T.C. Memo. 2013-234
UNITED STATES TAX COURT
ESTATE OF HELEN A. TROMBETTA, DECEASED, GAIL C. DOLE,
EXECUTRIX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23892-10. Filed October 21, 2013.
William E. Bonano and Richard M. Eigner, for petitioner.
Chong S. Hong and Rebecca S. Duewer-Grenville, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined a $6,464,225 deficiency in the
Federal estate tax of the Estate of Helen A. Trombetta (estate). The issues for
decision are: (1) whether the value of property transferred by Helen A. Trombetta
(decedent) to the Helen Trombetta Annuity Trust (annuity trust) is includable in
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[*2] the gross estate pursuant to section 2036(a), 2038(a)(1), or 2035(a); (2)
whether the value of property transferred by decedent to the Helen Trombetta
Personal Residence Trust (residence trust) is includable in the gross estate
pursuant to section 2036(a), 2038(a)(1), or 2035(a); (3) whether the estate is
entitled to a deduction claimed for mortgages payable secured by annuity trust
assets; and (4) whether the estate is entitled to a charitable contribution deduction.
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the date of decedent’s death, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated facts are
incorporated in our findings by this reference. Decedent resided in California at
the time of her death. Gail C. Dole (G. Dole) was appointed executrix of the
estate, and she resided in California at the time the petition was filed.
Decedent’s Background
At a date not apparent from the record, decedent married Joseph Trombetta
(J. Trombetta). Decedent and J. Trombetta had four children: Joan Adele
Clendenin, Carol Ann Carroll (Carroll), G. Dole, and Thomas Leon Trombetta (T.
Trombetta).
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[*3] During their marriage decedent and J. Trombetta owned various rental
properties. Decedent managed the day-to-day operation of the properties,
including cleaning, painting, gardening, and collecting rent, while J. Trombetta
managed the financial operation of the properties. At a date not apparent from the
record decedent reduced her property management obligations while J. Trombetta
continued to purchase additional rental properties.
In 1986 decedent and J. Trombetta purchased an apartment building with 27
units known as Black Walnut Square (Black Walnut Square property). In 1988
decedent and J. Trombetta purchased an apartment complex with 79 units known
as Tierra Plaza (Tierra Plaza property). Decedent and J. Trombetta purchased the
Black Walnut Square and Tierra Plaza properties subject to significant debt, and
they personally were liable on the mortgages secured by those properties.
Decedent and J. Trombetta subsequently decided to separate. Following
their separation decedent purchased a residential property in Modesto, California
(Modesto property), for $249,000.
Decedent and J. Trombetta’s marriage was dissolved by a judgment filed
May 20, 1992. Pursuant to the divorce judgment, decedent received various rental
properties, including the Tierra Plaza and Black Walnut Square properties. The
divorce judgment provided that decedent would hold J. Trombetta harmless from
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[*4] the liens and encumbrances attributable to the properties. At the time, the
Tierra Plaza and Black Walnut Square properties were highly leveraged.
After her divorce decedent’s primary assets were the various rental
properties she received pursuant to the divorce judgment, as well as the Modesto
property. Decedent primarily depended on the income from the Tierra Plaza and
Black Walnut Square properties for her living expenses.
In 1992 decedent hired Richard M. Eigner, an attorney, and Paul E. Korte, a
certified public accountant, to advise her regarding estate planning. In particular
decedent requested that Eigner help her develop an estate plan that would allow
her to: (1) maintain a cashflow of approximately $10,000 per month; (2) establish
a cash reserve of $100,000 for emergencies; (3) reduce her personal involvement
in managing the rental properties; (4) reduce her financial risk; and (5) provide for
the benefit of her children while minimizing any estate and gift tax consequences.
To achieve these objectives, decedent and Eigner developed a
comprehensive and integrated estate plan. In August 1993, at the age of 72,
decedent executed a will and created the Helen Trombetta Living Trust, the
annuity trust, and the residence trust. She also formed a limited partnership, Helen
Properties L.P. (Helen Properties), and transferred to Helen Properties her interests
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[*5] in all of the rental properties except the Tierra Plaza and Black Walnut Square
properties.
Annuity Trust
Decedent was the grantor of the annuity trust and its sole beneficiary.
Decedent, Carroll, G. Dole, and T. Trombetta were the cotrustees. Decedent was
vested with 50% of the annuity trust voting rights, and the other cotrustees split
the remaining voting rights. The annuity trust agreement provided that
“[d]ecisions of the trustees may be taken by majority vote of all trustees”.
(Emphasis added.)
The annuity trust agreement provided for an annuity term of 180 months
subject to decedent’s power to reduce the term. During the annuity term the
trustees would distribute to decedent, at quarterly or more frequent intervals, an
annual sum of $75,000 for the first 12-month period of the annuity term, with a
4% increase at the beginning of each successive 12-month period (periodic
payments). After termination of the annuity trust term the annuity trust was
prohibited from making any distributions to decedent.
Carroll, G. Dole, and T. Trombetta, as cotrustees, agreed that they would be
jointly and severally liable for any periodic payment in the event that the annuity
trust lacked sufficient funds to make such payment. However, if the annuity trust
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[*6] income exceeded the periodic payment due, the annuity trust agreement
provided that the cotrustees could distribute the excess income to decedent or
allow the income to accumulate in the trust. At the later of the end of the annuity
trust term or the date of decedent’s death, the annuity trust property would pass to
decedent’s surviving children or grandchildren.
The annuity trust agreement anticipated decedent’s transfers to the trust of
the Tierra Plaza and Black Walnut Square properties. The agreement provided
that the cotrustees were entitled to “manage, control, lease, grant options on,
mortgage, sell, convey, exchange, partition, divide, subdivide, improve, change
the character of, develop, repair, abandon and demolish trust property.” The
cotrustees could employ individuals as property managers or custodians to assist
with administration of the trust property. The annuity trust agreement also
provided that decedent intended her retained interest in the properties to qualify as
a qualified interest under section 2702(b)(1).
Decedent subsequently transferred to the annuity trust the Tierra Plaza and
Black Walnut Square properties. At the time of the transfers, the Tierra Plaza
property was security for aggregate indebtedness of approximately $2,020,000, the
Black Walnut Square property was security for indebtedness of approximately
$884,000, and decedent had an adjusted basis in the properties of $1,302,941.
