Estate of Cole v. Commissioner
| Decision Date | 20 November 1989 |
| Docket Number | 5664-74.,Docket No. 362-70 |
| Parties | Estate of Nathaniel Cole, Deceased, Maria Cole, Executrix v. Commissioner. Gary M. Devore v. Commissioner. |
| Court | U.S. Tax Court |
Leo Branton, Jr., for the petitioner. Erik P. Doerring and Ann M. Murphy, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $2,338,591.05 in the Federal estate tax of the estate of Nathaniel Cole and determined a deficiency in Gary M. Devore's Federal income tax of $135,302 and an addition to tax of $6,765 under section 6653(a)1 for the calendar year 1970.
Many of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for our decision the following: (1) Whether the estate of Nathaniel Cole (petitioner or the estate) is entitled to deductions under section 2053 for certain claims made against the estate; (2) whether $210,000 petitioner Gary M. Devore received from Anglo Dutch Capital Company in 1970 is taxable income to him; and (3) whether Gary M. Devore is liable for an
addition to tax under section 6653(a) for negligence.
Some of the facts have been stipulated and are found accordingly.2
Nathaniel Cole (Mr. Cole or decedent), an entertainer popularly known as Nat "King" Cole, was a resident of California when he died testate on February 15, 1965. Mr. Cole's widow, Maria Cole (although Maria Cole remarried she will be referred to herein as Mrs. Cole or the executrix), who subsequently married Gary M. Devore (Mr. Devore), was executrix of the estate of Nathaniel Cole. The executrix filed a Federal estate tax return on behalf of the estate with the office of the District Director of the Internal Revenue Service, Los Angeles, California, on November 16, 1966. Mr. Devore filed an individual Federal income tax return for his taxable year 1970 with the office of the District Director of the Internal Revenue Service, Los Angeles, California. Mr. Devore and the executrix resided in California at the time their respective petitions were filed with this Court.
Mr. Cole's will was admitted to probate in the Superior Court of the State of California for the County of Los Angeles (Superior Court) on March 23, 1965. Letters testamentary were issued to Mrs. Cole on that date recognizing her as executrix of the estate.
Various claims were filed against the estate. Those claimed debts of decedent that are at issue in this case were described in Schedule K of the estate tax return as follows:
World Minerals N.V. — balance of principal and interest due on Note dated 4/29/61
assigned to Claimant from Albert Shell and William Berman ........................ 130,000.00
Harry Margolis — reimbursement for travel expenses as attorney acting for decedent
for a period of two years prior to death ......................................... 2,130.08
Universal Decoration Leasing Company — personal loan made to decedent on 2/9/65 100,000.00
Aruba Bonaire Curacao Trust Company, Limited — loan made by decedent 10/21/64
for use in operation of Kell-Cole Productions, a 100% owned corporation .......... 50,000.00
World Minerals N.V. — 2 loans evidenced by Promissory Notes — a loan of
$150,000.00 — Note dated 1/24/64, bearing 8% interest, with interest accrued in
the sum of $22,500.00, and a second Note for $300,000.00 dated 1/1/65, with
interest at 7% — interest accrued in the sum of $14,000.00. Creditor's Claim was
filed for the sum of $486,500.00 but was settled for $475,000.00 .................. 475,000.00
Presentaciones Musicales S.A. — debt owed by Kell-Cole Productions — guaranteed by
decedent, who owned 100% of its shares — debt incurred in 1963 ...................... 20,724.40
World Entertainers Ltd. — 2 loans made to K-C Records, Inc. and guaranteed by
decedent, who was 100% shareholder — $5,000.00 loaned 11/18/63 on Note to bear
interest at 7%; $15,000.00 on Note dated 1/6/64, with interest at 7%. Claim was
for total of above plus accrued interest in the sum of $21,599.33, but was settled
for $21,500.00 ................................................................... 21,500.00
Claim of Associated Arts N.V. and Koningsplein N.V. for $450,000.00 arising out of
a dispute concerning interests in certain music publishing company copyrights
owned by decedent. Claimants filed a lawsuit to compel arbitration in Los Angeles
Superior Court Case No. 874,961. Arbitrator thereafter issued an Award to
Claimants in the sum of $328,000.00, and said Award was approved by the Los
Angeles Superior Court in said case No. 874,961 on 10/4/66 ....................... 328,000.00
Because of community property considerations, from the amount of the gross estate reported on the return, only one-half of the listed amounts were deducted in arriving at the amount of the taxable estate.
