Estate of Wayne-Chi Young, Tsai-Hsiu Hsu Yang v. Commissioner

110 T.C. No. 24UNITED STATES TAX COURT
ESTATE OF WAYNE-CHI YOUNG, DECEASED,
TSAI-HSIU HSU YANG, EXECUTRIX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20139-94. Filed May 11, 1998.
Decedent and his wife Yang owned real property in
California, a community property State. Decedent's Federal
Estate Tax Return reported 50 percent of the date of death
value of the property as decedent's interest therein under
sec. 2033, I.R.C., and then claimed a 15-percent fractional
interest discount under Propstra v. United States, 680 F.2d
1248 (9th Cir. 1982). After filing the estate tax return, P
obtained a State trial court decree which adjudicated
decedent's interest in certain property. R was not a party
to the State court proceeding. R determined that decedent
and Yang held the property as joint tenants with right of
survivorship, as stated in the deeds. Therefore, R
determined that decedent's gross estate included half the
value of the property under sec. 2040, I.R.C., and
disallowed the 15-percent fractional interest discount.
Held: The State trial court's decree does not bind
this Court for Federal estate tax purposes. Further, P has
failed to overcome the presumption of joint tenancy with
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right of survivorship created by the deeds under California
law.
Held, further: To deal with the inherent
characteristics of joint tenancy with right of survivorship,
sec. 2031, I.R.C., and sec. 2040, I.R.C., provide an
explicit approach to valuing joint tenancy. Fractional
interest discounts and lack of marketability discounts are
inapplicable to the valuation of joint tenancy under sec.
2040(a), I.R.C.
Held, further: P is liable for the addition to tax for
late filing under sec. 6651(a), I.R.C.
Lance M. Weagant and Randall D. Fowler, for petitioner.
Dwight M. Montgomery, for respondent.
WRIGHT, Judge: Respondent determined a deficiency of
$154,545 in petitioner's Federal estate tax and an addition to
tax under section 6651(a)1 in the amount of $38,636. After
concessions by the parties, the issues remaining are:
(1) Whether decedent's property interest in the Young
Property was an interest in joint tenancy or in community
property. We hold that decedent held the property in joint
tenancy.
(2) Whether a fractional interest discount or a lack of
marketability discount is applicable to the Young Property. We
hold that a discount is inapplicable.
1
All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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(3) Whether petitioner is liable for an addition to tax for
late filing under section 6651(a). We hold that petitioner is
liable.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated by this reference. Tsai-Hsiu Hsu Yang (Yang), also
known as Tsai-Hsiu Hsu Young, is executrix of the estate
(petitioner) of Wayne-Chi Young, deceased (decedent). Yang was
decedent's wife (collectively the Youngs). At all material
times, Yang and decedent were residents of the State of
California, a community property State. At all times relevant to
this case, neither decedent nor Yang was a citizen of the United
States, but they were residents of the United States.
Decedent died on June 28, 1989. At the time of decedent's
death, the executrix Yang knew that the assets of the estate
exceeded $1,200,000. On March 21, 1990, petitioner filed Form
4768, Application for Extension of Time To File a Return and/or
Pay U.S. Estate (and Generation-Skipping Transfer) Taxes,
requesting an extension of time to file the return and to pay the
estate tax to March 28, 1991. On April 11, 1990, respondent
approved petitioner's application for extension of time to file
and pay. Before March 28, 1991, petitioner filed a second Form
4768, requesting an additional extension to file the return and
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to pay the estate tax to March 28, 1992. On April 4, 1991,
respondent denied petitioner's application for extension of time
to file, but approved the application for extension to pay. On
September 6, 1991, petitioner filed the estate's Form 706, United
States Estate (and Generation-Skipping Transfer) Tax Return.
Wang, a certified public accountant, helped in petitioner's
filing of the return.
At the time of decedent's death, decedent and Yang owned the
following five real properties (collectively the Young Property),
each of which they had acquired by deed as husband and wife, as
joint tenants: (1) The Bixby Knolls Motel, located at 4045 Long
Beach Boulevard in Long Beach, California, which was purchased by
decedent and Yang on May 19, 1983; (2) a condominium located at
111 North Moore Avenue, #A, in Monterey Park, California, which
was purchased by decedent and Yang on February 18, 1986; (3) the
Oak Tree Inn located at 788 West Huntington Drive in Monrovia,
California, which was purchased by decedent and Yang on August
25, 1987; (4) a condominium located at 3507 Birkdale in El Monte,
California, which was purchased by decedent and Yang on September
2, 1988; and (5) a house located at 1635 Vallecito Drive in
Hacienda Heights, California, which was purchased by decedent and
Yang on March 13, 1989. At no time prior to decedent's death did
decedent or Yang execute a writing to change their legal title,
as husband and wife as joint tenants, in the properties.
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On decedent's estate tax return, petitioner excluded one-
half of the value of the Young Property, claiming decedent's
property interest in the Young Property was in the nature of
community property. Petitioner also claimed a fractional
interest discount of 15 percent on the Young Property, citing
Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982).
Respondent determined that petitioner was not entitled to the
fractional interest discount. The following table shows the
value of each Young property less the proportion of value
excluded from the gross estate as stated by petitioner and as
determined by respondent.
PROPERTY Petitioner's Respondent's
Calculations Determination
Value of Property Value of Property
(1)Bixby $565,000 $508,500
Knolls Hotel
(2) Condo- 193,000 193,000
Monterey
Park
(3) Oak Tree 3,300,000 3,300,000
Inn
(4) Condo- 160,000 160,000
El Monte
(5) House in 555,000 570,000
Hacienda
Heights
Less: 1/2 Community Interest 1/2 Interest
Less: Propstra Discount of None
15%
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Petitioner filed a spousal property petition in the Superior
Court of California, County of Los Angeles, alleging that the
Young Property was community property. After a hearing, the
Superior Court of California, County of Los Angeles, in a spousal
property order dated October 8, 1991, found that the Young
Property was "community property or quasi-community property
belonging one-half (1/2) to each spouse and passing one hundred
percent (100%) to TSAI-HSIU HSU YOUNG, the surviving spouse."
OPINION
Issue 1: Joint Tenancy or Community Property
It has been established that what constitutes an interest in
property held by a person within a State is a matter of State
law. Fernandez v. Wiener, 326 U.S. 340, 355-357 (1945); Poe v.
