Deutsch v. Commissioner
| Decision Date | 15 October 1997 |
| Docket Number | Docket No. 21845-93. |
| Citation | 74 T.C.M. 935 |
| Parties | Rosalyn Deutsch v. Commissioner. |
| Court | U.S. Tax Court |
Kenneth M. Hart and Stephen G. Vogelsang, San Francisco, Calif., for the petitioner. Sergio Garcia-Pages and Kenneth A. Hochman, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency of $201,825 in petitioner's 1989 income tax.1 The issue for decision is whether distributable net income (DNI) of the estate of petitioner's deceased husband is included in her gross income by reason of the payment to her during 1989 of her elective share of the estate under Florida law. We hold that petitioner is not required to include any part of the payment of her elective share in gross income.
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by reference. Petitioner resided in Lake Worth, Florida, when she filed the petition. Petitioner and Seymour Deutsch (decedent) had been married for approximately 9 years when he died on September 22, 1988, at age 67. Decedent was survived by three children from his first marriage, Jay R.
Deutsch (Mr. Deutsch) and his two sisters. Decedent's sister and her children, among them Richard L. Braunstein (Mr. Braunstein), also survived decedent.
Decedent died testate, leaving a net estate of $3,361,683. Decedent left petitioner substantially less than the statutory 30-percent elective share of $1,008,504 that she was entitled to under Fla. Stat. Ann. sec. 732.201 (West 1995). Under the will, petitioner would have taken no more than decedent's interests in two country clubs (the Woodcrest and Fountain bonds), and furnishings and other tangible personal property located at his residence, a Lake Worth, Florida, condominium. The will also purported to devise2 to petitioner the condominium, which actually passed to her outside the probate estate as surviving tenant by the entirety. The will devised the residuary estate in equal shares to Mr. Deutsch and his sisters.
Decedent's will designated Mr. Deutsch, a certified public accountant, and Mr. Braunstein, an attorney, as executors, or personal representatives, of his estate.3 In January 1989, Mr.
Braunstein informed petitioner that he believed decedent had intended to increase the amounts left to her under his will. Mr. Braunstein also informed petitioner that, regardless of the provisions of the will, she was entitled to elect to take the Florida elective share. He further told her that he would apprise decedent's children of his understanding of decedent's intention to change his will. Shortly thereafter, Mr. Braunstein disclaimed his bequest under the will.
On February 14, 1989, petitioner filed an "Election to Take Elective Share" with the probate division of the Circuit Court for the 15th Judicial Circuit for Palm Beach County, Florida (Probate Court). Petitioner's election resulted in more than 2 years of acrimonious litigation between her and Mr. Deutsch in 2 divisions of the Palm Beach County Circuit Court over the amount of petitioner's elective share, the timing of its payments, and, ultimately, whether such payment would cause petitioner to suffer the entire Federal income tax impact of the estate's 1989 DNI.
On May 26, 1989, the personal representatives filed a "Petition for Determination of Elective Share" with the Probate Court. The personal representatives asked the Probate Court to defer payment of petitioner's elective share, pursuant to Fla. Stat. Ann. sec. 732.214 (West 1995), until after they had filed the estate tax return, which was due upon the expiration of an extension on December 22, 1989. Petitioner's answer of June 16, 1989, requested the Probate Court to compel immediate payment.
Several concerns, some based on incomplete and erroneous information, impelled petitioner and her attorneys to request prompt payment of her elective share. Petitioner's attorneys correctly advised her that the elective share was not entitled to participate in income of the estate and that, until the Probate Court ordered payment of the elective share, she would not be entitled to receive interest on the fund. But petitioner's attorneys mistakenly believed that the estate was already liquid at the time of petitioner's election, and thus could easily pay the elective share without delay.
