Nicholson v. Comm'r of Internal Revenue (In re Estate of Nicholson)
| Citation | 94 T.C. 666,94 T.C. No. 39 |
| Decision Date | 30 April 1990 |
| Docket Number | Docket No. 3635-88. |
| Parties | ESTATE OF T. BUFORD NICHOLSON, DECEASED, WILLIAM B. NICHOLSON, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
H's testamentary trust gave to W ‘so much of the net income therefrom * * * as * * * [she] may from time to time require to maintain [her] usual and customary standard of living * * *.‘ HELD, W was not ‘entitled to all the income from the property‘ under the terms of the trust, and her interest in the trust therefore failed to qualify for the marital deduction as ‘qualified terminable interest property‘ within the meaning of sec. 2056(b)(7), I.R.C. R. Clay Hoblit, for the petitioner.
William R. Leighton, for the respondent.
By notice of deficiency dated December 1, 1987, respondent determined a deficiency in estate taxes in the amount of $353,537.26. The issue for consideration is whether an interest in a trust created by the decedent qualifies for the estate tax marital deduction as qualified terminable interest property, within the meaning of section 2056(b)(7). 1
The parties entered into a stipulation of facts, with attached exhibits, all of which are incorporated by this reference. At the time the petition in this case was filed, William B. Nicholson, executor of the estate of T. Buford Nicholson, maintained his business address in Corpus Christi, Texas.
In 1975, the decedent T. Buford Nicholson was 63 years old; he was engaged in ranching and tending to his numerous investments. His son, William Nicholson, had recently joined him as a business associate. William assisted his father in trading properties, engineering, legal, and sales matters, and generally in ‘helping him try to get everything organized in the manner that he wanted it organized.‘
By 1975, the decedent had become concerned about providing a source of income to his wife, Dorothy Nell Nicholson, in the event he should predecease her. Although the decedent and his wife possessed many of their assets as community property, he wished to spare her the concerns of providing for herself, because she was not familiar with his business operations, nor with business dealings in general. The decedent knew that the assets he and his wife then owned did not generate a sufficient income to support her in her usual standard of living. He accordingly wanted to assure that, if he died, those assets could be sold to provide her with a means of support in the manner to which she was accustomed. The decedent chose to use a trust to carry out his intentions because he thought that the sale of assets could be performed most readily if they were held by a trust. The decedent had used a trust as a means to hold property on at least one other occasion; in 1972 he established trusts for the benefit of his two children, William Buford Nicholson and Sally Lynn Miller.
The decedent executed his Last Will and Testament on December 30, 1975. Paragraph III of the will provides as follows:
I hereby give, devise and bequeath all of my property of whatsoever nature, kind or character, whether real, personal or mixed, of which I may die seized or possessed, or to which I may then or at any time thereafter be entitled, to the DOROTHY NELL AND BUFORD NICHOLSON TRUST, as evidenced by the instrument in writing dated the 30th day of December, 1975, and recorded in Volume 1556, at Page 19, of the Deed Records of Nueces County, Texas.
As indicated in the will, the decedent and his wife on December 30, 1975, created the ‘Dorothy Nell and Buford Nicholson Trust,‘ naming their children, William B. Nicholson and Sally Lynn Nicholson Miller, as trustees. The trust instrument provides, under the heading ‘Provisions for Irrevocable Trust‘:
1. In the event that Buford Nicholson should die or become legally or physically incompetent to administer this Trust or upon the death of Dorothy Nell Nicholson, this Trust shall then at such time become irrevocable and thereafter neither Dorothy Nell Nicholson nor Buford Nicholson will have the right to withdraw property from the Trust estate, or to alter the terms of this Trust. * * *
2. In administering their Irrevocable Trust, the Trustee or Trustees shall hold, manage and control the property comprising the Trust estate, collect the income therefrom, and SHALL DISBURSE SO MUCH OF THE NET INCOME THEREFROM TO BUFORD NICHOLSON AND DOROTHY NELL NICHOLSON, OR THE SURVIVOR OF THEM, AS THEY MAY FROM TIME TO TIME REQUIRE TO MAINTAIN THEIR USUAL AND CUSTOMARY STANDARD OF LIVING, and in this regard THE TRUSTEES MAY ALSO INVADE THE CORPUS OF THE TRUST FOR THESE PURPOSES.
