Estate of McCoy v. Comm'r ( 2009 )

T.C. Memo. 2009-61
UNITED STATES TAX COURT
ESTATE OF JOHN DAVID MCCOY, DECEASED, MICHELE MCCOY, PERSONAL
REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5521-07. Filed March 19, 2009.
Charles R. Brown, for petitioner.
Mark H. Howard, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined a deficiency of
$412,330 in the estate tax of the Estate of John David McCoy.
The issue to be decided is whether the Federal and State estate
taxes due from John David McCoy’s (decedent) estate were required
to be allocated to property that would have otherwise passed to
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the surviving spouse, thereby reducing the marital deduction
under section 2056(b)(4)(A),1 or whether the estate taxes should
be allocated to the property included in decedent’s taxable
estate under Utah’s equitable apportionment law.2 We hold that
Utah’s equitable apportionment law applies and the marital
deduction is not reduced.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated herein by this reference. Decedent, a resident of
Utah, died on November 15, 2002. The estate’s personal
representative, Michele McCoy (Ms. McCoy), resided in Utah at the
time the petition was filed.
Decedent left an executed last will and testament dated May
25, 1994 (the will). On May 25, 1994, decedent also executed a
revocable living trust agreement for the John D. McCoy Trust
(sometimes referred to as the original trust agreement). The
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
2
In the petition the estate argued that respondent
erroneously denied a deduction of special attorney’s fees paid in
connection with the collection of estate taxes from beneficiaries
of life insurance proceeds included in decedent’s estate. The
estate did not produce any evidence regarding this issue at trial
and did not address the issue on brief. Accordingly, we deem the
estate to have conceded this issue and sustain respondent’s
adjustment to the attorney’s fees.
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will and the original trust agreement stated that decedent’s
spouse was Roxanne McCoy. However, at the time of his death
decedent was divorced from Roxanne McCoy and married to Ms.
McCoy. The will was not updated to reflect that Ms. McCoy was
decedent’s spouse at the time of his death.
Decedent had earned a living in the printing industry, in
real estate, and by leasing and operating the Heber, Utah,
airport. Because he had dyslexia, decedent had trouble
understanding and communicating with other people. Decedent and
Ms. McCoy discussed estate issues during the course of their
marriage but did not specifically discuss taxes or tax planning.
In planning his affairs decedent generally tried to minimize the
taxes he paid.
Shortly after decedent’s death, Ms. McCoy learned that
decedent had amended and restated the original trust agreement on
December 5, 1999 (the restated trust agreement). Decedent told
Ms. McCoy that he had been meeting with an attorney, Sara Henry,
regarding his estate. Ms. Henry drafted the restated trust
agreement and sent it to decedent for his review, and decedent
signed the draft without Ms. McCoy’s knowledge.
After decedent’s death Ms. McCoy spoke with Ms. Henry
regarding decedent’s estate. After they discovered how complex
the restated trust agreement was, Ms. Henry recommended that Ms.
McCoy hire a second attorney because Ms. Henry did not feel
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confident that she could prepare the estate tax return. Ms.
McCoy followed Ms. Henry’s recommendation and hired Tom
Christensen, who has practiced in the area of estates and trusts
for 32 years. Mr. Christensen prepared the estate tax return.
Article 2.1 of the will provides that all of decedent’s
tangible personal property, with several enumerated exceptions,
would pass to his wife. Article 3.1 of the will, entitled
“Disposition of Residue”, provides:
I give the residue of my estate to the trustee of the
John D. McCoy Trust, created under the declaration of
trust executed on May 25, 1994, by John D. McCoy as
settlor and trustee. The trustee of that trust shall
add the residue of my estate to the trust principal and
hold, administer, and distribute the property in
accordance with the provisions of that declaration of
trust, including any amendments of that declaration of
trust that have been made before or after execution of
this will.
The original trust agreement provided that if decedent was
survived by his wife, payment of estate taxes and other debts and
expenses were to be charged to the nonmarital share of the trust.
