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

• Citation: 84 T.C. 649,84 T.C. No. 43
• Decision Date: 09 April 1985
• Docket Number: Docket No. 21753-81.
• Parties: ESTATE OF JOSEPH M. CARLI, DECEASED, ROBERT J. CARLI, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

84 T.C. 649

84 T.C. No. 43

ESTATE OF JOSEPH M. CARLI, DECEASED, ROBERT J. CARLI, EXECUTOR, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

Docket No. 21753-81.

United States Tax Court

Filed April 9, 1985

In 1972, decedent, a California resident, created a revocable trust in which he retained a life estate. Decedent transferred his residence to the trust. On the same day that he created the trust, the decedent executed a pour-over will. In 1974, the decedent and his then fiancee, J, entered into an antenuptial agreement, under which decedent agreed to amend the trust and will to provide J with a life estate in the residence upon his death. J's right to a life estate was conditioned on the parties' being married at decedent's death, and was defeasible in the event that she subsequently remarried. J provided no consideration for the life estate other than that contained in the agreement. Under the agreement, J waived a number of rights she would otherwise have had by virtue of marriage, including her community interest in the decedent's earnings during marriage. Decedent and J, who where then 75 and 73 years of age respectively, married two months later and remained married until decedent's death in December, 1977. The decedent never amended either the trust or the will prior to his death. J continued to live in the residence (which was appraised at $89,000 for death tax purposes) until March, 1978. At that time, J entered into an agreement with the executor of the decedent's estate, pursuant to which she relinquished her right to a life estate for a consideration of $10,000. On the Federal estate tax return, the estate claimed a marital deduction of $31,423 for the actuarial value of J's life estate in the residence. Petitioner subsequently abandoned this position, and contends that the value of the decedent's interest in the residence should be reduced by the value of J's life estate therein (which petitioner claims is $31,423). In the notice of deficiency, respondent disallowed the claimed $31,423 marital deduction, but allowed the estate a $10,000 deduction under section 2053(a)(3), I.R.C., 1954. In his amended answer to the petition, respondent asserts that the allowance of the $10,000 deduction under section 2053(a)(3) was erroneous. HELD: The full value of the residence ($89,000) is includible in the estate under sections 2036(a) and 2038(a), I.R,C., 1954, without reduction for the value of J's life estate. HELD FURTHER: J's claim to a life estate under the antenuptial agreement was supported by adequate and full consideration, and therefore the $10,000 payment to J from the estate is deductible under section 2053(a)(3), I.R.C., 1954. REBECCA T. HILL, EUGENE H. CIRANNI, and DAN HENRY LEE, for the respondent.

ALEXANDER F. EAGLE, III, for the petitioner.

JACOBS, JUDGE:^*

^* By statutory notice of deficiency, respondent determined a deficiency in estate tax in the amount of $7,424. In his amended answer to the petition, respondent claimed a $4,026 increased deficiency; thus, the total amount of estate tax in dispute is $11,450.

Due to concession ¹ by petitioner, the issues for decision are:

(1) whether the value of the decedent's residence, which the decedent transferred to a revocable trust, should be reduced to reflect the surviving spouse's right to a life estate in the residence under an antenuptial agreement. (2) whether the surviving spouse's right to a life estate under the antenuptial agreement is a claim deductible under section 2053. ²

FINDINGS OF FACT

The facts have been fully stipulated and are so found. The stipulation, together with joint exhibits, are incorporated herein by this reference and form the basis of the Court's findings of fact.

The decedent, Joseph M. Carli, was born in Italy in 1898 and resided in California from 1899 until his death on December 26, 1977. The decedent died of cancer, with which he had been afflicted since 1969.

The decedent's son, Robert J. Carli (Robert), filed this petition in his capacity as the executor of the decedent's estate. At the time he filed the petition, Robert resided in Santa Clara, California.

A Federal estate tax return was timely filed for the decedent's state with the Internal Revenue Service Center in Fresno, California, reporting a gross estate of $187,906.

On August 3, 1972, the decedent created a revocable trust, reserving a life estate unto himself. Upon the death of the decedent, the trust estate was to be divided into two trusts, one for the benefit of Robert and the other for the benefit of Robert's children. The decedent transferred to the trust his residence at 1481 Cromwell Drive, Santa Clara, California (the Cromwell residence) by a quit claim deed, dated August 21, 1972.

