T.C. Memo. 2005-128
UNITED STATES TAX COURT
ESTATE OF TIMOTHY J. TEHAN, DECEASED, TIMOTHY R. TEHAN, EXECUTOR,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17282-03. Filed May 31, 2005.
Michael F. Callahan, for petitioner.
William J. Gregg and Ann Welhaf, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined a deficiency of
$132,415 in Federal estate tax (estate tax) with respect to the
estate (estate) of Timothy J. Tehan (decedent).
The issues remaining for decision are:
(1) Is certain property includible in decedent’s gross
- 2 -
estate under section 2036(a)(1)?1 We hold that it is.
(2) Is the estate entitled to deduct under section 2053
claimed personal representative’s commissions in excess of the
amount allowed by respondent? We hold that it is to the extent
stated herein.
FINDINGS OF FACT
Most of the facts have been stipulated and are so found.
At the time the petition was filed, Timothy R. Tehan (Mr.
Tehan), the son of decedent and the personal representative of
the estate, resided in Bethesda, Maryland.
Decedent had eight children, including Mr. Tehan. Dece-
dent’s other children are: Ann M. Sanner, Patrick G. Tehan,
Eileen T. Tehan, Daniel J. Tehan, Erin M. Boccia, Maureen R.
Tehan, and William T. Tehan.
On March 28, 1990, decedent purchased condominium unit
number 610N (decedent’s residence) at 8101 Connecticut Avenue,
Chevy Chase, Montgomery County, Maryland. The purchase price of
that condominium was $240,000.
On January 25, 1992, decedent, while residing in decedent’s
residence, executed a declaration of trust under which he placed
$100 and certain life insurance policies into an irrevocable
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect on the date of decedent’s
death. All Rule references are to the Tax Court Rules of Prac-
tice and Procedure.
- 3 -
trust known as the "Timothy J. Tehan Irrevocable Trust".
On November 5, 1997, in anticipation of the three deeds
discussed below that decedent executed with respect to decedent’s
residence, decedent and decedent’s children executed an agreement
(November 5, 1997 agreement) concerning that residence, which was
the only agreement with respect to decedent’s use and occupancy
of decedent’s residence into which decedent and decedent’s
children entered. The November 5, 1997 agreement provided in
pertinent part:
THIS AGREEMENT, made this ___ day of _______,
1997,[2] by and between TIMOTHY J. TEHAN and TIMOTHY R.
TEHAN, ANN M. SANNER, PATRICK G. TEHAN, EILEEN T.
TEHAN, DANIEL J. TEHAN, ERIN M. BOCCIA, MAUREEN R.
TEHAN and WILLIAM T. TEHAN (collectively the “Owners”).
* * * * * * *
NOW THEREFORE, in consideration of the mutual
promises, covenants and agreements herein contained,
the parties agree as follows:
1. Occupancy of Property and Payment of Ex-
penses. Timothy J. Tehan shall have the sole and
exclusive right to the use and occupancy of the Prop-
erty for such period of time as he desires. While he
is occupying the Property, Timothy J. Tehan shall not
pay any rent, but shall be solely responsible for the
payment of any mortgage secured against the Property,
the monthly condominium assessment, the annual real
estate taxes and insurance premiums for the Property,
and all costs or expenses in connection with the main-
tenance and repair of the Property. At such time as
Timothy J. Tehan ceases to occupy the Property, such
costs and expenses shall be divided between the owners
of the Property, in accordance with their percentage
2
As we found above, decedent and decedent’s children exe-
cuted the agreement on Nov. 5, 1997.
- 4 -
interest in the Property.
2. Restrictions on Transfer of Interest. Except
as otherwise provided herein, no owner shall sell,
hypothecate, pledge, assign or otherwise, transfer with
or without consideration any part of his/her interest
in the Property to any other person without first
offering his/her interest first to Timothy J. Tehan,
and secondly, to the other owners, in accordance with
the provisions of this Paragraph 2:
(A) The owner desiring to sell, encumber or
otherwise dispose of his/her interest in the Property
(the “Selling Owner”) shall submit a written offer to
sell his or her interest to Timothy J. Tehan, setting
forth the price and terms and conditions under which
he/she is willing to sell his/her interest. For a
period of ninety (90) days after receipt of such offer,
Timothy J. Tehan shall have the right to accept said
offer and to purchase the interest of the Selling
Owner.
In the event Timothy J. Tehan does not
accept the offer, then the other owners shall have the
option, in proportion to their ownership interest, to
purchase said interest by notifying the Selling Owner
within thirty (30) days after the expiration of Timothy
J. Tehan’s option. If the owners accept the offer,
they shall, at the same time, fix a closing date not
more than sixty (60) days after the date of acceptance.
The purchase price shall be payable in
cash on the closing date, unless the offer provides
otherwise.
If Timothy J. Tehan and the owners all
fail to accept the offer, then the Selling Owner shall
be free, for a period of thirty (30) days thereafter,
to solicit offers from any bona fide prospective pur-
chasers.
If the Selling Owner receives a bona
fide offer to purchase his/her interest at a price and
on terms acceptable to the Selling Owner, he/she shall
send a written copy of said offer to Timothy J. Tehan
and the other owners and, for a period of ninety (90)
days after receipt of the offer, Timothy J. Tehan and
the other owners shall have the option to purchase the
- 5 -
interest of the Selling Owner at the same price and on
the same terms and conditions as set forth in the offer
of the bona fide prospective purchaser. If Timothy J.
