Maurice A. Deane School of Law at Hofstra University Scholarly Commons at Hofstra Law Hofstra Law Faculty Scholarship 2012 Everything You Always Wanted to Know About Farid But Were Afraid to Ask Linda Galler Maurice A. Deane School of Law at Hofstra University Follow this and additional works at:https://scholarlycommons.law.hofstra.edu/faculty_scholarship Recommended Citation Linda Galler,Everything You Always Wanted to Know About Farid But Were Afraid to Ask, 13Fla. Tax Rev.461 (2012-2013) Available at: https://scholarlycommons.law.hofstra.edu/faculty_scholarship/473 This Article is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Hofstra Law Faculty Scholarship by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please [email protected]. FLORIDA TAX REVIEW Volume 13 2013 Number 9 EVERYTHING You ALWAYS WANTED TO KNOW ABOUT FARID BUT WERE AFRAID TO ASK* by Linda Galler** I. INTRO DUCTIO N .................................................................................... 462 II. THE FACTS ACCORDING TO THE COURTS ......................................... 464 III. T HE T RUE STORY ................................................................................ 466 A. Before They M et: D oris ................................................................. 466 B. Before They M et: S.S. .................................................................... 467 C. The F irst Di vorce ........................................................................... 468 D. The Second Marriage and Doris'sA cquisition of Shares. .............. 469 IV. WHY WERE THE FACTS NOT THE FACTS? .................... .................... 473 A. Why the Government Might Have Agreed to the Stipulated Facts. 475 B. Why Doris Might Have Agreed to the Stipulated Facts ................. 478 V. DORIS'S BASIS UNDER THE REAL FACTS ........................................... 479 A. The Transfer of Shares was a Gift Before the Marriage.. ............... 479 B. Gifts to Mistresses are Excluded From Income ............................... 482 V I. L ESSONS L EARNED ............................................................................. 485 A. Tax Considerations. ........................................................................ 485 B. Litigation Considerations. .............................................................. 487 C. Ethical Considerations. ................................................................... 489 * Younger readers might be interested to know that Everything You Always Wanted to Know About Sex but were Afraid to Ask was a 1972 Woody Allen film that took its title from a book of the same name by David Reuben, M.D. Unlike the film, the book was not comedic. Indeed, Dr. Reuben was not happy about the movie and told the L.A. Herald-Examiner," I didn't enjoy the movie because it impressed me as a sexual tragedy. Every episode in the picture was a chronicle of sexual failure, which was the converse of everything in the book." Jeff Stafford, Everything You Always Wanted to Know About Sex . . . But Were Afraid to Ask, TURNER CLASSIC MOVIES, http://www.tcm.com/thismonth/article/?cid=12726&rss=mrqe (last visited July 25, 2012). This Article suggests that the Farid story is more like Allen's movie than Reuben's book. ** Professor of Law, Maurice A. Deane School of Law at Hofstra University. The author wishes to thank Lisa Spar of the Hofstra Law Library for assistance in locating sources. Special thanks to Melissa Gobin, Hofstra Law School Class of 2011, for her invaluable research assistance. Florida Tax Review [Vol 13:9 V II. C O NC LUSIO N ..................................................................................... 491 EPILOGUE: WHAT HAPPENED TO DORIS AND S.S.? ................................ 492 A. The Remainder ofthe Marriage. .................................................... 492 B . D oris ............................................................................................... 49 8 C. S. S ................................................................................................... 