T.C. Memo. 2007-169
UNITED STATES TAX COURT
ESTATE OF SYLVIA GORE, DONOR, DECEASED, PAMELA POWELL,
PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
ESTATE OF SYLVIA GORE, DECEASED, PAMELA POWELL,
PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 467-02, 468-02. Filed June 27, 2007.
Paul R. Hodgson and James E. Poe, for petitioner.
Elizabeth Downs, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined a deficiency of
$1,071,650 in the Federal estate tax of the Estate of Sylvia Gore
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(the estate).1 By separate notice of deficiency, respondent
determined a Federal gift tax deficiency of $918,962 with respect
to Sylvia Gore’s 1997 taxable year. The personal representative
of the estate filed separate petitions to redetermine the
deficiencies of the estate. These cases were consolidated for
purposes of trial, briefing, and opinion pursuant to Rule 141(a)
because they present common questions of fact and law.
Hereinafter, we shall refer to these consolidated cases as this
case.
1
All section references are to the Internal Revenue Code
(Code) in effect for June 12, 1997, the date of Sylvia Gore’s
death, and for the taxable year 1997, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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After concessions,2 the issues presented are:3
2
In the estate tax notice of deficiency, respondent
determined that the value of a $250,000 St. Francis Hospital,
Inc. bond was includable in Sylvia Gore’s (decedent’s) gross
estate under sec. 2038, or, alternatively, under either sec. 2031
or 2033. In the stipulation of facts, petitioner concedes that
the bond is includable in decedent’s gross estate.
In the estate tax notice of deficiency, respondent
disallowed a deduction of $19,084 for a note payable from
decedent. In the stipulation of facts, petitioner concedes that
the estate is not entitled to deduct $19,084 as a debt of
decedent.
In the explanation of adjustments section of the estate tax
notice of deficiency, respondent determined that the fair market
value of the Gore Family Limited Partnership (GFLP) was
$4,997,280. However, respondent used $4,997,290 as the value of
GFLP in computing the transfers during decedent’s life reflected
in the explanation of items. Although petitioner raised the
issue of this $10 discrepancy in the petition, petitioner
abandoned the issue in petitioner’s trial memorandum.
During the audit in this case, a $65,000 Grand River Dam
Authority bond that had not been reported as an asset of the
estate for estate tax purposes was discovered. The parties agree
that the Grand River Dam Authority bond was not transferred to
GFLP and is includable in decedent’s gross estate under sec.
2033.
3
Petitioner has raised two additional issues, but we need
not decide them in this opinion:
(1) Petitioner raised the issue of whether respondent
allowed the maximum credit for State death tax under sec. 2011.
The estate claimed a credit of $56,813 for State death taxes on
Form 706, United States Estate (and Generation-Skipping Transfer)
Tax Return, and respondent has not disallowed that credit.
Petitioner represents that Oklahoma has issued alternative orders
assessing additional death tax liabilities, and resolution of the
estate’s State death tax liability is pending before the Oklahoma
Tax Commission. Respondent correctly notes that the maximum
amount of credit allowed under sec. 2011 depends on the size of
the adjusted taxable estate for Federal estate tax purposes.
Respondent represents that he will allow an additional credit for
(continued...)
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(1) Whether the values of the assets of the Sidney Gore
Marital Fund (Marital Fund assets) are includable in Sylvia
Gore’s (decedent’s) gross estate under section 2033 or section
2041;
(2) alternatively, if decedent completed a transfer of
Marital Fund assets to the Gore Family Limited Partnership (GFLP)
before her death, whether the values of those assets are
includable in decedent’s gross estate under sections 2041, 2036,
and/or 2038;
(3) alternatively, if the value of the property to be
included in decedent’s estate is that of a 32.667-percent limited
partnership interest in GFLP, whether the value of that interest
on June 12, 1997, was $1,260,472, as respondent contends, or
$740,036, the value reported on the estate’s Federal estate tax
return;
(4) if the values of the Marital Fund assets are includable
in decedent’s gross estate under sections 2033, 2036, 2038,
3
(...continued)
State death tax, if it is paid and claimed by the estate within
the period specified in sec. 2011(c)(1).
(2) Petitioner also raised the issue of whether respondent
erred in not applying a $192,800 Federal estate tax payment made
on July 14, 2000, to reduce the amount of the estate tax
deficiency respondent determined in the notice of deficiency
dated Sept. 26, 2001. Respondent represents that the estate’s
unassessed prepayment of estate tax has been credited to the
estate’s account and will be treated as a July 14, 2000, payment
in computing any outstanding estate tax liability as a result of
this opinion.
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and/or 2041(a)(2), whether decedent’s gross estate should be
reduced by $46,664, the amount of a note payable to decedent from
GFLP;
(5) if decedent completed a transfer of the Marital Fund
assets to GFLP and made gifts of GFLP limited partnership
interests to the trusts for decedent’s children before her death,
whether the gifts to the trusts should be treated, for valuation
purposes, as indirect gifts of Marital Fund assets to GFLP’s
partners’ capital accounts or as direct gifts of limited
partnership interests;
(6) whether the value of a Smith Barney investment account
($102,139) is includable in decedent’s gross estate under section
2033;
(7) whether decedent’s estate is entitled to deduct
administration expenses in excess of those already claimed and
allowed under section 2053; and
(8) whether decedent’s estate is entitled to deduct ad
valorem tax of $3,367 under section 2053.
FINDINGS OF FACT
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the supplemental stipulation of
facts are incorporated herein by this reference. Decedent was
domiciled in Tulsa, Oklahoma, at the time of her death, and her
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estate is administered there. The estate’s personal
representative, Pamela Powell (Ms. Powell or petitioner), resided
in Tulsa, Oklahoma, when she petitioned the Court on behalf of
the estate.
Decedent died on June 12, 1997, and was the surviving spouse
of Sidney Gore, who died on January 25, 1995. Decedent and
Sidney Gore were married for 49 years and had two children,
Michael Gore (Mr. Gore) and Ms. Powell, and one grandchild, AP,
the son of Ms. Powell.
During his lifetime Sidney Gore was involved in the oil
production business. At the time of his death, the bulk of his
assets consisted of investments in oil companies and in
Government bonds. Sidney Gore had lived a frugal life and had
accumulated considerable wealth, but he did not share the details
of his finances with his family members or discuss his financial
matters with them.
Decedent did not work outside of the home and did not
accumulate substantial assets of her own during her marriage.
Neither decedent nor her children participated in Sidney Gore’s
business activities or in the management of his investments, and
they had little knowledge of his financial affairs.
Estate Plans of Sidney Gore and Decedent
On October 20, 1988, Sidney Gore executed a Declaration of
Trust Creating the Sidney Gore Trust (Sidney Gore Trust
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declaration), in which he appointed himself trustee and stated
his intention to fund the trust with $100 and “all of the
Properties, Assets and Securities described in ‘Schedule A’”.4
The Sidney Gore Trust declaration further provided that Sidney
Gore retained the power to revoke the Sidney Gore Trust and that
he was entitled to all trust income during his life.
The Sidney Gore Trust declaration also provided that, upon
Sidney Gore’s death, decedent would become the successor trustee
of the Sidney Gore Trust and that after debts, taxes, and
administration costs had been paid, the trust would be divided
into two shares or funds--the Sidney Gore Marital Fund (Marital
Fund) and a credit shelter fund to be known as the Sidney Gore
Family Fund (Family Fund). The Family Fund was to contain
property in a dollar amount equal to that which could pass free
of the Federal estate tax by reason of the unified credit, and
the Marital Fund was to contain the balance of the Sidney Gore
Trust assets.
With regard to the principal and income of the Marital Fund,
the Sidney Gore Trust declaration provided, in pertinent part, as
follows:
(a) Commencing at my death and during the life of
my Wife, the Trustees shall pay the income to my Wife
in monthly or more frequent installments as may be
convenient to her.
4
Schedule A was not attached to the copy of the Sidney Gore
Trust declaration in the record.
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(b) The Trustees also shall pay to my Wife such
amounts, without limitation, from the principal of the
Marital Fund, as she from time to time may direct by
writing filed with the Trustees, or if she is acting as
a Co-Trustee hereunder by writing filed with the Trust
Records, and copy thereof delivered to the Co-Trustee.
(c) In addition to the said payments, the Trustees
may from time to time pay to my Wife such amounts from
the principal of the Marital Fund, as they deem
necessary for her support, maintenance, health and
reasonable comfort, taking into consideration the
standard of living to which she is accustomed at my
death.
* * * * * * *
(e) My Wife shall have and is hereby granted the
power to appoint the principal and any undistributed
income, to any person exercisable only by a provision
in the Last Will and Testament of my Wife expressly
exercising said power under the right hereby granted.
(f) Upon the death of my Wife, the Trustees shall
distribute the then remaining principal and
undistributed income in the Marital Trust, to such
appointee or appointees (including the Estate of my
Wife), in such manner as my Wife may appoint by her
Last Will and Testament, and, to the extent that my
Wife shall fail validly to exercise said Power of
Appointment, the principal and any accrued or
undistributed income, shall be distributed to the
Trustees of the Family Fund, to be administered and
distributed as herein provided for the Family Fund.
All Payments made by the Trustees to my Surviving
Wife shall be made first out of the Sidney Gore Marital
Fund, both income and principal, until said Fund is
completely exhausted. Thereafter, if necessary,
payments may be made from the Family Fund.
With regard to the principal and income of the Family Fund,
the Sidney Gore Trust declaration provided that, during the life
of decedent:
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(a) The Trustees may, if the Marital Fund is
exhausted, pay the income to my Wife, in monthly or
more frequent installments as may be convenient to her.
(b) In addition to the said payments, if the
marital fund is exhausted, the Trustees may from time
to time pay to my Wife such amounts from the principal
of the Family Fund, as they deem necessary for her
support, maintenance, health and reasonable comfort,
taking into consideration the standard of living to
which she is accustomed at my death.
The Sidney Gore Trust declaration further provided that after
decedent’s death, the lesser of $100,000 or one-fourth of the
assets remaining in the Family Fund would be distributed to each
of Mr. Gore and Ms. Powell, and the balance of the assets would
be divided equally into two separate funds--the Michael Gore Fund
and the Pamela M. Gore Fund.5
On October 20, 1988, Sidney Gore executed his Last Will and
Testament. In his will, Sidney Gore appointed decedent as
executrix, and he bequeathed all personal property to her. The
will devised the residue of his estate to decedent, as the
successor trustee of the Sidney Gore Trust, to be held and
distributed in accordance with the Sidney Gore Trust declaration.
Also on October 20, 1988, decedent executed a Declaration of
Trust Creating the Sylvia Gore Trust (Sylvia Gore Trust
declaration), which contained provisions substantially identical
to those of the Sidney Gore Trust declaration, and a Last Will
5
We refer to Pamela M. Gore as Pamela Powell or Ms. Powell
throughout this opinion.
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and Testament, which contained provisions substantially identical
to those of Sidney Gore’s will. The Sylvia Gore Trust
declaration named decedent as trustee of the Sylvia Gore Trust
and provided that the trust would be funded with $100 and “all of
the Properties, Assets and Securities described in ‘Schedule
A’”.6 The Sylvia Gore Trust declaration also provided that
decedent retained the power to revoke the Sylvia Gore Trust and
was entitled to all trust income during her life.
Several years later, on January 24, 1995, Sidney Gore met
with his accountant, Cecilia Bowers, in the hospital where he was
hospitalized. On several previous occasions, Ms. Bowers had
discussed with Sidney Gore her belief that the Sidney Gore Trust
was not funded.7 At the January 24 meeting, Sidney Gore
expressed to Ms. Bowers his concerns about preserving the wealth
he had accumulated through his life’s work, protecting his assets
from waste, and conserving them for future generations. Sidney
Gore also expressed to Ms. Bowers his concern about decedent’s
future needs. He wanted to ensure that decedent would be
financially secure after his death and that his assets were made
available to her for that purpose.
6
Schedule A was not attached to the copy of the Sylvia Gore
Trust declaration in the record.
7
Neither party contends that the Sidney Gore Trust was not
funded, and both parties assume, for purposes of this case, that
the Sidney Gore Trust was funded at the time of his death.
