DocketNumber: Docket No. 6198-69.
Citation Numbers: 34 T.C.M. 758, 1975 Tax Ct. Memo LEXIS 198, 1975 T.C. Memo. 173
Filed Date: 6/2/1975
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
HALL,
FINDINGS OF FACT
Some of the facts have been stipulated and are accordingly found.
At the time of his death in Centralia, Washington on June 26, 1965, Samuel A. Agnew was a resident of Lewis County, Washington. Decedent was 86 years old and left a will dated March 25, 1964 and accompanying codicil dated April 9, 1964.
The will appointed the decedent's son, Samuel Jay Agnew ("Jay Agnew") and the Seattle-First National Bank ("Bank") co-executors. On July 1, 1965, the decedent's will was admitted to probate in the Superior Court of the State of Washington for Lewis County, and the court appointed Jay Agnew and the Bank co-executors.
Jay Agnew is a college graduate with a degree in business administration. For two years he studied forestry in college. Prior to 1963 he was primarily engaged in managing his father's ranch and farm operations in Washington, and did not participate in the family timber operations which were confined primarily to the State of Oregon. Beginning in 1963, due to his father's failing health, he became active in the Oregon timber operations. At the time of trial Jay Agnew was 56 years*200 old.
The will and codicil, after providing certain specific bequests, provided that the residue of the estate be placed in trust for the benefit of decedent's widow, Kathryn Agnew, for her life. Upon her death 1 the property was to be distributed, after certain additional bequests, as follows: 55 percent to Jay Agnew; 25 percent in trust for the benefit of Jay Agnew and his wife during their lifetimes, and upon the death of the survivor of them to their children, Danny and Zan Agnew; and 20 percent in trust for the benefit of Danny and Zan Agnew. Jay Agnew and the Bank were designated by the will and approved by the court as co-trustees of the trusts. Since the estate was clearly solvent, it was able to qualify under Washington law as a "non-intervention" estate, a status which allows probate with a minimum of court supervision. 2
The will provided that in the management of the estate and trusts the Bank would abide by the decisions of Jay Agnew. Except for certain specific bequests and a token amount used to fund the residuary trusts, the estate has not been distributed.
*201 On January 1, 1965, decedent and his wife made gifts to Jay Agnew of certain community property located in Oregon3 and California. 4 Decedent's one-half interest in these properties was included, as a gift in contemplation of death, in his gross estate for Federal estate tax purposes. The gift property located in Oregon included certain timber lands.
At the time of his death, decedent and his wife owned certain community property located in the State of Washington. All of this property was subject to probate in Washington. In addition, decedent and his wife owned timber property and other*202 assets located in the State of Oregon. All of these Oregon assets, having an approximate value of $16,000,000, were the subject of an ancillary probate administration in Curry County, Oregon. None of the Oregon property was appraised or inventoried in the Washington probate proceeding.
The decedent's will directed that Jay Agnew should either serve as executor of the Oregon estate or choose the administrator if he and/or the Bank were not able to serve. Because Oregon law did not at that time allow non-residents to serve in that capacity, Jay Agnew arranged for Maurice Saunders, an Oregon resident, to become the Oregon administrator of decedent's estate. Saunders was an employee and friend of Jay Agnew and served without compensation. Subsequently, Oregon law was changed to allow a non-resident individual to act as executor. Thereafter, Saunders resigned in favor of Jay Agnew, who was appointed as executor by the Oregon probate court on March 15, 1973. An attorney, William E. Taylor, was engaged to assist in the Oregon administration. He was paid a fee of $25,000.
The services rendered by the Bank as executor were extensive and varied. Much time and effort was expended in inventorying*203 and inspecting the assets, formulating overall policy, preparing and reviewing tax returns, participating in certain litigation, evaluating claims against the estate, reviewing and planning investments and consulting with Jay Agnew and legal counsel to attempt to settle Federal and state estate, inheritance, and income tax deficiencies. While the Bank has previously been the executor for many estates, this ranks among the largest, most diverse, and complicated estates the Bank has ever administered, either jointly or alone. Several Bank employees from various departments were involved, including members of the trust, tax, accounting and investment departments. A number of officers in these departments were employed almost full time for several years on the estate. At the time of trial the estate was still attempting to resolve Federal and state tax conflicts.
