Estate of Riese v. Comm'r

T.C. Memo. 2011-60

UNITED STATES TAX COURT

ESTATE OF SYLVIA RIESE, DECEASED, ELLEN C. GRIMES AND JUDITH A.
ZIPP, EXECUTORS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5388-08. Filed March 15, 2011.

T. Randolph Harris, for petitioner.

Monica E. Koch, Thomas J. Kerrigan, and Brian David Hans,

for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined a $3,114,357

deficiency in the Federal estate tax of the Estate of Sylvia

Riese (the estate). The issues for decision are whether: (1)

The value of a personal residence transferred by Sylvia Riese
 - 2 -

(decedent) to a qualified personal residence trust (QPRT) that

terminated 6 months before decedent’s death is included in the

value of decedent’s gross estate pursuant to section 2036;1 (2)

investment management fees of $125,000 paid by the estate are

deductible administrative expenses pursuant to section 2053; (3)

accrued rent of $46,298 is deductible as a debt of decedent

pursuant to section 2053; and (4) the estate is entitled to a

deduction of $46,452 for unpaid rent owed as an administrative

expense pursuant to section 2053.

FINDINGS OF FACT

Decedent was a resident of New York when she passed away.

Her daughters, Ellen C. Grimes (Mrs. Grimes) and Judith A. Zipp

(Ms. Zipp), were appointed coexecutors of the estate by letters

testamentary issued on March 10, 2004.2 Both resided in New York

when the petition was filed.

Decedent was wealthy and received substantial financial and

tax planning advice in her later years. She inherited her home

at 35 Tideway in Kings Point, New York (the residence), by

operation of law when her husband, with whom she lived and owned

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the time of decedent’s
death, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
Mrs. Grimes and Ms. Zipp also served as attorneys-in-fact
for decedent while she was alive pursuant to powers of attorney
decedent executed on Nov. 30, 1993, and Mar. 14, 2003.
 - 3 -

a tenancy by the entirety in the home, passed away in 1990. She

also inherited her husband’s fortune, which he had accumulated

over the years as cofounder of the popular Riese restaurant

chain.

Ms. Zipp lived 10 to 15 minutes from decedent. They had a

wonderful relationship, and Ms. Zipp spent a lot of time taking

care of decedent in decedent’s last few years. However, Ms. Zipp

trusted her sister, Mrs. Grimes, to care for decedent’s financial

matters.

Robert S. Grimes (Mr. Grimes), decedent’s son-in-law,3

provided investment management services to decedent through his

company, R.S. Grimes & Co. (RSG&C). Stefan F. Tucker (Mr.

Tucker), an attorney and partner in the firm of Venable LLP

(Venable),4 provided estate planning advice to Mr. and Mrs.

Grimes5 and began advising decedent around 1993. RSG&C watched

over decedent’s investments and assisted Mr. Tucker with

decedent’s estate planning. According to Mr. Tucker, Mr. Grimes

“gathered resources, brought in counsel and did everything he

3
Mr. Grimes is Mrs. Grimes’ husband.
4
For several years Mr. Tucker advised decedent as a member
of Tucker, Flyer, Sanger, Rider, and Lewis, P.C. On Jan. 1,
2000, Tucker Flyer merged with Venable, Mr. Tucker’s current
firm, and Mr. Tucker continued to advise decedent as a member of
Venable.
5
Mr. Grimes and Mr. Tucker met in 1974 and worked on
several transactions together throughout the years.
 - 4 -

could under R.S. Grimes & Co. to watch over and work on and save

as much of * * * [decedent’s] assets as he could”. Decedent paid

RSG&C an annual fee of $125,000 for its investment management

services from around 1990 until she died.

