Estate of Black v. Commissioner of Internal Revenue, 121409 FEDTAX, 23188-05
| Opinion Judge | HALPERN, Judge |
| Party Name | ESTATE OF SAMUEL P. BLACK, JR., DECEASED, SAMUEL P. BLACK, III, EXECUTOR, ET AL.,[1] Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Attorney | John W. Porter, J. Graham Kenney, Stephanie Loomis-Price, and Jason S. Zarin, for petitioner. Gerald A. Thorpe and Andrew M. Stroot, for respondent. |
| Case Date | December 14, 2009 |
| Court | U.S. Tax Court |
From 1927 until 1993, Mr. B was an employee, officer, or director of E (an insurance company) and was a major contributor to E's success. In 1993, he, his son, P, and trusts for P's two sons contributed their unencumbered E stock to BLP, a family limited partnership, in exchange for partnership interests proportionate to the fair market value of the E stock each contributed. Mr. B's advisers had explained the estate tax advantages of placing his E stock in BLP, but the transaction was initiated to implement Mr. B's buy-and-hold philosophy with respect to the family's E stock. Specifically, that transaction was a solution to his concerns that (1) P's wife and her parents (she in connection with a possible divorce from P, they because of their continual financial problems) would require P to sell or pledge some of his E stock to satisfy their monetary needs (P previously had pledged 125,000 E shares as collateral for a loan), and (2) his grandsons would sell all or some of the E stock that they would receive upon the termination of their trusts. In 1993, P and the two trusts owned approximately $12 million (of the B family's approximately $80 million) worth of E stock.
Mr. B's estate plan established a pecuniary marital trust for Mrs. B and a $20 million bequest to a university endowment. Mr. B died in December 2001, and Mrs. B, 5 months later, before there was time to fund the marital trust, which P, as executor of both estates, had intended to fund with a portion of Mr. B's estate's interest in BLP. On Mrs. B's estate's Federal estate tax return, P deemed the marital trust to be funded as of the date of her death.
Because Mrs. B's estate lacked sufficient liquid assets to discharge its tax and other liabilities, P, BLP's managing partner, and E agreed to have BLP sell some of its E stock in a secondary offering. That sale raised $98 million, of which E lent to Mrs. B's estate $71 million. The interest on the loan was payable in a lump sum on the purported due date, more than 4 years from the date of the loan, and was deducted in full on Mrs. B's estate's tax return under sec. 20.2053-1(b)(3), Estate Tax Regs. Mrs. B's estate used the funds to discharge its Federal and State tax liabilities, pay the $20 million bequest to the university endowment, reimburse E's costs, totaling $980,625, in connection with the secondary offering, and pay $1,155,000 each to P, as executor fees, and to a law firm, as legal fees.
R determined that (1) the value of the E stock apportionable to Mr. B's partnership interest in BLP at his death is includable in his gross estate under either sec. 2035(a) or 2036(a)(1) or (2), I.R.C., (2) the marital deduction to which Mr. B's estate is entitled under sec. 2056, I.R.C., is limited to the value of the partnership interest in BLP that actually passed to the marital trust, (3)the deemed funding date of the marital trust and, hence, the size of the BLP interest includable in Mrs. B's estate under sec. 2044, I.R.C., is determined by reference to the value of BLP on the date of Mr. B's death, not on the date of Mrs. B's death when the value of BLP was higher and it would require a smaller interest in BLP to fund the trust, (4)the interest payable on the BLP loan to Mrs. B's estate is not a deductible administration expense under sec. 2053(a)(2), I.R.C., and (5) Mrs. B's estate is not entitled to deduct the $980,625 reimbursement of E's secondary offering costs and is entitled to deduct only $500,000 of P's executor fee and $500,000 of the legal fees.
1. Held: Because Mr. B's transfer of E stock to BLP in exchange for a partnership interest therein constituted "a bona fide sale for an adequate and full consideration in money or money's worth" within the meaning of sec. 2036(a), I.R.C., the value of Mr. B's gross estate does not include the value of the transferred E stock apportionable to his date-of-death interest in BLP.
2. Held, further, holding No. 1 renders R's second determination moot.
3. Held, further, the deemed funding date of the marital trust is the date of Mrs. B's death.
4. Held, further, the loan from BLP to Mrs. B's estate was not "necessarily incurred" within the meaning of sec. 20.2053-3(a), Estate Tax Regs., and, therefore, the interest thereon is not a deductible administration expense under sec. 2053(a)(2), I.R.C.