Seaborn, 282 U.S. 101 (1930). In Commissioner v. Estate of
Bosch, 387 U.S. 456 (1967), the Supreme Court held that State law
as announced by the highest court of the State is to be followed.
"If there [is] no decision by that court then federal authorities
must apply what they find to be the state law after giving
'proper regard' to relevant rulings of other courts of the State.
In this respect, it may be said to be, in effect, sitting as a
state court." Id. at 465 (citing Bernhard v. Polygraphic Co. of
Am., Inc., 350 U.S. 198 (1956)). On the other hand, once
property rights are determined under State law, Federal law is
utilized to decide the tax consequences. Aquilino v. United
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States, 363 U.S. 509, 512-513 (1960); Morgan v. Commissioner, 309
U.S. 78 (1940).
In this case with the Young Property being situated in
California, California property law determines the nature of
decedent's interest in the Young Property. Under California law,
a husband and wife may hold property as joint tenants,2 tenants
in common, or as community property.3 Cal. Civ. Code sec. 5104
(West 1984). However, property cannot be both joint tenancy and
community property, as these two types of interests are mutually
exclusive. Sandrini v. Ambrosetti, 244 P.2d 742, 750 (Cal. Dist.
Ct. App. 1952); Schindler v. Schindler, 272 P.2d 566, 568 (Cal.
Dist. Ct. App. 1954).
2
Joint Tenancy is defined as:
[a] joint interest owned by two or more persons in equal
shares, by a title created by a single will or transfer,
when expressly declared in the will or transfer to be a
joint tenancy, or by transfer from a sole owner to himself
or herself and others, or from tenants in common or joint
tenants to themselves or some of them, or to themselves or
any of them and others, or from a husband and wife, when
holding title as community property or otherwise to
themselves or to themselves and others or to one of them and
to another or others, when expressly declared in the
transfer to be a joint tenancy, or when granted or devised
to executors or trustees as joint tenants.
Cal. Civ. Code sec. 683 (West 1984).
3
Community property is defined as "property acquired by
husband and wife, or either, during marriage, when not acquired
as the separate property of either." Cal. Civ. Code sec. 687
(West 1982).
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Under California law, property acquired by spouses during
wedlock is statutorily presumed to be community property. Cal.
Civ. Code sec. 5110 (West 1986). However, where a husband and
wife take property by deed as joint tenants, the presumption of
community property is rebutted. Schindler v. Schindler, supra at
568; Siberell v. Siberell, 7 P.2d. 1003, 1005 (Cal. 1932).
Property held by husband and wife in joint tenancy form is
subject to a rebuttable presumption that the character of the
property is as set forth in the deed. Schindler v. Schindler,
supra at 568. The presumption created by the deed may be
rebutted by evidence that the character of the property was
changed or affected by an agreement or common understanding, or
inferred from the conduct and declarations of the spouses.
Estate of Herzog v. Commissioner, T.C. Memo. 1992-193 (citing
Estate of Blair v. Blair, 199 Cal. App. 3d 161, 244 Cal. Rptr.
627 (1988); Estate of Levine v. Levine, 125 Cal. App. 3d 701, 178
Cal. Rptr. 275 (1981); Estate of Wilson, 64 Cal. App. 3d 786, 134
Cal. Rptr. 749 (1976)). Parol evidence may be admitted to
establish that the real property was intended to be community
property though title was taken by husband and wife as joint
tenants. United States v. Pierotti, 154 F.2d 758, 762 (9th Cir.
1946). However, there must be a mutual intent of the spouses to
transmute their interests in the land into community property.
Petersen v. Commissioner, 35 T.C. 962, 967 (1961). When evidence
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is introduced indicating an intent to hold the property as
community property, we must decide whether petitioner's evidence
overcomes the presumption created by the form in which title was
taken. Id.In this case, each deed of the Young Property stated that
decedent and Yang took title as husband and wife, as joint
tenants. According to California law, this creates a rebuttable
presumption that the Young property was joint tenancy as stated
in the deeds. To rebut this presumption, petitioner relies on
the Superior Court of California's determination that the Young
Property was community property and on the surviving spouse's
testimony regarding the intent of the parties.
Superior Court Decree:
Following decedent's death, petitioner filed a spousal
property petition in the Superior Court of California, County of
Los Angeles. In the spousal order, the court found that the
Young Property was "community property or quasi-community
property belonging one-half (1/2) to each spouse and passing one
hundred percent (100%) to TSAI-HSIU HSU YOUNG, the surviving
spouse." Petitioner argues that the Spousal Property Order
entered by the Superior Court of the State of California
precludes respondent from arguing that the Young Property was
joint tenancy under California law.
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In determining the binding or persuasive effect of State
court decrees on Federal courts, interpreting the application of
State law, the Supreme Court has acknowledged that where State
law governs the ownership of property (as here), the State's
highest court is the best authority on its own law. Commissioner
v. Estate of Bosch, 387 U.S. 456, 465 (1967) (citing Erie R. Co.
v. Tompkins, 304 U.S. 64 (1938)). A Federal court in a Federal
estate tax controversy is not conclusively bound by a State trial
court's adjudication. Id. The ruling of an intermediate
appellate State court is not to be disregarded by a Federal court
unless it is considered that the State's highest court would
decide otherwise. Id. If there is no decision by the State's
highest court, the Federal court must do the best it can to
discern what such State's highest court would decide. Id.;
Estate of Rowan v. Commissioner, 54 T.C. 633, 636-639 (1970).
While a hearing occurred in regard to the petition, only the
final order was submitted into evidence in regard to the
California Superior Court's basis for its determination. Without
other evidence, we cannot rule out that respondent, if present at
the California Court, would have prevailed in opposing
petitioner's petition that the property was community property.
See Estate of Rowan v. Commissioner, supra at 638. The evidence
before us does not show that the proceeding in the Superior Court
was a bona fide, adversarial litigation. Therefore, we conclude
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that we are not bound by the Superior Court of California's
determination.
Intent of Parties:
Evidence is admissible to show that a husband and wife, who
took property as joint tenants, actually intended it to be
community property. Sears v. Rule, 163 P.2d 443, 449 (Cal.
1945); Tomaier v. Tomaier, 146 P.2d 905, 906 (Cal. 1944).
Separate property may be converted to community property by oral
agreement, proven by the acts and conduct of the parties in
dealing with the property; however, the evidence must be
sufficient to support a finding, adverse to record title.