Mr. Tucker represented decedent with regard to estate

planning and other matters.6 In 1999 Mrs. Grimes mentioned to

him that decedent was agreeable to some additional estate

planning with respect to the residence. In response, Mr. Tucker

and Mrs. Grimes began considering the establishment of a QPRT for

decedent. Mr. Tucker sent a letter dated September 17, 1999, to

Mrs. Grimes explaining the Federal gift tax costs and some of the

benefits of establishing a QPRT for decedent. Mrs. Grimes then

visited decedent and explained the contents of the letter to her.

Decedent asked Mrs. Grimes whether she would directly benefit

from the establishment of a QPRT. Mrs. Grimes explained that

establishing a QPRT would result in a lower estate tax liability

but also that decedent would have to pay gift tax on the transfer

and pay rent to live in the residence after the QPRT expired.

Decedent agreed that a QPRT would be acceptable and gave Mrs.

Grimes permission to proceed.

6
Mr. Tucker is admitted to the bar of the District of
Columbia. His areas of practice include real estate, taxation,
and estate planning, and he is a former chair of the American Bar
Association Section of Taxation.
 - 5 -

On February 7, 2000, Mr. Tucker met with Mr. and Mrs. Grimes

at their residence to discuss the QPRT and other estate planning

options for decedent. At the meeting they agreed that a QPRT

would be the best alternative for keeping the value of the

residence out of decedent’s gross estate because decedent would

not have to give up any liquid assets.7 After explaining the

details of a QPRT to Mr. and Mrs. Grimes, Mr. Tucker excused

himself, went to Mr. Grimes’ library, and called decedent at her

home.8 During this call Mr. Tucker explained to decedent some of

the specifics about the QPRT; specifically, that upon termination

decedent would no longer own the residence and would have to pay

rent if she remained in the residence. After Mr. Tucker had

explained everything decedent agreed to establish a QPRT.

Following the meeting Mr. Tucker sent a letter dated

February 22, 2000, to decedent, courtesy of Mrs. Grimes,

explaining to decedent, inter alia, that she would have to pay to

her daughters fair market rent if she continued to live in the

residence after the QPRT terminated. Mrs. Grimes and decedent

7
At the time of her death decedent had over $5 million in
liquid assets. Other planning devices, such as a family limited
partnership, would have required decedent to give up some of
these assets.
8
Respondent disputes the occurrence of this conversation
because Mr. Tucker did not memorialize it in his notes or billing
records and Mrs. Grimes did not specifically remember Mr.
Tucker’s calling decedent. However, Mr. Tucker credibly
testified that he called decedent and discussed the QPRT with
her.
 - 6 -

discussed this letter, and Mrs. Grimes again helped decedent

understand the details. Mr. Tucker also sent drafts of QPRT

agreements for 3- and 5-year terms to decedent. Decedent

ultimately decided to create a 3-year QPRT.

On April 19, 2000, decedent established the Sylvia Riese

QPRT (the QPRT) under section 25.2702-5, Gift Tax Regs., and

executed a deed transferring the residence thereto. Decedent

reported the transfer of the residence to the QPRT on Form 709,

United States Gift (and Generation-Skipping Transfer) Tax Return,

for tax year 2000.

The QPRT agreement states, in pertinent part, that if the

settlor (i.e., decedent) survives the termination date of the

QPRT, the QPRT shall terminate and the balance of the trust fund

(i.e., the residence) shall be distributed 50 percent each to two

trusts, known as the 1997 Property Trusts (the Property Trusts),

which decedent established in 1996 for the benefit of Mrs. Grimes

and Ms. Zipp. The QPRT terminated by its terms on April 19,

2003. Decedent (or the QPRT) did not execute a deed transferring

the residence to the Property Trusts.

Mrs. Grimes never discussed rent directly with decedent

after the QPRT terminated. However, around the termination date

Mrs. Grimes called Mr. Tucker inquiring about how to determine

the proper amount of rent to charge decedent. She testified: “I

knew she’d agreed to it and, you know, I didn’t--I didn’t want to
 - 7 -

feel like I was badgering her. And so I called * * * [Mr.

