T.C. Memo. 1996-472
UNITED STATES TAX COURT
JULIAN P. KORNFELD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13169-95. Filed October 22, 1996.
Julian P. Kornfeld, pro se.
Clarke L. Randall, for petitioner.
Elizabeth Downs, for respondent.
MEMORANDUM OPINION
TANNENWALD, Judge: Respondent determined deficiencies in
petitioner's Federal income taxes for the taxable years 1990 and
1991 in the amounts of $11,803.00 and $13,122.00, respectively.
The sole issue for decision is whether petitioner is entitled to
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amortize the cost of acquiring a life interest in tax-exempt
bonds where others simultaneously acquired the remaining
interests.
The case was submitted fully stipulated under Rule 122.1
All of the stipulated facts, including those contained in the
attached exhibits, are found accordingly.
Petitioner resided in Oklahoma City, Oklahoma, at all
relevant times, including the time when he filed his petition
herein. He filed timely individual income tax returns for 1990
and 1991.
Petitioner is an experienced lawyer, particularly in the
fields of business and tax law.2 He has two daughters, Meredith
Kornfeld (Meredith) and Nancy Kornfeld (Nancy), both of whom were
adults and college graduates at all relevant times. At those
1
All statutory references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
2
The stipulation of facts contains a detailed description of
petitioner's experience and of his analysis of the pertinent
authorities prior to entering into the transactions involved
herein. Petitioner has emphasized the description and the
analysis presumably to persuade the Court that his "expertise"
should be a significant factor influencing us to arrive at a
conclusion favorable to him. Respondent has utilized the
description presumably to persuade us that petitioner's tax
motivation predominated and should persuade us to decide the
instant case in her favor. We consider petitioner's background
and analysis peripheral (as to respondent's use of it) and
irrelevant (as to petitioner's use of it) to the accomplishment
of the task before us, namely, independently to reach our own
conclusions based on the stipulated factual elements of the
transactions involved.
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times, petitioner also had a long-time secretary and
administrative assistant, Patsy D. Permenter (Permenter), who was
also an adult at such times and not otherwise related to
petitioner.
Petitioner, acting through a revocable trust of which he and
Permenter were trustees, entered into agreements entitled Joint
Purchases of Life Estates and Remainder Interests pursuant to
which the parties would identify securities to be acquired in
which petitioner would have a life estate and the other parties
would have interests as indicated by the following:
(1) May 1, 1989, agreement - remainder interests in
Meredith and Nancy;
(2) June 19, 1989, agreement - remainder interest in Nancy;
(3) October 31, 1989, agreement - secondary life interest
in Nancy and remainder interest in Permenter;
(4) June 15, 1990, agreement - secondary life interest in
Nancy and remainder interest in Permenter.
All of the agreements provided that the parties would
identify securities for joint investment by executing an agreed
form designated by the parties as Exhibit A, that each would pay
a proportionate share of the purchase price of the joint
investments and that the disposition of any such investments
could be made only upon the direction of all parties.
The bonds purchased were tax-exempt bonds and were acquired
from unknown third parties through Prudential Bache Securities
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(Prudential Bache) or from Prudential Bache's own inventory of
bonds. Prudential Bache confirmed each purchase involved herein
by a confirmation slip addressed to the Julian P. Kornfeld Life
Estate, with an Oklahoma City address.
After the purchases, but before the closing dates,
petitioner would calculate the value of the respective interests
in the bonds that he and the other parties were acquiring. The
Exhibits A executed by the parties were dated the same day as the
Prudential Bache confirmations. Petitioner's calculations were
based upon the actuarial values published by the Internal Revenue
Service. The allocations reflected in such calculations are not
disputed by respondent.
Based upon the aforesaid calculations, petitioner would
furnish Nancy, Meredith, and Permenter with the amounts indicated
as their share of the purchase price. This would be accomplished
either by check or wire transfer to the respective bank accounts
before the closing date of the purchase. During the years in
issue, Nancy's bank account was in Minneapolis, Minnesota,
Meredith's bank account was in Los Angeles, California, and
Permenter's in Oklahoma City, Oklahoma.
