104 T.C. 498 (T.C. 1995), 13004-90, Estate of Owen v. Commissioner of Internal Revenue

Docket Nº:13004-90
Citation:104 T.C. 498, 104 T.C. No. 25
Opinion Judge:CHABOT, Judge:
Party Name:Estate of Jack Brown Owen, Deceased, Mary Ann Heyen, Executrix, Petitioner v. Commissioner of Internal Revenue, Respondent
Attorney:John T. Suter, for petitioner. C. Glenn McLoughlin, for respondent.
Case Date:April 20, 1995
Court:United States Tax Court
 
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Page 498

104 T.C. 498 (T.C. 1995)

104 T.C. No. 25

Estate of Jack Brown Owen, Deceased, Mary Ann Heyen, Executrix, Petitioner

v.

Commissioner of Internal Revenue, Respondent

No. 13004-90

United States Tax Court

April 20, 1995

          Decision will be entered under Rule 155.

          SYLLABUS

         Decedent died on Oct. 2, 1986. Decedent made gifts in 1984 and before death in 1986. Petitioner paid Kansas State inheritance tax on account of substantially all of these gifts. After decedent's death, there were found in his car checks that had been written by him during the 2 weeks before his death. Petitioner underreported the value of two bank accounts on its Federal estate tax return by the amount of these checks.

         1. Held, the underreporting of the value of a bank account can be a valuation understatement within the meaning of sec. 6660, I.R.C. 1954.

         2. Held, further, petitioner is not entitled to a waiver of the addition to tax as to a $ 30,000 undervaluation of one bank account, but is entitled to a waiver of the addition to tax as to a $ 61,000 undervaluation of another bank account. Sec. 6660(e), I.R.C. 1954.

         3. Held, further, decedent's 1984 and 1986 gifts are not includable in the gross estate. Sec. 2035(a), (d)(1), I.R.C. 1954.

         4. Held, further, petitioner is not entitled to a credit for State death taxes in respect of decedent's gifts. Sec. 2011(a), I.R.C. 1954.

         5. Held, further, decedent's gifts are not to be taken into account in determining the maximum permissible credit for State death taxes. Sec. 2011(b), I.R.C. 1954.

         John T. Suter, for petitioner.

         C. Glenn McLoughlin, for respondent.

          OPINION

          CHABOT, Judge:

          Respondent determined a deficiency in Federal estate tax and additions to tax under sections 6653(a) [1] (negligence, etc.), 6653(b) (fraud), and 6660 (valuation understatement) against petitioner as follows:

Page 499

          Additions to tax

Sec. Sec. Sec. Sec.
Deficiency 6653(a)(1)(A) 6653(a)(1)(B) 6653(b)(1)(A) 6653(b)(1)(B) Sec. 6660
$ 101,960 $ 3,933.62 50 percent of $ 9,287.71 50 percent of $ 7,552
the interest the interest
on on
$ 78,672.45, $ 12,383.62,
the part of the part of
the under- the under-
payment payment
attributable attributable
to neg- to fraud
ligence,
etc.

          In the answer, respondent concedes the fraud additions to tax and asserts increased additions to tax on account of negligence, etc., for each of the items that had given rise to the fraud additions to tax in the notice of deficiency.          After concessions, [2] the issues for decision are as follows:

(1) Whether petitioner is liable for additions to tax under section 6660; (2) whether petitioner is entitled to a credit under section 2011(a) for State death taxes on account of decedent's 1984 and 1986 gifts; (3) whether decedent's 1984 and 1986 gifts are to be taken into account for the purpose of computing the maximum permissible State death tax credit under section 2011(b).

          FINDINGS OF FACT          Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.           Background          When the petition was filed in the instant case, petitioner was a Kansas estate with legal residence in St. John, Kansas. Decedent died a resident of St. John on October 2, 1986. Decedent's estate was probated in Stafford County, Kansas. Mary Ann Heyen (hereinafter sometimes referred to as Mary Ann), decedent's sister, is the executrix of the estate. Mary Ann was a legal resident of St. John when the petition was Page 500 filed. Letters testamentary were issued to Mary Ann by the District Court of Stafford County.          Petitioner's estate tax return was timely filed on July 6, 1987.           Gifts From Decedent--1984, 1986          In 1984, decedent made a gift of 15 shares of St. John National Bank stock, worth $ 14,810; this gift was not reported on petitioner's Federal estate tax return nor on petitioner's Kansas inheritance tax return. This gift is to be taken into account for purposes of section 2001(b) in the instant case as a component of adjusted taxable gifts.          In 1986, decedent gave 80 percent of the stock of Dominion Corp. to Mary Ann. This gift was valued at $ 391,865.82 on petitioner's Federal estate tax return (Schedule G--Transfers During Decedent's Life) and on petitioner's Kansas inheritance tax return and has an adjusted taxable gift value of $ 381,866 (the value of the property, rounded to the nearest dollar, less the section 2503(b) $ 10,000 exclusion). This gift is to be taken into account for purposes of section 2001(b) in the instant case as a component of adjusted taxable gifts and not as a component of transfers during decedent's life.          Also in 1986, decedent made gifts of $ 8,900 in personal property and $ 1,550 in farm assets; these gifts were not reported on petitioner's Federal estate tax return nor on petitioner's Kansas inheritance tax return. These gifts are to be taken into account for purposes of section 2001(b) in the instant case as components of adjusted taxable gifts.          The status of these gifts is summarized in table 1.           Reported on death tax return