Jay Agnew performed services of the same general nature as did the Bank. There was, however, no duplication of services to the estate. Shortly after the decedent's death in June 1965, Jay Agnew, together with the Bank, developed a long-term plan for management of the decedent's timber land, including harvesting the timber, reseeding*204 the cutover land, and bringing it to a sustaining cycle. It takes 30 to 50 years after reseeding before timber is marketable. A long-term approach was taken by Jay Agnew in other areas as well. He negotiated a 25-year lease of coal land the estate held in Washington to several utilities companies on a royalty basis. In making investments as co-executor, Jay Agnew purchased securities with a long-term capital gains position in mind.
Jay Agnew was responsible for the daily management of the total estate, including the Oregon administration, and was the final arbiter of disagreements between himself and his co-executor. To aid him in this task, Jay Agnew had certain employees of one of his companies, the Agnew Lumber Company in Centralia, Washington, perform bookkeeping, investment analysis, banking, secretarial, tax planning and other services for the estate. The cost of office assistance provided by the Agnew Lumber Company between 1966 and 1972, inclusive, attributable to the management of the estate and for travel expenses was approximately $137,226. This sum was deducted for Federal income tax purposes as business expenses by either the Agnew Lumber Company or S.J. Agnew Company, *205 an individual proprietorship owned by Jay Agnew. The figure does not include any salary for Jay Agnew. No part of these expenses was reimbursed by the estate. Jay Agnew did not maintain a detailed time record of his activities as executor. Because the estate's affairs were inextricably interwoven with all of his business affairs, he considered every decision made to be at least in part an estate administration decision.
Under Jay Agnew's management neither the main estate nor the ancillary estate purchased any additional timber or timberlands except to "square up" or "block-up" lines. 5 This occurred on approximately four occasions.
As executor, Jay Agnew employed certain individuals to guard the timber against fire and insect infestation. The estate's Oregon land and the Oregon land which Jay Agnew had received from his parents as a gift in 1965 were managed as a unit, with no allocation made between the two parcels regarding maintenance and other costs. The land belonging to Jay Agnew personally was not logged from the time of the gift to the time of trial.
Prior to his death, the decedent had entered*206 into a contract with Jay Agnew under the terms of which Jay Agnew cut and removed certain Oregon timber owned by decedent. The contract remained in effect after decedent's death, during which time the contract was revised several times. The contract and the laws of Washington and Oregon required reforestation when timber was cut.
The estate liquidated some of its assets, and the proceeds have been used or reserved for the payment of estate, inheritance and income taxes, and administrative expenses. The executors expect those items to total in excess of $10,000,000. The total estate income from the date of death through 1972 was $4,941,246, before Oregon and Federal income taxes.
On May 29, 1973 the co-executors filed a joint "Petition for Approval of Executor's [sic] Fees" in the Lewis County Superior Court. A detailed explanation of the services rendered to the estate by each co-executor was attached, along with four exhibits. The executor fee schedule normally used by the Bank would have resulted in a fee of approximately $635,000. However, in recognition of the fact that the everyday operations of the estate were managed by Jay Agnew, the Bank claimed only $440,193.12. Jay*207 Agnew claimed total executor's fees of $600,000, 1.89 percent of the total estate.