500 I. INTRODUCTION Students engaged in the study of federal income taxation routinely examine the case of Farid-es-Sultanehv . Commissioner,' in which the Court of Appeals for the Second Circuit addressed a wife's tax basis in stock she received under the terms of an antenuptial agreement. While the case invariably engenders a lively and engaging class discussion, the black letter law ultimately is straightforward: her basis equaled the fair market value of the shares on the date they were received because they were acquired for consideration (that being the release of marital rights in her future husband's property). The government had argued that her basis was the same as her husband's (a carryover basis) because she received the stock as a gift. Perhaps students' enthusiasm for the case results from a sense that they simply do not know the full story. After all, why would an engaged woman accept stock worth $787,5002 in exchange for the possibility of receiving over $33 million upon her husband's death - particularly when her fianc6 was twenty-five years her senior with a life expectancy of only sixteen and one-half years?3 The recital of facts in the court's opinion4 reflects that the marriage was brief and, one might suspect, tumultuous. Students are also confused by the case name: how did an American citizen end up as Farid-Es-Sultaneh? Alas, neither the trial court nor the Court of Appeals betrayed even the slightest interest in the taxpayer's motives or the details underlying what surely must have been a titillating tale. 1. 160 F.2d 812 (2d Cir. 1947) (FaridI ]), rev'd, 6 T.C. 652 (1946) (Farid ). 2. This figure was computed by multiplying the number of shares received (2,500) by the fair market value per share on April, 24, 1924 (as stated in the Court of Appeals opinion). Farid II, 160 F.2d at 813; see also Stipulation of Facts I , Farid 1, 6 T.C. 652 (No. 2968). For the significance of this particular date, see infra text accompanying notes 17-19. 3. See infra text accompanying notes 23-27. 4. The facts stated in the Tax Court's opinion are brief. See Fard 1, 6 T.C. at 652. The facts recited by the appellate court, however, present a fuller account. See Farid1 , 160 F.2d at 813-14. 2013] About Farid This Article reflects the results of a research expedition into the journalistic past and offers the real account.5 As one might suspect, the story would merit front-page coverage in celebrity gossip magazines if it occurred in modem times, involving as it did fame, wealth, serial separation and reconciliation, and sundry allegations of gold digging and infidelity. Surprisingly, the real story is not reflected in the facts set forth in either the trial or appellate court decision. Indeed, had the real facts been placed in issue, the case might well have been decided for the government. This discrepancy raises thought-provoking and important questions about the role of fact development in litigation and fact finding in the judicial process. This Article explores the impact, both in this case and generally, of litigating on the basis of "facts" that are not true, the strategic decisions that lawyers make in developing facts, and the ethical considerations implicated in framing a story. This Article begins by describing the facts as they were found and relied upon by the courts in Farid. It then recounts another version - the true story - and considers whether the real facts might have occasioned a different result, concluding that the correct facts would have produced a win for the government and a carryover basis. Indeed, Faridi s a model case for 6 the notion that everything in law revolves around facts. How a story is told or how a fact finder understands a series of facts guides the court's ruling as much as a judge's understanding of applicable law.7 This Article speculates on the motives of counsel in the case for both sides in stipulating to facts that were untrue and concludes that some strategic advantage probably induced them to agree to the facts as we have come to know them over the years. Finally, this Article ruminates on lessons taught by Farid in the context of substantive tax law, litigation strategy generally, and ethical considerations. An epilogue provides curious readers with the rest of the Farid story; while irrelevant to the legal issue in the Farid litigation, the tale of Farid's life is both fascinating and extraordinary. 