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After Sidney Gore’s death on January 25, 1995, and in
response to his concerns, Ms. Bowers first proposed the idea of a
limited partnership to Ms. Powell and Mr. Gore and later
discussed it with decedent. Ms. Bowers had little experience
with family limited partnerships and had never recommended one to
a client before she made the proposal to the Gore children, so
she recommended that Ms. Powell, Mr. Gore, and decedent retain an
attorney to further advise them about a limited partnership. Ms.
Powell and Mr. Gore ultimately engaged the services of attorneys
John L. Boyd and Jim Bishop.
On December 11, 1996, the Estate of Sidney Gore filed a
General Inventory and Appraisement in the District Court for
Tulsa County, State of Oklahoma (district court). The inventory
reported the total value of Sidney Gore’s estate as $4,568,204.
Formation of GFLP
On December 19, 1996, Ms. Powell and Mr. Gore executed a
Certificate of Limited Partnership for GFLP (certificate), which
they filed with the secretary of state of the State of Oklahoma.
The certificate set forth the name of the partnership, designated
John L. Boyd as its service agent, named Ms. Powell and Mr. Gore
as the general partners, and provided that the partnership was to
exist for 49 years and 12 days commencing on December 19, 1996.8
8
Stipulation 22 erroneously states that the commencement
date specified in the certificate is Dec. 26, 1996.
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Although Ms. Bowers had consulted decedent about forming GFLP,
decedent did not participate in its formation. On December 26,
1996, the secretary of state for the State of Oklahoma issued a
formal certificate.9
On December 26, 1996, Ms. Powell and Mr. Gore executed the
GFLP Partnership Agreement (partnership agreement). The
partnership agreement provided that GFLP was formed for
investment purposes and that profits and losses would be
allocated in proportion to the capital accounts of the partners.
With regard to initial capital contributions to GFLP, the
partnership agreement provided, in part, the following:
Each Partner shall make an initial contribution to the
capital of the Partnership, simultaneously with the
execution of this Agreement, in the amount shown on
Schedule A. In consideration, each Partner shall be
issued such number of units of Partnership interest
(“Partnership Units”) as is indicated on Schedule A,
consisting of the number of units of General
Partnership interest (each a “General Partnership
Unit”) and units of Limited Partnership interest (each
a “Limited Partnership Unit”) shown on Schedule A.
Each Partnership Unit shall represent equivalent
economic interests in the Partnership.
Schedule A to the partnership agreement named only Mr. Gore and
Ms. Powell as general partners and did not list the names of any
limited partners. Schedule A showed that Mr. Gore and Ms. Powell
had contributed $500 each for a general partnership unit. In
9
Respondent does not dispute that GFLP is a valid entity
under Oklahoma law.
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fact, neither Mr. Gore nor Ms. Powell made any capital
contributions when the partnership agreement was executed.
Distributions From Sidney Gore’s Estate
On December 30, 1996, the district court entered an Order
for Partial Distribution in the Estate of Sidney Gore that
provided for distribution of the following property to the Sidney
Gore Trust:
Schedule A--Real Estate
(1) Mineral interest in
Henry Hill gas well (Henry Hill lease)
Schedule B--Stocks and Bonds
(2) 2,500 common shares of
Tenneco, Inc. (Tenneco)
(3) 3,000 common shares of
Mobil Corp. (Mobil)
(4) 6,000 common shares of
Chevron Corp. (Chevron)
(5) 15,000 common shares of
Exxon Corp. (Exxon)
(6) 3,600 common shares of
Amoco Corp. (Amoco)
(7) 200 common shares of
Texaco, Inc. (Texaco)
(8) 10,200 common shares of
Phillips Petroleum (Phillips)
(9) 12-year and 15-year State
of Israel savings bonds (State of Israel bonds)
(10) Grand River Dam Authority
Oklahoma bond; 5.25-percent
interest, maturing on June 1,
2002, and held in a Paine
Webber account (GRDA bond No. 1)
(11) Grand River Dam Authority
Oklahoma bond; 6.8-percent
interest, maturing on June 1,
1997, and held in a Smith
Barney account (GRDA bond No. 2)
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(12) 50 Grand River Dam Authority
Oklahoma bonds; 5.2-percent
interest, maturing on June 1,
2000, and held by U.S. Trust
Co. (GRDA bond No. 3)
(13) 10 U.S. Government savings
bonds, series E (savings bonds)
(14) St. Francis Hospital bond (St. Francis bond)
(15) Colonial tax-exempt
mutual fund (Colonial Fund)
Schedule C--Cash and Certificates of Deposit (CDs)
(16) 17 $100 bills
(17) Boatmen’s Bank checking (Sidney Gore account
account No. xx-xxxx-xx6478 No. 6478)
(18) Two Treasury notes (Treasury notes)
(19) Commercial Federal CD No.
xxxxx10-2 (Commercial Federal CD)
(20) Valley National CD (Valley National CD
No. xxx48 No. 1)
(21) Valley National CD (Valley National CD
No. xxx09 No. 2)
(22) Bank of Oklahoma CD
No. xxx-xxxxx36 (Bank of Okla. CD)
(23) State Bank CD No. xxxxx11 (State Bank CD No. 1)
(24) State Bank CD No. xxx51 (State Bank CD No. 2)
Schedule D--Tangible Personal Property
(25) Household furnishings
(26) Personal clothing
(27) Wedding band and watch
The Order for Partial Distribution did not specify how the
property distributed to the Sidney Gore Trust was to be allocated
as between the Marital Fund and the Family Fund. However, the
Sidney Gore estate’s Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return, dated October 22, 1996,
reported that the estate’s assets were to be distributed as
follows: (1) Decedent was to receive the marital home, Bank of
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Oklahoma checking account No. xxxxxx6672 (joint account No.
6672), Social Security death benefit, household furnishings,
personal items, car, and two individual retirement accounts, the
cumulative value of which was in excess of $500,000; (2) the
Family Fund was to receive cash of $542,000; and (3) the Marital
Fund was to receive specific assets listed on pages 17-20 of the
estate tax return, which included the assets referenced in
schedules A, B, and C of the Order for Partial Distribution,10 a
Grand River Dam Authority Oklahoma bond bearing a 5.5-percent
interest rate that matures on June 1, 2009, and allegedly was
held in a Paine Webber account (GRDA bond No. 4),11 a Grand
River Dam Authority Oklahoma bond bearing a 5.0-percent interest
rate that matured on June 1, 2001, and was held in the same Paine
Webber account as GRDA bond No. 1 (GRDA bond No. 5), a Grand
River Dam Authority Oklahoma bond bearing a 5.0-percent interest
rate that matured on June 1, 2001, and was held in a Merrill
Lynch account (GRDA bond No. 6), an individual retirement
10
A Valley National CD No. xxx24 was listed on Schedule M,
Bequests, etc., to Surviving Spouse, of the Sidney Gore estate’s
Form 706. However, two Valley National CDs with different
numbers and different maturity dates were included on the Order
for Partial Distribution.
11
It is unclear from the record whether this bond actually
exists or whether Sidney Gore’s estate confused it with another
bond in reporting it on Form 706. The only mention of this bond
is in the Sidney Gore estate’s Form 706; it was not referred to
in any other documents in the record, including the Paine Webber
account statement and the parties’ valuation experts’ reports.
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account, and various dividends and accrued interest payments with
respect to the assets mentioned in (3) above, the cumulative net
value of which was in excess of $3,800,000. Sidney Gore’s estate
claimed a marital deduction of $4,411,359 on Form 706 for the
property distributed to decedent and the Marital Fund. The Form
706 reported a taxable estate of $642,411.12
On October 8, 1997, the district court issued an Order
Allowing Final Account, Determination of Heirship and Final
Decree of Distribution in the Estate of Sidney Gore. This order
authorized the distribution of GRDA bond No. 1, GRDA bond No. 5,
and any other property not otherwise mentioned or distributed to
Ms. Powell as successor trustee of the Sidney Gore Trust.13
Modification of Decedent’s Estate Plan
On December 23, 1996, decedent executed a Uniform Durable
Power of Attorney in which she designated Ms. Powell her
12
The Form 706 for the Estate of Sidney Gore is the only
documentary evidence in the record as to whether the assets
enumerated in the Order of Partial Distribution dated Dec. 30,
1996, were distributed to the Sidney Gore Trust, or that the
Marital Fund, in fact, was funded.
13
The record does not disclose why both the Dec. 30, 1996,
order and the final order of Oct. 8, 1997, authorized the
distribution of GRDA bond No. 1 and why neither order
specifically authorized the distribution of GRDA bond No. 4, if
it existed, and GRDA bond No. 6. We shall assume, for purposes
of this opinion, that the reference to “any other real or
personal property not inventoried and appraised in this estate
and not referred to herein” in the final order of Oct. 8, 1997,
operated to authorize the distribution of GRDA bonds Nos. 4 and
6.
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attorney-in-fact. On January 3, 1997, decedent resigned as
trustee of the Sylvia Gore Trust, and Ms. Powell became the
successor trustee. On January 8, 1997, decedent executed the
following five documents in the presence of her attorneys and Ms.
Powell: First Amendment Restating the Declaration Creating the
Sylvia Gore Trust (amendment); Last Will and Testament of Sylvia
Gore; Declaration Creating the Pamela M. Powell Irrevocable
Trust (Pamela Powell Trust); Declaration Creating the Michael
Gore Irrevocable Trust (Michael Gore Trust); and Exercise of
Power and Irrevocable Assignment (assignment).
The Amendment
The amendment provided that “all the property in which I
have an interest is from this date forward subject to the trust
which I now restate whether such property is set forth in an
attached schedule or is unscheduled, whether real or personal,
tangible or intangible”.14 The amendment also provided that
decedent retained the power to revoke the Sylvia Gore Trust at
any time, that decedent was entitled during her life to any
amount of income or principal from the Sylvia Gore Trust she
requested, and that, upon decedent’s death, the remaining
undistributed income and principal would be distributed equally
to the Pamela Powell Trust and the Michael Gore Trust. In
14
No schedule or other description of property was attached
to the copy of the amendment in the record.
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addition, the amendment contained a clause entitled “SPECIFIC
INVESTMENT”, which provided that “I have or shall invest or
direct investments of the assets subject to this trust in the
Gore Family Limited Partnership.” The amendment appointed Ms.
Powell trustee.
The Pamela Powell and Michael Gore Trust Declarations
The Pamela Powell and Michael Gore Trust declarations
contained substantially identical provisions. Under their
respective trust declarations, Ms. Powell and Mr. Gore were
entitled during their lives to receive income from their trusts
and such amounts of principal as they requested. The
declarations named the Trust Company of Oklahoma (TCO) trustee of
the trusts. The declarations directed TCO to distribute trust
principal as necessary for the health, education, and maintenance
of Ms. Powell, Mr. Gore, and any of their descendants but limited
the total principal distributions that could be made from each
trust to $100,000 in any year. In addition, the declarations
contained a clause entitled “SPECIFIC INVESTMENT”, which provided
as follows:
Subject to the approval of the general partners, the
Trustee is directed to invest the initial investment of
$500 as a limited partner in the Gore Family Limited
Partnership * * * It is my intention to make further
gifts to the Trustee of this trust as a limited partner
of the aforesaid partnership.
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Decedent’s Last Will and Testament
Decedent’s January 8, 1997, will revoked her last will and
testament of October 20, 1988, and appointed Ms. Powell personal
representative. Decedent’s will provided that after her estate’s
expenses and taxes were paid, the residue of her estate,
including all property over which she held a power of appointment
at death, would be distributed to the trustee of the Sylvia Gore
Trust.
The Assignment
The assignment provided, in pertinent part, as follows:
The Sidney Gore Marital Trust provides, inter
alia, that I, Sylvia Gore, the undersigned surviving
spouse of Sidney Gore, am empowered to withdraw all or
any portion of the assets of the Marital Trust. I,
therefore, on this 8th day of January, 1997, exercise
the aforesaid power by withdrawing all those assets
received or to be received by the Marital Trust. Such
withdrawals shall be effected as follows:
1. I hereby assign assets having a fair market
value of $100,000 to the Trust Company of Oklahoma,
Trustee of the Pamela M. Powell Irrevocable Trust and
assets having a fair market value of $100,000 to the
Trust Company of Oklahoma, Trustee of the Michael Gore
Irrevocable Trust. The aforesaid assets are to be
administered and distributed pursuant to the terms of
each respective trust.