On May 31, 1973 a judicial hearing with regard to the petition for executors' fees was held by Court Commissioner Lee J. Campbell. In attendance were J. M. Cunningham, attorney for the co-executors; David L. Servies, Vice President and Trust Officer of the Bank; Dan Agnew, adult grandson of decedent; Stanley Tonge, accountant for the Agnew Lumber Company; and Jay Agnew. Zan Agnew had been orally notified of the hearing but did not attend. The hearing lasted between 30 and 40 minutes. After taking the testimony of witnesses and examining the file, Commissioner Campbell approved the fees of both executors. Commissioner Campbell has acted as Court Commissioner in Lewis County on a part-time basis for approximately 35 years. Serving as the only judge in Lewis County was D. J. Cunningham, the brother of J. M. Cunningham. Although Judge D. J. Cunningham issued at least one order concerning the estate, J. M. Cunningham, attorney for the estate, felt that the interests of all concerned would be best served if his brother did not sit on the case. Accordingly, the case was handled by Commissioner Campbell.
*208 In most instances, the minimum fee schedule of the Lewis County Bar Association is used by the court in determining ordinary executors' fees. The schedule does not contemplate contested matters, litigation or any other such non-ordinary services. If the minimum fee schedule had been applied, the fee of Jay Agnew would have been between $634,000 and $635,000.
The gross value of the entire community estate, plus decedent's one-half community interest in the 1965 gift, was approximately $31,700,000. It consisted of real estate and improvements, mineral rights, stock, bonds, livestock and other miscellaneous assets.
Of the $600,000 fee paid to Jay Agnew, $100,000 was paid in 1969 and $500,000 in 1971. One-half of this fee (chargeable to decedent's one-half interest in the whole community property of decedent and his wife subject to probate) was deducted on the estate tax return as an administrative expense.
OPINION
Respondent contends that to the extent Jay Agnew performed services with a value in excess of $250,000, those services are non-deductible services of a
*210 The estate argues first that Jay Agnew's executor's fee attributable to decedent's one-half of the community property is deductible as a matter of law under
Respondent's innuendo that as a friend of the executor's attorney, the Commissioner was somehow biased or influenced is not justified. As a witness Commissioner Campbell impressed this Court as credible and forthright. Moreover, respondent--who called the Commissioner as a witness-had every opportunity to expose any impropriety or prejudice on the part of Commissioner Campbell while he was on the stand. Nothing irregular was discovered. The fact that members of bench and bar in a small town know each other is not surprising. Standing alone, this fact implies nothing and from it we infer nothing.
We now turn to the question whether Jay Agnew was functioning as executor or
Respondent's reliance upon
Having concluded that no
To reflect the concessions previously made
1. Kathryn Agnew died on June 14, 1971. ↩
2. See
3. Although Oregon is not a community property state, the Oregon property was purchased with Washington community property and was treated by decedent and his wife and the various taxing authorities like community property, i.e., all of it was included in the Oregon probate but only decedent's one-half was included in his taxable estate. ↩
4. This resulted in a dispute with the State of "Continued" California concerning the value of the gift for state inheritance tax purposes. At the time of trial the dispute had not been resolved. No ancillary administration was required in California.↩
5. This refers to purchasing a piece of land to fill out a section.↩
6. Only one-half of the fee, chargeable to decedent's one-half interest in the whole community property of the decedent and his wife subject to probate, is deductible on the estate tax return as an administration expense. ↩
7.
(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--
* * *
(2) for administration expenses,
* * *
as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.↩
8. Respondent asserts that "there is no reason at all why the great bulk of assets should not have been formally transferred over to the testamentary trustees, retaining only that portion necessary to provide for the disputed taxes." The amount of the disputed taxes, however, was unknown and potentially enormous. Had the co-executors guessed wrongly, they would have had to attempt to recover the assets from the transferees under penalty of personal liability.↩
9.
Estate of David Smith, Deceased v. Commissioner of Internal ... , 510 F.2d 479 ( 1975 )
Sharpe's Estate v. Commissioner of Internal Revenue , 148 F.2d 179 ( 1945 )
In Re the Estate of Bailey , 56 Wash. 2d 623 ( 1960 )
Estate of Mary F. Colton Park, Detroit Bank and Trust ... , 475 F.2d 673 ( 1973 )
Estate of Thomas W. Streeter, Deceased v. Commissioner of ... , 491 F.2d 375 ( 1974 )
In Re Belknap's Estate , 12 Wash. 2d 643 ( 1942 )