However, the restated trust agreement is not as clear.
Paragraph 5 states:
5. TRUSTEE’S AUTHORITY TO PAY EXPENSES, DEBTS AND
TAXES
The Trustee shall pay from the residue of the
trust estate prior to any distributions provided for
herein, all of the Settlor’s debts, expenses of last
illness, expenses of disposal of remains, all expenses
of administration and trust termination, including
attorneys’ fees, and shall pay all estate taxes, if
any, attributable to Settlor’s entire taxable estate.
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Paragraph 6 states in pertinent part:
6. DISTRIBUTIONS UPON SETTLOR’S DEATH
A. On the death of the Settlor and after all
payments are made pursuant to paragraph 5 above, the
Trustee shall distribute from the trust estate the
following specific bequests: * * * [specific bequests
to decedent’s children, grandchildren, and spouse
omitted]
* * * * * * *
B. Should Settlor be survived by MICHELE McCOY,
the rest, residue and remainder of the trust estate
shall remain in trust, to be held and distributed as
follows: * * * [Distribution directions omitted.]
Paragraph 6.B. provided for distributions of income and principal
solely for the benefit of Ms. McCoy. Nowhere in the restated
trust agreement or elsewhere is it stated expressly whether
paragraph 5 was intended to govern both the method of paying the
estate taxes and the manner in which the estate tax burden was to
be borne by the beneficiaries. Furthermore, the parties dispute
whether the “residue of the trust estate” discussed in paragraph
5 of the restated trust agreement is the residue of decedent’s
estate referred to in article 3.1 of the will or the residue of
the trust estate referred to in paragraph 6.B. of the restated
trust agreement.
Certain other property, such as life insurance and property
that decedent and Ms. McCoy jointly owned, passed outside the
will and trust according to the legal terms of the property.
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Decedent’s estate filed a Form 706, United States Estate
(and Generation-Skipping Transfer) Tax Return, on August 8, 2003.
The estate claimed a marital deduction of $3,933,725, which was
stated as the value of all of the assets of the gross estate
except those assets specifically passing to beneficiaries other
than Ms. McCoy. In determining the amount of estate tax, Mr.
Christensen charged the specific bequest beneficiaries other than
Ms. McCoy using equitable apportionment, generally by reducing
their shares for estate taxes before the shares were distributed.
On December 13, 2006, respondent issued to decedent’s estate
a statutory notice of deficiency determining that the estate’s
marital deduction should be reduced by $837,399 to $3,096,326,
resulting in a deficiency of $412,330. Respondent determined
that decedent’s estate improperly failed to reduce the value of
the property passing to Ms. McCoy by the amount of estate taxes
imposed on the estate. The Internal Revenue Service agent who
conducted the audit determined that the estate taxes should have
been paid out of the residue defined in paragraph 6.B. of the
restated trust agreement.
OPINION
I. The Marital Deduction
A tax is imposed on the transfer of the taxable estate of
every decedent who is a citizen or resident of the United States.
Sec. 2001(a). In computing the value of the taxable estate, an
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estate may generally deduct the value of any interest in property
that passes from the decedent to the decedent’s surviving spouse
to the extent that that property is included in determining the
value of the gross estate (marital deduction). However, the
marital deduction is reduced by estate, succession, legacy, or
inheritance taxes (estate taxes) allocable to the surviving
spouse’s interest. Sec. 2056(b)(4)(A). The issue in this case
is whether the estate taxes owed on the transfer of decedent’s
estate are allocable to the portion of the estate passing to Ms.
McCoy.
II. Burden of Proof
Deductions are a matter of legislative grace, and a taxpayer
generally bears the burden of proving entitlement to the
deductions claimed. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). This rule applies to the marital deduction.
The parties dispute whether section 7491(a)(1) applies to
shift the burden of proof to respondent. However, we need not
decide whether decedent’s estate has satisfied the requirements
under section 7491(a)(2) to shift the burden of proof to
respondent because no factual issue affects the outcome of this
case.
