Estate of Lorraine C. Disbrow, Deceased, Martha D. Johnson, Executrix, (2006)
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T.C. Memo. 2006-34UNITED STATES TAX COURT ESTATE OF LORRAINE C. DISBROW, DECEASED, MARTHA D. JOHNSON, EXECUTRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 6739-04. Filed February 28, 2006. Terrence E. Smolev, for petitioner. Marie E. Small, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION LARO, Judge: Petitioner petitioned the Court to redetermine a $426,377.57 deficiency that respondent determined in the Federal estate tax pertaining to the Estate of Lorraine C. Disbrow, Deceased (decedent's estate). Following concessions, we decide whether the fair market value of the residence (residence) -2of Lorraine C. Disbrow, Deceased (decedent), is includable in her gross estate under section 2036(a)(1).1 Decedent gave the residence to a newly formed, assetless general partnership whose partners were decedent, her children, and her children-in-law (i.e., her daughters-in-law and sons-in-law, collectively). Shortly thereafter, decedent gave all of her interest in the partnership to the other partners. Decedent continued to live at the residence until she died, paying the partnership less than fair rental value (FRV). Respondent determined that the fair market value of the residence is includable in decedent's gross estate because decedent until her death retained the 'possession' and 'enjoyment' of the residence within the meaning of section 2036(a)(1). We sustain that determination. We decide this case as the parties framed it, and we express no opinion on the validity of the partnership, which, as we find below, conducted no business and was not operated with an intent to make a profit. Nor do we consider respondent's alternative determination that decedent's estate is not entitled to annual exclusions from gift tax pursuant to section 2503(b) because decedent's gifts were of a future interest. -3FINDINGS OF FACT21. Preface Some facts were stipulated. We incorporate herein by this reference the parties' stipulation of facts and the exhibits submitted therewith. We find the stipulated facts accordingly. Martha Johnson is the executrix of decedent's estate. Martha Johnson resided in Hampstead, New Hampshire, when the petition in this case was filed. 2. Decedent and Her Family Decedent was born on January 14, 1922, and she died at 7:22 a.m. on February 9, 2000, at the age of 78. She was a U.S. citizen and a resident of the State of New York. She died -4-testate, having executed a last will and testament on August 24, 1978. Pursuant to that document, decedent bequeathed her estate to her children in equal shares. Decedent's estate, as reported on the Federal estate tax return, consisted primarily of cash, stocks, bonds, and annuities, and the reported bequest to each child was $118,000. Decedent's husband, John Disbrow, had died on February 23, 1993. He and decedent had five children: Martha Johnson, Nancy Kerrigan, Linda Labet, Sarah Disbrow, and David Disbrow. When decedent died, she also had four children-in-law: Robert Johnson (married to Martha Johnson), Patrick Kerrigan (married to Nancy Kerrigan), Michael Labet (married to Linda Labet), and David Wishart (married to Sarah Disbrow). At the time of the partnership agreement discussed infra, Martha Johnson and her husband lived in Hampstead, New York; Nancy Kerrigan and her husband lived in San Jose, California; Linda Labet and her husband lived in New Milford, Connecticut; Sarah Disbrow and her husband lived in Lincoln, Nebraska; and David Disbrow lived unmarried in Fort Lauderdale, Florida. Decedent's children and children-in-law all survived her. -53. The Residence The residence is at 224 Little Neck Road, Centerport, New York,3 and includes a two-story, single-family house (house) and landscaped grounds. The house is approximately 2,400 square feet and has two bedrooms and a bathroom on the second floor and three bedrooms and two bathrooms on the first floor. The house was built in or around 1955 and has a waterview and a private beach. The house is set in a private wooded area. On September 1, 1993, decedent had the residence valued through a comparative market analysis, which concluded that the residence was marketable at $350,000. John Disbrow purchased the residence on March 1, 1956, and he and decedent lived there until he died. Decedent acquired sole ownership of the residence upon his death, and the residence was her principal residence until she died. When John Disbrow died, decedent's health was failing, and her health continued to be poor until she died. Among other things, decedent during the time after her husband's death suffered a kidney failure and was under kidney dialysis; she was affected by a severe case of peritonitis; she fractured her pelvis; she fractured her hip; she broke both of her legs (getting out of bed); and she had multiple heart attacks, the last of which resulted in her death. During -6-that time, decedent also was feeble from age and mentally unstable. After John Disbrow