3. The trustees herein named shall not be required to post bond. SAID TRUSTEES SHALL HAVE ALL RIGHTS AND POWERS GIVEN TO TRUSTEES UNDER THE TEXAS TRUST ACT, AS AMENDED, AND SHALL ALSO HAVE FULL AND COMPLETE INDEPENDENT AUTHORITY TO INVEST, SELL, ASSIGN, TRANSFER, TRADE, MORTGAGE, LEASE OR OTHERWISE DEAL WITH THE PROPERTY OF THIS TRUST AS THEY MAY DEEM TO BE IN THE BEST INTERESTS OF DOROTHY NELL NICHOLSON AND BUFORD NICHOLSON. [Emphasis supplied.]
The trust was to terminate upon the death of the last survivor of the decedent and his wife. At that time, ‘the Trustee or Trustees shall then distribute the Trust estate to SALLY LYNN NICHOLSON MILLER and WILLIAM B. NICHOLSON, equally, share and share alike * * *.‘
After it was drafted, the decedent showed the trust instrument to his accountant. The decedent was not concerned with creating the maximum possible estate tax deduction. He sought assurance, however, that the trust would provide financial security for his wife, that it would free her from the worries of administering the estate assets, and, finally, that it ‘would not create a tax problem.‘
Once he had executed the trust instrument, the decedent did not seek to have the trust modified. The decedent later speculated that in order to raise cash, the trustees would probably have to sell his ranch, his ‘pride and joy,‘ because ‘it was a drain rather than a benefitting asset.‘ The ranch had a value of $564,446 at the date of decedent's death.
The decedent died on August 24, 1983. The community property assets on that date had the following values:
+-------------------------------------+
¦Real estate ¦$906,066 ¦
+--------------------------+----------¦
¦Mortgages, notes, and cash¦2 821,386¦
+--------------------------+----------¦
¦Insurance ¦83,088 ¦
+--------------------------+----------¦
¦Miscellaneous ¦257,111 ¦
+--------------------------+----------¦
¦Total ¦2,067,651 ¦
+-------------------------------------+
These assets included several hundred acres of ranch land, royalty interests in oil and gas wells, interest-bearing notes, and a 15-percent interest, worth approximately $180,000, in a real estate limited partnership.
Following the decedent's death, a representative of the accounting firm hired to prepare the estate's inventories commented to William Nicholson that the trust, as drafted, would not qualify for the estate tax marital deduction. William Nicholson accordingly went to the attorneys who had drafted the trust document. Those attorneys prepared a petition in State court, seeking to change the trust document. Respondent was not a party to this State court proceeding. On October 31, 1984, the District Court, 117th Judicial District, Nueces County, Texas, entered an Order of Modification of the Dorothy Nell and Buford Nicholson Trust. The Order provides, in pertinent part:
* * * an order of modification * * * would be in keeping with the intent of the settlors when the Trust was created * * *.
A modification of the Dorothy Nell and Buford Nicholson Trust is hereby ORDERED so that paragraph 2 under ‘Provisions for Irrevocable Trust‘ will read as follows:
‘2. The Trustees shall collect the income from the property comprising the Trust estate and, commencing as of the date of the death of Buford Nicholson and continuing for the life of Dorothy Nell Nicholson, shall pay the net income of the Trust estate to Dorothy Nell Nicholson in quarterly or more frequent installments. Upon the death of Dorothy Nell Nicholson, any income received or accrued by the Trust prior to the time of her death and not paid to her shall be paid to her personal representative as a part of her probate estate. During the lifetime of Dorothy Nell Nicholson, the Trustees shall make no distributions of income or principal to any person other than Dorothy Nell Nicholson. In addition to the distribution of income from the Trust properties, the Trustees may pay to Dorothy Nell Nicholson such part of the principal as, in the discretion of the Trustees, may be necessary to provide for her health and support and to maintain her in her usual and customary standard of living.
The Executor of the Estate of Buford Nicholson, in his sole and absolute discretion, shall determine whether to elect under section 2056(b)(7) of the Internal Revenue Code of the United States to qualify any portion of the Dorothy Nell and Buford [Nicholson] Trust for the federal estate tax marital deduction.‘
The decedent's son, William Nicholson, as executor, timely filed a United States Estate Tax Return, Form 706, with the Internal Revenue Service Center in Austin, Texas. On that return, he elected to claim a ‘marital deduction for an otherwise nondeductible interest‘ under Code section 2056(b)(7) in an amount representing the value of the assets in the trust.
As trustee, William Nicholson has administered the trust since his father's death with the acquiescence of his sister, Sally Lynn Miller. During that time, as trustee, he has sold three trust properties located in Zapata County, Texas, for a total gain of $20,000. He has repossessed property securing a note that formed a part of the estate assets, now valued by the parties at $263,571, and he has attempted to negotiate a settlement regarding...
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