Tucker].” Mr. Tucker explained to her that fair market rent

could be determined by contacting local real estate brokers and

that this could be done by the end of the year (i.e., December

31, 2003). Mr. Tucker entered a “tickler” in his pocket calendar

to remind himself to call Mrs. Grimes by Thanksgiving to make

sure everything was taken care of. However, before Thanksgiving

arrived decedent suffered a stroke and died unexpectedly on

October 26, 2003.9

Decedent continued to live in the residence until she died.

During the 6-month period from the QPRT’s termination until

decedent’s death, decedent continued to pay all of the property

taxes, insurance, upkeep, and maintenance on the residence. She

did not pay rent or execute a written lease or rental agreement

with the Property Trusts.

At the time of decedent’s death Mrs. Grimes had not yet

determined the fair market rent. When asked why, she responded:

“Distractions, * * * [Mr. Tucker] said it wasn’t--just as long as

it was handled and in place and all of that stuff, you know, well

before year end or near year end, that we would be okay. And I

9
Although decedent was 83 and suffered from normal
ailments associated with her age, her death was unexpected.
Decedent’s death certificate lists as her immediate cause of
death cardiopulmonary (cardiac) arrest caused by a
cerebrovascular accident (stroke) she had suffered days earlier.
 - 8 -

thought I had more time than I wind [sic] up having.” When

pressed further on recross she said: “I just didn’t do it”.

After decedent’s death the estate assumed responsibility for

and paid all property taxes, insurance, upkeep, and maintenance

on the residence until it was sold on October 6, 2004. The

Property Trusts did not maintain homeowners insurance for the

residence nor directly pay any of the foregoing expenses.

On January 24, 2005, Mrs. Grimes and Ms. Zipp filed Form

706, United States Estate (and Generation-Skipping Transfer) Tax

Return, for the estate.10 The estate did not include the value

of the residence in the calculation of decedent’s gross estate.

The estate claimed as a deduction under section 2053 a debt of

$46,298 owed to the Property Trusts for net fair market rent of

$7,500 per month from the date the QPRT terminated until

decedent’s death. The estate also claimed as deductions under

section 2053 administration expenses payable to the Property

Trusts of $46,452 for net fair market rent of $7,500 per month

from the day after decedent’s death through April 30, 2004, and

$125,000 for “investment management fees” paid to RSG&C.

Respondent examined the estate tax return and included in

the gross estate the value of the residence, alleged to be

10
The estate timely filed for an extension and made a
$2,975,000 Federal estate tax payment on July 26, 2004.
 - 9 -

$6,138,000.11 Respondent also denied the deductions for predeath

and postdeath rent as well as the investment management fees.

OPINION

Section 2001(a) 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 defines the taxable estate as

“the value of the gross estate” less applicable deductions.

Section 2031(a) specifies that the gross estate comprises “all

property, real or personal, tangible or intangible, wherever

situated”, to the extent provided in sections 2033 through 2046.

Section 2033 broadly provides: “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.”

Sections 2034 through 2046 explicitly mandate the inclusion

of several more narrowly defined classes of interests in

property. Among those specific sections is section 2036, which

provides, in pertinent part, as follows:

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

11
Respondent determined that the residence is includable
in the gross estate at the sale price of $6,820,000 less a 10-
percent discount for postdeath appreciation. The estate disputes
the determined value of the residence. However, the Court
deferred the valuation issue. On the basis of our holding
herein, a trial on the issue of valuation will not be necessary.
 - 10 -

sale for an adequate and full consideration in money or
money’s worth), by trust or otherwise, under which he
has retained for his life or for any period not
ascertainable without reference to his death or for any
period which does not in fact end before his death--

(1) the possession or enjoyment of, or the
right to the income from, the property, or

(2) the right, either alone or in conjunction
with any person, to designate the persons who
shall possess or enjoy the property or the income
therefrom.

