Estate of Frost v. C.I.R., 031893 FEDTAX, 17333-89
| Opinion Judge | WHITAKER, Judge: |
| Party Name | ESTATE OF Richard M. FROST, Deceased, Diana L. Frost, Executor; Diana L. Frost; Cynthia L. Butler; Richard M. Frost, Jr.; Laurie A. Jacobs Trust, Diana L. Frost, Trustee; and Richard M. Frost Trust, Diana L. Frost and Richard M. Frost, Jr., Trustees, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Attorney | Mark S. Coco and Robert T. Pappas, Columbus, OH, for petitioners. Ronald T. Jordan, Cincinnati, OH, for respondent. |
| Case Date | March 18, 1993 |
| Court | U.S. Tax Court |
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in the Federal estate tax of the Estate of Richard M. Frost, Deceased (the Estate) of $401,884, plus additions to tax of $200,942. Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for decision the following: (1) Whether any part of the asserted deficiency in estate taxes is due to fraud; (2) whether the Estate is entitled to a marital deduction for the value of certain interests in real estate that decedent's widow received in making an election against the will; and (3) whether, and, if so, to what extent, decedent's beneficiaries are liable for the asserted deficiencies in estate taxes and additions to tax.
In an Amendment to Answer to Petition, respondent also asserted that petitioners are liable for additions to tax under the provisions of section 6653(a)(1) and (2). Respondent has not advanced that position at trial or on brief, and we deem it to be abandoned. See Rule 151(e); Wilcox v. Commissioner, 848 F.2d 1007, 1008 n. 2 (9th Cir.1988), affg. T.C. Memo. 1987-225; Rockwell International Corp. v. Commissioner, 77 T.C. 780, 837 (1981), affd. 694 F.2d 60 (3d Cir.1982).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. All petitioners were residents of Sunbury, Ohio, when the petition was filed, except for petitioner Richard Frost, Jr., who resided in Johnstown, Ohio.
In the years before 1966, decedent operated a trucking business known as Frost Motor Express. He sold that business in 1966 and started another trucking business that dealt in hauling produce. He engaged Mr. Paul Beery, an attorney who specialized in motor transport law, to represent his business before Ohio's Public Utilities Commission and the Interstate Commerce Commission. Mr. Beery also assisted decedent in the formation of his various corporations.
Decedent married petitioner Diana Frost (Diana) in 1966. He had two children by a previous marriage, petitioner Richard Frost, Jr. (Richard), and Theodore Frost (Theodore). After his marriage, he adopted Diana Frost's two daughters, petitioner Cynthia Butler (Cynthia) and her sister Laurie Jacobs.
In the early 1970's, decedent branched out into other business activities, including the construction of houses and apartments, the acquisition of real estate in and around Columbus, Ohio, the acquisition of one-half of the stock of Homeland Carpet Mills, Inc., a Georgia manufacturing concern, and the acquisition of stock in Home Equipment Co., a corporation that sold and serviced forklift devices.
Decedent formed another corporation, Home Carpet Distributors, Inc. (HCD), late in 1980. He originally owned all 100 of HCD's issued and outstanding shares. Decedent steered some of HCD's shipping business to his son Richard, who was then operating his own trucking business. In 1980, decedent put Richard on the HCD payroll.
In 1982, decedent formed Home Cushion Co., a corporation that manufactured carpet padding. It operated as a subsidiary of HCD.
Cynthia Butler, decedent's adopted daughter, had worked at decedent's office during summers and on weekends, beginning in 1972. In 1976, she worked as a keypunch operator for the Ohio Highway Patrol. She continued this job until 1984, when, at her father's request, she went on the payroll of HCD. In the early 1980's, decedent occasionally indicated that he wanted Richard and Cynthia to succeed him as owners of HCD. On a few occasions, decedent attempted to give stock certificates in HCD to Richard, who declined to take them.
Theodore, decedent's younger son, completed 2 years of study at Ohio State University. In 1972, he moved to California to pursue an acting career. He worked for 10 or 11 years for a florist's business, then, with a $2,000 advance from his father, started a delivery business in California. Theodore did not get along well with Diana, his father's new wife.
At the beginning of 1984, decedent's business ventures were prospering. He submitted a balance sheet to the Huntington National Bank listing his personal assets. The fixed assets included real estate valued at $1,854,790 (subject to mortgages of $388,035), stock of Homeland Carpet Mills valued at $361,491, stock of HCD valued at $210,844, stock of Home Equipment Co. valued at $58,600, and stock of Home Cushion Co. valued at $8,150.
