Estate of Davenport v. Comm'r

T.C. Memo. 2006-215

UNITED STATES TAX COURT

ESTATE OF SARAH M. DAVENPORT, DECEASED, RICHARD DAVENPORT,
EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16060-04. Filed October 5, 2006.

D died on Oct. 31, 2000, and a Federal estate tax
return was thereafter filed on behalf of her estate.

Held: Two annuities payable under a settlement
agreement are includable in the gross estate pursuant
to sec. 2033, I.R.C.

Held, further, for purposes of inclusion in the
gross estate, the annuities are to be valued under sec.
7520, I.R.C., in accordance with the actuarial
valuation methodology of sec. 20.2031-7(d), Estate Tax
Regs.

Held, further, under the circumstances present in
this case, expenditures incurred for a funeral luncheon
are not properly deductible as funeral expenses under
sec. 2053(a)(1), I.R.C.
 - 2 -

John D. Mabley, for petitioner.

John W. Stevens, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: Respondent determined a Federal estate tax

deficiency of $507,103 for the Estate of Sarah M. Davenport (the

estate). The issues for decision are:

(1) Whether two annuities payable under a settlement

agreement are includable in the gross estate for Federal tax

purposes pursuant to section 2033 or 2039;

(2) whether, in the event that the annuities are to be

included in the gross estate, they were properly valued by

respondent under section 7520; and

(3) whether the estate is entitled to a deduction for the

cost of a funeral luncheon pursuant to section 2053.1

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference. Sarah M. Davenport

(decedent) was a resident of the State of Michigan when she died

intestate in that State on October 31, 2000. Her estate has

1
Unless otherwise indicated, section references are to the
Internal Revenue Code (Code) in effect as of the date of death of
Sarah M. Davenport, and Rule references are to the Tax Court
Rules of Practice and Procedure.
 - 3 -

since been administered by the Wayne County Probate Court in

Detroit, Michigan. The executor of decedent’s estate, Richard

Davenport (Mr. Davenport) resided in Michigan at the time the

petition in this case was filed.

Decedent was born on August 16, 1988, to Mr. Davenport and

Donna Weiss-Davenport (Ms. Weiss-Davenport). Thereafter, in

August of 1989, a complaint was brought in the Circuit Court for

the County of Wayne, State of Michigan, stemming from alleged

actions and omissions in relation to the birth of decedent. The

complaint named as plaintiffs “Sarah Maria Davenport, a Minor, by

her Next Friend, Donna Weiss-Davenport, and Donna Weiss-Davenport

and Richard Davenport, Individually”. Named defendants included

Michelle Shultz, M.D., East Side Gynecology-Obstetrics, P.C., and

Bon Secours Hospital (also referred to as the Sisters of Bon

Secours Hospital). Marietta S. Robinson served as attorney for

the plaintiffs in the lawsuit.

The complaint was premised on allegations that decedent

sustained physical injuries and decedent’s parents sustained

personal injuries as a result of negligence and/or malpractice by

the defendants at the time of her birth. Specifically, the

complaint recited that decedent:

suffered a massive hypoxic insult and, as a
consequence, has failed to develop normally, has
suffered central nervous system damage including, but
not limited to, cerebral palsy, motor damage and mental
retardation and requires special care and treatment and
will, for the remainder of her natural life, be
 - 4 -

required to receive special care and treatment,
education and training.

The foregoing lawsuit was subsequently resolved by means of

a Settlement Agreement and Release (the settlement agreement)

executed by the plaintiffs on September 17, 1991.2 In

consideration for payments set forth in paragraph 2.0 of the

settlement agreement (detailed in paragraphs 2.1 through 2.2B),3

the plaintiffs agreed to release and forever discharge the

defendants from any and all claims related to decedent’s birth.

As most pertinent to the matters at issue here, the settlement

agreement provided in part:

2.0 PAYMENTS

In consideration of the release set forth
above, the Defendants agree to pay to the individuals
named below (“Payees”) the sums outlined in this
Section 2 below:

2.1 Payments due from Defendants on or before
October 1, 1991 as follows:

2
Although the parties stipulated that the plaintiffs signed
the agreement on Sept. 17, 2001, a cursory review of the
underlying documents reveals a typographical error in
substituting 2001 for 1991. See Cal-Maine Foods, Inc. v.
Commissioner, 93 T.C. 181, 195 (1989) (holding that stipulations
are properly disregarded where clearly contrary to evidence
contained in the record). A similar error was made in
referencing Aug. 16, 1998, as decedent’s date of birth.
3
The settlement agreement and the parties’ stipulations,
testimony, and briefs seem to use the terms “section” and
“paragraph” in a rather random and interchangeable fashion when
referring to the various divisions or provisions of the
agreement. The Court, except in instances of direct quotation,
will employ “paragraph” throughout this opinion for clarity and
simplicity.
 - 5 -

$2,775,000 ($100,000 of this amount to be
paid by the insurer of Michelle Shultz, M.D.
and East Side Obstetrics-Gynecology, P.C.)
payable to Donna Weiss-Davenport and Richard
Davenport, individually, and the law offices
of Marietta S. Robinson, their attorney.

All sums set forth herein constitute damages
on account of personal injuries or sickness,
within the meaning of Section 104 (a)(2) of
the Internal Revenue Code of 1986, as
amended.

2.2 Periodic payments from Defendant, Sisters of
Bon Secours Hospital, to Donna Weiss-Davenport and
Richard Davenport as co-conservators of Sarah Maria
Davenport as outlined below:

2.2 A. $2,500 per month, beginning November 15,
1991, for Sarah’s life, compounded
annually at 5%, guaranteed 30 years.

All sums set forth herein constitute
damages on account of personal injuries
or sickness, within the meaning of
Section 104 (a)(2) of the Internal
Revenue Code of 1986, as amended.

2.2 B. $2,500 per month, beginning November 15,
1991, for Sarah’s life, compounded
annually at 5%, guaranteed 30 years.

All sums set forth herein constitute
damages on account of personal injuries
or sickness, within the meaning of
Section 104 (a)(2) of the Internal
Revenue Code of 1986, as amended.