died, decedent did not always stay at the residence because, for a significant period of time, she was hospitalized, in rehabilitation, or living with David Disbrow as his home in Florida. When decedent was at the residence, she generally confined herself to the first floor because she could not get up the stairs by herself. Decedent generally lived at the residence without anyone to assist her except to the extent that a family member was there also. One or more of decedent's children frequently visited or stayed with decedent to assist her. 4. Funny Hats Partnership (Funny Hats) In addition to her health complications, immediately following John Disbrow's death decedent questioned whether she wanted to keep living at the residence with all of her memories, and she was unsure of the financial aspects of her life and how she would handle the ownership responsibilities associated with the residence (primarily, its maintenance). (John Disbrow had always handled the financial aspects and ownership responsibilities.) Decedent hired a legal team to advise her on her finances. One of her advisers was Anthony Curto (Curto), the attorney whom she had recently retained to probate John Disbrow's estate. Curto advised decedent on the application to her of the probate and estate tax laws, and he advised her that she should -7respond to those laws by transferring the residence to a family general partnership. According to Curto, decedent could then give all of her interest in the partnership to her family, continue to live at the residence as a tenant of the partnership, and remove the residence from the reach of the Federal estate tax. Decedent followed Curto's advice. On December 10, 1993, at almost 72 years of age, decedent (together with her children and children-in-law) executed a general partnership agreement (partnership agreement) forming Funny Hats.4 Curto and his firm prepared all of the documentation for that purpose. As stated in the partnership agreement, the partners of Funny Hats and their partnership interests were as follows: Partner Partnership Interest Martha Johnson 7.1875% Robert Johnson 7.1875 Nancy Kerrigan 7.1875 Patrick Kerrigan 7.1875 Linda Labet 7.1875 Michael Labet 7.1875 David Wishart 7.1875 Sarah Disbrow 7.1875 David Disbrow1 14.3750 Decedent 28.1250 100.0000 -8None of the partners of Funny Hats contributed any asset to Funny Hats upon its formation. Later on December 10, 1993, decedent transferred her entire interest in the residence to Funny Hats for no consideration.5 Immediately before that transfer, decedent, in her capacity as executrix of John Disbrow's estate, had transferred the residence to herself from John Disbrow's estate. As of the time of decedent's transfer of the residence to Funny Hats, the partners of Funny Hats had assured decedent that she could continue to live at the residence as long as she furnished the funds necessary to maintain it. By way of an agreement dated January 1, 1994, decedent gave her 28.125-percent interest in Funny Hats to her children and children-in-law (collectively, donees). In accordance with that agreement, the change to each partner's interest in Funny Hats was as follows: Initial Subsequent Partner Partnership Interest Partnership Interest Martha Johnson 7.1875% 10% Robert Johnson 7.1875 10 Nancy Kerrigan 7.1875 10 Patrick Kerrigan 7.1875 10 Linda Labet 7.1875 10 Michael Labet 7.1875 10 David Wishart 7.1875 10 Sarah Disbrow 7.1875 10 David Disbrow 14.3750 20 Decedent 28.1250 0 100.0000 100 -9-The partnership agreement of Funny Hats states that Funny Hats was 'created to establish and conduct the business of real estate ownership and management' and that its place of business was the address of the residence. Funny Hats conducted no business and was not operated with an intent to make a profit. Decedent wanted to divest herself of the responsibility of maintaining the residence, but the donees wanted her to keep the residence. The donees persuaded decedent to retain the residence by telling decedent that they would maintain the residence as long as decedent furnished the funds necessary to do so. The donees enjoyed the residence as a place to vacation, to get together as a family, or simply to relax. The only assets of Funny Hats were the residence and a checking account. With four exceptions, the checking account of Funny Hats was funded by $69,250 of transfers from decedent, a $6,774 loan from her in 1999, and $1,712 of interest. (We have attached as an appendix our reconciliation of each year's beginning and ending cash balances of the Funny Hats checking account.) The exceptions are: (1) Funny Hats deposited $348,600 at the end of 2000 from a sale of the residence to David Disbrow, (2) each of the partners of Funny Hats, other than David Disbrow, contributed to it $1,000 and $800 in 1995 and 1997, respectively, (3) David Disbrow contributed to Funny Hats an additional $1,000 and $800 in 1995 and 1997, respectively, and he contributed -10-$6,714 to Funny Hats in 2000, and (4) Funny Hats...
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