Until September 15, 1989, consistent with their mistaken belief in the estate's liquidity, petitioner and her attorneys also mistakenly believed that the estate's 1989 DNI would not exceed $100,000. Notwithstanding that the Florida elective share is not entitled to participate in estate income, petitioner's attorneys believed that petitioner's elective share would attract the estate's DNI in the year of payment. As early as summer 1989, petitioner's attorneys were trying to minimize the impact of the estate's DNI on petitioner's income tax liability, well before they learned in late September how much DNI there would be. In a July 6, 1989, letter to Mr. Deutsch's attorneys, petitioner's attorneys asked the estate to make an immediate distribution to the residuary beneficiaries, which would have required them to include their proportionate shares of DNI in their taxable income. In subsequent telephone conversations with Mr. Deutsch's attorneys at the end of August, petitioner's attorneys again asked the estate to make concurrent distributions to the residuary beneficiaries. When Mr. Deutsch refused to do so, petitioner's attorneys asked him to postpone payment of the elective share until a later year.
On September 6, 1989, petitioner filed with the Probate Court a Motion for Appointment of Administrator Ad Litem, alleging that Mr. Deutsch's dual role as estate fiduciary and beneficiary created a conflict of interest. On September 15, 1989, petitioner and her attorneys were informed by one of Mr. Deutsch's attorneys that the estate income for 1989 would exceed $250,000. At a hearing on the motion before the Probate Court on September 25, 1989, the parties discussed amounts and components of estimated estate income. Based upon Mr. Deutsch's work papers, which were presented to the Probate Court in support of the estate's plan to satisfy petitioner's elective share, the parties stipulated that estate income was projected to be $650,000 in 1989 and $50,000 in 1990. Petitioner asked the Probate Court to synchronize payment of the elective share with distributions to the residuary beneficiaries.
The parties entered into a settlement, stipulating the projected 1989 income, the size of the net estate, $3,361,683, and the elective share, $1,008,504, and the assets to be used to satisfy the elective share. The Probate Court ratified this settlement in an Agreed Order, dated September 25, 1989, the day of the hearing. The Order also provided for the transfer to petitioner, as part of the elective share, of the specific assets that would have passed to her under the will, with the balance to be paid in cash.
The Probate Court's order directed the personal representatives to pay petitioner the elective share in its entirety in 1989, and not to make any distributions to the residuary beneficiaries until 1990 or thereafter. In the same Order, the Probate Court denied petitioner's motion for appointment of an administrator ad litem. On October 30, 1989, in response to petitioner's motion for rehearing, the Probate Court amended its order to permit but not require the personal representatives to make distributions to the residuary beneficiaries during 1989. Petitioner promptly appealed the modified order. In January 1990, the Florida Fourth District Court of Appeals dismissed the appeal. On November 3, 1989, during pendency of the appeal, Mr. Deutsch tendered, and petitioner accepted payment of the elective share, less amounts left in escrow to pay various State tax liabilities. The estate paid petitioner the amount that had been fixed by the Agreed Order of September 25, 1989. It did not include interest from the date of the Agreed Order to the date of payment.
In the 1989 calendar year fiduciary income tax return for decedent's estate, filed August 15, 1990, pursuant to extensions, Mr. Deutsch reported DNI of $707,095, net of tax-exempt interest, and claimed a distribution deduction for that amount pursuant to section 661(a) for the payment to petitioner in satisfaction of her elective share. Mr. Braunstein did not sign the estate's fiduciary income tax return.
The $707,095 of 1989 DNI reported by the estate was divided into three major categories: Dividend and interest income of $152,910, some of which the estate received after petitioner received her elective share on November 3 1989; $377,753 of income from 2 individual retirement accounts (IRA's), including post mortem interest and other income paid to the estate in 1989; and capital gains of $176,432 that, pursuant to advice from the attorney who drafted decedent's will, Mr. Deutsch treated as estate income in their entirety. The capital gains consisted entirely of post mortem asset appreciation that the estate realized when Mr. Deutsch liquidated estate assets in anticipation of paying the elective share to petitioner.
On September 13, 1990, petitioner filed her 1989 income tax return, pursuant to extensions. Petitioner's return did not include the DNI shown by the estate's fiduciary income tax return as having been distributed to her. Petitioner's return included a Form 8275 (Disclosure Statement under Section 6661) with a rider that disclosed receipt of the elective share and its noninclusion in her gross income and also disagreed with inclusion of the capital gains in estate DNI.
Following dismissal, in March 1990, of her appeal of the Probate Court Order, petitioner sued Mr. Deutsch in the Civil Division of the Circuit Court for the 15th Judicial Circuit for Palm Beach County, Florida. Petitioner...
To continue reading
Request your trial