Estate of Mary P. Bolles, John T. Bolles v. Commissioner , 2020 T.C. Memo. 71 ( 2020 )

T.C. Memo. 2020-71UNITED STATES TAX COURT
ESTATE OF MARY P. BOLLES, DECEASED,
JOHN T. BOLLES, EXECUTOR, Petitioner v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket No. 4803-15. Filed June 1, 2020.
William E. Taggart, Jr., and Josh P. Davis, for petitioner.
Andrew R. Moore, and Michael Skeen, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Mary Bolles died on November 19, 2010. Her son John
filed a Federal estate tax return, and respondent determined a deficiency in estate
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[*2] tax of $1,152,356.1 In this opinion we refer to Mary Bolles by her name or as
decedent. We refer to her sons, John and Peter, by their first names.
This case has a long procedural history during which related cases asserting
gift tax liability were dismissed and petitioner filed numerous motions attempting
unsuccessfully to remove any consideration of whether Mary made gifts to Peter
from the docket before us. At trial respondent conceded the primary issue in the
notice of deficiency, whether the estate had undervalued Peter’s debt, and asserted
the alternative position from the notice. Accordingly, the issue remaining in
dispute is whether advances totaling $1,063,333 that Mary made over many years
to Peter should be treated as loans or as gifts. Each side sees the answer as totally
one way. We disagree with both parties as we explain herein.
FINDINGS OF FACT
When John timely filed the petition, he was a resident of California. The
evidence in this case consists of stipulated facts, documents admitted by
stipulation, and testimony. The facts stated in the two stipulations of fact are
incorporated in our findings.
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code as amended and in effect at all relevant times, and all Rule
references are to the Tax Court Rules of Practice and Procedure. Amounts are
rounded to the nearest dollar.
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[*3] A loving mother of her five children, Mary was determined to provide her
assets to her children equally. Her practice was to keep a personal record of her
advances and occasional repayments for each child. On the basis of her original
intent and the advice of her tax counsel, she treated the advances as loans. She
forgave the “debt” account of each child every year on the basis of the gift tax
exemption amount. Her practice would have been noncontroversial but for the
substantial funds she advanced to Peter.
Mary married John Savage Bolles in 1935, and they divorced in 1977.
Decedent and John Savage Bolles established the Bolles Trust in connection with
the dissolution of their marriage to hold some of their jointly owned property,
including their substantial art collection and an office building in San Francisco.
At the time of her death Mary and her five children were among the beneficiaries
of the Bolles Trust. John Savage Bolles died in 1983.
Peter was the oldest of their five children. He graduated from college with a
degree in architecture in 1965. On the basis of his academic achievements and his
father’s reputation as an architect in San Francisco, Peter’s professional career
showed great promise. He began his career in Boston. He took over his father’s
architecture practice in San Francisco in the early 1970s and enjoyed some early
success in attracting clients. Peter expanded the practice through the 1970s into
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[*4] the early 1980s; but despite his salesmanship he began to have financial
difficulties largely because his expectations exceeded realistic results. By 1983
Peter’s practice was not current on its bills. In July 1983 Peter, as president of
Bolles Associates and Peter B. Bolles, P.A., entered into an agreement with the
Bolles Trust to use trust property as security for $600,000 in bank loans. The
agreement also reflects that the Bolles Trust was owed $159,828 in back rent by
Peter’s practice. Within a year Peter had failed to meet the obligations of the
agreement, and the Trust was ultimately held liable for the $600,000. Mary had
contemporaneous knowledge of these events.
Mary transferred $1,063,333 to or for the benefit of Peter from 1985
through 2007. The annual amounts are shown below:
Year Annual amount
1985 $7,000
1986 98,121
1987 35,500
1988 155,500
1989 40,500
1990 89,075
1991 105,682
1992 210,126
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[*5] 1993 24,780
1994 10,685
1995 833
1996 3,750
1997 8,850
1998 14,750
1999 40,790
2000 24,200
2001 22,450
2002 43,653
2003 44,650
2004 72,390
2005 7,200
2006 ---
2007 3,348
We note these numbers exceed the amount in dispute by $500, but respondent has
conceded this additional amount.
Peter did not repay decedent after 1988 although he did hold gainful
employment for many years after that and attempted to revive his practice in Las
Vegas.
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[*6] Decedent directly transferred money to Peter, deposited money into
accounts to which Peter had access, and made payments on loans taken out by
Peter. Decedent also issued a letter to American Asian Bank in September 1986
allowing Bolles Associates to withdraw funds totaling $27,121 to pay interest on a
loan. Later, in April 1992 decedent paid $196,928 to settle the balance of a bank
loan Peter owed.
Decedent was the settlor of the Mary Piper Bolles Revocable Trust dated
October 27, 1989. Under the revocable trust decedent specifically excluded Peter
from any distribution of her estate upon her death.
In late 1994 or early 1995 decedent began working with Karen Hawkins, an
attorney who assisted decedent in organizing her financial affairs and prepared
various documents for decedent, including estate planning documents. As part of
her estate planning, decedent signed a “First Amendment to Mary Piper Bolles
Trust” (First Amendment) which, in article five, “Distributions After Settlor’s
Death”, no longer explicitly excluded Peter from any distribution but provided a
formula to account for the “loans” made to him during Mary’s lifetime.
