Estate of Le Caer v. Commissioner, Docket Nos. 29631-07

• Decision Date: 07 September 2010
• Docket Number: 30041-07.,Docket Nos. 29631-07
• Citation: 135 T.C. 288
• Parties: ESTATE OF Lucien J. Le CAER, Deceased, LORRAINE LE CAER-DOMINI, CO-TRUSTEE AND DENISE LE CAER STAGNER, CO-TRUSTEE, Petitioner,<BR>v.<BR>COMMISSIONER OF INTERNAL REVENUE, Respondent.<BR>ESTATE OF MARIE L. LE CAER, DECEASED, LORRAINE LE CAER-DOMINI, CO-TRUSTEE AND DENISE LE CAER STAGNER, CO-TRUSTEE, Petitioner,<BR>v.<BR>COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

135 T.C. 288

ESTATE OF Lucien J. Le CAER, Deceased, LORRAINE LE CAER-DOMINI, CO-TRUSTEE AND DENISE LE CAER STAGNER, CO-TRUSTEE, Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
ESTATE OF MARIE L. LE CAER, DECEASED, LORRAINE LE CAER-DOMINI, CO-TRUSTEE AND DENISE LE CAER STAGNER, CO-TRUSTEE, Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Docket Nos. 29631-07

30041-07.

09-07-2010

[135 T.C. 289]

Nick A. Moschetti, Jr., for petitioners.

Wesley J. Wong, for respondent.

OPINION

MARVEL, Judge:

Respondent determined a $2,400 deficiency in the Federal estate tax of the Estate of Lucien Le Caer (Mr. Le Caer) and a $227,399 deficiency in the Federal estate tax of the Estate of Marie L. Le Caer (Mrs. Le Caer).^[1] After concessions,^[2] the issues for decision are: (1) Whether and to what extent Mrs. Le Caer's estate may claim a credit under section 2013 for Federal estate tax paid on the transfer of property to Mrs. Le Caer from Mr. Le Caer's estate; (2) whether Mrs. Le Caer's estate may decrease the gross estate by or claim as an allowable deduction the amount of the Federal and State estate tax paid with respect to Mr. Le Caer's estate; and (3) whether the trustees of Mr. Le Caer's estate filed a valid qualified terminable interest property (QTIP) protective election and whether such election may apply to the Rule 155 computations.

Background

The parties submitted this case fully stipulated under Rule 122. We incorporate the stipulated facts into our findings by this reference. Mr. Le Caer was a resident of Nevada when he died testate on January 19, 2004. Mrs. Le Caer also was a resident of Nevada when she died testate on March 29, 2004.^[3] For purposes of this Opinion the estates and the cotrustees are referred to as petitioners.

Mr. Le Caer was born in 1924, and Mrs. Le Caer was born in 1923. The couple had two daughters, Lorraine Le Caer-Domini and Denise Le Caer Stagner.

On April 21, 1992, Mr. and Mrs. Le Caer, as settlors and cotrustees, executed the Lucien and Marie Louise Le Caer

[135 T.C. 290]

1992 Family Trust Agreement. Mr. and Mrs. Le Caer subsequently executed several amendments to the trust. On February 19, 2002, Mr. and Mrs. Le Caer executed the Restated Lucien and Marie Louise Le Caer 1992 Family Trust Agreement (restated trust agreement), which governed the disposition and management of trust assets when Mr. and Mrs. Le Caer died. As settlors, Mr. and Mrs. Le Caer transferred to the trust certain property, including real estate, several accounts at Nevada State Bank, and vehicles. The restated trust agreement addressed the administration and distribution of the trust during Mr. and Mrs. Le Caer's lifetime and on the death of either spouse, irrespective of whose death occurs first. The restated trust agreement also provided for the disposition of assets upon the death of the second spouse to die.

According to the restated trust agreement, upon the death of the first spouse to die the corpus of the trust, including any additions to the trust from the will of that spouse, was to be divided into four shares (share A, share B, share C, and share D). Share A was to receive the surviving spouse's^[4] separate property of the trust fund^[5] and his or her interest in the community property of the trust fund. During the lifetime of the surviving spouse, the trustee would pay all or part of the net income and, in the trustee's discretion, the principal of share A, for the benefit of the surviving spouse, the couple's children, or their issue. The surviving spouse had the power of appointment over share A, and if she failed to exercise it, share A would follow the disposition of share B upon her death.

