Pittard v. Comm'r of Internal Revenue (In re Estate of Pittard)

• Decision Date: 06 December 1977
• Docket Number: Docket No. 1399-74.
• Parties: ESTATE of ALLIE W. PITTARD, DECEASED, JOHN E. PITTARD, JR., EXECUTOR, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

69 T.C. 391

ESTATE of ALLIE W. PITTARD, DECEASED, JOHN E. PITTARD, JR., EXECUTOR, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 1399-74.

United States Tax Court

Filed December 6, 1977.

The executor administrated his mother's estate managed and operated a corporation in which his mother was sole shareholder, and was a cobeneficiary of her estate. The estate tax return he filed substantially understated the value of the estate. Held, the estate is not entitled to a sec. 2053 deduction for the money the deceased borrowed from the banks and transferred to the corporation, because the estate could have been reimbursed by the corporation. Held, further: The estate's return was false and fraudulent with the intent to evade taxes. Therefore, the additions to tax under sec. 6653(b), I.R.C. 1954, are applicable. Charles L. Steel IV, for the petitioner.

Gary F. Walker, for the respondent.

IRWIN, Judge:

Respondent determined a deficiency of $74,725.72 and an addition to tax for fraud under section 6653(b)¹ of $37,362.86 in petitioner's estate tax return filed in 1970. Other issues having been disposed of by agreement of the parties, the three issues remaining for decision are:

(1) Whether the executor improperly omitted his mother's corporation stock and her annuity payments from her original estate tax return;

(2) Whether the estate's deduction claimed for decedent's debt on three notes was canceled by decedent's right to look to Chapman Corp. for payment of the notes; and, if there exists such a right, whether this right of reimbursement was worthless; and

(3) Whether any part of the deficiency was due to fraud with intent to evade taxes.

FINDINGS OF FACT

Some of the facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, are found accordingly.

Allie W. Pittard (Allie) was a resident of Oxford, N.C., when she died testate on July 19, 1969. John E. Pittard, Jr. (Pittard, Jr. or petitioner), decedent's son, was appointed executor of the estate. At the time of filing the petition herein, petitioner resided in Oxford, N.C.

A Federal estate tax return was filed on December 14, 1970, with the District Director of Internal Revenue, Greensboro, N.C. No payment of the amount reported due and owing on the return was submitted with the filing of the return. An amended Federal estate tax return was filed on August 29, 1972.

Allie's husband, John E. Pittard, Sr. (Pittard, Sr.), predeceased her in March 1953. Pittard, Sr., was survived by his wife, Allie, their daughter, Wilma P. Searles (Wilma or Mrs. Searles), and their son, John E. Pittard, Jr., who is the executor herein. Subsequent to his father's death, petitioner has resided in Oxford, N.C., and his sister, Wilma, has resided in California with her husband, Fred Searles.

When Pittard, Sr., died in 1953, he was president and chief executive of Chapman Lumber Co. of Oxford, North Carolina, Inc. (Chapman Corp.).

As of May 29, 1942, Chapman Corp. had 200 shares of issued and outstanding common stock. At his death Pittard, Sr., held 198 of these shares, his wife, Allie, held 1 share and Hal Pittard held 1 share.

Allie became executrix of Pittard, Sr.‘s estate. With regard to the probate of that estate she reported his interest in the 198 shares of Chapman Corp. stock to the Clerk of Superior Court, Granville County. Allie was the sole devisee and legatee of Pittard, Sr.‘s will, thus receiving all the rights and interests to those 198 shares held by her predeceased husband. When Allie died on July 19, 1969, her will conveyed her 200 shares² of Chapman Corp. stock to her daughter, Wilma, and to her son, Pittard, Jr., as follows:

To my daughter, Wilma P. Searles, and my son, J. E. Pittard, Jr., share and share alike, I give, devise and bequeath in fee-simple forever my entire net real and personal estate, provided, however, that my son, J. E. Pittard, Jr., shall have and he is hereby extended the privilege of taking my Chapman Lumber Company stock on account of his share at a value to be placed upon the same as of the date of my death by agreement between my daughter and son, if possible, and if my daughter and son are unable to agree on the value of such stock I direct that such value be fixed and determined by three qualified appraisers, one to be selected by my daughter, the other to be selected by my son, and the third to be selected by the other two, and the value placed upon such stock shall be binding upon both my daughter and my son, and after the value of said stock shall have been determined in one or the other manners herein provided for my said son shall, if he desires, have such stock in full of his share in my estate if such value equals one-half of the net value of my estate, and if it does not equal one-half of the net value of my estate he shall have such stock on account of his share, and if it exceeds one-half in value of my net estate, then my said son shall effect equality with his sister by paying to her one-half of the difference between the value placed on said stock and one-half of the net value of my estate.

