                          T.C. Memo. 2010-105



                      UNITED STATES TAX COURT



 ESTATE OF ROBERT C. FORTUNATO, DECEASED, ANTHONY M. FORTUNATO,
              SPECIAL ADMINISTRATOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6937-07.                  Filed May 12, 2010.



     Dennis Calo, Frank Agostino, Jeremy M. Klausner, and Leonard

Greco, for petitioner.

     Louis B. Jack, Kathleen A. Tagni, and Sherri Spradley

Wilder, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:   Respondent determined a deficiency in

Federal estate tax of $11,662,737, and a section 6663 fraud

penalty of $8,649,140, against the Estate of Robert C.
                                 - 2 -

Fortunato.1   Robert C. Fortunato (sometimes Robert or decedent)

died testate on November 4, 2002, in California.   Pursuant to

Robert’s will, Robert’s brother, Anthony Fortunato (Anthony), was

appointed executor and sole beneficiary of Robert’s estate.2     At

the time the petition was filed, Anthony resided in New Jersey.

The parties stipulated that appeal would be to the Court of

Appeals for the Third Circuit.

     The issues for decision are:    (1) Did Robert own an interest

in one or more of a group of warehouse companies on the date of

his death, and if so (2) whether the failure to report the value

of the interest(s) on the estate’s tax return was fraudulent.

The companies involved are collectively known as the St. George

warehouse companies.   The parties agree that if Robert had an

ownership interest in one or more of the St. George warehouse

companies, another trial would be held to determine the value of

that omitted interest.




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect on the date of Robert C.
Fortunato’s death, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
     2
      Robert’s will was challenged by his daughter, with whom he
was estranged. Robert’s daughter alleged that Anthony unduly
influenced Robert in drafting the will. The Superior Court of
California, County of Los Angeles, found that the will was valid
and admitted it to probate on July 26, 2004.
                                - 3 -

                           FINDINGS OF FACT

      Some of the events upon which this case turns occurred 25

years ago.   In many instances, witnesses describing these events

gave differing accounts as to what transpired.      The trial lasted

nearly 3 weeks.   The record is voluminous--3560 pages of

testimony and more than 400 exhibits.     After sifting through the

record and after carefully observing each of the 25 witnesses to

determine his/her credibility, we make the following findings of

fact.

I.   Robert C. Fortunato

      Robert C. Fortunato, whom everyone called Bobby, was born on

May 30, 1942, the third of seven Fortunato children, in order:

George, Lucy, Bobby, Rosemary, Linda, Anthony, and Regina.

      Bobby’s persona was such that he doggedly refused to back

down to anyone.   Such a strong-willed personality caused Bobby,

as a youth, to “seek and find trouble”.       Twice Bobby was indicted

for Robbery 1, Grand Larceny, and Assault.      In 1962 he pleaded

guilty to Robbery 2, a felony, and was given a suspended sentence

and probation.    But after again pleading guilty to Robbery 2 in

1963, Bobby was sentenced to 7-1/2 to 15 years in Sing Sing

Prison.   He served approximately 6 years of the sentence.

      Following his release from Sing Sing Prison in 1969, Bobby

went to work for Reliable Van and Storage (Reliable) as a

dispatcher and its office manager.      He worked there and elsewhere
                                 - 4 -

until 1979 when he became a coowner and president of Container

Overseas in Linden, New Jersey.    Container Overseas operated a

warehouse and export business.

      Container Overseas became one of the largest exporting

companies in the country.   However, because of severe financial

problems, caused in part by its employees’ misappropriating

company funds as well as the company’s having to borrow at a high

rate of interest, Container Overseas was forced to close in May

1984.

      At the time of the collapse of Container Overseas, Bobby

owed trust fund penalties to the Internal Revenue Service (IRS)

approximating $490,000 for failure to pay over Container

Overseas’ withheld employee taxes.       In addition Bobby owed a

large amount (in the hundreds of thousands of dollars) to

overseas creditors including some who allegedly belonged to the

Chinese mafia.

II.   Anthony Fortunato

      Anthony was the youngest of the Fortunato brothers.      He was

10 years younger than Bobby and 21 years younger than George.

      The Fortunatos were a close-knit family, devoted and

supportive of each other, and had a strong sense of Italian-

American identity and tradition.    The Fortunato brothers in most

cases deferred to the wishes of their father, Biagio Fortunato,

and the younger brothers looked up to their older brothers.
                                - 5 -

     Anthony adored Bobby and often followed Bobby’s lead.

Anthony viewed Bobby as a visionary and believed that if he

wanted to do well, he would be well advised to listen to Bobby.

“When it came to business, I put nobody ahead of him”, said

Anthony.

     But while Bobby was the “ambitious” brother, Anthony tended

to be the “reliable” brother.   When adversity struck, Bobby did

not rise to the occasion.   Thus, when Biagio Fortunato and George

each died in 1990, Bobby refused to shoulder any responsibilities

and Anthony became the de facto head of the Fortunato family,

providing financial support to his mother and to George’s family.

     Anthony briefly attended college in 1972.   From 1973 to 1978

he worked at Reliable, performing a variety of tasks. Anthony’s

first position at Reliable was that of a furniture mover, but

within a short period, he began working at Reliable’s container

freight station (CFS) operation.    A CFS’ function is to receive

and “break down” shipping containers imported from overseas.    The

freight is warehoused until it is retrieved by its recipients or

forwarded to another destination.   Because the cargo is from

overseas sources, a CFS is considered a U.S. Customs Service

bonded location and is subject to Customs Service regulations.

     Anthony was in charge of the unloading and storage of the

containers.   He managed this operation for 2 or 3 years before

reverting to his former position as a furniture mover.   Although
                                 - 6 -

this position change was a retrograde step in terms of

responsibility, Anthony earned more money doing the simpler job

because of overtime pay rules.