III. Utah Apportionment Law
State law governs the manner in which estate taxes are
apportioned to the assets included in a decedent’s gross estate.
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Riggs v. Del Drago, 317 U.S. 95, 98 (1942); Estate of Sawyer v.
Commissioner, 73 T.C. 1, 3 (1979). In this case Utah law governs
the apportionment of the estate’s taxes.
Utah Code Ann. sec. 75-3-916 (1993) provides, in pertinent
part:
(1) As used in this section:
* * * * * * *
(d) “Person interested in the estate” means any
person, including a personal representative,
conservator, guardian, or trustee entitled to receive,
or who has received, from a decedent while alive or by
reason of the death of a decedent any property or
interest in property included in the decedent’s taxable
estate.
(2) Unless otherwise provided in the will or other
dispositive instrument, the [estate] tax shall be
apportioned among all persons interested in the estate.
The apportionment shall be made in the proportion that
the value of the interest of each person interested in
the estate bears to the total value of the interests of
all persons interested in the estate. The values used
in determining the tax shall be used for that purpose.
If the decedent’s will or other dispositive instrument
directs a method of apportionment of tax different from
the method described in this code, the method described
in the will or other dispositive instrument controls.
[Emphasis added.]
The apportionment described in this statute is referred to as
“equitable apportionment”. Equitable apportionment is a rule
that estate taxes should be charged only to the property that
generates or creates the tax liability. Estate of Brunetti v.
Commissioner, T.C. Memo. 1988-517. Most State estate tax
apportionment statutes provide that this or a similar rule
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applies unless a contrary intent is clearly expressed in the
testator’s will or other documents. Id. Accordingly, the issue
we must decide is whether the will and the restated trust
agreement direct a method of apportioning the estate taxes that
is different from the method prescribed in the Utah code.3
IV. Analysis
Respondent argues that the equitable apportionment statute
does not apply because paragraph 5 of decedent’s restated trust
agreement clearly directs that the residue of the trust estate
described in paragraph 6.B. of the restated trust agreement,
which was created solely for the benefit of Ms. McCoy, should
bear the burden of the estate taxes. Respondent argues that
there is no ambiguity to be resolved using Utah law.
While it is possible that the residue discussed in paragraph
5 of the restated trust agreement refers to the residue discussed
in paragraph 6.B. of the restated trust agreement, we find that
it is at least as likely that it refers to the residue of
decedent’s estate described in article 3.1 of the will, which
includes all of the property passing by the will except for
personal property specifically given to decedent’s wife. The
fact that the payments referred to in paragraph 5 of the restated
3
The equitable apportionment statutes were added when Utah
adopted the Uniform Probate Code in 1975. Accordingly, cases
decided before that time, such as Thayn v. United States, 386 F.
Supp. 245 (D. Utah 1974), are not controlling.
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trust agreement were intended to be made before the rest of the
estate was divided according to paragraph 6 of the restated trust
agreement supports this construction. However, the fact that
decedent uses the term “residue” in both article 3.1 of the will
and paragraph 6.B. of the restated trust agreement creates an
ambiguity that cannot be resolved by looking at these provisions
alone.
Furthermore, it is not clear whether decedent intended these
provisions to govern the allocation of the taxes at all or
whether he merely intended them to be the source of the estate
tax payments. The restated trust agreement states that “The
Trustee shall pay from the residue of the trust estate prior to
any distributions provided for herein , * * * all estate taxes,
if any, attributable to Settlor’s entire taxable estate.”
(Emphasis added.) While decedent may have intended the word
“from” to indicate that the taxes were to be both charged to and
paid out of the residue, this intention is not as clear as the
statement in the original trust agreement that “If the settlor is
survived by his wife, payments under this section shall be
charged to the Nonmarital Share”. The restated trust agreement
provides no similar clear guidance as to whether the residue of
the restated trust agreement (whether the residue described in
the will or in paragraph 6.B. of the restated trust agreement) is
also to bear the burden of the estate tax. While it is possible
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that, as respondent argues, decedent intended for the residue of
the trust estate to both be the source of the estate tax payment
and bear the burden of the estate tax, we find that this intent
is not clear.