3.0 PAYEE’S RIGHTS TO PAYMENTS

Plaintiffs acknowledge that the Periodic
Payments cannot be accelerated, deferred, increased or
decreased by the Plaintiffs or any Payees; nor shall
the Plaintiffs or any Payees have the power to sell,
mortgage, encumber, or anticipate the Periodic
Payments, or any part thereof, by assignment or
otherwise.
 - 6 -

4.0 PAYEE’S BENEFICIARY

Any payments to be made after the death of
any Payee pursuant to the terms of this Settlement
Agreement shall be made to such person or entity as
shall be designated in writing by Payee to Defendant,
Sisters of Bon Secours Hospital or its Assignees. If
no person or entity is so designated by Payee, or if
the person designated is not living at the time of the
Payee’s death, such payments shall be made to the
estate of the Payee. Donna Weiss-Davenport and Richard
Davenport, as co-conservators for Sarah Maria
Davenport, may designate in writing to Defendant,
Sisters of Bon Secours Hospital, or the Assignee, the
person or entity to whom Periodic Payments should be
made in the event of Sarah Maria Davenport’s death. * *
*

Pursuant to paragraphs 5.0 and 6.0 of the settlement

agreement, the Sisters of Bon Secours Hospital was authorized to

discharge its obligation under paragraph 2.2A by making a

“qualified assignment” to Allstate Settlement Corporation and to

fund the periodic payment liability through purchase of an

annuity policy from Allstate Life Insurance Company. Similarly,

those provisions authorized the hospital to discharge its

liability under paragraph 2.2B of the settlement agreement by

making a “qualified assignment” to Safeco Assigned Benefits

Service Company and to fund that liability through purchase of an

annuity policy from Safeco Life Insurance Company.

The referenced qualified assignments were made and

corresponding annuities obtained. A single premium immediate

life annuity was issued by Allstate Life Insurance Company, with

Allstate Settlement Corporation designated as the owner, decedent
 - 7 -

as the measuring life, and “Donna Weiss-Davenport and Richard

Davenport as Co-Conservators of Sara [sic] Maria Davenport” as

the payee for benefit checks. Likewise, a single premium

nonparticipating immediate annuity was issued by Safeco Life

Insurance Company, with Safeco Assigned Benefits Service Company

designated as the owner, decedent as the annuitant, and her

parents in their role as “Co-Conservators” as the payee.

Consistent with the settlement agreement, both annuities provided

for $2,500 monthly payments commencing November 15, 1991,

increasing at a compounded 5 percent annually, for a minimum of

360 payments. Both annuities also indicated that decedent’s

estate would be the beneficiary in the event of her death.

As noted above, decedent died on October 31, 2000, due to

septic, acute renal failure and cardiogenic shock. A Form 706,

United States Estate (and Generation-Skipping Transfer) Tax

Return, was filed on her behalf on July 31, 2001. The Form 706

reported a total gross estate of $414,937.05, total deductions of

$51,253.19, a resultant taxable estate of $363,683.86, and a

gross estate tax of $109,452.51. After application of the

unified credit, no tax was reported as due.

The principal assets included in the gross estate were

mutual fund interests and U.S. Treasury bills. Schedule I,

Annuities, listed the Allstate and Safeco annuities but reported

that the respective includable value of each at the date of death
 - 8 -

was zero. The claimed deductions incorporated $10,573.35 from

Schedule J, Funeral Expenses and Expenses Incurred In

Administering Property Subject to Claims. The funeral expenses

included $3,638.92 for “Funeral luncheon”, and the administration

expenses included $1,451.25 labeled as “Wayne County Probate

Court”.

The Form 706 was subsequently examined by the Internal

Revenue Service (IRS). During the ensuing audit process, a

representative of the estate provided the examiner with a copy of

an inventory prepared for the Wayne County Probate Court. The

inventory had been signed by decedent’s parents on February 14,

2001, and was apparently filed with the probate court on March 9,

2001, accompanied by payment of a $1,331.25 inventory fee. The

inventory reflected the estate’s interest in the Allstate and

Safeco annuities at a value of $1,118,000. Later, the estate

provided the examiner with two amended inventories that excluded

the value of the annuities.

On June 10, 2004, the IRS issued to the estate a statutory

notice determining the aforementioned deficiency of $507,103.

The determined deficiency was based upon the inclusion in the

gross estate of the Allstate and Safeco annuities at a combined

value of $1,514,572 and the disallowance of the $3,639 (rounded)

for the funeral luncheon. The estate timely petitioned this

Court for redetermination.
 - 9 -

OPINION

I. Burden of Proof

As a general rule, determinations by the Commissioner are

presumed correct, and the taxpayer bears the burden of proving

otherwise. Rule 142(a). Section 7491 may operate, however, in

specified circumstances to place the burden on the Commissioner.

Section 7491 is applicable to court proceedings that arise in

connection with examinations commencing after July 22, 1998, and

reads in pertinent part:

SEC. 7491. BURDEN OF PROOF.

(a) Burden Shifts Where Taxpayer Produces Credible
Evidence.--

(1) General rule.--If, in any court
proceeding, a taxpayer introduces credible
evidence with respect to any factual issue
relevant to ascertaining the liability of the
taxpayer for any tax imposed by subtitle A or B,
the Secretary shall have the burden of proof with
respect to such issue.

(2) Limitations.--Paragraph (1) shall apply
with respect to an issue only if--

(A) the taxpayer has complied with the
requirements under this title to substantiate
any item;

(B) the taxpayer has maintained all
records required under this title and has
cooperated with reasonable requests by the
Secretary for witnesses, information,
documents, meetings, and interviews; * * *

See also Internal Revenue Service Restructuring and Reform Act of

1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727, regarding
 - 10 -

effective date. Section 7491 is applicable here in that

examination of the estate tax return began after July 22, 1998.

With respect to the deficiency determinations in dispute,

the operative rules are contained in section 7491(a). The estate

seems to make the assertion, for the first time on reply brief,

that the burden of proof as to factual issues shifts to

respondent under the credible evidence proviso. The Court,

however, concludes a shift is not appropriate on this record for

the reasons set forth below.