Adjusted
taxable gift
Item value Federal Kansas
1984--St. John National Bank stock $ 14,810 not shown not shown
1986--Dominion Corp. stock 381,866 $ 391,865.82 $ 391,865.82
1986--Personal property 8,900 not shown not shown
1986--Farm assets 1,550 not shown not shown
Total 407,126 391,865.82 391,865.82

          Petitioner paid $ 73,545 in Kansas State inheritance tax, some portion of which is attributable to the gift of Dominion Corp. stock. On its Federal estate tax return, petitioner Page 501 claimed a credit for $ 19,978.42 of this amount, and a credit for $ 55,417.55 on account of estate taxes paid by the estate of Jenny Owen, who died in 1984 ( supra note 2), leaving a net Federal estate tax of $ 13,854.39.           Bank Accounts          When decedent died he owned two checking accounts, as follows: St. John National Bank account #120251 (hereinafter sometimes referred to as the St. John Bank account) and First National Bank & Trust of St. John account #35259 (hereinafter sometimes referred to as the First National Bank account). After decedent's sudden death, five checks that decedent had recently written were found by the Reno County, Kansas, Sheriff's Department in a suitcase in decedent's car. Decedent had not delivered these checks. Meryle Heyen (hereinafter sometimes referred to as Meryle) is Mary Ann's husband. Brenda Heyen (hereinafter sometimes referred to as Brenda) is decedent's niece. Bill Bebee (hereinafter sometimes referred to as Bill) is Brenda's husband. These five checks are described in table 2.           Table 2           St. John Bank account

Notation on
Date Payee check memo line Amount
9/21/86 Brenda Gift $ 10,000
9/21/86 Bill Gift 10,000
9/21/86 Meryle Gift 10,000
Total 30,000

          First National Bank account

9/27/86 Mary Ann Past loan and re- 61,000
imbursed expenses
9/21/86 Meryle Heyen, Fertilizer [1] 3,720
Inc.

         The $ 61,000 check to Mary Ann was not honored by the First National Bank & Trust of St. John in the ordinary Page 502 course of business. It was later presented anew and cashed, however, by direction of the Probate Court some months after decedent's death. The three $ 10,000 checks and the $ 61,000 check are not payments for decedent's legal obligations.          Table 3 shows the actual values of the two bank accounts as of the date of decedent's death, and the values reported on petitioner's Federal estate tax return.           Table 3

Reported as
percent of
Reported Actual actual [1]
St. John Bank account $ 54,517 $ 84,517 64.5
First National Bank
account 19,052 [2] 80,052 23.8

          The underreporting of the values of the two bank accounts, shown in table 3, resulted from petitioner's reducing the actual values of those bank accounts by the amounts of the first four checks described supra in table 2.          The amounts reported on petitioner's Federal estate tax return are the same as the amounts reported on the Inventory and Valuation filed with the District Court of Stafford County on June 19, 1987. The Inventory and Valuation further describes the bank accounts under the category All Other Personal Property, as follows:

6. Checking account #35259, First National Bank
& Trust, St. John, Ks, $ 83,772.20 less outstand-
ing checks of $ 3,720 and $ 61,000 $ 19,052.20
7. Checking account #120251 St. John National
Bank, St. John, Ks, $ 84,516.79 less outstanding
checks of $ 30,000 54,516.79

         In contrast, petitioner's Federal estate tax return shows only the net amounts and does not refer to the outstanding checks. The checks referred to in the Inventory and Valuation are the checks described supra in table 2. Page 503           Gifts to Decedent          During 1984 and 1985 Mary Ann and Meryle each wrote checks payable to decedent; these checks were cashed or deposited. The account on which the checks were written is titled in the names of Mary Ann, Meryle, and Brenda.          These checks are described in table 4.           Table...

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