The Utah Supreme Court, in In re Estate of Huffaker, 641
P.2d 120, 121 (Utah 1982), directed:
there is a strong policy in favor of the equitable
allocation of the tax burden provided in the statute
prescribing apportionment, and that a direction to the
contrary in a will or other dispositive instrument must
be expressed in terms that are specific, clear, and not
susceptible of reasonable contrary interpretation.
In support of this statement the Utah Supreme Court cited, and
therefore implicitly approved of, cases from a number of other
States where the rule is that if there is any ambiguity as to how
the estate taxes are to be apportioned, the ambiguity should be
resolved in favor of apportionment. Bolstad v. Wells Fargo Bank
Am. Trust Co. (In re Estate of Armstrong), 366 P.2d 490, 494
(Cal. 1961) (“But running through the cases generally is the
thought that apportionment of the taxes is the general rule to
which exception is to be made only when there is a clear an
unambiguous direction to the contrary. Ambiguities are to be
resolved in favor of apportionment.”); Jackson v. Hubbard (Estate
of Carley), 153 Cal. Rptr. 528, 531 (Ct. App. 1979) (finding
unanimous agreement in the courts that equitable apportionment
applies unless “there is a clear and unambiguous direction to the
contrary either in the will or the trust agreement, and * * * any
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ambiguity appearing in the instrument must be resolved in favor
of apportionment”); New York Trust Co. v. Doubleday, 128 A.2d 192
(Conn. 1956) (discussed below); Hunter v. Manhan, 580 P.2d 474
(Nev. 1978) (applying proration in the absence of a clause
prohibiting it); In re Estate of Erieg, 267 A.2d 841 (Pa. 1970)
(discussed below); Zerbe v. Eggleston (In re Estate of Hilliar),
498 P.2d 1237, 1239 (Wyo. 1972) (“a directive against
apportionment should be expressed in clear and unambiguous
language.”); see also Hamilton v. Hamilton, 869 P.2d 971, 978
(Utah Ct. App. 1994) (quoting In re Estate of Huffaker, supra at
121, and stating that equitable apportionment will not apply
“only if there is specific and clear language in * * * [the
testator’s] will directing that the tax burden should be
otherwise divided.”).
We particularly note that the Utah Supreme Court cited New
York Trust Co. v. Doubleday, supra at 192, which presents a
situation very similar to ours. In that case the testator’s will
made certain legacies to his widow and other persons and then
left his remaining assets in a residuary estate. Id. at 193.
The residuary estate was to be divided into five parts, one part
to go to the testator’s widow and the other four to go to his
children and grandchildren. Id. The last paragraph of article
twelfth of the will provided:
“I direct my executors to pay from my residuary estate
all estate, inheritance, transfer, succession and other
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death taxes or other taxes in the general nature
thereof which may be payable with respect to any
property included in my gross taxable estate * * *”
Id. The parties agreed that under this clause all estate and
succession taxes were payable from the residuary estate,
including taxes on the specific legacies not included in the
residuary estate. However, the parties disputed how the actual
Federal estate tax should be borne within the residuary estate.
Id.
The children argued that the ninth article of the will
governed not only payment of the taxes but also how they should
be borne. They argued that the beneficiaries of each of the five
parts should bear one-fifth of the total tax, including the
widow, despite the fact that the widow’s share was exempt from
Federal estate tax. Id. at 196. The widow argued that
Connecticut’s proration statute applied. Like the Utah statute,
it provides that in the absence of a directive in the will to the
contrary, Federal and State estate taxes are equitably prorated
among the beneficiaries in proportion to the values of their
gifts, except that those whose legacies do not create or add to
the tax burden are not required to bear it. Id. at 196-197
(citing Jerome v. Jerome, 93 A.2d 139, 142 (Conn. 1952)).