Pittard, Jr., had not read his mother's will until it was presented for probate. Pursuant to the provisions of this will, a proposed sales agreement was drafted by Wilma's attorney to enable Pittard, Jr., to purchase his sister's share of the Chapman Corp. stock. This proposed agreement followed a meeting held between Wilma and her husband, their attorney, an unnamed accountant, and Pittard, Jr., and his attorney, Stephen S. Royster. The written agreement was never signed and no stock was ever purchased subsequent to this agreement attempt.

After his mother's death, Pittard, Jr., was contacted by one of respondent's agents on an unrelated tax collection matter. The agent and petitioner had known each other for approximately 25 years. Pittard, Jr., showed the agent the assets of the estate and was reminded by the agent that one-half of Allie's estate would go to his sister. As executor, Pittard, Jr., filed his mother's estate tax within 17 months after her death. This return was prepared by an attorney based on information supplied by Pittard, Jr. Petitioner succeeded his mother as fiduciary of his father's estate. He filed a final accounting for his father's estate with Superior Court and personally negotiated the value of the Chapman Corp. stock for his father's estate. Petitioner did not include the 200 shares of Chapman Corp. as an asset of his mother's gross estate in the original return filed December 14, 1970.

Petitioner graduated from high school, attended college for 2 years, and then started working with his father, Pittard, Sr., at Chapman Corp. in 1948. Subsequent to his father's death in 1953, petitioner managed and operated the corporation. Allie was elected secretary of the corporation in 1953. On her death, the corporation's financial statements, books, and records were in petitioner's control. At the time he served as executor of his mother's estate, he was also a member of the boards of directors for both the Union National Bank and the Granville Savings & Loan Association in Oxford, N.C.

As executor, Pittard, Jr., retained Stephen S. Royster, an attorney, for his mother's estate. When the will was probated, Royster discussed the estate with the clerk of the court. Royster prepared Allie's estate tax return from information provided him in the main by petitioner. He advised petitioner to account for every asset in the estate. While it is a general practice for Royster to sign the attorney's declaration stating that the return is true, correct, and complete based on all information relating to matters required to be reported on the return, Royster did not sign the declaration on Allie's estate tax return. Royster also represented Chapman Corp. and was familiar with its corporate affairs.

Allie's estate tax return was selected and assigned for audit 2 years after her death. Preliminary to auditing the return, respondent's agent contacted the clerk of the court for Granville County. The clerk disclosed public records to the agent which indicated that the Chapman Corp. stock was included in Pittard, Sr.‘s estate and that Allie inherited that stock as sole beneficiary of that estate.

In November 1971, respondent's agent questioned Royster about the stock omission. The attorney replied that Pittard, Jr., had told him that he had purchased his mother's stock 4 to 6 years before her death. When petitioner was contacted by respondent's agent on May 4, 1972, he was advised by petitioner that he had purchased his mother's Chapman Corp. stock in 1953, the year his father died. Petitioner also told the agent that the documents concerning the sale had been burned in a fire that destroyed all Chapman Corp. records and some of his and his mother's personal records after his mother's death in 1969 and that the stock record book was destroyed by fire. Pittard, Jr., could not recall what he paid for the stock and produced no evidence of the purchase from any records. However, it was subsequently discovered that corporate records—-including the corporate minute book, stock certificates, stock record book, some financial books and records, and some of Allie's personal correspondence between Allie and Chapman Corp.—-were located in the corporation's safe at Allie's death in 1969 and were not destroyed by fire. Respondent produced two stubs from the stock record book at trial. They contained the notation that on January 5, 1970, John E. Pittard, Jr., transferred to himself 198 shares of stock in Chapman Corp. from the estate of J. E. Pittard, Sr., and 1 share from Allie. During the administration of the estate, petitioner told his sister he had purchased Chapman stock from their mother. Pittard, Jr., also wrote out checks in his capacity as executor to himself or Chapman Corp. in the amount of $46,865.

On March 17, 1972, Pittard, Jr., wrote a letter to respondent's...