Wealthy ninety-one year old Frank Armstrong, Jr., kept company with two sweet young things. He showed he cared for them by giving them real estate.

 

His children were worried that he might give his friends stock in National Fruit Products, Inc. He owned controlling interest in this company, which manufactured applesauce, apple juice and other fruit products. To encourage him to give them the stock, the children agreed that if the Internal Revenue Service valued the stock above $100 a share, they would pay the extra gift tax.

 

Normally the donor is obligated to pay the gift tax. Payment by the donee usually reduces the tax because it reduces the value of the gift. To illustrate, if a person receives a $ 20,000 car and pays the gift tax on it of $ 1,000, the value received is only $ 19,000. So, the tax is based on a gift of $ 19,000.

 

A year and a half after the gifts, the Winchester , Va. , resident died. The IRS did value the stock above $100.

 

Armstrong's estate paid the additional tax. This payment plus the gift taxes paid with the return caused the estate to pay a total of $4 million in gift taxes, making the estate practically insolvent.

 

The estate applied for a tax refund based on the children's obligation to pay the tax.

 

The IRS and the court said even though the children agreed to pay the additional tax, they didn't; the estate did. The court refused to reduce the value of the gifts and denied the refund.