Estate of Chagra v. Commissioner
| Decision Date | 11 July 1990 |
| Docket Number | Docket No. 7887-86. |
| Parties | Estate of Lee Chagra, Deceased, Joseph Abraham, Administrator v. Commissioner. |
| Court | U.S. Tax Court |
Towner Leeper and John Leeper, 661 Mesa Hills, El Paso, Tex., for the petitioner. Byron Calderon and C. Joseph Craven, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $193,364 in the Federal estate tax liability of the estate of Lee Chagra and an addition to tax of $48,341 under section 6651(a)(1).1 After concessions by both parties, the issues to be decided are whether alleged debts of decedent are deductible claims against the estate under section 2053(a)(3), and whether petitioner is liable for an addition to tax under section 6651(a)(1) for failing to file an estate tax return by the prescribed due date.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Decedent, Lee Chagra (hereinafter decedent), died a resident of El Paso, Texas, on December 23, 1978. Decedent's widow, Joanne Chagra (hereinafter Mrs. Chagra), was appointed independent executrix of the estate of Lee Chagra (hereinafter the estate or petitioner) and filed a Federal estate tax return on July 21, 1983. Her brother, Joseph Abraham, Jr. (hereinafter "Mr. Abraham"), who had been a partner in decedent's criminal law practice between 1962 and 1967, served as the attorney for the estate of Lee Chagra. Mrs. Chagra died of cancer on January 10, 1986. Mr. Abraham, a resident of El Paso, Texas, was thereafter appointed temporary administrator of the estate of Lee Chagra and was serving in that capacity when the petition in this case was filed.
Decedent and Mrs. Chagra frequently went to Las Vegas, Nevada, in 1975 and 1976 so that decedent could gamble at two casinos, Caesar's Palace and the Aladdin Hotel. Decedent and Mrs. Chagra usually stayed at Caesar's Palace and would often remain in Las Vegas for several days at a time. Decedent often wagered thousands of dollars in a day gambling at Caesar's Palace and the Aladdin Hotel. The employees of both casinos were very familiar with decedent and Mrs. Chagra, and the management, particularly at Caesar's Palace, considered decedent a valuable customer due to his frequent visits and high stakes gambling at the casinos.
While decedent was at the gaming tables in Caesar's Palace and the Aladdin Hotel, he would sign credit instruments commonly known as "markers" in exchange for a stack of gambling chips. Decedent's credit limit with Caesar's Palace and the Aladdin Hotel was substantial. Decedent kept a special credit card account with the Aladdin Hotel which had a credit limit in 1976 of $100,000 "per trip or [over] 14 days". On several occasions in 1976, decedent was advanced as much as $201,000 in chips in one day at Caesar's Palace. When decedent was advanced chips on credit, it was with the understanding that the chips were to be used for gaming at the tables. Decedent would place bets at the tables with some of the chips, but several times during a gambling session would hand many of the chips to Mrs. Chagra who would place them in her purse at the gaming tables and exchange them for cash at a cashier counter within either Caesar's Palace or the Aladdin Hotel. Similarly, decedent would take some of the chips he had obtained, either by signing markers or by winning bets, and exchange them for cash at the cashier counters. Decedent and his wife would often return to El Paso, Texas, with thousands of dollars in cash, while unpaid balances totalling thousands of dollars remained on decedent's credit accounts at Caesar's Palace and the Aladdin Hotel. Credit managers from Caesar's Palace and the Aladdin Hotel were continually contacting decedent concerning his unpaid credit balances. Decedent made irregular, but numerous, payments on his accounts to bring his balance close to zero before signing more markers on his subsequent trips to Las Vegas. Caesar's Palace and the Aladdin Hotel never charged decedent any interest on his outstanding marker balances.