The court found that the ninth article of the will only
directed the payment of the taxes and did not settle the question
of whether the residuary beneficiaries should bear the taxes
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equally or whether proration should apply: “The directive in the
will that all estate taxes be paid from the residue is not a
directive against the prorating of estate taxes among residuary
gifts.” New York Trust Co. v. Doubleday, supra at 196. The
court found that some doubt existed as to the testator’s
intention and the testator failed to speak clearly on the
question of proration. Id. Accordingly, the court found that
the will did not override the usual proration rule and that the
four nonmarital shares were required to bear all of the estate
tax burden. Id. at 196-197.
Similarly, in In re Estate of Erieg, supra at 842, also
cited with approval by the Utah Supreme Court, the testator left
all of his tangible personal property to his wife, then gave 67
percent of the residue of his estate to his widow and the
remaining 33 percent to his niece. The testator included a
clause that stated: “All taxes and interest and penalties
thereon payable by reason of my death with respect to property
comprising my gross taxable estate, whether or not passing under
this Will, shall be paid from my residuary estate.” Id. The
parties disagreed as to whether this meant that the widow and the
niece should each bear a portion of the estate taxes or whether
Pennsylvania’s proration statute, similar to Connecticut’s
proration statute and Utah’s equitable apportionment statute,
should apply. Id. at 843. The court agreed with the executor
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that the tax payment clause cited above did not trump the usual
proration rules:
We do not find that the directive in ITEM IV that
“[a]ll taxes * * * shall be paid from my residuary
estate,” provides the explicit expression of a contrary
intent necessary to render the statutory presumption
inapplicable. Both the executor’s and Jane Laher’s
[the niece] proposed methods of distribution would be
consistent with the direction that all taxes be paid
from the residue. The question in this case is not
whether the taxes are to be deducted from the residue,
but from whose share of the residue they should be
taken. And ITEM IV can hardly be said to contain any
guidance on this point.
Id. at 845.
Like the testators in these cases, decedent specified that
the residue was to be the source of the payment of the estate
taxes but failed to specify how the taxes were to be apportioned
between the beneficiaries of the residue. Furthermore, decedent
did not even clearly define what he meant by “residue”.
Respondent argues that the wording of the restated trust
agreement is similar to that found in cases such as Estate of
Fine v. Commissioner, 90 T.C. 1068 (1988), affd. without
published opinion 885 F.2d 879 (11th Cir. 1989), Estate of Miller
v. Commissioner, T.C. Memo. 1998-416, affd. without published
opinion 209 F.3d 720 (5th Cir. 2000), Estate of Lewis v.
Commissioner, T.C. Memo. 1995-168, and Estate of Lurie v.
Commissioner, T.C. Memo. 2004-19, affd. 425 F.3d 1021 (7th Cir.
2005), in which we found that equitable apportionment did not
apply because the testators’ wills unambiguously overrode the
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apportionment rules of those States (Virginia, Texas, New
Hampshire, and Illinois, respectively). In Estate of Fine v.
Commissioner, supra at 1070, 1074-1076, the Court found that the
testator specifically directed that the Virginia apportionment
statute would not apply because the testator’s will specifically
stated: “‘all such taxes [including estate taxes] are to be paid
out of the residuary estate without apportionment’.” (Emphasis
added.) Similarly, in Estate of Miller v. Commissioner, supra,
the testator’s will stated: “‘[estate taxes] shall be borne by
my residuary estate. Such payment shall be made as an expense of
administration without apportionment and without contribution or
reimbursement from anyone whomsoever’”. (Emphasis added.)
Also similarly, in Estate of Lewis v. Commissioner, supra, the
testator’s will stated: “estate taxes * * * shall be paid out of
the residue of my estate without apportionment and with no right
of reimbursement from any recipient of any such property’”.
(Emphasis added.)
