Kerr v. Comm'r of Internal Revenue (In re Estate of Cavenaugh)
| Citation | 100 T.C. 407,100 T.C. No. 27 |
| Decision Date | 13 May 1993 |
| Docket Number | No. 24321–90.,24321–90. |
| Parties | ESTATE OF Herbert R. CAVENAUGH, Deceased, Wm. Monroe Kerr, Independent Administrator, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Wm. Monroe Kerr and A.M. Nunley III, for petitioner.
Steve Brower, for respondent.
Respondent determined a deficiency of $215,075 in petitioner's Federal estate tax and an addition to tax of $43,015 under section 6651(a)(1) for late filing of the Federal estate tax return.
Unless otherwise noted, all section references are to the Internal Revenue Code in effect as of the date of Herbert R. Cavenaugh's death, and all Rule references are to the Tax Court Rules of Practice and Procedure. All references to petitioner are to the Estate of Herbert R. Cavenaugh.
After concessions by the parties, the following questions remain for decision:
(1) Whether petitioner erroneously excluded from the gross estate of Herbert R. Cavenaugh (Dr. Cavenaugh) property that passed to him from his predeceased first wife Mary Jane Stephens Cavenaugh (Mrs. Cavenaugh), for which he, as executor of her estate, had elected to claim a marital deduction for qualifying terminable interest property under section 2056(b)(7);
(2) whether petitioner erroneously excluded from Dr. Cavenaugh's gross estate one-half the death benefit paid to petitioner as named beneficiary of a term life insurance policy on his life that had been taken out during the lifetime of Mrs. Cavenaugh; and
(3) whether petitioner is liable for an addition to tax under section 6651(a)(1) for late filing of the Federal estate tax return.
We answer these questions in the affirmative, thereby adopting each of respondent's determinations.
Some of the facts have been stipulated and are so found.
Dr. Cavenaugh was a practicing physician who resided in Midland, Texas, when he died on May 15, 1986. Surviving Dr. Cavenaugh were his second wife, Cindy Evon Gwin Cavenaugh (Cindy Cavenaugh), and his three sons by Mrs. Cavenaugh: Herbert R. Cavenaugh, Jr., James S. Cavenaugh, and John W. Cavenaugh. When the petition in this case was filed, Wm. Monroe Kerr, petitioner's independent administrator, resided in Texas.
Mrs. Cavenaugh was married to Dr. Cavenaugh when she died on July 31, 1983. The Cavenaughs 1 had been married for more than 25 years at the time of Mrs. Cavenaugh's death. When Mrs. Cavenaugh died, and for many years prior to her death, the Cavenaughs had resided in Texas, a community property State.
On August 17, 1980, the Cavenaughs purchased, from New England Mutual Life Insurance Co. (New England Mutual), a $650,000 face amount term life insurance policy (the policy). The policy provided that New England Mutual would pay the face amount to the named beneficiary on receipt of proof of Dr. Cavenaugh's death. The policy had a 1–year term and could be renewed automatically, by annual payments of increasing premiums, to a final expiration date of August 17, 2001. The policy also could be converted to “permanent insurance”, at the Cavenaughs' option, any time prior to its anniversary date nearest Dr. Cavenaugh's 65th birthday.
The policy had no cash value or loan value. However, the policy did provide for an annual dividend to be determined each year by New England Mutual and credited to the policy. Dividends, at the Cavenaughs' election, could be paid in cash, used to reduce premiums, or held and accumulated by New England Mutual for the benefit of the Cavenaughs or the beneficiary of the policy. Accumulated dividends would bear interest, the rate to be determined each year by New England Mutual but not less than 3.5 percent per year compounded yearly. The Cavenaughs were permitted to withdraw the accumulated dividends at any time with the balance to be paid, at the policy's termination, to the Cavenaughs or the named beneficiary.
Dr. Cavenaugh renewed the policy, either joined by Mrs. Cavenaugh or individually, each year until his death on May 15, 1986. On August 27, 1985, the face amount of the policy having been increased to $750,000 at some unspecified prior time, Dr. Cavenaugh filed an application with New England Mutual to reduce the face amount of the policy from $750,000 to $650,000. The policy had a face amount of $650,000 at Dr. Cavenaugh's death on May 15, 1986.
Petitioner was the named beneficiary of the policy from at least August 27, 1985, until it terminated with Dr. Cavenaugh's death. On October 20, 1986, New England Mutual paid petitioner, as the named beneficiary of the policy, a death benefit of $654,160.62. The death benefit consisted of the policy's face amount of $650,000, post mortem dividends of $3,367.87, and a return of unused premium of $792.75.
