Estate of Frances Elaine Freedman v. Comm'r

T.C. Memo. 2007-61
UNITED STATES TAX COURT
ESTATE OF FRANCES ELAINE FREEDMAN, DECEASED,
ROBIN ELAINE CARNETTE, PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6416-04. Filed March 19, 2007.
In late 1999, D received stock in ECNC in exchange
for her interest in a business venture. In January of
2000, D contributed the stock to a recently opened
joint brokerage account titled in her name and that of
her son. Shares of ECNC were thereafter sold between
late January and early March of 2000, generating
substantial capital gains.
Held: D, and not her son, is considered under
State law to be the owner of all ECNC stock in the
joint account and is therefore taxable on the full
amount of the gain arising from its sale.
Joe M. Gonzalez, for petitioner.
Michael A. Pesavento, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: Respondent determined a Federal income tax
deficiency in the amount of $567,864 and a penalty pursuant to
section 6662 of $113,572.80 with respect to the 2000 taxable year
of Frances Elaine Freedman (decedent).1 After concessions, to be
explained in greater detail below, the principal issue for
decision is what portion of gain from certain stock sales is
taxable to decedent in 2000.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of the parties, with accompanying exhibits, are
incorporated herein by this reference. Decedent was a resident
of the State of Florida when she died testate in Sint Maarten
(also referred to as St. Martin), Netherlands Antilles, on
June 17, 2003. Her estate was admitted to probate in the Circuit
Court for Hernando County, Florida, and her daughter, Robin
Elaine Carnette (Ms. Carnette), was appointed personal
representative. The instant tax case was subsequently filed on
behalf of the Estate of Frances Elaine Freedman (the estate), at
which time Ms. Carnette resided in Brunswick, Georgia.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended and in effect for the
year in issue, and Rule references are to the Tax Court Rules of
Practice and Procedure.
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Family Background
Decedent was born on June 2, 1933. Her formal education
ended upon dropping out of high school during eleventh grade.
She thereafter married and divorced several times. Among her
children were half-siblings Ms. Carnette and Ernest Greene (Mr.
Greene), born in or about 1961 and 1964, respectively.
eConnect Stock and Proceeds
At some time prior to September of 1999, decedent and her
then companion, Peter Pajarinin (Mr. Pajarinin), became involved
in owning and operating an Internet casino in Costa Rica. On
September 8, 1999, decedent and Mr. Pajarinin sold their
interests in the venture and as part of the transaction each
received 525,000 shares of stock in eConnect, the acquiring
entity. The stock at that time was considered a “penny stock”,
trading over the counter with the ticker symbol ECNC at under 30
cents per share.
On or about January 7, 2000, a joint account was opened in
the names of “Frances Elaine Freedman & Ernest Greene” with the
brokerage firm of Valdes & Moreno, Inc. (Valdes & Moreno).
Valdes & Moreno served as the “introducing broker” for the
account, which account in turn was carried and cleared under an
agreement with the investment banking firm First Southwest
Company. The opening of this account was documented by, among
other things, a customer agreement, a joint account agreement,
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and a margin and short agreement. These documents set forth
information concerning the account as well as its governing terms
and conditions. The customer agreement designated the type of
account as “JTWROS”, and the joint account agreement reflected a
similar designation creating an account “as joint tenants with
rights of survivorship and not as tenants in common”, whereby in
the event of death of one of the parties thereto, the “entire
interest” in the account would be vested in the survivor(s).
The agreements further made explicit that with respect to
joint accounts, all authority, obligations, and liability of the
tenants thereunder were joint and several. Any tenant could give
binding instructions with respect to assets in the account,
including buying, selling, or requesting distributions, and First
Southwest Company was entitled to rely on such instructions from
any tenant without further investigation. The agreements were
also covered by an express choice of law clause, to wit:
This Agreement and its enforcement shall be governed by
the laws of the state of Texas and shall cover
individually and collectively all accounts which the
undersigned has previously opened, now has open or may
open or reopen with FSWC, FSWC’S predecessor or any
introducing broker, and any and all previous, current
and future transactions in such accounts. * * *
Marco Listrom (Mr. Listrom) was the Valdes & Moreno broker
overseeing the account. Decedent contacted him in late 1999
seeking a broker to assist her in selling the recently acquired
eConnect stock. The account was funded on or about January 11,
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2000, through decedent’s signing over of the certificate for her
525,000 shares of eConnect to First Southwest Company for
transfer into the account. The value of the stock at that
juncture still did not exceed approximately 25 to 50 cents per
share. Mr. Greene contributed no property or funds to the
account at its inception or at any time thereafter.
The customer agreement used to open the account contained a
number of blanks to be completed with information pertaining to
the client, including Social Security number, address, telephone
number, date of birth, marital status, employer, bank reference,
etc. Decedent’s personal data was used to complete each such
field. The form also noted an approximate net worth of $50,000
and an absence of previous investment experience. The space for
initial transaction was marked “SELL” “ECNC”.
