Alfred I. DuPont Testamentary Trust v. Comm'r of Internal Revenue

• Decision Date: 15 April 1974
• Docket Number: Docket No. 330-72.
• Citation: 62 T.C. 36
• Parties: ALFRED I. DUPONT TESTAMENTARY TRUST, THE FLORIDA NATIONAL BANK OF JACKSONVILLE, EDWARD BALL, WILLIAM B. MILLS, J. C. BELIN, T. S. COLDEWEY, W. L. THORNTON, AND ALFRED D. DENT, TRUSTEES, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

62 T.C. 36

ALFRED I. DUPONT TESTAMENTARY TRUST, THE FLORIDA NATIONAL BANK OF JACKSONVILLE, EDWARD BALL, WILLIAM B. MILLS, J. C. BELIN, T. S. COLDEWEY, W. L. THORNTON, AND ALFRED D. DENT, TRUSTEES, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 330-72.

United States Tax Court

Filed April 15, 1974.

Herbert R. Berk, for the petitioner.

Jon T. Flask, for the respondent.

Held, expenses incurred by a testamentary trust for maintaining an elaborate estate on which the decedent's widow resided as a ‘lessee’ under an arrangement to pay ‘rent’ of $1 a year were not deductible under sec. 212, I.R.C. 1954. Held, further, such expenses were similarly not deductible under sec. 642(c), I.R.C. 1954, merely because the estate was to be transferred to a charitable foundation upon the widow's death.

The Commissioner determined income tax deficiencies for 1966 and 1967 in the amounts of $164,249.51 and $257,362.64, respectively, against petitioner, a testamentary trust created under the last will and testament of Alfred I. duPont. Among petitioner's assets is ‘Nemours,‘ an elaborate estate, which during the years in issue served as the principal residence of Jessie Ball duPont, Mr. duPont's widow and the principal beneficiary as well as a trustee of petitioner. At issue is whether expenses paid by petitioner in 1966 and 1967 for the maintenance of Nemours are deductible. If such expenses are found generally to be deductible, a further question is presented as to whether certain of the expenditures were capital in nature and therefore not deductible for that reason.

FINDINGS OF FACT

The parties have filed two stipulations of fact which, together with accompanying exhibits, are incorporated herein by this reference.

Alfred I. duPont died on May 29, 1935, at the age of 71, a legal resident of Jacksonville, Fla. His will provided for the creation of a testamentary trust, the petitioner herein. The trust's fiduciary income tax returns for 1966 and 1967 were filed with the district director of internal revenue at Jacksonville, Fla. The trustees are the Florida National Bank of Jacksonville, Edward Ball, William B. Mills, J. C. Belin, T. S. Coldewey, W. L. Thornton, and Alfred D. Dent.

In or about 1910 Mr. duPont caused to be built a large mansion on a portion of a 300-acre tract of land located in Brandywine Hundred, New Castle County, Del. The mansion and the grounds were collectively named ‘Nemours,‘ and a large staff of personnel was employed to maintain them. Over the years a substantial amount of landscaping and building was done on the grounds, so that at the time of Mr. duPont's death in 1935 they included formal gardens, three manmade lakes, a greenhouse, large monuments built in honor of Mr. duPont's ancestors, an extensive system of roadways, various bridges and walkways, stables, water pumping plants, and various other buildings.

In 1921, Mr. duPont, who was then about 57 years of age, married Jessie Ball, who was then about 37 years of age. They lives at Nemours until 1926, at which time they acquired a second home, Epping Forest in Jacksonville, Fla., which became their principal residence. However, they continued to reside at Nemours to some extent. From 1926 until 1964 it was kept open and ready for any use which Mr. and Mrs. duPont might make of it; a full-time staff was maintained to keep the house open. During this period Mr. duPont, while he was alive, and Mrs. duPont used Nemours on the average of 2 months per year.

On January 14, 1925, Mr. duPont organized Nemours, Inc. (‘the corporation’), to which he transferred Nemours in exchange for all of the new corporation's stock. He continued to hold all of the outstanding stock until his death, at which time it passed to his estate, as is set forth more fully below. On March 19, 1925, Nemours, Inc., as ‘lessor,‘ entered into an agreement with Mr. and Mrs. duPont, as ‘lessees,‘ whereby it agreed to ‘lease’ Nemours to them ‘for the term of their joint natural lives and for the additional term of the life time of the survivor of them upon the death of the other of them.’ In return, Mr. and Mrs. duPont agreed to pay ‘rent’ of $1 per year. They also agreed, ‘As a further consideration for said lease * * * to pay all taxes of every kind and nature lawfully assessed against said property herein leased, during the continuation of the lease, and to pay all expenses for the necessary upkeep and repairs of said property, incurred during the term of the lease.’ On or about January 17, 1929, Mr. duPont transferred to Nemours, Inc., 20,000 shares of preferred stock of Almour Securities, Inc., which had a fair market value at that time of $2 million. At the same time Mr. and Mrs. duPont and Nemours, Inc., executed an amendment to the March 19, 1925, agreement, whereby Nemours, Inc., agreed that since ‘certain income bearing securities' had been transferred to it ‘as further consideration,‘ it would pay ‘the entire taxes of every kind and nature lawfully assessed against (Nemours) * * * , and also (that it would) promptly pay each year all the necessary and proper expenses and charges of upkeep and repairs of said property, and all expense of operating said property including the garage, greenhouses, gardens and all other necessary expense of maintaining the property in its present condition, save and except that the Lessees agree to pay the necessary expenses incurred inside the Mansion House upon said property, and the salaries of their personal employees.'¹