       Upon leaving Reliable in 1978 Anthony worked in a variety of

jobs, including selling insurance.       Sometime in 1984 Anthony

began to work for Bobby at Container Overseas.

III.    The Establishment of St. George New Jersey

       When Container Overseas closed in 1984, Bobby tried to be

positive while saying good-bye to his employees.       Robert Gennuso

(Gennuso), a colleague at Container Overseas, testified:         “Well,

amidst hugging and that, Bobby told me that he would try to put

something together and keep business going, and that I would be

welcomed.”

       But the reality was different.     Bobby did not put anything

together.    Instead, the closure of Container Overseas began a

period of difficulties for Bobby, Anthony, and their families.

Bobby had no money, was hiding from his creditors, and was

sleeping on the couch in his parents’ home.       To avoid his

creditors, Bobby did not maintain a bank account and refused to

sign or put his name on any document.       Bobby withdrew from the

world, and even his closest friends had difficulty reaching him

at times.    And Anthony had no steady job.

       This state of affairs was not long tenable, and Anthony

looked for new business opportunities.       Because Anthony had
                               - 7 -

experience in shipping and warehousing, he focused his attention

on those industries.   He consulted with numerous individuals,

including his father (by profession a longshoreman and thus

familiar with shipping) and brothers, all of whom believed that

the shipping industry was beginning to be dominated by

containerized freight and that Anthony would do well to establish

a CFS to service the rising demand.

     In the middle of 1984 Anthony decided that he should

establish a CFS as well as a non-Customs Service bonded

warehouse.   George invested in these ventures with Anthony.

Bobby was not asked to, and did not, become an investor.

     Anthony thought that two corporations had to be formed--one

to operate the CFS and one to operate the non-Customs Service

bonded warehouse--and that each business had to be operated from

a separate building.   Therefore, in mid-to-late-1984, Anthony

leased two buildings, and on February 27, 1985, he caused to be

incorporated St. George Trucking & Warehousing, Inc., doing

business as St. George Warehousing (St. George New Jersey), to

operate the CFS, and A.R.G. Warehouse, Inc. (A.R.G.), to operate

the non-Customs Service bonded warehouse.   Anthony and George

each acquired a 50-percent interest in each corporation.    Anthony

was the president, and George was the vice president, of each

corporation.
                                 - 8 -

      For a time, St. George New Jersey and A.R.G. physically

operated alongside each other.    Anthony soon realized that he did

not need two companies or two buildings.    The operations of both

companies were combined.    St. George New Jersey moved to A.R.G.’s

warehouse at 330 Hurst Street, and A.R.G. became dormant.

      Anthony relied on others to complete all legal formalities

with respect to the establishment of each corporation.    He

requested his accountant to issue stock certificates, but no

certificates were issued.

      After establishing the companies, Anthony applied for a CFS

bond from the Customs Service.     Gennuso joined both A.R.G. and

St. George New Jersey while both companies were at 330 Hurst

Street.   Gennuso assisted in having St. George New Jersey become

a CFS at the Hurst Street location and in acquiring the required

CFS bond from the Customs Service.

IV.   Early Operation of A.R.G. and St. George New Jersey

      At first, St. George New Jersey and A.R.G. had little

revenue or profit.   Anthony divided his time between the two

companies, working for a low salary.     Because the companies did

not have sufficient cashflow to pay George a salary, George

worked elsewhere.    And from time to time, Bobby acted as Anthony

and George’s business strategist.

      George joined St. George New Jersey after it moved to a new

warehouse on Stiles Street, where he worked with the truck
                                - 9 -

drivers.   Biagio Fortunato came to the warehouse every day; he

worked for free.

      Bobby began to work for St. George New Jersey full time and

soon assumed leadership of the business.    He created the

strategies that moved St. George New Jersey forward, and he “more

or less [told] Anthony and George what needed to be done” to

implement his strategies.   Bobby had no business title and was

not on the company’s payroll.

      Anthony was content to remain in the background, organizing

the freight in St. George New Jersey’s warehouse.    However, he

was the company’s financial backer.     Indeed, Gennuso testified:

“Anthony organized and managed very well the physical operation,

and I know that he was there for the financial assistance.”

V.   The Concealment of Robert C. Fortunato’s Role at St. George
     New Jersey

      Each week an employee of St. George New Jersey would write a

check from the company’s checking account to a fictitious person,

cash the check, and then place the proceeds in the company’s safe

for Bobby’s use.   Through such sub rosa means Bobby sidestepped

Customs Service requirements that the names and fingerprints of

all owners, officers, and employees of a CFS be provided to the

Customs Service.   Moreover, this clandestine remuneration

arrangement enabled Bobby to avoid filing Federal income tax

returns or paying taxes for years.
                               - 10 -

VI.   The Expansion of St. George New Jersey

      St. George New Jersey left its Hurst Street location in 1986

and moved to a larger warehouse on Stiles Street.     The larger

building resulted in larger expenses, such as more rent, more

cargo handling equipment, and more employees.    St. George New

Jersey lacked the cashflow to meet these costs; thus, it turned

to Anthony and George for the required funds.

      Anthony and George lacked the necessary funds to advance to

St. George New Jersey.    They turned to their parents for

assistance.    In 1987 their parents transferred title to the

family house in Brooklyn, New York, on which there was no

mortgage, to Anthony and George.    Thereafter, Anthony and George

used the house as collateral to obtain a $100,000 bank loan.       The

loan proceeds were then lent to St. George New Jersey.     When

George died in 1990, George’s interest in the house was conveyed

to Anthony who then paid off the loan.

      But even with the loan proceeds, St. George New Jersey

struggled.    St. George New Jersey lost its biggest account, and

the company was constantly behind on its warehouse rent payments.