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[*7] Following decedent’s transfers of the properties to the annuity trust the
annuity trust paid the interest and principal owed on the indebtedness, although
the annuity trust never assumed the mortgages secured by the properties.
Decedent’s transfers of the properties were the only transfers to the annuity
trust. The annuity trust agreement prohibited any additional contributions of
property to the annuity trust.
Decedent reported the transfers of the properties to the annuity trust on her
Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for
1993. On an attached schedule decedent reported that the properties had a net
value of $1,425,802, that she had a retained interest of $921,809, and that she had
made a gift of $503,993, the remaining value.
Residence Trust
Decedent was grantor, trustee, and the sole beneficiary of the residence
trust. The residence trust agreement provided that decedent had the right to use
any trust property as a personal residence and the right to receive the net income
from the trust. The only limitation on decedent’s right to use the trust property
was the residence trust term. The term of the trust was 180 months, subject to
decedent’s power to reduce the term. The residence trust agreement further
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[*8] provided that decedent intended the residence trust to qualify as a qualified
personal residence trust under section 2702.
Upon termination of the residence trust term decedent or her estate would
receive the trust property and any accrued income. If decedent was living at
termination, the trust property would be distributed equally to her children or their
children. If decedent was deceased at termination, the trustee would distribute the
balance of the trust property as directed by decedent’s will or, if not so directed,
equally to decedent’s children or their children.
Decedent subsequently transferred the Modesto property to the residence
trust. At the time of the transfer, decedent had an adjusted basis in the Modesto
property of $399,637. Decedent’s transfer of the Modesto property was the only
transfer to the residence trust.
On her Form 709 for 1993 decedent reported the transfer of the Modesto
property to the residence trust. On an attached schedule decedent reported that the
Modesto property had a net worth of $150,000, that she had a retained interest of
$92,491, and that she had made a gift of $57,509, the remaining value.
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[*9] Subsequent Events
On August 1, 1993, decedent received from the annuity trust her first
periodic payment of $6,250 and she continued to receive monthly periodic
payments of $6,250 during 1993.
In August 1993 decedent, along with her son-in-law M. Dole, began
negotiating with different banks to refinance the Tierra Plaza property. On
October 22, 1993, decedent, in her individual capacity, executed deeds of trust
regarding the Tierra Plaza property in favor of Stockton Savings Bank and
Brentwood Bank of California. Decedent executed the deeds to obtain a more
favorable interest rate with respect to the mortgages on the Tierra Plaza property.
Decedent personally was liable for the mortgages on the Tierra Plaza property.
On August 1, 1994, decedent received from the annuity trust a periodic
payment of $6,500, reflecting a 4% increase over prior payments. Decedent
subsequently decided that she would prefer to receive a lower payment amount
“with the understanding that the deferred amounts would accrue interest and be
paid later to [d]ecedent or her estate along with the accrued interest”.
Accordingly, on September 1, 1994, decedent received a periodic payment of
$6,250, and the annuity trust began recording the amount of the shortage and
calculating a balance due to decedent equal to the amount of the shortage plus 6%
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[*10] interest. All of decedent’s payments through April 1, 1997, were in amounts
less than the scheduled amounts, with the exception of four periodic payments that
were in amounts in excess of the scheduled amounts.
On May 1, 1997, decedent received a periodic payment in excess of the
scheduled payment amount, eliminating the balance due to decedent but creating a
an outstanding balance due to the annuity trust. Decedent continued to receive
periodic payments in amounts in excess of the scheduled amount through April 1,
1998. Beginning on May 1, 1998, the annuity trust made periodic payments in
amounts less than the scheduled amounts, with the exception of a $17,311.62
payment made December 1, 1998. Despite the decreased payment amounts,
decedent continued to have an outstanding balance due to the annuity trust.
Decedent subsequently considered selling the Tierra Plaza and Black
Walnut Square properties. Decedent wanted to extricate herself from her property
management obligations and ensure continued funding of the annuity trust. Korte
advised decedent that a sale of the properties would result in substantial Federal
taxes that would reduce the value of the annuity trust corpus.
To preserve the value of the annuity trust corpus, in April 1999, at
decedent’s direction, the annuity trust entered into a residential lease and option
with the Doles with respect to the Tierra Plaza and Black Walnut Square
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[*11] properties. The lease provided for a term of 34 years beginning April 1,
1999. With respect to the Tierra Plaza property, the lease provided for a monthly
rent of $21,827.58 and an option price of $3,300,000. With respect to the Black
Walnut Square property, the lease provided for a monthly rent of $7,275.88 and an
option price of $1,100,000. The monthly rent payments provided the annuity trust
with sufficient income to make the periodic payments to decedent.
On January 1, 2001, the annuity trust made a periodic payment to decedent
of $7,311.62, an amount less than the scheduled amount. After this periodic
payment decedent no longer had an outstanding balance due to the annuity trust;
however, the annuity trust again began to accrue a balance due to decedent. The
annuity trust made periodic payments in amounts less than the scheduled amounts
for the remainder of the annuity trust term because decedent had determined that
she did not need the full scheduled amount for her living expenses.
In December 2001 the annuity trust paid off the mortgage secured by the
Black Walnut property. On December 15, 2001, decedent, on behalf of the
annuity trust, issued a promissory note to Helen Properties. Under the terms of the
promissory note Helen Properties would lend decedent and the annuity trust
$721,801.27, to be repaid in monthly installments beginning January 15, 2002.
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[*12] The promissory note was secured by the Tierra Plaza and Black Walnut
Square properties. Decedent personally was liable for the promissory note.
In March 2005 decedent was diagnosed with cancer. In or about 2006 an
intrafamily dispute developed between T. Trombetta on the one hand and decedent
and the Doles on the other. In April 2006 decedent responded to T. Trombetta’s
attempts to take control of the family affairs by asserting to her son that she was
still able to make any and all decisions for herself. She remained mentally alert
and in firm control of her affairs through the last month of her life.
Because decedent believed that she would not live until the termination of
the annuity and resident trust terms, in August 2006 she amended the annuity and
residence trust agreements as well as her will. Decedent reduced the number of
months of the annuity trust term to 156, thereby providing for the annuity trust
term to terminate on July 31, 2006. She also provided more specific instructions
regarding the division of the annuity trust income and corpus following her death.
Decedent reduced the number of months of the residence trust term to “that
number of months (not greater than 180) that is determined by making the month
during which the * * * [decedent] dies the last month preceding the Termination
Date.” Thus, under the terms of the August 2006 amendment, the residence trust
would terminate after decedent died. Decedent amended her will and the
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[*13] residence trust agreement to create a “charitable remainder unitary trust”.