With respect to every purchase, the amounts furnished by
petitioner were deposited in the bank accounts. Thereafter, and
before the closing dates, Nancy, Meredith, and Permenter issued
their separate checks to Prudential Bache in the amounts
reflected in petitioner's calculations as allocable to the
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interest each was acquiring. The monthly statements of
Prudential Bache for the Julian P. Kornfeld Life Estate indicated
the separate receipt of funds from petitioner, Meredith, Nancy,
and Permenter.
Neither Meredith, Nancy, nor Permenter was under any legal
obligation to utilize the funds received from petitioner to
acquire their interests in the purchased bonds. However, they
and petitioner intended that the funds would be so used.
Annexed hereto as Exhibit 1 is a schedule reflecting the
date and amount of each bond purchase involved herein, the
closing date of Prudential Bache, dates of petitioner's gifts3 to
the other parties, and the dates of payments by petitioner and
the other parties.
Petitioner furnished Nancy, Meredith, and Permenter with
funds in rounded amounts equal to the payments they made to
Prudential Bache. Neither Nancy, Meredith, nor Permenter
expended any amount in excess of the funds so furnished to make
any part of such payments.
Petitioner filed gift tax returns reflecting the gifts to
Nancy, Meredith, and Permenter but paid no tax on account of the
unified credit. See sec. 2505. Petitioner reported no other
gifts to Meredith, Nancy, or Permenter during the years at issue.
3
The use of the word "gifts" is not dispositive of the subject
of the gifts by petitioner, i.e., of funds or interests in the
bonds, which is the critical issue herein.
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When purchased bonds were redeemed, each party to the
agreements received their proceeds based upon the actuarial
values thereof published by the Internal Revenue Service. The
values are not disputed by respondent.
At issue is the right of petitioner to amortize, ratably
over his expected life, his cost of acquiring his life interests
in bonds purchased pursuant to joint purchase agreements.
Petitioner argues that he purchased his interests and that the
other participants acted independently in purchasing their
interests. Respondent contends that: (1) While, in form, the
purchases were by petitioner and the other participants, i.e.,
petitioner's daughters and secretary, in substance, petitioner
purchased the bonds as a whole, retaining life interests for
himself and donating the remaining4 interests to the other
participants with the result that (2) petitioner split
nondepreciable assets and is not entitled to an amortization
deduction. We dealt with the same issue in Gordon v.
Commissioner, 85 T.C. 309 (1985), in which we sustained
respondent's contentions and rejected the taxpayer's claim of an
amortization deduction, and in Richard Hansen Land, Inc. v.
Commissioner, T.C. Memo. 1993-248, where we applied Gordon and
rejected respondent's contentions and sustained the taxpayer's
4
We use the word "remaining" instead of "remainder" because of
the secondary life interest of Nancy in some of the bonds and the
fact that the proper characterization of that interest is in
question. See infra pp. 13-14.
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claim of an amortization deduction in a case involving the
acquisition of land.
Initially, we note that the fact that the bonds involved
herein were tax-exempt bonds does not operate to deprive
petitioner of his claimed amortization deduction. See Gordon v.
Commissioner, supra at 322 n.6 (citing Manufacturers Hanover
Trust Co. v. Commissioner, 431 F.2d 664 (2d Cir. 1970), affg. a
Memorandum Opinion of this Court).5 We further note that there
is no issue as to the amount of petitioner's claimed amortization
deduction if we hold that he is entitled to such deduction.
The basic question is whether or not the transactions were
structured in the right way, i.e., whether they were in fact what
they appear to be in form. See Gordon v. Commissioner, supra;
Hobby v. Commissioner, 2 T.C. 980, 985 (1943). This is a
question that the courts have been faced with many times in a
variety of contexts. Compare Cumberland Public Service Corp. v.
Commissioner, 338 U.S. 451 (1950), with Commissioner v. Court
Holding Co., 324 U.S. 331 (1945) (whether a sale was by a
corporation or its shareholders). Compare also Zenz v.
Quinlivan, 213 F.2d 914 (6th Cir. 1954), with Wall v. United
States, 164 F.2d 462 (4th Cir. 1947) (dividend or capital gain on
redemption of shares of corporation). We see no need to repeat
5
We note that the extent to which amortization deductions could
be taken with respect to tax-exempt income-producing property was
not changed by the enactment in 1989 of sec. 167(e). See infra
p. 13 and note 6.
