DiLeonardo v. Commissioner
| Decision Date | 05 April 2000 |
| Docket Number | Docket No. 5508-97. |
| Citation | 79 T.C.M. 1820 |
| Parties | Sharon Purcell DiLeonardo v. Commissioner. |
| Court | U.S. Tax Court |
Sharon Purcell DiLeonardo, pro se. Alan E. Staines, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in Federal individual income tax and an addition to tax under section 6651(a)(1)1 () against petitioner as follows:
Addition to Tax
Year Deficiency Sec. 6651(a)
1993 ................ $ 3,517 $879
1994 ................ 18,887 0
After concessions by both sides,2 the issue for decision is whether under section 212 petitioner may deduct payments she made as ordered by a California court.
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petition was filed in the instant case, petitioner resided in Santa Rosa, California.
Petitioner is an income beneficiary of a testamentary trust established by the will of petitioner's grandfather, L.O. Ivey. This testamentary trust is hereinafter sometimes referred to as the Trust. L.O. Ivey's will was admitted to probate in 1978. By July 1, 1991, the other income beneficiaries of the Trust were petitioner's mother, Helen True Purcell, hereinafter sometimes referred to as Purcell, and petitioner's two siblings. Purcell and petitioner's two siblings are hereinafter sometimes collectively referred to as the other beneficiaries.3 Purcell was entitled to receive 50 percent of the Trust's income. Petitioner and her two siblings were each entitled to receive one-sixth of the Trust's income. See infra note 3.
Crocker National Bank acted as trustee for the Trust until May 31, 1986, when Crocker National Bank was acquired by Wells Fargo Bank. Wells Fargo Bank, hereinafter sometimes referred to as the Trustee, has acted as the Trust's Trustee since May 31, 1986.
Petitioner's husband, Joseph DiLeonardo, hereinafter sometimes referred to as DiLeonardo, is licensed by California as both an attorney and a real estate broker.
On July 5, 1991, the Trustee filed with the Superior Court of the State of California for the County of Los Angeles (hereinafter sometimes referred to as the California Court), its third accounting (hereinafter sometimes referred to as the Third Account), covering the period October 1, 1987, through April 15, 1991. Petitioner and DiLeonardo each received a copy of the Third Account.
Among other matters in the Third Account, the Trustee recommended a distribution of "delayed income" with respect to the sale of L.O. Ivey's residence after the death of L.O. Ivey's widow, who had lived in the residence rent-free pursuant to a court-ordered probate homestead. The Trustee calculated the amount payable to each of the income beneficiaries, but acknowledged that a different formula would result in a different, smaller, current distribution. The Trustee asked the California Court to provide instructions on this matter and, in connection therewith, to appoint a guardian ad litem to represent minor and unborn contingent remainder beneficiaries. The Trustee also proposed that the net profit from the sale of that residence be allocated half to income and half to principal.
After reviewing the Third Account, DiLeonardo advised petitioner to contact an attorney specializing in probate matters to review the Third Account, make recommendations, and represent petitioner as needed. DiLeonardo contacted several attorneys on petitioner's behalf.
Two attorneys, John D. Burroughs, hereinafter sometimes referred to as Burroughs, and Evan W. Field, hereinafter sometimes referred to as Field, from the law firm of Burroughs, Froneberger & Field, reviewed the Third Account. Burroughs and Field agreed to represent petitioner if any action were necessary regarding the Third Account. Petitioner paid a small amount to Field and Burroughs to do some investigative and preliminary work. Field and Burroughs agreed to a contingency fee arrangement for their representation of petitioner concerning the Third Account.
Field told petitioner that he had spoken with his father-in-law, Professor Halbach, regarding the Third Account. Field told petitioner that Professor Halbach was the former Dean of Boalt Hall School of Law at the University of California and a foremost expert on trusts in the United States. Field also told petitioner that Professor Halbach recommended that petitioner be very aggressive in objecting to the Third Account.
