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

• Decision Date: 26 July 1976
• Docket Number: Docket No. 330-72.
• Citation: 66 T.C. 761
• Parties: ALFRED I. DuPONT TESTAMENTARY TRUST, THE FLORIDA NATIONAL BANK OF JACKSONVILLE, EDWARD BALL, WILLIAM B. MILLS, J. C. BERLIN, T. S. COLDEWEY, W. L. THORNTON, AND ALFRED D. DENT, TRUSTEES, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

66 T.C. 761

ALFRED I. DuPONT TESTAMENTARY TRUST, THE FLORIDA NATIONAL BANK OF JACKSONVILLE, EDWARD BALL, WILLIAM B. MILLS, J. C. BERLIN, 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 July 26, 1976.

Held, upon remand by the Fifth Circuit Court of Appeals to consider an issue not previously presented to this Court, petitioner testamentary trust is not entitled to deductions under section 651 or 661, I.R.C. 1954, in respect of certain expenditures made by it in 1966 or 1967 in connection with the maintenance of property occupied by the decedent's widow (the principal income beneficiary of the testamentary trust) under a certain lease arrangement entered into prior to the decedent's death. Herbert R. Berk and Patrick J. Murphy, for the petitioner.

Thomas F. Donahue, for the respondent.

OPINION

RAUM, Judge:

This case is now before us on remand from the Fifth Circuit Court of Appeals. Our original opinion, 62 T.C. 36, was accompanied by detailed findings of fact which are incorporated herein by this reference. We set forth below only those facts necessary to an understanding of the issue which we have been directed by the Court of Appeals to resolve.

In 1925, Alfred I. duPont organized Nemours, Inc., a corporation. In exchange for all of the corporation's stock he transferred to it full title to his elaborate Delaware residential estate known as ‘Nemours' (consisting of a mansion and some 300 acres of surrounding grounds on which were located various other buildings and structures). Mr. duPont and his wife, Jessie Ball duPont, thereafter leased Nemours from the corporation, for the term of their joint lives plus the life of the survivor, for an annual rental of $1. Subsequently, Mr. duPont transferred securities valued at $2 million to the corporation in return for its further agreement to pay all taxes assessed against Nemours as well as the expenses of maintaining the grounds (including the mansion's exterior). The expenses incurred inside the mansion house and the salaries of the duPonts' personal employees remained the responsibility of the lessees.

Mr. duPont and his wife resided at Nemours until 1926 when they acquired a second home, Epping Forest, in Jacksonville, Fla., which became their principal residence.¹ They used Nemours about 2 months a year until 1935 when Mr. duPont died; thereafter Mrs. duPont continued to use it also about 2 months a year until 1962. In that latter year, while in Delaware, Mrs. duPont broke a leg and remained at Nemours until her death in 1970 when she was 86 years old. As the result of a second accident in 1966, she was confined almost entirely to a wheelchair. She was an invalid, and made very little use of the elaborate facilities at Nemours, although they were available to her.

Mr. duPont's will made certain specific bequests (including the contents of the Nemours mansion to his wife) and then established a testamentary trust, the petitioner herein, to which he gave the remainder of his estate, which included all of the stock of Nemours, Inc. The trustees were directed to pay out of income the first $200,000 a year to Mrs. duPont, then to pay certain enumerated annuities, after which any remaining income was to be paid to Mrs. duPont. (During each of the tax years the total income of the trust was in excess of $13 million and the amount payable to Mrs. duPont was in excess of $11 million.) The will further provided that upon Mrs. duPont's death the trustees were to cause to be organized a charitable corporation to be known as ‘The Nemours Foundation’ in honor of certain ancestors of Mr. duPont and to transfer to it the Nemours property.

Upon Mr. duPont's death, in 1935, title to the stock of Nemours, Inc., passed, according to the directions of his will, to the executors of his estate. The stock was held by Mr. duPont's executors from the time of his death in 1935 until 1937, when they liquidated the corporation and transferred its assets (consisting of Nemours and certain securities) to the testamentary trust, subject to the continuing obligation to maintain the grounds and pay the taxes during Mrs. duPont's life tenancy. Prior to its liquidation the corporation had paid the maintenance expenses and taxes; thereafter the charges of both categories were paid by the testamentary trustees.

