Estate of Dowlin v. Commissioner
| Decision Date | 28 April 1994 |
| Docket Number | Docket No. 26008-91. |
| Citation | 67 T.C.M. 2750 |
| Parties | Estate of Calista B. Dowlin, Deceased, Lynn Phillips, Executrix v. Commissioner. |
| Court | U.S. Tax Court |
Robert E. Glaser and Cynthia C. Schafer, for the petitioner. John E. Budde, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiency in, and additions to, petitioner's Federal estate tax:
Additions to Tax
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Deficiency Section 6651(a)(1)1 Section 6653(a)(1)(A) Section 6653(a)(1)(B) Section 6660(a)
$284,139 .......... $65,712 $14,207 * $65,239
* 50 percent of the interest due on the portion of the underpayment attributable to negligence. Respondent
determined that the entire underpayment was attributable to negligence
The issues remaining for decision are:
(1) What was the value of certain real property (the residence) owned by Calista B. Dowlin (decedent) on the date of her death? We find and hold that its value was $270,000.
(2) Is the decedent's estate (the estate) entitled to deduct as administration expenses under section 2053(a) certain expenses incurred with respect to the residence and extraordinary executrix commissions? We hold than it is not.
(3) Is the estate liable under section 6651(a)(1) for the addition to tax for failure to file timely its estate tax return? We hold that it is.
(4) Is the estate liable under section 6653(a)(1)(A) and (B) for the additions to tax for negligence? We hold that it is.
(5) Is the estate liable under section 6660(a) for the addition to tax for a valuation understatement? We hold that it is to the extent stated herein.
Some of the facts have been stipulated and are so found.2
At the time the petition was filed and at all times relevant to the instant case, Lynn Phillips (Ms. Phillips), the decedent's daughter and executrix of the estate, resided in Bloomington, Indiana.
Decedent died testate on March 27, 1988. Except for two specific bequests totaling $15,000, decedent left the residue of her estate, including the residence, to Ms. Phillips. Decedent gave the executrix the power to sell any of decedent's property. As executrix, Ms. Phillips generally paid the expenses relating to the estate.
At the time of her death, the personal property of decedent that was includible in the gross estate for Federal estate tax purposes was worth approximately $1,000,000. This property was more than adequate to pay decedent's debts at the time of her death as well as expenses incurred by the estate.
From 1936 until her death, decedent lived at the residence which is located in Jackson Township in Stark County, near Canton, Ohio. The residence consisted of 3.75 acres of land comprised of two adjacent parcels. At the time of decedent's death, no improvements were on the parcel consisting of 1.32 acres. The house in which decedent resided until her death (the house) is situated on the other parcel consisting of 2.43 acres. The house, which has 4,601 square feet and which was built of brick in colonial style in 1928, contains a foyer, a living room, a library/family room, a dining room, a kitchen, a butler's pantry, seven bedrooms, four and a half bathrooms, seven fireplaces, a green house, an enclosed patio, a full basement, a third-floor attic, a two-level screened porch, and an attached two-car garage. It is heated by oil-burning furnaces. The neighborhood in which the residence is located is one of the most affluent in the Canton, Ohio, area.
At the time of decedent's death the house was in a neglected condition. By way of illustration, paint and wallpaper on the interior of the house were peeling and loose, plaster was cracked, floors were dirty, screens for the porch were torn, shutters were missing or deteriorated, doors were warped, and baseboards were separated from the floors. At the time of, and for some time prior to, her death, decedent was using only her bedroom and the library, and a housekeeper was using the kitchen and living in a room over the garage. The rest of the house was not being used.
When she died, decedent had in effect a homeowner's insurance policy (insurance) that insured the house for $497,000. The executrix renewed that policy after decedent's death.
It was not necessary to sell the residence to pay the estate's debts. A decision was made to sell it because Ms. Phillips did not want to live there. In order to be in a better position to sell the residence, the executrix began repairing the house in November or December 1988. The repair work performed included painting the house inside and out, replastering or installing dry wall, and refinishing the floors.