At some point after the account was established, decedent
expressed to Mr. Greene that she was interested in selling the
eConnect stock if it reached 50 cents per share. Mr. Greene then
decided to conduct some online research into the company and
product underlying the stock. He advised his mother that he
thought, based on the eConnect technology, that the shares had
the possibility of rising beyond her intended target and should
be held longer. As the stock later began to appreciate, Mr.
Greene participated in the excitement, tracking the rising price
online and communicating with decedent.
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Between January 24 and March 8, 2000, decedent placed sell
orders with Valdes & Moreno that resulted in the following sales
of eConnect shares:
Date Shares Sold Share Price Net Proceeds
1/24/00 25,000 $1.50 $36,746.75
1/24/00 20,000 1.50 29,397.00
3/07/00 60,000 10.56 629,976.88
3/08/00 152,500 15.00 2,278,271.75
In total, 257,500 shares were sold during this period for net
proceeds, after commissions, of $2,974,392.38.
After each of the foregoing sales, decedent submitted to
First Southwest Company a request for transfer of funds. On
January 24, 2000, she requested a wire transfer of $30,000 for
the benefit of R.V. World Hudson, Inc., which she used to
purchase a motor home for herself. Two wire transfer requests
were placed on January 25, 2000, one directing $9,000 to a bank
in Virginia for the benefit of Ms. Carnette and Ms. Carnette’s
husband, and the other directing $27,000 to a bank in Costa Rica
for decedent’s own benefit. Likewise, on March 16, 2000,
decedent requested a wire transfer to AmSouth Bank in Hudson,
Florida, for her own benefit, which transfer was completed on the
same date in the amount of $2,909,593.56. The latter transaction
removed from the Valdes & Moreno account the entire cash balance
and left only the remaining 267,500 shares of eConnect.
The day after the March 8, 2000, sale of eConnect, the
Securities and Exchange Commission apparently froze all trading
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in the stock. By March 31, 2000, the value had fallen to $1.47
per share and was still dropping. It continued falling and never
recovered any significant value during the period that shares
remained in the Valdes & Moreno account. Over the next few
years, decedent used the Valdes & Moreno account for occasional
trading activity of modest value. Decedent wrote personal checks
to facilitate such purchases from accounts at Wells Fargo.
Although the record does not permit any direct tracing of funds,
as no underlying documentation with respect to any Wells Fargo
account was introduced, the evidence supports that some portion
of the proceeds from the eConnect sales was eventually
transferred to an account or accounts at Wells Fargo entities and
that such accounts were in decedent’s name alone. The balance of
the cash generated by the limited trading activity taking place
after the 2000 eConnect sales was eventually distributed at
decedent’s request. First Southwest Company on April 29, 2003,
issued a check to decedent and Mr. Greene as joint tenants, using
decedent’s Florida address, in the amount of $4,584.05.
During 1999 and early 2000, decedent maintained her
permanent residence in Hudson, Florida, but lived for extended
periods in Costa Rica. Mr. Greene during early 2000 lived in an
apartment in Burbank, California. Ms. Carnette moved from
Woodbridge, Virginia, to Brunswick, Georgia, at some point during
2000. Following the eConnect sales and transfer of funds from
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the Valdes & Moreno account, decedent became interested in moving
to California. Mr. Greene assisted in the search for property,
and between late March and early May of 2000, a residence located
at 61 Mollison Drive in Simi Valley, California, was selected and
purchased for approximately $645,000. Decedent paid for the home
in cash principally by means of wire transfer from one or more of
the accounts into which she had placed funds originating from the
eConnect sales.
During the process of buying the property in California,
decedent proposed that Mr. Greene reside with her in the Simi
Valley home, apparently in part to facilitate efforts by
Mr. Greene to start his own small business in the software
development field. Deed to the property was taken in the names
“ERNEST GREENE, a Single Man and FRANCES ELAINE FREEDMAN, an
Unmarried Woman as Joint Tenants”. Likewise, escrow documents
and a buyer walk-through inspection form reflected both Mr.
Greene and decedent as buyers.
Decedent and Mr. Greene lived together until early 2002,
when decedent moved back to Florida and the Simi Valley home was
sold. Prior to that sale, Mr. Greene executed a quitclaim deed
to decedent of any interest he held in the property, and decedent
gave him $10,000 to help defray costs of relocation. While they
were residing together, decedent also contributed an amount
between $25,000 and $50,000 to Mr. Greene’s business venture, and
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two 2000 Nissan Xterras were purchased, one for decedent and the
other for Mr. Greene. Decedent paid property taxes and insurance
costs associated with the Simi Valley property. Mr. Greene did
not pay rent but contributed towards general maintenance
expenses.
Ms. Carnette came to California in March of 2002 and
assisted decedent in moving back to Florida. After returning,
decedent purchased a house at 24140 Powell Road in Brooksville,
Florida, which served as her principal residence until her death.
