Early v. Comm'r of Internal Revenue
| Citation | 52 T.C. 560 |
| Decision Date | 26 June 1969 |
| Docket Number | Docket No. 802-67. |
| Parties | ALLEN M. EARLY AND JEANNETTE B. EARLY, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Leland E. Fiske, for the petitioner.
Roy E. Graham, for the respondent.
Petitioners acquired a joint life interest in a percentage of the income from an estate trust in exchange for their transfer to the trust of certain shares of stock transferred to them by decedent outside her probate estate. Held, the amortized cost of acquiring the life estate is deductible under sec. 167(a)(2), I.R.C. 1954. Held, further, that portion of the amortized cost allocable to tax-exempt interest income is not disallowed as a deduction by sec. 265, I.R.C. 1954.
Respondent determined deficiencies in petitioners' Federal income tax of $8,533.62 for 1964 and $7,669.87 for 1965. Petitioners have alleged in their petition overpayments of $2,285.16 for 1964 and $3,334.17 for 1965.
The principal question is whether petitioners have an amortizable cost basis in a joint life interest in a percentage of the income from an estate trust acquired in exchange for their transfer to the trust of certain shares of stock transferred to them by decedent outside her probate estate. If we answer the question affirmatively, we must further decide whether the amortized cost is allowable as a deduction to the extent allocable to tax-exempt interest income.
Some of the facts have been stipulated and are found accordingly.
Allen M. Early (herein called petitioner) and Jeannette B. Early (herein called Jeannette) are husband and wife, who resided in Dallas, Tex., at the time they filed their petition herein. Their joint Federal income tax returns for the years 1964 and 1965 were filed with the district director of internal revenue at Dallas, Tex.
Petitioner has been a practicing certified public accountant for many years. In 1949 he was employed by the Creslenn Oil Co. as office manager and accountant for its Dallas Office. The Creslenn Oil Co. operated certain oil properties jointly with Sam N. Van Wert, a friend of the president of the company, and provided him office space and bookkeeping services for a monthly charge. As accountant for the Creslenn Oil Co., petitioner maintained the books and records of Sam N. Van Wert.
In 1954 Sam N. Van Wert died, leaving most of his estate, which consisted of oil properties and a substantial number of stocks and bonds, to his widow, Rose S. Van Wert (herein called Rose). The Creslenn Oil Co., through petitioner, continued to keep the books and records for Rose, charging her monthly for the service. Her stock certificates, deeds, and bonds, as well as her books and records, were in petitioner's possession.
The petitioners and the Van Werts were friends from the time petitioner became employed with the Creslenn Oil Co.
On November 11, 1957, petitioner prepared a number of stock powers covering 70,000 shares of El Paso Natural Gas Co. stock (referred to herein collectively as the El Paso stock) owned by Rose, naming petitioner as transferee of 50,000 of the shares and Jeannette as transferee of the remaining 20,000 shares. Rose's signatures on the powers were guaranteed to be authentic by a bank official. The powers contained no reservations. The substance of this transaction was not divulged to others during Rose's life.
In 1958 petitioner prepared and filed a Federal gift tax return for Rose for the taxable year 1957 listing total gifts of $5,818.34, consisting of certain stock and debenture rights, not including the El Paso stock, transferred to petitioner.
Rose died on August 12, 1958, leaving a will with codicil in which four specific bequests were made. Dr. William N. Fuqua, Jr., who was Rose's long-time personal physician, and his wife were given Rose's home and personal effects, a maid was given $75,000, petitioner was given $10,000, and petitioners were given $10,000 in trust for their son. Relatives ‘in blood or law’ of Rose were specifically excluded from any bequest or devise. The residue of her estate was transferred to trust with the income to go to the Fuquas during their lives and the life of the survivor, with the remainder in equal parts to Southwestern Medical Foundation and Salesmanship Club Boys Camp, both charitable organizations.
At the time of Rose's death, petitioner was in possession of the El Paso stock and the stock powers covering it, over which he and Jeannette claimed ownership through an inter vivos gift from Rose in 1957, which had been subject to a life interest retained by Rose in the income from the stock.
