Estate of Cafaro v. Commissioner
| Decision Date | 20 July 1989 |
| Docket Number | Docket No. 38608-84. |
| Citation | 1989 TC Memo 348,57 TCM(CCH) 1002 |
| Parties | Estate of Charles P. Cafaro, Deceased, Grace Cafaro, Executor v. Commissioner. |
| Court | U.S. Tax Court |
Brent H. Gwillim and Richard N. Molchan, 124 S.W. Adams, Peoria, Ill., for the petitioner. Clinton M. Fried, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in Federal estate tax in the amount of $63,605.96 and an addition to tax under section 6651(a)(1)1 in the amount of $15,901.49 for the estate of Charles P. Cafaro who died in 1978.
After concessions,2 the remaining issue for decision is whether events occurring after the date of death of the decedent may be considered in determining whether certain alleged debts of the decedent are deductible by the estate under section 2053(a) (3) as claims against the estate.
This case was submitted fully stipulated under Rule 122. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
The decedent, Charles P. Cafaro, died on September 26, 1978, while a domiciliary of Illinois, and the estate of the decedent is being administered in Illinois. Mr. Cafaro's wife, Grace Cafaro, is the executrix of the estate and resided in Peoria, Illinois at the time the petition in this case was filed.
On January 20, 1982, Grace Cafaro, as executrix, filed the Federal estate tax return (Form 706) for the estate of the decedent with the Kansas City Service Center of the Internal Revenue Service. On the estate tax return, the following alleged debts of the decedent, among others, were listed as deductions on Schedule K:
Person or Entity to Amount Deducted
Whom Debt Owed on Return
1. Donna Lowman $ 4,000.00
2. Gary Kailey, Creative Concepts 22,261.66
3. Bloomington Federal Savings &
Loan Association 484,315.28
4. First National Bank of
Galesburg 122,411.57
5. National Bank of Petersburg 32,287.12
_____________
Total $665,275.63
With regard to the amount allegedly owed to Donna Lowman, Donna Lowman filed a claim in the Circuit Court of the Tenth Judicial Circuit of Illinois, Peoria County, in Probate, (hereinafter referred to as the Probate Court) in the amount of $4,000. This amount related to a contract entered into between the decedent and Donna Lowman for the purchase of stock in Executive Centers of America, Inc. On July 5, 1984, Grace Cafaro, as executrix, paid Donna Lowman the sum of $2,000 in full satisfaction of her claim. On September 10, 1984, Donna Lowman's claim in the Probate Court was dismissed, pursuant to a Stipulation of Dismissal executed by counsel for the claimant and the estate.
On February 2, 1979, Mr. Kailey filed a timely claim in the Probate Court in the amount of $22,261.66. This amount was allegedly owed to Gary Kailey for the advertising services of Creative Concepts. In 1980, pursuant to an agreement of the parties in Probate Court, Mr. Kailey's claim was settled by the payment of $15,000, and the estate was released from any further obligation.
With respect to the amount the decedent allegedly owed to Bloomington Federal Savings & Loan Association, on August 15, 1977, Associates Partnership, Ltd. executed a note on Bloomington Federal Savings & Loan Association's corporate form for $750,000, with interest at the rate of 9-1/2 percent per annum. The note stated that "for value received, the undersigned Associates Partnership, Ltd. a limited Partnership organized and existing under the laws of the State of Illinois hereby promises to pay to the order of Bloomington Federal Savings and Loan Association * * *." The decedent executed the note in his capacity as general partner of Associates Partnership, Ltd. In addition, the decedent and his wife, Grace Cafaro, executed the note in their individual capacities. The money was received by the partnership and not by the decedent or his wife individually. On April 9, 1979, Bloomington Federal Savings & Loan Association filed a claim against the estate in the Probate Court in the amount of $484,315.28. This claim was not paid by the estate. The loan was assumed and ultimately paid by Becker Brothers, Inc. on September 28, 1984.