Philip D. Stoner (hereinafter Mr. Stoner) is a certified public accountant with the El Paso accounting firm of Cox, Colton, Stoner, Starr & Co. Mr. Stoner performed accounting services for decedent and Mrs. Chagra from at least 1976 until the date of decedent's death. Mr. Stoner continued to prepare income tax returns for Mrs. Chagra after decedent's death. Decedent kept track of some of his gambling activities by keeping a handwritten gambling ledger. Mr. Abraham was aware of decedent's gambling ledger, but Mr. Stoner was never given the gambling ledger. Among the accounts Mr. Stoner maintained for decedent was one entitled "gambling income" and another entitled "gambling debts". Mr. Stoner based the figures and dates of the "gambling income" account as follows: first, decedent deposited cash obtained from his gambling activities into the bank account of his law practice; next, personnel in decedent's law office classified the various bank deposit slips and cancelled checks of decedent, labelling the deposit slips representing the cash decedent had obtained from gambling activities as "gambling income"; and, then, Mr. Stoner received the deposit slips from decedent's law office and made bookkeeping entries in decedent's "gambling income" account which was kept on the accounting firm's computer system. Although Mr. Stoner was not aware of exactly how decedent incurred the liabilities reflected in the "gambling debts" account, he labeled the account as such because decedent told Mr. Stoner he owed certain sums to casinos in Las Vegas.
At the time of his death, decedent owed $236,000 to Caesar's Palace and $160,000 to the Aladdin Hotel. The estate had not paid these debts at the time of trial. Caesar's Palace wrote off decedent's debt on February 12, 1979, because Lee Chagra died. The Aladdin Hotel also wrote off decedent's debt.
During the nine months following decedent's death, the estate's attorney, Mr. Abraham, consulted Mr. Stoner regarding the filing of a Federal estate tax return. Mr. Stoner gathered information and documents concerning decedent's finances and concluded that because the estate was insolvent an estate tax return need not be filed. Mr. Stoner informed Mr. Abraham, who informed Mrs. Chagra, the independent executrix of the estate at that time, that no Federal estate tax return needed to be filed. On July 21, 1983, following an inquiry by respondent, Mrs. Chagra filed a Federal estate tax return and listed the value of decedent's gross estate at $781,520. By statutory notice of tax deficiency dated March 17, 1986, respondent determined a deficiency in petitioner's Federal estate tax of $193,364 and an addition to tax of $48,341. The estate filed a petition on March 24, 1986, seeking a redetermination of its estate tax.
One week prior to trial, Mr. Abraham filed an "Inventory, Appraisement and List of Claims" ex parte for decedent's estate with the Probate Court of El Paso County, Texas. The probate court approved the document on the same day it was filed, February 2, 1988.
The following debts of decedent were claimed as deductions by the estate but were disallowed by respondent.2
Lender of Amount Actually
Purported Debt Claimed Paid by Estate
Caesar's Palace .................................... $236,000 -0-
Aladdin Hotel ...................................... 160,000 -0-
Joseph Abraham, Sr
(Decedent's father-in-law) ...................... 80,000 $20,000
Joseph Abraham, Sr
(Decedent's mother) .............................. 37,800 37,800
Joe Chagra
(Decedent's brother) ............................. 14,500 14,500
Ralph Swafford ..................................... 12,000 12,000
Lanward Development
Corporation ...................................... 6,275 6,275
Jubilee Glass Works ................................ 7,417 -0-
Robert Milkman ..................................... 19,000 -0-
Jimmy Allen ........................................ 3,000 -0-
Romo Trust ......................................... 1,784 -0-
Trust Accounts
of estate ........................................ 14,100 -0-
First State Bank
(Acct. #126-045-0) ............................... 2,382 --
The estate issued checks to Joseph Abraham, Sr., Josephine Chagra, Joe Chagra, Ralph Swafford, and the Lanward Development Corporation in the aggregate amounts of $20,000, $37,800, $14,500, $12,000, and $6,275, respectively. There was also a cashier's check, dated September 22, 1971, representing a transfer of $12,000 from Ralph Swafford to Lee Chagra, decedent. The cashier's check was deposited in decedent's bank account at Southwest National Bank, El Paso, Texas.
OpinionInitially, we must decide who bears the burden of proof. In general, the statutory notice of tax deficiency is presumed to be correct and petitioner bears the burden of proving that respondent's determination of its estate tax deficiency is in error. Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111, 115 (1933); Rule 142(a). In particular, deductions are a matter of legislative grace and entitlement thereto must be shown by petitioner. New Colonial Ice Co. v. Helvering [4 USTC ¶ 1292], 292 U.S. 435 (1934). However, petitioner argues that because the Texas probate court approved petitioner's "Inventory, Appraisement and List of Claims," respondent bears the burden of proof. Petitioner asserts that the probate court's decree creates a presumption as to the amount and deductibility of claims under Texas law and that, under Fed. R. Evid. 302 and Commissioner v. Estate of Bosch [...
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