By 1989 the company was failing and had nearly gone out of

business.    Anthony then began doing sales work.   He procured

several new accounts, including one worth more than $1 million.

      The Stiles Street warehouse was not large enough to handle

the additional business.    Anthony met with the landlord, seeking
                               - 11 -

to terminate the company’s lease.    Anthony informed the landlord

that if St. George New Jersey stayed at Stiles Street, the

company would either “always be lagging behind” or, worse, might

go out of business.    Although St. George New Jersey owed $700,000

in rent, the landlord agreed to a buyout arrangement whereby St.

George New Jersey would be released from its lease and rental

obligation by paying the landlord $300,000 in installments of

$10,000 each over 30 months.    Anthony was required to pledge his

home as collateral.    Ultimately, the $300,000 due the landlord

was paid.

       St. George New Jersey moved into a new and larger warehouse.

With its new accounts, St. George New Jersey became financially

stable.    However, it still required, from time to time, infusions

of capital.    At an unspecified date between 2001 and 2005 St.

George New Jersey obtained a bank loan which Anthony personally

guaranteed.

VII.    The Establishment of St. George California

       At the same time Anthony undertook the responsibility to

rescue St. George New Jersey, Bobby was thinking about other

matters.    Bobby knew that clients of St. George New Jersey were

forwarding a substantial amount of freight through California.

He saw this as an opportunity to expand St. George’s business by

establishing a hub in California to service these clients.    Bobby

recognized that by establishing a CFS in California and by having
                             - 12 -

freight shipped to the California CFS, St. George New Jersey

could charge loading, transport, unloading, and storage fees at

both the New Jersey and California locations.   Bobby further

realized that once ensconced on the West Coast, St. George New

Jersey would be well positioned to exploit the ever-increasing

volume of goods being imported from the Far East.

     Soon after Anthony stabilized St. George New Jersey’s

finances, he, Bobby, and Gennuso each traveled to the West Coast

to investigate establishing a California presence.    Many of St.

George New Jersey’s clients had offices in Los Angeles, and

Anthony visited them in an attempt to persuade them to use St.

George New Jersey for their CFS and warehousing needs in

California.

     Because St. George New Jersey did not have the capital to

establish a new warehouse in California, Bobby approached

individuals with whom he had prior business dealings, namely, the

Molfetta brothers (Michael, Frank, and Robert Molfetta), Raymond

Robinson, Anthony Casinelli, and Richard Baddini to provide

capital to establish the new California warehouse.3   Because



     3
      The Molfetta brothers and Robinson, Casinelli, and Baddini
all agreed to invest in the venture. However, Robinson
encountered financial problems within a year of the establishment
of St. George California and thereafter sold his interest to
Anthony and the Molfetta brothers. Baddini and Casinelli
provided some capital, but did not participate in the business as
much as had been hoped, and soon left. No stock certificates
were ever issued to these individuals.
                                - 13 -

Bobby was involved in this endeavour, the Molfetta brothers

agreed to buy stock in the new company.      As Michael Molfetta

testified:     “Bobby was the guy that we knew could make things

happen with the right team.”     The Molfettas (through their family

corporation, Tribro, Inc.) invested $100,000 in the venture.

Anthony invested a similar amount, obtaining the funds from St.

George New Jersey.     St. George Warehouse and Trucking Co. of

California, Inc. (St. George California), was incorporated on

November 30, 1989.

     St. George California leased a warehouse and applied for a

CFS bond with the Customs Service.       Bobby’s name was not listed

in the bond application.

     Periodically, Anthony and the Molfetta brothers lent money

to St. George California.     St. George California also borrowed

money from commercial lenders and periodically leased equipment.

Whenever personal guaranties were required, Anthony would

guarantee the loan or lease.

VIII.    Robert C. Fortunato’s Hidden Management of St. George
         California

        While at St. George New Jersey, Bobby set up the St. George

California operations.     He selected Lou Des Lauriers (Des

Lauriers) to be the company’s general manager, and Des Lauriers

took his orders from Bobby, who remained in New Jersey.

        At first, St. George California struggled.   Its business was

not operating properly.     Bobby flew out to California to take
                               - 14 -

charge.   He quickly fixed the various problems.   Bobby enjoyed

the southern California lifestyle and decided to remain there

permanently.    Des Lauriers remained at St. George California as

Bobby’s right-hand man.

      As at St. George New Jersey, Bobby held no title at St.

George California.   He was not an officer and was never

mentioned in any submission that St. George California made to

the Customs Service.

      As in New Jersey, in California Bobby hid from his

creditors, fearful that they would discover him, maintained no

bank account, and refused to sign his name on any document.

Indeed, Des Lauriers described Bobby as a “non-person”.

      Anthony was the president of St. George California.   He was

ensconced in New Jersey and did not direct the overall operations

of St. George California.    Rather, Bobby ran St. George

California as he saw fit.    In Anthony’s words, Bobby had “carte

blanche” with respect to St. George California and its

subsidiaries.   Ultimately Bobby began to refer to himself as the

“CEO” or the “owner” of St. George California to many of its

customers and vendors, especially when they preferred to deal

directly with the company’s owner.

IX.   Robert C. Fortunato’s Compensation From St. George
      California

      Upon joining St. George California, Bobby continued his

clandestine remuneration scheme.    However, Bobby eventually filed
                                - 15 -

Federal income tax returns to take advantage of an IRS amnesty in

the early 1990s and to bring himself into the tax system.      But

Bobby did not report all the income he earned.    Rather, he

reported $30,000 per year, when in reality he was receiving

between $200,000 and $1.2 million a year from St. George

California and other St. George warehouse companies.

      Bobby was by far the most highly compensated person at St.