She amended the residence trust agreement to instruct the trustee to transfer the
Modesto property after her death to a “charitable remainder unitary trust” for a
term of years with “a unitary payout percentage that will target the present value
(as determined under applicable Regulations) of the interests of the charitable
beneficiaries to and among whom the [charitable remainder unitary trust’s] corpus
is to be distribution [sic] following the [charitable remainder unitary trust’s] term
of years to equal about $250,000.” Decedent provided that her estate would be the
sole beneficiary entitled to the unitrust payments during the term of years.
Decedent intended that the “charitable remainder unitary trust” would allow her
estate a charitable contribution deduction of $250,000.
Decedent died on September 16, 2006. At the time, she was using the
Modesto property as her personal residence. On decedent’s date of death the
aggregate mortgage indebtedness secured by the Tierra Plaza property was
$2,194,245.50, and the leased fee value of the Tierra Plaza and Black Walnut
Square properties was $4,300,000.
Following decedent’s death the annuity trust had a balance due to decedent
of $121,979.28. On September 18, 2006, the annuity trust paid $50,000 to
decedent’s estate. On November 13, 2006, the annuity trust paid $72,682.05 to
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[*14] decedent’s estate. After the November payment the balance due to
decedent’s estate was zero.
On December 18, 2006, G. Dole, as trustee of the residence trust, created
the Helen Trombetta Charitable Remainder Unitrust (charitable remainder
unitrust). The charitable remainder unitrust agreement provided that the charitable
remainder unitrust would pay decedent’s estate an annual payment equal to
19.9105% of the fair market value (FMV) of the trust assets, valued as of the first
day of each taxable year, for a five-year term beginning September 16, 2006. At
the termination of the trust term the trustee would distribute the principal and
income of the trust to one or more charitable organizations. G. Dole subsequently
transferred the Modesto property to the charitable remainder unitrust.
On January 5, 2007, the Modesto property was sold to an unrelated buyer
for $750,020, resulting in net proceeds of $707,630.41.
On August 29, 2007, G. Dole filed a petition for reformation of decedent’s
amendment to the residence trust, with the Superior Court of California, County of
Stanislaus (superior court). In the petition G. Dole indicated that decedent’s intent
in amending the residence trust agreement was to remove the assets of that trust
from her estate, which could only be accomplished by terminating the residence
trust before she died. However, decedent erroneously amended the residence trust
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[*15] agreement to provide that the trust would terminate after the month during
which decedent died. G. Dole requested that the amendment be altered to provide
that the residence trust term would instead end on the last day of the month before
the month during which decedent died. On October 3, 2007, the superior court
entered a reformation order that effectively terminated the residence trust as of
August 31, 2006.
During 2011 the charitable remainder trust contributed $344,000 to
qualified charitable organizations.
Tax Reporting and the Notice of Deficiency
On September 28, 2007, the estate filed a Form 706, United States Estate
(and Generation-Skipping Transfer) Tax Return. The estate reported a total value
for the gross estate of $1,814,423. On an attached Schedule F, Other
Miscellaneous Property, the estate reported a balance due with respect to the
periodic payments of $104,212 and related interest of $17,767. On an attached
Schedule G, Transfers During Decedent’s Life, the estate reported that in 1993
decedent had transferred to the annuity trust the Tierra Plaza and Black Walnut
Square properties, valued $1,050,156 and $375,646, respectively, and that the net
value of the transferred future interests was $503,993. The estate also reported
that: (1) decedent had relinquished her right to receive periodic payments from
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[*16] the annuity trust for the final two years of the annuity trust term; (2) the total
amount of the scheduled periodic payments for those years was $254,756; and (3)
the present value of the relinquished periodic payments was $232,226. On the
Schedule G the estate reported that in 1993 decedent had transferred to the
residence trust the Modesto property valued at $150,000 and that the net value of
the transferred future interest was $57,509.
In August 2010 decedent’s estate filed an informal claim for refund. In the
claim for refund decedent’s estate claimed a charitable contribution deduction of
$250,000 and a deduction for mortgages payable of $2,195,272.
In a notice of deficiency dated September 14, 2010, respondent determined
that the estate had failed to report transfers during decedent’s life of $14,365,823.
Respondent determined that the FMV of the Tierra Plaza and Black Walnut
Square properties as of decedent’s date of death was $14,177,325. Respondent
determined that the FMV of the Modesto property as of decedent’s date of death
was $750,000. Respondent disallowed the estate’s claimed deductions for
charitable contributions and mortgages payable.
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[*17] OPINION
Preliminary Matters
Generally, under section 7491(a), if a taxpayer introduces credible evidence
with respect to any factual issue, the burden of proof is shifted to the
Commissioner. The burden shifts, however, only when the taxpayer has
maintained all records and has cooperated with reasonable requests by the
Commissioner for witnesses, information, documents, meetings, and interviews.
Sec. 7491(a)(2)(B); see Higbee v. Commissioner, 116 T.C. 438, 440-441 (2001).
The parties dispute whether the burden shifts to respondent under section
7491(a). A prolonged discussion of burden of proof is unnecessary because we
decide this case on the preponderance of the evidence. See Knudsen v.
Commissioner, 131 T.C. 185, 189 (2008) (“In a case where the standard of proof is
preponderance of the evidence and the preponderance of the evidence favors one
party, we may decide the case on the weight of the evidence and not on an
allocation of the burden of proof.”); see also Estate of Jorgensen v. Commissioner,
T.C. Memo. 2009-66, aff’d, 431 Fed. Appx. 544 (9th Cir. 2011).
As another preliminary matter, we note that the parties’ briefs in this case
failed to comply with Rule 151(e)(3), which directs that a party’s proposed
findings “shall consist of a concise statement of essential fact and not a recital of
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[*18] testimony nor a discussion or argument relating to the evidence or the law”
and shall include “references to the pages of the transcript or the exhibits or other
sources relied upon to support the statement.” (Emphasis added.)
Some of the parties’ proposed findings, including significant findings
concerning cash balances in estate bank accounts as of decedent’s date of death,
are not supported by either the exhibits or the testimony cited. As a result, many
of the proposed findings have not been adopted. Although the stipulations are
extensive, we have confined our factual findings to those material to the resolution
of the issues for decision. The parties will bear the burden of extracting from the
stipulated exhibits information necessary to the computations for the decision to
be entered in this case pursuant to Rule 155.