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the underpinnings of that question which we explored in detail in
Gordon v. Commissioner, supra, and Richard Hansen Land, Inc. v.
Commissioner, supra. We think it important, however, to
recognize, as we did in those cases, that the fact that tax
reasons generated the choice of the structure used is not, in and
of itself, sufficient to require us to sustain respondent.
Against the foregoing background, we proceed to examine the
various elements involved herein, upon which the base resolution
of the ultimate factual question, i.e., were there separate
purchases of a life interest by petitioner and of the remaining
interests by the other parties or was there a purchase of the
entire ownership of the bonds by petitioner followed by a gift of
the interests in the bonds remaining after petitioner's retained
life estate. The burden of proof is on petitioner, Rule 142(a),
and that burden is not lessened because this is a fully
stipulated case. Borchers v. Commissioner, 95 T.C. 82, 91
(1990), affd. 943 F.2d 22 (8th Cir. 1991).
Some preliminary observations are in order. First, we
recognize, as we did in Gordon v. Commissioner, supra, that the
holders of the remaining interests were related to petitioner,
i.e., daughters, or closely identified with petitioner, i.e.,
petitioner's longtime secretary.6 While such relationships are
6
While Permenter was not "related" to petitioner in the same
way as his daughters, see secs. 167(e)(5)(B) and 267, we are
satisfied that, on the basis of the record herein, her
(continued...)
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not determinative, their existence provides a basis for
"skepticism" in accepting the form of the transaction. See
Gordon v. Commissioner, 85 T.C. at 325-326. Moreover, as we also
noted in Gordon, the pattern of tax benefits flowing from the
transactions involved herein are such as to constitute "a yellow
caution signal on our road to decision." Id. at 326.
Second, a substantial portion of the stipulation dealt with
assets possessed by the participants other than petitioner during
the years at issue. While the values of those assets,
particularly those of a corporation owned by the daughters, is
not clearly established, it would appear that substantial amounts
were involved and petitioner argues that the availability of such
assets as a potential source of payment for the remaining
interests of Nancy, Meredith, and Permenter in the bonds should
be considered in determining whether such interests were
independently purchased. We agree with respondent that the
availability of such assets is irrelevant to the issue before us.
That such assets might have been used does not answer the
question of how to characterize the transactions involved herein
where the funds used were supplied by petitioner.7
6
(...continued)
"relationship" should not be treated differently in view of the
fact that we have concluded that sec. 167(e) does not impact our
conclusion. See infra p. 13.
7
We note that in Gordon v. Commissioner, 85 T.C. 309, 328
(1985), we indicated that the presence of other assets available
(continued...)
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Finally, petitioner relies heavily on cases involving what
he claims to be analogous transactions, especially those dealing
with gifts of stock to a charity followed by a redemption of such
stock by the corporation. We dealt at some length with these
cases and cases involving seemingly analogous situations in
Gordon v. Commissioner, 85 T.C. at 327, and concluded that such
cases "are sufficiently distinguishable in terms of their factual
context and the issue involved so as not to furnish any
significant guidance to our decision herein." We continue to
adhere to that view.
Petitioner attaches great significance to the fact that gift
tax returns were filed in respect of all the funds provided by
petitioner, whereas in Gordon v. Commissioner, supra, most of the
transfers of funds by the taxpayer to the holder of the remainder
interest were not reflected in any gift tax returns. We are not
persuaded that this provides a significant basis for
distinguishing Gordon. Such returns merely reflect the values of
the gifts8 to the recipients which happen to coincide with the
amounts of the funds transferred. Although the gift tax returns
stated that the gifts were cash gifts, such self-serving labeling
is not determinative and its impact is not significant in light
7
(...continued)
to the holder of the remainder but not used was a factor
unfavorable to the taxpayer's position.
8
See supra note 3.
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of the other factors discussed herein which cause us to conclude
that interests in the bonds themselves were the subject matter of
the gifts. Moreover, the tax impact of the gifts, i.e., the
potential loss, at an indeterminate future date, of a portion of
petitioner's estate tax exemption by virtue of the utilization of
the unified credit is a far cry from the income tax consequences
of the receipt of wages by Hansen in Richard Hansen Land, Inc. v.