George California.    Payments to him were recorded in the

company’s financial records by Jorge Cruet (Cruet), the chief

financial officer, as “officer salary”, “professional fees”, or

“notes payable stockholders.”    These classifications were made

because Cruet believed Bobby to be the owner of St. George

California.    Cruet, however, did not see any documentation to

substantiate this belief.

X.   Robert C. Fortunato’s Personal Expenses Paid by St. George
     California

      Bobby enjoyed an expensive lifestyle.   Once he established

himself at the helm of St. George California, he used the

resources of the company as his own.     St. George California paid

all the expenses for Bobby’s house and automobile.    Additionally,

St. George California paid entertainment expenses of Bobby and

his retinue.    Anthony was aware of Bobby’s use of the company’s

funds, but Anthony did not care.    Bobby was his brother and, as

long as St. George California was a success, Anthony wanted to

leave it alone.
                               - 16 -

XI.    The Establishment of St. George Georgia

       Both St. George California and St. George New Jersey shipped

a substantial amount of freight through Atlanta, Georgia.      Des

Lauriers was familiar with William Dillard (Dillard), who owned a

struggling warehouse in Atlanta and who was interested in

participating in a business venture.    Des Lauriers brought the

opportunity to acquire Dillard’s company to Bobby’s attention,

and Bobby sent an employee to visit Dillard.

       In 1995 Anthony traveled to Atlanta and met with Dillard.

After discussing the matter with Bobby, Anthony agreed to go into

business with Dillard.    Des Lauriers handled the establishment of

the new company.    The Molfetta brothers were not consulted,

although they ultimately acquired an interest in the Atlanta

warehouse.

       On May 26, 1995, St. George Warehouse Co. of Georgia, Inc.

(St. George Georgia), was incorporated. St. George Georgia

operated as both a CFS and a general warehouse.    Dillard reported

to Bobby, speaking with him via telephone.

XII.    The Establishment of Other St. George Warehouses

       St. George California established several subsidiaries

that operated warehouses in other cities.    Warehouses were

established in Chicago, Dallas, Houston, Charleston, South

Carolina, and Miami (although the Miami warehouse soon closed).
                                - 17 -

St. George California was the hub of the entire operation.       The

general managers of all the subsidiaries reported to Bobby.

XIII.     The Establishment of the St. George Trucking Companies

        Bobby individually established and owned three trucking

companies to service some of the needs of the St. George

warehouse companies:     St. George Express, Ltd., St. George

Express USA, Inc., and St. George Express Texas, Inc.     The St.

George trucking companies had no office space of their own;

rather, they operated out of St. George California office space.

        The St. George trucking companies transported freight for

the St. George warehouse companies.      All their revenue came from

St. George California.     When Bobby discovered that the St. George

trucking companies were earning a substantial profit, he directed

that they reduce the amount they charged St. George California so

that their revenues and income would be a “wash”.

XIV.     The Redemption of the Molfetta Brother’s Interests in St.
         George California

        Two of St. George California’s warehouses, both of which

were leased from Prentiss Properties (Prentiss), suffered

considerable damage in a storm.     The freight stored in these

warehouses was damaged.     As a result, St. George California

decided to break its leases, which led to a lawsuit.     Eventually

Prentiss made a settlement offer which would have allowed St.

George California to terminate the leases.     Discussions between

Bobby, Anthony, and each of the Molfetta brothers were held with
                               - 18 -

regard to whether the settlement offer should be accepted.     Bobby

and Michael Molfetta wanted to accept the offer while Anthony,

Frank Molfetta, and Robert Molfetta did not.     Consequently, St.

George California declined the settlement offer.

     Bobby was furious.   Although he eventually forgave Anthony

for not siding with him, his relationship with the Molfetta

brothers was poisoned.    After St. George California lost the

lawsuit in part because Frank Molfetta improvidently signed a

document that waived certain rights, Bobby and Anthony felt that

the Molfettas could no longer participate in St. George

California’s business.    Consequently, Anthony negotiated with

Frank Molfetta with regard to St. George California’s redeeming

the Molfettas’ stock.

     Pursuant to the terms of a redemption agreement (concluded

in 1997), each of the Molfetta brothers received approximately

$1.5 million in deferred payments.4     The Molfettas required both

Bobby and Anthony to guarantee the corporation’s obligation.      The

Molfettas insisted on Bobby’s guaranty to ensure he remained

working at the company, believing that “if Bobby goes, the

company goes.”




     4
      As part of the agreement, the Molfettas’ shares in St.
George Georgia were also redeemed.
                                - 19 -

XV.   The Attempted Sale to Edward O’Donnell

      In 2000 Anthony started to consider selling St. George New

Jersey.     Bobby offered to pay Anthony $1 million to “forget to

sell the company” and to “work easy” (i.e., stay away from the

operations of the St. George warehouse companies).      However,

Anthony was adamant.     He approached John Ruse (Ruse), a partner

at Dictor Capital, a private mergers and acquisitions firm with

broad experience in selling small-to-mid-sized businesses, to

market St. George New Jersey.5    As negotiations developed with a

potential buyer (Edward O’Donnell, see infra p. 21), Anthony

agreed that all of the St. George warehouse companies would be

included in any sale.

      Ruse examined the financial information and other background

materials of all the St. George warehouse companies.      Ruse

drafted a marketing document (the Confidential Business Review or

CBR).     The CBR was essentially a sales pitch.   Ruse testified:

      But my direction in creating this document was to create a
      document that described how the business ran. It was not to
      create a [sic] asset purchase agreement to legally specify
      every asset being sold and the exact ownership of every
      piece of property et cetera. I just wanted to make that
      clear.