5. The story presented here is as real or true as the press reports of the day. The facts related herein, other than those explicitly referred to as derived from judicial opinions, are based exclusively on contemporaneous newspaper articles. 6. STEFAN H. KRIEGER & RICHARD K. NEUMANN, JR., ESSENTIAL LAWYERING SKILLS 11 (4th ed. 2011) ("The analysis of facts permeates this [important] book because the analysis of facts permeates the practice of law."). 7. Id. at 188; see generally id. at 131-40, 177-80. Florida Tax Review [Vol. 13:9 II. THE FACTS ACCORDING TO THE COURTS Because the case was fully stipulated, the pertinent facts were never in dispute.8 The lower court (United States Tax Court), therefore, was not called upon to find facts based on evidence presented but merely adopted verbatim the stipulations crafted and agreed upon by lawyers for the government and for the taxpayer. Whereas the Tax Court's recital of the facts was brief, the Court of Appeals' extended account is fully consistent with the Stipulation of Facts submitted to the Tax Court.9 The taxpayer, Doris Farid-es-Sultaneh ("Doris"),10 was an American citizen who sold shares of common stock in S.S. Kresge Company in 1938 for $230,802.36." Doris had acquired the shares from her ex-husband, S.S. Kresge ("S.S.,,).12 In December 1923, when S.S. was married to another woman and Doris was unmarried, he delivered 700 shares to her; these shares had a fair market value of $290 per share.' 3 The shares were to be held by Doris "'for her benefit and protection in the event that the said Kresge should die prior to the contemplated marriage between the petitioner [Doris] and said Kresge."" 4 S.S. divorced his first wife on January 9, 1924 and, on or about January 23, 1924, he delivered another 1,800 shares to Doris, these 8. Farid1 1, 160 F.2d 812, 813 (2d Cir. 1947); see also Faridl, 6 T.C. 652 (1946). Most Tax Court cases are tried on stipulated facts; live testimony is rare. JANE C. BERGNER, MERTENS LAW OF FEDERAL INCOME TAXATION § 50.90 (2012). Current Tax Court Rule 91 sets out a mandatory pretrial stipulation procedure covering, inter alia, factual matters that are not in dispute. TAX CT. R. 91(a). A stipulation is treated as a conclusive admission of a party but only for purposes of the pending litigation. TAX CT. R. 91(e); Borchers v. Commissioner, 95 T.C. 82, 90 (1990), affd, 943 F.2d 22 (8th Cir. 1991) (stipulated facts are treated in the same manner as facts found by the court on the basis of evidence presented at trial). Why the parties in Farid I might have acquiesced in the particular facts in the case is considered later in this article. See infra Part III. 9. See Stipulation of Facts, supra note 2. 10. The taxpayer was known as "Doris" through most of her life. See infra note 31 and accompanying text. 11. To get a sense of size of the transaction, the amount realized on the sale in 1938, $230,802, is equivalent to $3,756,310.73 in 2012 U.S. dollars. CPI Inflation Calculator, U.S. BOARD OF LABOR AND STATISTICS, http://data.bls.gov/cgi- bin/cpicalc.pl (last visited Jul. 25, 2012). 12. Mr. Kresge was known as "S.S." S.S. Kresge Dead; Merchant was 99, N.Y. TIMES, Oct. 19, 1966, at 1. 13. Farid 11, 160 F.2d at 813; see also Farid 1, 6 T.C. at 652. The Stipulation of Facts states that the value of this stock was $280 per share. Stipulation of Facts, supra note 2, 2. 14. Farid II, 160 F.2d at 813 (quoting from the Stipulation of Facts 2, Farid-es-Sultanehv . Commissioner, 6 T.C. 652 (1946) (No. 2968)). 