DocketNumber： Docket No. 1828-65
Citation Numbers： 1967 U.S. Tax Ct. LEXIS 145, 47 T.C. 491
Judges： Turner
Filed Date： 2/20/1967
Status： Precedential
Modified Date： 11/14/2024
*145
In 1942, Herbert C. Tiffany, decedent, and his wife created a trust, with themselves as cotrustees, holding certain property in trust for their children. The trust then entered into a lease agreement, leasing the property to a partnership, in which decedent was a partner. The partnership made several payments to the trust for rental and for property sold on behalf of the trust. Thereafter, for about 10 years, no payments were made to the trust by the partnership. Prior to Dec. 1, 1949, the Tiffanys borrowed $ 12,161.78 in cash from the trust. In that year, decedent, in his individual capacity, assumed the partnership liability to the trust in the amount of $ 46,268.71. Thus, on Dec. 1, 1949, the Tiffanys owed the trust a total of $ 58,430.49 (a community obligation), and on that date they executed a secured note in said amount in favor of the trust. When decedent died in September 1961, the assets of this trust consisted of the secured note and accrued interest thereon in the aggregate amount of $ 118,029.49, and cash of $ 2,311.90. The obligation of decedent to the trust at the time of his demise was $ 59,014.74, which was claimed*146 as a deduction on his estate tax return. *491 Respondent, in his notice of deficiency, determined that the decedent's estate should be increased by $ 59,014.74, resulting in a deficiency in estate tax in the amount of $ 20,118.24 to account for decedent's one-half community obligation for principal and accrued interest totaling $ 118,029.49 on a promissory note dated December 1, 1949, executed in favor of the decedent and Virginia Tiffany as trustees for their children under a declaration of trust dated July 9, 1942. Respondent concedes that the estate is entitled to a credit for State death taxes paid to the State of Arizona in the amount of $ 2,374.18. Respondent also concedes that in the event additional amounts are found to be includable in the estate of the decedent herein, an increased credit will be allowed by reason of any additional State estate taxes paid. The principal issues presented for our consideration are: (1) Whether the promissory note, deducted on the estate tax return of the *492 decedent, and payable to Herbert C. and Virginia Tiffany as trustees of a trust, was part of a bona fide transaction for adequate and full consideration and therefore deductible from decedent's gross estate within the purview of Virtually all of the facts have been stipulated. The stipulation of the parties and attached exhibits are incorporated by this reference. FINDINGS OF FACT Herbert C. Tiffany, the decedent, hereinafter sometimes referred to as Tiffany, died testate on September 4, 1961, in Phoenix, Ariz. His will was admitted to probate by the Superior Court of Phoenix, Ariz. The coexecutors, Virginia Tiffany*150 and Herbert C. Tiffany, Jr., were appointed October 4, 1961. The estate tax return for the estate of Herbert C. Tiffany, deceased, was filed with the district director of internal revenue, Phoenix, Ariz., on December 4, 1962. On July 9, 1942, Herbert C. and Virginia Tiffany (hereinafter sometimes called the Tiffanys) owned as community property the following equipment and items: A Parsons trencher, a Cat 12 blade, an Austin '99' blade-DS 1572, an Austin '99' blade-DS 2096, an Austin '99' blade-DS 1960, a P. & H. shovel, a 9 x 36 Cedar Rapids, a 1150 gal Mack dist, a G.M.C. grease truck, a Kohler light plant, a Chevy semi-truck 6YSO 6496, a Chevy dump truck 1/2 6YR01 3905, a Chevy dump truck 6YR01 3847, a Chevy dump truck jeep 6YS02 4917, a Case tractor, a Fordson tractor and accessories, a Chevy pickup 6AK 07 13222, a 1935 Dodge pickup and 12-6445, a Jaeger water pump, 3", a Seamon mixer, an Austin 6 ton roller, an Essick 3 ton roller and trailer, a welder and accessories, a buckeye trencher, a large two-wheel trailer, a Cadillac coupe and a sheepsfoot roller. This property had an aggregate fair market value on that date of $ 24,000. On July 9, 1942, Herbert C. and Virginia Tiffany*151 executed a declaration of trust with respect to the aforesaid equipment and items. In the trust instrument, the Tiffanys were named cotrustees. The trust contained, The amount to be expended for the benefit of any of the beneficiaries at any time shall be in the discretion of the Trustees; such amount need not be equally divided among the beneficiaries, but there shall be expended for each beneficiary such amount as the particular needs of such beneficiary with respect to care, maintenance and education shall require. The discretion of the Trustees in dividing such expenditures among the beneficiaries shall not be subject to review. * * * * *493 In the event of the death or inability to act of either of the Trustees herein named, the survivor shall become the sole Trustee and continue with the administration of this trust as such sole Trustee. * * * * This trust shall be irrevocable, but the Trustors reserve the right to change the successor Trustees hereinabove named by written supplement attached hereto and signed by the Trustors, and in the event one of the Trustors shall be deceased or incompetent to act, the remaining*152 Trustor shall have the similar right to change the successor Trustees. There