First, the Court finds that the estate has failed to

introduce credible evidence with respect to the three primary

matters in contention. Credible evidence for purposes of section

7491(a) is defined as “the quality of evidence which, after

critical analysis, the court would find sufficient upon which to

base a decision on the issue if no contrary evidence were

submitted (without regard to the judicial presumption of IRS

correctness).” H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3

C.B. 747, 994-995. As to inclusion of the annuities in the gross

estate and as will be explored with greater specificity below,

this matter may be decided based on a preponderance of the

evidence, without regard to burden of proof. Moreover, the

estate’s self-characterized credible testimony on this point is

in fact nebulous and cuts both ways. As to valuation of the

annuities, the estate has offered no evidence directed toward
 - 11 -

supporting any particular figure or amount. Lastly, as to the

disputed deduction, the broad, generalized testimony advanced

lacks the probative value sought under the credible evidence

standard.

Second, even where credible evidence is introduced, the

taxpayer must establish, as a prerequisite to any shift under

section 7491(a)(1), that the taxpayer has complied under section

7491(a)(2) with all substantiation requirements, has maintained

all required records, and has cooperated with reasonable requests

for witnesses, information, documents, meetings, and interviews.

H. Conf. Rept. 105-599, supra at 239-240, 1998-3 C.B. at 993-994.

The estate in its burden of proof argument makes no attempt to

address specifically whether it has satisfied these conditions.

The record also suggests that at least as to certain issues,

namely valuation, it has not. Thus, the estate has not shown

compliance with section 7491(a)(2).

Third, this Court has noted in earlier cases the potential

impropriety of shifting the burden under section 7491(a) where

the taxpayers did not raise the issue prior to the briefing

process. E.g., Menard, Inc. v. Commissioner, T.C. Memo. 2004-

207; Estate of Aronson v. Commissioner, T.C. Memo. 2003-189.

The rationale for this concern rests upon the possible prejudice

to the Commissioner’s ability to introduce evidence specifically

directed toward cooperation during the audit period. Menard,
 - 12 -

Inc. v. Commissioner, supra; Estate of Aronson v. Commissioner,

supra.

II. Inclusion in the Gross Estate

A. General Rules

As a general rule, the Code imposes a Federal excise tax “on

the transfer of the taxable estate of every decedent who is a

citizen or resident of the United States.” Sec. 2001(a). The

taxable estate, in turn, is defined as “the value of the gross

estate”, less applicable deductions. Sec. 2051. Section 2031(a)

specifies that the gross estate comprises “all property, real or

personal, tangible or intangible, wherever situated”, to the

extent provided in sections 2033 through 2045 (i.e., subtitle B,

chapter 11, subchapter A, part III of the Code).

Section 2033 states broadly that “The 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.”

As alternately expressed by regulation, the gross estate

encompasses all property “beneficially owned by the decedent at

the time of his death.” Sec. 20.2033-1(a), Estate Tax Regs.

Sections 2034 through 2045 then explicitly mandate inclusion of

several more narrowly defined classes of assets. Among these

specific sections is section 2039, which reads in pertinent part

as follows:
 - 13 -

SEC. 2039. ANNUITIES.

(a) General.--The gross estate shall include the
value of an annuity or other payment receivable by any
beneficiary by reason of surviving the decedent under
any form of contract or agreement entered into after
March 3, 1931 (other than as insurance under policies
on the life of the decedent), if, under such contract
or agreement, an annuity or other payment was payable
to the decedent, or the decedent possessed the right to
receive such annuity or payment, either alone or in
conjunction with another 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.

(b) Amount Includible.--Subsection (a) shall apply
to only such part of the value of the annuity or other
payment receivable under such contract or agreement as
is proportionate to that part of the purchase price
therefor contributed by the decedent. * * *

In considering the inclusion of an annuity in the gross

estate, the conflation of sections 2033 and 2039 casts a wide

net. Section 2033 and its predecessors have long been construed

to reach annuities payable to a decedent’s estate upon his or her

death. E.g., Millard v. Maloney, 121 F.2d 257, 259 (3d Cir.

1941); Equitable Trust Co. v. Commissioner, 31 B.T.A. 329, 333-

334 (1934), revd. on another issue sub nom. Commissioner v. Chase

Natl. Bank, 82 F.2d 157 (2d Cir. 1936); Arrington v. United

States, 34 Fed. Cl. 144, 147-148, 150 (1995), affd. without

published opinion 108 F.3d 1393 (Fed. Cir. 1997). Section 2039

was enacted to broaden the reach of the gross estate to draw in

annuities payable to surviving beneficiaries, such as joint and

survivor annuities and annuities to be received by designated

third persons. Gray v. United States, 410 F.2d 1094, 1096-1097
 - 14 -

(3d Cir. 1969); Estate of Gribauskas v. Commissioner, 116 T.C.

142, 149 (2001), revd. on another issue 342 F.3d 85 (2d Cir.

2003).

B. Preliminary Matters

1. Annuities at Issue

Turning to the instant case, the Court notes at the outset

that the parties are in apparent concurrence that the annuities

with which we are concerned, for purposes of the question of

inclusion in the gross estate, are the rights to periodic

payments as extant under the terms of the settlement agreement.

Both parties explicitly recognize that the Allstate and Safeco

annuity contracts do not control, being merely the mechanisms

utilized by the payor to fund the legal obligations created by

and set forth in the settlement agreement. In absence of any

call for an alternative approach and cognizant that the Court of

Appeals for the Federal Circuit has condoned this perspective in

analogous circumstances, albeit in an unpublished opinion (cited

by both parties), we proceed in a manner consistent with the

parties’ framework. See Arrington v. United States, 108 F.3d

1393 (Fed. Cir. 1997).

2. Parol Evidence

Given the foregoing, interpretation of the settlement

agreement will be central to resolution of the parties’ dispute

vis-a-vis inclusion of the annuities in the gross estate. The
 - 15 -

estate at trial sought to introduce testimony directed towards

the intent of the signatories to the settlement agreement.

Respondent raised a continuing objection to such testimony under

the parol evidence rule. The Court reserved ruling on the matter

and will now overrule respondent’s objection.