On June 8, 1989, Ms. Phillips and her husband applied to The Central Trust Company (Central Trust) for a line of credit secured by a mortgage on the residence. On their loan application, they listed the residence as an asset with a value of between $700,000 and $1,000,000. Ms. Phillips recorded her ownership interest in the residence with Stark County on June 27, 1989, because Central Trust required that she do so as a condition of its extending credit to her and her husband. Central Trust extended a $200,000 line of credit secured by a mortgage on the residence.
Between the date of decedent's death on March 27, 1988, and the date on which Ms. Phillips' interest in the residence was recorded with Stark County on June 27, 1989, the estate incurred a variety of expenses with respect to the residence, including a total of $8,814 paid to the housekeeper whom Ms. Phillips continued to employ and who lived at the residence until May 1989 and $6,046 paid to State and Federal governments relating to the housekeeper's employment. Between July 14, 1988, and June 14, 1989, Ms. Phillips paid $2,448 for lawn care and snow removal. On February 11, 1989, she paid $1,613 for homeowner's insurance. Between April 18, 1988, and June 14, 1989, she paid $3,228 for heating oil for the house. Between April 2, 1988, and February 27, 1989, she paid $530.35 for electricity at the house. Between July 14, 1988, and March 19, 1989, she paid $263.67 for telephone service at the house.
In the fall of 1989, the house served as a designers' show house for a local hospital's fundraising activity (the fundraising event). Thereafter in 1989, Ms. Phillips listed the residence for sale at $849,000 and continued to have renovations made to the house that had not been completed before the fundraising event. Once the fundraising event was over, the house was vacant, and the insurance on it was canceled. In 1990, the asking price for the residence was lowered to $659,000. On July 26, 1991, the residence was sold to Thomas C. and Ruth A. Moser (the Mosers) for $360,000.3
Ms. Phillips as executrix retained Alan Segedy (Mr. Segedy), an attorney, to assist her in the administration of decedent's estate, including the preparation of the estate's tax returns. The original due date of the estate's Federal estate tax return (the return) was December 27, 1988. The estate obtained an extension of the due date until March 1, 1989. No other request for an extension of the due date was made. On January 4, 1989, the estate paid the Internal Revenue Service (the Service) $119,821.26 with respect to its estate tax liability. The return was filed on July 3, 1989.
Ms. Phillips and her husband met with Mr. Segedy in Canton, Ohio, for the purpose of reviewing a draft of the return (the draft return) that he was preparing for the estate on her behalf. The draft return claimed as deductions certain expenses, the amounts of which Mr. Segedy had estimated. Ms. Phillips did not know the source for Mr. Segedy's estimates and did not believe that they were correct. She was also concerned about the deduction of certain types of expenses estimated in the return that had not yet been incurred, such as expenses for selling the residence. Since Ms. Phillips was concerned about the estimated expenses claimed as deductions in the draft return, she asked Mr. Feeley, another attorney in Canton, to review it. Although Ms. Phillips believed that the estimates in the draft return were wrong, she signed it and gave it to Mr. Segedy to file as the Federal estate tax return for the estate.
The return, as filed on July 3, 1989, shows a date of "2/27/89" that was typed in the space next to Ms. Phillips' signature and a date of "2/25/89" that was typed in the space next to Mr. Segedy's signature. Ms. Phillips denies having signed the return on February 27, 1989.
On August 25, 1989, Mr. Segedy wrote a letter (August 25 letter) to the Service, showing that a copy was sent to Ms. Phillips, in which he attributed the late filing of the return to problems encountered with valuation of the estate's assets and to the determination of debts and costs of administration.
In the notice of deficiency (notice), respondent made various determinations, a number of which have been conceded by the estate or by respondent. Still in dispute are respondent's determinations that the fair market value of the residence as of decedent's death was not the $125,000 claimed in the return and that certain expenses incurred with respect to the residence and claimed as deductions in the return are not deductible administration expenses. Although the estate has conceded that the amounts of such claimed deductions are wrong, it maintains that it is entitled to deduct the correct amounts of such expenses, viz., utilities, insurance, alleged caretaker services, and other similar items.
Also in dispute are respondent's determinations in the notice that the estate is liable for the additions to tax for failure to file timely the return, for negligence, and for a valuation...
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