Estate of Herzog v. Commissioner
| Decision Date | 31 March 1992 |
| Docket Number | Docket No. 27523-90. |
| Citation | 63 T.C.M. 2620 |
| Parties | Estate of Arthur L. Herzog, Deceased, Maurice R. Clark, Executor v. Commissioner. |
| Court | U.S. Tax Court |
James H. Garrett, 701 B. St., San Diego, Calif., for the petitioner. June Y. Bass, for the respondent.
Respondent determined a deficiency of $755,912 in petitioner's Federal estate tax. After a trial in which petitioner contended unsuccessfully that certain real property was community property passing to a qualified terminable interest trust, by various pending motions, petitioner attempts to assert a claim that such property passed to decedent's surviving spouse as joint tenancy property, eligible for the marital exclusion. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect on the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Maurice R. Clark (Clark) is executor of the estate (petitioner) of Arthur L. Herzog, deceased (decedent). At all material times, the executor and decedent were residents of the State of California.
Decedent died on November 13, 1986, survived by his wife, Daisy May Herzog (Mrs. Herzog). Decedent and Mrs. Herzog were married in 1931 and during their marriage resided in the State of California, a community property state. Decedent and Mrs. Herzog had no children.
On or about June 1, 1945, a Grant Deed was recorded in the records of the County of San Diego, State of California, by which certain real property (the commercial property) was conveyed to "ARTHUR L. HERZOG AND DAISY MAY HERZOG, husband and wife, as joint tenants". On or about July 1, 1970, a Grant Deed was recorded in the records of San Diego County, reciting that certain real property (the residence) was conveyed to "ARTHUR L. HERZOG and DAISY M. HERZOG, husband and wife as joint tenants".
On or about April 7, 1982, decedent was appointed the conservator of the person and estate of Mrs. Herzog. The conservatorship estate, over which decedent was given authority, consisted solely of Mrs. Herzog's separate property, which was the subject of various inventories filed in the conservatorship proceedings. Mrs. Herzog's share of community property was not part of her conservatorship estate.
On May 19, 1983, decedent, as conservator of the conservatorship estate of Mrs. Herzog, filed a "Petition to Substitute for Joinder or Consent Requirements: Execution of Lease". In that petition, decedent, represented by counsel, declared under penalty of perjury that:
3. The Petitioner and the Conservatee own community real property, described in Exhibit "A" which is attached hereto and by reference made a part hereof, which is not part of the conservatorship estate under Probate Code Section 3051(b)(2). Said property was vested in joint tenancy for convenience only. See page 3, lines 5-6, of the complaint for divorce instituted by the conservatee in 1950, a copy of which is attached hereto as Exhibit "B," and by reference made a part hereof; and page 2 of Exhibit "C," attached hereto and by reference made a part hereof, which is a copy of an agreement entered into by the Conservator and the Conservatee on December 26, 1950.
Exhibits A, B, and C to the said petition referred to the commercial property and the residential property. The agreement dated December 26, 1950, mentioned in the above-quoted portion of the petition, stated:
4. It is agreed that the parties hereto own as joint tenants certain real property more particularly described in Paragraph V in the complaint filed by wife in the above-mentioned action, and that such real property shall be and remain vested in the parties hereto as joint tenants.
5. It is understood and agreed that all other property of every kind and nature, real and personal, wherever situated, standing of record in the name of the husband and under his custody, possession and control, is and shall remain the community property of the parties.
By order filed June 2, 1983, the Superior Court of the State of California, in and for the County of San Diego, authorized decedent, as conservator, to join in and consent to the lease of the commercial property, reciting, on a form provided by the attorneys for the conservator, "It is to the advantage of the conservatorship estate to enter into the refinancing of the loan on community real property belonging to the Conservator and the Conservatee on the terms and conditions set forth in this order".
On or about August 5, 1986, decedent executed a Last Will and Testament in which he devised and bequeathed his entire estate to the Herzog Family Trust under a trust indenture dated August 5, 1986. The Herzog Family Trust indenture recited ARTHUR L. HERZOG (referred to in this instrument as the "Trustee"), declares that ARTHUR L. HERZOG and DAISY MAY HERZOG (referred to in this instrument as the "Trustors") have transferred and delivered to the Trustee, without consideration, the property described in Schedule A attached to this instrument. [Apparently Schedule A was never prepared; no such schedule has been provided to the Court.]