is also reserved to the Trustors or to the Surviving Trustor, in the event one of them is deceased or incompetent to act, the right to terminate this trust. In the event the trust is so terminated the trust property shall be paid over in equal portions to the beneficiaries, or the duly appointed guardians of such as are minors at the time of such termination, in equal portions, making allowance for any portion of the principal theretofore distributed to any of said beneficiaries. Unless sooner terminated, this trust shall terminate when the youngest surviving beneficiary reaches the age of twenty-one years, and upon such termination, there shall be distributed to said beneficiaries equal portions of the trust property making allowance for distributions of principal theretofore made to any of the beneficiaries. In addition the trustees had discretion as to whether or not to distribute principal at age 21, and the trust was to terminate no later than the date that the youngest beneficiary reached age 21. On July 9, 1942, the trust entered into an agreement to lease the aforesaid equipment to Tiffany Construction*153 Co., a copartnership composed of A. E. Tiffany and Herbert C. Tiffany. The interest of Herbert C. Tiffany in the copartnership constituted community property of Herbert C. and Virginia Tiffany, his wife. The accounting entries made by the bookkeeper for Tiffany Construction Co. with respect to the equipment leased by the trust to the partnership are as follows: *494 Proceeds from sales of equipment that were not credited to the trust account are as follows: No cash payments were made between January 14, 1948, and September of 1961. An Internal Revenue Service audit resulted in taxing to the grantors of the trust (under the Clifford Trust doctrine), the rental payments made to the trust by the partnership. On December 1, 1949, the partnership owed the trust $ 46,268.71. On that date the partnership also was indebted to A. E. Tiffany for certain equipment leased to the partnership by A. E. Tiffany. On December 1, 1949, Herbert C. Tiffany assumed the obligation of the partnership to the trust in the total amount of $ 46,268.71. *155 This assumption resulted in a community obligation of Herbert C. Tiffany and his wife to the trust. On the same date, A. E. Tiffany assumed the obligation of the partnership to A. E. Tiffany. Prior to December 1, 1949, the Tiffanys had borrowed cash from the trust in the aggregate amount of $ 12,161.78. On December 1, 1949, the Tiffanys were indebted to the trust in the total amount of $ 58,430.49. This indebtedness was a community obligation. On December 1, 1949, the Tiffanys executed a promissory note in the total amount of $ 58,430.49 in favor of the trust. As security for the payment of this note, the Tiffanys executed a realty mortgage in favor of the trust. This mortgage was recorded on April 21, 1954, in the office of the county recorder of Maricopa County, Ariz. The property covered by this mortgage, after deduction of the amount allocable to a certain parcel of approximately 12 acres, later released from said mortgage, was valued in the estate tax return at $ 150,000. On September 8, 1960, the Tiffanys, as trustees, executed a partial release of the mortgage. This partial release was recorded on September 12, 1960, in the office of the county recorder of Maricopa *156 County, Ariz., and provided that certain of the property covered by the realty mortgage securing the note of Herbert C. and Virginia Tiffany was released. The purpose of the release of this portion of the property was to consummate a sale from the Tiffanys to N. Spencer Shumway, Jr., Kenneth Dale Shumway, and Donald Shumway. As part of the purchase price the buyers executed a promissory note secured by a realty mortgage on the property known as lots 1, 2, 3, and 4 of the *495 Tiffany Tract, recorded in the office of the Maricopa County recorder, and constituting part of the originally mortgaged property. This mortgage dated July 14, 1960, was assigned by Herbert C. and Virginia Tiffany to themselves as trustees by assignment of the mortgage as collateral security. At the time of the instant trial $ 22,059 had been paid to the trust, including principal and interest, on the note executed by the Tiffanys in favor of the trust on December 1, 1949. No payments on this note were made prior to the death of Herbert C. Tiffany. Payments made thereafter were made from proceeds of the sale of property to the Shumways in 1960. These payments commenced in September of 1961 and the proceeds*157 have been paid directly by the collection agent, Phoenix Title & Trust Co., to the trust as follows: Arrangements for the aforementioned sale of real estate, including provisions of payments by the collection agent to the trustee, were made by Herbert C. Tiffany in 1960. On September 4, 1961, the date of the death of Tiffany, accrued interest on the aforesaid indebtedness of $ 58,430.49 totaled $ 59,599. This obligation, including principal and interest, plus cash of $ 2,311.90, constituted the only assets of the trust on September 4, 1961. On September 4, 1961, the Tiffanys were indebted on the note owing to the trust in the aggregate amount of $ 118,029.49, all of which amount constituted a community obligation. In January 1961, Tiffany suffered a stroke. After May 1961, he did not go to the office of the partnership, Tiffany