Among the documents Ms. Hawkins drafted was a one-page document
captioned “Acknowledgement [sic] and Agreement Regarding Loans”
(Acknowledgment). The Acknowledgment is dated May 3, 1995, and signed by
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[*7] Peter. The Acknowledgment recites that Peter “has received, directly or
indirectly, loans from Mary Piper Bolles in a total amount of $771,628” and as of
May 3, 1995, “he has neither the assets, nor the earning capacity, to repay all, or
any part, of the amount previously loaned, directly or indirectly, to the
undersigned by Mary Piper Bolles.” As a result Peter “acknowledges and agrees”
that,
irrespective of the uncollectability or unenforceability of the said
loans, or any portions thereof, the entire amount specified
hereinabove, $771,628.00, plus an imputed amount of interest
thereon, computed at the Applicable Federal Rate for short-term
indebtedness determined as of the end of each calendar year, shall be
taken into account for purposes of any and all calculations to be made
pursuant to Article Five, paragraph 5.3, of the First Amendment to
Mary Piper Bolles Revocable Trust executed on November 8, 1994.
Contrary to the recital in the Acknowledgment, the First Amendment was
not executed until August 27, 1996. The calculations found in article five of the
First Amendment describe the manner in which advances, described as loans, are
to be taken into account in dividing the trust assets among decedent’s children
upon her death. In essence, under subparagraph (b), the value of the trust assets
after allowance for expenses such as estate tax is divided equally; however, each
child’s share is reduced, and that amount redistributed pro rata among the other
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[*8] beneficiaries, by the amount of the child’s outstanding loans, if any, plus
accrued interest.
The explanation of adjustments to the notice of deficiency states:
I. Schedule C, Items 2 and 3
It is determined that the fair market value of the Promissory Note and
receivable due from Peter P. Bolles under IRC section 2031 is
$1,063,333 instead of zero as reported and that interest on the
Promissory Note and receivable is includible in the gross estate under
IRC section 2033 in the amount of $1,165,778. Therefore, the value
of the gross estate is increased by $2,229,111.
II. Adjusted Taxable Gifts
In the event it is determined that the fair market value under IRC
section 2031 of the Promissory Note and receivable from Peter Bolles
and interest on the Promissory Note and receivables is zero then it is
determined that Mary P. Bolles transferred property to Peter Bolles
during her life such that “adjusted taxable gifts” in the amount of
$1,063,333 is included in computing taxpayer’s estate tax liability
under IRC section 2001(b).
OPINION
Respondent has conceded the primary position in the notice of deficiency
that the estate tax return undervalued the debt from Peter and now relies solely on
the alternative argument that Mary’s advances to Peter were gifts. The first
question presented by the alternative argument is whether interest on the advances
may be included in the adjustment such that the adjustment exceeds the amount
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[*9] stated in the notice of deficiency’s explanation of the alternative adjustment.
The inclusion of interest on the alleged gifts is not stated in the notice of
deficiency or the answer. Also, respondent has not amended his answer to expand
the simple text of the notice of deficiency. While the alternative position in the
notice of deficiency is at issue, there is no procedural basis to expand that position
beyond its own terms and only $1,063,333 is at issue.
The second issue is petitioner’s argument that under Rule 142 respondent
has the burden of proof on the gift issue. While petitioner’s position has merit, we
do not need to resolve the issue because the evidence in this case permits a
resolution on the record of trial, and we do not rely on the burden of proof to
decide this case.
Finally, we address the issue of whether the advances were loans or gifts.
Both parties rely on the analysis of Miller v. Commissioner, T.C. Memo. 1996-3,
aff’d, 113 F.3d 1241 (9th Cir. 1997), for the traditional factors used to decide
whether an advance is a loan or a gift. Those factors are explained as follows:
(1) there was a promissory note or other evidence of indebtedness, (2) interest was
charged, (3) there was security or collateral, (4) there was a fixed maturity date,
(5) a demand for repayment was made, (6) actual repayment was made, (7) the
transferee had the ability to repay, (8) records maintained by the transferor and/or
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[*10] the transferee reflect the transaction as a loan, and (9) the manner in which
the transaction was reported for Federal tax purposes is consistent with a loan.
These factors are not exclusive. See, e.g., Estate of Maxwell v.
Commissioner, 98 T.C. 594 (1992), aff’d, 3 F.3d 591 (2d Cir. 1993). In the case
of a family loan, it is a longstanding principle that an actual expectation of
repayment and an intent to enforce the debt are critical to sustaining the tax
characterization of the transaction as a loan. Estate of Van Anda v.
Commissioner, 12 T.C. 1158, 1162 (1949), aff’d per curiam, 192 F.2d 391 (2d Cir.
1951).
While Mary recorded the advances to Peter as loans and kept track of
interest, there were no loan agreements or attempts to force repayment.
Respondent focuses on the lack of security for the loans to Peter. We agree that
the reasonable possibility of repayment is an objective measure of Mary’s intent.
The estate maintains that during her life Mary always considered these advances
as loans. We cannot reconcile this argument with the deterioration of Peter’s
financial situation and the ultimate failure of his practice in San Francisco and
later in Las Vegas.
Peter’s creativity as an architect and his ability to attract clients likely
impressed Mary. We find she expected him to make a success of the practice as
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[*11] his father had, and she was slow to lose that expectation. However, it is
clear she realized he was very unlikely to repay her loans by October 27, 1989,
when her trust provided for a specific block of Peter’s receipt of assets at the time
of her death. Accordingly, in 1990 the “loans” lost that characterization for tax
purposes and became advances on Peter’s inheritance from Mary. In conclusion,
we find the advances to Peter were loans through 1989 but after that were gifts.
We have considered whether she forgave any of the prior loans in 1989, but we
find that she did not forgive the loans but rather accepted they could not be repaid
on the basis of Peter’s financial distress.
In reaching our holding, we have considered all arguments made, and, to the
extent not mentioned above, we conclude they are moot, irrelevant, or without
merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.