Stemming from the well-established principle that State law

creates legal rights and property interests while Federal law

determines how the rights and interests so created shall be

taxed, Morgan v. Commissioner, 309 U.S. 78, 80-81 (1940), this

Court looks to the relevant State’s parol evidence rule in

deciding whether to exclude extrinsic evidence concerning the

rights created under a written instrument. Estate of Craft v.

Commissioner, 68 T.C. 249, 263 (1977), affd. per curiam 608 F.2d

240 (5th Cir. 1979). The settlement agreement here was executed

in Michigan and provides in paragraph 12.0 that it is to be

“construed and interpreted in accordance with the law of the

State of Michigan.” Hence, we look to Michigan’s parol evidence

rule.

Use of the parol evidence rule to ascertain the intent of

the parties to a contract has long provenance in Michigan. As

early stated by the Supreme Court of Michigan:

We must look for the intent of the parties in the words
used in the instrument. This court does not have the
right to make a different contract for the parties or
to look to extrinsic testimony to determine their
intent when the words used by them are clear and
 - 16 -

unambiguous and have a definite meaning. * * * [Mich.
Chandelier Co. v. Morse, 297 N.W. 64, 67 (Mich. 1941).]

That court has further explained that the question of whether a

document is ambiguous presents a question of law, Port Huron

Educ. Association, MEA/NEA v. Port Huron Area Sch. Dist., 550

N.W.2d 228, 237 (Mich. 1996), and has defined an instrument as

ambiguous where “its words may reasonably be understood in

different ways”, Raska v. Farm Bureau Mut. Ins. Co., 314 N.W.2d

440, 441 (Mich. 1982).

Michigan courts have also cataloged recognized exceptions to

the parol evidence rule that may operate notwithstanding a

facially unambiguous document, as follows:

“For example, the rule does not preclude admission of
extrinsic evidence showing: that the writing was a
sham, not intended to create legal relations; that the
contract has no efficacy or effect because of fraud,
illegality, or mistake; that the parties did not
‘integrate’ their agreement, or assent to it as the
final embodiment of their understanding; or that the
agreement was only ‘partially integrated’ because
essential elements were not reduced to writing.” [NAG
Enters., Inc. v. All State Indus., Inc., 285 N.W.2d
770, 771-772 (Mich. 1979) (quoting Goodwin, Inc. v.
Orson E. Coe Pontiac, Inc., 220 N.W.2d 664, 668 (Mich.
1974)); internal citations omitted.]

Consequently, for instance, the Michigan courts generally treat

the issue of whether a writing is a complete and integrated

agreement as a threshold inquiry to which parol evidence may be

directed prior to any application of the rule. Id. at 771.

However, an explicit merger or integration clause in the

agreement will typically render this exception unavailable.
 - 17 -

Archambo v. Lawyers Title Ins. Corp., 646 N.W.2d 170, 177 (Mich.

2002); UAW-GM Human Res. Ctr. v. KSL Recreation Corp., 579 N.W.2d

411, 418 (Mich. Ct. App. 1998).

The settlement agreement at issue here contains in paragraph

14.0 an express integration clause to the effect that “This

Settlement Agreement contains the entire agreement between the

Plaintiffs and the Defendants with regard to matters set forth in

it”. Moreover, the estate has at no time so much as raised any

allegation of sham, fraud, illegality, or mistake. Accordingly,

the Court concludes that none of the threshold exceptions

enumerated by the Michigan courts are extant on these facts and,

thus, that application of the parol evidence rule will turn on

the presence or absence of ambiguity.

Respondent’s primary position in this litigation is that

unambiguous language of the settlement agreement afforded to

decedent the sole beneficial interest in the annuities and

establishes that her claims provided the sole consideration for

those periodic payments. The estate counters that the terms of

the agreement are susceptible to a reading under which all

plaintiffs held joint beneficial interests in all payments to be

made thereunder and all of their claims collectively provided the

consideration for any and all relief to be paid.

While the Court rules infra that both the settlement

agreement itself and the totality of the evidence in the record
 - 18 -

speak distinctly and by a preponderance in favor of a given

construction of the periodic payment provisions, the agreement

does not on its face exclude the estate’s construction. As an

example, the attorney who represented all three plaintiffs is

mentioned only in the lump-sum payment clause of paragraph 2.1.

Likewise, paragraph 3.0 refers to plaintiffs and payees in the

plural when discussing rights to the periodic payments. We also

note that the IRS examiner who audited the estate tax return

answered a question on cross-examination regarding whether there

was anything in paragraph 2.2 that indicated whose claims were

furnishing the consideration for the annuities: “No, there’s

nothing stated specifically as to which claim this applies to, it

just says who it’s payable to.” The Court in these circumstances

declines to limit the evidence considered under the parol

evidence rule. Respondent’s objection is overruled.

C. Analysis

The record in the instant case reflects that the annuities

at issue here were, as of the date of decedent’s death, payable

to her estate. The settlement agreement provides that, in

absence of designation of a beneficiary by decedent or her

parents as co-conservators, the periodic payments would be made

to the estate. The estate has never alleged, nor does any

documentary evidence suggest, that any such designation had been
 - 19 -

effected as of October 31, 2000, when decedent died.4

Furthermore, this construction of the legally determinative

settlement agreement is corroborated by the documentation

contained in the record with respect to the Allstate and Safeco

annuity contracts. Both contracts reflect decedent’s estate as

the beneficiary, and there is no evidence that any amending

change of beneficiary had been made at the time of her death.

Given the foregoing, the Court will analyze inclusion of the

annuities under the rubric of section 2033. The critical inquiry

thus becomes whether, and to what extent, decedent held a

4
The examiner who audited the estate tax return testified
at trial that the estate represented at some point that the
annuities were payable to a trust created after the date of
death. The estate never challenged that assertion. The estate
then, and only on reply brief, twice referenced trusts. The
first mention is set forth below:

While the funds were to provide care to the decedent
during her lifetime, the ultimate disposition of those
funds were [sic] not controlled by the decedent’s
estate, but by her parents through their powers of
attorney. Indeed, these powers were exercised to
transfer the remaining annuity payments to trusts
established by the parents, consistent with the control
powers given to them under the Agreement. [Emphasis
added.]