Construction Co., or handle any of the partnership's business, except once on June 4, 1961, when he signed two or three checks at the office. *158 After this illness, the business of the partnership functioned without him. By June 15, 1961, Tiffany was confined to his bed, and thereafter, until his death on September 4, 1961, he was dependent for all of his needs upon other persons. *496 On December 4, 1962, the coexecutors of decedent's estate filed an estate tax return including, On December 4, 1962, the estate of Herbert C. Tiffany forwarded to the Arizona estate tax commissioner a check in the amount of $ 2,374.18, and the*159 Arizona State Tax Department issued its receipt, dated December 5, 1962. The decedent owned real property in California and the Arizona tax constituted a prorata share of the Federal credit. OPINION Respondent determined that the decedent's estate should be increased by $ 59,014.74 to account for decedent's one-half community obligation for principal and accrued interest totaling $ 118,029.49 on a promissory note dated December 1, 1949, executed in favor of the decedent and Virginia Tiffany as trustees for their children under a declaration of trust dated July 9, 1942, under the provisions of sections 2036, 2037, 2038, and 2053(a) of the 1954 Code. *160 It is respondent's primary position that no deduction is allowable for the promissory note in question because under The record shows that prior to 1942 Herbert C. and A. E. Tiffany were partners in the Tiffany Construction Co., in Arizona. Herbert C. and Virginia Tiffany owned assets which could be used in the construction business which had an aggregate fair market value of about $ 24,000. On July 9, 1942, the Tiffanys created a trust with themselves as trustees. On the same date they transferred $ 24,000 in equipment to the trust and immediately leased the equipment to the partnership. During the next few years the partnership made some cash payments to the trust and accrued but did not pay other amounts to the trust. The parties stipulated that (at some time not shown in the record) an audit by the Internal Revenue Service resulted in the taxation of the payments to the trust to the Tiffanys as grantors, under the so-called Clifford Trust doctrine. Thereafter, the partnership ceased making cash payments to the trust, at least from early in 1948 to late in 1961, but bookkeeping entries continued to be made which increased the liability shown on the books of the partnership in favor of the trust. Sometime prior to December*165 1949, the Tiffanys borrowed at least $ 12,161.78 in cash from the trust. There is no evidence that they ever sought, as trustees of the trust, to collect on the outstanding obligation from the partnership. In December 1949, they assumed the obligation to the trust in the amount of $ 46,268.71 shown on the partnership books and apparently added the amount of $ 12,161.78 previously borrowed and gave the trust a note in the amount of $ 58,430.49. They then executed a mortgage to secure the note but the mortgage was not recorded until 4 years later. Nothing was paid in the way of principal or interest on the note for more than 10 years. In late 1960 the Tiffanys as trustees released part of the property held as security and sold the parcel in their individual capacities. Then, as individuals, they assigned the mortgage received on the sale to the trust as additional security. The payments from the 1960 sale were to be paid to the trust but no payments were made until after Tiffany's death. *499 From these facts the only conclusion we can draw is that the claim subsequently made against the estate of the decedent based on the note was not incurred in a bona fide transaction for*166 an adequate and full consideration in "money or money's worth" as required by Here, in substance, the initial transfer of the construction equipment to the trust and lease back to the partnership in 1942 was in the nature of an unsuccessful attempt to shift income for the benefit of their children. No consideration of any ascertainable value in money or money's worth was involved with respect to this initial transfer, and no claim is made by the petitioners that there was. Thereafter, the trust lay dormant for more than 10 years with no attempt on the part of the Tiffanys as trustees or*167 fiduciaries to enforce collection from the partnership. However, credits to the trust continued to be made on the partnership's books. Then, in 1949, the Tiffanys attempted to change the character of the initial transfer by giving the promissory note to the trust which represented amounts owed to it by the partnership plus amounts the Tiffanys had borrowed from the trust in their private capacities with the approval of themselves as trustees. The alleged consideration for the assumption of the partnership's debt was that A. E. Tiffany would assume an obligation of the partnership to himself for certain equipment he had leased to the partnership. Nothing in the record shows whether the debt to A. E. Tiffany was bona fide or whether it was for adequate consideration. It seems clear to us on these facts that the Tiffanys assumed an indebtedness created by mere book entries and gave the trust a promissory note, which included funds previously appropriated to themselves as trustees. This note and the trust remained dormant until it was decided to