Tehan or the other owners do not exercise the said
option, the Selling Owner shall be free to sell his/her
interest to the bona fide prospective purchaser pro-
vided: (i) the purchase price and terms and conditions
of sale shall not be different than set forth in the
bona fide offer previously sent to Timothy J. Tehan and
the other owners; (ii) if the sale is not consummated
within thirty (30) days after the option of Timothy J.
Tehan and the other owners expire, the interest shall
once again be subject to the restrictions herein; and
any transferee of the Selling Owner’s interest shall
automatically be bound by the terms of this Agreement
and shall be required to join in, execute, acknowledge
and deliver a copy of this Agreement, and he/she shall
thereupon become an owner.
3. Sale of Property. At such time as Timothy J.
Tehan ceases to occupy the Property, the Property shall
be sold and the net proceeds of sale shall be allocated
and distributed among the Owners in proportion to their
percentage of ownership interest. [Reproduced liter-
ally.]
On or about November 5, 1997, decedent executed a deed
(first deed), which was recorded. That deed provided in perti-
nent part:
Witnesseth, that for no consideration, the Grantor
[decedent] does hereby grant and convey unto each of
the Grantees [decedent’s children], in fee simple and
as tenants in common, an undivided 4.5% interest, in
and to that piece or parcel of improved land [dece-
dent’s residence] * * *.
On or about January 2, 1998, decedent executed a second deed
(second deed), which was recorded. That deed provided in perti-
nent part:
Witnesseth, that for no consideration, the Grantor
[decedent] does hereby grant and convey unto each of
the Grantees [decedent’s children], in fee simple and
- 6 -
as tenants in common, an undivided 4.5% interest, in
and to that piece or parcel of improved land [dece-
dent’s residence] * * *.
* * * * * * *
The Grantor does furthermore confirm that, as of
the date of execution of this instrument, ownership of
the property hereinabove described is vested in the
following entities, as tenants in common, with their
percentage interest opposite each name:
PERCENTAGE
NAME INTEREST
TIMOTHY J. TEHAN 28%
TIMOTHY R. TEHAN 9%
ANN M. SANNER 9%
PATRICK G. TEHAN 9%
EILEEN T. TEHAN 9%
DANIEL J. TEHAN 9%
ERIN M. BOCCIA 9%
MAUREEN R. TEHAN 9%
WILLIAM T. TEHAN 9%
On or about March 22, 1999, decedent executed a third deed
(third deed).3 That deed provided in pertinent part:
Witnesseth, that for no consideration, the Grantor
[decedent] does hereby grant and convey unto each of
the Grantees [decedent’s children], in fee simple and
as tenants in common, an undivided 3.5% interest, in
and to that piece or parcel of improved land [dece-
dent’s residence] * * *.
* * * * * * *
The Grantor does furthermore confirm that, as of
the date of execution of this instrument, ownership of
the property hereinabove described is vested in the
following entities, as tenants in common, with their
percentage interest opposite each name:
3
The record does not disclose whether the third deed was
recorded.
- 7 -
PERCENTAGE
NAME INTEREST
TIMOTHY R. TEHAN 12.5%
ANN M. SANNER 12.5%
PATRICK G. TEHAN 12.5%
EILEEN T. TEHAN 12.5%
DANIEL J. TEHAN 12.5%
ERIN M. BOCCIA 12.5%
MAUREEN R. TEHAN 12.5%
WILLIAM T. TEHAN 12.5%
At all times after decedent and decedent’s children executed
the first deed on November 5, 1997, until decedent died on May
17, 1999, decedent continued to treat decedent’s residence as his
own. Thus, pursuant to the terms of the November 5, 1997 agree-
ment, until he died decedent continued to (1) use and occupy
decedent’s residence and (2) pay all of the monthly expenses with
respect to that residence (monthly expenses), which totaled about
$900 excluding utility expenses and between $1,000 and $1,100
including utility expenses4 and which included condominium fees,5
real property taxes on decedent’s residence, homeowner’s insur-
ance, and expenses of maintaining that residence.6 At no time
4
Decedent’s children would not have required decedent to
vacate decedent’s residence if he had failed to pay the monthly
expenses.
5
The record does not disclose the amount(s) of monthly
condominium fees with respect to decedent’s residence that
decedent paid during the period Nov. 5, 1997, to the date of
decedent’s death. However, the record establishes that during
the period Mar. 28, 1990, the date on which decedent purchased
decedent’s residence, until the date of his death, such condomin-
ium fees ranged from $396 to $514.
6
There was no mortgage loan with respect to decedent’s
(continued...)
- 8 -
did decedent need permission from his children in order to have
guests at decedent’s residence or to redecorate it. At no time
during decedent’s life did any of decedent’s children use or
occupy decedent’s residence or pay any of the monthly expenses
with respect to that residence. None of decedent’s children
attempted to sell his or her purported interest in decedent’s
residence before decedent died. After decedent died, decedent’s
children sold that residence.
