Estate of Ona E. Hendrickson, (1999)

Docket Number: 13527-97

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Estate of Ona E. Hendrickson, (1999)

T.C. Memo. 1999-357

UNITED STATES TAX COURT ESTATE OF ONA E. HENDRICKSON, DECEASED, DONALD G. HENDRICKSON, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 13527-97. Filed October 25, 1999.

Scott R. Cox and Sheldon G. Gilman, for petitioner. Russell D. Pinkerton, for respondent.

CONTENTS Overview of Issues and Conclusions .............. 4 FINDINGS OF FACT ....................... 6

The Hendrickson Family Farm ............... 9 Decedent's Gifts of Family Farm Land ........... 9 Income and Losses From Family Farm Operations ..... 11 Decedent's Share of Investment Income of Garry's Estate;

Value of Coal Mining Rights ............. 14

Distributions From Garry's Estate to Decedent ..... 16 Expenses Attributable to Decedent's Investment Income . 17 Net Investment Income of Garry's Estate to Which Decedent Became Entitled During 1979-93 ........... 17 Facts Relating to Petitioner's Primary Position--Existence of Claimed Family Farm Partnership ......... 18 Facts Relating to Petitioner's Secondary Position--Use of Decedent's Investment Income To Pay Expenses of Family Farm; Consideration Received by Decedent for Any Investment Income Not So Used .......... 21 HEI Receivable ..................... 21 Children's Performance of Services for Family Farm ... 22 Land Bank Loan ..................... 23 Use of Land Bank Loan Proceeds ............. 23 Interest Deductions Claimed by Garry's Estate or Decedent With Respect to Land Bank Loan ........... 25 Security for Land Bank Loan Included in Decedent's Estate 25 Miscellaneous Facts Relating to Land Bank Loan ..... 27 OPINION I. Did Decedent Make Taxable Gifts of Investment Income Received by Garry's Estate During 1979-93? ...... 27

A. Relevance of Decedent's Taxable Gifts to This Estate Tax Case .................. 29

B. Broad Definition of "Taxable Gift" ......... 31 C. The Parties' Positions--In General ......... 33 D. Petitioner's Primary Argument--Decedent's Transfer of Investment Income Was a Bona Fide, Ordinary Business Transaction ............... 39

E. Petitioner's Secondary Argument--Decedent Either Spent Investment Income on Her Own Expenses or Received Full Consideration for Any Income That Benefited Children .............. 48

1. Petitioner's Estate "Accounting" ........ 49 2. Unreliability of Petitioner's Accounting .... 50 3. Petitioner's Accounting Shows That Much of Decedent's Investment Income Was Spent on Children's Expenses .............. 52

4. Decedent Did Not Receive Consideration Claimed by Petitioner for Any Income Not Used To Pay Farm Expenses ........... 53

5. No Land Bank Loan Payments Were Decedent's Expenses ................... 56

6. Decedent's Income Was Not Used To Pay Decedent's Share of Expenses of Any Business Other Than Family Farm .................. 58

F. Decedent Gave Her Investment Income to Children As Asserted by Respondent on Brief, Except to Limited Extent Income Was Used To Pay Decedent's Share of Expenses of Family Farm ......... 60

II. Is Petitioner Entitled To Deduct a Portion of Land Bank Loan as Unpaid Mortgage? .......... 64 A. Value of Security Included in Decedent's Estate .. 65 B. Uncertainty That Land Bank Loan Will Ever Be Paid by Decedent's Estate ............ 68 1. Petitioner's Section 2053 Deduction Must Be Reduced on Account of Decedent's Contribution Rights ............. 68

2. The Value of Decedent's Contribution Rights Cannot Be Determined ............ 70

3. Decedent's Status as Guarantor or "Accommodation" Party ............ 71 C. Conclusion Re Unpaid Mortgage Deduction ...... 72 III. Unused Exclusions Available as Conceded in Respondent's Brief; Offset and Deduction for Gift Taxes Payable ................... 74

MEMORANDUM FINDINGS OF FACT AND OPINION BEGHE, Judge: Respondent determined a deficiency of $1,243,548 in the Federal estate tax of the Estate of Ona E. Hendrickson, Donald G. Hendrickson, personal representative (petitioner). Respondent also determined a late filing addition to tax of $248,710 under section 6651(a)(1).1 By amended answer, respondent asserted an additional deficiency of $150,178 in estate tax and an additional late filing addition of $30,035.

Overview of Issues and Conclusions Following concessions by the parties,2 the two issues for decision are the "lifetime gifts" issue and the "unpaid mortgage" issue.

The lifetime gifts issue concerns whether, during 1979-93, Ona E. Hendrickson (decedent) made lifetime taxable gifts to her children of $913,200 in coal royalties, dividends, and interest received by the estate of her late husband. Petitioner asserts that decedent made no such gifts. According to petitioner, decedent made transfers of her share of the estate's investment income to a "family farm partnership" owned one-half by decedent and one-half by the children. Petitioner ...

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