Decedent also acquired property, apparently indirectly through a
corporation, in Sint Maarten, Netherlands Antilles.
Tax Reporting and Examination
First Southwest Company issued a “2000 COMPOSITE STATEMENT
OF 1099 FORMS” with respect to the Valdes & Moreno account. The
document was issued to “FRANCES ELAINE FREEDMAN & ERNEST GREENE
JTWROS” at the Simi Valley address and reflected decedent’s
Social Security number. It showed interest of $1,261.18 and
total gross proceeds less commissions from the eConnect sales of
$2,974,392.38.
In March of 2001, James E. Gill (Mr. Gill), a certified
public accountant in California, met with decedent and Mr. Greene
regarding preparation of decedent’s personal income tax return
for 2000. Using information supplied by decedent and/or Mr.
Greene, Mr. Gill completed decedent’s Form 1040, U.S. Individual
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Income Tax Return, for 2000. The return was signed by decedent
and Mr. Gill on April 11, 2001, and filed with the Internal
Revenue Service (IRS). The Form 1040 was accompanied by a
Schedule D, Capital Gains and Losses, that reflected the sale of
257,500 shares of eConnect, with an acquisition date of
September 8, 1998, a basis of zero, and resultant long-term
capital gain of $2,974,393. The return also reported interest
and dividend income received with respect to various financial
accounts, including accounts at AmSouth, Dean Witter Reynolds,
Fiserv, Valdes & Moreno, and Wells Fargo. Decedent did not file
a gift tax return for 1999, 2000, 2001, 2002, or 2003.
Mr. Greene filed a Form 1040 for 2000 prepared by an
individual not associated with Mr. Gill’s firm. The return
reported no capital gain or loss and no interest or dividends.
Mr. Greene’s return was subsequently selected for examination by
the IRS, but the audit in mid-2002 yielded no recommended
changes.
By early 2003, decedent’s 2000 income tax return was
likewise under examination. In April of 2003, decedent executed
a Form 2848, Power of Attorney and Declaration of Representative,
authorizing Mr. Gill to represent her in connection with the 2000
audit. Following decedent’s intervening death on June 17, 2003,
Mr. Gill continued review of the 2000 return and obtained
additional documentation from the estate. That review led him to
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conclude that the 2000 reporting should be altered in two
respects. First, having learned that the eConnect stock was
acquired in 1999, rather than 1998, Mr. Gill realized that the
gain generated upon disposition was short term in nature.
Second, based upon the fact that the Valdes & Moreno account was
jointly held by decedent and Mr. Greene, Mr. Gill was of the
opinion that the gain should have been split evenly between the
two joint tenants.
The IRS disagreed that the gain was so divisible and on
January 15, 2004, issued to decedent a notice of deficiency
determining the aforementioned deficiency and accuracy-related
penalty. The notice reflected two adjustments: Interest income
was increased by $975 reported to the IRS by Wells Fargo Bank,
and the eConnect sales were reclassified as resulting in short-
term capital gain.
Shortly thereafter, the estate submitted to the IRS a Form
1040X, Amended U.S. Individual Income Tax Return, on behalf of
decedent for the year 2000. Mr. Gill prepared the amended return
incorporating only one-half of the proceeds from the eConnect
sales but treating the concomitant capital gains as short term.
The net effect was a decrease in total tax of $21,451, for which
the estate requested a refund. The amended return was received
by the IRS on February 9, 2004, but was not processed. A notice
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of claim disallowance was also sent denying the $21,451 refund in
full.
Death and Probate Proceedings
Approximately 2 weeks prior to her June 17, 2003, death,
decedent had telephoned Ms. Carnette and asked her to come to
Sint Maarten, where decedent was in the hospital. Ms. Carnette
did so and was with decedent until her death. During that
period, on June 16, 2003, decedent executed a will appointing Ms.
Carnette as sole heiress, executrix, and administrator of
decedent’s estate.
The just-mentioned will was admitted to probate in the
Circuit Court for Hernando County, Florida, and Ms. Carnette was
appointed personal representative in late 2003. Her petition for
administration contained a listing of estate assets that
included, among other items, the Brooksville, Florida, property
($425,000); a 2000 Nissan ($8,000); a 1988 Holiday Rambler travel
trailer ($18,000); bank accounts at SunTrust ($82,461); and
portfolio accounts at Wells Fargo ($431,587.75) and Valdes &
Moreno ($2,286.50). Mr. Greene then filed suit in the Superior
Court for Los Angeles County, California, in early 2004,
contending that decedent’s property should pass in accordance
with a pourover will and trust executed by decedent in California
on July 7, 2000, that purportedly left all assets to Mr. Greene.
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Contentious litigation between the siblings over decedent’s
estate ensued and remained unresolved as of at least mid-2006.