On August 17, 1998, decedent executed a last will and
testament (decedent’s will). Decedent’s will provided in perti-
nent part:
ITEM I
I direct my Personal Representative, hereinafter
named, to pay the expenses of my last illness and
funeral as soon after my death as may be practicable in
such amount as he may deem proper, and without regard
to any limitation in the applicable local law as to the
amount of such expenses.
ITEM II
I direct that all inheritance, estate, legacy or
other taxes which may be imposed with respect to my
estate, whether or not passing under this will, shall
be paid out of my residuary estate.
ITEM III
All the rest, residue and remainder of my estate,
of whatsoever kind and wheresoever situate, I give,
6
(...continued)
residence. Thus, decedent made no mortgage loan payments with
respect to that residence during the period Nov. 5, 1997, until
the date of his death.
- 9 -
devise and bequeath, absolutely and in fee simple, unto
my children, TIMOTHY R. TEHAN, ANN M. SANNER, PATRICK
G. TEHAN, EILEEN T. TEHAN, DANIEL J. TEHAN, ERIN M.
BOCCIA, MAUREEN R. TEHAN and WILLIAM T. TEHAN, in equal
shares, per stirpes.
ITEM IV
My Personal Representative shall have the powers
and duties accorded to Personal Representatives under
the Estates and Trusts Article of the Annotated Code of
Maryland, Section 7-401, and any amendments thereto.
In addition, and not by way of limitation of any such
powers, my Personal Representative is authorized and
empowered at any time, and from time to time, in his
absolute discretion: (1) to hold and retain all or any
portion of property received from my estate or from any
other source, without regard to any law or will of
court concerning diversification, risk or non-produc-
tivity; (2) to invest and reinvest (or leave tempo-
rarily uninvested) any funds or any other property, of
any kind or nature, without regard to any law or rule
of court prescribing investment obligation of fiducia-
ries; (3) to sell, exchange, partition or otherwise to
deal with property, real or personal, at public or
private sale, for such purposes and upon such terms as
my Personal Representative may deem appropriate; (4) to
borrow money and to secure payment of any amount so
borrowed by mortgage of any real or personal property;
(5) to divide and distribute any property hereunder, in
kind or in money, or in part kind and part money.
ITEM V
I do hereby nominate, constitute and appoint my
son, TIMOTHY R. TEHAN, Personal Representative of this,
my Last Will and Testament. If my said son shall fail
to qualify or cease to act, I appoint my son, PATRICK
G. TEHAN, as Personal Representative in his place and
stead.
I direct that my Personal Representative not be
required to file a bond or enter other security in any
jurisdiction for the faithful performance of his du-
ties.
On May 17, 1999, decedent died while a resident and domicil-
- 10 -
iary of Maryland. After decedent’s death, pursuant to the
provisions of decedent’s will, the Circuit Court for Montgomery
County, Maryland, sitting as the Orphans’ Court (Orphans’ Court),
appointed Mr. Tehan as the personal representative of decedent’s
estate.
On the date of decedent’s death, the fair rental value of
decedent’s residence was between $1,600 and $2,200 per month. On
the same date, the fair market value of that residence was
$275,000.
On or about August 17, 2000, Mr. Tehan filed Form 706,
United States Estate (and Generation-Skipping Transfer) Tax
Return (estate tax return), on behalf of the estate. The estate
tax return listed as part of decedent’s gross estate, inter alia,
the following types of assets and the following date-of-death
values for such types of assets:
Assets Value
Schedule A–-Real Estate $0
Schedule B–-Stocks and Bonds 280,334
Schedule C–-Mortgages, Notes and Cash 178,974
Schedule D–-Insurance on the Decedent’s Life 146,000
Schedule E–-Jointly Owned Property 1,380
Schedule F–-Other Miscellaneous Property 29,534
Schedule G–-Transfers During Decedent’s Life 0
Schedule H–-Powers of Appointment 0
Schedule I–-Annuities 1,027,210
Decedent’s estate tax return claimed deductions of $79,993 in
Schedule J, Funeral Expenses and Expenses Incurred in Administer-
ing Property Subject to Claims, which included $32,000 of execu-
- 11 -
tor’s commissions and $10,000 of attorney’s fees. Decedent’s
estate tax return did not claim any deductions in Schedule L,
Expenses Incurred in Administering Property Not Subject to
Claims.
On a date not disclosed by the record between May 5 and June
28, 2001, Mr. Tehan, in his capacity as the personal representa-
tive of the estate, and his attorney filed with the Orphans’
Court a document entitled “Consent Petition for Allowance of
Personal Representative’s Commissions and Attorneys’ Fees”
(consent petition). All of the beneficiaries of the estate
consented to the granting of the consent petition. In the
consent petition, the personal representative and his attorney
requested the Orphans’ Court to allow personal representative
commissions of $32,000 and attorney’s fees of $7,500. In the
consent petition, the personal representative and his attorney
claimed, inter alia, as follows:
8. Aggregate commissions and attorney[’s] fees in
excess of the amount authorized by § 7-601 of the
Estates and Trusts Article [of Maryland] is [sic]
requested due to the extraordinary amount of time,
diligence and expertise required of the Personal Repre-
sentative in administering the substantially larger,
but non-commissionable, “non-probate” assets of the
estate of approximately $1.2 million, as opposed to the
relatively modest amount of “probate assets”. Specifi-
cally, the personal representative estimates that of
the more than 350 hours of time expended in administer-
ing his father’s estate over the last 22 months, ap-
proximately 50% of this time was expended attending to
issues arising from or related to the non-
commissionable portion of the taxable estate.
