Estate of Kelly Services' founder fights IRS ruling

By Jerry Moskal

• July 29, 2002

WASHINGTON - From humble beginnings, William Kelly guided his Troy-based company into becoming a worldwide colossus.

Now Kelly's estate may have to pay the price: $154.1 million.

That's how much the Internal Revenue Service has demanded that the estate of the founder of Kelly Services Inc. pay in additional taxes. The estate filed a petition asking the U.S. Tax Court in Washington to overturn the IRS ruling.

The dispute hinges over how Kelly's will and a trust he established in his name are interpreted, and to a lesser degree the value of his company stock, Jerome Caufield, a New York City tax attorney for the estate, said.

Kelly, who grew up on Vancouver Island, British Columbia, formed the company in 1946 to cater to the booming post-World War II auto industry. Kelly was 92 when he died Jan. 3, 1998, in Fort Lauderdale, Fla.

"There's some valuation issue, but it's the way (the estate is) split up where we differ," Caufield said. "We're not reading it the way they are.

"If it's not settled, sooner or later we'll file briefs, and a lot more will become public. ... We think we're going to be able to talk to the IRS."

Caufield said settlement talks won't begin until the IRS files an answer to the estate's June 26 petition. He said the IRS will have 60 days to answer the petition once the court serves the agency a copy of the document.

Caufield said he cannot comment beyond what is in the petition. He said that more information about the case will become public once the court orders the two sides to file briefs and reports.

An IRS spokesman said the agency is barred by law from commenting on pending tax cases.

In 1946, Kelly, who went by the nickname Russ, set up a service bureau in Detroit so customers could bring in their inventory calculation, typing, duplicating services, advertising and other jobs. Later, he branched out to provide customers temporary help.

In the process, Kelly amassed an estate worth more than $502.9 million, according to the IRS. The estate put the value at $303.7 million.

Terence Adderley, Kelly's son and estate executor, now heads the company.

The estate's petition claimed the IRS erroneously:

· Ruled that the 14.19 million class A common stock shares owned by Kelly when he died were worth $430 million rather than the $405.8 million reported by the estate.

· Found that his almost 2.19 million shares of class B nonvoting stock were worth $66.3 million instead of $62.2 million.

· Limited the marital deduction for his widow to $1.88 million. The estate claimed it is entitled to a $187.7 million marital deduction.

· Determined that the estate is entitled to only a $1.47 million deduction for state death taxes instead of more than $45.9 million.

The company announced earlier this month that it was buying 500,000 shares of its stock for $13.1 million from the William R. Kelly Trust. Once the purchase is completed, the company still will have $55 million in cash and short-term investments available, Carl Camden, company president and CEO, said in the announcement.

In a telephone interview July 17, Camden said that although he is aware of the pending tax case involving the Kelly estate, he was not familiar with the details.

The IRS notice of deficiency was issued March 29, and the agency has 60 days to answer the estate's June 26 petition. If the agency and the estate fail to negotiate a settlement, the case could go to trial before a Tax Court judge.