sell some of the property securing the note. It was only after the Shumway sale in 1960 that the trust received any income. Thus, we have*168 a claim which had its origin in a depletion of the estate in 1942 coupled with a device to shift income which failed followed by a trust dormant for a decade. Unquestionably, the transaction which gave rise to the claim in question was not contracted bona fide and for an adequate and full consideration within the intendment of the statute. *500 Petitioners, citing 14 In the instant case we fail to see anything in the original 1942 transfer which would qualify the claim of the trust against the estate as a liability contracted bona fide and for an*172 adequate and full consideration in money or money's worth, thereby constituting a deductible claim against the estate. Nor do we see anything of substance in the events since that time which would change the nature of the liability which the estate now seeks to deduct. We believe that the initial transfer to the trust and later the assumption by the Tiffanys of the obligation of the partnership to the trust was in the nature of a family contract or understanding which cloaked a gift to the Tiffanys' children in the form of a provision in the trust for their care, maintenance, and education. The realistic view of what this was to accomplish, we think, was the application of the trust assets and income accruing thereto toward the discharge of the legal obligation of the Tiffanys under State law to provide support for their dependents. The allowance for deductions is a matter of legislative grace, and the one seeking a deduction must show that he comes within the statute allowing it. Under the circumstances, we conclude that the claim in question does not meet the statutory test under We have found as facts the stipulation of the parties pertaining to the last illness of decedent which relate to the alternative issue under sections 2036 and 2038 of the Code. However, in view of our conclusion hereinabove with respect to the principal issue, we find it unnecessary to discuss the alternative issue. To allow for concessions of the parties,
*154 Record of Credits to and Payments Made to the Account of H. C. Tiffany Children -- Trust on the Books of the Partnership of Tiffany Construction Co. Date Dr. Cr. 12-31-42 Rental on Equip. 6-31 to 12-31-42 $ 15,000.00 Rental on Equip. to cover depreciation 7,257.57 4- 5-43 Check on Account $ 19,736.52 7-10-43 Taxes paid by Tiffany Const. Co 2,521.05 7-10-43 Proceeds from Sale of Austin 99 Motor Grader 748.40 10- 7-43 Check on Account 3,500.00 12-31 Proceeds from Sale of Dodge Pickup 1.00 12-31-43 Rental of Equipment 26,000.00 12-31-44 Rental of Equipment 9,500.00 5-22-45 Check on Account 8,000.00 5-22-45 Proceeds from sale of Station Wagon 860.00 12-31-45 Rental of Equipment 3,500.00 12-31-46 Proceeds from sale of Mack Truck 150.00 12-31-46 Proceeds from sale of Case Tractor 1,100.00 12-31-46 Rental of Equipment 3,500.00 12-31-47 Proceeds from sale of Equipment 3,115.00 1-14-48 Income Tax paid by T.C.C. 753.66 1-14-48 do 404.03 9-9-48 Credit 5,000.00 12-31-49 Balance on account transferred to H.C. Tiffany acct 40,818.71 75,731.97 75,731.97 Jan. 7, 1948 Trerber $ 2,000 Jan. 23, 1948 Welder 450 Feb. 9, 1949 Cad. Coupe 500 Feb. 28, 1949 Motor Grader 2,500 5,450 Year Interest Total amount 1961 $ 1,829.10 $ 4,070.10 1962 1,640.10 4,782.60 1963 1,451.10 4,601.10 1964 1,262.10 4,412.10 1965 1,073.10 4,193.10 22,059.00 (includes interest) Schedule of Trust Property Sept. 4, 1961 Cash $ 2,311.90 Promissory Note of H. C. Tiffany and Virginia Tiffany dated 12-1-49 executed in favor of H. C. Tiffany and Virginia Tiffany, Trustees, in the original principal sum of $ 58,430.39 plus interest at 8% per annum from 12-1-49, secured by mortgage on property described in Schedule A, Item 3, and by security assignment of Item 9, Schedule C. Principal Balance $ 58,430.39 Accrued Interest 59,599.00 118,029.39 Total 120,341.29 Less 1/2 interest contributed by surviving spouse 60,170.64 60,170.65
1. Unless otherwise indicated, all references are to the Internal Revenue Code of 1954, as amended.↩
1. This column shows payments of rental and proceeds from the sale of equipment made to the trust directly or for the benefit of the trust. The final entry (on Dec. 31, 1949) reflects the assumption on that date by Tiffany of the partnership obligation to the trust in that amount.↩
2. This column shows the accrued obligation for rent and proceeds on the sale of equipment.↩
2.
(a) General Rule. -- For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts -- (1) for funeral expenses, (2) for administration expenses, (3) for claims against the estate, and (4) for unpaid mortgages on, or any indebtedness in respect of, property where the value of the decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate,↩
3.
(1) Limitations applicable to subsections (a) and (b). -- (A) Consideration for claims. -- The deduction allowed by this section in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded on a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth; * * *↩
3.
(1) Limitations applicable to subsections (a) and (b). -- (A) Consideration for claims. -- The deduction allowed by this section in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded on a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth; * * *↩
4.
5.