- 12 -
On June 29, 2001, the Orphans’ Court issued an order (June
29, 2001 order) approving, inter alia, the $32,000 of personal
representative’s commissions that Mr. Tehan requested in the
consent petition.7 Pursuant to that order, on October 15, 2004,
the estate issued a $32,000 check to Mr. Tehan. Mr. Tehan
deposited that check into his personal savings account on Novem-
ber 9, 2004, three days before the trial was held in this case.
In the notice of deficiency (notice) that respondent issued
with respect to decedent’s estate, respondent determined, inter
alia, to include in decedent’s gross estate under section
2036(a)(1) decedent’s residence that respondent determined had a
value of $310,000 on the date of decedent’s death.8 In the
notice, respondent also determined, inter alia, to disallow as
deductions (1) $20,822 of the $32,000 claimed as personal repre-
sentative’s commissions and (2) $2,500 of the $10,000 claimed as
attorney’s fees.9
7
In the June 29, 2001 order, the Orphans’ Court also ap-
proved the $7,500 of attorney’s fees requested in the consent
petition.
8
In the stipulation for trial, respondent stipulated that
the date-of-death value of decedent’s residence was $275,000.
9
In the stipulation for trial, the estate conceded, inter
alia, respondent’s determinations to increase decedent’s taxable
estate by the amounts of $10,000 and $1,896, respectively, for a
note receivable and a State income tax refund. As a result of
those concessions, on brief respondent concedes that the amount
of personal representative’s commissions that respondent deter-
mined in the notice to allow as a deduction under sec. 2053
(continued...)
- 13 -
OPINION
We first address section 7491(a). The parties agree that
section 7491(a) is applicable in the instant case. The parties
disagree, however, over whether the burden of proof has shifted
to respondent under section 7491(a) with respect to the issue
presented under section 2036(a)(1).10 We need not and shall not
address that disagreement. That is because resolution of the
issue presented under section 2036(a)(1) does not depend on who
has the burden of proof.
Section 2036(a)(1)
The only dispute between the parties under section
2036(a)(1)11 is whether decedent retained for his life the
9
(...continued)
should be increased from $11,178 to $11,607. At trial, the
estate conceded respondent’s determination in the notice to
disallow $2,500 of the $10,000 of attorney’s fees that the estate
claimed as a deduction under sec. 2053.
10
Petitioner does not claim that the burden of proof has
shifted to respondent under sec. 7491(a) with respect to the
issue presented under sec. 2053.
11
Sec. 2036(a)(1) 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 ascer-
tainable without reference to his death or for any
(continued...)
- 14 -
possession or enjoyment of decedent’s residence within the
meaning of that section. It is the estate’s position that he did
not. It is respondent’s position that he did.
In support of the estate’s position under section
2036(a)(1), the estate argues:
Here, the decedent made three transfers. The
transfers were for less than full consideration. In
fact they were gratuitous; gifts to his children.
However, they were not transfers under which he re-
tained for his life the right to possession or enjoy-
ment of the property transferred or the income from the
property.
The deeds were absolute transfers of fee interests
in the property without reservation. The decedent did
not retain under the transfer the right to possession
or enjoyment of the condominium for his life. Until
the third conveyance, March 22, 1999, the decedent was
a tenant in common with his grantees. As a co-tenant
he had the non-exclusive right to use and enjoy the
property as did all the other co-tenants. See gener-
ally 20 Am.Jur.2d-Tenancy and Joint Ownership. Sec. 32,
41, 42.
The decedent acquired the right to exclusive
possession of the condominium by contract, the parties’
Agreement regarding use and payment of expenses * * *
(hereinafter “the Agreement”). Generally, all co-
tenants are obligated to contribute to the expenses and
upkeep of the property and a tenant who pays more than
his pro-rata share is entitled to contribution from the
other tenants. Kline v Kline, 581 A2d 1300, 85 Md. App
28, 49 (Md. App. 1991) cert. den. 587 A2d 246, 322 Md.
240. However, here the parties entered into an Agree-
ment that provided for the decedent’s exclusive use and
occupancy of the condominium in return for payment of
11
(...continued)
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 * * *
- 15 -
all of the expenses of the condominium. The grantees
gave up their right to use and occupancy in return for
the decedent’s agreement to pay all of the expenses and
not look to them for contribution. The Agreement was
intended to cover only the period of time between the
first conveyance and the last conveyance.
* * * * * * *
In Guynn v United States, 437 F.2d, 71-1 USTC Par.
12,742 (4th Cir. 1971), the decedent, an eighty year
old woman, conveyed a residence to her daughter but
remained in the residence without an express agreement
that entitled her to do so, paid no rent to the
grantee, and paid for improvements and certain ex-
penses. The decedent’s grantee, her daughter, testi-
fied that the decedent’s remaining in the property was
not discussed because it was understood by all involved
that she would stay in the property until her death.
The Fourth Circuit held that the property was included
in the estate based on an implied agreement for a
retained life estate.
In [Estate of] Barlow [v. Commissioner, 55 T.C.