Includability of Assets in Decedent’s Gross Estate
Section 2051 defines the term “taxable estate” as “the value of the gross
estate”, less applicable deductions. Section 2033 broadly states that “[t]he 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.” Sections 2034 through
2045 then explicitly mandate inclusion of several more narrowly defined classes
of assets.
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[*19] For example, section 2036(a) provides:
SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.
(a) General Rule.--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--
(1) the possession or enjoyment of, or the right to the
income from, the property, or
(2) 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.
The general purpose of section 2036(a) is to include in a decedent’s gross estate
transfers of property that are “‘essentially testamentary’ in nature.” Ray v. United
States, 762 F.2d 1361, 1362 (9th Cir. 1985) (quoting United States v. Estate of
Grace, 395 U.S. 316, 320 (1969)). Testamentary transfers are those “transfers
which leave the transferor a significant interest in or control over the property
transferred during his lifetime.” Estate of Grace, 395 U.S. at 320.
Section 2036(a) includes the value of assets in a decedent’s gross estate
when: (1) decedent made an inter vivos transfer of property; (2) decedent’s
transfer was not a bona fide sale for adequate and full consideration; and (3)
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[*20] decedent retained an interest or right in the transferred property that she did
not relinquish before her death. See Estate of Bongard v. Commissioner, 124 T.C.
95, 112 (2005). In addition, section 2035(a) provides that a decedent’s gross
estate includes the value of any property with respect to which the decedent made
a transfer or relinquished a power within three years of her death if the value of
such property would have been included in her estate under section 2036 but for
her transfer of an interest in the property or her relinquishment of a power with
respect to the property.
Annuity Trust
Respondent contends that decedent’s gross estate must include the values of
the Tierra Plaza and Black Walnut Square properties pursuant to section 2036(a).
Petitioner does not contest that decedent made inter vivos transfers of property to
the annuity trust. Rather petitioner contends that section 2036(a) is inapplicable
because: (1) decedent’s transfers of the Black Walnut Square and Tierra Plaza
properties were bona fide sales for adequate and full consideration; or (2) decedent
did not retain during her life an interest in the transferred properties. We address
each of petitioner’s arguments in turn.
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[*21] Bona Fide Sale Exception
Section 2036(a) does not apply if the transfer of property was part of a bona
fide sale in exchange for full and adequate consideration. A bona fide sale is an
arm’s-length business transaction between a willing buyer and a willing seller.
Estate of Reichardt v. Commissioner, 114 T.C. 144, 155 (2000). Availability of
the exception rests on two requirements: (1) a bona fide sale, meaning an arm’s-
length transaction, and (2) full and adequate consideration. See Estate of Harper
v. Commissioner, T.C. Memo. 2002-121. The situation before us meets neither of
these criteria.
First, decedent did not receive full and adequate consideration for the
transfers of the rental properties. Decedent received an interest reducible to
money value, i.e., the present value of the periodic payments. However, decedent
and Eigner structured the annuity trust as a grantor trust, and decedent reported the
difference between the then present value of the periodic payments and the FMV
of the Tierra Plaza and Black Walnut Square properties as a gift on her Form 709
for 1993. Decedent’s structuring of the annuity trust and subsequent tax reporting
supports a finding that she did not transfer the properties to the trust in exchange
for full and adequate consideration.
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[*22] Second, no bona fide sale, in the sense of an arm’s-length transaction,
occurred in connection with decedent’s transfers of the properties to the annuity
trust. Eigner prepared the annuity trust agreement in the absence of any
meaningful negotiation or bargaining with the other anticipated cotrustees or
future beneficiaries. Eigner and decedent determined how the entire estate plan
would be structured and operated and what property would be contributed to
which vehicle. Decedent, as the sole beneficiary and the sole transferor, formed
the transaction, fully funded the annuity trust, and essentially stood on both sides
of the transaction.
Petitioner nonetheless contends that decedent’s transfers of the properties to
the annuity trust satisfy the bona fide sale exception because, according to
petitioner, decedent had clear nontax purposes for the transfers. In particular
petitioner contends that decedent’s purpose in transferring the properties was to
relieve herself of the burden of managing the properties and to receive an assured
income. Petitioner urges us to adopt the standard set forth in Estate of Bigelow v.
Commissioner, 503 F.3d 955, 969 (9th Cir. 2007), aff’g T.C. Memo. 2005-65, for
evaluating whether a decedent transferred an asset to a family member as part of a
bona fide sale.
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[*23] In Estate of Bigelow v. Commissioner, 503 F.3d at 968-969, the U.S. Court
of Appeals for the Ninth Circuit analyzed the decedent’s reasons for transferring
property to a family limited partnership. The court stated that when a decedent
transfers property to a family limited partnership, “[t]he crux of the bona fide
transfer inquiry is whether the taxpayer can demonstrate that the transfer had
‘legitimate and significant nontax reasons.’” Id. (quoting Estate of Bongard v.
Commissioner, 124 T.C. at 123). If the taxpayer can demonstrate that the
decedent had legitimate and significant nontax reasons for the transfer, the bona
fide sale exception is satisfied. Id. The court also noted that intrafamily transfers
are subject to heightened scrutiny. Id.
Although a number of other cases have applied the “legitimate and
significant nontax reasons” standard to determine whether a bona fide sale
exception was satisfied, all of the cases applied the standard in the context of a
transfer to a family limited partnership. See, e.g., Estate of Black v.
Commissioner, 133 T.C. 340, 362 (2009); Estate of Bongard v. Commissioner,
124 T.C. at 118-119; Estate of Stone v. Commissioner, T.C. Memo. 2012-48;
Estate of Turner v. Commissioner, T.C. Memo. 2011-209. Decedent transferred
the Tierra Plaza and Black Walnut Square properties to a grantor trust, not a
family limited partnership. Decedent’s transfers are not comparable to a transfer
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[*24] to a family limited partnership, particularly given that no other individual
received a present interest in the annuity trust. We are not persuaded and are
unable to find that decedent’s transfers to the annuity trust are sufficiently similar
to a transfer to a family limited partnership to apply the “legitimate and significant
nontax reasons” standard.
Furthermore, even if we were to find that the “legitimate and significant
nontax reasons” standard was applicable, the evidence does not establish that
decedent had substantial nontax reasons for transferring the properties to the
annuity trust. With respect to decedent’s desire to reduce her property
management obligations, the annuity trust agreement provided that all of the
cotrustees could manage the properties and did not exclude decedent from the
right or obligation of managing the properties. In fact, decedent continued to
participate in managing the properties even after she established the annuity trust.