Tax Court Proceedings
A timely petition disputing the notice of deficiency was
filed with this Court on April 14, 2004. Both in the petition
and in subsequent stipulations the estate has conceded: (1) That
an additional $975 of interest income was received by decedent in
2000 but not reported on her original return, and (2) that the
sales of eConnect shares during 2000 did not qualify for long-
term capital gain treatment. Following a 2-day trial in November
of 2005, the parties filed posttrial briefs. Respondent on
opening brief conceded the accuracy-related penalty under section
6662(a) asserted in the notice of deficiency. Accordingly, none
of the specific adjustments made in the notice of deficiency
remain in dispute. The estate, however, continues to propound
the argument first raised during the audit that the estate is
entitled to report only one-half of the capital gain generated by
the eConnect sales and, correspondingly, to receive a refund in
the approximate amount of $21,000.2
Simultaneously with the filing of its reply brief on
June 8, 2006, the estate filed a motion to reopen the record for
2
The Court notes that to the extent that the petition seeks
reasonable administrative and/or litigation costs pursuant to
sec. 7430, any such claim is premature and will not be further
addressed. See Rule 231.
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receipt of two additional exhibits. Respondent thereafter filed
an objection to the motion.
OPINION
I. General Rules
A. Federal Taxation Principles
The Internal Revenue Code imposes a Federal tax on the
taxable income of every individual. Sec. 1. Section 61(a)
specifies that gross income for purposes of calculating such
taxable income means “all income from whatever source derived”.
Encompassed within this broad pronouncement are all “undeniable
accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion.” Commissioner v. Glenshaw
Glass Co., 348 U.S. 426, 431 (1955). More particularly, gains
derived from dealings in property, interest, and dividends are
expressly enumerated as falling under the purview of section
61(a). Sec. 61(a)(3), (4), (7).
As a corollary, it is blackletter law that gains derived
from property are taxable to the owner of the property. See,
e.g., Commissioner v. Court Holding Co., 324 U.S. 331, 334
(1945); Salvatore v. Commissioner, 434 F.2d 600, 601-602 (2d Cir.
1970), affg. T.C. Memo. 1970-30; Waltham Netoco Theatres, Inc. v.
Commissioner, 401 F.2d 333, 334-335 (1st Cir. 1968), affg. 49
T.C. 399 (1968); Martin Ice Cream Co. v. Commissioner, 110 T.C.
189, 212-213 (1998); Steubenville Bridge Co. v. Commissioner, 11
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T.C. 789, 798 (1948). Property ownership, in turn, is determined
by State law, consistent with the overarching principle that
State law creates legal rights and property interests while
Federal law determines how the rights and interests so created
shall be taxed. Morgan v. Commissioner, 309 U.S. 78, 80-81
(1940).
B. State Law Regarding Joint Accounts
The parties to the instant litigation do not dispute that
the relevant State law for purposes of this case is that of
Texas. In 1979, Texas adopted provisions derived from article VI
of the Uniform Probate Code governing multiple-party accounts,
codified at Tex. Prob. Code Ann. secs. 436-449 (Vernon 2003).
See Stauffer v. Henderson, 801 S.W.2d 858, 862-863 (Tex. 1990).
As pertinent here, Tex. Prob. Code Ann. sec. 436 defines
“Multiple-party account” to include “a joint account” and “Joint
account” to mean “an account payable on request to one or more of
two or more parties whether or not there is a right of
survivorship.” Accounts at brokerage firms are expressly placed
within the scope of the statutory scheme. Id. Tex. Prob. Code
Ann. sec. 437 then clarifies the reach of the ensuing provisions,
as follows:
Sec. 437. Ownership as Between Parties and Others
The provisions of Sections 438 through 440 of this
code that concern beneficial ownership as between
parties * * * of multiple-party accounts, are relevant
only to controversies between these persons and their
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creditors and other successors, and have no bearing on
the power of withdrawal of these persons as determined
by the terms of account contracts.
Next, the just-referenced Tex. Prob. Code Ann. sec. 438,
entitled “Ownership During Lifetime”, directs in subsection (a)
(hereinafter TPC 438(a)) thereof: “A joint account belongs,
during the lifetime of all parties, to the parties in proportion
to the net contributions by each to the sums on deposit, unless
there is clear and convincing evidence of a different intent”.
Finally, Tex. Prob. Code Ann. sec. 439 completes the general
structure, governing rights of survivorship and disposition of
sums remaining on deposit at the death of a party to a joint
account.
II. Analysis
Given the foregoing backdrop, the outcome of the instant
litigation turns largely upon application of TPC 438(a). The
documentation with respect to the Valdes & Moreno account
establishes its status as a joint account at a financial
institution within the meaning of the Texas Probate Code.
Moreover, the instant litigation is concerned with ownership as
between the parties of this multiple-party account in the context
of a controversy between one of these parties and a creditor,
namely the IRS. That is precisely the type of situation that
Tex. Prob. Code Ann. sec. 437 specifies is governed by TPC 438(a)
and following provisions. Respondent and the estate, however,
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have very different views as to the result that should obtain
from applying TPC 438(a) here.