      The CBR included information on all the St. George warehouse

companies, specifically the nature of the industry, the structure




      5
      Ruse had marketed 80 to 100 businesses while with Dictor
Capital, succeeding in selling 25 to 30 businesses.
                              - 20 -

of the companies, their facilities, revenue streams, customers,

competition, and finances.   The CBR contained the following:

     the current President and his brother started the Company in
     the Metro New York area. In 1989 they expanded operations
     to the West Coast, setting up operations in the Long Beach
     area. The President’s brother started the Long Beach CFS
     facility and continues to actively manage West Coast
     Operations.

     When Ruse initially met Anthony, Anthony told him that he

was the sole owner of the St. George companies.   Ruse did not

verify that statement because he did not believe the identity of

the owner of the St. George Companies to be of significance in

marketing the business.   As far as Ruse was concerned:

     You know, you had Anthony who was the president and 100
     percent owner and shareholder of it, but he never told me
     any different than the fact that Robert was with him from
     the beginning and Robert was a substantial officer and
     partner with him in this thing and so that, you know, they
     worked together. But it has always been my understanding
     that Anthony was the sole shareholder.

     Although Ruse referred to Anthony and Bobby as “partners” in

the St. George business, Ruse “did not mean, you know that he

[Bobby] was an equity partner, just they’re a partner in a

business.”

     A statement in the CBR read:   “Our Client’s operations are

run through a series of companies that for accounting and tax

purposes are separate C-Corporations with common ownership”.

Ruse testified that he intended that statement to convey his

belief that Anthony owned 100 percent of the St. George warehouse
                               - 21 -

companies, not that Anthony and Bobby each held a 50-percent

interest in each warehouse company.

     As noted supra p. 19, Anthony initially desired to sell only

St. George New Jersey.    Ruse’s initial marketing materials

referred only to the business of that company.    Ruse ran an

advertisement in the Wall Street Journal advertising a “Niche

Logistics Company”.   The only serious response came from Edward

O’Donnell (O’Donnell).    When O’Donnell learned that St. George

New Jersey was affiliated with a nationwide chain of warehouse

and trucking companies, O’Donnell informed Anthony and Ruse that

he would be interested only in acquiring all the St. George

companies as an integrated operation.    Anthony told O’Donnell

that he would have to speak to Bobby before agreeing to such a

proposal.

     Bobby initially was opposed to selling the business, but by

the fall of 2000 Anthony prevailed upon Bobby to accept the idea

of putting the entire group of St. George warehouse and trucking

companies up for sale.

     Bobby, along with Anthony and Ruse, met with O’Donnell

around the end of 2000.    Bobby agreed to consider, but not commit

to, the proposal.   Bobby remained ambivalent throughout all the

discussions, once saying:    “What would I do with all the money?”

     O’Donnell made an oral proposal to buy all the St. George

companies for $30 million.    The amount proposed was intended to
                               - 22 -

be a discussion amount that would set in motion the due diligence

process.    O’Donnell let it be known that were he to purchase the

companies, Bobby would have to remain and agree to operate St.

George California.

       Bobby, Anthony, and Cruet discussed the idea.   Anthony

favored going forward with the proposal, while Bobby did not.

Because O’Donnell wanted Bobby to remain with the company after

the sale, Bobby’s approval was vital.

       Bobby did not like O’Donnell, and he did not want to work

for him.    Other St. George California employees felt the same

way.    Even beyond that, St. George California was Bobby’s life,

and he wanted to continue to run the company without supervision,

something he would be unable to do were O’Donnell to become the

owner.    Because Bobby declined to remain at St. George California

after a sale, O’Donnell’s oral proposal was withdrawn.

       As part of his pursuit to buy the St. George companies,

O’Donnell and his attorney, Peter Ehrenberg (Ehrenberg), composed

several draft letters of intent.    Drafts were first addressed to

Bobby and Anthony, then to Anthony and Bobby, then to just

Anthony and then again to Anthony and Bobby.    The addressees of

the drafts of the letter of intent changed constantly because

neither O’Donnell nor Ehrenberg knew who actually owned the St.

George warehouse companies.    Inasmuch as the possible acquisition

was in the preliminary stage, neither O’Donnell nor Ehrenberg
                                - 23 -

performed due diligence with respect to the St. George Companies,

and neither O’Donnell nor Ehrenberg examined the legal documents

of the St. George warehouse companies.     O’Donnell believed that

Anthony and Bobby shared responsibility for operating the St.

George warehouse companies, and he was concerned that by leaving

either Anthony’s or Bobby’s name off the letter of intent, or

even by putting their names in the wrong order, he might cause

the deal to fail.

XVI.    The St. George Warehouse Companies After the O’Donnell
        Sale Discussions

        After the possible sale to O’Donnell fell through, Anthony

proposed selling the St. George warehouse companies to an ESOP

(employee stock ownership plan).     Being unable to convince Bobby

to agree to such a sale, Anthony withdrew his proposal.

        In 2002, Bobby changed his mind about keeping his role at

the St. George warehouse companies hidden and contacted St.

George California’s banker, inquiring as to the possibility of

raising $10 to $20 million for “buying out” Anthony.     Bobby died

before he could formally approach Anthony with respect to such a

buyout proposal.

                                OPINION

I.     Introduction

        The Federal estate tax is imposed on the value of the

decedent’s taxable estate with specified adjustments.     Sec.

2001(b).     The value of the decedent’s taxable estate is the value
                                - 24 -

of the decedent’s gross estate less enumerated deductions.     Sec.

2051.     The value of the decedent’s gross estate includes the

value of all of the decedent’s property to the extent provided

under sections 2031 through 2046.

      Section 2031(a) provides that “The value of the gross estate

of the decedent shall be determined by including to the extent

provided for in this part, the value at the time of his death of

all property, real or personal, tangible or intangible, wherever

situated.”     Section 2033 provides that “The value of the gross

estate shall include the value of all property to the extent of

the interest therein of the decedent at the time of his death.”

This includes “the value of all property, whether real or

personal, tangible or intangible, and wherever situated,

beneficially owned by the decedent at the time of his death.”