Second, in the context of explaining why the initial probate
inventory included the value of the annuities while later
inventories did not, the estate commented that “the annuities
were never paid to or a part of decedent’s probate estate, but
instead were transferred to trusts created by the parents.”
These remarks, when taken in the contexts presented, support an
inference that any redirection of annuity payments to a trust or
trusts took place subsequent to decedent’s death. The estate
does not otherwise mention a trust or trusts or base any specific
argument on the existence of such an entity.
 - 20 -

beneficial interest in the annuities at the time of her death.

The record as a whole clearly manifests that decedent held at

least some beneficial interest in the annuities. Decedent was

one of three plaintiffs in the underlying lawsuit, injuries she

suffered at the hands of the defendants were expressly detailed

in the complaint, and explicit claims for judgment to redress

those injuries were made by her. The settlement agreement was

then entered to resolve that lawsuit, and decedent therein was

named as the payee of the annuities, and only of the annuities.

Decedent was also the measuring life or annuitant for both of the

annuity contracts obtained to fund the settlement agreement

payments, and the resultant benefit checks were made payable to

her through her parents as co-conservators.

On these facts, there can be little doubt that decedent

possessed at least some beneficial interest in the annuities.

Moreover, even the estate does not appear seriously to contend to

the contrary. Rather, the estate focuses on arguing that

decedent’s parents likewise held beneficial interests in the

annuities. This nuance goes more properly to the question of the

extent of decedent’s interest for purposes of inclusion in her

gross estate, not the antecedent issue of some interest

includable under section 2033.

Concerning this issue of the extent of decedent’s interest,

the documentary record as a whole leans distinctly in the
 - 21 -

direction of decedent alone as the intended beneficiary of the

annuities. Highly probative is the structure of the settlement

agreement in explicitly naming decedent’s parents individually,

and not decedent, as payees of the lump sum due under paragraph

2.1, then naming decedent as the sole payee of the annuities

under paragraph 2.2. The Allstate and Safeco annuity contracts

are again corroborative of such a construction for the reasons

just mentioned above. Features to which the estate points, such

as the use of plural “Plaintiffs” in paragraph 3.0 and the

reference to the attorney for all three plaintiffs only in

paragraph 2.1, while arguably enough to engender a degree of

ambiguity, are insufficient to counteract the overall thrust of

the documents.

Nor does paragraph 4.0, likewise emphasized and relied upon

by the estate, suggest an opposing result. The estate contends

on reply brief: “Respondent also continues to overlook the

importance of the fact that the parents were given general powers

of appointment over the two annuities, exercisable during their

lifetimes, to direct where further annuity payments should be

made in the event of Sarah’s death.” However, paragraph 4.0 by

its terms affords the right to designate an alternate beneficiary

to decedent’s parents only in their capacity “as co-

conservators”. The very existence of this provision thus

supports, rather than detracts from, the impression gleaned from
 - 22 -

the settlement agreement that the annuity payments were intended

to benefit decedent alone.

Even the inventory prepared for the Wayne County Probate

Court bears a degree of corroborative value. As of February 14,

2001, decedent’s parents apparently viewed the annuities as part

of decedent’s probate estate, representing $1,118,000 of the

reported total assets of $1,535,853. The evidence further

suggests that this document was in fact filed with the probate

court on March 9, 2001, accompanied by payment of a $1,331.25

inventory fee. The Court takes judicial notice of the fact that

the probate inventory fee imposed under Michigan law is computed

based on the size of the estate and that $1,331.25 corresponds to

the fee that would be due on an estate of $1,535,853. See Mich.

Comp. Laws Serv. sec. 600.871 (LexisNexis 2004); see also Fed. R.

Evid. 201; Estate of Reis v. Commissioner, 87 T.C. 1016, 1026-

1027 (1986).

Although both parties concurred that amended inventories

excluding the annuities were provided to the IRS, no such

documents were proffered as evidence, nor was there any

indication that a refund of some portion of the inventory fee was

sought or obtained from the probate court. Rather, it is

noteworthy that $1,451.25 was claimed as an administrative

expense labeled Wayne County Probate Court on the Form 706 signed

on July 27, 2001. This would seem to correlate with the
 - 23 -

$1,331.25 inventory fee, along with the $100 petition or

application filing fee imposed at that time under Michigan law

(now $150), and some combination of minor fees or costs totaling

$20. See Mich. Comp. Laws Serv. secs. 600.871, 600.880, 600.880b

(LexisNexis 2004).

The estate relies principally on testimony of decedent’s

parents to buttress characterization of the annuities as part of

a joint and unallocated settlement of all claims in the lawsuit.

Mr. Davenport first testified that all claims were negotiated

together in the settlement procedure and that the various claims

were not broken down or discussed separately in formulating the

agreement. Then, when asked to describe the reasoning behind the

decision to establish the annuities,5 he offered:

Annuities offered some advantage that I felt for
my daughter. One of our biggest fears with her was
that she would outlive us. So annuity offered a
benefit of a continuous stream of monies, even if we
were to pass away before her.

It also offered some protection in the event that
myself or my wife was sued. These funds--monies,
cannot be attached, and it would ensure her funds for
as long as she lived, as long as she needed them.

Mr. Davenport later confirmed that his understanding upon signing

the agreement was that the annuity payments under paragraph 2.2

were not just for decedent’s claims alone. He also expressed his

5
Mr. Davenport, by profession a financial planner,
testified that he was responsible for the idea behind structuring
a portion of settlement in the form of annuities from two
different companies, to reduce risk.
 - 24 -

understanding of paragraph 3.0 as follows: “Well, we understood

this provision agreement that it really offered Sarah absolute

protection. That there would be monies available for her, and

her care, from this annuity. That there’s no way anybody could

cash in the annuity, and take proceeds from her.”

Ms. Weiss-Davenport, like her husband, testified that she

viewed the lawsuit as comprising a single claim for the three

plaintiffs and was never privy to any breakdown of pain,

suffering, or medical problems for her daughter separately. When

asked to describe her role in connection with the annuity

amounts, Ms. Weiss-Davenport stated:

Well, I think that one of my biggest roles was
just Rick and I having the discussion about why we
should do it this way, how they work, because I,
obviously, do not have a background in finance, and how
this would benefit, in the long run, Sarah, to have two
separate payments coming in, from two different
companies, in case, as Rick said, one of the companies
were to go under.