It is respondent’s position that the record in this case
establishes both that decedent contributed all the property
placed in the Valdes & Moreno account and that she did not intend
at the time she opened and funded the account to make a gift of
eConnect stock to Mr. Greene. The estate, in contrast, while not
disputing the applicability of TPC 438(a),3 argues that decedent
clearly intended to effect a gift of one-half of the eConnect
stock to Mr. Greene by placing it in the joint account. The
estate also points to a presumption in Texas common law that a
parent intends to make a gift to a child upon delivering
possession, conveying title, or purchasing property in the name
of the child.
As previously quoted, TPC 438(a) legislates ownership of
joint accounts during life in proportion to respective
contributions, absent clear and convincing proof of a contrary
intent. The evidence here is unequivocal in showing that all of
the eConnect stock funding the Valdes & Moreno account was
contributed by decedent and that Mr. Greene at no time placed any
of his personal assets in the account. Hence, the focus of this
3
Although the estate failed to cite or mention TPC 438(a)
on opening brief, the estate’s reply brief and subsequent motion
to reopen the record quote and discuss the statute in a manner
presumptive of its applicability and never so much as allege that
TPC 438(a) is not operative here.
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case can be narrowed particularly to application of the
“different intent” exception.
In construing provisions of the Texas Probate Code derived
from the Uniform Probate Code, Texas courts have looked to
corresponding provisions in the uniform act, considering the
degree of textual similarity and taking guidance from the
comments accompanying the uniform laws. See, e.g., Stegall v.
Oadra, 868 S.W.2d 290, 293 (Tex. 1993); Stauffer v. Henderson,
supra at 863; Dickerson v. Brooks, 727 S.W.2d 652, 654 (Tex. App.
1987). The language of TPC 438(a) is identical to that of Unif.
Probate Code sec. 6-103(a) (1969 Act), 8 U.L.A. (Part II) 464
(1998), the attendant comment of which reads in relevant part:
This section reflects the assumption that a person
who deposits funds in a multiple-party account normally
does not intend to make an irrevocable gift of all or
any part of the funds represented by the deposit.
Rather, he usually intends no present change of
beneficial ownership. The assumption may be disproved
by proof that a gift was intended. * * * It is
important to note that the section is limited to
describe ownership of an account while original parties
are alive. Section 6-104 prescribes what happens to
beneficial ownership on the death of a party. The
section does not undertake to describe the situation
between parties if one withdraws more than he is then
entitled to as against the other party. Sections 6-108
and 6-112 protect a financial institution in such
circumstances without reference to whether a
withdrawing party may be entitled to less than he
withdraws as against another party. Presumably,
overwithdrawal leaves the party making the excessive
withdrawal liable to the beneficial owner as a debtor
or trustee. Of course, evidence of intention by one to
make a gift to the other of any sums withdrawn by the
other in excess of his ownership should be effective.
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The final Code contains no provision dealing with
division of the account when the parties fail to prove
net contributions. The omission is deliberate.
Undoubtedly a court would divide the account equally
among the parties to the extent that net contributions
cannot be proven; but a statutory section explicitly
embodying the rule might undesirably narrow the
possibility of proof of partial contributions and might
suggest that gift tax consequences applicable to
creation of a joint tenancy should attach to a joint
account. The theory of these sections is that the
basic relationship of the parties is that of individual
ownership of values attributable to their respective
deposits and withdrawals; * * *
The just-quoted comment elucidates that the “different
intent” contemplated by the exception contained in TPC 438(a) is
an intent to make a gift. Stated otherwise then, the necessary
showing required to override the rule of ownership in proportion
to contributions is clear and convincing proof that a gift was
intended. Moreover, the comment drives home that since the
opening of a joint account and the depositing of assets therein
are inherent in any scenario covered by the statute, these facts
play no role in establishing the requisite intent to meet the
exception.
Under Texas law, clear and convincing evidence demands
“‘that measure or degree of proof which will produce in the mind
of the trier of fact a firm belief or conviction as to the truth
of the allegations sought to be established.’” In re G.M., 596
S.W.2d 846, 847 (Tex. 1980) (quoting State v. Addington, 588
S.W.2d 569, 570 (Tex. 1979)); see also Oadra v. Stegall, 871
S.W.2d 882, 891 (Tex. App. 1994). This burden falls on the party
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claiming that a gift has been made.4 Oadra v. Stegall, supra at
891. Extrinsic or parol evidence is typically inadmissable to
prove the nature of an account for purposes of the Texas Probate
Code but is not proscribed on questions of the ownership and
capacities of parties to such an account. Stegall v. Oadra,
supra at 294; Oadra v. Stegall, supra at 894.
Texas courts adhere to a requirement of three elements as
necessary to establish the existence of a gift: (1) Intent to
make a gift; (2) delivery of the property; and (3) acceptance of
the property. Dorman v. Arnold, 932 S.W.2d 225, 227 (Tex. App.