Sec. 20.2033-1(a), Estate Tax Regs.

II.   Contention of the Parties

        The issue involved in this case is one of fact; i.e, whether

Robert C. Fortunato had an ownership interest in the St. George

warehouse companies at the time of his death.     Not surprisingly,

respondent maintains he did; petitioner maintains he did not.

        Respondent asserts that Bobby founded and coowned the St.

George warehouse companies with his brothers Anthony and George.

In that vein, respondent posits that Bobby, because of his past

problems (i.e., the felony convictions, tax liens, and creditor
                              - 25 -

issues), believed he had to conceal his ownership interest in the

St. George warehouse companies to avoid problems with the Customs

Service, the IRS, and his creditors.    Respondent readily

acknowledges that no stock certificates were issued to Bobby.

Nonetheless, respondent contends that the manner in which the

companies operated indicated that Bobby held either an

uncertificated or beneficial ownership interest in the St. George

warehouse companies.   Respondent asserts that Bobby was “the

boss”; that he developed the business strategy for the companies;

that the employees of the companies reported to him; that he

controlled the finances of the companies (including using the

companies’ coffers as his personal “piggy bank”); and that on

occasion he held himself out to the customers and vendors of the

companies as the owner in his dealings with them.    Thus,

respondent maintains, and asks us to conclude, that on the date

of his death, Bobby owned a 50-percent interest in St. George New

Jersey, a 50-percent interest in St. George California, and a 25-

percent interest in St. George Georgia.

     The estate maintains that because of Bobby’s past problems,

Bobby did not intend to own, and at no time owned, an interest in

the St. George warehouse companies.    The estate concedes that

Bobby developed the business strategy for the St. George

warehouse companies and that the employees of the companies
                               - 26 -

reported to him, but it counters that Bobby was handsomely paid

for his services.

III.    Applicable Law

       To determine a decedent’s interest in property, we look to

State law.    “State law, which creates legal interests and rights

in property, including powers of appointment, determines the

nature, scope, and validity of such legal interests and rights.”

Estate of Posner v. Commissioner, T.C. Memo. 2004-112.     The

Supreme Court has stated:

            State law creates legal interests and rights. The
       federal revenue acts designate what interests or rights, so
       created, shall be taxed. Our duty is to ascertain the
       meaning of the words used to specify the thing taxed. If it
       is found in a given case that an interest or right created
       by local law was the object intended to be taxed, the
       federal law must prevail no matter what name is given to the
       interest or right by state law.

Morgan v. Commissioner, 309 U.S. 78, 80-81 (1940) (fn. ref.

omitted).

       Thus, Morgan stands for the proposition that if we determine

that State law creates a property interest or a right thereto, we

are not necessarily bound by the formalities of State law; we may

look through to the substance.    For example, in McCue v.

Commissioner, a Memorandum Opinion of this Court dated Mar. 4,

1946, we stated in the context of determining whether a decedent

held a beneficial ownership interest in a parcel of real

property:
                              - 27 -

           It will be seen that the title to the lot and house was
      in the McCues [name] from the beginning, and the only
      question is whether they were bought with Nolan’s [the
      decedent] money on his behalf and, in fact, were
      beneficially owned by him at death. In tax cases we deal
      with the realities of a situation and not with the
      formalities of title, and although a recorded legal title to
      land creates a prima facie presumption of ownership in the
      title holder, that presumption may be overcome by evidence
      showing that the real or equitable ownership lies elsewhere.
      And if the evidence indicates that this is so, we are not
      concerned in a tax case with the niceties of chancery
      doctrine upon resulting or constructive trusts.

IV.   Robert C. Fortunato Did Not Hold an Ownership Interest in
      the St. George Warehouse Companies

      “‘[T]axation is not so much concerned with the refinements

of title as it is with actual command over the property taxed--

the actual benefit for which the tax is paid.’”     Frank Lyon Co.

v. United States, 435 U.S. 561, 572 (1978) (quoting Corliss v.

Bowers, 281 U.S. 376, 378 (1930)).     Thus, for tax purposes,

courts have held that an individual may be deemed to own stock in

a corporation where he/she has a beneficial ownership in the

corporation even if no stock certificate was issued.     See Pahl v.

Commissioner, 150 F.3d 1124 (9th Cir. 1998), affg. T.C. Memo.

1996-176.

      New Jersey, California, and Georgia courts all have held

that stock certificates are merely evidence, not determinative,

of shareholder status, and that a legal owner of a corporation

may be an uncertificated shareholder.     See Pac. Fruit Co. v.

Coon, 40 P. 542, 544 (Cal. 1895) (“it is quite as well settled

that the issuance of a certificate of corporate stock is not a
                               - 28 -

necessary preliminary to ownership or assessability of such

stock.”); Fulgam v. Macon & Brunswick R.R. Co., 44 Ga. 597, 598

(1872) (“The certificate of stock is only the evidence of his

right.   He would be a full stockholder, with all the rights of

one, if the certificate was not issued at all.”); Abraham v. Twp.

of Teaneck Ethics Bd., 793 A.2d 805, 809 (N.J. Super. Ct. App.

Div. 2002) (“stock certificates are, however, only evidence of

shareholder status; their physical possession is not a

prerequisite to the formation of the corporate relationship or

ownership in the company.”).

     In determining whether an individual has beneficial

ownership in a corporation, we look to the facts and surrounding

circumstances to determine whether the putative shareholder

exhibits an intent to become a shareholder and concomitantly

whether the corporation exhibits an intent to make the putative

shareholder an owner.    “‘Since courts cannot successfully

conjecture as to the subjective intent of the parties, the

objective evidence of intent provided by the parties’ overt acts

must be relied upon.’”    Pahl v. Commissioner, T.C. Memo. 1996-176

(quoting Pac. Coast Music Jobbers, Inc. v. Commissioner, 55 T.C.

