Estate of Bograd v. C.I.R., 020188 FEDTAX, 4417-85

Docket Nº:Docket. 4417-85
Opinion Judge:WHITAKER, JUDGE:
Attorney:Bruce A. Miller, for the petitioner. Linda K. West, for the respondent.
Case Date:February 01, 1988
Court:United States Tax Court

55 T.C.M. (CCH) 11




Docket. No. 4417-85

United States Tax Court

February 1, 1988

Held: Petitioner failed to prove that the taxable estate does not include the value of bearer notes purchased by decedent before his death; HELD FURTHER, petitioner is not entitled to a deduction for payments in settlement of claims of beneficiary of testamentary trust.

Bruce A. Miller, for the petitioner.

Linda K. West, for the respondent.



Respondent issued a notice of deficiency on December 7, 1984, having determined a deficiency in the estate tax liability of the Estate of Nathan Bograd (petitioner) in the amount of $97,201.58. After concessions, the issues for decision are:

(1) Whether bearer Treasury notes totaling $160,000 should be included in the taxable estate; and

(2) whether the estate is entitled to a deduction for administrative expenses in the amount of $35,000.


Some of the facts have been stipulated and are so found. Nathan Bograd (Dr. Bograd), decedent, died testate March 17, 1981. He was a resident of Montgomery, Alabama. His nephew, John B. Keifer, and his friend, Garnet Turner, were appointed to serve as co-executors of his estate. Letters Testamentary were granted to Mr. Keifer and Mr. Turner by the Probate Court of Montgomery County, Alabama, on May 6, 1981, the same day the Probate Court admitted decedent's will to probate. At the time the petition in this case was filed, John B. Keifer resided in New Orleans, Louisiana.


During his life, Dr. Bograd purchased Treasury notes through Union Bank & Trust Company (Union Bank) in Montgomery, Alabama. The following securities were held in safekeeping by the bank and were reported on Schedule C of the estate tax return filed by the petitioner:

Amount Bought Description Maturity
$ 5,000 04/09/79 Treasury Note 9 5/8% due 03/31/81
5,000 04/30/79 Treasury Note 9 3/4% due 04/30/81
5,000 02/15/78 Treasury Note 7 1/2% due 05/15/81
5,000 07/02/79 Treasury Note 9 1/8% due 06/30/81
45,000 07/09/76 Treasury Note 7 5/8% due 08/15/81
10,000 10/31/79 Treasury Note 12 5/8% due 10/31/81
4,000 01/02/79 Treasury Note 9 3/8% due 12/31/82
Interest on these securities was paid semiannually by Union Bank. Dr. Bograd also purchased bearer (coupon) Treasury notes through Union Bank that were not held in safekeeping by the bank. These notes, listed below, were not included in the estate tax return, and they were not found by the executors of the estate in Dr. Bograd's personal effects or his Union Bank safe deposit box which was located at the Eastbrook branch: [1]
Amount Bought Description
$15,000 12/31/79 Treasury Note 11 3/8% due 12/31/81
10,000 08/15/79 Treasury Note 9% due 08/15/82
40,000 12/01/80 Treasury Note 13 7/8% due 11/30/82
30,000 12/31/80 Treasury Note 15 1/8% due 12/31/82
40,000 02/02/81 Treasury Note 13 5/8% due 01/31/83
20,000 03/02/81 Treasury Note 13 7/8% due 02/28/83
5,000 08/16/76 Treasury Note 8% due 08/15/86
Of these bearer notes, those purchased before 1981 were delivered by a representative of Union Bank to Dr. Bograd personally. He generally kept the notes in his safe deposit box located at the Eastbrook branch of Union Bank. Dr. Bograd and his sister, Ann Keifer, were the only individuals with access to this box. The two notes purchased in 1981, shortly before Dr. Bograd's death, were delivered by a representative of the bank to Coralie McDavid, a close personal friend to whom Dr. Bograd had authorized delivery. Jane Cannon, Assistant Vice-President of the investment department of Union Bank in Montgomery, kept records of the dates the bearer notes were received and delivered by the bank. The $40,000 note arrived on March 10, 1981. A representative of the bank delivered the note to Ms. McDavid on March 16, 1981, the day before decedent's death. The $20,000 note arrived at the bank April 13, 1981. Ms. Cannon, who usually handled the delivery of the notes on behalf of the bank, was out of town when the note arrived and was unaware of Dr. Bograd's death. She phoned authorization for the release of the note pursuant to prior instructions of Dr. Bograd and Ms. McDavid picked up the note on April 16, 1981. Usually Ms. Cannon debited Dr. Bograd's account when he purchased a Treasury note, however Ms. McDavid purchased this note with a check she had received from Dr. Bograd drawn on another bank. Ms. McDavid delivered the $40,000 note to Dr. Bograd's sister the same day she picked it up from the bank. [2] Upon receipt of the second note, Ms. McDavid put it in her own safe deposit box. In the statutory notice respondent determined that Dr. Bograd owned all of the bearer notes on the date of his death, that the notes were part of the gross estate, and that on the alternate valuation date their fair market value was $160,000. Accordingly, respondent increased the value of the taxable estate by $160,000. EXPENSES OF THE ESTATE In his Last Will and Testament decedent made various specific bequests of property, none of which included the bearer notes discussed above. The rest, residue, and remainder of his property was bequeathed to John B. Keifer as trustee of a testamentary trust to be known as the ‘ Nathan Bograd Trust.‘ The terms and conditions of the trust included the following: C. During the term of her life, I hereby authorize and direct my Trustee to allow, make available and provide the use and occupancy of my home located on Hillwood Drive to Coralie McDavid. During such time the following circumstances and conditions will govern and control Coralie McDavid's use and occupancy of said home: 1. Coralie McDavid shall pay all taxes, insurance and repairs on said home up to a maximum of Five Hundred ($500.00) Dollars per year; and, in the event that Coralie McDavid is called upon to pay any sum in excess of Five Hundred ($500.00) Dollars per year for such taxes, insurance and repairs, the Trustee is hereby authorized and directed to reimburse her for such sum in excess of Five Hundred ($500.00) Dollars. * * * Ms. McDavid resided in Dr. Bograd's house after his death. Upon discovering that repairs to the house were needed, she contacted Garnet Turner. He inspected the house, had a structural engineer examine it, and then had contractors bid on the repair job. Mr. Turner also advised Mr. Keifer that repairs were necessary to preserve the property value. During the year 1982, Ms. McDavid expended a total of $20,696.04 for taxes, insurance, and repairs to the house. She sought reimbursement from Mr. Keifer, as Trustee, pursuant to the terms of the testamentary trust. In April 1985, when it appeared that reimbursement would not be forthcoming, Ms. McDavid filed a Complaint in the Circuit Court of Montgomery County, Alabama, naming as defendants John B. Keifer, as Co-Executor of the Estate of Nathan Bograd, Deceased, and as Trustee of the Nathan Bograd Trust; and Garnet Turner, as Co-Executor of the Estate of Nathan Bograd, Deceased. Ms. McDavid averred that Mr. Keifer, as Co-Executor and Trustee, failed to reimburse her for payments she made and that his actions were willful, malicious, and without good cause. Ms. McDavid sought relief of $20,696.04 compensatory damages and $250,000 punitive damages. Count II of the Complaint charged the estate and the trustee with willfully, wantonly, and maliciously converting certain brass objects. Ms. McDavid sought compensatory damages of $1,200 and punitive damages of $250,000 with respect to this charge. The parties agreed to settle the dispute later that year. Ms. McDavid executed a Limited Release of All Claims whereby, in consideration of the sum of $15,000, she released all claims she may have had for payment of the repair bill and for failure of the estate or the Trustee to deliver the brass objects. Mr. Keifer executed a Full Release of All Claims whereby, in consideration of $1.00 and dismissal with prejudice of Ms. McDavid's lawsuit, he released all claims against her relating to the lawsuit, and specifically released ‘ Any claim for negotiable instruments, treasury bills, treasury notes, or any other assets, tangible or intangible personal, real...

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