Bernatas v. Honnert (In re Bernatas' Estate), 328 P.2d 539, 541
(Cal. Dist. Ct. App. 1958). A mistaken belief about the nature
of the property, or intent communicated to the other spouse about
converting the property from one form to another, without more,
will not rebut the presumption raised by the form of deed by
which such property was acquired by husband and wife. Edwards v.
Dietrich, 257 P.2d 750, 754 (Cal. Dist. Ct. App. 1953).
Petitioner primarily relies upon Yang's testimony. In her
written statement, Yang stated that she and decedent always
viewed the marital accumulations as "community property."
According to Yang, the Youngs thought the property was community
property.
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At trial, Yang stated that her understanding was that the
ownership of the property was such that "each one gets half."
Upon divorce, "each one gets a half." If Yang predeceased
decedent, then "he will become the executrix[or] or I could will
to him or to the children." In regard to managing the Oak Tree
Inn, Yang and decedent would hire a manager.
The Youngs were informed by real estate brokers that title
should be taken as joint tenancy in order to avoid probate.
However, at trial, Yang testified that she believed she relied on
the broker's advice, but in regard to the Bixby Knolls Hotel,
Yang could not remember whether the real estate broker told the
Youngs to hold title in joint tenancy. Yang testified that they
did not consult an attorney regarding title to the Young
Property. In regard to title, she "[figured] it's -- belong to
both of us."
Petitioner asserts that Yang's testimony at trial is
consistent with her written statements regarding the mutual
understanding and further asserts that no contrary evidence was
presented by respondent. First, we note it is petitioner's
burden to show that the Young Property was held other than as
stated in the deed. We are presented with Yang's statement that
"each one gets half." Petitioner did not present any other
testimony to support Yang's statements. In evaluating her
statements which were translated, we understand the language
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barrier created because Yang cannot read, write, or speak
English. However, we are not satisfied that Yang understood the
distinctions between community property and joint tenancy.
Considering the record, we do not find a mutual understanding
that decedent and Yang took title other than as stated in the
deed.
Transmutation Into Community Property:
In California, the law is settled that a husband and wife
may agree with respect to the character of the property which
they hold and may transmute their property from one status to
another by agreement. Estate of Brockway v. Commissioner, 18
T.C. 488, 496 (1952)(citing In re Watkins Estate, 16 Cal. 2d 793,
797, 108 P.2d 417 (1940)), affd. 219 F.2d 400 (9th. Cir. 1954);
Tompkins v. Bishop, 211 P.2d 14 (Cal. Dist. Ct. App. 1949). See
Cal. Civ. Code sec. 5110.710 (West 1983).4 To be valid, any such
transmutation of real property occurring after December 31, 1984,
must be made in writing by an express declaration and satisfy the
other requirements in California Civil Code section 5110.730
(West 1984).5 See Orr v. Petersen (Estate of Petersen), 34 Cal.
4California Civil Code sec. 5110.710 (West 1983) was later
repealed in 1993, but it was continued in California Family Code
sec. 850(b) (West 1994).
5
California Civil Code sec. 5110.730 was repealed and
continued without substantive change in California Family Code
sec. 852 (West 1994). California Family Code secs. 850 and 852
were operative January 1, 1994. Because decedent died in 1989,
(continued...)
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Rptr. 2d 449, 455 (Cal. Ct. App. 1994). An express declaration
requires "language which expressly states that the
characterization or ownership of the property is being changed."
Bolton v. MacDonald (In re Estate of MacDonald), 794 P.2d 911,
918 (Cal. 1990). On the other hand, transmutations occurring
before January 1, 1985, do not need to be written. Prior to
January 1, 1985, there was little in the way of requisite
formalities; all that was required was substantial credible and
relevant evidence. Weaver v. Weaver (In re Marriage of Weaver),
273 Cal. Rptr. 696, 699 (Cal. Ct. App. 1990) (citations omitted).
Out of the five properties constituting the Young Property,
only the Bixby Knolls Motel was purchased prior to January 1,
1985. Therefore, in regard to the other four properties, in
order for a transmutation to be valid, it must be made in a
writing by an express declaration. Petitioner admitted that at
no time prior to decedent's death in June of 1989, did decedent
or Yang execute a writing to change their legal title, as husband
and wife as joint tenants, in the properties. Further,
petitioner did not present any other writing which would satisfy
the express declaration requirement. We find that there was no
valid transmutation for the following parcels of the Young
Property, which were acquired after December 31, 1984: (1) Condo
5
(...continued)
California Civil Code secs. 5110.710 and 5110.730 are the
applicable sections.
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at Monterrey Park; (2) Oak Tree Inn; (3) condo in El Monte; and
(4) house in Hacienda Heights.
We reject petitioner's argument that the language in
decedent's will transmuted the property from joint tenancy into
community property. Petitioner points to the fact that
decedent's will makes no mention of joint tenancy property, but
refers to community property. Decedent's will was executed on
July 18, 1985. As of that date, only one of the five properties
making up the Young Property was owned by decedent and his wife.
Further, the language in the will does not meet the standard of
an "express declaration" to change characterization or ownership
of property. The will merely provides that all of decedent's
properties, both real and personal, be devised to Yang. This
provision and the provision referring to decedent's one-half
interest in the community property have no impact on decedent's
interest held in joint tenancy property. We find decedent's
failure to mention "joint tenancy"6 in his will to be of little
significance because under the law, joint tenancy cannot be
devised.
6
We note that decedent provided that inheritance, estate,
or other death taxes attributable to the probate estate and to
"any property or transfer of property outside my probate estate"
be paid. The language "property outside my probate estate"
implies that decedent's property might pass outside the probate
estate, which would cover joint tenancy with right of
survivorship.
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In regard to the Bixby Knolls Motel, which was purchased on
May 19, 1983, there was no evidence presented to establish that
decedent and Yang transmuted the Bixby Knolls Motel into
community property by an agreement, oral or written, prior to
January 1, 1985. There was no evidence presented to support a
finding that decedent and/or Yang intended to transmute the Bixby
Knolls Motel into community property.
Therefore, we find that the Youngs did not effectively
transmute the Young Property from joint tenancy into community
property.
Conclusion:
From the record, we conclude that the evidence presented by
petitioner has not overcome the presumption of joint tenancy.
Therefore, decedent and Yang held the Young Property as joint
tenants with the right of survivorship.
Issue 2: Discount Issue
Having determined that the Young Property was held in joint
tenancy under State law, we now turn to the Federal estate tax
aspects of the case. In determining an estate's tax liability,
the gross estate must be defined. 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
[sections 2031-2046], the value at the time of his death of all
property, real or personal, tangible or intangible, wherever
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situated." It provides that the time of valuation is at the date
of decedent's death (or the alternate valuation date as provided
by section 2032).
