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

• Decision Date: 19 March 1970
• Docket Number: 1342-64,Docket Nos. 95357,6182-65.
• Citation: 54 T.C. 493
• Parties: ESTATE OF DAISY F. CHRIST, DECEASED, ROBERT JOHNSON CHRIST, EXECUTOR, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

54 T.C. 493

ESTATE OF DAISY F. CHRIST, DECEASED, ROBERT JOHNSON CHRIST, EXECUTOR, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 95357

1342-64

6182-65.

United States Tax Court

Filed March 19, 1970.

[54 T.C. 494]

Donald B. Falconer, for the petitioner.

Roger A. Pott and Joseph A. Nadel, for the respondent.

Decedent was a widow and a resident of California. She died on Dec. 2, 1961. During the probate of her husband's will, subsequent to his death on Apr. 16, 1952, decedent made an election, effective Sept. 30, 1953, whereby she agreed to transfer all of her share of community property to a testamentary trust created pursuant to the will. The deceased husband's share of the community property was also transferred to the

trust. The trust provided that the widow was to be the sole beneficiary of a life interest, with the remainder to be paid to the spouses' son upon the termination of the trust at the widow's death. The son was also the trustee of the trust. On Dec. 9, 1959, less than 2 years before the decedent's death, an agreement was executed between the son and the decedent whereby she agreed to assign and transfer her entire life interest in the portion of the trust attributable to her share of the community property transferred to the trust in return for a fixed, lifetime, private annuity. The income from the trust was currently distributable to the widow, but the trustee failed to distribute net income which had accrued to the trust in 1960 and 1961. The trustee also erroneously reported income as taxable to the trust in the taxable years 1957, 1958, and 1959, and paid income taxes thereon. Held:

1. On the facts, with regard to the income tax cases, held: (1) The widow purchased the Life interest in the portion of the trust attributable to her husband's share of community property transferred to the trust and she is entitled to amortization deductions based on her cost basis in the life interest and her life expectancy, as reflected in the regulations for valuation of a life estate; (2) The attempted assignment of her life interest in the portion of the trust attributable to her share of community property was in violation of a spendthrift provision of the trust. The transaction, lacking substance was effected merely to avoid income and estate taxes and it is considered a sham. All of the net income of the trust is includable in the widow's income in her taxable years 1960 and 1961. Annuity payments received in 1960 and 1961 are not recognized and amounts reported as income from the annuity are eliminated from Daisy's income for 1960 and 1961.

2. On the facts, with regard to the estate tax case, held: (1) The widow's election of Sept. 30, 1953, constituted a transfer of property with a retained life estate for less than adequate and full consideration in money's worth. The attempted transfer of the life estate in the portion of the trust attributable to the widow's share of community property was a sham and is not recognized. The value at the date of death of the portion of the trust corpus attributable to the widow's share of community property transferred to the trust, less the consideration received in the transaction, is includable in decedent's gross estate under secs. 2036 and 2043 of the Code; (2) The consideration received in the transaction, for the purpose of valuation under sec. 2043, is the value of the life interest in the portion of the trust attributable to her husband's share of the community property transferred to the trust (valued as of the effective date of the widow's election), plus other consideration received by the widow under her husband's will; Righter v. United States, 400 F.2d 344 (C.A. 8, 1968); Estate of Gregory, 39 T.C. 1012 (1963); (3) Income from the trust accrued prior to decedent's death, but undistributed, is includable in decedent's gross estate under sec. 2033; (4) Overpayments of income taxes by the trustee is income to which decedent was entitled, and the enforceable claim against the trustee constituted a property interest of decedent at the date of her death includable in her estate under 2033; (5) There was reasonable cause for failure to file the decedent's estate tax return timely and no additions to tax should be made under sec. 6651(a).

