Estate of Hutchinson v. Commissioner

• Court: U.S. Tax Court
• Writing for the Court: COHEN
• Citation: Estate of Hutchinson v. Commissioner, 47 T.C.M. (CCH) 1018, 1984 TC Memo 55 (T.C. 1984)
• Decision Date: 01 February 1984
• Docket Number: Docket No. 13925-82.
• Parties: Estate of Russell E. Hutchinson, Phillip E. Hutchinson and Richard A. Hutchinson, Co-executors v. Commissioner.

47 TCM (CCH) 1018

1984 TC Memo 55

T.C. Memo. 1984-55. Estate of Russell E. Hutchinson, Phillip E. Hutchinson and Richard A. Hutchinson, Co-executors v. Commissioner.

Docket No. 13925-82.

United States Tax Court.

Filed February 1, 1984.

David F. Rees and Robert G. Elrod, 803 First Federal Bldg., Indianapolis, Ind., for the petitioners. Elsie Hall, for the respondent.

Memorandum Findings of Fact and Opinion

COHEN, Judge:

In a statutory notice of deficiency dated March 18, 1982, respondent determined a deficiency of $25,907.83 in the Federal estate taxes due from petitioner-estate. The issues for resolution are:

(1) Whether section 2035,¹ as in effect prior to the Tax Reform Act of 1976, applies to certain transfers made prior to December 31, 1976, where the transferor's death occurred on or after January 1, 1977, and within 3 years of the date of those transfers, and if so;

(2) Whether the transfers by decedent of certain real property, given by him to two of his children, were made in contemplation of death within the meaning of section 2035.

Findings of Fact

Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

Russell E. Hutchinson (decedent) died testate on August 4, 1978. Phillip E. Hutchinson and Richard A. Hutchinson (petitioners), two of decedent's children, are the duly appointed and acting co-executors of decedent's estate. Phillip and Richard resided in Indiana at the time the petition herein was filed. An estate tax return (Form 706) was timely filed on behalf of decedent's estate with the Internal Revenue Service Center, Memphis, Tennessee.

Decedent was survived by seven children born of his marriage to Aletha Hutchinson, to wit, Thomas C., Phillip E., and Richard A. Hutchinson, Linda Katharine App, Sylvia S. Miller, Janet C. Ingle, and D. Claire Marchant.

For some period of time beginning prior to 1964, decedent and his brother, Roland Hutchinson, were co-owners of a business named Premier Hybrids (Premier) and several parcels of farmland. Decedent was essentially in charge of Premier, which produced, processed, and marketed farm seeds, and Roland was in charge of farming the land. In 1973 the brothers dissolved their partnership. As a result of this dissolution, decedent received the farm seed business and 200 acres of farmland, and Roland received the balance of the farmland. Decedent continued to operate Premier, and Roland continued to farm the land, including much of decedent's farmland, which Roland rented for approximately $75 per acre through the date of decedent's death.

In April 1974, decedent's first wife, Aletha, was informed by her doctors that she had terminal cancer, and a life expectancy of only a few months. In the following months, decedent devoted much of his time to caring for Aletha, and in the later part of 1974, decedent turned over control of Premier to his sons, Phillip and Richard. Aletha died on January 29, 1975. Decedent continued to assist in the operation of Premier on a part-time basis through at least 1976.

From 1967 to 1975, decedent made three gifts of real property located in Indiana to his children who wanted to build homes on the gifted property as follows:

  Date                Donee    Acres
                  1967 ............  Phillip    1.44
                  8-72 ............  Richard   10.00
                  1-1-75 ..........    Janet    5.00
                

On April 7, 1975, decedent executed a will drafted by his attorney, Robert G. Elrod. The distributive provisions of that will provided, inter alia, that Thomas and Sylvia were to each receive 41.19 acre tracts of farmland located in Marion County, Indiana, and that Phillip, Linda, Janet, and D. Claire were to also receive specified tracts of real property located in Indiana. The will did not provide for Richard, who had already been given 10 acres of property, to receive any more real property. On April 29, 1974, decedent gave 6.83 acres of real property, on which Premier was located, to his seven children in equal shares.