1996); Grimsley v. Grimsley, 632 S.W.2d 174, 177 (Tex. App.
1982). Given that these requirements are stated in the
conjunctive and that the emphasis of TPC 438(a) is on the issue
of intent, focus at the outset on the first-listed element is
appropriate here.
The estate cites a litany of circumstances in an effort to
show that decedent intended by placing her eConnect stock in the
joint account to make a gift to Mr. Greene.5 This alleged
4
The State law rules on placement of burden relevant in
this case dovetail with the typical rule in tax litigation that
the burden of proof rests on the taxpayer generally and on the
party raising any new matter particularly. See Rule 142(a).
Although sec. 7491(a) can effect a shift of burden in specified
circumstances, the estate makes no argument that the statute has
any application here and has not addressed the preconditions for
its use.
5
The estate also directs the Court’s attention to a number
(continued...)
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evidence can be grouped roughly into five general categories.
The first incorporates documents involved in the opening and
routine administration of the Valdes & Moreno account. For
example, the estate notes the assignment of the eConnect stock
certificate to First Southwest Company, the Valdes & Moreno
customer agreement, the joint account agreement, the margin and
short agreement, the monthly account statements, the sale
confirmation statements, the composite Form 1099, and the check
issued in 2003 by First Southwest Company of the remaining cash
balance in the Valdes & Moreno account. The estate alleges that
these documents are probative in that they reflect the names of
both decedent and Mr. Greene as parties to the account and/or by
their terms afford to decedent and Mr. Greene equal rights and
authority to deal with the account.
5
(...continued)
of Texas cases, the majority of which: (1) Construe State law
prior to enactment of the current Texas Probate Code; (2) deal
more generally with gift issues outside the specialized context
of the operative joint account rubric; and/or (3) pertain to
issues of ownership in controversies between parties to joint
accounts, a matter expressly not covered by TPC 438(a) and
related provisions, rather than ownership in controversies vis-a-
vis creditors. The bulk of this material is not germane to the
Court’s disposition here, or at best marginally relevant and
cumulative, and will not be further addressed. As noted by the
Supreme Court of Texas in an opinion construing the related
provision of Tex. Prob. Code Ann. sec. 439 (Vernon 2003),
enactment of the Texas Probate Code served to replace “the
various legal theories” which had been used in analyzing joint
account matters and were “difficult to reconcile”. Stauffer v.
Henderson, 801 S.W.2d 858, 862-863 (Tex. 1990).
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Undoubtedly, the foregoing evidence and like documentation
might be highly probative were the aim to establish existence of
a joint account. That point, however, is undisputed. The
instant inquiry is already taking place under the rubric of TPC
438(a). Because that provision operates solely in the context of
joint accounts, documentation showing accounts titled in the
names of multiple parties and conferring on them contractual
rights vis-a-vis a financial institution is presumed and inherent
in all cases. Accordingly, the clear and convincing evidence
referenced in the exception must demand something more. The
estate’s reliance on materials of this nature is therefore
misplaced and carries little, if any, weight in establishing
decedent’s intent to make a gift. In fact, the exclusive use of
decedent’s personal information in filling out the customer
agreement could cut the other way.
The second general category of circumstances pressed by the
estate relates to Mr. Greene’s claimed management of and control
over the Valdes & Moreno account. The estate mentions that Mr.
Greene conducted “due diligence” with respect to the eConnect
shares, attended eConnect shareholder meetings, consulted and
jointly made decisions with decedent regarding the account,
recommended when to sell the eConnect stock, shared in the
excitement of the rising price and sale, opened mail related to
the account, was the subject of purported comments by decedent
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referring to the money as theirs, and later handled liquidation
of the account by “initiat[ing] the movement of the money from
Valdes & Moreno, Inc. to Wells Fargo where the money still is,
via some mere stops along the way at some Florida banks.”
Attempted review of these alleged circumstances, however,
highlights a key problem with the record in this case. The noted
details are drawn largely from uncorroborated testimony of
Mr. Greene, whose testimony in general the Court finds to be
singularly lacking in credibility. We have before us testimony
by Mr. Greene taken in three contexts; i.e., his deposition from
October of 2004 in the Florida probate litigation, his statements
on direct examination at the trial of this Tax Court case as a
witness for respondent, and his responses on cross-examination by
counsel for the estate. Comparison reveals that Mr. Greene’s
overall position in the probate litigation is essentially the
opposite of his stance as a witness for respondent.
His deposition testimony is geared towards emphasizing his
involvement in all that relates to the eConnect shares, so as to
challenge the will being probated and to establish an interest in
decedent’s property. In this Court, his comments are shaded
towards distancing himself from any interest in the stock and
concomitant taxable gain. The result is two inconsistent
presentations, with the intersection between the two represented
by unconvincing attempts on cross-examination to explain apparent
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contradictions. The Court therefore is unable to rely on much of
Mr. Greene’s testimony, particularly when it comes to his
management of or control over the stock sales and Valdes & Moreno
account, where some of the most marked discrepancies arise.