With respect to decedent’s desire to receive an assured income, the record shows
that Eigner and decedent structured the annuity trust to provide for periodic
payments to decedent at least in part because of the beneficial tax treatment of
such an arrangement as opposed to an alternative arrangement, such as a sale of
the properties or transfers of the properties to Helen Properties.
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[*25] Decedent undisputedly transferred the rental properties to the annuity trust
as part of her overall estate plan. Decedent transferred her assets to the annuity
trust at age 72, and at the same time she executed her will. See, e.g., Estate of
Rosen v. Commissioner, T.C. Memo. 2006-115, slip op. at 44. Decedent had
significant stated tax reasons for creating the annuity trust. While decedent’s
creation of the annuity trust accomplished some nontax objectives, we are unable
to find that, when viewed in totality, those nontax objectives were significant.
Accordingly, the transfers do not qualify under the bona fide sale exception.
Retained Interest
Whether a decedent retained an interest in transferred property depends
upon whether “there is an express or implied agreement at the time of transfer that
the transferor will retain lifetime possession or enjoyment of, or right to income
from, the transferred property.” Estate of Thompson v. Commissioner, 382 F.3d
367, 375 (3d Cir. 2004), aff’g T.C. Memo. 2002-246. To avoid characterization as
a retained interest, the decedent must have “absolutely, unequivocally, irrevocably,
and without possible reservations” parted with all of her title, possession, and
enjoyment of the transferred assets. Commissioner v. Estate of Church, 335 U.S.
632, 645 (1949).
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[*26] As used in section 2036(a)(1), the term “enjoyment” has been described as
“synonymous with substantial present economic benefit.” Estate of McNichol v.
Commissioner, 265 F.2d 667, 671 (3d Cir. 1959), aff’g 29 T.C. 1179 (1958); see
also Estate of Reichardt v. Commissioner, 114 T.C. at 151. Regulations
additionally provide that use, possession, right to income, or other enjoyment of
transferred property is considered as having been retained or reserved “to the
extent that the use, possession, right to the income, or other enjoyment is to be
applied toward the discharge of a legal obligation of the decedent, or otherwise for
his pecuniary benefit.” Sec. 20.2036-1(b)(2), Estate Tax Regs. Enjoyment of the
transferred property is retained for purposes of section 2036(a)(1) if there is an
express or implied understanding among the parties at the time of the transfer,
even if the retained interest is not legally enforceable. See Estate of Rapelje v.
Commissioner, 73 T.C. 82, 86 (1979); Estate of Turner v. Commissioner, T.C.
Memo. 2011-209.
As used in section 2036(a), the term “right” has been described as “an
ascertainable and legally enforceable power”. United States v. Byrum, 408 U.S.
125, 136 (1972). Section 20.2036-1(b)(3), Estate Tax Regs., provides:
With respect to such a power, it is immaterial (i) whether the power
was exercisable alone or only in conjunction with another person or
persons, whether or not having an adverse interest; (ii) in what
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[*27] capacity the power was exercisable by the decedent or by another
person or persons in conjunction with the decedent; and (iii) whether
the exercise of the power was subject to a contingency beyond the
decedent’s control which did not occur before his death * * *. The
phrase, however, does not include a power over the transferred
property itself which does not affect the enjoyment of the income
received or earned during the decedent’s life. * * *
However, the decedent’s retention of the right to exercise managerial power over
the transferred property does not in and of itself result in inclusion under section
2036(a). Byrum, 408 U.S. at 132-134.
We consider all the facts and circumstances surrounding the transfer and the
subsequent use of the property in deciding whether there was an implied
agreement. See Estate of Thompson v. Commissioner, 382 F.3d at 376. In
assessing whether a decedent impliedly retained the right to possession or
enjoyment of the assets, we previously have considered factors such as the use of
the transferred assets to pay the decedent’s personal expenses, the decedent’s
relationship to the assets before and after the transfer, “commingling of funds, a
history of disproportionate distributions, testamentary characteristics of the
arrangement, the extent to which the decedent transferred nearly all of his or her
assets, the unilateral formation of the partnership, the type of assets transferred,
and the personal situation of the decedent.” Estate of Erickson v. Commissioner,
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[*28] T.C. Memo. 2007-107, slip op. at 20; see Estate of Hurford v.
Commissioner, T.C. Memo. 2008-278, slip op. at 73.
M. Dole testified that, before her death, decedent made all decisions with
respect to the Tierra Plaza and Black Walnut Square properties and that the
cotrustees generally acted on decedent’s recommendation. He testified further that
decedent took the lead role in negotiating the refinancing of the properties
following their transfer to the annuity trust. Decedent alone retained signatory
authority with respect to the disposition of the properties, as shown by the
residential lease option and promissory note decedent executed with respect to the
properties. Decedent thus retained de facto control over the properties and their
disposition. See, e.g., Estate of Thompson v. Commissioner, 382 F.3d 367; Estate
of Reichardt v. Commissioner, 114 T.C. at 152.
In addition, the annuity trust agreement provided that any additional
income could be distributed to decedent at the direction of the trustees. Decedent
retained 50% of the voting rights, and the remaining voting rights were divided
among her children. Because decedent and her children could make distributions
of additional income to decedent when and in the amount they pleased, decedent
maintained the same enjoyment of the properties and their income stream as
she had before she transferred the properties to the annuity trust. See, e.g.,
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[*29] Estate of Thompson v. Commissioner, 382 F.3d 367; Estate of Rosen v.
Commissioner, slip op. at 50-51; see also sec. 20.2036-1(b)(3), Estate Tax Regs.
Decedent also received an additional economic benefit in that the annuity trust, on
behalf of decedent, applied the income from the transferred properties to the
discharge of her loan obligations with respect to those properties. See Estate of
Bigelow v. Commissioner, 503 F.3d at 965; Strangi v. Commissioner, 417 F.3d
468, 477 (5th Cir. 2005), aff’g T.C. Memo. 2003-145; Estate of Malkin v.
Commissioner, T.C. Memo. 2009-212.
Finally, decedent transferred the properties to the annuity trust on the advice
of Eigner and Korte to minimize the tax consequences of passing her estate to her
descendants. See, e.g., Estate of Rosen v. Commissioner, slip op. at 52.
