration is merely an

offer that is revocable during its term. Hott v. Pearcy/Christon, Inc., 663 S.W.2d

851, 853-854 (Tex.App.-Dallas 1983) (citing J. Calamari & J. Perillo,

CONTRACTS § 2-27 (2d ed. 1977)). “Once consideration passes, the option

becomes irrevocable and this is what is typically labeled an option contract.” Hott

v. Pearcy/Christon, Inc., 663 S.W.2d at 854 (citing J. Calamari & J. Perillo,

CONTRACTS § 4-15, at 158).

Thus, in Texas as elsewhere, an option is not assignable unless and until it

ripens into an irrevocable option contract. See El Paso Production Co. v. PWG

Partnership, 866 P.2d 311, 316 (N.M. 1994), cert. denied, 512 U.S. 1207 (1994)

(“the Texas courts, see, e.g., Hott v. Pearcy/Christon, Inc., 663 S.W.2d 851, 853–54
Docket No. 7671-19 -4-

(Tex.Ct.App.1983), writ ref'd n.r.e., cite favorably to the Contracts Hornbook written

by Calamari and Perillo, which suggests that once an offer to purchase has ripened

into an option contract by the payment of money to secure the option, the rights

created usually are assignable, unless the option calls for some sort of personal

performance. John D. Calamari & Joseph M. Perillo, Contracts § 18-32 (3d ed.

1987).”). See also 29 Williston on Contracts § 74:18 (4th ed.) (“It is accordingly

generally held that an irrevocable option (that is one which is a contract) can be

enforced by an assignee” (citing, inter alia, Rollingwood Trust No. 10 v.

Schuhmann, 984 S.W.2d 312 (Tex. App.-Austin 1998)).

For this reason, petitioner’s lengthy discussion of Cotton v. Deasey, 766

S.W.2d 876 (Tex. App.-Dallas 1989) has no relevance to this case. Cotton v.

Deasey involved an enforceable contract supported by consideration (the real

estate broker’s efforts to market the property at issue), not, as here, merely an offer

to enter into a contract. Similarly, Rollingwood Trust No. 10 v. Schuhmann, 984

S.W. 312 (Tex. App.-Austin 1998), on which petitioner also relies in the Sur-

Reply, is not helpful to petitioner, but rather illustrates why the option here

belonged to Mr. Sharp at his death. In Rollingwood Trust, the court states: “[I]n

determining whether an option right can be enforced, a fundamental question . . . is

whether the option contract is supported by sufficient consideration.” The court

Docket No. 7671-19 -5-

held that an option contract for which the offeree had paid $1,000 was assignable

to a third party who could enforce the contract. The option at issue in the

Rollingwood Trust case is distinguishable from the option created by the July 1,

1994 Resolution because, as in Deasey v. Cotton, it was supported by

consideration and thus an assignable contract. In contrast, if, as petitioner

contends, neither Mr. Sharp nor the Pop’s Trust provided consideration for the

option granted by the July 1, 1994 Resolution, it is not an enforceable contract. It

was unassignable and remained exercisable by Mr. Sharp only. Similarly, the

option (or extension) to purchase FBBI shares granted to Mr. Sharp in the June 30,

2004 Resolution was also unassignable.1

In short, the option at issue was not a binding contract, but rather simply an

offer to purchase shares from FBBI unsupported by consideration. Therefore, it

could not be assigned and Mr. Sharp owned it at his death. As an asset owned at

his death, the option is includible in Mr. Sharp’s estate under I.R.C. § 2033.

1
The option granted in the February 3, 2014 Resolution was assignable only
because the February 3, 2014 Resolution explicitly so provided, stating that the
option was exercisable by “Mr. Sharp or assignees”. Although assignable by its
terms, Mr. Sharp never actually assigned the offer made by the February 3, 2014
Resolution before his death.
Docket No. 7671-19 -6-

B. Mr. Sharp had the right to exercise the Option under the February 3,
2014 Resolution because under Texas Law, FBBI, as the Offeror, not
Mr. Sharp, the Offeree, is the master of the offer and can dictate the
terms of acceptance.