2. I hereby assign the remainder of those assets
received or to be received by the Marital Trust to the
Gore Family Limited Partnership, the beneficial
interest to be allocated as follows:
(a) An undivided one-third interest shall be
credited to the capital account of Pamela M.
Powell, Trustee of the Sylvia Gore Revocable Trust
dated October 20, 1988, as amended;
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(b) An undivided one-third interest shall be
credited to the capital account of the Trust
Company of Oklahoma, Trustee of the Michael Gore
Irrevocable Trust; and
(c) An undivided one-third interest shall be
credited to the capital account of the Trust
Company of Oklahoma, Trustee of the Pamela M.
Powell Irrevocable Trust.
I hereby authorized [sic] and empower Pamela M.
Powell as my attorney-in-fact with all those powers
granted to her by that certain Durable Power of
Attorney dated December 23, 1996, to act in my behalf
for the purpose of executing this Exercise of Power and
Irrevocable Assignment.
The assignment did not identify or describe any specific assets
to which it was to apply, and it is unlikely that decedent knew
when she signed the assignment the specific assets that Sidney
Gore and/or the Sidney Gore Trust owned.
Before her death, decedent did not transfer title to any
assets in the Marital Fund to TCO to fund the gifts of $100,000
to each of the Michael Gore and Pamela Powell Trusts.15 After
January 8, 1997, decedent did not execute any other documents
confirming any transfer of assets pursuant to the assignment,
reflecting any gifts of GFLP partnership interests, or
documenting any sale or transfer of assets to GFLP.
15
In the estate tax notice of deficiency, respondent
determined that the fair market value of GFLP was $4,997,280.
This figure does not include the two $100,000 amounts assigned to
the children’s trusts that were reported as gifts on decedent’s
gift tax return. However, respondent has not asserted an
increased estate tax deficiency to reflect the estate tax on the
$200,000.
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Management of GFLP During Decedent’s Life
From its formation in December 1996 through and including
June 12, 1997, the date of decedent’s death, GFLP did not operate
a business or engage in any business or investment activity.
During that same period, GFLP did not hold legal title to any
Marital Fund assets other than a bank account opened in February
1997.
On January 30, 1997, Ms. Powell delivered 40 certificates,
representing all of the Tenneco, Mobil, Chevron, Exxon, Amoco,
and Texaco shares, 9,300 of the 10,200 shares of Phillips stock
in the Marital Fund,16 and 500 shares of Newport News
Shipbuilding, Inc. stock (Newport News stock)17 to TCO. Each of
the 40 certificates delivered to TCO was registered to Sidney
Gore, except the certificates for 8,000 shares of Exxon stock
registered in the names of Sidney Gore and decedent as joint
tenants. When she delivered the certificates to TCO, Ms. Powell
16
Stipulation 100 states that certificates representing all
of the shares of Phillips stock in the Marital Fund were
delivered to TCO. However, Mr. Gore’s estate tax return lists
10,200 shares of Phillips stock as a distribution to the Marital
Fund. The record does not disclose what happened to the
remaining 900 shares.
17
The 500 shares of Newport News Shipbuilding, Inc. stock
were omitted from both the Dec. 30, 1996, Order for Partial
Distribution in the Estate of Sidney Gore and the retained Form
706 for Sidney Gore’s estate. The parties have stipulated that
the Newport News stock was distributed to the Sidney Gore Trust.
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did not instruct TCO to reregister the shares in the name of
GFLP.
On February 20, 1997, Ms. Powell and Mr. Gore, in their
capacity as general partners of GFLP, entered into an Investment
Management Agency Agreement (agency agreement) with TCO. The
agency agreement stated in part the following: “[GFLP] hereby
delivers to * * * [TCO] the assets described in ‘Exhibit A’,
attached hereto and made a part hereof. Any additional assets
deposited by * * * [GFLP] will also be held pursuant to this
Agreement when accepted by * * * [TCO].”18 The agency agreement
further provided that TCO: (1) Shall safekeep, collect and
receive income from, and invest or dispose of the assets
deposited as directed by GFLP; (2) shall have the authority and
discretion to sell or exchange any assets deposited by GFLP; (3)
shall distribute income or principal upon the request of GFLP;
and (4) shall periodically analyze the assets held.
On February 24, 1997, Mr. Gore contributed $500 to GFLP for
his 1-percent general partnership interest, and on March 1, 1997,
Ms. Powell contributed $500 for her 1-percent general partnership
18
No “Exhibit A” was attached to the copy of the agency
agreement in the record.
- 23 -
interest.19 The funds to make the contributions came from
decedent.
On February 25, 1997, decedent signed a $1,000 check made
payable to TCO, which was delivered to TCO with instructions to
treat the payment as a $500 contribution to GFLP on behalf of
each of the Pamela Powell and Michael Gore Trusts. On February
27, 1997, in response to decedent’s request, TCO issued two $500
checks, representing the initial capital contributions by the
Pamela Powell and Michael Gore Trusts for their 1-percent limited
partnership interests, to GFLP.
On February 25, 1997, Ms. Powell opened a checking account
for GFLP, account No. xx-xxxx-xx7045 (GFLP account No. 7045),
with an initial deposit of $24,168.10.20 On March 3, 1997, Ms.
Powell deposited $2,000, representing the capital contributions
of Ms. Powell, Mr. Gore, the Pamela Powell Trust, and the Michael
Gore Trust, into GFLP account No. 7045. Additional deposits of
$226,456.76 were made to GFLP account No. 7045 between February
25 and March 7, 1997.21
19
The terms of the partnership agreement had required Ms.
Powell and Mr. Gore to pay such amounts when they executed the
partnership agreement on Dec. 26, 1996.
20
This was the only GFLP bank account in existence during
decedent’s life.
21
Ms. Bowers testified that decedent deposited a portion of
the distributions from Sidney Gore’s individual retirement
accounts, on which decedent was a designated beneficiary, into
(continued...)
- 24 -
The funds deposited in GFLP account No. 7045 as of March 7,
1997, were expended as follows. On March 7, 1997, a wire
transfer of $134,500 from GFLP account No. 7045 was made to Mr.
Gore to enable him to purchase his home in Temecula,
California.22 On April 14 and 15, 1997, Ms. Powell wrote checks
for $35,000 and $60,000, drawn on GFLP account No. 7045 and made
payable to Sylvia Gore, which were then deposited into an account
titled “Sylvia Gore, Trustee of Sidney Gore Trust”, account No.
xxxxxx0825 (trust account No. 0825).
TCO concluded that, as of April 25, 1997, GFLP was “not
funded”. TCO’s records also show that TCO never received, on
GFLP’s behalf, any of the dividends paid with respect to the
Marital Fund stocks for the first quarter of 1997.
On May 21, 1997, the Amoco, Tenneco, and Newport News stocks
were reregistered from “Sidney Gore” to “Sylvia Gore, Trustee of
the Sidney Gore Trust”, and on June 5, 1997, the Chevron stock
was similarly reregistered.23 The Exxon, Mobil, Phillips, and
21
(...continued)
GFLP account No. 7045.
22
Mr. Gore executed a deed that transferred the home to GFLP
on Mar. 10, 1997, but made no cash payments of rent to GFLP.
Although Ms. Bowers testified that rent payments were deducted
from Mr. Gore’s partnership distributions, the only documentary
evidence of any rent payments is the reference to rent payments
contained in Ms. Bowers’s accounting records.
23
Although the record is not entirely clear, Ms. Powell
apparently signed stock powers on a date not disclosed by the
(continued...)
- 25 -
Texaco stocks were titled in Sidney Gore’s name throughout
decedent’s life, except for 8,000 shares of Exxon stock which
were registered in the names of Sidney Gore and decedent as joint
tenants.24
During 1997, Ms. Powell deposited some but not all of the
dividends paid on Marital Fund stocks for the first 6 months of
1997, into GFLP account No. 7045. None of the dividend checks
issued with respect to Marital Fund stocks for the first 6 months
of 1997 was made payable to GFLP.
On June 6, 1997, Ms. Powell also deposited into GFLP account
No. 7045 $3,400 of interest paid on the Smith Barney investment
account and $6,250 of interest paid on the Merrill Lynch account.
On the deposit date, the Smith Barney and Merrill Lynch accounts
were still titled in decedent’s name, not GFLP’s.
Management of Decedent’s Finances After GFLP Was Formed
Decedent suffered from Parkinson’s disease and had been
admitted to the hospital for disorientation and decreased levels
of consciousness on several occasions after Sidney Gore’s death.
From December 1996 until her death, decedent had to have private
23
(...continued)
record but after she delivered the Marital Fund stocks to TCO’s
vault.
24
In a letter from TCO to John Boyd dated Sept. 15, 1997,
TCO implied that the matter of transferring stocks has “lied
dormant within TCO”, and in a letter to the Oklahoma Tax
Commission dated Jan. 8, 2002, TCO stated that it “was remiss in
its timely transfer of the assets to GFLP”.
- 26 -
home health care providers. During 1997, Ms. Powell shopped for
decedent’s groceries and medications and paid decedent’s bills.
From January 8, 1997, until decedent’s death, Ms. Powell
withdrew funds for decedent’s personal living expenses from
several bank accounts titled in decedent’s name or in the name of
one of the trusts. Throughout that same period, Ms. Powell
deposited into those bank accounts dividends and interest paid
with respect to stocks, bonds, and other assets held in the
Marital Fund, which allegedly had been assigned to GFLP. For
example, decedent maintained a trust checking account for the
Sidney Gore Trust, trust account No. 0825, in the name of “Sylvia
Gore, Trustee of the Sidney Gore Trust, Pamela Powell”, into
which Ms. Powell25 deposited some but not all of the dividends
paid on Marital Fund stocks and distributions from GFLP as
follows:26
25
Decedent remained the trustee of the Sidney Gore Trust
from the time she executed the assignment until she died.
26
Ms. Powell also deposited $2,472.13, which appears to be
interest paid on the Commercial Federal CD, into trust account
No. 0825. However, the only evidence of this is the word
“Commercial” that is handwritten on the check line of the deposit
slip, and there are no other documents on record to corroborate
that interest was paid on this CD in 1997.
- 27 -
Date of deposit Payor Amount
Mar. 14, 1997 Exxon $6,320
Mar. 14, 1997 Exxon 5,530
Mar. 14, 1997 Mobil 3,180
Mar. 14, 1997 Tenneco 750
Mar. 14, 1997 Texaco 170
Apr. 14, 1997 GFLP 35,000
Apr. 15, 1997 GFLP 60,000
Total 110,950
From December 23, 1996, through June 12, 1997, Ms. Powell used
trust account No. 0825 to pay decedent’s personal expenses in the
following amounts:
Description of expense Amount
Decedent’s home health care providers $28,610.00
Decedent’s medicine, doctor’s bills, and
other medical expenses 2,145.95
Decedent’s groceries 4,187.08
Decedent’s utilities, phone, and home
maintenance and insurance 7,614.70
Entertainment and gifts on behalf of
decedent 32,337.73
Decedent’s estimated State and Federal
individual income taxes 100,000.00
Total 174,895.46
Neither Ms. Powell nor decedent wrote any checks to GFLP from
trust account No. 0825.
Decedent and Sidney Gore had maintained a joint checking
account, joint account No. 6672, in the name of “Sidney Gore or
Sylvia Gore”, which remained open throughout 1997. On January
21, 1997, Ms. Powell deposited $5,481.03, representing the
proceeds from the redemption of Colonial Fund shares, into joint
account No. 6672. From January 13 through June 12, 1997, Ms.
Powell wrote a check for $6,500 payable to decedent and another
- 28 -
for $1,000 payable to herself from joint account No. 6672.
Neither Ms. Powell nor decedent wrote any checks to GFLP from
joint account No. 6672 from January 13 through June 12, 1997.
Decedent and Pamela Powell also maintained a joint checking
account, account No. xxx4495 (decedent’s account No. 4495), in
the name of “Sylvia Gore or Pamela Powell”, which remained open
throughout 1997. From January through June 12, 1997, Ms. Powell
deposited decedent’s Social Security payments totaling $8,022
into account No. 4495.