Thus, while statements by Mr. Greene might be sufficient to
show that he assisted decedent by researching, tracking, and
making recommendations about the eConnect shares, his comments
fall short of establishing any genuine management and control.
Furthermore, the documentary record supports that any time an
actual sales call or request to transfer funds was made, it was
decedent’s personal action that formally initiated the
transaction. Shared excitement and casual use of plural pronouns
are hardly a substitute for the complete dearth of documentary
evidence to show Mr. Greene making even one order with respect to
the account. Notably, the estate tries to minimize the
significance of decedent’s prompt transfer of the sales receipts
out of the Valdes & Moreno account by claiming that Mr. Greene
“initiated the movement”. Suffice it to say that the attempt,
conclusory, self-serving, and unsupported, fails to blunt one of
the key objective facts in this litigation--that shortly after
the eConnect sales, decedent ordered Valdes & Moreno to transfer
the proceeds to other accounts that the record indicates were in
her name alone.
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The third category of circumstances cited by the estate
pertains to alleged evidence that Mr. Greene “benefited
substantially” from the eConnect transactions. Included in this
category are the joint purchase and rent-free occupation of the
Simi Valley home, as well as Mr. Greene’s receipt of: (i)
$30,000 for his business; (ii) a Nissan Xterra; and (iii) $10,000
for later relocation from the Simi Valley home. Again, however,
much of this claimed evidence is testimonial and suffers from the
same shortcomings just discussed.
Mr. Greene’s statements concerning his role in the
negotiations on the house and the acquisition of the Xterra are
particularly nebulous and fraught with inconsistencies, and his
eventual execution of a quitclaim deed for the house undercuts
any understanding between those involved of a true and intended
ownership interest. Regardless, the salient feature is that all
of these transactions occurred after decedent transferred the
eConnect proceeds out of the Valdes & Moreno account into other
accounts of her own. At most the benefits portray an intent to
share her wealth by giving specific, limited gifts to her son at
times subsequent to the eConnect windfall. They do not reflect a
scenario where ownership of half the wealth by Mr. Greene was a
fait accompli because she had previously given him the underlying
stock before it was sold.
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The fourth category of circumstances raised by the estate
pertains to the events and documents that are the subject of the
estate’s motion to reopen the record. The estate asks the Court
to permit submission of three additional documents, incorporated
into two exhibits: (1) Exhibit 46-P, copies of decedent’s
purported July 7, 2000, pourover will and family trust; and (2)
Exhibit 47-P, a copy of a motion for partial summary judgment
filed by Mr. Greene in the Florida probate litigation.
Reopening the record for the submission of additional
evidence is a matter within the discretion of the trial court.
Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331
(1971); Butler v. Commissioner, 114 T.C. 276, 286-287 (2000).
The standard for doing so may be summarized as follows: “A court
will not grant a motion to reopen the record unless, among other
requirements, the evidence relied on is not merely cumulative or
impeaching, the evidence is material to the issues involved, and
the evidence probably would change the outcome of the case.”
Butler v. Commissioner, supra at 287.
The items proffered in the estate’s motion to reopen the
record fall short of the foregoing standard. Even if admitted,
the documents would not alter the outcome in this case. The
estate contends that the pourover will and family trust show
decedent’s “donative intent that Mr. Greene own one-half of all
that she had in 2000, the year of the subject sale which produced
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the taxable gain in this case.” These documents, however,
actually weigh against the estate’s position here. Critically,
they were executed after decedent had transferred the
overwhelming majority of the eConnect sales proceeds to other
accounts owned individually by her, including apparently various
accounts at Wells Fargo. A number of accounts at Wells Fargo and
Dean Witter are among the assets listed on the schedule of
property placed in the trust, as is the Simi Valley residence.
Terms of the trust, which is revocable by decedent, operate to
apply the property for decedent’s benefit during life and to
distribute the assets to Mr. Greene only upon her death.
Consequently, as of July of 2000, decedent was behaving as
if the property generated by the eConnect sales was still under
her control and hers to give away at her death, not as if half
was already owned by Mr. Greene. Such would seem to belie an
intent to gift the underlying stock upon funding of the Valdes &
Moreno account in January of 2000. The motion for summary
judgment, which seeks a ruling based on the alleged validity of
the pourover will and trust, is no more helpful to the estate and
is even less probative, a mere litigating position in another
proceeding. The admission of these materials would therefore do
little, if anything, to provide support for the stance taken by
the estate here.
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Furthermore, even if the documents buttressed the estate’s
argument, denial of their admission would be appropriate on
grounds of prejudice to respondent. By submitting the documents
after trial, the estate deprived respondent of any opportunity to
examine or question them during the proceeding. In fact, the
items were not proffered until after respondent had filed both
opening and reply briefs. Furthermore, it is clear from the
record that the will and trust documents were available to the
estate at least a year prior to trial in the instant case. The
estate offers no explanation or excuse as to why the materials
could not have been exchanged and dealt with in accordance with
the procedures set forth in Rule 91 and the Court’s standing
pretrial order. We normally do not countenance such tardiness.