2013] About Farid to be held for the same purpose as the first 700 shares.'5 No value was stated 6 for the 1,800 shares.' On April 24, 1924, Doris and S.S. executed an antenuptial agreement in which: she acknowledged the receipt of the shares "as a gift by the said Sebastian S. Kresge, pursuant to this indenture, and, as an ante-nuptial settlement, and in consideration of said gift and said ante-nuptial settlement, in consideration of the promise of said Sebastian S. Kresge to marry her, and in further consideration of the consummation of said promised marriage" she released all dower and other marital rights, including the right to her support to which she otherwise would have been entitled as a matter of law when she became his wife.7 The couple married "immediately after the ante-nuptial agreement was executed."'8 The value of the stock on April 24, 1924 was $315 per share and rose to $330 per share on May 6, 1924, when the shares were transferred to Doris on the corporation's books.' 9 Doris and S.S. divorced on May 18, 1928. Doris claimed no alimony, and none was awarded to her.20 Because of a series of stock dividends over the years, Doris's adjusted basis per share in 1938 (the year at issue) was $10.66% per share computed on the basis of the fair market value 15. Id.; see also Faridl,6 T.C. at 652. 16. The Stipulation of Facts states that the value of this stock was $290 per share. Stipulation of Facts, supra note 2, 2. 17. Farid 1,1 60 F.2d at 813. The language within the quotation marks is from the aritenuptial agreement. See Stipulation of Facts, supra note 2, at Exhibit 1- A. The Stipulation of Facts states that the 2,500 shares referred to in the agreement were the same shares previously received by Doris in December 1923 and January 1924. Id. 3. The alternative version of facts reflects that Doris believed she was going to receive 2,500 additional shares under the agreement. See infra notes 52-62 and accompanying text. 18. Farid1 1, 160 F.2d at 813; see also Faridl, 6 T.C. at 652. 19. Farid1 1, 160 F.2d at 813. 20. Id. Florida Tax Review [Vol 13:9 per share at "the time" of her acquisition,21 and $0.159091 computed as a carryover of S.S.'s adjusted basis.22 The Court of Appeals' recital of facts concluded by noting the couple's ages and life expectancies as of the date of their marriage23 and the value of S.S.'s wealth. Doris was thirty-two years old with a life expectancy of thirty-three and three-fourths years (i.e., sixty-five and three-fourths years).24 S.S. was fifty-seven years old with a life expectancy of sixteen and one-half years (i.e., seventy-three and one-half years).25 He was then worth approximately $375,000,00026 and owned real estate worth approximately $100,000,000.27 Il1. THE TRUE STORY Before recounting the alternative version of Doris's story, a brief synopsis of her life and of S.S.'s life, prior to their marriage, is provided here. A. Before They Met: Doris The future Mrs. Kresge began life as Mabel Doris Mercer.28 She was born in 1889 to Captain George A. Mercer, reported variously as a Pittsburgh police captain, a Superintendent of Buildings in Allegheny, Pennsylvania,29 and as a partner of Andrew Carnegie.30 By the time Ms. Mercer applied for a license to marry S.S., she had dropped "Mabel" from use.31 21. Id. According to the Stipulation of Facts, the value per share on April 24, 1924 was $14 per share, but Doris used $10.66% per share as her adjusted basis. Stipulation of Facts, supra note 2, 11-12. The discrepancy is not explained. 22. Farid1 1, 160 F.2d at 813. It is unclear what date the court referred to as "the time" of Doris's acquisition since she received the shares in two blocks, on two dates, and the corporation recorded her ownership on a third date. 23. See Stipulation of Facts, supra note 2, 15 (reflecting life expectancies on April 24, 1924, the date of the marriage). 24. Farid1 l, 160 F.2d at 814. 25. Id. at 813. 26. $375,000,000 in 1924 is worth $5,032,412281 in 2012. CPI Inflation Calculator,s upra note 11. 27. Farid 11, 160 F.2d at 813. $100,000,000 in 1924 is worth $1,343,197,661 in 2012. CPI Inflation Calculator,s upra note 11. 28. P.L. Harden Weddedto Mabel Mercer, N.Y. TIMES, Apr. 18, 1911, at 3. 29. Id 30. From the Magazine, TIME, May 5, 1924. 31. See S.S. Kresge Obtains License Here to Wed, N.Y. TIMES, Apr. 24, 1924, at 9 (license issued to S.S. Kresge and Doris Mercer). 