Section 20.2036-1(c)(1)(i), Estate Tax Regs., further

explains: “An interest or right is treated as having been

retained or reserved if at the time of the transfer there was an

understanding, express or implied, that the interest or right

would later be conferred.”12 Whether there existed an implied

agreement depends on the facts and circumstances of each

transaction and case.

Respondent argues that an implied agreement can be inferred

from the fact that “nothing changed after the QPRT expired”.

Decedent continued to live in the residence without executing a

lease or paying rent. Respondent urges us to follow the

reasoning in Guynn v. United States, 437 F.2d 1148 (4th Cir.

12
During the audit years the identical language was
contained in sec. 20.2036-1(a), Estate Tax Regs. The language
was moved to sec. 20.2036-1(c)(1)(i), Estate Tax Regs., by T.D.
9414, 2008-35 I.R.B. 454, 458, and that provision is applicable
to estates of decedents dying after Aug. 16, 1954. See sec.
20.2036-1(c)(3), Estate Tax Regs.
 - 11 -

1971), and hold that decedent retained for life an interest in

the residence.

The estate, relying primarily on Estate of Barlow v.

Commissioner, 55 T.C. 666 (1971), argues that there was no

understanding, express or implied, that decedent would remain in

the residence for life without paying rent. Decedent always

intended to pay rent, and the trustees of the Property Trusts

intended to enforce decedent’s obligation. However, actual

payment of rent never materialized because of decedent’s

unexpected death 6 months after the QPRT terminated.

We do not find either case relied upon by the parties to be

squarely on point. In Estate of Barlow the decedent and his wife

conveyed farm property to their four children, simultaneously

leasing the property back for an amount that was found to be fair

market rent. Pursuant to the lease, the lessee was responsible

for the taxes and the amount would be credited towards the rent.

The lessees paid rent into a trust account for the children’s

benefit for the first 2 years. The lessors reported the rent as

income. Because of the health of the decedent and other personal

problems of one of the children, rent payments ceased after the

first 2 years and the balance was paid in a lump sum upon the

decedent’s death 4 years later. The value of the property was

not included in the taxable estate even though for 4 years the

decedent did not actually pay the rent. The Court found that the
 - 12 -

outright transfer of the property to the children and the

leaseback were bona fide transactions. The forbearance from

collecting rent was due to circumstances that arose later and

were not contemplated by the parties at the time of the

transaction.

The Court held that the decedent in Estate of Barlow

transferred the property without retaining a life estate. The

parties executed a lease, and rent was properly paid and reported

for 2 years. Rent payments ceased because of later unforseen

circumstances; there was no understanding at the time of the

transfer that rent would not be paid. In the case at hand,

decedent never executed a lease or made any rent payments during

the 6-month period after the QPRT terminated. While this alone

is not determinative, as will be discussed below, the

circumstances differ enough that we decline to directly apply the

reasoning in Estate of Barlow.

In Guynn v. United States, supra, an elderly woman named

Mrs. Calvert purchased and moved into a home near where her

daughter lived. Four months later she conveyed the property to

her daughter but continued to live there. Mrs. Calvert remained

in the home for an additional year and 3 months after executing

the deed transferring the house to her daughter without an
 - 13 -

express agreement entitling her to do so.13 During that time she

paid no rent to her daughter but paid for improvements to the

property and certain expenses. Mrs. Calvert’s daughter testified

that Mrs. Calvert’s remaining in the property was not discussed

because it was understood by all involved that she would stay in

the home until her death.14 The Court of Appeals for the Fourth

Circuit held that the value of the property was included in the

gross estate on the basis of an implied agreement for a retained

life estate.