Commissioner, T.C. Memo. 1993-248.
Petitioner's principal argument rests on the absence of any
legal obligation on Nancy, Meredith, or Permenter to use the
funds provided by petitioner to acquire the remaining interests.
While this is an important element, it is not controlling, as our
opinion in Gordon v. Commissioner, supra, makes clear. Indeed,
as we pointed out in Gordon, the freedom of Nancy, Meredith, and
Permenter legally to refuse to utilize the funds provided by
petitioner to pay for the remaining interests "is of minimal
significance where * * * the facts reveal that the entire
transaction was set up around the expectation that the joint
implementation of the * * * [taxpayer's] investment strategy
would occur." Gordon v. Commissioner, 85 T.C. at 331 n.16. We
think that the pattern of the transactions herein unquestionably
falls within the "expectation" parameter.9 Unquestionably,
petitioner was the architect of the investment strategy and
9
Cf. Muserlian v. Commissioner, 932 F.2d 109, 113 (2d Cir.
1991, affg. T.C. Memo. 1989-493.
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orchestrator of its implementation. We are aware that the
parties have stipulated that 'Because of Julian's tax, financial,
and business expertise, Meredith and Nancy generally consult with
Julian about all major or significant financial transactions.'
But such a general description lacks the quality necessary to
support the conclusion that there was meaningful advance
consultation and exercise of independent judgment by Nancy and
Meredith in respect of the specific transactions involved herein,
to say nothing of the fact that the stipulation does not include
any reference to Permenter. Moreover, we note that Exhibits A
executed by petitioner and Nancy, Meredith, or Permenter were
uniformly dated the same day as the confirmations from Prudential
Bache. The amounts of funds provided from time to time by
petitioner to Nancy, Meredith, and Permenter were, within
pennies, equal to the amounts of the checks they issued to
Prudential Bache; by way of contrast, the separate funds of the
trust in Gordon v. Commissioner, supra, were used albeit to a
minor extent. The time spans between confirmation, payment, and
closing dates reflected in Exhibit 1 to this opinion are such as
to indicate that neither Nancy, Meredith, nor Permenter had any
meaningful opportunity or desire to exercise dominion and control
over the funds and elect not to participate in the purchases.
In short, we are satisfied that, on the basis of the record
as a whole, petitioner, like the taxpayer in Gordon v.
Commissioner, supra, acquired the entire ownership in the bonds
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and then divided that ownership by retaining a life interest and
transferring the remaining interests to Nancy, Meredith, and
Permenter.
In arriving at this conclusion, we recognize that we reached
an opposite result in Richard Hansen Land, Inc. v. Commissioner,
supra. However, the factual circumstances in Hansen Land were
quite different; in particular, in the case of Richard Hansen, he
acquired the remainder interest with funds that he received as
taxable income in a transaction whose bona fides were not
questioned by respondent. His wholly owned corporation, whose
separateness was also not questioned by respondent, acquired the
amortizable term interest, and the Kammerzells utilized their own
separate funds.
Concededly, the disposition of cases such as the one before
us inevitably involves the difficult task of line drawing. But,
as we have previously observed:
the necessity of drawing lines is part of the daily
grist of judicial life and should not influence us to
adopt another rule simply to avoid difficulties in
application. See Estate of Lillie MacMunn Stewart [v.
Commissioner], 52 T.C. 830, 836 (1969), revd. on other
grounds 436 F.2d 1281 (3d Cir. 1971). [Allen v.
Commissioner, 66 T.C. 340, 346 (1976); fn. ref.
omitted.]
In view of our conclusion, we have no need to address the
application of section 167(e) in respect of the transactions
under the October 31, 1989, and June 15, 1990, agreements and the
question whether Nancy's secondary life interest constituted a
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remainder interest for the purpose of that section. See H. Rept.
101-247 at 1361-1362 (1989); H. Conf. Rept. 101-386 at 625-626
(1989).
In view of the foregoing,
Decision will be entered
for respondent.
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DISSEMINATION.]