2013] About Farid At the age of 17, Doris became engaged to Carl Borntraeger, a ward of industrialist Henry C. Frick.32 Neither Captain Mercer nor Mr. Frick was pleased with the relationship. There reportedly was a scene, and as a result, Doris ran away to New York City to pursue a life on the stage. She landed a minor role on Broadway in a musical comedy, Earl and the Girl. Displeased, Captain Mercer tricked his daughter into taking a trip home to Pennsylvania. Once over the state line, Captain Mercer confined his daughter against her will in the Episcopalian Country Home in Germantown.33 Within a month, Doris and Carl implemented an escape plan worthy of a B movie, involving a seemingly secure second floor window, a linen sheet, a mad slide, and a fall to the ground. The couple returned to New York City but never married.34 In 1911, Doris married Percival L. Harden, publisher of The Club Fellow, a weekly gossip newspaper - also known to some as a "reputation monger',35 and as a "tattle magazine, 36 - published in New York and Chicago. It was Mr. Harden's second marriage, his first having ended in divorce. However, his second marriage soon met the same fate as the first and ended in 1918. After Harden's death in 1930, Doris is reported to have said: "My first husband was a delightful, worldly man. He was charming not only to me but unfortunately to every other woman he met. Naturally, that 38 was unsettling." B. Before They Met: S.S. Sebastian Kresge is best remembered as the founder of S.S. Kresge Company (the "Company"). At the time of his death in 1966,39 the Company 32. Interestingly, Doris and Frick are buried in the same cemetery - Homewood Cemetery in Pittsburgh, Pennsylvania. Other notable "inhabitants" include ketchup magnate H.J. Heinz II, former U.S. Senator H.J. Heinz IIl, and Baseball Hall of Famer Pie Traynor. Homewood Cemetery, FIND A GRAVE, http://www.findagrave.com/php/famous.php?page=cem&FScemeteryid=45139 (last visited Aug. 7, 2012); Homewood Cemetery, JANIE & TIM (Aug. 14, 2011), http://janieandtim.com/?p=627 (photographs of notable graves). 33. S.S. Kresge WedAgain, N.Y. TIMES, Apr. 25, 1924, at 20. 34. P.L . Harden Wedded to Mabel Mercer, supra note 28, at 3. 35. National Affairs: Jardines,T IME, Aug. 23, 1926, at 11. 36. The Press: So Many of Them, TIME, Apr. 21, 1930, at 28. 37. Third Wife Sues Harden, N.Y. TIMES, Dec. 23, 1926, at 10. 38. The Press: End of a Gossipist, TIME, Apr. 28, 1930, at 29. Mr. Harden took his own life in a New York hotel room. Harden, Publisher,E nds Life by Shot, N.Y. TIMES, Apr. 18, 1930, at 24. 39. Despite a life expectancy, in 1947, of sixteen and one-half years when he was fifty-seven years old, S.S. lived to be 99. Farid i, 160 F.2d 812, 813 (2d Cir. Florida Tax Review [Vol. 13:9 owned 930 stores throughout the United States, Canada, and Puerto Rico - 670 Kresge variety ("5-and-10-cent") stores, 150 Kmart department stores, and 110 Jupiter discount stores.40 S.S. is also remembered as a generous philanthropist, primarily through the Kresge Foundation, which he established in 1924 - coincidentally the same year in which he divorced his first wife and married Doris - through an initial contribution of $1.3 million and which made grants of $70 million during his lifetime.4' S.S. was born in 1867 on a farm in Bald Mountain, Pennsylvania. As a young man he worked as a traveling salesman. One customer who particularly impressed S.S. was Frank Woolworth, who had founded a 5-and- 10-cent store chain several years earlier. Resolving to enter that same business, S.S. went into partnership with John G. McCrory, becoming a half- owner of a 5-and-10-cent store in Memphis and another in Detroit. The partners eventually split, with each partner taking full ownership of one store. S.S. became sole owner of the Detroit emporium and soon began opening Kresge stores throughout the Midwest.42 The Company went public in 1912. S.S served as President from 1907 to 1925 and as Chairman of the Board from 1913 until shortly before his death. In 1925, when S.S. left the presidency, the Company operated 307 stores. That same year, S.S. purchased a large interest in Stern