As indicated above, Mrs. duPont resided at Nemours from 1962 until her death in 1970. The trust spent $255,753 in 1966 and $274,451 in 1967 for general maintenance of the Nemours estate; it expended an additional $114,284 during 1967 for improvements thereon, including the paving of certain roadways, the restoration of ornamental stonework, and the purchase of certain vehicles for use in connection with the estate. On the Federal fiduciary income tax returns for 1966 and 1967 the trustees claimed deductions in respect of these amounts. The Commissioner disallowed these deductions in their entirety.

In our earlier opinion we held that the trust could not deduct, under section 212, the expenses of maintaining Nemours either as expenses proximately related to property held for the production of income or as expenses incurred in the management of trust property. And we held further that the trust was not entitled to a charitable deduction under section 642(c) in respect of these expenditures.

The Court of Appeals affirmed our resolution of both of these issues. 514 F.2d 917. However, it also considered petitioner's additional contention (raised for the first time in the appellate proceeding) that the trust should be allowed to deduct these amounts under section 651 or 661, which define the tax consequences to a trust of certain transactions between the trust and its beneficiaries. Noting a possible relationship between the resolution of this question and the tax liability of Mrs. duPont, it stated (514 F.2d at 922): ‘The record before us does not reveal whether Mrs. duPont reported any part of these payments as income to her in either tax year. She would have been required to do this by sections 652 and 662, if the payments had qualified for deductions by the trust as funds distributed to her pursuant to the trust agreement under section 651 or 661.’ Moreover, the Court of Appeals indicated that it was ‘unsure of the basis for the Commissioner's action in recognizing for estate tax purposes the creation and amortization of a maintenance reserve fund for Nemours and his failure to challenge the trust's annual maintenance deductions from the time this reserve had been depleted until the 1966 and 1967 tax years.'² 514 F.2d at 922. And in remanding the case for consideration of the newly claimed deductions under section 651 or 661, the Court of Appeals also raised the question ‘whether limitations would bar the present assessment or allocation of (the disallowed) amounts to (Mrs. duPont) personally.’ 514 F.2d at 922-923

Pursuant to the remand, a hearing was held by this Court on March 3, 1976. No additional evidence was presented apart from a ‘Second Supplemental Stipulation of Facts,‘ to which petitioner objected as irrelevant, and which established merely that Mrs. duPont had not included as income on her 1966 and 1967 returns any portion of the amounts paid by the trust for maintenance and improvements of Nemours which are the subject of the present controversy. We are inclined to agree with petitioner that Mrs. duPont's treatment of these amounts on her 1966 and 1967 returns is irrelevant, but we received the stipulation because the Court of Appeal's appeared to think that the record was incomplete without evidence as to that matter.

Although the parties have not presented us with any evidence or arguments as to ‘whether limitations would bar the present assessment or allocation of such amounts to her personally’ (514 F.2d at 922-923), it is quite clear that the usual 3-year period of limitations (sec. 6501(a), I.R.C. 1954) has long since expired. However, we cannot determine, from the record before us, whether Mrs. duPont's tax liability for these years is currently subject to adjustment either, for example, because the normal 3-year period has been extended by agreement (sec. 6501(c)(4)), or because the highly complex mitigation provisions of sections 1311-1315 might lift the bar of the period of limitations against her or her estate in the event that the petitioners should prevail in this litigation.³ In the circumstances, we express no opinion on the matter.

Also, the parties have not presented any additional materials on the remand relating to the so-called maintenance reserve or the Commissioner's failure to challenge the deductions for the years preceding 1966 after the reserve had been depleted. We have no further enlightenment on these matters than was available to the Court of Appeals when the case was before it, and, of course, to the extent that the record is deficient in this or any other respect, petitioner must bear the consequences since the burden of proof was upon it. However, in our judgment, the manner of treating these deductions in earlier years in wholly irrelevant, since it has been firmly established that the Commissioner's erroneous treatment of an item in earlier years or his failure to challenge a taxpayer's erroneous treatment does not preclude an examination of the correctness of the treatment of such item for the tax years in issue. Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 183; Union Equity Cooperative Exchange v. Commissioner 481 F.2d 812, 817 (10th Cir.); Caldwell v. Commissioner, 202 F.2d 112, 115 (2d Cir.); ‘The mere fact that (the taxpayer) may have obtained a windfall in (an earlier year) does not entitle (it) to like treatment in (a later year).’ George R. Tollefsen, 52 T.C. 671, 681, affirmed 431 F.2d 511 (2d Dir.), certiorari denied 401 U.S. 908. See also Dixon v. United States, 381 U.S. 68,...