666 (1971)], the decedent and wife conveyed farm prop-
erty to their four children, simultaneously leasing the
property back for a share of the crops that was found
to be fair market rental. The property was not in-
cluded in the taxable estate even though for four years
the decedent did not actually pay the rent. The Court
found that the outright transfer of the property to the
children and the lease back were bona fide transac-
tions. The forbearance from collecting rent was due to
circumstances that arose later and were not contem-
plated by the parties at the time of the transaction.
The difference between Barlow and Guynn is that in
Barlow, as in this case, the decedent really trans-
ferred the entire fee without retaining a life estate.
Barlow, like the decedent here, was contractually
obligated to pay for his continuing use of the prop-
erty, no life estate having been reserved under the
transfer. Guynn simply remained in possession without
paying any quid pro quo because the parties so agreed.
She retained a life estate so Section 2036 applied.
There was no discussion or paperwork because none was
needed. [Reproduced literally.]
- 16 -
In support of respondent’s position under section
2036(a)(1), respondent argues:
A decedent’s gross estate includes property inter-
ests with a retained life estate. I.R.C. § 2036(a).
Inclusion is required where the decedent retained
“possession or enjoyment” or right to income from
property transferred for less than full consideration.
I.R.C. §* * * 2036(a)(1)* * *. Here, the decedent
retained the necessary “possession or enjoyment” of his
personal residence–Unit #610N such that its value
should be included in the decedent’s gross estate.
Even though the decedent and his eight children exe-
cuted a series of conveyances transferring legal title
to Unit #610N, no consideration was paid by the dece-
dent’s children for the conveyance. The decedent paid
all of the expenses for Unit #610N before, during, and
after the series of conveyances. The decedent did not
pay any rent for the occupancy of Unit #610N before,
during, and after the series of conveyances. His
“possession or enjoyment” of Unit #610N was undisturbed
during and after the series of transfers. He did not
need the approval of his children to have guests or
redecorate Unit #610N. It was uncontroverted at trial
that even if the decedent had not paid expenses to
maintain Unit #610N during and after the series of
transfers, his children would not have sought to evict
him from Unit #610N. Finally, as legal title of the
decedent’s eight children in Unit #610N increased
progressively to 36%, then 72% and, finally, 100%, the
decedent still paid all of the expenses to maintain
Unit #610N without reflecting any change in ownership.
When all is said and done, the decedent retained
complete “possession or enjoyment” over Unit #610N
before, during, and after the series of transfers. As
such, Code section 2036 mandates that the value of Unit
#610N be included in the decedent’s gross estate. * * *
Section 2036(a)(1) applies if there exists at the time of
the transfer of property an agreement, either express or implied,
that the transferor will retain possession or enjoyment of the
property transferred, even if the transferor has no legally
- 17 -
enforceable right to do so. Guynn v. United States, 437 F.2d
1148, 1150 (4th Cir. 1971); Estate of Rapelje v. Commissioner, 73
T.C. 82, 86 (1979); Estate of Honigman v. Commissioner, 66 T.C.
1080, 1082 (1976); Estate of Barlow v. Commissioner, 55 T.C. 666,
670 (1971).
In the case of real property, the terms “‘possession’ and
‘enjoyment’ [in section 2036(a)(1)] have been interpreted to mean
‘the lifetime use of the property.’” Estate of Maxwell v.
Commissioner, 3 F.3d 591, 593 (2d Cir. 1993) (quoting United
States v. Byrum, 408 U.S. 125, 147 (1972)), affg. 98 T.C. 594
(1992).
In the present case, there was an express agreement, namely
the November 5, 1997 agreement, which was executed on the same
date on which the first deed was executed, under which decedent
continued during his lifetime to (1) use and occupy, i.e.,
possess and enjoy, decedent’s residence, (2) pay all of the
monthly expenses with respect to that residence,12 and (3) other-
wise treat that residence as his own. At no time did decedent
need permission from his children in order to have guests at
decedent’s residence or to redecorate it. At no time during
decedent’s life did any of decedent’s children use or occupy
decedent’s residence or pay any of the monthly expenses with
12
Decedent’s children would not have required decedent to
vacate decedent’s residence if he had failed to pay the monthly
expenses.
- 18 -
respect to that residence. None of decedent’s children attempted
to sell his or her purported interest in decedent’s residence
before decedent died.13
This Court and other courts have found that facts such as
those which we have found in the instant case surrounding the
transfer of property by a decedent demonstrate that the decedent
retained possession and enjoyment of the property transferred
within the meaning of section 2036(a)(1). See, e.g., Estate of
Maxwell v. Commissioner, supra at 594; Guynn v. United States,
supra; Estate of Rapelje v. Commissioner, supra at 88; Estate of
Honigman v. Commissioner, supra at 1083; Estate of Kerdolff v.
Commissioner, 57 T.C. 643, 649 (1972).
The estate’s reliance on Estate of Barlow v. Commissioner,
supra, is misplaced. In Estate of Barlow, the decedent involved
there and his wife gratuitously transferred a farm to their
children and, under a contemporaneously executed lease, retained
the possession and enjoyment of that farm in return for the
payment by them of a “fair, customary rental”. Id. at 667, 671.