Petitioner states:

The IRS contends, once again ignoring Texas law, that language
used by FBBI in the 2014 extension document could somehow restore
in Mr. Sharp a right which he had assigned to Pop's Trust 20 years
before, specifically the right to exercise the option. But under Texas
law, once an assignor assigns a property interest, the assignor's rights in
the assigned property are extinguished. Rollingwood Trust No. 10 v.
Schuhmann, 984 S.W.2d 312 (Tex. App.-Austin 1998). Thus, when
Mr. Sharp assigned his interest in the option to Pop's Trust in 1994, he
forever parted with the legal right to exercise the option, no matter what
a document prepared 20 years later might say.

Petitioner’s Sur-Reply, p. 8. However, it is petitioner that ignores universal, as

well as Texas, black-letter law. As discussed above, an option unsupported by

consideration is an unassignable offer. However, even if petitioner could

overcome this hurdle, the result would be the same.

“Under Texas law, the offeror, not the offeree, is the master of the offer, and

the offeror can dictate the terms of acceptance and the expiration of the time for

acceptance.” In re Kelso, 196 B.R. 363, 370 (Bankr. N.D. Tex. 1996) (citing

Lacquement v. Handy, 876 S.W.2d 932, 935–936 (Tex.App.—Ft. Worth 1994, no

writ). See also Joiner v. Elrod, 716 S.W.2d 606, 609 (Tex. App.-Corpus Christin-

Edinburg 1986) (offeror may dictate the terms of acceptance of an offer); Williams
Docket No. 7671-19 -7-

v. Bank of America, 602 Fed. Appx. 187, 188-189 (5th Cir. 2015) (an offeror is

master of his own offer and can dictate the terms of acceptance); Lone Star Gas

Co. v. Coastal States Gas Producing Co., 388 S.W.2d 251, (Tex. App.-Corpus

Christi 1965) (same).

Accordingly, when the offeror here (FBBI) granted an extension of time to

exercise the option in the February 3, 2014 Resolution, it was the “master of [its]

own offer and could dictate any terms of acceptance [it] wanted”. Lacquement v.

Handy, supra, at 935-936. Thus, FBBI could clearly dictate that the offer could be

accepted by any person it wanted, including “Mr. Sharp or assignees.” See 2

Williston on Contracts § 6:27 (4th ed.) (“the offeror, as the master of its offer, may

make the offer to a specified offeree or its assigns, and in that case an assignee of

the offeree, being included within the terms of the offer, may accept it.”). 2

Further, any doubt over whether Mr. Sharp could exercise the offer

embodied in the February 3, 2014 Resolution would be resolved in his favor as

2
As noted above, although FBBI permitted assignment of the offer set forth in
the February 3, 2014 Resolution, Mr. Sharp never actually assigned this offer to
the Pop’s Trust. Even if he had, under the terms of the offer, he himself would still
have been able to exercise the option in addition to any “assignees”. In contrast,
neither the July 1, 1994 Resolution nor the June 30, 2004 Resolution provided that
the option could be exercised by Mr. Sharp’s assignees. Rather, those options
permitted exercise only by Mr. Sharp “or his heirs”, indicating that, in those
resolutions, FBBI granted Mr. Sharp alone the power to accept the offers during
his lifetime.
Docket No. 7671-19 -8-

offeree. Under Texas law, a written offer is generally construed more strictly

against the offeror. Republic National Bank of Dallas v. Northwest National Bank

of Fort Worth, 578 S.W.2d 109, 115 (“In Texas a writing is generally construed

most strictly against its author and in such a manner as to reach a reasonable result

consistent with the apparent intent of the parties.”); see also Lacquement v. Handy,

supra, at 936 (“since the offeror has chosen the words used in the offer, in cases of

doubt we will adopt the meaning that is more favorable to the offeree”).