HARRON, Judge:

Respondent determined a deficiency in estate taxes, Estate of Daisy F. Christ, docket No. 6182-65, in the amount of $132,786.70, and he made an addition to tax under section 6651(a) of the Code in the amount of $33,196.68, representing a 25-percent penalty for late filing of the estate tax return. ¹

[54 T.C. 495]

Respondent also determined deficiencies in income taxes of Daisy F. Christ, dockets Nos. 95357 and 1342-64, for the 5 taxable years 1957-61, inclusive, in the following amounts:

+-------------------------------------------+
                ¦Docket No. ¦Year ¦Income tax deficiency ¦
                +------------+------+-----------------------¦
                ¦ ¦( 1957¦$5,389.72 ¦
                +------------+------+-----------------------¦
                ¦95357 ¦( 1958¦5,653.52 ¦
                +------------+------+-----------------------¦
                ¦ ¦( 1959¦3,600.57 ¦
                +------------+------+-----------------------¦
                ¦ ¦( 1960¦14,970.72 ¦
                +------------+------+-----------------------¦
                ¦1342-64 ¦( 1961¦6,656.03 ¦
                +-------------------------------------------+
                

The issues for decision under the income tax cases are as follows:

Whether Daisy's election to have her share of community property pass under her husband's will (which provided for the community property to be placed in a testamentary trust in which Daisy was the sole income beneficiary during her life) constituted a bargained-for sale or exchange of Daisy's remainder interest in her share of the community property as consideration for a life interest in the portion of the community property contributed to the testamentary trust by her husband, Andrew, or whether Daisy's irrevocable transfer of the remainder interest in her share of the community property should be considered a gift, and the receipt of the life interest in Andrew's share of the community property passing to the testamentary trust considered a bequest under Andrew's will.

If her election is considered a bargained-for sale or exchange, whether Daisy is entitled to amortization deductions based on the cost of acquiring the life interest in Andrew's portion of the community property transferred to the trust; and, if so, what was the cost of acquiring the life interest and what was its expected useful life.

Whether an agreement between the trustee, her son Robert, and Daisy, in which she allegedly transferred her life estate in the portion of the trust attributable to her share of community property in exchange for a fixed-amount, lifetime, private annuity, should be recognized for Federal tax purposes; and, if so, whether Daisy is entitled to exclusions from gross income of a percentage of the annuity payments received in 1960 and 1961, as a recovery of the cost of acquiring the alleged annuity.

With respect to the estate tax case, the issues for decision are as follows:

Whether Daisy's transfer of her remainder interest in her community property in return for a life interest in Andrew's portion of the community property transferred to the testamentary trust, was an exchange for full and adequate consideration in money or money's worth.

If the transfer of her remainder interest was not for full and adequate consideration in money or money's worth, whether Daisy's transfer of her share of community property constituted a transfer of

[54 T.C. 496]

property with a retained life estate, the value of which is includable in her gross estate under section 2036(a) of the Code.

Whether Daisy's transfer of her life interest in the portion of the trust attributable to her share of the community property in exchange for a fixed-amount, lifetime, private annuity should be recognized for tax purposes; and, if so, whether it was a transfer of property in contemplation of death within the meaning of section 2035, for less than adequate and full consideration in money or money's worth.

If the agreement between Daisy and Robert constituted a transfer in contemplation of death for less than adequate and full consideration, what interests in the trust property are includable in Daisy's gross estate, by application of sections 2035 and 2036, and what is the value of the interests includable under sections 2035 and 2036 at the date of her death.

Whether certain amounts of net income of the testamentary trust, earned during Daisy's lifetime, but which were held by the trustee and were undistributed at the date of her death, should be includable in her gross estate.

Whether certain claims of the trust for refund of income taxes should be included in Daisy's gross estate.

Whether the failure to file an estate tax return for Daisy's estate within the time prescribed by statute was due to reasonable cause and not due to willful neglect.

FINDINGS OF FACT

Some of the facts have been stipulated, and they are incorporated herein by reference.

Daisy F. Christ (hereinafter referred to as Daisy) died, testate, on December 2, 1961. Income tax returns were filed by Daisy on a cash basis for the calendar years 1957, 1958, 1959, and 1960. These returns for the taxable years 1957 through 1960, inclusive, were filed with the district director of internal revenue in San Francisco. Daisy's son, Robert Johnson Christ was duly appointed as the executor of Daisy's estate, and, acting in that capacity, he is the petitioner in these cases. Petitioner, as executor of Daisy's estate, filed an income tax return for Daisy's taxable year, 1961, with the district director of internal revenue in San Francisco. Petitioner also filed the estate tax return for Daisy's estate with the district director in San Francisco. At the date of her death, and during the taxable years 1957 through 1961, Daisy was a resident of Piedmont, Alameda County, Calif. Petitioner, Robert, was also a resident of Alameda County when he filed Daisy's...