In the instant case, the November 5, 1997 agreement was not a
lease agreement, and decedent did not agree under that agreement
13
After decedent died, decedent’s children sold that resi-
dence.
- 19 -
to pay any rent,14 let alone fair rental value, for his posses-
sion and enjoyment of decedent’s residence.15
Based upon our examination of the entire record before us,
we find that decedent retained a life estate in decedent’s
residence during the period November 5, 1997, until the date of
his death. On that record, we further find that decedent re-
tained possession and enjoyment of decedent’s residence within
the meaning of section 2036(a)(1). On the record before us, we
find that the value of decedent’s residence is includible in
decedent’s gross estate under that section.16
Section 2053
The estate has the burden of establishing its entitlement to
deduct under section 2053 the claimed personal representative’s
14
Indeed, the November 5, 1997 agreement provides that
decedent “shall not pay any rent” while occupying decedent’s
residence.
15
Despite the purported decrease in decedent’s ownership
interest in decedent’s residence under the first deed, the second
deed, and the third deed, decedent paid all of the monthly
expenses with respect to that residence.
16
For the first time on brief, the estate advances an alter-
native argument that “if inclusion [of decedent’s residence] in
the taxable estate were to be based upon the decedent’s remaining
in the property for six weeks when he had no contractual right to
do so, it should be limited to the 28% interest conveyed in
1999.” On the record before us, we reject the estate’s alterna-
tive argument. In finding that decedent retained possession and
enjoyment of decedent’s residence within the meaning of sec.
2036(a)(1), we have not relied only on decedent’s remaining in
that residence during the period starting on the date on which
the third deed was executed until the date of his death.
- 20 -
commissions.17
It is the estate’s position that it is entitled to deduct
under section 2053 personal representative’s commissions of
$32,000. It is respondent’s position that the estate is entitled
to deduct under section 2053 personal representative’s commis-
sions of $11,607.18
In support of its position under section 2053, the estate
argues that, under section 20.2053-3(b), Estate Tax Regs.,19 the
June 29, 2001 order of the Orphans’ Court, which allowed $32,000
17
See supra note 10.
18
The amount of personal representative’s commissions claim-
ed by the estate that remains in dispute is $20,393. See supra
note 9.
19
Sec. 20.2053-3(b), Estate Tax Regs., entitled “Executor’s
commissions”, provides in pertinent part:
The executor * * * may deduct his commissions in such
an amount as has actually been paid * * *. If the
amount of the commissions has not been fixed by decree
of the proper court, the deduction will be allowed
* * * to the extent that all three of the following
conditions are satisfied:
(i) The district director is reasonably satisfied
that the commissions claimed will be paid;
(ii) The amount claimed as a deduction is within
the amount allowable by the laws of the jurisdiction in
which the estate is being administered; and
(iii) It is in accordance with the usually ac-
cepted practice in the jurisdiction to allow such an
amount in estates of similar size and character.
- 21 -
of personal representative’s commissions,20 is dispositive of the
issue presented under section 2053. According to the estate:
Section 20.2053-3(b), Estate Tax Regs. appears to
provide, by negative implication, that a state court
order is dispositive of the issue of the deductibility
of personal representative’s commissions. It provides
that “the executor may deduct has commissions in such
amount as has actually been paid. If the amount of the
decree has not been fixed by order of the proper court,
the deduction will be allowed*** to the extent that all
three of the following conditions are satisfied....”
Id. The further requirements are applicable only to
cases where personal representative’s commissions are
not approved by court order. [Reproduced literally.]
In support of respondent’s position under section 2053,
respondent argues that, under section 7-602 of Md. Code Ann.,
Est. & Trusts (1999) (Md. Code Ann., Est. & Trusts, sec.
7-602),21 the aggregate amount of personal representative’s
20
The June 29, 2001 order of the Orphans’ Court also allowed
$7,500 of attorney’s fees.
21
Sec. 7-602, Md. Code Ann., Est. & Trusts, provides in
pertinent part:
(a) General.–-An attorney is entitled to reason-
able compensation for legal services rendered by him to
the estate and/or the personal representative.
(b) Petition.–-Upon the filing of a petition in
reasonable detail by the personal representative or the
attorney, the court may allow a counsel fee to an
attorney employed by the personal representative for
legal services. The compensation shall be fair and
reasonable in the light of all the circumstances to be
considered in fixing the fee of an attorney.
(c) Considered with commissions.–-If the court
shall allow a counsel fee to one or more attorneys, it
shall take into consideration in making its determina-
(continued...)
- 22 -
commissions and attorney’s fees allowable as a deduction is
limited to the amount determined under section 7-601(b) of Md.
Code Ann., Est. & Trusts (1999) (Md. Code Ann., Est. & Trusts,
sec. 7-601(b)) (quoted and discussed below). Consequently,
according to respondent, the estate is entitled to deduct under
section 2053 only $11,607 of personal representative’s commis-
sions.