Decedent’s motivations, the testamentary character of the annuity trust, and the
actions taken with respect to the annuity trust are “more consistent with an estate
plan than an investment in a legitimate business.” Estate of Thompson v.
Commissioner, 382 F.3d at 377.
Given decedent’s continued control over the transferred properties, her
right to the excess income from the properties, and the use of the income from
the properties to discharge her personal legal obligations, we are unable to find
that decedent “absolutely, unequivocally, irrevocably, and without possible
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[*30] reservations” parted with all of her title, possession, and enjoyment of the
transferred properties. Commissioner v. Estate of Church, 335 U.S. at 645. We
conclude that decedent retained an interest in the entirety of the transferred
properties.
Petitioner nonetheless contends that decedent did not have a retained
interest in the transferred properties because decedent received only the right to
the specific periodic payments, computed without regard to the annuity trust’s
income. Petitioner argues that decedent retained an interest in only the periodic
payments rather than the entirety of the transferred properties. In so arguing,
petitioner characterizes decedent’s transfer of the Tierra Plaza and Black Walnut
Square properties as a sale in exchange for an annuity rather than a transfer with a
retained interest.
The U.S. Court of Appeals for the Ninth Circuit has set forth standards to
aid in deciding whether a decedent’s transfer of property to a trust in exchange for
an annuity constitutes a retained interest or a sale in exchange for an annuity. Ray,
762 F.2d at 1363. The Court of Appeals stated that a retained interest existed
where:
(1) the property the taxpayers transferred to the trust was, in effect,
the only source for their “annuity” payments; (2) since the trust’s
income was designed to equal the annual payments to the taxpayers,
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[*31] the “annuity” payments would not be paid from the trust
corpus; and (3) the trust corpus would be available for “ultimate
distribution to the trust beneficiaries.”
Id. (citing Lazarus v. Commissioner, 513 F.2d 824, 829 (9th Cir. 1975), aff’g 58
T.C. 854 (1972)). By contrast, a sale in exchange for an annuity occurred where
the parties structured the transaction as an annuity obligation, the amount of the
annuity did not bear a mathematical relationship to the trust income, the transferor
did not control the property transferred, and the trust corpus was used to pay the
annuity rather than simply providing for annuity payments as a conduit for the
trust income. Id. The court concluded that the decedent’s interests in the property
after the transfer constituted a retained interest under section 2036(a). Id. The
court further concluded that the taxpayer’s reliance on Fid.-Phila. Trust Co. v.
Smith, 356 U.S. 274, 280 n.8 (1958), was misplaced because the payments at issue
“were chargeable solely to the transferred property and income therefrom; they
were not personal obligations of the trustee.” Ray, 762 F.2d at 1364.
While decedent formally structured the transaction as an annuity obligation
and did not calculate the amount of the periodic payments as a percentage of the
annuity trust income, these facts alone are an insufficient basis upon which to rest
a conclusion that decedent sold the properties to the trust in exchange for an
annuity. The record shows that decedent’s transfer was more akin to a transfer
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[*32] with a retained interest than to a sale in exchange for an annuity. Decedent
continued to control the transferred properties. See supra pp. 24-29. The
transferred properties were the only source for the funds for the periodic payments,
and decedent intended that the periodic payments would be made from the annuity
trust’s income rather than the trust corpus, as evidenced by her refusal to sell the
properties after learning that such sale would invade the trust corpus. The trust
corpus was never used to make any part of the periodic payments and therefore
was available and intended for distribution to the ultimate trust beneficiaries, i.e.,
decedent’s children and grandchildren. The periodic payments simply were a
“conduit” for payment to decedent of the income from the Tierra Plaza and Black
Walnut Square properties.
As in Ray, petitioner’s reliance on Fid.-Phila. Trust Co., 356 U.S. at 280
n.8, is misplaced. Although the cotrustees agreed to advance funds to the annuity
trust if the income and assets were insufficient to fund decedent’s periodic
payments, the record shows that the cotrustees were never required to advance any
money and that decedent intended the annuity trust to make the periodic payments
using the income generated by the properties rather than any contributions of the
cotrustees. In fact, the periodic payments were funded with only the income from
the transferred properties.
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[*33] Petitioner’s argument presupposes that we find that decedent had a retained
interest in the periodic payments only; however, as discussed supra, we have
concluded that decedent had a retained interest in the entirety of the transferred
properties rather than just an interest in the periodic payments. Furthermore,
decedent did not receive only the right to specified payments under the annuity
trust agreement. In addition to decedent’s authority to distribute to herself any
excess annuity trust income, decedent had the authority, and exercised the
authority, to increase or decrease the periodic payment amount at her discretion,
despite provisions in the annuity trust specifying a certain amount.
While the amount of the payment was not tied to the income of the annuity
trust, the annuity trust was funded with decedent’s assets only, and the annuity
trust used these assets to produce sufficient income to fund the required periodic
payments. See, e.g., Estate of Hurford v. Commissioner, slip op. at 58-59. While
the cotrustees agreed to advance funds to the annuity trust if needed, the cotrustees
never actually advanced any such funds and the structure of the annuity trust made
it unlikely that the cotrustees would ever have to advance such funds.
Accordingly, we reject petitioner’s argument that decedent’s retained interest was
limited to an interest in only the periodic payments.
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[*34] Alternatively, petitioner contends that decedent did not have a retained
interest in the transferred properties because California law limited decedent’s
authority to distribute any excess trust income to herself. In support of this
argument petitioner cites the following California statutory provision:
Unless a settlor or a testator clearly indicates that a broader power is
intended by express reference to this subdivision, a person who is a
beneficiary of a trust that permits the person, as trustee or cotrustee,
to make discretionary distributions of income or principal to or for the
benefit of himself or herself may exercise that power in his or her
favor only for his or her health, education, support, or maintenance
within the meaning of Sections 2041 and 2514 of the Internal
Revenue Code. * * *
Cal. Prob. Code sec. 16081(c) (West 2011).
Although California law limited decedent’s authority to distribute excess
income to herself, it did not extinguish that authority. In fact, Cal. Prob. Code sec.
16081(c) provides an ascertainable standard for distributing the excess income that
is fairly broad. Petitioner failed to cite, and we have not found, any case in which
a court has held that a State statute that limited the decedent’s authority to
distribute income attributable to transferred property rendered that authority
irrelevant in considering whether the decedent had retained a right to the income
of the transferred property. We therefore reject petitioner’s argument.