We wanted it set up this way so that in the event
that Rick and I were to become deceased, or, for
example, one of us left the marriage and there was a
new person coming on board, we wanted to make sure that
Sarah’s share would be kept up.

And that’s why we set it up this way: for her
safety. Because as Rick said, our biggest fear was
that what would happen to her if she outlived us. And
at the time we had no other children to consider
helping to take care of her.

Thus, the Court has before it a situation where on the one

hand decedent’s parents affirmed, primarily in response to

leading questions on direct examination, that they understood all
 - 25 -

payments under the agreement as representing a unitary and

unallocated resolution of all claims raised in the lawsuit. On

the other hand, when Mr. Davenport and Ms. Weiss-Davenport

explained in detail the reasoning underlying the annuity

provisions, every remark connects these payments to decedent’s

“benefit”, “absolute protection”, “care”, “share”, “safety”, what

“she needed”. Hence, as alluded to previously, the testimony

upon which the estate places such great reliance in fact cuts

both ways. Overall and at first blush, it patently corroborates

that decedent at a minimum possessed some beneficial interest in

the annuities, as required for inclusion under section 2033.

However, when scrutinized closely, the more detailed, heartfelt,

and therefore credible testimony goes even further, weighing

heavily towards a beneficial interest held by decedent alone.

Not once did either of decedent’s parents reference any

manner in which they personally and individually would benefit

from the annuity payments under paragraph 2.2 of the settlement

agreement. Moreover, in discussing paragraph 3.0, they both

chose to emphasize how they felt bound thereby from effecting any

change in or control over the payment streams. Only in response

to further questions directed to paragraph 4.0 did decedent’s

parents make comments that reverted to the idea of some degree of

control over the annuities. As previously mentioned, however,
 - 26 -

the rights afforded by paragraph 4.0 inured to decedent’s parents

only as her “co-conservators”.

The Court would also make a final observation in connection

with the testimonial record. It is well settled that when a

settlement agreement fails to designate the reason for a payment,

the intent of the payor in making the payment controls for tax

purposes. See, e.g., Francisco v. United States, 267 F.3d 303,

319 (3d Cir. 2001); Knuckles v. Commissioner, 349 F.2d 610, 613

(10th Cir. 1965), affg. T.C. Memo. 1964-33; Metzger v.

Commissioner, 88 T.C. 834, 847-848 (1987), affd. without

published opinion 845 F.2d 1013 (3d Cir. 1988); Reisman v.

Commissioner, T.C. Memo. 2000-173, affd. 3 Fed. Appx. 374 (6th

Cir. 2001). Yet the estate did not call as a witness any of the

defendants in the underlying lawsuit. Suffice it to say that the

silence of the record in this regard speaks loudly. See, e.g.,

Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165

(1946), affd. 162 F.2d 513 (10th Cir. 1947).

In support of their respective positions, both sides rely

primarily on a single case. The estate analogizes from Kegel v.

State, 830 P.2d 563 (N.M. Ct. App. 1992), while respondent draws

our attention to Arrington v. United States, 34 Fed. Cl. 144

(1995). Kegel v. State, supra at 564, involved a settlement

agreement resulting from a malpractice lawsuit brought by a

disabled minor child and his parents. The settlement agreement
 - 27 -

provided for a “‘trust fund to be established in * * * [the

child’s] behalf’”. Id. During the settlement process, a number

of checks were issued, payable to various combinations of the

child, his conservator, and his parents, and an annuity was

assigned to the child, through his conservator, and to his

parents, “individually”. Id. The annuity and portions of the

lump-sum payments were placed in the trust. Id.

The question before the court was whether the trust was a

“Medicaid qualifying trust” under 42 U.S.C. sec. 1396a(k)(2)

(1988), such that the trust estate would be deemed “available” to

the child and would eliminate his eligibility for health care

benefits from the State. Id. As pertinent there, the trust

would meet the statutory definition of qualifying only if the

child were considered to have established or created the trust.

Id. at 565-566. On the facts presented, the court in Kegel v.

State, supra at 567-568 concluded:

There is nothing in the record to support a
finding or conclusion that * * * [the child] or his
conservator was entitled to any particular portion of
the proceeds. The record indicates that his parents
and the conservator acted jointly in deciding upon a
trust as a vehicle for managing the funds they
anticipated as a result of the settlement. To the
extent the parents funded the trust with their share of
the settlement proceeds, the Department appears to
concede that the trust was not a Medicaid qualifying
trust. * * *

* * * * * * *

The creation of this trust involved multiple
grantors. * * * [The child] never had unrestricted
 - 28 -

legal or equitable title to the additional sums made
available, and he himself played no role in the
decision to create the trust. We conclude that there
is too little in this record to support a determination
that * * * [the child] was the grantor of the trust in
this case.

As can be gleaned from the foregoing recitation, Kegel v.

State, supra, is both legally and factually distinguishable from

the case at bar. From a legal standpoint, that case was

concerned with a technical exegesis of a narrow statutory

definition having no particular analogue in the Federal estate

tax regime. Critically, the question of whether a person is the

creator or grantor of a trust is distinctly different from the

question of whether someone had a beneficial interest in a trust

or other property. From a factual standpoint, the documentary

record in Kegel v. State, supra, showed extensive commingling of

interests and did not favor any particular separation or

allocation. In contrast and for the reasons cataloged above, the

record here does, on balance, weigh distinctly in favor of

decedent as the sole intended beneficiary of the annuities.

Arrington v. United States, supra, offers stronger

parallels. That case, too, dealt with settlement of a lawsuit

brought by parents individually and on behalf of a minor son who

had sustained injuries at birth. Id. at 145-146. The pertinent

settlement agreement provided, inter alia, for an annuity “‘for

the sole use and benefit of’” the child, guaranteed for 360

months, and payable to the child’s estate in the event of his
 - 29 -

death. Id. The annuity was funded through purchase of a

contract policy listing the initial payee as “‘Wilford Arrington

and Deborah Arrington, as Parents and Next Friends of William

Arrington, for the sole use and benefit of William Arrington,’”

and listing the contingent payee as the child’s estate. Id. at

146. The court held that the child was the sole beneficial owner

of the annuity, such that its value was includable in his gross

estate under section 2033. Id. at 147-148, 150.