The executrix filed a "FIRST AND FINAL ACCOUNT AND REPORT OF EXECUTRIX AND PETITION FOR SETTLEMENT, FOR ALLOWANCE OF COMMISSIONS AND FEES, AND FOR INSTRUCTIONS ON WAIVER, AND FOR FINAL DISTRIBUTION" (account and petition) with the Superior Court on December 15, 1967. In the account and petition, the executrix represented that all of the above claims, with the exception of the claim of Associated Arts N.V. and Koningsplein N.V., had been allowed by her as executrix of the estate, approved by the Superior Court, and paid.
On December 28, 1967, the Superior Court approved the account and petition with an "ORDER SETTLING FIRST AND FINAL ACCOUNT AND REPORT OF EXECUTRIX, FOR ALLOWANCE OF COMMISSIONS AND FEES, FOR INSTRUCTIONS TO EXECUTRIX ON GRANTING OF WAIVER, AND FOR FINAL DISTRIBUTION UNDER WILL" (final order). The Superior Court ordered and adjudged that the administration of the estate was brought to a close, that the account and petition was "settled, allowed, and approved," and that all the acts and transactions of the executrix relating to the matters set forth in the account and petition were "ratified, confirmed, and approved."
On December 20, 1965, Associated Arts and Koningsplein, as plaintiffs, filed a complaint in the Superior Court against the executrix as defendant. The complaint alleged that Mr. Cole and Associated Arts had entered into a written contract in 1961 relating to Mr. Cole's personal services, that Associated Arts had later assigned the contract to Koningsplein, and that Mr. Cole had breached the contract by not divesting himself of his interests in certain musical copyrights. Attached to the complaint was an unexecuted copy of the alleged contract, translated from the Dutch language. The complaint further alleged that the plaintiffs and defendant had agreed to submit to the jurisdiction of the Superior Court the question of whether the contract required the parties to enter into arbitration in the Netherlands Antilles. In their prayer for relief, the plaintiffs requested a declaratory judgment that the defendant was required to enter into such arbitration and requested in the alternative damages of $450,000. The answer to the complaint was filed two days later. The answer denied that Mr. Cole had breached the contract and asserted that the contract's arbitration provisions applied only during the time the contract was in force, not after Mr. Cole's death caused the contract to expire. The answer confirmed the assertion in the complaint that the parties had agreed to let the Superior Court decide the question of whether the contract required the parties to enter into arbitration in the Netherlands Antilles.
The Superior Court, on March 2, 1966, made findings of fact, including that: (1) Mr. Cole and Associated Arts had entered into a contract; (2) the contract required Mr. Cole to divest himself of all interests in the ownership and control of musical material subject to copyright; (3) Mr. Cole had still owned interests in musical copyrights at the time of his death; (4) the contract provided for mandatory arbitration between the parties, which the plaintiffs had demanded both before and after Mr. Cole's death; and (5) the plaintiffs had filed a claim against the estate that the executrix rejected on or about September 24, 1965. The remaining findings of fact, and conclusions of law, were as follows:
Several months later, on October 24, 1966, the Superior Court entered a "JUDGMENT AFFIRMING AWARD OF ARBITRATOR" (affirming judgment), which provided in part that the estate was obligated to pay $328,000 to Associated Arts in full satisfaction of all Associated Arts claims relating to certain music companies and that Associated Arts would have a lien in the amount of $328,000 against certain of...
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