In determining the taxable estate, section 2053(a)(2),
relating to expenses incurred in administering property that is
included in the gross estate and subject to claims, allows a
deduction from the value of the gross estate of “such amounts
* * * for administration expenses * * * as are allowable by the
laws of the jurisdiction * * * under which the estate is being
administered.” Section 20.2053-3, Estate Tax Regs., provides in
pertinent part:
(a) In general. The amounts deductible from a dece-
dent’s gross estate as “administration expenses” of the
first category (see paragraphs (a) and (c) of §
20.2053-1) are limited to such expenses as are actually
and necessarily incurred in the administration of the
decedent’s estate; that is, in the collection of as-
sets, payment of debts, and distribution of property to
the persons entitled to it. * * * Expenditures not
essential to the proper settlement of the estate, but
incurred for the individual benefit of the heirs,
legatees, or devisees, may not be taken as deductions.
21
(...continued)
tion, what would be a fair and reasonable total charge
for the cost of administering the estate under this
article, and it shall not allow aggregate compensation
in excess of that figure.
- 23 -
Administration expenses include (1) executor’s commis-
sions; (2) attorney’s fees; and (3) miscellaneous
expenses. * * *
Section 2053(b) allows deductions of amounts representing
expenses incurred in administering property that is included in
the gross estate and not subject to claims to the same extent
such expenses would be allowable as deductions under section
2053(a)(2) if such property were subject to claims, and such
amounts are paid before the expiration of the period of limita-
tion for assessment provided in section 6501. Section 20.2053-8,
Estate Tax Regs., provides in pertinent part:
Usually, these expenses [expenses in administering
property not subject to claims] are incurred in connec-
tion with the administration of a trust established by
a decedent during his lifetime. They may also be
incurred in connection with the collection of other
assets or the transfer or clearance of title to other
property included in a decedent’s gross estate for
estate tax purposes but not included in his probate
estate.
(b) These expenses may be allowed as deductions
only to the extent that they would be allowed as deduc-
tions under the first category [of deductions set forth
in section 20.2053-1(a)(1), Estate Tax Regs.] if the
property were subject to claims. See § 20.2053-3. The
only expenses in administering property not subject to
claims which are allowed as deductions are those occa-
sioned by the decedent’s death and incurred in settling
the decedent’s interest in the property or vesting good
title to the property in the beneficiaries. Expenses
not coming within the description in the preceding
sentence but incurred on behalf of the transferees are
not deductible.
(c) The principles set forth in paragraphs (b),
(c), and (d) of § 20.2053-3 (relating to the allowance
of executor’s commissions, attorney’s fees, and miscel-
laneous administration expenses of the first category
- 24 -
[of deductions set forth in section 20.2053-1(a)(1),
Estate Tax Regs.]) are applied in determining the
extent to which trustee’s commissions, attorney’s and
accountant’s fees, and miscellaneous administration
expenses are allowed in connection with the administra-
tion of property not subject to claims.
Section 20.2053-1(b)(2), Estate Tax Regs., relating to the
effect of a local court decree on expenses claimed under section
2053(a) and (b) provides in pertinent part:
(2) Effect of court decree. The decision of a
local court as to the amount and allowability under
local law of a claim or administration expense will
ordinarily be accepted if the court passes upon the
facts upon which deductibility depends. * * * If the
decree was rendered by consent, it will be accepted,
provided the consent was a bona fide recognition of the
validity of the claim (and not a mere cloak for a gift)
and was accepted by the court as satisfactory evidence
upon the merits. It will be presumed that the consent
was of this character, and was so accepted, if given by
all parties having an interest adverse to the claimant.
The decree will not be accepted if it is at variance
with the law of the State; as, for example, an allow-
ance made to an executor in excess of that prescribed
by statute. * * *
In determining the deductibility of expenses under section
2053, the deductions claimed must be allowable not only by the
State law under which the estate is administered but also by
Federal law. See Estate of Grant v. Commissioner, 294 F.3d 352,
354 (2d Cir. 2002), affg. T.C. Memo. 1999-396; Estate of Love v.
Commissioner, 923 F.2d 335, 337 (4th Cir. 1991), affg. T.C. Memo.
1989-470; Estate of Posen v. Commissioner, 75 T.C. 355, 367
(1980).
We reject the estate’s argument that the June 29, 2001 order
- 25 -
of the Orphans’ Court is “dispositive of the issue of the deduct-
ibility of personal representative’s commissions.” The exercise
of the discretion of the Orphans’ Court of Maryland to determine
the amount of commissions allowable to a personal representative
is limited by Maryland statutes to the amounts prescribed in such
statutes. Am. Jewish Joint Distrib. Comm. v. Eisenberg, 70 A.2d
40, 41 (Md. 1949); Cearfoss v. Snyder, 35 A.2d 235, 237 (Md.
1943).
Section 7-601(b), Md. Code Ann., Est. & Trusts, prescribes
the computation of the compensation allowable to the personal
representative of an estate as follows:
(b) Computation of compensation.--Unless the will
provides a larger measure of compensation, upon peti-
tion filed in reasonable detail by the personal repre-
sentative * * * the court may allow the commissions it
considers appropriate. The commissions may not exceed
those computed in accordance with the table in this
subsection.
If the property subject to The commission may
administration is: not exceed:
Not over $20,000.................................... 9%
Over $20,000 ...................$1,800 plus 3.6% of the
excess over $20,000
Thus, under Md. Code Ann., Est. & Trusts, sec. 7-601(b), the
maximum compensation to which the personal representative of an
estate is entitled in order to compensate such representative for
all of the ordinary work of administering an estate subject to
administration, see Lehman v. Kairys, 142 A.2d 546, 548 (Md.