The estate maintains that Arrington v. United States, supra,

is distinguishable on its facts largely because the annuity

payments there, unlike here, were directly traceable to the

child’s claims and because here, unlike there, decedent’s parents

were granted control to direct the payments to other than

decedent’s estate. As to the former, although the language of

the settlement agreement in Arrington v. United States, supra,

may have been more explicit in naming the child as the

beneficiary of the annuity, we find the overall structure of the

settlement agreement here to be equally persuasive. Notably, the

agreement in Arrington v. United States, supra, would appear to

have earmarked no compensation for the child’s parents, while

here decedent’s parents were designated as the payees of specific

sums. As to the latter complaint, we refer again to the fact

that the alleged control of decedent’s parents by its terms
 - 30 -

existed only in a fiduciary capacity and therefore does not limit

or weaken decedent’s interest in the annuities.

To recapitulate, the Court is satisfied that decedent should

be characterized as the sole beneficial owner of the annuities,

such that the value thereof in includable in her gross estate

under section 2033. Consequently, we need not reach the question

of whether the annuities would likewise be properly included

under section 2039. Nonetheless, our affirmative answer on the

question of inclusion does necessitate examination of the issue

of valuation, to which we now turn.

III. Valuation of the Annuities

A. General Rules

With respect to an interest included in the gross estate

pursuant to section 2033 and/or following provisions, the general

rule governing valuation is set forth in section 20.2031-1(b),

Estate Tax Regs.:

The value of every item of property includible in a
decedent’s gross estate under sections 2031 through
2044 [now 2045 due to addition and renumbering] is its
fair market value at the time of the decedent’s death,
except that if the executor elects the alternate
valuation method under section 2032, it is the fair
market value thereof at the date, and with the
adjustments, prescribed in that section. The fair
market value is the price at which the property would
change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or to
sell and both having reasonable knowledge of relevant
facts. * * *
 - 31 -

However, section 7520, enacted as part of the Technical and

Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 5031(a),

102 Stat. 3668, provides a specific rule for valuing enumerated

forms of property interests, as follows:

SEC. 7520. VALUATION TABLES.

(a) General Rule.--For purposes of this title, the
value of any annuity, any interest for life or a term
of years, or any remainder or reversionary interest
shall be determined--

(1) under tables prescribed by the Secretary,
and

(2) by using an interest rate (rounded to the
nearest 2/10ths of 1 percent) equal to 120 percent
of the Federal midterm rate in effect under
section 1274(d)(1) for the month in which the
valuation date falls.

* * * * * * *

(b) Section Not To Apply for Certain Purposes.--
This section shall not apply for purposes of part I of
subchapter D of chapter 1 [relating to qualified plans
and deferred compensation] or any other provision
specified in regulations.

For estate tax purposes, regulations promulgated under

section 7520 direct that the relevant actuarial tables for

valuing interests covered by the statute are contained in section

20.2031-7, Estate Tax Regs. Sec. 20.7520-1(a)(1), Estate Tax

Regs.; see also sec. 20.2031-7(d)(5), Example (4), Estate Tax

Regs. (illustrating the calculation for valuing an annuity of

$10,000 per year payable to a decedent or the decedent’s estate).

The regulations under section 7520 also delineate exceptions to
 - 32 -

the application of that section. Sec. 20.7520-3, Estate Tax

Regs. The estate has raised none of these exceptions, and they

will not be further addressed.

Section 20.2031-7, Estate Tax Regs., entitled “Valuation of

annuities, interests for life or term of years, and remainder or

reversionary interests”, reads in part:

(a) In general.--Except as otherwise provided in
paragraph (b) of this section and sec. 20.7520-3(b)
(pertaining to certain limitations on the use of
prescribed tables), the fair market value of annuities,
life estates, terms of years, remainders, and
reversionary interests for estates of decedents is the
present value of such interests, determined under
paragraph (d) of this section. The regulations in this
and in related sections provide tables with standard
actuarial factors and examples that illustrate how to
use the tables to compute the present value of ordinary
annuity, life, and remainder interests in property.
These sections also refer to standard and special
actuarial factors that may be necessary to compute the
present value of similar interests in more unusual fact
situations.

(b) Commercial annuities and insurance
contracts.--The value of annuities issued by companies
regularly engaged in their sale, and of insurance
policies on the lives of persons other than the
decedent, is determined under sec. 20.2031-8. * * *

The referenced section 20.2031-8, Estate Tax Regs., then states,

as relevant here: “The value of a contract for the payment of an

annuity, or an insurance policy on the life of a person other

than the decedent, issued by a company regularly engaged in the

selling of contracts of that character is established through the

sale by that company of comparable contracts.” Sec. 20.2031-

8(a)(1), Estate Tax Regs.
 - 33 -

B. Analysis

In the present matter, respondent determined the value of

the annuities includable in the gross estate utilizing the tables

and interest rates prescribed under section 7520 and set forth in

section 20.2031-7(d), Estate Tax Regs. Those computations have

not been made a part of the record, and the estate has never

disputed that the calculations reflect a correct application of

the section 7520 actuarial methodology and attendant tables.

Rather, the estate advocates use of section 20.2031-8, Estate Tax

Regs., contending for valuation “on the basis of the cost of

commercial replacement annuities as of decedent’s date of death”.

The estate’s argument on this point is limited to a few

sentences, the substance of which is contained in the following:

“Petitioner takes the position that commercial annuities were

purchased in connection with the settlement arrangement.

Therefore, the proper method for valuation of such annuities

would be comparable commercial contracts as of the Decedent’s

date of death, the method of valuation specified under Treas.

Reg. 20:2031-8.”

There exist, however several difficulties with the estate’s

position. First, as previously noted, the legally determinative

document conferring on decedent the right to streams of periodic

payments is the settlement agreement. That right is to periodic

payments from the hospital, not from a commercial annuity
 - 34 -

provider. Again, the annuity contracts function only as the

chosen method of funding the legal rights created under the

settlement agreement, and such choice should not affect the value

of the independently operative legal entitlement.