With respect to share B, the settlors intended that share B or a portion thereof would qualify for a marital deduction under section 2056. Share B was to receive property as follows:

(a) Share B shall consist of property of the trust fund in an amount equal to the maximum marital deduction as finally determined for federal estate tax purposes which is allowable under Section 2056 of the Internal Revenue Code * * * reduced by the aggregate value as finally determined for federal estate tax purposes of any property (other than property passing under this Share B) included in the * * * [estate of the first

[135 T.C. 291]

spouse to die] for federal estate tax purposes with respect to which a marital deduction is allowable; provided, however, that such amount shall be further reduced by the amount, if any, needed to increase * * * [the taxable estate of the first spouse to die] to the largest amount which will, after application of the unified credit against the federal estate tax and the credit for state death taxes * * *, not result in any federal estate tax being imposed * * *

The trustee was to pay or apply for the benefit of the surviving spouse the income and, in the trustee's discretion, the principal, of share B. The surviving spouse had the right to invade the principal of share B in amounts not exceeding a certain annual limit. Upon the death of the surviving spouse, any accumulated share B income was to be distributed to share A.

The settlors intended that share C of the trust was to consist of any amount that would otherwise have passed under share B of the trust but which the surviving spouse disclaimed or renounced. Share D was to consist of all of the remainder of the trust fund property. The trustee was to pay the income and, in the trustee's discretion, the principal, of share D for the benefit of the surviving spouse, the couple's children, or their issue. Upon the death of the surviving spouse, the trustee was to divide shares B, C, and D among the settlors' children.

Also on April 21, 1992, in conjunction with the trust, Mr. and Mrs. Le Caer executed wills. Each will disposed of the testator's separate property and a one-half interest in the community property. After enumerated bequests, each testator devised the remainder of his or her estate to the trust. Each testator directed in the respective will that all estate taxes be paid out of the residuary estate.

In accordance with the restated trust agreement, after Mr. Le Caer died on January 19, 2004, share B was funded in the amount of $1,900,295. Share C was not funded. Share D was funded in the amount of $1,500,000.

On February 18, 2004, Mr. Le Caer's estate and Mrs. Le Caer sold vacant land and, after paying off the mortgage loan, received $489,288. On February 23, 2004, Mr. Le Caer's estate and Mrs. Le Caer sold an apartment building and, after paying off the mortgage loan, received $217,470.

On March 29, 2004, Mrs. Le Caer died.

[135 T.C. 292]

On October 19, 2004, Mr. Le Caer's estate timely filed the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. The return reported a gross estate of $3,553,224, consisting of a one-half community property interest in various real estate valued at $1,925,879,^[6] five bank accounts at Nevada State Bank totaling $64,474, and an account at Western National Trust Co. (Western) valued at $1,562,871. The trustees made a QTIP election under section 2056(b)(7) with respect to $1,405,295 of the assets included in Mr. Le Caer's gross estate. Accordingly, a portion of share B in the amount of $1,405,295 qualified for a marital deduction, and a portion of share B in the amount of $495,000 did not qualify for a marital deduction. Mr. Le Caer's estate reported a taxable estate of $1,995,000. After an allowable unified credit of $555,800 and a credit for State death taxes of $24,810, the estate reported tax payable of $200,190, which it enclosed with the return. Mr. Le Caer's estate also mailed a $24,810 check for the payment of the Nevada estate tax to the Nevada Department of Taxation. The estate simultaneously filed a notice of protective election under section 6166.

On November 4, 2004, a Form 706 for Mrs. Le Caer's estate was signed, and on December 7, 2004, it was mailed. The return reported a $4,976,586 gross estate consisting of Mrs. Le Caer's interest in real estate valued at $1,572,500,^[7] three bank accounts at Nevada State Bank totaling $354,039, and the Western account valued at $1,639,752. Her gross estate also included personal property valued at $5,000 and the QTIP remainder of $1,405,295. Mrs. Le Caer's estate claimed a credit for tax on prior transfers of $225,000. The estate reported tax due of $1,259,596, which it enclosed with the return. The estate filed a notice of protective election under section 6166.

On December 29, 2004, an amended Form 706 for Mrs. Le Caer's estate was signed, and it was subsequently mailed. On the amended Form 706 Mrs. Le Caer's estate reported the same gross estate and credit for tax on prior transfers as it

[135 T.C. 293]

had on the original Form 706. However, on the amended Form 706 Mrs. Le Caer's estate claimed a $225,000 deduction as part of Schedule K, Debts of the Decedent, and Mortgages and Liens. The estate included the following narrative:

Federal Estate Taxes of decedents [sic] predeceased spouse, Lucien Jean Le Caer * * *, who died on 1/19/2004, which taxes were fully paid by decedent, and the gross estate of Lucien Jean Le Caer was not reduced by his $225,000 Federal Estate tax liability/debt and no deduction was taken on the 706 Federal Estate Tax Return filed for Lucien Jean Le Caer.

Mrs. Le Caer's estate claimed an overpayment of $101,700.

Respondent audited both estates' returns and on September 18, 2007, issued notices of deficiency. With respect to each estate respondent increased taxable gifts by $5,000 and determined the maximum allowable credit for State death taxes. By stipulation and on brief, however, respondent conceded the taxable gift adjustments and agreed with the estates' computations of the allowable State death credits.^[8] See supra note 2. With respect to the amended Form 706 filed by Mrs. Le Caer's estate, respondent disallowed the entire credit for tax on prior transfers under...