All property subject to these trusts at any time is intended to be community property or separate property of the Trustors, and is sometimes referred to as the "Trust Estate", and shall be held, administered and distributed as provided below. It is the Trustors' intention that all property transferred in trust under this instrument and the proceeds thereof shall continue to retain its character as community or separate property during the joint lifetime of the Trustors, subject, however, to all the terms and conditions of this instrument.
During the lifetime of both Trustors, this trust may be revoked in whole or in part by either Trustor by delivering written notice to the other Trustor and to the Trustee. In the event of such revocation, the entire Trust Estate or the portion affected by the revocation shall revert to both Trustors retaining its prior character as community or separate property. This trust may not be amended during the lifetime of the Trustors without the written agreement of both of them.
From and after the death of the predeceased spouse, if the surviving spouse is ARTHUR L. HERZOG, he shall have the power to alter, amend or revoke this Trust in whole or in part, by delivering written notice to the Trustee. If the surviving spouse is DAISY MAY HERZOG, this Trust may not be altered, amended or revoked.
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Distribution of Income and Principal
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3. Upon the death of the predeceased Trustor, the Trustee shall distribute $150,000.00 to MAURICE R. CLARK and $50,000.00 to ROSE DECK and shall divide the remainder of the Trust Estate into two (2) separate trusts designated Trust "A" and Trust "B".
(a) Trust "A" shall consist of Two Hundred Thousand and no/100 ($200,000.00) Dollars.
(b) Trust "B" shall consist of the remainder of the Trust Estate.
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5. The income and principal of Trust "B" shall be held, dealt with and distributed as hereinafter provided:
(a) The Trustee, in his sole discretion, shall distribute as much of the net income in quarterly or other convenient installments to the surviving Trustor during his or her lifetime as the Trustee feels he or she may need to maintain the standard of living that the surviving Trustor has become accustomed to.
(b) Upon the death of the surviving Trustor the Trustee shall pay out of the Trust Estate the surviving Trustor's last illness and funeral expenses, costs incurred in administering the surviving Trustor's estate, other obligations incurred for the support of the surviving Trustor and any estate and inheritance taxes (including interest and penalties thereon) arising by reason of the surviving Trustor's death.
(c) The remaining Trust Estate shall be used solely for charitable purposes and shall be administered as per paragraphs 6 and 7 of this Article.
The trust indenture was executed by decedent for himself and as conservator for Mrs. Herzog.
Clark was nominated as executor in the will and as successor trustee of the trust by the documents executed August 5, 1986. Upon the death of the surviving trustor, Clark, and Clark's wife, the trust was to terminate and the corpus to be distributed to a charitable organization designated by the survivor of decedent, Clark, or Clark's wife.
By Order for Probate filed January 29, 1987, Clark was appointed executor of the estate of decedent. Also in January 1987, Clark was appointed conservator of the person and estate of Mrs. Herzog. Clark's attorney in the probate proceedings and in the conservatorship proceedings was Philip Altfest (Altfest).
In January 1988, a Form 706, United States Estate Tax Return, was filed on behalf of decedent's estate by Clark. Altfest was named as the representative of the estate. On Schedule A— Real Estate, the residence and the commercial property were listed at a total value of $5,105,000 "Less Spouse's ½ interest". Nothing was listed on Schedule E—Jointly Owned Property. On Schedule M—Bequests, etc., to Surviving Spouse, property was described as a "Qualified terminable interest".
In a First Account Current and Report of Conservator and Petition for Allowance of Fees, filed March 8, 1990, Clark, through Altfest as his attorney, alleged that he was accounting for all of the property of the conservatorship. Neither the commercial property nor the residence was listed in the inventory filed in the conservatorship proceeding.
In a Petition to Settle Account, Preliminary Distribution and for Partial Allowance of Commissions and Attorneys Fees (dated July 5, 1991) filed in the probate proceedings in the Superior Court of the State of California for the County of San Diego for the estate of decedent, Clark, as executor, represented by Anthony J. Caputo (Caputo), accounted for property of the estate,...
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