The will and codicil, which were filed for probate in Dallas County, Tex., were contested by some 44 persons claiming to be Rose's heirs, absent a will, upon the grounds that Rose lacked testamentary capacity at the time of their execution or that they were signed by reason of undue influence by some of the beneficiaries. In addition, certain contestants and beneficiaries objected to the retention of the El Paso stock by petitioners and threatened to bring suit to have the stock declared an asset of the estate.
In November 1959 all interested parties executed a settlement agreement under which petitioners agreed to transfer all the El Paso stock to the estate in exchange for 32 percent of the income from the entire estate for the life of petitioner, less $4,000 per year for the first 4 years, and after his death 32 percent of the income to Jeannette, if she survived him, for her life. The stock powers were declared null and void and were destroyed by petitioner. Petitioners paid a legal fee of $20,000 in connection with this settlement.
The El Paso stock surrendered to the Estate of Rose S. Van Wert (sometimes referred to herein as the estate) by petitioners had a fair market value at the date of transfer of $32.6875 per share, or a total valuation of $2,288,125. Their value was included in the gross estate of Rose in the return filed by her estate as a transfer by gift with the retention of the income for life. Petitioner was designated by Rose and was appointed as coexecutor of her estate.
On January 12, 1960, the estate filed an amended gift tax return for Rose for the taxable year 1957 reporting the full value of the El Paso stock as a taxable gift in that year and paying a gift tax of $341,898.78. On October 27, 1961, the estate filed a claim for refund of the entire amount paid with the amended return. In settlement of the claim, petitioner, as coexecutor of the estate, and the estate tax examiner agreed that for tax purposes Rose made a completed gift to petitioners in 1957, the value of which should be measured by the actuarial value of the life estate ultimately received by them. As a result of this agreement, a refund of gift tax of $180,717.49 was made to the estate.
The administration of the estate was completed on January 31, 1961, at which time all assets were delivered to the trustee of the trust provided for by the will and petitioners began receiving the income according to the settlement agreement. The El Paso stock comprised about 53 percent of the corpus of the trust.
In 1961 petitioner's age was 47 and Jeannette's age was 46. Based upon respondent's actuarial tables, petitioners had a joint expected life of 31.16 years.
In their Federal income tax returns for the years 1961, 1962, 1963, 1964, and 1965, petitioners claimed amortization of a cost basis of the life estates in the Estate of Rose S. Van Wert, computed as follows:
+---------------------------------+
¦Value of life estate ¦$716,919.91¦
+---------------------+-----------¦
¦Legal fees ¦20,000.00 ¦
+---------------------+-----------¦
¦ ¦ ¦
+---------------------+-----------¦
¦Total basis ¦736,919.91 ¦
+---------------------+-----------¦
¦Expected life (years)¦31.16 ¦
+---------------------+-----------¦
¦Annual amortization ¦23,649.54 ¦
+---------------------------------+
The amortization was apportioned between taxable income and non-taxable interest, and the amounts apportioned to nontaxable interest were not claimed as a deduction on their Federal income tax returns. The apportionment was as follows:
During the years 1961 to 1965, inclusive, the petitioners received taxable and nontaxable income from the Rose S. Van Wert Trust as follows:
Petitioners alleged in their petition that they improperly allocated a portion of the amortized cost to nontaxable income and claim that such cost is deductible in full.
OPINIONRespondent argues that the receipt by petitioners of the life estate pursuant to the settlement with the estate was tantamount, under the rationale of Lyeth v. Hoey, 305 U.S. 188 (1938), to an acquisition by ‘gift, bequest, or inheritance,‘ precluding amortization of its value by application of section 273, I.R.C. 1954.1 In addition, respondent obliquely questions whether Rose intended a gift to petitioners of the El Paso stock. Petitioners view the settlement as a taxable exchange of property which resulted in no gain or loss because the basis of the property transferred by petitioners should be deemed to equal the value of the...
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