A second, more practical problem arises in that the estate

has at no time offered any evidence whatsoever regarding the

value of comparable commercial contracts. The only figure

contained in the record other than that determined by respondent

in the notice of deficiency is the $1,118,000 listed on the

probate inventory. The estate has never mentioned how the

inventory amount was derived or suggested that it would equate

with the cost of a commercial contract. Accordingly, even if the

Court were to accept the estate’s position that the annuities

should be valued under section 20.2031-8, Estate Tax Regs., the

estate has failed to show that such value would in fact differ

from the amount determined by respondent under section 20.2031-7,

Estate Tax Regs. The Court is thus constrained to uphold

respondent’s $1,514,572 valuation.

IV. Deduction for Funeral Luncheon

Section 2053(a)(1) provides for a deduction from the gross

estate for such funeral expenses as are allowed by the laws of

the jurisdiction under which the estate is being administered.

Michigan law allows reasonable funeral and burial expenses as a
 - 35 -

charge against the estate. See Mich. Comp. Laws Ann. Serv.

700.1103(g), 700.3805(1)(b) (LexisNexis 2005).

On Form 706, the estate claimed total funeral expenses of

$7,796.38, broken down and described therein as follows:

Description Amount

A.H. Peters Funeral Home $2,475.20
Cremation 105.00
Soloist 150.00
Priest 250.00
Organist 150.00
Obituary notice 316.84
Cemetery (niche for urn) 250.00
Funeral luncheon 3,638.92
Various related expenses (holy
picture cards, acknowledgments,
postage) 460.42

Respondent allowed all of the expenses claimed with the exception

of the $3,639 (rounded) designated for the funeral luncheon. The

estate alleges that the cost of the luncheon is properly

deductible under section 2053(a)(1).

Regulations promulgated under section 2053(a)(1) offer only

limited guidance. Although neither the statute itself nor the

regulations define “funeral expenses”, section 20.2053-2, Estate

Tax Regs., highlights “A reasonable expenditure for a tombstone,

monument, or mausoleum, or for a burial lot, either for the

decedent or his family, including a reasonable expenditure for

its future care” and “the cost of transportation of the person

bringing the body to the place of burial” as examples of

deductible costs. Caselaw interpreting the term has in turn
 - 36 -

provided the following touchstone: “The basis of this deduction

is the necessity of the expense in connection with the decedent’s

funeral.” Estate of Berkman v. Commissioner, T.C. Memo. 1979-46;

see also Estate of Tuck v. Commissioner, T.C. Memo. 1988-560 (“As

we interpret the term ‘funeral expenses’, it means expenses

incurred in connection with the decedent’s funeral.”).

The record contains no documentary evidence with respect to

the claimed funeral luncheon expense. At trial, decedent’s

parents provided the information set forth below. Mr. Davenport

testified in a colloquy with counsel:

Q Now I’d like to draw your attention to
Sarah’s funeral. In connection with the funeral, was
there a reception after the funeral?

A Yes, there was.

Q And what was the purpose of that reception?

A In large part it was to say, Thank you to a
lot of people in our family, teachers, other healthcare
professionals that worked with us and Sarah over the
years.

Q And were these individuals invited to the
funeral?

A Yes, they were.

Q And these were people that had rendered care
to her. Did she require a great deal of care?

A Yes, she did.

Ms. Weiss-Davenport was similarly asked what she “felt the

purpose of that reception was”, and she responded:
 - 37 -

As Rick said, during Sarah’s life--she lived 12
years--she was very, very complex with her care. We
had a multitude of people throughout the years who fell
in love with her. People who we didn’t even know
until, you know, later on.

Even after she died, people came to us saying, you
know, what a wonderful little girl she was. And we
wanted to show gratitude towards those people.

The church that we belong to went way out, and
really helped us out during this terrible time.

She had therapist, teachers, just friends, and we
wanted to just show gratitude towards them, and have
the luncheon.

And to be honest with you, we had to hold it in a
place that was large enough, because the church hall,
the reception hall, was unable to handle the volume of
people that showed up for the funeral. So.

On reply brief, the estate then summarizes its position regarding

this item, maintaining “that the funeral reception expense

incurred on the day of decedent’s funeral, because of decedent’s

unique medical circumstances and the support and assistance she

received during her short lifetime is an expense intimately tied

to decedent’s funeral arrangements and is deductible for federal

estate tax purposes.”

Unfortunately, while we applaud the spirit of gratitude and

generosity that apparently animated the decision to sponsor the

funeral luncheon, the record before us is simply inadequate to

establish the event’s deductibility. First, as a practical

matter, both Michigan State law and the Federal regulations

suggest a standard of reasonableness in examining the amount of
 - 38 -

funeral expenditures. Because the record here offers nothing but

the total line-item figure of $3,638.92, we lack any basis

whatsoever for determining reasonableness. We do not know

whether that amount comprises charges for the venue, decorating,

catering, entertainment, or a combination of supplies and

services. We do not know who received the claimed payment or

payments.

Second, the record is likewise insufficient to establish the

requisite necessity in connection with decedent’s funeral. From

the testimony at trial, it is to be inferred that the focus of

the luncheon was on recognizing and thanking third parties for

their support both during decedent’s life and after her passing.

That represents a shift from the traditional focus of a funeral

in eulogizing and laying to rest the deceased. The evidence,

consisting only of broad and generalized statements about the

intent of the luncheon, deprives the Court of any ability to

compare what may in fact have transpired there with activities

typically associated with funeral services.

In addition, the testimony suggests that the reception was

held at a different location than the funeral service itself, as

according to Ms. Weiss-Davenport, the guests in attendance were

so numerous that “the church hall, the reception hall, was unable

to handle the volume of people that showed up for the funeral”.

Similarly, the extent of the overlap in attendance is unclear.
 - 39 -

Although Mr. Davenport testified that those who attended the

reception were invited to the funeral, did some individuals

attend only one or the other? Suffice it to say that the Court

is constrained to hold for respondent on this issue as well.

In closing, the Court has considered all of the parties’

contentions, arguments, requests, and statements. To the extent

not discussed herein, we conclude that they are meritless,

irrelevant, or moot. To reflect the foregoing,

Decision will be entered

for respondent.