Value is "the price at which the property would change hands
between a willing buyer and a willing seller, neither being under
any compulsion to buy or to sell and both having reasonable
knowledge of relevant facts." United States v. Cartwright, 411
U.S. 546, 551 (1973); Estate of Hall v. Commissioner, 92 T.C.
312, 335 (1989); Estate of Heckscher v. Commissioner, 63 T.C.
485, 490 (1975); sec. 20.2031-1(b), Estate Tax Regs. The willing
seller and the willing buyer are hypothetical rather than
specific individuals or entities. Estate of Bright v. United
States, 658 F.2d 999, 1005-1006 (5th Cir. 1981). The
determination of value is to be made as of the valuation date,
and knowledge of unforeseeable future events that may have
affected the value cannot be attributed to the hypothetical buyer
or seller. Sec. 20.2031-1(b), Estate Tax Regs.
Real estate valuation is a question of fact to be resolved
on the basis of the entire record. Ahmanson Found. v. United
States, 674 F.2d 761, 769 (9th Cir. 1981); Estate of Fawcett v.
Commissioner, 64 T.C. 889, 898 (1975). After determining the
gross value of the property, there may be adjustments upward or
downward for such factors affecting value as minority discounts,
discounts for lack of marketability, control premiums, and
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fractional interest discounts.7 See Estate of Andrews v.
Commissioner, 79 T.C. 938 (1982) (discussing a minority
discount); Estate of Piper v. Commissioner, 72 T.C. 1062, 1084-
1086 (1979) (discussing a discount for lack of marketability for
stock); Estate of O'Keeffe v. Commissioner, T.C. Memo. 1992-210(discussing blockage discounts for works of art); Estate of
Salsbury v. Commissioner, T.C. Memo. 1975-333 (discussing control
premiums). Petitioner bears the burden to show that respondent
was incorrect in disallowing the fractional interest discount for
the Young Property. Rule 142(a).
Section 2031 directs attention to other sections to
determine what property, and to what extent, is included in the
gross estate. Section 2033 provides that there shall be included
in the value of the gross estate the value of all property to the
extent of the decedent's interest therein at the time of his
death. Because at death the decedent does not own an interest in
joint tenancy, section 2033 is inapplicable to joint tenancy.
Section 2040(a) provides in relevant part that the value of the
gross estate shall include the value of all property to the
extent of the interest therein held as joint tenants with the
7
Minority discount normally applies with respect to the
ownership of stock comprising less than 50 percent of the voting
stock of a closely held corporation, so the owner does not have
significant control over the operations. On the other hand, a
control premium may be applicable when the block of stock
represents control of the corporation.
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right of survivorship by the decedent and any other person,
except such part of the value that is attributable to the amount
of consideration in money or money's worth furnished by the
surviving joint tenant. Sec. 2040(a); sec. 20.2040-1(a), Estate
Tax Regs. In applying that exception, the entire value of
jointly held property is included in a decedent's gross estate
unless the executor submits facts sufficient to show that
property was not acquired entirely with consideration furnished
by the decedent, or was acquired by the decedent and the other
joint owner or owners by gift, bequest, devise, or inheritance.
Wilson v. Commissioner, 56 T.C. 579, 586 (1971); sec.
20.2040-1(a)(2), Estate Tax Regs. If part of the consideration
is found to have been contributed by the surviving joint tenant,
then the part of the value of the property as is proportionate to
such consideration is excluded from the decedent's gross estate.
Sec. 20.2040-1, Estate Tax Regs.
Notwithstanding section 2040(a), section 2040(b) provides
that in the case of any qualified joint interest, the value
included in the gross estate is one-half of the value of the
qualified joint interest. Section 2040(b)(2)(B) defines
qualified joint interest to include property held by the decedent
and the decedent's spouse as joint tenants with right of
survivorship, but only if the decedent and the spouse of the
decedent are the only joint tenants. However, section
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2056(d)(1)(B) provides that if the surviving spouse of the
decedent is not a citizen of the United States, section 2040(b)
shall not apply.
Having determined that the Young Property was held in joint
tenancy, section 2040, along with section 2031, is applicable.
Yang, the surviving spouse of decedent, held the Young property
in joint tenancy with decedent. Because Yang is not a citizen of
the United States, section 2056(d)(1)(B) applies, making section
2040(b) inapplicable. Instead, section 2040(a) is applicable.
During trial and respondent's opening brief, respondent
relied on the application of section 2040(b). In the reply
brief, respondent noted the mistake of relying on section 2040(b)
and stated that section 2040(a) is applicable. In order to avoid
prejudice to petitioner, respondent concedes the value of the
joint tenancy included in the gross estate to be one-half of the
entire value of the Young Property, not the full value.8
Normally, section 2040(a) starts with the full inclusion of
the value of the joint tenancy in the gross estate of the first
joint tenant to die. In order to reduce this inclusion, there is
a strict tracing of contributions by the surviving joint tenant.
Because petitioner and respondent were relying at trial upon the
application of section 2040(b), the record that they presented
8
While respondent noted the mistake on reply brief, during
opening statement at trial, petitioner's counsel acknowledged the
interplay of sec. 2040(b) and sec. 2056(d)(1)(B).
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does not enable us to determine the contributions of the spouses
as contemplated under section 2040(a). In light of respondent's
concession that the valuation of the joint tenancy in decedent's
gross estate is to be one-half, we shall assume that Yang, the
surviving spouse, traced one-half of the contributions for the
Young Property.
Both parties have agreed on the value of each entire parcel
included in the Young Property: (1) Bixby Knolls Hotel $508,500;
(2) Condo - Monterey Park $193,000; (3) Oak Tree Inn $2,750,000;
(4) Condo - El Monte $160,000; and (5) House - Hacienda Heights
$555,000. The dispute between the parties that we must resolve
is whether, and to what extent, a fractional interest discount or
a lack of marketability discount, which has been allowed in
regard to tenancy in common and community property, should be
applied to decedent's property held in joint tenancy with right
of survivorship.
Petitioner argues that section 2040 is an includability
section, determining the interest in the gross estate, not a
valuation section. Petitioner notes that section 2040, like
section 2033, contains the language "to the extent of the
interest therein". After determining the inclusion of property
under section 2033 or 2040, petitioner argues that sections 2031,
2032, and 2032A determine the value. Therefore, with the same
goal in sections 2033 and 2040, petitioner argues that the
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language of section 2040 cannot be construed to prohibit
fractional interest discounts and lack of marketability
discounts, while such valuation discounts have been allowed under
section 2033.