In May 1984, decedent, who was then 56 years old, discovered that he had cancer. Surgery was scheduled for May 22, 1984. In anticipation of not surviving the surgery, decedent called his attorney Mr. Paul Beery about preparing a will. Mr. Beery referred decedent to Mr. James Jones, an attorney who specialized in estate planning and Federal taxation. On May 19, 1984, 3 days before the operation, Mr. Jones met with decedent in the hospital to discuss decedent's estate plan and proposed disposition of assets. When discussing his estate plan with Mr. Jones, decedent asked his wife and children to leave the hospital room, unless he had something specific to discuss with them. Among other things, decedent told Mr. Jones that he wanted the HCD stock to be given equally to Richard and Cynthia.
Mr. Jones and his associates " burned a lot of midnight oil" preparing will and trust documents. Mr. Jones returned to the hospital 2 days later and discussed the documents he had drafted with decedent, who signed them.
In the Last Will and Testament that Mr. Jones had prepared, decedent bequeathed three parcels of real estate to the trustees of the " Richard M. Frost Trust" . Decedent also transferred to the trust the following:
A. All of my stock of any class in Home Land Carpet Mills, Inc., a Georgia corporation having a mill in Dalton, Georgia.
B. All of my stock of any class in Home Carpet Distributors, Inc., an Ohio corporation having its principal office in Columbus, Ohio.
C. All of my stock of any class in Home Equipment Co., Incorporated, an Ohio corporation having its principal office in Columbus, Ohio.
From the trust corpus, there were established two subordinate trusts. Trust A was to be funded with a 17-unit apartment project that decedent owned. That trust was for the exclusive benefit of decedent's adopted daughter Laurie Jacobs. Decedent expressed his belief that her situation was such that she would benefit from having a trustee manage that property. Trust B was structured to allow decedent's wife an income interest for life, with the remainder going to Richard and Cynthia. The trustees were Diana, Richard, and Cynthia. Decedent made these dispositions into a trust at Mr. Jones' suggestion, so that the bulk of the assets would qualify for an estate tax marital deduction.
Decedent also expressed concerns that Theodore would cause problems for Diana Frost. Accordingly, his will provided an outright bequest to Theodore Frost of two parcels of real estate, located on East Fifth Avenue and Woodland Avenue in Columbus, Ohio.
While he was in the hospital, decedent talked with his adopted daughter Cynthia and told her that she " had" 50 percent of the HCD business, and, hence, that she was getting nothing additional in his will.
Decedent survived the operation and returned to work at HCD. In August 1984, however, he discovered that the operation had not cured his cancer. At that time, decedent successfully urged both Richard and Cynthia to work at HCD.
On September 13, 1984, decedent signed HCD's corporate income tax Form 1120. The Form 1120 had been prepared by a bookkeeping service which had signed as " Preparer" the day before. The same bookkeeping service had prepared each of HCD's prior income tax returns. Each of them, including the one signed by decedent in 1984, indicated that decedent was the owner of 100 percent of HCD's stock.
Decedent got back in touch with his attorney Mr. Paul Beery in October 1984, with questions about making gifts of stock and other assets to his children. He also requested possession of the HCD books that theretofore had been in Mr. Beery's offices. Mr. Beery directed Mr. Michael Spurlock, an attorney in his office, to address decedent's inquiries. Mr. Beery also directed that the HCD books be checked to make sure they were current. Mr. Spurlock prepared a one-page memorandum. Therein he advised decedent against making gifts during decedent's lifetime. He noted that a gift tax might be due, " or, at the very least, a gift tax return will have to be filed for the current year. This would also be true for any gifts you made in prior years" . Mr. Spurlock noted that a transfer of property at death would produce a tax basis for the beneficiaries that was equal to the current fair market value of the property. The result would be that the beneficiaries' sale of the property would produce lower capital gains taxes than would be the case with a transfer during decedent's life. Mr. Spurlock thus recommended that decedent " consider making these gifts in your Will instead of making a gift at this time" . He advised that the corporate minutes and the stock ledger " must be consistent" .
At the time he got this memorandum, decedent also received HCD's corporate record book from Mr. Beery's office. He returned it in February 1985, together with the HCD stock ledger and stock certificates. Mr. Beery then assigned another attorney, Mr. Daniel Ryan, to look over HCD's corporate records. Mr. Ryan noted that the share...
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