After decedent died, Ms. Powell continued to handle
decedent’s finances and to pay her remaining expenses. Ms.
Powell deposited the following Marital Fund assets into
decedent’s account No. 4495:27
Date Source of Funds Amount
June 16, 1997 Proceeds of Smith Barney
investment account $102,139.01
July 7, 1997 Proceeds of Valley National
CD No. 1 20,612.90
July 7, 1997 Interest accrued on Valley
National CD No. 1 1,185.24
July 28, 1997 Proceeds of Valley National
CD No. 2 24,907.99
July 28, 1997 Interest accrued on Valley
National CD No. 2 1,457.12
Total 150,302.26
27
After June 12, 1997, Ms. Powell did not write any checks
on, or deposit any funds into either joint account No. 6672 or
trust account No. 0825. Ms. Powell closed trust account No. 0825
on Aug. 24, 1997.
- 29 -
From June 12 through December 1997, Ms. Powell paid more than
$100,000 toward decedent’s taxes, utilities, funeral expenses,
administrative expenses, and other expenses related to decedent’s
home from decedent’s account No. 4495. In addition, Ms. Powell
made $36,000 in “loans from the estate” to herself and Mr. Gore
from decedent’s account No. 4495. Ms. Powell did not
write any checks from decedent’s account No. 4495 to GFLP during
1997.
On or about September 4, 1997, Ms. Powell opened account No.
xxx3408 in the name of “The Estate of Sidney Gore, Pamela Powell,
Personal Representative” (Sidney Gore estate account No. 3408).
Ms. Powell made the following deposits to Sidney Gore estate
account No. 3408:
Date of deposit Description Amount
Sept. 4, 1997 Phillips dividend $3,468
Sept. 4, 1997 Proceeds of Bank of
Okla. CD 100,000
Sept. 11, 1997 Mobil dividend 3,180
Total 106,648
On September 11, 1997, Ms. Powell wrote checks from Sidney Gore
estate account No. 3408 totaling $3,900 for Mr. Gore’s28 1997
estimated local and Federal income taxes. Ms. Powell did not
write any checks from Sidney Gore estate account No. 3408 to GFLP
through January 6, 1998.
28
Mr. Gore refers to Michael Gore.
- 30 -
Management of GFLP After Decedent’s Death
As of June 12, 1997, GFLP did not hold title to any of the
Marital Fund assets. The Mobil, Exxon, Texaco, and Phillips
stocks were registered to Sidney Gore, except for 8,000 shares of
Exxon, which were registered to Sidney Gore and decedent as joint
tenants; the Amoco, Tenneco, Newport News, and Chevron stocks
were registered to “Sylvia Gore, Trustee of the Sidney Gore
Trust”; decedent’s name remained on the Smith Barney account,
Merrill Lynch account, Valley National CDs No. 1 and No. 2, and
State Bank CD No. 2; Sidney Gore’s name remained on the Paine
Webber investment account, Colonial Fund, State Bank CD No. 1,
Bank of Okla. CD, GRDA bond No. 3, and the Henry Hill lease.29
Title to the other Marital Fund assets remained unchanged
throughout 1997.
On September 18, 1997, GFLP finally delivered to TCO stock
certificates for those Marital Fund stocks that had been
reregistered in the name of GFLP. In December 1997, TCO finally
began to receive dividend checks for dividends on Marital Fund
stocks that had been reregistered to GFLP. A TCO report dated as
of April 25, 1998, listed only those stocks that had been
29
The record does not disclose the owner’s name, as of June
12, 1997, of the State of Israel bonds, the savings bonds, GRDA
bond No. 4 (if it exists), the Treasury notes, and the Commercial
Federal CD. TCO records clearly indicate that TCO never held
title to these assets on behalf of GFLP, and there is no other
credible evidence on record that GFLP held title to these assets.
- 31 -
reregistered to GFLP and 90,600 shares of Dreyfus Treasury Prime
(purchased on November 10, 1997) as GFLP assets under management.
The process of transferring title to Marital Fund assets to
GFLP continued through at least 2000.30
GFLP Accounting Records
In October 1997, more than 9 months after GFLP was formed
and 4 months after decedent died, Ms. Bowers created partnership
accounting records that purported to show (1) transfers of assets
from decedent to GFLP; (2) sales of decedent’s assets to GFLP,
Ms. Powell, Mr. Gore, and the Pamela Powell and Michael Gore
Trusts; (3) deposits made to GFLP account No. 7045, trust account
No. 0825, and joint account No. 6672; and (4) amounts paid for
decedent’s expenses out of GFLP’s assets offset by amounts
allegedly owed to decedent by GFLP. However, Ms. Bowers did not
date any of the individual transactions she recorded as journal
entries. Instead, she set up the records to correspond to
transactions that should have occurred upon the formation of GFLP
and the execution of the assignment.
30
More recent account statements show that, as of June 30,
1999, the Colonial Fund was still titled to “Sidney Gore”, and as
of June 2000, the Paine Webber investment account had been
retitled to “Pamela Powell, Successor Trustee of the Sidney Gore
Family Fund Trust”. As recently as May 2000, TCO had written a
letter to Ms. Powell requesting that she sign documents to
transfer the Merrill Lynch account to GFLP, and on Aug. 27, 2000,
Ms. Powell finally transferred the Henry Hill lease to GFLP.
- 32 -
The GFLP accounting records prepared by Ms. Bowers purport
to show that decedent transferred the following Marital Fund
assets to GFLP: Amoco, Chevron, Exxon, Mobil, Texaco, Tenneco,
Phillips, and Newport News stocks; Henry Hill lease; Merrill
Lynch account; Paine Webber account; Colonial Fund; Smith Barney
account; US Trust account; one of the two Treasury notes; Sidney
Gore account No. 6478; State Bank CDs No. 1 and No. 2; and Bank
of Okla. CD. In addition, Ms. Bowers listed Sidney Gore estate
account No. 3408, joint account No. 6672, and trust account No.
0825 as GFLP assets.
The accounting records also purport to show that after
decedent executed the assignment, decedent allegedly sold the
Commercial Federal CD, the savings bonds, a Valley National CD,
and one of the Treasury notes to GFLP in exchange for a note
payable to her from GFLP. Ms. Bowers then made adjusting journal
entries purporting to record the use of GFLP assets to pay
decedent’s personal expenses and a corresponding reduction of the
note payable owed to decedent. However, GFLP did not execute any
promissory notes payable to decedent from December 1996 through
December 1997.
The accounting records also purport to document the
existence of various notes payable to GFLP from the Sylvia Gore,
Pamela Powell, and Michael Gore Trusts. However, neither
- 33 -
decedent nor any of the GFLP partners executed any notes payable
to GFLP from December 1996 through December 1997.
After decedent died, Ms. Powell continued to use GFLP
account No. 7045 to pay some of decedent’s and Mr. Gore’s
personal expenses. In October 1997, checks in excess of $700
drawn on GFLP account No. 7045 and signed by Mr. Gore were issued
to pay property taxes on Mr. Gore’s California home. In December
1997, Ms. Powell wrote additional checks from GFLP account No.
7045 to pay expenses related to decedent’s home.
On December 8, 1997, Ms. Powell opened a money market
savings account on behalf of GFLP at Nations Bank, account No.
xx-xxxx-xx6020 (GFLP account No. 6020), with an initial deposit
of $5,000 from GFLP account No. 7045. On July 11, 2000, Ms.
Powell wrote a check for $192,800 from GFLP account No. 6020,
payable to the U.S. Treasury, for decedent’s Federal estate
taxes.31
The Estate and Gift Tax Returns
On March 15, 1998, decedent’s estate filed Form 709, U.S.
Gift (and Generation–Skipping Transfer) Tax Return (gift tax
return). Ms. Bowers prepared the gift tax return. The gift tax
return reported that decedent had made the following gifts on
January 8, 1997: (1) $102,500 cash to the Pamela Powell Trust;
31
The record does not indicate the source of the funds on
deposit in GFLP account No. 6020, except for the $5,000
transferred from GFLP account No. 7045.
- 34 -
(2) $110,500 cash to the Michael Gore Trust; (3) a 1-percent
general partnership interest in GFLP to the Pamela Powell Trust,
valued at $34,627; (4) a 1-percent general partnership interest
in GFLP to the Michael Gore Trust, valued at $34,628; (5) a 32-
percent limited partnership interest in GFLP to the Michael Gore
Trust, valued at $503,834; and (6) a 32-percent limited
partnership interest in GFLP to the Pamela Powell Trust, valued
at $503,834. Ms. Bowers relied solely on the assignment to
conclude that decedent had made completed gifts on January 8,
1997.
Ms. Bowers relied on a valuation opinion letter dated
February 17, 1997, from K. Scott Sallee of Baird, Kurtz & Dobson
to calculate the value of the gifts reported on Form 709.32 In
the opinion letter, Mr. Sallee concluded that, after subtracting
the $200,000 that was supposed to have been transferred to the
Pamela Powell and Michael Gore Trusts, the total value of GFLP
was $4,266,627.33 Mr. Sallee then applied a combined discount
for lack of control and marketability of 55 percent to compute an
“adjusted aggregate nonmarketable and noncontrolling” value for
32
Each page of the valuation opinion attached to Form 709
was stamped with the following: “Preliminary Draft For
Discussion Purposes Only”.
33
Although the funds to complete the gifts of $100,000 to
each of the Pamela Powell and Michael Gore Trusts were never
transferred from the Marital Fund to TCO, respondent has not
argued that these gifts were incomplete.
- 35 -
GFLP of $1,919,982.34 Ms. Bowers then applied an additional
discount in calculating the value of decedent’s alleged gifts of
limited partnership interests to her children reported on Form
709.
On October 19, 1998, the estate filed Form 706. Ms. Bowers
prepared the Form 706, which reported a gross estate of
$1,776,893, deductions of $395,446, and a taxable estate of
$1,381,447. The Form 706 reported that decedent owned a “one-
third interest” in GFLP, that the partnership interest had a book
value of $1,424,908,35 and that the partnership interest had a
fair market value, of $740,036.36 On Schedule C, Mortgages,
Notes, and Cash, of Form 706, the estate listed a $46,664 note
payable to decedent from GFLP as an asset of the estate. On
Schedule K, Debts of the Decedent, and Mortgages and Liens, of
34
Mr. Sallee stated in his opinion letter that interests in
GFLP were held as follows: Ms. Powell and Mr. Gore each held a
1-percent general partnership interest, decedent held a 34-
percent limited partnership interest, and the Pamela Powell and
Michael Gore Trusts each held a 32-percent limited partnership
interest. However, Mr. Sallee’s description of decedent’s
limited partnership interest was incorrect; decedent held a
32.667-percent limited partnership interest.
35
In preparing the tax return, Ms. Bowers described
decedent’s limited partnership interest as a “one-third
interest”, rather than a 32.667-percent interest.
36
In calculating the value of decedent’s limited partnership
interest in GFLP, Ms. Bowers adjusted the total fair market value
of GFLP stated in the valuation opinion because Mr. Sallee had
based his opinion on the asset values reported on Sidney Gore’s
estate tax return.
- 36 -
Form 706, the estate deducted $1,543 for real estate taxes owed
on decedent’s home.
Respondent’s Determinations
On September 26, 2001, respondent issued a notice of
deficiency with respect to the gift tax return, in which he
advanced two alternative positions. Respondent determined that
the transfer of the Marital Fund assets was an indirect gift of
one-third of the assets to Ms. Powell and one-third of the assets
to Mr. Gore. Respondent valued each indirect gift at $1,479,514,
the fair market value of one-third of the Marital Fund assets.
Alternatively, respondent disallowed the discount that was
applied in valuing the partnership interests transferred to the
Pamela Powell and Michael Gore Trusts and valued each gift at its
fair market value, which respondent determined to be $1,479,514,
rather than $503,834 as shown on the gift tax return. Respondent
also included a gift of $1,700 cash to Ms. Powell and a gift of
$870 cash to Mr. Gore.37
On September 26, 2001, respondent issued a separate notice
of deficiency with respect to the estate tax return, in which he
advanced two alternative positions. Respondent included the fair
market value of GFLP ($4,977,280) in decedent’s taxable estate
under sections 2036 and/or 2038 and reduced the taxable estate by
37
Petitioner has not contested respondent’s determination to
increase decedent’s taxable gifts by $1,700 and $870, and these
amounts are not at issue in this case.