In cases dealing with section 2033, the rationale for a
fractional interest discount is based on the rights of the
tenants in common under local law, arising from the unity of
interest and unity of possession. A fractional interest discount
may be appropriate when a partial interest in property would sell
for less than its proportionate share. Estate of Iacono v.
Commissioner, T.C. Memo. 1980-520. For example, decedent owns
Real Property A with X as tenants in common. While decedent has
an undivided one-half interest in the property, a willing buyer
may discount the value of decedent's interest in Property A due
to the fact that a buyer of such interest would own the property
concurrently with the other tenant in common, and as such, there
is the inconvenience of dealing with several owners, partition
suits, and potential disagreements among the owners. See Estate
of Barclay v. Commissioner, 2 B.T.A. 696 (1925); Estate of Youle
v. Commissioner, T.C. Memo. 1989-138. Discounts for lack of
marketability arise from the inherent difficulty in the sale of
the asset.
In arguing for the application of fractional interest
discounts and/or lack of marketability discounts in the context
- 23 -
of section 2040, petitioner primarily relies on the Court of
Appeals for the Ninth Circuit's decision in Propstra v. United
States, 680 F.2d 1248 (9th Cir. 1982), where a fractional
interest discount was allowed for community property under
section 2033.
In Propstra, the Ninth Circuit upheld a 15-percent discount
in the value of the decedent's undivided one-half interest in
real property held as community property. Id. at 1253. The
court noted that the Federal estate tax is an excise tax, levied
on the privilege of transferring property at death. Id. at 1250
(citing Estate of Bright, 658 F.2d 999, 1001 (5th Cir. 1981)).
The amount to be taxed is valued by the property actually
transferred, rather than what is owned by the decedent before
death, or the interest held by the legatee after death. Id. The
Government argued that under a unity of ownership theory, a
fractional interest discount was inapplicable because "one can
reasonably assume that the interest held by the estate will
ultimately be sold with the other undivided interest and that
interest's proportionate share of the market value of the whole
will thereby be realized." Id. at 1251. After considering the
language of section 2031 and section 2033, the court was
unwilling to impute "unity of ownership" principles for valuation
purposes. Id. Further, the court looked at the "willing seller"
- 24 -
as a hypothetical seller, rather the estate or any of decedent's
beneficiaries. Id. at 1251-1252.
In Propstra, the court allowed a fractional interest
discount for community property. Contrary to petitioner's
arguments, we find the situation presented in Propstra is not
analogous to the current situation involving joint tenancy.
First, Propstra dealt with section 2033, which provides that
the value of the gross estate shall include the value of all
property to the extent of the interest therein held by the
decedent at the time of his death, and not section 2040, the
relevant provision in our case. Section 2033 looks to the
interest held by the decedent at his death. With community
property, each spouse owns a present vested one-half interest in
the community property. Their respective interests in such
property are individually wholly owned (that is, separate
property), so that the decedent has no interest, title or
ownership, marital or otherwise, in the other's interest in the
community property. As a result under section 2033, one-half of
the value of property held as community property (that being the
decedent's interest in the property) is includable in a
decedent's gross estate, and the surviving spouse's one-half of
the value is excluded from decedent's gross estate. In light of
this, Propstra v. United States, supra, looked at the undivided
one-half interest held by the decedent at his death.
- 25 -
On the other hand, joint tenancy is a distinct property
interest from tenancy in common and community property.9 The
right of survivorship is the chief characteristic that
distinguishes a joint tenancy from other interests in property.
United States v. Jacobs, 306 U.S. 363, 370 (1939); Zeigler v.
Bonnell, 126 P.2d 118, 120 (Cal. Dist. Ct. App. 1942). While a
joint tenancy may be severed by mutual agreement or by a
conveyance by one of the joint tenants during the lives of the
joint tenants, the decedent cannot devise property held by the
decedent and another in joint tenancy. Estate of Sullivan v.
Commissioner, 175 F.2d 657 (9th Cir. 1949), revg. 10 T.C. 961(1948). Joint tenancy has been characterized as a specialized
form of a life estate, with what amounts to a contingent
remainder in the fee, the contingency being dependent upon which
joint tenant survives. Id. The surviving joint tenant does not
secure that right from the deceased joint tenant, but from the
devise or conveyance by which the joint tenancy was first
created. At the time of decedent's death, decedent's interest in
the property is extinguished, with the joint tenancy
automatically passing to the surviving joint tenant by the
operation of law, avoiding the need for probate.
9
For example, tenants in common own an undivided fraction
of the whole property held as tenancy in common. On the other
hand, joint tenants own the whole property subject to the rights
of the others.
- 26 -
In order to include property held by a decedent in joint
tenancy in the decedent's gross estate, Congress enacted section
202(c) in the Revenue Act of 1916, ch. 463, 39 Stat. 756,10 the
predecessor of the current section 2040.11 The enactment of the
10
Sec. 202(c) of the Revenue Act of 1916, ch. 463, 39
Stat. 756, 778, provided that the gross estate included:
SEC. 202(c). To the extent of the interest therein held
jointly or as tenants in the entirety by the decedent and
any other person, or deposited in banks or other
institutions in their joint names and payable to either or
the survivor, except such part thereof as may be shown to
have originally belonged to such other person and never to
have belonged to the decedent.
For the purpose of this title stock in a domestic
corporation owned and held by a nonresident decedent shall
be deemed property within the United States, and any
property of which the decedent has made a transfer or with
respect to which he has created a trust, within the meaning
of subdivision (b) of this section, shall be deemed to be
situated in the United States, if so situated either at the
time of the transfer or the creation of the trust, or at the
time of the decedent's death.
11
Sec. 2040(a) reads as follows:
SEC. 2040(a). General Rule.--The value of the gross estate
shall include the value of all property to the extent of the
interest therein held as joint tenants with right of
survivorship by the decedent and any other person, or as
tenants by the entirety by the decedent and spouse, or
deposited, with any person carrying on the banking business,
in their joint names and payable to either or the survivor,
except such part thereof as may be shown to have originally
belonged to such other person and never to have been
received or acquired by the latter from the decedent for
less than an adequate and full consideration in money or
money's worth: Provided, That where such property or any
part thereof, or part of the consideration with which such
property was acquired, is shown to have been at any time
acquired by such other person from the decedent for less
(continued...)