866, 874 (1971), affd. 457 F.2d 1165 (5th Cir. 1972).

     Respondent asserts that, as a matter of State law, because

Bobby “played a key role in forming the original St. George

warehouse entities, * * * he would have been entitled to stock in
                              - 29 -

these entities.”   Respondent’s “right to stock” theory is founded

on the following New Jersey, California, and Georgia statutes

which provide that rendering services may constitute

consideration for stock.

N.J. Stat. Ann. sec. 14A:7-5(1) (West 1973) provides:

     Subject to any restrictions contained in the certificate of
     incorporation, the consideration for the issuance of shares
     may be paid, in whole or in part, in * * * (d) labor or
     services actually performed for the corporation or in its
     formation * * *

Cal. Corp. Code sec. 409(a)(1) (West 1986) provides that shares

may be issued:

     For such consideration as is determined from time to time by
     the board, or by the shareholders if the articles so
     provide, consisting of any or all of the following: * * *
     services actually rendered to the corporation or for its
     benefit or in its formation or reorganization; * * *

Ga. Code Ann. sec. 14-2-621(b) (West 1993) provides:

     The board of directors may authorize shares to be issued for
     consideration consisting of any tangible or intangible
     property or benefit to the corporation, including * * *
     services performed, * * *

     Respondent cites numerous cases in support of his position.

But in each of these cases the putative shareholder (1) had an

intent (at least at one time) to become a shareholder, and (2)

took action to follow through on that intent, usually through the

contribution of cash or property to acquire the ownership

interest.   Additionally, in each case respondent cites, there was

evidence that the corporation intended to make the putative

shareholder an owner.
                               - 30 -

     One of the cases respondent cites is Lask v. Bedell, Inc.,

109 A. 849 (N.J. Ch. 1919), affd. 111 A. 926 (N.J. 1920).    In

that case, Lask lent $2,000 to Corcoran to enable Corcoran to

acquire shares of stock in Bedell, Inc.    The loan was evidenced

by a note.    Corcoran purchased the stock and assigned a 50-

percent interest in his Bedell, Inc. stockholdings to Lask as

collateral.    Stock certificates evidencing Corcoran’s interest in

Bedell, Inc., were prepared, but never delivered, even though

Bedell, Inc., recognized Corcoran as a stockholder.    Corcoran

later disappeared for reasons not herein relevant, but not before

writing a letter to Lask to which was attached an assignment of

Corcoran’s stockholdings in Bedell, Inc., to Lask.    When Bedell,

Inc., refused to honor the assignment, claiming that Corcoran was

never a valid shareholder, Lask sued Bedell, Inc., requesting the

court to compel Bedell, Inc., to issue to him the stock owned by

Corcoran.    The court found that Corcoran was a shareholder of

Bedell, Inc., and the assignment of Corcoran’s stock to Lask to

be valid.

     Another case respondent cites is Pahl v. Commissioner, 150

F.3d 1124 (9th Cir. 1998), wherein the Court of Appeals for the

Ninth Circuit upheld this Court’s determination that Pahl (1) was

a shareholder in a law firm which was an S corporation and (2)

should have reported a pro rata share of the law firm’s 1990

income on his individual tax returns.    In reaching its decision,
                              - 31 -

the court found:   (1) Pahl agreed with the law firm to become a

25-percent shareholder of the law firm as of August 9, 1989, by

agreeing to purchase stock for 25 percent of the audited book

value of the firm as of July 31, 1989, (2) Pahl did not pay the

amount called for in his agreement with the law firm, and (3) the

law firm did not issue stock to Pahl.

     After Pahl joined the firm, he became disenchanted; and by

May 1990 he informed the other shareholders that he was

separating from the firm effective June 30, 1990.   As part of

Pahl’s withdrawal from the firm, it was agreed that Pahl would

pay the firm $8,000 and assume both the balance outstanding on

the firm’s line of credit (which Pahl had negotiated) and certain

other firm obligations in exchange for Pahl’s receiving the

firm’s furniture and equipment and accounts receivable.

     Lask, Paul, and each of the other cases respondent cites are

distinguishable from the instant case in that in each case there

was objective evidence, as demonstrated by the parties’ overt

acts, whereas here there is not, to show that (1) the putative

shareholder intended to acquire an ownership interest in the

corporation, and (2) the corporation intended the putative

shareholder to become an owner.   See, e.g., LiButti v. United

States, 107 F.3d 110 (2d Cir. 1997); Shades Ridge Holding Co. v.

United States, 888 F.2d 725 (11th Cir. 1989); F.P.P. Enters. v.

United States, 830 F.2d 114 (8th Cir. 1987); United States v.
                               - 32 -

Secapure, 101 AFTR 2d 2008-1495, 2008-1 USTC par. 50,277 (N.D.

Cal. 2008); Hansen v. Bear Film Co., 168 P.2d 946 (Cal. 1946);

Pac. Fruit Co. v. Coon, 40 P. 542 (Cal. 1895); Sumner v. Flowers,

279 P.2d 772 (Cal. Ct. App. 1955); Meyer & Holler v. Ramona

Village, 43 P.2d 823 (Cal. Ct. App. 1935); Harrell v. Harrell,

290 S.E.2d 906 (Ga. 1982); Fulgam v. Macon & Brunswick R.R. Co.,

44 Ga. 597 (1872); Kueffer Crane & Hoist Serv., Inc. v.

Passarella, 543 S.E.2d 113 (Ga. Ct. App. 2000); Haas v. Koskey,

226 S.E.2d 279 (Ga. Ct. App. 1976); Abraham v. Twp. of Teaneck

Ethics Bd., 793 A.2d 805 (N.J. Super. Ct. App. Div. 2002).