1958); Talbert v. Reeves, 127 A.2d 533, 538 (Md. 1956), is
- 26 -
determined by reference to the amount of property subject to
administration (i.e., probate property). The parties agree that
the value of decedent’s probate property as of the date of his
death was $500,738. Under Md. Code Ann., Est. & Trusts, sec.
7-601(b), the maximum amount of commissions allowable to Mr.
Tehan, the estate’s personal representative, was $19,107,22
calculated as follows:
9% x $20,000 = $1,800
3.6% x $480,73823 = 17,307
Total = 19,107
The June 29, 2001 order of the Orphans’ Court allowed the
estate’s personal representative commissions of $32,000. That
amount exceeds the maximum amount of commissions allowable under
Md. Code Ann., Est. & Trusts, sec. 7-601(b). We are not required
to accept the June 29, 2001 order of the Orphans’ Court allowing
$32,000 of personal representative’s commissions. Sec. 20.2053-
1(b), Estate Tax Regs.
On the record before us, we find that the estate is not
entitled to deduct personal representative’s commissions in
excess of $19,107, the maximum amount of such commissions allow-
22
Respondent agrees that the maximum amount of commissions
allowable under Md. Code Ann., Est. & Trusts, sec. 7-601(b) to
Mr. Tehan, the personal representative of the estate, was
$19,107.
23
The value of decedent’s probate property reduced by
$20,000 is $480,738.
- 27 -
able under Md. Code Ann., Est. & Trusts, sec. 7-601(b).24 Re-
spondent appears to acknowledge that, if attorney’s fees of
$7,500 had not been allowed under Md. Code Ann., Est. & Trusts,
sec. 7-602, the estate would have been entitled to deduct under
section 2053 that maximum amount of commissions. However, as we
understand respondent’s position, Md. Code Ann., Est. & Trusts,
sec. 7-602(c), requires that the amount of commissions allowable
to a personal representative under Md. Code Ann., Est. & Trusts,
sec. 7-601(b), be reduced by the amount of attorney’s fees
allowed. Consequently, respondent maintains that the estate is
entitled to deduct under section 2053 only $11,607 of personal
representative’s commissions (i.e., $19,107 (maximum amount of
commissions allowable under Md. Code Ann., Est. & Trusts, sec.
7-601(b)) minus $7,500 (attorney’s fees allowed under Md. Code
Ann., Est. & Trusts, sec. 7-602)).
We reject respondent’s interpretation of Md. Code Ann., Est.
& Trusts, sec. 7-602(c). That section provides that if a Mary-
land court determines to allow attorney’s fees, in making that
determination “it shall take into consideration * * * what would
be a fair and reasonable total charge for the cost of administer-
ing the estate * * * and it shall not allow aggregate compensa-
24
On the instant record, we find that the estate has failed
to persuade us that the personal representative performed any
extraordinary work of administering decedent’s probate estate (or
nonprobate estate).
- 28 -
tion in excess of that figure.” See Wolfe v. Turner, 299 A.2d
106, 109 (Md. 1973); Wright v. Nuttle, 298 A.2d 389, 391 (Md.
1973). Section 7-602(c), Md. Code Ann., Est. & Trusts, does not
limit, as respondent appears to argue, the aggregate amount of
the commissions allowable to an estate’s personal representative
and the fees allowable to an estate’s attorney to the maximum
compensation allowable to such personal representative under Md.
Code Ann., Est. & Trusts, sec. 7-601(b).
Respondent determined to allow the estate a deduction under
section 2053 of $7,500 for attorney’s fees. Respondent does not
argue, and the record does not establish, that the aggregate
amount of the commissions allowable to the estate’s personal
representative under Md. Code Ann., Est. & Trusts, sec. 7-601(b)
(i.e., $19,107) and the fees allowable to the estate’s attorney
under Md. Code Ann., Est. & Trusts, sec. 7-602, which respondent
allowed the estate to deduct under section 2053 (i.e., $7,500),
is not “a fair and reasonable total charge for the cost of
administering the estate” of decedent under Md. Code Ann., Est.
& Trusts, sec. 7-602(c).25
25
In respondent’s reply brief, respondent contends for the
first time that petitioner did not demonstrate “that the attor-
ney’s fees paid by the estate were for other than routine work of
the estate’s personal representative.” We reject respondent’s
contention. Respondent allowed the estate to deduct under sec.
2053 $7,500 of attorney’s fees. Implicit in respondent’s deter-
mination to allow such a deduction is respondent’s acknowledgment
that such attorney’s fees are allowable by both Maryland law and
(continued...)
- 29 -
Based upon our examination of the entire record before us,
we find that the estate is entitled to deduct under section 2053
personal representative’s commissions of $19,107.
We have considered all of the contentions and arguments of
the parties that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.
To reflect the foregoing and the concessions of the parties,
Decision will be entered
under Rule 155.
25
(...continued)
Federal law. To be allowable by Maryland law, the $7,500 of
attorney’s fees necessarily was for work other than the routine
or ordinary work of an executor or administrator in administering
an estate. See Riddleberger v. Goeller, 282 A.2d 101, 107-108
(Md. 1971); Colley v. Britton, 123 A.2d 296, 302-303 (Md. 1956).