- 27 -
Federal estate tax was part of the Revenue Act of 1916, ch. 463,
39 Stat. 756; the act's main purpose was to raise revenue. Since
its origin in 1916, the provision including joint tenancy in the
gross estate, now incorporated in section 2040(a), has remained
substantially unchanged.12
11
(...continued)
than an adequate and full consideration in money or money's
worth, there shall be excepted only such part of the value
of such property as is proportionate to the consideration
furnished by such other person: Provided further, That where
any property has been acquired by gift, bequest, devise, or
inheritance, as a tenancy by the entirety by the decedent
and spouse, then to the extent of one-half of the value
thereof, or, where so acquired by the decedent and any other
person as joint tenants with right of survivorship and their
interests are not otherwise specified or fixed by law, then
to the extent of the value of a fractional part to be
determined by dividing the value of the property by the
number of joints tenants with right of survivorship.
12
In 1919, sec. 202(c) was renumbered sec. 402(d), and the
second paragraph dealing with stock in a domestic corporation was
deleted. In the Revenue Act of 1921, ch. 134, sec. 402(d), 42
Stat. 227, 278, sec. 402(d) read as follows:
SEC. 402(d). To the extent of the interest therein held
jointly or as tenants in the entirety by the decedent and
any other person, or deposited in banks or other
institutions in their joint names and payable to either or
the survivor, except such part thereof as may be shown to
have originally belonged to such other person and never to
have been received or acquired by the latter from the
decedent for less than a fair consideration in money or
money's worth: Provided, That where such property or any
part thereof, or part of the consideration with which such
property was acquired, is shown to have been at any time
acquired by such other person from the decedent for less
than a fair consideration in money or money's worth, there
shall be excepted only such part of the value of such
property as is proportionate to the consideration furnished
by such other person: Provided, further, That where any
(continued...)
- 28 -
The constitutionality of the inclusion of the full value of
a joint tenancy in decedent's gross estate has been addressed by
the Supreme Court. In holding that the full value of a joint
tenancy and a tenancy in the entirety may constitutionally be
included in decedent's gross estate, the Supreme Court said:
The question * * * is, not whether there has been, in
the strict sense of that word, a "transfer" of the property
by the death of the decedent, or a receipt of it by right of
succession, but whether the death has brought into being or
ripened for the survivor, property rights of such character
as to make appropriate the imposition of a tax upon that
result (which Congress may call a transfer tax, a death duty
or anything else it sees fit), to be measured, in whole or
in part, by the value of such rights.
* * * * * * *
At * * * [the joint tenant's] death, however, and because of
it, * * * [the survivor], for the first time, became
entitled to exclusive possession, use and enjoyment; she
ceased to hold the property subject to qualifications
imposed by the law * * *. Thus the death of one of the
parties to the tenancy became the "generating source" of
important and definite accession to the property rights of
the other.
12
(...continued)
property has been acquired by gift, bequest, devise, or
inheritance, as a tenancy in the entirety by the decedent
and spouse, or where so acquired by the decedent and any
other person as joint tenants and their interests are not
otherwise specified or fixed by law, then to the extent of
one-half of the value thereof; * * * [Emphasis added to show
the added language by the Revenue Act of 1921]
The purpose of the added language was to "remove uncertainties in
the existing law relating to the interests held jointly or as
tenants in the entirety." S. Rept. 275, 67th Cong., 1st Sess.
(1921), 1939-1 C.B. (Part 2) 181, 198.
In 1924, the provision was renumbered sec. 302(e), and it
was "reworded to secure greater clarity." S. Rept. 398, 68th
Cong., 1st Sess. (1924), 1939-1 C.B. (Part 2) 266, 290. In the
1939 Code, the provision became sec. 811(e)(1). Then in 1954,
the provision became sec. 2040(a).
- 29 -
Tyler v. United States, 281 U.S. 497, 503-504 (1930). The
possession by the decedent of the right of survivorship justifies
the inclusion in the decedent's gross estate due to its
"generating source."
Congress has the power to levy a tax upon the occasion of a
joint tenant's acquiring the status of survivor at the death of
the other joint tenant. United States v. Jacobs, 306 U.S. 363,
367 (1939).
[The] termination of a joint tenancy marked by a change in
the nature of ownership of property was designated by
Congress as an appropriate occasion for the imposition of a
tax. * * * It is immaterial that Congress chose to measure
the amount of the tax by a percentage of the total value of
the property, rather than by a part, or by a set sum for
each such change. The wisdom both of the tax and of its
measurement was for Congress to determine.
Id. at 371.
In arguing that section 2040 is a mere includability
section, petitioner focuses on the language in "to the extent of
the interest therein." According to petitioner, section 2040
merely determines the interest to be included in decedent's gross
estate. In light of similar language in section 2033, petitioner
argues that discounts should be available to joint tenancy under
the valuation provision of section 2031.
We think petitioner's focus is incomplete. In addition to
the cited language, section 2040(a) also provides the following
introductory language: "The value of the gross estate shall
include the value of all property to the extent of the interest
- 30 -
therein held as joint tenants with right of survivorship by the
decedent and any other person". (Emphasis added.) While
petitioner categorizes section 2031 as the only section to
determine value and section 2040 as a mere inclusion section, we
conclude that determining value is dependent on examining both
section 2031 and section 2040.
Section 2031 provides the starting point, but it is very
broad. In section 2031's accompanying regulations, we learn that
value is determined by looking at the willing buyer and the
willing seller, which then needs to be considered in conjunction
with sections 2033 through 2044. Sec. 20.2031-1(b), Estate Tax
Regs.
In light of this definition of value, (i.e., the willing
buyer and the willing seller), we go to section 2040. In section
2040, Congress provided an explicit approach to valuing joint
tenancy to be included in the decedent's gross estate. Unlike
section 2033 which looks to the actual interest held by the
decedent alone (i.e., one-half, one-third, or one-fourth
interest), section 2040(a) starts with the inclusion of the
entire value of the joint tenancy property held by the decedent
and any other person in the gross estate of the first joint
tenant to die, and the amount to be excluded from the decedent's
gross estate is proportionate to the consideration furnished by
the surviving joint tenant. If part of the value of the property
- 31 -
is shown to be attributable to consideration furnished by the
survivor, the amount to be excluded from the gross estate is that
portion of the entire date-of-death value of the property which
the consideration furnished by the survivor bears to the total
cost of acquisition and capital additions. Sec. 2040(a); sec.