     The record reveals that Bobby never desired or intended to

be a shareholder of the St. George warehouse companies because

(1) he was fearful that if his creditors were aware of any assets

owned by him, they would attempt (forcibly or otherwise) to

collect the debt, and (2) he was worried that his past criminal

convictions would stigmatize any company in which he had an

ownership interest.

     Bobby had no financial reason to be a shareholder.   Bobby

was given carte blanche use of the St. George warehouse companies

coffers, which enabled him to enjoy a quality of life many would

envy.   Moreover, Bobby had no need to accumulate wealth to pass

on to others upon his death.   He had no spouse and was estranged

from his children.    The sole object of Bobby’s bounty was Anthony

who already owned the St. George warehouse companies.
                              - 33 -

     Bobby had none of the financial burdens associated with

equity ownership.   He never made, nor was he ever asked to make,

any contributions or loans to the companies or guaranteed any of

their debts.   Bobby had no risk of loss.   He had no capital at

risk and, should the corporate veil ever be pierced, he would

have no personal liability.   Having been a coowner of Container

Overseas, Bobby experienced the problems associated with being an

owner of a business, and we believe he did not wish to repeat

that experience.

     Respondent’s cavalier assertion that “Bobby would not have

spent the rest of his life struggling to grow a business and

working to make [the St. George warehouse companies] a success

unless he was an equity owner” is unsupported speculation on

respondent’s part, which we reject.

     From Anthony’s perspective, Bobby was irresponsible, and

Anthony saw firsthand how poorly Bobby dealt with setbacks.

Although Anthony gave Bobby carte blanche over St. George

California’s operations, we think he did so because of his belief

that when it came to business canniness, Bobby was the best.    But

we are not willing to equate Bobby’s leadership ability and his

knack for finding and exploiting business opportunities with

Bobby’s having a property right (i.e., ownership interest) in the

St. George warehouse companies.
                              - 34 -

     Bobby was a take-charge person and had strong managerial

skills.   Because of Bobby’s leadership role, many of Bobby’s

colleagues assumed he had to be a co-owner.    In this regard, we

are mindful that one of respondent’s witnesses, Janet Des

Ruisseau, testified that on the basis of her observations of

Bobby’s dealings with Angelo Carrera (Carrera), a close friend of

Bobby’s, she assumed Bobby and Carrera coowned a company called

Container Innovations.   But her assumption was wrong, for Carrera

testified:

     Q [by Dennis Calo]: * * * Janet Des Ruisseau testified
     previously that Bobby Fortunato was your partner in
     Container Innovations, a company that you started?

     A:   Yes

     Q: And your answer to me was that after what he did at
     Container Overseas, I wouldn’t let him near my business,
     correct?

     A: That’s absolutely correct, and he knew that from the
     get-go.

     THE COURT:   So he wasn’t your partner?

     THE WITNESS: No. No, and he knew that, that I
     wouldn’t let him near my business.

We believe those who assumed Bobby was a co-owner of the St.

George warehouse companies were as wrong as Janet Des Ruisseau in

their assumption.

     Respondent argues that Bobby’s involvement in the failed

sale of the St. George warehouse companies to O’Donnell evidences

Bobby’s equity ownership.   We disagree.   O’Donnell stated that
                              - 35 -

since he deemed Bobby to be the key employee of the St. George

warehouse companies, he wanted Bobby’s approval of the sale, not

because he felt Bobby was one of the owners but because he

wanted Bobby to remain.

     We are mindful of Bobby’s statement “what would I do with

all the money?” when Anthony discussed the proposed sale to

O’Donnell.   While that statement might be deemed to support

respondent’s position, we believe that it was made in the context

that were the business to be sold, Bobby expected Anthony to give

him a portion of the sale proceeds not because of any ownership

interest Bobby had in the business but because of his familial

relationship with Anthony and Anthony’s history of providing for

his family’s welfare.

     Ruse testified that although he had no personal knowledge as

to the ownership structure of the St. George warehouse companies,

he had no reason to doubt that Anthony was the sole owner.     Ruse

further stated that unusual ownership and operating arrangements

can occur in closely held family companies:

     You have to understand, in selling private companies you see
     all sorts of very interesting ownership relationships in
     families. I was visiting a gentleman who was a former
     client last night whose daughter ran the business for years
     for him, who is now running it for the company that bought
     the business. She never had any ownership interest in the
     business, he got all the money from it. So I mean, it
     wasn’t something I really dwelt upon.

     Finally, respondent asserts that the reduction in fees that

the St. George trucking companies (which were owned by Bobby)
                              - 36 -

charged to the St. George warehouses is evidence that Bobby had

an ownership interest in the St. George warehouse companies.    We

disagree.   The reduction in the shipping rates did not affect the

viability of the trucking companies; and because of Bobby’s

generous compensation from the St. George warehouse companies, he

did not depend on the St. George trucking companies for his

livelihood.   We believe Bobby reduced the shipping rates because

(1) he intensely disliked paying taxes and (2) that dislike

trumped everything else.

V.   Conclusion

     On the totality of the record we find as the ultimate fact

that Bobby did not own a property interest in the St. George

warehouse companies at the time of his death.    Anthony and Bobby

had an unusual arrangement by which both brothers prospered--

Anthony through the growth of the St. George warehouse companies;

and Bobby through the compensation Anthony, as an absentee owner

and devoted brother, was willing to give Bobby for his services.

And that arrangement ended upon Bobby’s death.

     As a postscript, we do not fault respondent, in an attempt

to protect the Federal fisc, for suspecting that Bobby had an

ownership interest in the St. George warehouse companies at the

time of his death.   But we are unable to conclude that

respondent’s suspicion reflects reality.
                          - 37 -

To reflect concessions,


                                    Decision will be entered

                               under Rule 155.