On March 30, 1976, the decedent entered into a guaranty agreement with First Galesburg National Bank & Trust. Under that agreement the decedent guaranteed payment of any indebtedness that Executive Centers of America, Inc. might contract with First Galesburg National Bank & Trust, to the extent of $200,000. On July 19, 1977, Executive Centers of America, Inc. executed a note for $170,000, with interest at the rate of 9-1/2 percent per annum, secured by a real estate mortgage on the corporation's property located in McLean County, Illinois. The decedent and Lawrence C. Shank executed the note in their capacities as president and treasurer, respectively, of Executive Centers of America, Inc. These funds were not received by the decedent in his individual capacity. On April 30, 1979, First Galesburg National Bank & Trust filed a claim against the estate in the Probate Court in the amount of $122,411.57. The bank asked that the claim be treated as a claim of the seventh class to protect the rights of the claimant in the event that the primary debtor, Executive Centers of America, Inc., failed to pay and discharge the note. This claim was not paid by the estate; it was paid by the liquidating trust of Executive Centers of America, Inc. on June 10, 1982. The real estate mortgage that was the security for the note was then released, discharged, and quitclaimed back to Executive Centers of America, Inc.
On November 19, 1976, Executive Centers of America, Inc. executed a note to the National Bank of Petersburg for $50,000, with interest at the rate of 9 percent per annum. The decedent and Lawrence C. Shank executed the note in their capacities as president and treasurer, respectively, of Executive Centers of America, Inc. The decedent and Grace Cafaro also appeared as signatories on the note in their individual capacities. The funds were not received by the decedent or his wife in their individual capacities. On May 7, 1979, the National Bank of Petersburg filed a claim against the estate in the Probate Court in the amount of $32,287.12. The bank's claim stated that the decedent "was the Co-signer of a Promissory Note in the total amount of $50,000 * * *." The claim was not paid by the estate. On August 14, 1982, Executive Centers of America, Inc. paid off the note.
On August 13, 1984, respondent timely mailed a notice of deficiency to petitioner. Respondent increased petitioner's taxable estate by $707,488.06 due principally to the disallowance of certain debts deducted on Schedule K of the Federal estate tax return, including the debts remaining in dispute in this case. Respondent later conceded that with respect to the amount claimed by Donna Lowman, $2,000 was deductible by petitioner and with respect to the amount claimed by Gary Kailey, $15,000 was deductible by petitioner.
Respondent also determined an addition to tax under section 6651(a)(1) due to the fact that the Federal estate tax return was not filed within the time prescribed by law, and petitioner did not show that the failure to file on time was due to reasonable cause and not due to willful neglect. The parties agree that in the event this Court determines that there is a deficiency in estate tax due from petitioner, then the addition to tax as provided by section 6651(a)(1) is applicable.
OpinionSection 2053(a)(3) provides for a deduction from the gross estate for "claims against the estate * * * as are allowable by the laws of the jurisdiction * * * under which the estate is being administered." In regard to deduction of estimated amounts, section 20.2053-1(b)(3), Estate Tax Regs., provides as follows:
An item may be entered on the return for deduction though its exact amount is not then known, provided it is ascertainable with reasonable certainty, and will be paid. No deduction may be taken upon the basis of a vague or uncertain estimate. * * *
As to deductions for claims against the estate, section 20.2053-4, Estate Tax Regs., generally provides that:
The amounts that may be deducted as claims against a decedent's estate are such only as represent personal obligations of the decedent existing at the time of his death, whether or not then matured, and interest thereon which had accrued at the time of death * * *. Only claims enforceable against the decedent's estate may be deducted. * * * Emphasis supplied.
The purpose of allowing claims against the estate as deductions from the gross estate is to assure that the estate tax is imposed only on the net estate, i.e., on what actually passes in value from the dead to the living. Estate of Courtney v. Commissioner Dec. 32,639, 62 T.C. 317, 321 (1974); Estate of Hagmann v. Commissioner Dec. 32,019, 60 T.C. 465, 467 (1973), affd. 74-1 USTC ¶ 12,996, 492 F.2d 796 (5th Cir. 1974). The deduction is limited to those claims that are valid and enforceable under the laws of the jurisdiction in which the estate is administered. Estate of Thompson v. Commissioner Dec. 37,096, 74 T.C. 858, 861 (1980), revd. on an issue of Indiana law, initially without published opinion 720 F.2d 681 (7th Cir. 1983), but then published in full 730 F.2d 1071 (7th Cir. 1984); Estate of Courtney v. Commissioner, supra, 62 T.C. at 320-321.3 For a claim to be valid, there must be an assertion of a right and the right to assert the claim must not have been relinquished or abandoned. Estate of DuVal v. Commissioner Dec. 14,354, 4 T.C. 722, 725 (1945), affd. 45-2 USTC ¶ 10,237, 152 F.2d 103 (9th Cir. 1945), cert. denied 328 U.S. 838 (1946).
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