In Estate of Lurie v. Commissioner, supra, the Court found
that Illinois equitable apportionment law did not apply and the
testator intended for estate taxes to be paid from the residuary
probate estate or a revocable trust (which would benefit the
surviving spouse) but not from other “notice” trusts (which would
benefit other beneficiaries). The testator’s will provided that
estate taxes were to be paid from the testator’s residuary
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estate. If the testator’s estate was insufficient, the revocable
trust instrument provided that the taxes should be “charged”
against the principal of the trust and that such payments should
be made “without reimbursement from the Grantor’s Executor or
Administrator, from any beneficiary of insurance upon the
Grantor’s life, or from any other person”.
We find that the facts of the case before us more closely
resemble the facts set forth in New York Trust Co. v. Doubleday,
128 A.2d 192 (Conn. 1956), and In re Estate of Erieg, 267 A.2d
841 (Pa. 1970). Neither the will nor the restated trust
agreement contains the “without apportionment” language that the
Court found significant in the first three cases that respondent
cited. Furthermore, neither the will nor the restated trust
agreement specify whether the estate taxes should be “borne by”
or “charged against” the residue (whichever residue that may be),
or whether the residue should merely be the source of payment,
potentially entitled to reimbursement from the other
beneficiaries.
While the testator’s trust agreement in Estate of Lurie v.
Commissioner, supra, did not clearly specify whether
apportionment should apply, the Court found that such a specific
direction was not necessary to opt out of Illinois equitable
apportionment law because the Illinois apportionment law applies
only “if the decedent provided no direction * * * about payment
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of Federal estate tax”. Id. (emphasis added) (citing Fleming v.
Gowling (In re Estate of Gowling), 411 N.E.2d 266, 269 (Ill.
1980), and Roe v. Estate of Farrell, 372 N.E.2d 662, 665 (Ill.
1978)). By contrast, given the Utah Supreme Court’s approval of
New York Trust Co. and In re Estate of Erieg, under Utah law a
payment clause alone does not meet the standard set out in In re
Estate of Huffaker, 641 P.2d at 121, that a direction to opt out
of Utah’s equitable apportionment statute “must be expressed in
terms that are specific, clear, and not susceptible of reasonable
contrary interpretation.” See also Estate of Brunetti v.
Commissioner, T.C. Memo. 1988-517 (applying the California
equitable apportionment statute even though the testator’s will
provided that estate taxes were to be paid out of the residue of
the testator’s estate “without apportionment” because of the
strong presumption that equitable apportionment applies absent a
clear and unambiguous direction to the contrary). Because the
restated trust agreement does not specify how the estate taxes
should be apportioned and does not specify which residue those
taxes should be paid from, we find that equitable apportionment
applies.4
4
The parties dispute whether we should consider extrinsic
evidence. Respondent argues that extrinsic evidence is not
necessary because the will and the restated trust agreement
unambiguously provide that the estate taxes are to be borne by
Ms. McCoy’s share of the estate. The estate argues that under
Utah law extrinsic evidence is admissible to show that a
(continued...)
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Accordingly, we need not address the parties’ alternative
arguments.
On the basis of the foregoing,
Decision will be entered
under Rule 155.
4
(...continued)
provision in a document is ambiguous. See Gillmor v. Macey, 121
P.3d 57, 70 (Utah Ct. App. 2005). We need not address these
arguments because we find the will and the restated trust
agreement fail on their face to direct the apportionment of
estate taxes, and the little extrinsic evidence that is available
supports our conclusion that decedent did not intend to direct
the apportionment of estate taxes in his testamentary documents.
The facts that (1) Ms. Henry was not experienced in the area of
estate tax planning, (2) decedent had no background in estate tax
planning, (3) decedent had difficulty communicating with and
understanding others, and (4) decedent generally tried to
minimize the taxes he paid but did not discuss tax matters with
his wife when discussing estate planning, all indicate that
decedent most likely gave no consideration to which portion of
his estate would bear the burden of the estate taxes under the
restated trust agreement. If he had been aware of the issue, it
appears he most likely would have directed the apportionment of
the estate taxes as he did in the original trust agreement.