Thereafter, DiLeonardo, Burroughs, and Field recommended that petitioner object to the Third Account in two ways: (1) Object to the actions of the Trustee during the period covered by the Third Account and ask for reductions in the Trustee's fees or that the Trustee be surcharged, and (2) object to the Trustee's request for authority regarding new actions. Burroughs prepared Objections to the Third Account and Report of the Trustee, hereinafter sometimes referred to as the Objections, for petitioner. Two meetings between DiLeonardo, Burroughs, Field, and petitioner were held before petitioner signed the Objections.
It appears that, after the Trustee's first account, petitioner filed objections to that account, and those objections resulted in substantial reductions in the Trustee's fees. At that time, the Trustee tried to have sanctions imposed on petitioner but was unsuccessful in that attempt. With this experience in mind, DiLeonardo, Burroughs, Field, and petitioner discussed whether the Trustee would move for sanctions or an award of litigation costs against petitioner if she filed the Objections. DiLeonardo, Field, and Burroughs represented to petitioner that this would not happen because the Objections were good on their face and would not subject petitioner to any kind of sanction, penalty, or litigation costs award. After consultation with DiLeonardo, Field, and Burroughs, and after assurances that the Objections were reviewed by Professor Halbach and investigated by another law firm, petitioner signed the Objections.
On August 7, 1991, petitioner filed the Objections with the California Court. Petitioner made several Objections to the Third Account, including the following:
Guardian ad litem. Petitioner agreed that a guardian ad litem should be appointed, but objected to the Third Account by asking the California Court to delay authorizing the distribution until the guardian was appointed and had sufficient time to review the Third Account, appear before the California Court, and make appropriate objections.
Insufficiently productive assets. Petitioner contended that the Trustee failed to earn a normal rate of return on trust assets, focusing on two of these assets. One asset was the residence which had been occupied by L.O. Ivey's widow after his death. Petitioner contended that the Trustee failed to make the property productive after the death of L.O. Ivey's widow and that the Trustee sold the residence for only $3.5 million, although the residence had been appraised at $5.2 million and there had been offers to buy the residence for more than $3.5 million. The other asset was a series of gypsum mining claims located in Nevada. L.O. Ivey owned the claims for 10 to 12 years before his death. For nearly 15 years the Trust did not receive income from the claims but did incur expenses associated with them. The Trustee disposed of the claims after petitioner filed the Objections.
Charges of bias and fraud. Petitioner charged that the Trustee failed to protect the interests of income beneficiaries with regard to the residence that had been occupied by L.O. Ivey's widow, and that, to make up for this, the Trustee proposed to distribute the proceeds of the sale of that residence in a way that would fail to protect the interests of the remainder beneficiaries. Petitioner proposed that the income beneficiaries' lost income be made up for out of the Trustee's assets and not by taking away what should go to remainder beneficiaries. Petitioner charged that the Trustee should have opposed homestead status for the residence of L.O. Ivey's widow, and that the Trustee's failure to oppose homestead status was a breach of fiduciary duty which may have resulted from "an extrinsic fraud". The asserted extrinsic fraud involved a conflict of interest in that the conservator for L.O. Ivey's widow (the conservator also was a residual beneficiary of the widow's estate) was married to a partner in the law firm that represented the Trustee, as a result of which the Trustee acted, or failed to act, in a manner that favored L.O. Ivey's widow over the other beneficiaries of the Trust.
Investments too aggressive. Petitioner charged that there was a large turnover in the Trust's investment portfolio, and contended that she should be given the opportunity to investigate the situation.
Self-dealing. Petitioner charged that the Trustee improperly deposited substantial cash amounts in the Trustee's own money market accounts and contended that there should be an examination of comparative interest rates and costs to determine whether income beneficiaries were disadvantaged by these deposits.
The Litigation, Award of Costs.
On November 8, 1991, the California Court granted summary adjudication in favor of the Trustee on most of the Objections. On November 12, 1991, the remaining Objections were withdrawn by Burroughs.
After the remaining Objections were withdrawn, the Third Account was approved by the California Court. The California Court also ordered that the extraordinary distributions provided for in the Third Account be held pending the other beneficiaries' motion for litigation costs. In December 1991, the other beneficiaries moved against petitioner for litigation costs.
The California Court awarded litigation costs to the other beneficiaries, the...
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