- 37 -
$740,036, the discounted value of decedent’s limited partnership
interest in GFLP reported on the estate tax return.
Alternatively, respondent disallowed the discount for lack of
control and marketability that was applied in valuing decedent’s
limited partnership interest for estate tax purposes and
increased the taxable estate by the difference between the
undiscounted fair market value of that partnership interest
($1,665,760) and the discounted value reported on the estate tax
return ($740,036).
In conjunction with respondent’s alternative position and
the gift tax deficiency determined separately, respondent
increased the value of the gross estate by the amount of
additional gift tax due on the undiscounted fair market values of
the limited partnership interests decedent allegedly gave to the
Pamela Powell and Michael Gore Trusts and allowed those amounts
as deductions. Under either alternative, respondent included
$102,139, representing the value of the Smith Barney account, in
the gross estate under section 2033 and disallowed the estate’s
deduction of $1,543 for ad valorem tax on decedent’s home.38
38
Respondent’s computation of the estate tax deficiency
erroneously omits the additional tax owed as a result of the
disallowed deduction of $1,543 for real estate taxes.
- 38 -
Tax Court Pleadings
Petitioner timely petitioned this Court for redetermination
of respondent’s estate tax and gift tax determinations.
Respondent subsequently moved for leave to file an amendment to
his answer in the estate tax case (docket No. 468-02). In the
motion, respondent asserted as an alternative to the primary and
alternative positions taken in the estate tax notice of
deficiency that the purported transfers of Marital Fund assets by
decedent “did not actually occur or were incomplete for gift tax
purposes at the time of decedent’s death” (the incomplete
transfer argument). Respondent also asserted that petitioner is
not prejudiced by his incomplete transfer argument because
respondent bears the burden of proof as to the incomplete
transfer argument, and the same facts relevant to respondent’s
other arguments are relevant to the incomplete transfer argument.
Petitioner did not object to respondent’s motion, and we granted
the motion. Respondent’s amendment to answer, alleging that the
transfers of Marital Fund assets to GFLP were not made or were
incomplete for gift tax purposes as of decedent’s death, was
filed on September 5, 2002.
OPINION
I. Burden of Proof
Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving them
- 39 -
incorrect. Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503
U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933).
However, the Commissioner bears the burden of proof with respect
to any new matter pleaded in the answer. See Rule 142(a)(1).
Respondent concedes that he has the burden of proof on the issue
of whether decedent’s alleged transfer of Marital Fund assets to
GFLP was an incomplete transfer, because respondent asserted this
alternative theory in an amendment to his answer.
With respect to the remaining issues, petitioner has not
argued that section 7491 applies, nor has petitioner established
that the requirements of section 7491(a) have been met.39
Consequently, we conclude that section 7491(a) does not shift the
burden of proof to respondent on the remaining issues. We note,
however, that our conclusions are based upon the preponderance of
the evidence and do not depend upon any allocation of the burden
of proof.
39
Before trial, petitioner filed a motion to shift burden of
proof to respondent but did not assert that sec. 7491 applies.
Rather, petitioner argued that respondent’s determinations were
arbitrary and excessive, on the basis of alleged errors in the
notices of deficiency and respondent’s reliance on several
alternative theories in the case. At the beginning of the trial,
we denied the motion without prejudice to petitioner’s right to
raise burden of proof issues in the posttrial briefs. Petitioner
did not raise any burden of proof issues in the briefs, and
consequently, we deem petitioner to have abandoned the arguments
regarding the burden of proof.
- 40 -
II. Whether Respondent Has Raised a New Issue on Brief
Respondent asserts for the first time on brief in
conjunction with his incomplete transfer argument that the values
of the Marital Fund assets are includable in decedent’s gross
estate under section 2033 or section 2041(a)(2). Petitioner
contends that respondent’s section 2041(a)(2) argument is a new
issue that we should decline to decide.
A party may not raise an issue for the first time on brief
if the new issue surprises and prejudices the opposing party.
Smalley v. Commissioner, 116 T.C. 450, 456 (2001) (citing
Seligman v. Commissioner, 84 T.C. 191, 198-199 (1985), affd. 796
F.2d 116 (5th Cir. 1986)). In evaluating whether the opposing
party will suffer prejudice, we must consider the degree to which
the opposing party is surprised by the new issue and the opposing
party’s need for additional evidence to respond to the new issue.
Pagel, Inc. v. Commissioner, 91 T.C. 200, 212 (1988), affd. 905
F.2d 1190 (8th Cir. 1980). Furthermore, a party may not rely
upon a new theory unless the opposing party has been provided
with fair warning of the intention to base an argument upon that
theory. Id. at 211-212. “Fair warning” means that the taxpayer’s
ability to prepare its case was not prejudiced by the
Commissioner’s failure to give notice, in the notice of
deficiency or in the pleadings, of his intention to rely on a
particular theory. Id.
- 41 -
Although respondent did not refer to section 2041(a)(2) in
the notices of deficiency, pleadings, or trial memoranda, or at
trial, we disagree that respondent has raised a new issue.
Regardless of which Code section respondent relies upon to
include the values of the property in decedent’s gross estate,
the issue before us remains whether the values of the assets
decedent allegedly transferred before her death are includable in
her gross estate. Both section 2033 and section 2041(a)(2)
operate to include property in a decedent’s gross estate. The
sections differ in that they apply to, and operate on, different
property interests of a decedent. Our conclusion as to which
section applies will depend upon, and flow from, our conclusion
regarding the types of property interests decedent held on the
date of her death.
Even if we were to conclude that respondent’s reliance on
section 2041(a)(2) is a new issue, however, we would still allow
respondent to rely on that Code section. Because the Sidney Gore
Trust declaration allegedly granted decedent a general power of
appointment over the Marital Fund assets, respondent’s current
reliance on both sections 2033 and 2041(a)(2) should not cause
surprise or prejudice to petitioner.40 Moreover, petitioner is
40
Although respondent argues on brief that the Sidney Gore
Trust did not grant decedent a general power of appointment over
Marital Fund assets within the meaning of sec. 2041(a), it
appears that decedent did have such a power. See, e.g., Estate
(continued...)
- 42 -
not required to introduce any additional or different evidence
than petitioner already has introduced to prove that the values
of the Marital Fund assets should not be included in decedent’s
gross estate under section 2041(a)(2). The record already
contains the necessary evidence for us to decide whether decedent
transferred her interest in Marital Fund assets to GFLP or to its
partners before her death and, if she did not, whether decedent
held a general power of appointment over Marital Fund assets on
the date of her death. As a result, we will consider
respondent’s argument regarding the application of section
2041(a)(2) as necessary.
III. Whether Decedent Completed Transfers of Marital Fund Assets
Before Her Death
A. The Alleged Withdrawal and Transfers
On January 8, 1997, decedent executed an assignment that
provided for the withdrawal of all of the assets from the Marital
Fund and for the following transfers of Marital Fund assets:
1. The transfer of Marital Fund assets having a value of
$100,000 to the Pamela Powell Trust for no consideration;
40
(...continued)
of Kurz v. Commissioner, 101 T.C. 44 (1993), supplemented T.C.
Memo. 1994-221, affd. 68 F.3d 1027 (7th Cir. 1995). In addition,
respondent’s position on brief conflicts with the admission made
in his answer in docket No. 467-02 that “the Sidney Gore
revocable trust provided for a marital trust, as to the principal
of which decedent, Sylvia Gore, had a general power of
appointment.”
- 43 -
2. the transfer of Marital Fund assets having a value of
$100,000 to the Michael Gore Trust for no consideration;
3. the transfer of the balance of the Marital Fund assets
to GFLP to be allocated equally to the capital accounts of GFLP’s
three limited partners: the Sylvia Gore Revocable Trust, the
Michael Gore Trust, and the Pamela Powell Trust.41
Because the parties disagree regarding whether the alleged
transfer to GFLP was completed before decedent died on June 12,
1997,42 we must first decide whether decedent effectively
withdrew the Marital Fund assets from the Marital Fund and, if
she did, whether decedent completed any transfers of Marital Fund
assets during her lifetime.
B. The Parties’ Arguments
Petitioner argues that decedent’s execution of the
assignment on January 8, 1997, was sufficient under Oklahoma law
to withdraw all of the Marital Fund assets from the Marital Fund
41
Petitioner argues in petitioner’s posttrial briefs that,
contrary to the wording of the assignment, the assignment
resulted in decedent’s transferring all of the Marital Fund
assets to GFLP in exchange for a 98-percent limited partnership
interest. Petitioner contends that decedent then made gifts of
GFLP limited partnership interests to decedent’s children’s
trusts. We find no credible evidence in the record to support
petitioner’s construction of the assignment and petitioner’s
description of the transfer the assignment allegedly effected,
and we do not discuss this aspect of petitioner’s arguments
further.
42
Respondent does not challenge the status of the alleged
transfers to the children’s trusts as completed gifts.
- 44 -
and to complete the above-described transfers. Respondent
contends that decedent’s execution of the assignment did not
effect a withdrawal of Marital Fund assets from the Marital Fund
pursuant to her power of withdrawal under the Sidney Gore Trust.
Alternatively, respondent contends that, even if the assignment
qualified as a valid exercise of decedent’s power to withdraw,
the simple act of executing the assignment, without more, was not
sufficient under Oklahoma law to complete the transfers described
in the assignment. Respondent further contends that decedent did
not transfer title to, or signature authority over, any of the
Marital Fund assets before her death on June 12, 1997, that
decedent never delivered the Marital Fund assets to GFLP, and
that decedent never released dominion and control over the
Marital Fund assets during her lifetime. Respondent alleges that
decedent continued to treat the Marital Fund assets (and the
income therefrom) as her property during her lifetime.
C. Decedent’s Alleged Withdrawal of Marital Fund Assets on
January 8, 1997
In order to apply the appropriate Federal tax laws, we must
first determine what property interests decedent owned on the
date of her death. Because State law determines whether a
taxpayer has a property interest or right, we must examine the
law of the State of Oklahoma to ascertain whether decedent had a
property interest in the Marital Fund assets on the date of her
death and, if so, the nature of that interest. See Morgan v.
- 45 -
Commissioner, 309 U.S. 78, 80 (1940) (State law creates legal
interests and rights, and Federal tax law determines the proper
tax treatment of those interests or rights); Estate of Davenport
v. Commissioner, 184 F.3d 1176, 1182 (10th Cir. 1999) (quoting
United States v. Irvine, 511 U.S. 224, 238 (1994)), affg. T.C.
Memo. 1997-390.
We begin our analysis with the assignment,43 the document
that petitioner contends accomplished the withdrawal of the
Marital Fund assets and the transfer of those assets to the
trusts of decedent’s children and to GFLP. We examine Oklahoma
law to ascertain the effect of the assignment. See Morgan v.
Commissioner, supra at 80.
Under Oklahoma law, an assignment is “‘an expression of
intention by one that his rights shall pass to and be owned by
another.’” Johnson v. Schick, 882 P.2d 1059, 1061 (Okla. 1994)
(quoting Hoffman v. Barnett, 178 P.2d 89, 90 (Okla. 1946)). An
assignment may be a legal assignment that relates to a “thing in
being”, or it may be an equitable assignment that relates to
contingent interests, expectancies, and things potential.
Hoffman v. Barnett, supra at 91. A valid assignment is
43
Although the same disturbing informality characterized
transactions involving Sidney Gore, respondent concedes that
“certain stock was distributed to the Sidney Gore Trust as a
marital bequest to decedent.” In other words, respondent does
not contest that there was a qualifying transfer into the Sidney
Gore Trust and that the Marital Fund was in existence.
- 46 -
enforceable under Oklahoma law.44 Union Life Ins. Co. v. Priest,
694 F.2d 1252, 1255-1256 (10th Cir. 1982).
Respondent acknowledges the enforceability of an assignment
under Oklahoma law. Respondent argues, however, that the
relevant issue is not the assignment’s enforceability but whether
the assignment effected a withdrawal of Marital Fund assets from
the Sidney Gore Trust.