On the 1929 corporation income tax return of Nemours, Inc., the receipt of the Almour Securities, Inc., stood was reflected in a $2 million increase in ‘paid-in surplus.’ Similarly, on the balance sheets included in the corporation income tax returns of Nemours, Inc., for 1930, 1931, 1935, and 1936 the value of the Almour Securities, Inc., stock continued to be reflected in ‘paid-in surplus' or ‘surplus,‘ which item, however, was reduced to take into account changes in other assets and liabilities of Nemours, Inc. On the balance sheets in its returns for 1932 and 1937, the latter being the year that Nemours, Inc., was dissolved, as set forth more fully below, this amount was reflected in the ‘undivided profits' and ‘earned surplus and undivided profits' items, respectively.² Moreover, the corporation's income tax returns for each of the years 1929-37 reported the holding of ‘stocks of domestic corporations' with a value of $2 million. This was by far the corporation's largest asset during these years, its next largest assets being ‘land’ and ‘buildings' which, in the aggregate, steadily increased in value from a low of $572,215.10 in 1929 to a peak of $1,039,521.75 in 1934 and 1935, and then decreased slightly to $1,036,420.37 for 1936 and 1937.

On none of the corporation's income tax returns for the years 1928-37 did it report any rental income; however, it did report $100,000 of dividend income for each of the years 1929-36, and $75,000 of dividend income for that portion of 1937 prior to its dissolution in September of that year (as more fully hereinafter set forth). Also, for the years 1929-35 the corporation claimed an offsetting deduction for the full amounts thereof as dividends ‘from a domestic corporation’ the income of which was subject to taxation under the applicable revenue acts, thereby in effect rendering such dividends tax free in the hands of the recipient corporation.³ It also claimed a deduction, for each of the years 1929-37, for the expenses of maintaining Nemours' grounds.⁴

Nemours, Inc.‘s corporation income tax return for 1928, the year before it received the Almour Securities, Inc., stock, was blank except for identifying information and the words ‘None Operating’ which were typed in the ‘Gross Income’ area of the return. Its ‘tentative return’ for 1928 similarly contained no information whatever as to any items of income or deduction, but simply had the words ‘Net Loss' written by hand as the final entry on the line calling for ‘net income.’ The corporation's income tax returns for each of the years 1929-37 showed a net loss for each year. Its income tax returns for 1928, 1929, and 1930 reported its business as ‘Owners and operators of Real Estate,‘ while its returns for 1935 (the year of Mr. duPont's death), 1936, and 1937 reported its business as ‘Holding Real Estate for Charitable Foundation.’⁵

Upon the death of Mr. duPont in 1935, title to the stock of Nemours, Inc., passed to his executors. The corporation continued to maintain the grounds until it was liquidated in 1937, whereupon the executors paid for such maintenance. When Nemours was thereafter transferred to the trust, the petitioner herein, it continued to provide the maintenance for the grounds.

Mr. duPont's last will and testament, after providing for specific bequests to certain named individuals, including leaving the Epping Forest home and the contents of the mansion at Nemours to his wife provided that the remainder of his estate, which included all of the stock of Nemours, Inc., was to comprise the corpus of a testamentary trust. There were several named trustees and alternate trustees (in the event that one or more of the named trustees proved to be unwilling or unable to serve), among the former being the Florida National Bank of Jacksonville and Mrs. duPont. At all times from the inception of the trust until her death Mrs. duPont served as a trustee. While she was alive the trustees were to pay her $200,000 each year from the trust's net income. After it was established that ‘sufficient net income (was) available for that purpose’ (i.e., to pay her that amount), certain annuities were to be paid from the remaining net income of the trust to certain named individuals. Finally, after the payment of the $200,000 to Mrs. duPont and the payment of the other annuities, any remaining net income was to be paid to Mrs. duPont. The will further provided that after Mrs. duPont's death the...