On October 2, 1980, Mrs. Cavenaugh executed her last will and testament. In that will, Mrs. Cavenaugh named Dr. Cavenaugh and Midland National Bank, Midland, Texas (Midland National Bank), or its successor, independent executor and successor independent executor of her estate, respectively. Midland National Bank, or its successor, also was named trustee of the residuary trust under the will.
The bulk of Mrs. Cavenaugh's estate was to be held in trust by Midland National Bank, as trustee, for the benefit of Dr. Cavenaugh during his life, and then for the benefit of the Cavenaugh children. However, Mrs. Cavenaugh's will also provided for specific transfers to Dr. Cavenaugh of various interests in real property. Among such interests was a life estate in Mrs. Cavenaugh's community interest in the family home, which interest was valued on her Federal estate tax return at $185,000.2 Article III of Mrs. Cavenaugh's will provided that
it is my will that my husband, so long as he lives, shall have the full use and occupancy without any charge or obligation whatsoever of my interest in our family homestead in Midland, Midland County, Texas, or any other home bought out of the product [sic] thereof, as hereinafter provided. My Trustee * * *, and my beloved husband, shall have the power to sell said home, or other home acquired with the product [sic] thereof, and in the event of such sale, the proceeds of such sale, or so much thereof as said Trustee determines necessary or appropriate for the purpose shall be invested by the Trustee in another home; but if my husband shall not desire the reinvestment of such proceeds in such substitute home, then my interest in the proceeds of such sale shall be and become part of the residue of my estate and shall be governed by the provisions respecting the residue of my estate * * *. I hereby direct that my Trustee * * * cooperates [sic] fully in permitting my said husband's full enjoyment thereof.
Mrs. Cavenaugh also transferred to Dr. Cavenaugh, in Article IV of her will, a life estate in her community interests in other real property, including mineral interests, which were assigned an aggregate value of $305,672.30 on her Federal estate tax return. With respect to these transferred property interests, Mrs. Cavenaugh's will provided, in pertinent part of Article IV, that
Under no circumstances is it my intent to invest in my said husband, nor shall he have, any right or power which would ever enlarge his interest in any of the property referred to herein beyond that of a life tenant, or which would or should ever be construed to be such as to cause the principal or corpus of any of such property to be includable in the estate of my said husband for either Federal estate or state inheritance tax purposes at the time of her [sic] death.
In Article V of her will, Mrs. Cavenaugh gave the residue of her estate to Midland National Bank as trustee of the residuary trust. Paragraph B of Article V of Mrs. Cavenaugh's will directed her trustee to pay Dr. Cavenaugh, during his lifetime, the net income of the residuary trust. Paragraph B of Article V of the will also provided that the payments thereunder should be made “monthly or at the end of such other periods as may be necessary or desirable in the discretion of the Trustee.” Paragraph D of Article V of the will provided Dr. Cavenaugh a noncumulative right to withdraw, in any calendar year, from the corpus of the residuary trust the greater of $5,000 or 5 percent of the market value of the principal.
On August 23, 1983, the Midland County Court admitted Mrs. Cavenaugh's will to probate. The Midland County Court, pursuant to Article VII of the will, appointed Dr. Cavenaugh executor of Mrs. Cavenaugh's estate. Dr. Cavenaugh did not notify the Midland National Bank, or its successor in interest, First City National Bank of Midland, that it had been named trustee of the residuary trust under the will.
Although Dr. Cavenaugh was the executor of Mrs. Cavenaugh's estate for almost 3 years, the community assets were not partitioned or distributed during this time. However, a few months after Mrs. Cavenaugh's death, Dr. Cavenaugh sold the Cavenaugh family home, without joining or notifying Midland National Bank or its successor. Dr. Cavenaugh reinvested the sales proceeds in another house and a $60,000 interest-bearing promissory note.
Dr. Cavenaugh, as executor of Mrs. Cavenaugh's estate, hired Robert J. Kaufman, a certified public accountant, to prepare Federal estate and Texas inheritance tax returns for Mrs. Cavenaugh's estate. Dr. Cavenaugh told Mr. Kaufman that his primary concern was to reduce to zero Mrs. Cavenaugh's estate and inheritance tax liabilities.
Mrs. Cavenaugh's Federal estate tax return prepared by Mr. Kaufman claimed no unified credit against estate tax. However, Dr. Cavenaugh elected to claim a marital deduction for all qualified terminable interest property (QTIP) under section 2056(b)(7). Schedule M of Mrs. Cavenaugh's estate tax return included the following statement: “The entire net estate passes directly to the surviving spouse under paragraph II of the will of the...
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