The estate planning on behalf of both Sidney Gore and
decedent reflects a remarkable and persistent pattern of
informality and inaction that makes any decision regarding what
actually took place a difficult one. Both Sidney Gore and
decedent executed wills and trust agreements before they died,
but they never actually transferred any assets into their trusts
before their deaths. Respondent has apparently accepted for
purposes of this proceeding that, by reason of Sidney Gore’s
death and the distribution order, Sidney Gore’s trust was funded,
that his trust included a Marital Fund, and that decedent had a
power to withdraw Marital Fund assets during her lifetime.
Respondent argues, however, that decedent’s execution of the
assignment without more was insufficient to withdraw the Marital
Fund assets from the Sidney Gore Trust.
44
In order for an equitable assignment to be enforceable
under Oklahoma law, the equitable assignee must have furnished
consideration to the assignor. See Johnson v. Schick, 882 P.2d
1059, 1061 (Okla. 1994).
- 47 -
Although we can certainly understand why respondent makes
this argument, we shall reject it. Decedent’s execution of the
assignment combined with her exercise of dominion and control
over the Marital Fund assets after January 8, 1997, and her use
of Marital Fund assets after she executed the assignment
convinces us that decedent intended to withdraw the Marital Fund
assets on January 8, 1997, and that she actually did so before
she died on June 12, 1997.
D. Decedent’s Alleged Transfers of Marital Fund Assets
Petitioner argues that decedent’s execution of the
assignment on January 8, 1997, also effected transfers of Marital
Fund Assets to GFLP. Respondent argues that the assignment did
not result in a completed transfer to GFLP that satisfies the
requirements for valid inter vivos gifts under Oklahoma law.
All of the alleged transfers described in the assignment,
except perhaps one, are transfers for no consideration; i.e,
gifts. The only alleged transfer that may not be a gift is the
alleged transfer of Marital Fund assets to GFLP. With respect to
this alleged transfer, petitioner argues that the transfer was a
bona fide sale for an adequate and full consideration in money or
money’s worth within the meaning of section 2036(a), and
respondent argues that it was not. For purposes of this part of
our analysis, we focus only on whether decedent’s execution of
the assignment resulted in a completed transfer of property to
- 48 -
GFLP and not on whether there was consideration for the alleged
transfer to GFLP.
The requirements for a valid inter vivos gift under Oklahoma
law are: (1) Donative intent; (2) actual delivery of the subject
matter of the gift; (3) the relinquishment by the donor of all
ownership, dominion, and control over the subject matter of the
gift; and (4) acceptance of the gift by the donee. Estate of
Davenport v. Commissioner, supra at 1183, 1186; Stinchcomb v.
Stinchcomb, 674 P.2d 26, 30 (Okla. 1983); Frazier v. Okla. Gas &
Elec. Co., 63 P.2d 11, 13 (Okla. 1936). The transfer by gift
must be “gratuitous and irrevocable and go into immediate and
absolute effect”. Fox v. Kramer (In re Estate of Estes), 983
P.2d 438, 445 (Okla. 1999); Courtney v. First Natl. Bank, 569
P.2d 458, 460 (Okla. 1977); Davis v. Natl. Bank of Tulsa, 353
P.2d 482, 486 (Okla. 1960). In order to establish an inter vivos
transfer by gift after the death of the alleged donor, the
proponent of the gift must introduce evidence that is “clear,
explicit, and convincing as to every element.” Fox v. Cramer (In
re Estate of Estes), supra at 445; see also Stinchcomb v.
Stinchcomb, supra at 30; Shepherd v. Wood (In re Estate of
Griffin), 599 P.2d 402, 404 (Okla. 1979); Davis v. Natl. Bank of
Tulsa, supra at 486; Barry v. Phillips, 329 P.2d 1042, 1043
(Okla. 1958); Ratcliff v. Lee, 192 P.2d 843, 845 (Okla. 1948).
- 49 -
We begin our analysis of the alleged property transfers by
examining whether decedent relinquished all incidents of
ownership, dominion, and control over the Marital Fund assets
when she executed the assignment on January 8, 1997.
The Marital Fund assets consisted primarily of stocks,
bonds, and bank and investment accounts. Under Oklahoma law, the
owner of stock is presumed to be the person in whose name shares
of stock are registered or to whom stock certificates are issued.
Davis v. Natl. Bank of Tulsa, supra at 483; Frazier v. Okla. Gas
& Elec. Co., supra at 14; Okla. State Bank of Ada v. Cole, 38
P.2d 914, 916 (Okla. 1934). If a financial institution holds
funds in an account registered to a customer, a presumption
arises under Oklahoma law that the funds are owned by the
customer whose name appears on the account. Barry v. Phillips,
supra at 1045; Taliaferro v. Reirdon, 99 P.2d 500, 503 (Okla.
1940); Hastings v. Hugo Natl. Bank, 197 P. 457 (Okla. 1921).
As of June 12, 1997, either decedent’s name or Sidney Gore’s
name appeared on the stock certificates of all stocks included in
the Marital Fund and on most, if not all, of the other assets in
the Marital Fund.45 The record is devoid of any credible
45
We cannot unequivocally state that “all” assets of the
Marital Fund property were titled to decedent or Sidney Gore
because the record does not establish in whose name, if any, the
State of Israel bonds, savings bonds, Treasury notes, Commercial
Federal CD, and GRDA bond No. 4 were titled or registered during
1997.
- 50 -
evidence that GFLP held legal title to any assets of the Marital
Fund when decedent died.
Petitioner argues, however, that decedent’s failure to
transfer legal title to Marital Fund assets pursuant to the
assignment was immaterial because legal title is only prima facie
evidence of ownership. Although the transfer of legal title is
not an essential element of an inter vivos gift under Oklahoma
law, the presumption under Oklahoma law that ownership lies with
the person holding legal title to an asset can be overcome only
by evidence that the donor delivered, or otherwise parted with
dominion and control over, the subject matter of the gift.
Estate of Davenport v. Commissioner, supra at 1185-1186; Davis v.
Natl. Bank of Tulsa, supra at 486; Barry v. Phillips, supra at
1045; Frazier v. Okla. Gas & Elec. Co., supra at 14; see also
sec. 25.2511-2(b), Gift Tax Regs. (a gift is complete only when
the donor “has so parted with dominion and control as to leave in
him no power to change its disposition, whether for his own
benefit or for the benefit of another”). Whether the donor has
parted with dominion and control and is powerless to change the
disposition of the property is governed by State law. Estate of
Dillingham v. Commissioner, 88 T.C. 1569, 1575-1576 (1987), affd.
903 F.2d 760 (10th Cir. 1990); Estate of Cummins v. Commissioner,
T.C. Memo. 1993-518.
- 51 -
Under Oklahoma caselaw, a donor retains the incidents of
ownership, dominion, and control over stocks and other financial
instruments, even where the donor intends to make a gift and/or
delivers the subject matter of the gift, in the following
instances: (1) The donor continues to receive and expend
dividends paid on stock; (2) the donor retains the sale proceeds
from stock; (3) the donor continues to collect payments on a
promissory note; or (4) the donor maintains the ability to cash a
certificate of deposit for himself, to change the payee, or to
pledge it as collateral. Estate of Davenport v. Commissioner,
supra at 1188 (fact that donor did not receive any dividends
demonstrated that donor did not exercise any control over the
stock); Courtney v. First Natl. Bank, supra at 460 (donor failed
to relinquish dominion and control, and alleged transfer of
property was not irrevocable); Davis v. Natl. Bank of Tulsa,
supra; Barry v. Phillips, supra; Frazier v. Oklahoma Gas & Elec.,
supra.
Respondent argues that decedent retained dominion and
control over Marital Fund assets after January 8, 1997, by
collecting dividends and interest on Marital Fund assets, by
retaining proceeds from the sale or liquidation of Marital Fund
assets, by depositing income generated by Marital Fund assets
into bank accounts she owned and/or controlled, and by using
income from Marital Fund assets for her personal expenses. We
- 52 -
agree. From December of 1996 until decedent’s death on June 12,
1997, Ms. Powell, in her capacity as decedent’s attorney-in-fact,
deposited nearly $19,000 of dividends paid on Marital Fund stocks
into trust account No. 0825 and more than $5,000 from the
redemption of Colonial Fund shares into decedent’s joint account
No. 6672. After January 8, 1997, Ms. Powell used income from
Marital Fund assets that decedent had allegedly transferred to
GFLP to pay for decedent’s medical and household expenses, in-
home health care, gifts, entertainment, and State and Federal
income taxes.
Even after decedent’s death, Ms. Powell continued to collect
dividends, interest, and proceeds from Marital Fund assets, and
she deposited the amounts into accounts that decedent’s estate
controlled. The deposits were used for the benefit of the
estate, Ms. Powell, and Mr. Gore. Between June 16 and July 28,
1997, Ms. Powell deposited into decedent’s account No. 4495 more
than $150,000, consisting of proceeds from the sale of Marital
Fund assets and interest paid on Marital Fund assets that were
still titled in decedent’s or Sidney Gore’s name. Ms. Powell
spent approximately $100,000 of funds attributable to or derived
from Marital Fund assets that had been deposited into decedent’s
account No. 4495 to pay for decedent’s funeral expenses and her
remaining personal and household expenses. In addition, Ms.
Powell and Mr. Gore “borrowed” $36,000 of income attributable to
- 53 -
Marital Fund assets that was deposited into decedent’s account
No. 4495 after decedent died.
The record overwhelmingly establishes that decedent and/or
her estate retained dominion and control over Marital Fund assets
after January 8, 1997. Before her death on June 12, 1997,
decedent did not surrender any voting rights in Marital Fund
stocks, nor did decedent attempt to relinquish dominion or
control over Marital Fund stocks. Neither decedent nor Ms.
Powell changed the name on any of the investment and bank
accounts in the Marital Fund before decedent died. Most
significantly, decedent and/or Ms. Powell continued to control
and use Marital Fund assets for decedent’s benefit after January
8, 1997.
Petitioner argues that decedent relinquished all dominion
and control over Marital Fund stocks to TCO when the agency
agreement between TCO and GFLP was executed. With regard to the
remaining assets of the Marital Fund, petitioner contends that
TCO controlled the assets as trustee of the Pamela Powell and
Michael Gore Trusts, that Ms. Powell controlled the assets as
trustee of decedent’s revocable trust, and that Ms. Powell and
Mr. Gore controlled the assets as general partners of GFLP. This
argument is not supported by credible evidence in the record.
The record shows that TCO did not exert any meaningful management
authority over Marital Fund assets until months after decedent’s
- 54 -
death. If decedent had actually relinquished dominion and
control of the Marital Fund assets to TCO, under the terms of the
agency agreement TCO would have collected all income from the
property, and TCO would have distributed to decedent only such
amounts as GFLP directed. The reality established by the record
is that Ms. Powell, acting on behalf of decedent or her estate,
controlled the receipt and disposition of the income from Marital
Fund assets without having to request any distributions from TCO
or GFLP to pay decedent’s expenses.
Petitioner attempts to explain why the dividends, interest,
and proceeds of the Marital Fund property were deposited into
various bank accounts belonging to or controlled by decedent by
arguing that “other bank account names were used because of the
problems with getting banks to accept checks not made payable to
GFLP”. Petitioner insists, however, that all of decedent’s bank
accounts were treated as GFLP accounts. Petitioner’s explanation
is too facile, and it fails to explain why some dividend and
interest checks were deposited directly into GFLP account No.
7045 while others were not. None of the Marital Fund assets were
registered or titled in the name of GFLP, and none of the
dividend and interest checks were issued in GFLP’s name.46
Petitioner’s explanation also does not explain why $22,415 of the
46
Regardless of the payees’ identities, once the checks were
deposited, decedent could have transferred the funds to GFLP.
Decedent did not do so.
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$41,777 of dividends paid during the first 6 months of 1997 was
never deposited into GFLP account No. 7045 or why dividend and
interest income generated by Marital Fund assets allegedly
transferred to GFLP was not transferred to the GFLP account after
it was deposited into non-GFLP accounts.