Notwithstanding Mr. Sharp’s purported assignment of the option to the

Pop’s Trust in 1994, in renewing the option in 2014, the FBBI Board nevertheless

granted the right to exercise the option to “Mr. Sharp or assignees.” Whether the

option granted in the February 3, 2014 Resolution constituted a new option or an

extension of the offer made in 1994, FBBI, as the offeror, had the right to dictate

the terms of the offer, including the term that the option could be exercised by Mr.

Sharp or his assignees.

Petitioner cites Rollingwood Trust No. 10 v. Schuhmann, supra, for the

uncontroversial proposition that the rights of an optionee in an option contract are

extinguished when the optionee assigns the contract to a third party. 984 S.W.2d

315. In Rollingwood Trust, the optionor, the Schuhmanns, granted the optionee,

Ferguson, an option to purchase real property. Ferguson assigned the option to

Docket No. 7671-19 -9-

Rollingwood Trust in April 1994. In May 1994, prior to the option’s expiration

but after Ferguson had assigned it, he paid $1,000 to the Schuhmanns to extend its

exercise period. The Court found that in extending the period of exercise,

Ferguson was not acting on his own behalf (because his rights in the contract had

been extinguished when he assigned it), but as an agent for Rollingwood Trust.

Petitioner’s reliance on Rollingwood Trust ignores two important

characteristics of the option at issue there that distinguish it from the FBBI option:

First, as noted above, Rollingwood Trust involves an enforceable contract not, as

here, an unassignable offer. Second, in this case, the offeror, FBBI, as the master

of its offer, expressly granted Mr. Sharp the ability to exercise the option (or

extension) granted by the February 3, 2014 Resolution. There is no suggestion in

Rollingwood Trust that the option there had a similar provision expressly granting

to both the original optionee and any assignee the ability to exercise the option.

In short, Mr. Sharp’s purported assignment of the option granted by the July

1, 1994 Resolution to the Pop’s Trust did not preclude FBBI, as the offeror, from

restoring Mr. Sharp’s right to exercise the option (assuming it was assignable to

begin with) when FBBI made the February 3, 2014 Resolution granting the right to

exercise the option to “Mr. Sharp or assignees.” Indeed, under Texas law, if a

dispute arose over the terms of the option granted by the February 3, 2014
Docket No. 7671-19 - 10 -

Resolution (whether deemed the grant of a new option or an extension of a

previously-granted option), the option would be construed strictly against FBBI, as

the offeror, and in favor of the offerees, Mr. Sharp and his assignees. Because the

February 3, 2014 Resolution by its terms granted Mr. Sharp (or his assignees) the

right to exercise the option and he held this right at the time of his death, the value

of the option is includible under I.R.C. §§ 2036(a)(2) and/or 2038(a)(1).

CONCLUSION

For the foregoing reasons and the reasons stated in the Motion for Partial

Summary Judgment and Respondent’s Reply to Petitioner’s Response to

Respondent’s Motion for Partial Summary Judgment, respondent respectfully

requests that the Court grant Respondent’s Motion for Partial Summary Judgment.

MICHAEL J. DESMOND
Chief Counsel
Internal Revenue Service

January 5, 2021
Date: By:
CARINA J. CAMPOBASSO
Senior Counsel
(Small Business/Self-Employed)
Tax Court Bar No. CC0548
10 Causeway Street, Room 401
Boston, MA 02222-1061
Telephone: (617) 788-0813
Email: carina.j.campobasso@
irscounsel.treas.gov
Docket No. 7671-19 - 11 -

OF COUNSEL:
JOSEPH W. SPIRES
Division Counsel (Small Business/Self-Employed)
MICHAEL R. FIORE
Area Counsel (Small Business/Self-Employed:Area 1)
NINA P. CHING
Associate Area Counsel (Small Business/Self-Employed)