On the same day that the trust was created, the decedent executed a will in which he bequeathed all his tangible personal property to Robert and directed that the residue of his estate be added to the corpus of the trust.

On June 21, 1974, in anticipation of marriage, the decedent, then age 75, and Jennie Margaret Downey Whitlatch (Jennie), then age 73, entered into an antenuptial agreement. Pursuant to the antenuptial agreement, each party waived all rights that either would otherwise acquire in the other's property by virtue of their marriage, including any rights that would accrue upon death. The agreement further provided that the parties' separate property, whether acquired before or during the marriage, would remain separate property. The agreement delineated which expenses and obligations were to be considered separate liabilities and which were to be treated as joint obligations, and provided that joint obligations were to be paid from a joint bank account to which each would contribute equally.

The agreement further provided that the decedent and Jennie would reside in the Cromwell residence, and that the decedent would amend his will to provide that, upon the death of the decedent, Jennie would have the right to live in the Cromwell residence for the rest of her life, unless she either remarried or relinquished her life estate in the Cromwell residence. The only consideration received by the decedent for Jennie's life estate in the Cromwell residence was that provided under the antenuptial agreement.

On August 10, 1974, the decedent and Jennie were married. At that time, Jennie, a retired teacher, owned property worth more than $150,000 and had a monthly income of $750, which consisted of a pension and social security benefits. The decedent was employed as an automobile service manager throughout 1974, during which time he earned a salary of $12,414.01. The decedent terminated his employment in February of 1976 for health reasons. After the marriage, the decedent did not revise or amend either his will or the trust agreement as he had agreed.

Following the decedent's death in December of 1977, Jennie continued to live in the Cromwell residence, which then had an appraised value of $89,000. In March of 1978, Jennie entered into a ‘Mutual Settlement and Release Agreement‘ with Robert individually and as trustee and executor of the decedent's estate. Under the agreement, she relinquished her life estate in the Cromwell residence for a consideration of $10,000.

The California State Controller valued Jennie's life estate in the Cromwell residence at $31,423 for state inheritance tax purposes.

OPINION

The decedent's transfer of the Cromwell residence to the revocable trust on August 21, 1972, constituted a transfer described in sections 2036(a) and 2038(a). ³ On the Federal estate tax return, the estate claimed a marital deduction of $31,423 for the actuarial value of Jennie's life estate in the Cromwell residence. Petitioner subsequently abandoned this position, and now contends that the value of the decedent's interest in the Cromwell residence must be reduced by the value of Jennie's life estate therein (which petitioner claims is $31,423). In the notice of deficiency, respondent disallowed the claimed $31,423 marital deduction, ⁴ but allowed the estate a $10,000 deduction under section 2053(a)(3) for the payment made to Jennie. In his amended answer to the petition, respondent asserts that the allowance of the $10,000 deduction under section 2053(a)(3) was erroneous.

Petitioner's argument is addressed to the value at which the Cromwell residence is to be included in the gross estate under section 2031. ⁵ Petitioner maintains that the value of the residence should be discounted or reduced by the value of Jennie's right to a life estate therein under the antenuptial agreement. Petitioner premises his argument on this Court's decision in Estate of Johnson v. Commissioner, 77 T.C. 120 (1981), which was reversed on appeal, 718 F.2d 1303 (5th Cir. 1983).

We believe the present case is readily distinguishable from that presented in Estate of Johnson. In that case, we held that a surviving spouse's statutory homestead rights in Texas should be treated as a type of restriction or encumbrance that diminished the value at which the decedent's residence was includible in the gross estate. In analyzing the restrictive nature of homestead rights in Texas, the majority noted that the right of life occupancy granted a surviving spouse under the Texas homestead statute was personal to the surviving spouse and therefore distinguishable from a life estate. 77 T.C. at 124, n. 3.

In the present case, the right at issue is not a statutorily created right that attached to the decedent's real property by operation of law, but a right under an antenuptial agreement to a life estate in the marital residence upon the death of the promisor-spouse. Further, Jennie's rights under the agreement did not have the Texas homestead critical features of: (1) impairment of decedent's ability to convey the property during his life; and (2) exemption of the property from the decedent's creditors either before or after death. We find, therefore, no basis for...