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[*35] We conclude that there was an implied agreement between decedent and the
cotrustees at the time of the transfer of the properties to the annuity trust that
decedent would retain enjoyment and economic benefit of the transferred
properties. Decedent retained such enjoyment and economic benefit during her
lifetime. Contrary to petitioner’s assertion, decedent did not retain an interest in
the periodic payments only but rather she retained an interest in the entirety of the
transferred properties. Accordingly, decedent had a retained interest in the
transferred properties under section 2036(a).
Section 2035
We now must consider whether decedent’s action in reducing the annuity
trust term in August 2006 constituted a transfer of an interest in or relinquishment
of a right with respect to the properties and, if so, whether section 2035 operates to
include the transferred properties in decedent’s gross estate notwithstanding such
action. Petitioner contends that decedent’s reduction of the annuity trust term
constituted an exercise of power rather than a relinquishment of power and,
consequently, the transferred properties are not includible in decedent’s gross
estate. Respondent contends that decedent’s reduction of the annuity trust term
was a relinquishment of power because in so doing, she transferred the complete
present enjoyment of the annuity trust corpus and income to the remaindermen.
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[*36] Section 2035(a) provides for the inclusion in a decedent’s gross estate of the
value of such property that would have been includable under sections 2036 or
2038 but for the decedent’s relinquishment of a power with respect to that
property during a three-year period ending on the date of the decedent’s death. In
Estate of Jalkut v. Commissioner, 96 T.C. 675, 685 (1991), this Court analyzed
whether either of two sets of transfers constituted a relinquishment by the
decedent of his power to alter, amend, revoke, or terminate the trust under section
2038.
In 1984 decedent Jalkut, as trustee, made gift transfers to six donees. Id.
The Court concluded that the decedent made these transfers pursuant to his power
to withdraw income and principal from the trust and therefore the gift transfers
constituted an exercise of the decedent’s power. Id.; see also McNeely v. United
States, 16 F.3d 303, 305 (8th Cir. 1994) (holding that the decedent exercised
rather than relinquished her power with respect to the trust when she made
distributions to individuals pursuant to her power to invade the trust corpus at
will); Estate of Frank v. Commissioner, T.C. Memo. 1995-132; Estate of Barton v.
Commissioner, T.C. Memo. 1993-583. By contrast, in 1985 the decedent was
incapacitated and the remaining trustees distributed income and principal from the
trust to the decedent and his descendants. Estate of Jalkut v. Commissioner, 96
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[*37] T.C. at 685. The Court concluded that the transfers constituted “a
relinquishment by the decedent, through the trustees, of his power to alter, amend,
revoke or terminate the trust with respect to the transferred assets”. Id.; see also
White v. United States, 881 F. Supp. 688, 694-695 (D. Mass. 1995).
As discussed supra, decedent here retained an interest in the transferred
properties, including the right to control the properties, distribute excess income
from the properties, and use income from the properties to satisfy her personal
loan obligations. Contradicting petitioner’s argument, decedent’s retained interest
was not limited to her interest in the periodic payments; and even if she had
exercised, rather than relinquished, a power with respect to the periodic payments,
she still retained an interest in the transferred properties on the basis of her other
rights with respect to the properties.
When decedent reduced the annuity trust term she relinquished her right to
the periodic payments as well as her right to distribute excess income from the
annuity trust, as this authority was limited to the pendency of the annuity term. By
reducing the annuity trust term decedent relinquished her power to distribute
excess income to herself and her right to the full amount of periodic payments.
Once she reduced the annuity trust term decedent no longer was entitled to invade
the trust corpus or change the amounts of the distributions to the remaindermen.
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[*38] Accordingly, decedent’s action in reducing the annuity trust term constituted
a relinquishment of her power with respect to her right to receive periodic
payments and to distribute excess income from the transferred properties.
Value
Petitioner appears to contend that decedent retained an interest in only the
portions of the transferred properties required to fund the periodic payments. In so
contending petitioner relies primarily on Rev. Rul. 82-105, 1982-1 C.B. 133--
made obsolete as of July 14, 2008, by T.D. 9414, 2008-35 I.R.B. 454. Respondent
contends that the full FMV of the Tierra Plaza and Black Walnut Square
properties as of decedent’s date of death is includible in decedent’s gross estate.
If section 2036(a) applies, the decedent’s gross estate includes the full FMV
of the property transferred, determined as of the decedent’s date of death. Fid.-
Phila. Trust Co. v. Rothensies, 324 U.S. 108 (1945); see also sec. 20.2036-1(c),
Estate Tax Regs. If the decedent retained an interest in or a right to all of the
transferred property, the decedent’s gross estate must include the value of the
entire property. Sec. 20.2036-1(c)(1)(i), Estate Tax Regs. However, if the
decedent retained an interest in or a right to only part of the transferred property,
the decedent’s gross estate must include only a corresponding portion of the
property under section 2036. Id.
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[*39] In Rev. Rul. 82-105, supra, the Commissioner determined that a decedent
who created a charitable remainder annuity trust had retained only the right to
income from a portion of the transferred property. Consequently, the decedent’s
gross estate was required to include the value of only the specific portion of the
corpus that was necessary to produce the annuity payments. Id.
In addition to her right to receive the periodic payments, decedent retained
other interests in the transferred properties, including the right to control the
properties, the right to distribute excess income from the properties, and the right
to use such income to satisfy her personal loan obligations. Rev. Rul. 82-105,
supra, is inapplicable because decedent did not receive only the right to the
periodic payments.
Decedent retained an interest in the entirety of the transferred properties and
accordingly, decedent’s gross estate includes the FMV of the Tierra Plaza and
Black Walnut Square properties as of decedent’s date of death. The parties
stipulated that the leased fee value of the Tierra Plaza and Black Walnut Square
properties as of decedent’s date of death was $4,300,000. We reject petitioner’s
arguments in favor of a reduced FMV. Accordingly, we conclude that the
properties had an FMV as of decedent’s date of death of $4,300,000 in accordance
with the parties’ stipulation.
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[*40] Residence Trust
Petitioner does not dispute that decedent’s gross estate must include a
portion of the value of the Modesto property. However, petitioner contends,
without persuasive reason or authority, that decedent’s gross estate must include
only an amount equal to the rental value of the Modesto property for the residence
trust term. Respondent contends that decedent’s gross estate must include the
FMV of the Modesto property as of decedent’s date of death.