Petitioner relies on the GFLP accounting records prepared by
Ms. Bowers after decedent’s death to support petitioner’s
arguments that decedent released all ownership, dominion, and
control over Marital Fund assets when she executed the assignment
on January 8, 1997. However, the accounting records were created
months after the various transactions occurred and are not
credible. We view the GFLP accounting records as just one more
argument regarding how the Marital Fund assets should have been
handled after the January 8, 1997, assignment. The GFLP
accounting records represent nothing more than a self-serving and
belated attempt to create the appearance that decedent
transferred property to GFLP, that GFLP treated all of the bank
accounts held in decedent’s and Sidney Gore’s names as its own
property, and that GFLP received all income from Marital Fund
assets after January 8, 1997.
As an additional explanation for decedent’s treatment of the
income generated by Marital Fund assets, petitioner argues that
the income decedent retained was actually owed to her by GFLP as
payment for assets that decedent sold to GFLP. According to
- 56 -
petitioner, Ms. Bowers set up an account payable in the GFLP
accounting records reflecting a debt of GFLP owed to decedent,
deductions from that amount for GFLP funds Ms. Powell used to pay
decedent’s personal living expenses, and interest allegedly paid
by GFLP on the debt. Petitioner also relies upon decedent’s and
GFLP’s retained Federal income tax returns for the taxable year
1997 to establish the existence of the debt and to show that GFLP
paid interest on the debt.
Respondent argues that petitioner has not explained which
transactions gave rise to the debt GFLP allegedly owed to
decedent and that the account payable in the GFLP accounting
records represents nothing more than “adjusting journal entries,
intended, in part, to account for Decedent’s at-will expenditure
of funds attributed to GFLP”. We agree. Neither decedent nor
GFLP executed a promissory note or any other documents to
evidence GFLP’s alleged debt to decedent. The assignment makes
no reference to the sale of any of decedent’s own property to
GFLP. Neither the GFLP accounting records nor the tax returns,
which were prepared nearly 2 years after GFLP’s debt to decedent
allegedly arose, are sufficient to prove that a valid debt
existed.
Finally, petitioner argues that decedent parted with
dominion and control but that TCO delayed transferring to GFLP
legal title to Marital Fund assets. Although TCO apparently has
- 57 -
assumed some responsibility for the delay, the documents upon
which petitioner relies are extremely vague regarding TCO’s
alleged inaction. Petitioner did not present any testimony from
TCO employees to prove when and for how long the delay occurred
or to show exactly how TCO was at fault.
It is entirely possible that any delay on the part of TCO
occurred well after decedent’s death or that the delay was also
attributable to decedent’s or Ms. Powell’s deliberate inattention
to the technicalities of title. TCO had clearly outlined what
steps needed to be taken to transfer Marital Fund stocks to GFLP
months before decedent’s death. Nevertheless, Ms. Powell did not
sign the necessary stock powers when she delivered the stock
certificates to TCO, and her only explanation for the failure--
that she thought TCO would assume all responsibility to transfer
title to the stock--is not credible.47
The record overwhelmingly establishes that decedent or Ms.
Powell on decedent’s behalf continued to exercise ownership,
dominion, and control over Marital Fund assets from January 8,
1997, when decedent withdrew the Marital Fund assets from the
47
TCO had not yet entered into the agency agreement with
GFLP when Ms. Powell delivered the stock certificates to TCO.
And, although the record shows that Ms. Powell eventually signed
stock powers on behalf of decedent to transfer the stocks to
GFLP, the record does not reveal when she did so. TCO was still
asking Ms. Powell to sign documents to transfer Marital Fund
assets to GFLP as recently as May 2000, and Ms. Powell was still
completing the transfer of other property to GFLP in August 2000.
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Sidney Gore Trust, to June 12, 1997, the date of her death.48
Consequently, we conclude that decedent did not complete any
transfer of Marital Fund assets to GFLP before her death on June
12, 1997. We consider, therefore, whether the estate was
obligated to include the value of Marital Fund assets allegedly
transferred to GFLP in decedent’s gross estate, either because
she owned them outright on the date of her death or,
alternatively, because she held a general power of appointment
over the Marital Fund assets on the date of her death.
IV. Inclusion of Marital Fund Assets in Decedent’s Estate
A. Sections 2033 and 2041
Section 2001 imposes a tax on the transfer of the taxable
estate of every decedent who is a citizen or resident of the
United States. Section 2051 provides that, for purposes of the
tax imposed by section 2001, the value of the taxable estate is
determined by deducting from the value of the gross estate
allowable deductions.
The gross estate of a decedent who is a citizen or resident
of the United States is determined in accordance with chapter 11,
subchapter A, part III, of the Code (part III). Part III
includes sections 2031 through 2046, which describe different
48
The absence of any one element of an inter vivos transfer
of property is sufficient for us to find that no completed
transfer was made. See Fox v. Kramer (In re Estate of Estes),
983 P.2d 438, 445 (Okla. 1999).
- 59 -
types of property interests whose values must be included in the
calculation of a decedent’s gross estate. Section 2031(a)
provides that “The value of the gross estate of the decedent
shall be determined by including to the extent provided for in
this part, the value at the time of his death of all property,
real or personal, tangible or intangible, wherever situated.”
Section 2033 provides 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.” Section
2041(a)(2) requires that property with respect to which the
decedent had a general power of appointment49 created after
October 21, 1942, also be included in the decedent’s gross
estate.
We have concluded that decedent, by executing the assignment
on January 8, 1997, and exercising dominion and control over the
Marital Fund assets from that date to the date of her death,
effectively exercised the withdrawal power granted to her by the
Sidney Gore Trust declaration. We have also concluded, however,
that the assignment was not sufficient to effect a transfer of
49
Sec. 2041(b)(1) defines “general power of appointment” to
mean “a power which is exercisable in favor of the decedent, his
estate, his creditors, or the creditors of his estate”. However,
sec. 2041(b)(1)(A) provides that “A power to consume, invade, or
appropriate property for the benefit of the decedent which is
limited by an ascertainable standard relating to the health,
education, support, or maintenance of the decedent” is not a
general power of appointment.
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Marital Fund assets to GFLP. Because decedent, on the date of
her death, continued to own, control, and use Marital Fund
assets, the value of the Marital Fund assets allegedly
transferred to GFLP, including income therefrom as of the
appropriate valuation date, must be included in decedent’s gross
estate under sections 2031(a) and 2033.
We recognize, of course, that our holding under section 2033
depends for its accuracy on our conclusion that decedent
effectively withdrew the Marital Fund assets from the Sidney Gore
Trust. Even if our conclusion is wrong, however, the value of
the Marital Fund assets would still be includable in decedent’s
gross estate because decedent, on the date of her death, had a
general power of appointment within the meaning of section
2041(a)(2) with respect to any Marital Fund assets still subject
to the Sidney Gore Trust.
Section 2041(b)(1) defines a general power of appointment as
a power exercisable in favor of the decedent, her estate, her
creditors, or the creditors of her estate. A general power of
appointment over the corpus of a trust exists where the lifetime
income beneficiary has the unrestricted power to distribute the
corpus of the trust to herself. Sec. 20.2041-3(f), Example (3),
Estate Tax Regs. In that situation, the entire corpus of the
trust as of the time of death is includable in the decedent’s
gross estate under section 2041. Secs. 20.2041-1(b)(1), 20.2041-
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3(f), Example (3), Estate Tax Regs. Decedent had an unrestricted
power to distribute the corpus of the Marital Fund to herself by
reason of her power of withdrawal.
In addition, the Sidney Gore Trust declaration gave decedent
“the power to appoint the principal and any undistributed income,
to any person” by a provision in her will and authorized the
trustees, upon decedent’s death, to “distribute the then
remaining principal and undistributed income in the Marital
Trust, to such appointee or appointees (including the Estate of
my Wife), in such manner as my Wife may appoint by her Last Will
and Testament.” Such language is sufficient to create a general
power of appointment, sec. 20.2041-1(c)(1), Estate Tax Regs., and
respondent conceded as much in his answer in docket No. 468-02.
If any assets remained in the Marital Trust at decedent’s death,
section 2041(a)(2) requires that the value of those assets be
included in decedent’s gross estate.
B. Section 2036
A decedent’s gross estate includes the value of property
interests transferred by the decedent during his or her lifetime
if the decedent retained for life the possession or enjoyment of,
or the right to the income from, the transferred property. Sec.
2036(a)(1). Petitioner maintains that section 2036(a) is
inapplicable because decedent completed a transfer of the Marital
Fund assets to GFLP before her death and did not retain enjoyment
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of the transferred property. We have already rejected
petitioner’s argument that decedent completed a transfer of
Marital Fund assets to GFLP during her lifetime. Nevertheless,
even if we were to assume that decedent successfully transferred
Marital Fund assets to GFLP before her death, we would still
conclude that the values of the assets are includable in
decedent’s gross estate under section 2036(a).50
The relevant portion of section 2036(a) provides:
SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.
(a) General Rule.--The value of the gross estate
shall include the value of all property to the extent
of any interest therein of which the decedent has at
any time made a transfer (except in case of a bona fide
sale for an adequate and full consideration in money or
money’s worth), by trust or otherwise, under which he
has retained for his life or for any period not
ascertainable without reference to his death or for any
period which does not in fact end before his death--
(1) the possession or enjoyment of, or the
right to income from, the property * * *
50
Before her death, decedent transferred $2,000 to GFLP to
pay the required capital contributions of each of her children
and their trusts. In addition, on Jan. 8, 1997, decedent
executed the amendment to her trust agreement expressing her
intention that “all the property in which I have an interest is
from this date forward subject to the trust” and that the trust
assets either had been or would be invested in GFLP. Various
deposits were made into GFLP’s account between Jan. 8 and June
12, 1997, and respondent has stipulated that GFLP was validly
formed under Oklahoma law. We shall assume, therefore, that GFLP
was in existence and that it had some assets on the date of
decedent’s death, and we shall consider the parties’ arguments
regarding the applicability of sec. 2036.
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Section 2036(a) is designed to include in a decedent’s gross
estate “‘transfers that are essentially testamentary--i.e.,
transfers which leave the transferor a significant interest in or
control over the property transferred during his lifetime.’”
Estate of Abraham v. Commissioner, 408 F.3d 26, 37 (1st Cir.
2005) (quoting United States v. Estate of Grace, 395 U.S. 316,
320 (1969)), affg. T.C. Memo. 2004-39, amended 429 F.2d 294 (1st
Cir. 2005). A decedent retains an interest described in section
2036(a) unless he “absolutely, unequivocally, irrevocably, and
without possible reservations” parts with possession and
enjoyment of the transferred property. Commissioner v. Estate of
Church, 335 U.S. 632, 645 (1949). Possession or enjoyment of
transferred property is retained for purposes of section
2036(a)(1) where there is an express or implied understanding to
that effect among the parties at the time of the transfer, even
if the retained interest is not legally enforceable. Sec.
20.2036-1(a), Estate Tax Regs.; see also Estate of Reichardt v.
Commissioner, 114 T.C. 144, 151 (2000); Estate of Harper v.
Commissioner, T.C. Memo. 2002-121. All of the facts and
circumstances surrounding the transfer and subsequent use of the
property are considered in deciding whether there was an implied
agreement or understanding. Estate of Reichardt v. Commissioner,
supra at 151. The taxpayer bears the burden of disproving the
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existence of an agreement regarding retained enjoyment, a burden
especially onerous in intrafamily situations. Id. at 151-152.
This Court has applied section 2036(a)(1) to assets
transferred to a family partnership in which the decedent
retained the possession of, enjoyment of, or the right to the
income from the transferred assets. See, e.g., id. at 150-155;
Estate of Harper v. Commissioner, supra. In each case, we found
inclusion in the gross estate appropriate because the decedent
failed to curtail his or her enjoyment of the property following
the transfer to the family partnership. Factors indicating an
implicitly retained interest under section 2036(a)(1) include
transfer of the majority of the decedent’s assets, continued use
of transferred property, commingling of personal and partnership
assets, disproportionate distributions to the decedent, use of
entity funds for personal expenses, and testamentary
characteristics of the arrangement. See Estate of Reichardt v.
Commissioner, supra (decedent commingled partnership and personal
funds, used partnership’s checking account as his personal
account, and continued to use assets in same manner as before
they were transferred); Estate of Strangi v. Commissioner, T.C.
Memo. 2003-145 (decedent maintained same relationship to his
assets as he had before formation of family partnership), affd.