20.2040-1(a), Estate Tax Regs. (stating for section 2040
purposes, "it makes no difference that the survivor takes the
entire interest in the property by right of survivorship and that
no interest therein forms a part of the decedent's estate for
purposes of administration. The section [2040] has no
application to property held by the decedent and any other person
(or persons) as tenants in common".). The exclusion for the
"consideration furnished" by the other joint tenant can be
expressed mathematically as follows:
Entire value of Property TIMES Survivor's consideration = Amount
(on the date of death or Entire Consideration Paid Excluded
alternate valuation date)
Estate of Goldsborough v. Commissioner, 70 T.C. 1077, 1082
(1978), affd. without published opinion 673 F.2d 1310 (4th Cir.
1982).
Under the scheme of section 2040(a), the amount includable
in a decedent's gross estate does not depend on a valuation of
property rights actually transferred at death, or on a valuation
of the actual interest held by the decedent (legal title);
instead, decedent's gross estate includes the entire value of
- 32 -
property held in a joint tenancy by him and any other person,
except to the extent the consideration for the property was
furnished by such other person. See Estate of Peters v.
Commissioner, 386 F.2d 404, 407 (4th Cir. 1967), affg. 46 T.C.
407 (1966). Contrary to petitioner's argument, the statute does
not inquire how much a willing buyer would pay to purchase the
decedent's interest in the joint tenancy at the date of his
death, because, at the moment of death, decedent no longer holds
any interest in the property. The property passes by right of
survivorship, unlike property governed by section 2033 which
passes under a decedent's will or by intestate succession. Even
if prior to death, decedent sold his interest in the joint
tenancy (and by doing so severed the joint tenancy with right of
survivorship), the value that a willing buyer would pay does not
necessarily compare to the approach taken by Congress in section
2040.13 Section 2040(a) provides an artificial inclusion of the
joint tenancy property: the entire value of the property less
any contribution by the surviving joint tenant. Except for the
statutory exclusions in section 2040(a), there is no further
13
For example, A and B held Property X as joint tenants.
The property was purchased with funds provided solely by A.
During A's life, A could sell his interest for roughly one-half
of the entire value. However, if A predeceases B, the inclusion
in A's gross estate would be 100 percent.
- 33 -
allowance to account for the fact that less than the entire
interest is being included.14
As a result of this artificial inclusion, we conclude that
section 2040 is not concerned with quantifying the value of the
fractional interest held by the decedent (as would be the case
under section 2033). The fractional interest discount, as
applied in section 2033, is based on the notion that the interest
is worth less than its proportionate share, due in part to the
problems of concurrent ownership. These problems are created by
the unity of interest and unity of possession. However, at the
moment of death, the co-ownership in joint tenancy is severed,
thus alleviating the problems associated with co-ownership. We
14
Similarly, sec. 2040(b) also provides its own rules. It
provides that the value included in the gross estate is "one-half
of the value of such qualified joint interest." Once the parties
have determined the value of the qualified joint interest, then
this is merely divided in half to determine the amount included
in decedent's gross estate.
Under sec. 2040(b), an estate would not argue that a market
discount applied due to the interplay of the marital deduction
and the step-up in basis. While one-half of the value of the
joint tenancy is included in the gross estate, there is an
accompanying marital deduction in the same amount. The marital
deduction sec. 2056 provides that in determining the value of
decedent's gross estate, there is allowed a deduction for the
value of any interest that is included in gross estate and that
passes from the decedent to the surviving spouse. Under sec.
1014, the surviving spouse has a step-up in basis for the portion
of the joint tenancy included in decedent's gross estate. On the
other hand, the marital deduction is inapplicable when the
surviving spouse is not a citizen of the United States. At the
same time, sec. 2040(b) is inapplicable in that situation.
- 34 -
conclude that the Young Property is not entitled to a fractional
interest discount.
Similarly, a lack of marketability discount arises from an
inherent difficulty in the sale of the asset. It has been
applied in determining the value of works of art and the value of
restricted securities. See, e.g., Estate of O'Keeffe v.
Commissioner, T.C. Memo. 1992-210. In regard to the Young
Property, there is no inherent difficulty in its sale. We
conclude that a lack of marketability discount is not applicable
to the Young Property.
Petitioner argues that respondent's position is based on the
unity of ownership theory; i.e., the theory that because the
surviving joint tenant succeeds to the interest of the deceased
joint tenant, there can be nothing to apply a fractional interest
discount against. We note that the unity of ownership theory has
been rejected by the courts, as in Propstra v. United States, 680
F.2d 1248 (9th Cir. 1982), but we do not characterize
respondent's position as relying on the unity of ownership
theory. Instead, we are looking at the inherent property
characteristics of joint tenancy and the approach taken by
Congress to value the property under section 2040 and section
2031.
We conclude that a fractional interest discount and a lack
of marketability discount are inapplicable to the Young Property.
- 35 -
Issue 3: Section 6651(a)
Section 6651(a)(1) imposes an addition to tax for the
failure to file an estate tax return within the time prescribed
by law, including any approved extension. The rate of the
addition to tax is 5 percent of the amount of tax required to be
shown on the return for each month or fraction thereof that the
return is late, not to exceed 25 percent in the aggregate.
However, if the delinquency is due to reasonable cause and not
due to willful neglect, the addition to tax is not imposed. As
the legal standard for reasonable cause, the regulations call on
taxpayers to show that they used "ordinary business care and
prudence". Sec. 301.6651-1(c)(1) and (2), Proced. & Admin. Regs.
Willful neglect is defined to mean a conscious, intentional
failure or reckless indifference. United States v. Boyle, 469
U.S. 241, 245 (1985). Whether petitioner acted with reasonable
cause and not due to willful neglect is a question of fact.
Estate of Cavenaugh v. Commissioner, 100 T.C. 407, 425 (1993),
affd. in part and revd. in part 51 F.3d 597 (5th Cir. 1995).
Petitioner bears the burden of showing that (1) that the failure
did not result from willful neglect and (2) that the failure was
due to reasonable cause. Rule 142(a); United States v. Boyle,
supra at 245 (1985).
Section 6018(a) provides that an estate tax return shall be
made if "the gross estate at the death of a citizen or resident
- 36 -
exceeds $600,000". Section 6075(a) provides that the estate tax
return shall be filed within 9 months after the date of the
decedent's death. Generally, an extension to file cannot exceed
6 months. Sec. 6081(a).