The Court will deny the estate’s motion to reopen.
The fifth category drawn upon by estate is the familial
relationship between decedent and Mr. Greene and the presumption
related thereto under Texas law. As stated in the following oft-
cited pronouncement, Texas courts adhere to a rule under which:
“There is, however, a presumption that a parent intends to make a
gift to his child if the parent delivers possession, conveys
title, or purchases property in the name of a child.” Woodworth
v. Cortez, 660 S.W.2d 561, 564 (Tex. App. 1983); see also
Richardson v. Laney, 911 S.W.2d 489, 492 (Tex. App. 1995); Oadra
v. Stegall, 871 S.W.2d at 891; Masterson v. Hogue, 842 S.W.2d
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696, 697 (Tex. App. 1992). The presumption is rebuttable by
clear and convincing evidence. Richardson v. Laney, supra at
492; Masterson v. Hogue, supra at 697; Kyles v. Kyles, 832 S.W.2d
194, 197 (Tex. App. 1992).
Although research has not revealed any Texas cases directly
addressing the propriety of using this presumption in the context
of joint account matters controlled by TPC 438(a) and related
provisions, the Court for the sake of argument will assume its
potential applicability here. Accordingly, we consider the
sufficiency of the evidence offered by respondent to overcome any
presumption of donative intent.
In contrast to the weak and suspect nature of the
circumstances relied upon by the estate in an attempt to show
donative intent, as discussed above, the more objective evidence
in the record leans strongly in the opposite direction. As
alluded to previously, one of the most salient facts here is that
within days of each relevant sale of eConnect shares, decedent
wired the proceeds out of the joint account. The March 16, 2000,
transfer of $2,909,593.56 into a personal account at AmSouth Bank
is particularly revealing. Moreover, none of the investment
accounts in which the proceeds subsequently came to rest is
purported to be any type of joint account over which Mr. Greene
possessed even formal authority. Such actions are nearly
impossible to reconcile with the idea of shares’ having been
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given to Mr. Greene 3 months earlier. Again, the limited later
gifts of comparatively small monetary amounts likewise belie a
preceding gratuitous transfer of the underlying shares, as does
the quitclaim deed of Mr. Greene’s interest in the Simi Valley
residence.
In addition to the positive inferences which may be drawn
from the numerous instances in which decedent did act to exercise
dominion over activity in the Valdes & Moreno account and the
funds generated by the eConnect sales (i.e., as to all material
transactions prior to her death, making all eConnect buy and sell
calls to the broker, wiring the resultant funds, giving
particular gifts to her children, etc.), negative inferences
arise from the lack of any such activity on the part of
Mr. Greene. The record contains no specific evidence of any
instance in which Mr. Greene exercised any formal authority over
the contents of the joint account. Even his testimony portrays a
role only akin to that of an adviser.
Also highly probative is the contemporaneous tax reporting
by both decedent and Mr. Greene. Positions taken in a tax return
may be treated as admissions and may be disavowed only by cogent
proof that they are incorrect. Waring v. Commissioner, 412 F.2d
800, 801 (3d Cir. 1969), affg. T.C. Memo. 1968-126; Mendes v.
Commissioner, 121 T.C. 308, 312 (2003); Estate of Hall v.
Commissioner, 92 T.C. 312, 337-338 (1989).
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On her original 2000 income tax return, decedent reported
selling all 257,500 shares. She further did not file a gift tax
return for 2000. Consistent with his mother’s treatment,
Mr. Greene did not report any sale of shares on his 2000 return.
The change in position to that reflected in decedent’s amended
return transpired only after her death, at a time when she could
no longer speak to her intentions regarding the eConnect stock
and the Valdes & Moreno account. Decedent’s own representations
on a return she reviewed and signed are decidedly more persuasive
than recharacterizations by others nearly 3 years later, not to
mention after an IRS assertion of additional tax due.
Given the entire record in this case, the Court therefore
concludes that the evidence is sufficient to rebut any
presumption, arising due to a parent-child relationship, that a
gift was intended. Hence, the circumstances cited by the estate,
whether viewed individually or as a collective whole, fail to
afford clear and convincing evidence of an intent to make a gift
to Mr. Greene upon decedent’s establishment and funding of the
disputed joint account, as mandated by TPC 438(a). Consideration
of the remaining elements of a gift, i.e., delivery and
acceptance, is unnecessary. The general rule of TPC 438(a) thus
applies to accord ownership of the eConnect stock in proportion
to the respective contributions of the parties to the joint
account. The result is that decedent owned all the shares at the
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time of the sales underlying this litigation, and she alone is
taxable on the gain generated thereby.
To reflect the foregoing and concessions made by the
parties,
An appropriate order and
decision will be entered.