In Estate of Tehan v. Commissioner, T.C. Memo. 2005-128, the

decedent gradually conveyed more and more of his interest in his

home to his eight children until his interest eventually reached

zero percent.15 Pursuant to an express agreement with his

children,16 the decedent had “‘the sole and exclusive right to

13
Mrs. Calvert occupied the property from the date of
original purchase on Dec. 29, 1961, until her death on Aug. 10,
1963. On May 2, 1962, Mrs. Calvert, along with the original
sellers of the property, executed a deed for the property to her
daughter.
14
Presumably rent too was not discussed.
15
Mr. Tehan purchased the condominium in 1990. He
executed deeds on Nov. 5, 1997, Jan. 2, 1998, and Mar. 22, 1999,
conveying to his eight children, in fee simple and as tenants in
common, an undivided 4.5-percent interest, an undivided 4.5-
percent interest, and an undivided 3.5-percent interest,
respectively, leaving his percentage interest in the property at
zero after the third transfer. He died on May 17, 1999.
16
The decedent and his children executed the agreement on
Nov. 5, 1997, the same date he executed the first of the three
deeds.
 - 14 -

the use and occupancy of the Property for such period of time as

he desires’” and “‘shall not pay any rent, but shall be solely

responsible for the payment of [other expenses]’”.17 We held

that the decedent retained a life estate in his residence during

the period from November 5, 1997, until the date of his death and

that he retained possession and enjoyment of his residence within

the meaning of section 2036(a)(1).18

The transfers in Guynn v. United States, 437 F.2d 1148 (4th

Cir. 1971), and Estate of Tehan were direct gifts with no

discussion whatsoever of the payment of rent to allow the grantor

to remain in the property. Estate of Tehan is an example of an

express understanding and Guynn an example of an implied

understanding that the grantor would retain an interest in the

transferred property for life. To the contrary, decedent

17
Other expenses included mortgages, condominium
assessments, real estate taxes, insurance premiums, and costs
associated with maintenance and repair.
18
With respect to the decedent’s reliance on Estate of
Barlow v. Commissioner, 55 T.C. 666 (1971), in Estate of Tehan v.
Commissioner, T.C. Memo. 2005-128, we said:
The estate’s reliance on [Estate of Barlow] is
misplaced. In Estate of Barlow, the decedent involved there
and his wife gratuitously transferred a farm to their
children and, under a contemporaneously executed lease,
retained the possession and enjoyment of that farm in return
for the payment by them of a “fair, customary rental”. In
the instant case, the * * * agreement was not a lease
agreement, and decedent did not agree under that agreement
to pay any rent, let alone fair rental value, for his
possession and enjoyment of decedent’s residence. [Internal
citations and fn. refs. omitted.]
 - 15 -

executed a QPRT agreement and rent was discussed on multiple

occasions (e.g., when Mrs. Grimes explained the September 17,

1999, letter to decedent, during the February 7, 2000, phone call

between Mr. Tucker and decedent, in the February 22, 2000, letter

to decedent, and during subsequent conversations, etc.).

Decedent agreed to pay rent and the trustees of the Property

Trusts to which the residence transferred expected and intended

to collect rent after the QPRT terminated. Furthermore, Mrs.

Grimes’ call to Mr. Tucker upon the QPRT’s termination to find

out how to determine fair market rent negates any possibility of

an implied understanding that decedent would retain an interest

in the residence for life. While counsel’s advice to determine

rent by the end of the year was not the most prudent course of

action, i.e., executing a lease and determining rent before the

QPRT terminated would have been ideal, we accept the parties’

good faith testimony that they intended to determine rent by the

end of the year.

We find as a matter of fact that there was an agreement

among the parties for decedent to pay fair market rent, the

amount of which was to be determined and payments to begin by the

end of 2003. See Diaz v. Commissioner, 58 T.C. 560, 565 (1972)

(basing analysis upon evaluation of the entire record and

credibility of witnesses). The Secretary had not issued any

regulations or guidance as to how and when rent should be paid
 - 16 -

upon the termination of a QPRT. We believe that doing so by the

end of the calendar year in which the QPRT expired would have

been reasonable under the circumstances.

Unlike many cases involving the transfer of a personal

residence where the decedent continued to live in the residence

until death, see, e.g., Estate of Van v. Commissioner, T.C. Memo.