Section 20.2036-1(c)(2)(i), Estate Tax Regs., provides that, in calculating
the value of property includible in a decedent’s gross estate:
If a decedent transferred property into * * * [a retained annuity,
unitrust, or other interest in any trust] and retained or reserved the
right to use such property, or the right to an annuity, unitrust, or other
interest in such trust with respect to the property decedent so
transferred for decedent’s life, any period not ascertainable without
reference to the decedent’s death, or for a period that does not in fact
end before the decedent’s death, then the decedent’s right to use the
property or the retained annuity, unitrust, or other interest * * *
constitutes the retention of the possession or enjoyment of, or the
right to the income from, the property for purposes of section 2036.
The portion of the trust’s corpus includible in the decedent’s gross
estate for Federal estate tax purposes is that portion of the trust corpus
necessary to provide the decedent’s retained use or retained annuity,
unitrust, or other payment * * *
Accordingly, a decedent’s gross estate includes the FMV of a residence if the
decedent retained an interest in the residence for her life or for any other period
- 41 -
[*41] that does not end before the decedent’s death. See also sec. 2036(a); Estate
of Disbrow v. Commissioner, T.C. Memo. 2006-34.
Decedent had the right to reside in and actually resided in the Modesto
property until her death. She retained possession and enjoyment of the Modesto
property within the meaning of section 2036(a)(1). See, e.g., Estate of Tehan v.
Commissioner, T.C. Memo. 2005-128. The entire Modesto property, rather than
only its fair rental value, was necessary to provide decedent’s retained use of the
property. Accordingly, decedent’s gross estate must include the FMV of the
Modesto property as of decedent’s date of death. See, e.g., Estate of Trotter v.
Commissioner, T.C. Memo. 2001-250; Estate of Callahan v. Commissioner, T.C.
Memo. 1981-357.
Mortgages Payable Deduction
Respondent concedes that decedent’s estate is entitled to a deduction with
respect to the Tierra Plaza mortgages because decedent personally was liable for
those mortgages. Respondent contends that decedent’s estate is not entitled to a
deduction for any mortgage with respect to the Black Walnut property because the
record does not establish that decedent personally was liable for that mortgage.
However, respondent concedes that decedent’s estate is entitled to offset the value
of the Black Walnut Square property by the amount of the indebtedness secured by
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[*42] that property. We infer from respondent’s brief that the amount in dispute is
attributable to the promissory note that the annuity trust issued to Helen Properties
in 2001.
Amounts deductible as administration expenses are limited to those actually
and necessarily incurred. Sec. 2053(a)(2); see sec. 20.2053-3(a) and (b)(1), Estate
Tax Regs. The value of a decedent’s gross estate shall be reduced by the amount
of any “unpaid mortgages on, or any indebtedness in respect of, property where
the value of the decedent’s interest therein, undiminished by such mortgage or
indebtedness, is included in the value of the gross estate”. Sec. 2053(a)(4).
Section 20.2053-7, Estate Tax Regs., provides:
If the decedent’s estate is liable for the amount of the mortgage or
indebtedness, the full value of the property subject to the mortgage or
indebtedness must be included as part of the value of the gross estate;
the amount of the mortgage or indebtedness being in such case
allowed as a deduction. But if the decedent’s estate is not so liable,
only the value of the equity of redemption (or the value of the
property, less the mortgage or indebtedness) need be returned as part
of the value of the gross estate. * * *
However, if the property was mortgaged after the decedent transferred a remainder
interest, the decedent’s estate is not entitled to a deduction for the full amount of
the mortgage or the net equity of redemption value unless the decedent personally
- 43 -
[*43] was liable for the mortgage. Estate of Theis v. Commissioner, 81 T.C. 741,
750 (1983), aff’d, 770 F.2d 981 (11th Cir. 1985).
In December 2001 the annuity trust paid off the mortgage secured by the
Black Walnut property and decedent was relieved of any personal liability with
respect to that property. On December 15, 2001, decedent, on behalf of the
annuity trust, issued a promissory note to Helen Properties, for which decedent
personally was liable. The parties agree that the promissory note represented
mortgage indebtedness secured by the Tierra Plaza and Black Walnut Square
properties.
As discussed supra, the value of decedent’s gross estate includes the FMV
of the Tierra Plaza and Black Walnut Square properties as of decedent’s date of
death. Decedent personally was liable for the mortgage indebtedness identified by
the promissory note. Accordingly, decedent’s estate is entitled to deduct the full
unpaid amount of the indebtedness attributable to the promissory note.
Charitable Contribution Deduction
Petitioner claims $250,000 as a charitable contribution deduction of
decedent’s estate. Respondent contends that decedent’s gross estate is not entitled
to a charitable contribution deduction because the residence trust term ended
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[*44] before decedent’s death and therefore decedent did not possess the right to
direct the disposition of the Modesto property to a charitable organization.
Section 2055 provides a charitable contribution deduction for amounts
transferred by a decedent for qualified charitable and religious uses. The transfers,
however, must have been made during the decedent’s lifetime or by will. Sec.
20.2055-1(a), Estate Tax Regs. Deductions are not permitted where the amounts
passing to a charity turn on the actions of a personal representative. Estate of
Engelman v. Commissioner, 121 T.C. 54, 70-71 (2003).
The residence trust agreement, both before and after amendment in August
2006, provided that if decedent was living at termination the trust property would
be distributed equally to her children or their children, but if decedent was
deceased at termination, the trustee would distribute the balance of the trust
property as directed by decedent’s will. The residence trust terminated before
decedent’s death pursuant to judicial reformation.
Decedent provided for the creation of the charitable remainder unitary trust
in the amendment to her will. Because the residence trust terminated before
decedent’s death, however, the Modesto property should have been distributed
equally to decedent’s children or grandchildren rather than distributed as directed
by decedent’s will, i.e., in part to the charitable remainder unitary trust. The
- 45 -
[*45] amounts passing to the charitable organizations turned on the actions of M.
Dole, who became trustee of the residence trust following termination of the trust
term, rather than the actions of decedent during her lifetime or in her will.
Therefore the estate is not entitled to any deduction for charitable contributions.
See, e.g., id.
Conclusion
We have considered the parties’ additional arguments, including some
abandoned by the parties’ failure to address them in the briefs. Certain of the
issues suggested by the parties will be resolved on the stipulated facts by
computations pursuant to Rule 155. To the extent other arguments are not
discussed, we conclude that they are irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.