Brothers, a New York department store, and smaller interests in The Fair, a Chicago department store that eventually became part of Montgomery Ward & Co., and Kresge Newark, Inc., a Newark department store that later became Chase Newark Store. S.S. also was President for many years of the Kresge Realty Company.43 S.S. resided in Detroit from 1899 until he moved to New York City in 1924.44 C. The First Divorce Although S.S.'s courtship of Doris began while Kresge was married to another woman, the ground for divorce alleged by the first Mrs. Kresge 1947). He died in 1966, outliving Doris by more than three years. See infra notes 258-60 and accompanying text. 40. S.S. Kresge Dead; Merchant was 99, supra note 12, at I. Annual sales exceeded $851 million in 1965, when the company employed 42,000 people. Id at 38. 41. S.S. Kresge Dead; Merchant was 99, supra note 12, at 38. 42. Id. Mr. McCrory's collection of stores grew as well. In 1987, McCrory stores bought all of the Kresge stores that were still operating. Isadore Barmash, A Kresge-McCrory Reunion, N.Y. TIMES, Apr. 4, 1987, at 33. For a history of the McCrory businesses, see ISADORE BARMASH, FOR THE GOOD OF THE COMPANY: WORK AND INTERPLAY IN A MAJOR AMERICAN CORPORATION (1976). 43. Barmash, A Kresge-McCrory Reunion, supra note 42, at 33. 44. Id. 2013] About Farid was cruelty, not adultery.45 Her divorce pleadings never mentioned another woman but instead described her husband as "frequently sullen and morose,'46 with a "moody disposition and temperament,'47 refusing to speak to her or their children for days at a time. He was a "nagger" and a "scolder," she alleged, who refused to accept responsibility for his children.48 The couple had five children, two of whom were minors at the time of the divorce. Their oldest son, Stanley, was already working with his father at the time.49 The divorce settlement reportedly was $10,000,000.50 D. The Second Marriage and Doris's Acquisition of Shares S.S. and Doris married in New York on April 24, 1924.5' A year later, the couple was in court. Doris sued S.S. seeking 17,500 shares of Company stock, which she asserted he had promised her before their marriage as a settlement in lieu of her dower rights. News reports at the time valued her claim at $7,000,000.53 The complaint alleged that the couple had reached an oral agreement, that S.S. was supposed to have had a written agreement drawn up to reflect the terms of that agreement, but that the document ultimately drafted and signed reflected only 2,500 shares. 54 (This document is the same agreement referred to in the later tax case). Doris further alleged that her husband had caused her to sign the antenuptial agreement "by persuasion, artifice, and fraud. 55 In this regard, it may be noted that both Farid opinions indicated that the agreement was signed 45. S.S. Kresge Obtains License Here to Wed, supra note 31, at 9. 46. Id.; see also Wife of Kresge Gets Divorce on Cruelty Charge, CHI. TRIB., Jan. 12, 1924, at 2. 47. Kresge Trial Delayed, N.Y. TIMES, Aug. 19, 1923, at 6. 48. Id. 49. See STANLEY S. KRESGE, THE S.S. KRESGE STORY, 24-25 (1979) (Stanley worked at a Detroit Kresge store during school vacations, became a manager-trainee in 1923, and then managed several 5-and-10-cent stores before joining the Company's headquarters staff in 1930). Stanley became Chairman of the Board when his father stepped down many years later but retired a year later. Sebastian S. Kresge, 98, Quits as Head of Chain He Founded, N.Y. TIMES, Jun. 22, 1966, at 63; Stanley Sebastian Kresge, 85, Retailer and Philanthropist, N.Y. TIMES, Jul. 3, 1985, at D19. 50. Wife Sues Kresge for $7,000,000 Stock, N.Y. TIMES, June 23, 1925, at 1. Mrs. Kresge was given sole possession of "the palatial Kresge residence" in Detroit. Wife of Kresge Gets Divorce on Cruelty Charge, supra note 46, at 2. 51. S.S. Kresge Wed Again, supra note 33, at 20. 52. Wife Sues Kresge for $7,000,000 Stock, supra note 50, at 1. 53. Id.; Mrs. Kresge Reduces Claim to $1,000,000, N.Y. TIMES, July 14, 1925, at 21. 54. Wife Sues Kresge for $7,0 00,000 Stock, supra note 50, at 1. 55. Id.