2011-22, the existence of an implied agreement in this case is

negated by the express agreement among the parties for the

payment of rent. Many factors, e.g., the creation of the QPRT,

the payment of gift tax upon the transfer of the residence to the

QPRT, the several instances in which decedent agreed to pay rent,

the fact that Mrs. Grimes called Mr. Tucker upon the QPRT’s

termination to find out how to determine the amount of rent to

charge, and Mr. Tucker’s corroborating testimony, all lead us to

find that there was no agreement or understanding that decedent

would retain an interest in the residence for life without paying

rent.

We believe that Mrs. Grimes, on the advice of counsel,

intended to and would have determined fair market rent by the end

of 2003 and decedent would have paid rent. We believe further

that Mr. Tucker would have made sure a lease was executed, rent

was determined, and all appropriate changes were made to effect

the change of ownership. Unfortunately, decedent died

unexpectedly in October before any of this occurred.
 - 17 -

On our examination of the entire record, we find that under

the facts of this case decedent did not retain a life estate in

the residence. There was no understanding, express or implied,

at the time of transfer that decedent could occupy the residence

rent free. Accordingly, the value of the residence was properly

excluded from the gross estate and respondent’s determination is

not sustained on this issue.

Deduction for Accrued Rent

Section 2053(a)(3) provides for a deduction from the gross

estate for claims against the estate. To be deductible, a claim

must be allowable under the laws of the State in which the estate

is administered. Only claims that are “enforceable against the

decedent’s estate” and only those amounts that “represent

personal obligations of the decedent existing at the time of his

death” are deductible. Sec. 20.2053-4, Estate Tax Regs.

Although decedent had not entered into a lease with the

Property Trusts and specific terms were not determined until

after her death, decedent’s occupation of the residence

constituted a tenancy-at-will recognized under New York law. See

N.Y. Real Prop. Law sec. 228 (McKinney 2006); Talamo v.

Spitzmiller, 23 N.E. 980 (N.Y. 1890). Decedent therefore had a

personal obligation to pay rent and was indebted to the Property

Trusts at the time she died. Accordingly, the estate is entitled

to a deduction for accrued rent as a debt of the decedent.
 - 18 -

Deduction for Unpaid Rent and Investment Management Fees

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.” Section 20.2053-3(a),

Estate Tax Regs., provides, in pertinent part: “The amounts

deductible from * * * [the] gross estate as ‘administration

expenses’ * * * are limited to such expenses as are actually and

necessarily incurred in the administration of the decedent’s

estate”. See also Estate of Todd v. Commissioner, 57 T.C. 288,

296 (1971).

The estate argues that it was reasonable for the estate to

occupy the residence for a short period after decedent’s death

and that it properly owes rent to the Property Trusts on the

basis of decedent’s obligation to pay rent. However, as there

was no formal lease between the Property Trusts and decedent, the

tenancy-at-will ceased upon decedent’s death. The estate did not

require a roof over its head and was not obligated to pay rent to

the Property Trusts. See Fried v. Commissioner, 445 F.2d 979,

985 (2d Cir. 1971) (the estate failed to adequately prove an

obligation to pay rent for 3 months following the decedent’s

death in the absence of a valid lease), affg. 54 T.C. 805 (1970).
 - 19 -

Next, the estate argues that the $125,000 paid to decedent’s

son-in-law for services provided by RSG&C was a reasonable and

necessary expense because Mr. Grimes had extensive knowledge of

decedent’s assets because of his previous service to her.

However, the estate failed to introduce any evidence of the

services RSG&C provided to the estate. Mr. Tucker testified that

he was unsure of exactly what services RSG&C provided to the

estate, and Mr. Grimes did not testify at all. We believe the

estate has failed to adequately explain the services RSG&C

provided to the estate and has not shown that $125,000 was a

reasonable and necessary expense. Accordingly, respondent’s

determination with respect to the investment management fees is

sustained.

Conclusion

In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.