Decedent died on June 28, 1989. Petitioner was granted an
extension to file the estate tax return until March 28, 1991;
however, petitioner did not file the return until September 6,
1991. As a result of filing the estate tax return more than 5
months late, petitioner is subject to a 25-percent addition to
tax, unless the delinquency was due to reasonable cause and not
due to willful neglect.
In order to avoid the penalty, petitioner's argument is
based on Yang's claim that she relied on the accountant Wang's
advice. According to Yang, Wang stated that the estate tax
return might be required, depending on the value of the Oak Tree
Inn. With litigation pending in regard to the Oak Tree Inn, Wang
in 1990 suggested that an extension to file be submitted, which
was ultimately granted, extending the filing date until March 28,
1991. Later, in the summer of 1990, Wang told Yang that no
Estate Tax Return would be due. Then according to Yang, "[b]ased
upon Mr. Wang's advice that the Estate Tax Return would probably
not be required, I did not ask him again about the matter. I
felt that I could rely on Mr. Wang's advice because of his
- 37 -
education, apparent competency, and our longstanding and mutually
productive relationship."
Petitioner contends that respondent did not present any
evidence to contradict that she reasonably relied upon her
accountant's advice. However, as we have noted, the burden of
proof is on petitioner to establish (1) that the failure did not
result from willful neglect and (2) that the failure was due to
reasonable cause. In light of this burden, we note that
petitioner did not call the accountant to testify to corroborate
Yang's testimony. See Wichita Terminal Elevator Co. v.
Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th
Cir. 1947). In light of Yang's uncorroborated testimony, we
consider the following facts to evaluate whether petitioner has
met the burden of proving that Yang reasonably relied upon the
accountant's advice.
The executrix Yang admitted that she knew that decedent's
assets totaled more than $1,200,000 at his death. This clearly
meets the filing threshold as required by law. Petitioner
contends that the executrix relied upon the accountant's
statement that "the Estate Tax Return would probably not be
required."
To support its position, petitioner relies on United States
v. Boyle, supra at 250. In Boyle, the executor argued that the
failure to file the return was due to reasonable cause, reliance
- 38 -
on his attorney. Id. at 244. The Supreme Court noted that
engaging an attorney to assist in the probate proceedings is
plainly an exercise of the ordinary business care and prudence as
described by the regulations. Id. at 250. The Court continued
to say:
When an accountant or attorney advises a taxpayer on a
matter of tax law, such as whether a liability exists, it is
reasonable for the taxpayer to rely on that advice. Most
taxpayers are not competent to discern error in the
substantive advice of an accountant or attorney.
* * *
By contrast, one does not have to be a tax expert to
know that tax returns have fixed filing dates and that taxes
must be paid when they are due. In short, tax returns imply
deadlines. Reliance by a lay person on a lawyer is of
course common; but that reliance cannot function as a
substitute for compliance with an unambiguous statute. * * *
Id. at 251. The Court held that reliance on an agent was not
reasonable cause for failing to perform a nondelegable duty of
filing the return. Id. at 252.
When a taxpayer shows that he reasonably relied on the
"advice" of an accountant or attorney, even when such advice
turned out to be mistaken, courts have frequently held that such
reliance constitutes reasonable cause if the executor did not
merely assign the nondelegable duty to file to the attorney or
accountant. Estate of La Meres v. Commissioner, 98 T.C. 294, 314
(1992). To support its position of reliance on Wang's erroneous
advice, petitioner cites the following cases: Estate of La Meres
v. Commissioner, supra; Housden v. Commissioner, T.C. Memo. 1992-
91; and Estate of DiPalma v. Commissioner, 71 T.C. 324 (1978).
- 39 -
In all three cases, the Court found that the taxpayer's good
faith reliance on the attorney's erroneous advice constituted
reasonable cause. These cases were distinguishable from Boyle
and other cases in which the taxpayer simply delegated all
responsibility for filing to an agent. Estate of La Meres, supra
at 319. In Estate of DiPalma, the attorney for the estate led
the executrix to believe that pending litigation justified
delaying the filing of the estate tax return. Petitioner
compares this to the present situation, where Wang advised
petitioner that no estate tax return would be due because of the
Oak Tree Inn litigation.
The inquiry is whether petitioner relied in good faith on
the accountant's advice with respect to the filing requirement.
The principal difficulty which we have with petitioner's
arguments is that the objective evidence does not necessarily
lead us to the conclusion that Yang was unaware that the return
was due. See Estate of La Meres, supra at 316-317. Examining
the chronology of events, we note that decedent died on June 28,
1989. On March 21, 1990, petitioner filed for an extension of
time to file and to pay the estate tax to March 28, 1991. On
April 11, 1990, respondent approved the Estate's application for
extension of time to file and pay. According to Yang, in the
summer of 1990, Wang told Yang that a return would not be due,
and as a result of this statement, Yang did not ask Wang about
- 40 -
the matter again. However, this contradicts the events that
transpired in 1991. Prior to the lapse of the first extension
(before March 28, 1991), Yang as the executrix filed an
application for a second extension of time to file the return to
March 28, 1992, but respondent denied the extension of time to
file on April 4, 1991. As a result, the executrix knew that the
second request was denied, resulting in the return being due by
March 28, 1991. This is distinct from the facts presented in
Estate of La Meres, where the respondent did not notify
petitioner about the denial of the second extension until the
audit. Id. at 321. We think a prudent taxpayer upon
notification that the second extension was denied would have
inquired further and would not have relied upon Wang's statement
that a return would not be due.
Further, while in Yang's affidavit she stated that she
relied on Wang's advice "because of his education, apparent
competency, and our longstanding and mutually productive
relationship," her testimony at trial was less persuasive.
During trial, Yang testified that Wang had performed tax services
for the Youngs, but she was unaware of Wang's educational
background, such as where he attended school and whether he had a
master's degree in taxation. While Yang was aware that Wang was
a certified public accountant, her testimony was unclear whether
she based her reliance on that fact. See Sanders v.
- 41 -
Commissioner, 21 T.C. 1012, 1019 (1954), affd. 225 F.2d 629 (10th
Cir. 1955).
Accordingly, we hold on this record that petitioner has not
carried its burden of proof that the delinquent filing of the
estate tax return was due to reasonable cause and not to willful
neglect. Therefore, petitioner is liable for the addition to tax
under section 6651(a).
To reflect the foregoing,
Decision will be entered under
Rule 155.