417 F.3d 468 (5th Cir. 2005); Estate of Thompson v. Commissioner,
T.C. Memo. 2002-246 (decedent transferred most of his assets to
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partnership and was able to withdraw these assets from
partnership at any time), affd. 382 F.3d 367 (3d Cir. 2004);
Estate of Harper v. Commissioner, supra (decedent commingled
funds, distributions were made disproportionately to decedent,
and arrangement possessed testamentary characteristics); Estate
of Schauerhamer v. Commissioner, T.C. Memo. 1997-242 (decedent
transferred a substantial amount of her assets to a partnership
and deposited income from partnership in a personal account that
she used to pay personal and partnership expenses).
Section 2036(a), however, provides for an exception to its
general inclusion rule. Under the exception, where assets are
transferred through a “bona fide sale for an adequate and full
consideration in money or money’s worth”, the value of those
assets is not subject to inclusion under section 2036(a).
Availability of the exception rests on two requirements: (1) An
arm’s-length transaction, and (2) adequate and full
consideration. Estate of Harper v. Commissioner, supra. The
decedent’s receipt of a partnership interest is not a bona fide
sale for full and adequate consideration where an intrafamily
transaction merely attempts to change the form in which the
decedent holds property. Estate of Thompson v. Commissioner,
supra. In addition, the transfer must be motivated by a
legitimate nontax business purpose. See Estate of Bongard v.
Commissioner, 124 T.C. 95, 118 (2005); Estate of Bigelow v.
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Commissioner, T.C. Memo. 2005-65; Estate of Stone v.
Commissioner, T.C. Memo. 2003-309.
Petitioner asserts that decedent’s only interest in the
transferred assets was as a beneficiary of the Sylvia Gore
Revocable Trust, which held a 32.667-percent limited partnership
interest in GFLP. Because GFLP is a separate legal entity formed
in compliance with Oklahoma law, petitioner argues that decedent
relinquished all control, possession, enjoyment, or right to
income upon the alleged transfer of the Marital Fund assets to
GFLP. Petitioner argues that decedent retained no benefit or
control over the assets and that TCO controlled or managed the
GFLP assets during decedent’s life. Additionally, petitioner
argues that decedent did not execute or contemplate an agreement
reserving any control of the transferred assets.
Decedent, however, did not part with possession or enjoyment
of the property purportedly transferred to GFLP. At the time of
decedent’s death, GFLP did not hold title to any of the Marital
Fund assets. From its formation until the date of decedent’s
death, GFLP did not engage in any business or investment
activity. Only after decedent’s death and long after GFLP’s
formation were accounting records created purporting to show that
decedent transferred a series of Marital Fund assets to GFLP.51
51
Accounting manipulations occurring after decedent’s death
cannot refute the existence of an implied agreement permitting
(continued...)
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Decedent individually or through Ms. Powell as attorney-in-fact
continued to receive all of the income from the property
transferred to GFLP, directed its deposit, and benefited from its
use without restriction. Ms. Powell continued using Marital Fund
assets allegedly transferred to GFLP for decedent’s benefit.
Decedent’s access to the assets was without restriction, allowing
decedent to maintain the same relationship to her assets as
existed before the alleged transfer to GFLP.
The circumstances surrounding the alleged transfer and
subsequent use of the Marital Fund assets demonstrate an implied
agreement between decedent and her children. Accordingly,
because decedent continued to control and to use Marital Fund
assets after the alleged transfer to GFLP on January 8, 1997, the
assets transferred to GFLP are includable in decedent’s gross
estate under section 2036.
Decedent’s transfer of Marital Fund assets to GFLP also does
not qualify for the bona fide sale exception contained in section
2036(a). Decedent’s transfer did not occur through an arm’s-
length transaction because decedent essentially acquired her
interest from herself. See Estate of Harper v. Commissioner,
T.C. Memo. 2002-121. Decedent stood on both sides of the
transaction, and the partnership was formed without any
51
(...continued)
the continued use of transferred assets. See Estate of Harper v.
Commissioner, T.C. Memo. 2002-121.
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bargaining or negotiating because the seller and the purchaser
were the same person. Cf. Estate of Stone v. Commissioner, supra
(transfers to family partnerships were arm’s-length transactions
because each member of family was represented by independent
counsel and transfers were motivated primarily by investment and
business concerns).
Decedent’s transfer also was not made for full and adequate
consideration. Decedent’s receipt of a partnership interest is
not full and adequate consideration within the meaning of section
2036 because decedent used GFLP merely as a vehicle for changing
the form in which she held her interest in the Marital Fund
assets. See Estate of Thompson v. Commissioner, T.C. Memo. 2002-
246. Decedent’s transfer represents a circuitous “recycling of
value” because no change was made to the underlying pool of
assets; no one other than decedent made contributions of property
or services in the interest of true joint ownership or
enterprise. See Estate of Harper v. Commissioner, supra. The
value of decedent’s interest in GFLP is derived exclusively from
the assets that decedent allegedly contributed to GFLP. Under
these facts, decedent did not engage in any bona fide transaction
for consideration upon the creation and funding of GFLP.
Accordingly, petitioner is not entitled to rely on the exception
under section 2036(a).
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We hold that, even if Marital Fund assets were transferred
to GFLP, the full date-of-death values of those assets are
includable in decedent’s gross estate under section 2036(a).
V. Whether the Gross Estate Should Be Reduced by the Amount of
GFLP’s Alleged Debt to Decedent
The estate listed as an asset of the estate a note
receivable from GFLP to decedent. Petitioner argues that if we
include all of the Marital Fund assets allegedly transferred to
GFLP in decedent’s gross estate under sections 2033 and
2041(a)(2), “it is factually impossible for * * * [decedent] to
owe to herself $46,664”. Respondent argues that although the
estate has never explained or substantiated the transactions
generating the alleged debt GFLP owes to decedent, the gross
estate should not be reduced by that amount because the expert
witnesses testified at trial that the $46,664 amount was already
taken into account in both petitioner’s and respondent’s
determinations of the net asset value of the gross estate.
We concluded earlier in this opinion that petitioner has not
proven that decedent contributed or sold any of her own assets to
GFLP with the expectation that GFLP would repay her. A
conclusion that the amount of GFLP’s alleged debt to decedent is
includable in the gross estate would be inconsistent with our
findings of fact in this case. The existence of the alleged debt
depends, in the first instance, upon a finding that the Marital
Fund assets had been transferred to GFLP. Our primary finding is
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that no such transfer took place. Moreover, the record
adequately demonstrates that no bona fide debt owed by GFLP to
decedent existed on the date of decedent’s death. Accordingly,
the value of the gross estate must be reduced by $46,664.
VI. Whether the Value of the Smith Barney Investment Account Is
Includable in Decedent’s Gross Estate
Petitioner argues that including the proceeds of the Smith
Barney account in decedent’s gross estate would result in taxing
the same funds twice because that amount was deducted from the
alleged debt GFLP owed to decedent, which increased the overall
value of GFLP. Petitioner relies solely on the GFLP accounting
records to support petitioner’s position.
Respondent argues that petitioner has not provided any
detail regarding the items giving rise to the alleged debts
between GFLP and its partners. Respondent contends further that
the amount is includable in the gross estate under section 2033
because the value of the Smith Barney account was not reported on
decedent’s estate tax return or included as an asset of GFLP in
valuing GFLP or its partnership interests.
The estate did not report the value of the Smith Barney
account as part of decedent’s gross estate on Form 706.
Therefore, we sustain respondent’s determination that $102,139,
the value of the Smith Barney account, is includable in the gross
estate under section 2033.
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VII. Whether the Estate Is Entitled To Deduct Administration
Expenses in Excess of Those Allowed
Petitioner contends that the executor’s fee, appraisal fees,
legal fees, and interest accrued on the Oklahoma death tax and
the Federal estate and gift tax liabilities, incurred after
filing the estate tax return and in excess of the amounts already
allowed, are deductible from decedent’s gross estate.
Respondent contends that petitioner has not presented any
documentation to substantiate the estate’s expenses but
acknowledges that petitioner may submit the appropriate forms,
along with supporting documentation, to respondent for a
determination of reasonableness of the amounts claimed.
Alternatively, respondent asserts that petitioner may request
additional administration expense deductions in the Rule 155
proceeding, or we may determine the allowable administration
expense deductions in a Rule 156 proceeding.
Section 2053(a)(2) provides that the value of the taxable
estate shall be determined by deducting from the value of the
gross estate such amounts for administration expenses as are
allowable by the laws of the jurisdiction under which the estate
is being administered. Administration expenses include
executor’s commissions; attorney’s fees, including those fees
associated with contesting an asserted deficiency; and
miscellaneous expenses such as appraiser’s fees, accountant’s
fees, and court costs. Sec. 20.2053-3, Estate Tax Regs. In
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addition, interest attributable to a State death tax or Federal
estate tax deficiency may be deductible as an administration
expense under section 2053. Estate of Bahr v. Commissioner, 68
T.C. 74 (1977).
At the trial, petitioner did not substantiate any additional
administration expenses the estate had paid or incurred since
filing its estate tax return. However, we do not doubt that the
estate has paid or incurred additional administration expenses
that are allowable as deductions if substantiated. Petitioner
should promptly submit documentation of any additional
administration expenses to respondent, and the parties should
attempt to reach an agreement regarding this issue. If the
parties are unable to do so, we shall decide the issue as
appropriate in a Rule 155 or 156 proceeding.
VIII. Whether the Estate Is Entitled To Deduct ad Valorem Tax
The estate claimed a deduction of $1,543 for ad valorem tax
on Schedule K of Form 706, which respondent disallowed.
Petitioner now maintains that the estate is entitled to deduct
$3,367, the full amount of ad valorem tax owed for 1997, under
section 2053(a)(3). Respondent argues the estate is not allowed
to deduct any of decedent’s ad valorem tax because petitioner has
not established that the tax was a personal obligation of
decedent on the date of her death that met the requirements for
deductibility under section 2053.
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Ad valorem tax may be deducted from the value of the gross
estate if the tax is an enforceable obligation of the decedent on
the date of the decedent’s death and is allowable under State
law. Sec. 2053(a)(3), (c)(1)(B); sec. 20.2053-6(b), Estate Tax
Regs. Under Oklahoma law, only ad valorem tax that is a lien on
a decedent’s property on the date of the decedent’s death is an
enforceable obligation of the decedent on that date. Okla. Stat.
Ann. tit. 68, sec. 808(a) (West 2001). Ad valorem tax becomes a
lien on property on the date the tax becomes due and payable.
Okla. Stat. Ann. tit. 68, sec. 3101 (West 2001). Ad valorem tax
for each fiscal year becomes due and payable on the first day of
November. Okla. Stat. Ann. tit. 68, secs. 2804, 2913 (West
2001).
On June 12, 1997, no enforceable obligation existed with
respect to decedent’s 1997 ad valorem tax. The 1997 ad valorem
tax did not become due and payable and a lien against decedent’s
real property until November 1, 1997. Ms. Powell paid the 1997
ad valorem tax on decedent’s home on November 24, 1997.
Petitioner has not offered any evidence to substantiate the
amount of any allowable deduction. Moreover, the Oklahoma
statute cited by the estate is inapplicable here because there
was no conveyance of decedent’s property in 1997. Okla. Stat.
Ann. tit. 68, sec. 2912 (West 2001). The Oklahoma cases cited by
petitioner are equally inapplicable, as they relate to whether a
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purchaser or seller is liable for ad valorem taxes when real
property is sold and do not address the issue of when the State
ad valorem tax liability actually becomes due and payable. Allen
v. Henshaw, 168 P.2d 625 (Okla. 1946); Bd. of Commrs. v. Cent.
Baptist Church, 276 P. 726 (Okla. 1929). Accordingly, petitioner
has not established that the estate is entitled to any deduction
for decedent’s 1997 ad valorem tax. We sustain respondent’s
determination disallowing the $1,543 ad valorem tax deduction
claimed by the estate.
IX. Conclusion
We have considered the remaining arguments of both parties
for results contrary to those expressed herein and, to the extent
not discussed above, find those arguments to be irrelevant, moot,
or without merit.
To reflect the foregoing,
Decisions will be entered
under Rule 155.