5. Held, further, Mrs. B's estate is entitled to deduct $481,000 of its reimbursement of E's secondary offering costs, $577,500 for P's executor fee, and $577,500 for legal fees because only those amounts correspond to expenditures or effort on behalf of Mrs. B's estate.
Respondent has issued four notices of deficiency (the notices) to Samuel P. Black III (petitioner). Two were issued to him in his capacity as executor of the estate of Samuel P. Black, Jr. (Mr. Black's estate and Mr. Black, respectively), and two were issued to him in his capacity as executor of the estate of Irene M. Black (Mrs. Black's estate and Mrs. Black, respectively). Two notices were with respect to Federal gift tax (one with respect to Mr. Black and one with respect to Mrs. Black), each determining a deficiency in tax of $147,623 for 2001 for gifts by Mr. Black that were treated for Federal gift tax purposes as made one-half by each spouse. The other two notices were with respect to Federal estate tax, one determining a deficiency in tax of $129,166,964 for Mr. Black's estate, and the other determining a deficiency in tax of $82,224,024 for Mrs. Black's estate. Petitioner is the son of Mr. and Mrs. Black.
After concessions (all of which relate to valuation issues and issues resolved by the settlement of the valuation issues) the issues for decision are (1) whether the fair market value of stock that Mr. Black contributed to the Black Interests Limited Partnership (Black LP) is includable in his gross estate pursuant to section 20362 (the section 2036 issue); (2) if we decide that the fair market value of the stock Mr. Black contributed to Black LP, rather than the fair market value of Mr. Black's interest in Black LP, is includable in his gross estate under section 2036, whether the marital deduction to which Mr. Black's estate is entitled under section 2056 should be computed according to the value of the partnership interest that actually passed to Mrs. Black or according to the value of the underlying stock apportionable to that interest (the marital deduction issue); (3) for purposes of determining the value of the marital trust property includable in Mrs. Black's gross estate under section 2044, whether the marital trust that Mr. Black established for Mrs. Black's benefit should be deemed funded on the date of his death or on the date of her death (the date of funding issue); (4)whether Mrs. Black's estate may deduct, as an administrative expense under section 2053(a)(2), $20,296,274 in interest on an alleged loan from Black LP (the interest deductibility issue); (5)whether Mrs. Black's estate may deduct, as administrative expenses under section 2053, the following fees or expense reimbursements: (a) a $1,150,000 fee paid to petitioner for services as the executor of Mrs. Black's estate and trustee of the marital trust, (b) a $1,150,000 fee paid to the law firm of MacDonald, Illig, Jones & Britton LLP (MacDonald Illig), and (c) $980,625 paid to Black LP as reimbursement for expenses incurred in connection with a secondary offering of stock Black LP held (together, the fee deductibility issues); (6) whether under section 7491(a) respondent bears the burden of proof with respect to all factual issues (the burden of proof issue). The notices also contain certain other adjustments that are purely computational. Their resolution depends on our resolution of the issues in dispute.
FINDINGS OF FACT
Some facts are stipulated and are so found. The stipulation of facts, with accompanying exhibits, is incorporated herein by this reference.
At the time the petitions were filed, petitioner resided in Pennsylvania.
The Black Family
Mr. Black was born on April 2, 1902, and died, at the age of 99, on December 12, 2001. Mrs. Black was born on December 18, 1906, and died shortly after Mr. Black, on May 25, 2002. Mr. and Mrs. Black were married in 1932 and remained married until Mr. Black's death. The Blacks were survived by their son (petitioner) and grandsons (petitioner's children), Samuel P. Black IV (Samuel), and Christopher Black (Christopher), who were 33 and 31 years old, respectively, when Mrs. Black died.
Mr. Black's History With Erie Indemnity Company
Mr. Black was born into poverty in Mercer County, Pennsylvania. At age 11, he was selling bread on the street corner and peddling newspapers door-to-door. At age 19, he began work as an insurance adjuster at the Philadelphia Indemnity Exchange, where he worked with H.O. Hirt and O.G. Crawford.
In 1925, H.O. Hirt and O.G. Crawford founded Erie Indemnity Co. (Erie) and, in 1927, hired Mr. Black as Erie's first fulltime claims manager. In 1925, Erie was a Pennsylvania automobile insurance company; by the early 1990s, Erie had become a multiline insurance company offering auto, home, commercial, and life insurance in 11 States and the District of Columbia through a network of independent insurance agents. Erie also managed the Erie Insurance Exchange, a reciprocal insurer.
Mr. Black was a large part of Erie's success. Upon joining Erie, Mr. Black installed an extension of the "home office" telephone in his room at the YMCA across the street from Erie's office, making Erie one...
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