On June 10, 1975, decedent wrote to Elrod requesting him to prepare a "schedule for disposing of my real property to the children to whom each parcel is willed so as to incur the least tax." In response to this letter, Elrod requested and decedent provided valuations of the various parcels of real estate. Elrod then advised decedent that the proposed transfers would result in a gift tax of approximately $18,250. For each of the gifts to his children made prior to this time, decedent claimed part of his specific exemption and paid no gift tax. After he learned of the probable tax liability triggered by the proposed transfers, with one exception, decedent made no further gifts prior to December 30, 1976. The single exception was that in July 1975, decedent gave Phillip the real property that he was to receive under the terms of the will.

In November 1976, decedent was referred by his regular physician to Dr. Douglas H. White, an internist with a particular interest in cardiology. Decedent stated that he had heart disease and complained of being tired and short of breath. Following an examination, White determined that decedent's heart was enlarged, that his mitral valve was not performing properly, that his heart beat erratically, and that he had mild congestive heart failure, which meant that his blood was not being adequately circulated. In addition, White noted that decedent was still depressed about the death of Aletha.

At the time of the examination, decedent was taking Lanoxin, a medication that slows the heart rate down and makes the heart muscle contract more forcefully, and Lasix, a diuretic. White ordered decedent to continue both of these medications and prescribed Triavil, an antidepressant. White also ordered several tests that he considered routine for new patients, including an electrocardiogram, a chest x-ray, a blood count and an urinalysis. At the conclusion of the examination, White suggested that decedent be reexamined every 3 to 6 months. The results of the tests were not communicated to decedent, however, until sometime in January 1977.

In the latter part of 1976, Elrod advised decedent that, because of the enactment of the Tax Reform Act of 1976, decedent should consider making any contemplated gifts prior to January 1, 1977. On December 30, 1976, decedent made gifts to Thomas and Sylvia of the real property that each of them was to receive under the provisions of his will. At the time of these transfers, Thomas and Sylvia resided in Missouri and Wisconsin, respectively, where they continued to reside through the time of trial. Roland, who had rented and farmed both of these parcels prior to the gifts, continued to rent these parcels.

After Aletha's death and through 1976, decedent was mentally alert, lived alone, took care of his own personal needs, and engaged in social visits with friends. During this period, decedent's physical appearance did not indicate that his health was impaired, and he never complained to his children of any illness or other problems with his health.

In June 1977, decedent began courting Lillian Maze (Lillian), a lifetime friend, and on December 31, 1977, they were married. For approximately 1 year, they traveled, entertained, and enjoyed various activities together.

On July 11, 1978, decedent was admitted to Methodist Hospital in Indianapolis, Indiana, because of abdominal pain. On August 4, 1978, he underwent an operation to replace the mitral valve in his heart. Decedent failed to survive that surgery, succumbing at age 71. At the time of his death, decedent was survived by a brother, age 61, and a sister, age 68. His father had died at age 86 of heart disease, and his mother had died at age 87 of parkinsonism.

The value of the real property transferred to Thomas and Sylvia on December 30, 1976, was not included in decedent's gross estate reported on the Federal estate tax return prepared by Elrod and signed by Phillip and Richard as co-executors of decedent's estate. Schedule G of that return contained the following statement:

Co-Executors contend that * * * the transfers of real property to Thomas and Sylvia are not includable in decedent's gross estate for estate tax purposes because the gifts were consistent with a pattern established by decedent of dividing his property among his children while in good health, and were not made in contemplation of death.

In his notice of deficiency, respondent determined that the December 30, 1976, transfers of property to Thomas and Sylvia were made in contemplation of death and that the value of those transfers is includable in decedent's gross estate under section 2035(a).

Ultimate Finding of Fact

The transfers of the aforementioned property to Thomas and Sylvia by decedent were made in contemplation of death.

Opinion

Issue 1 — Applicability of Section 2035

The first issue for resolution is whether section 2035, as in effect prior to the Tax Reform Act of 1976, applies to the transfers of real property to Thomas and Sylvia. Prior to the passage of that Act, section 2035 (former section 2035) provided as follows:

SEC. 2035. TRANSACTIONS IN CONTEMPLATION OF DEATH.

(a) General Rule. — The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, in contemplation of his death.

(b) Application of General Rule. — If the decedent within a period of 3 years ending with the date of his death (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) transferred an interest in property, relinquished a power, or exercised or released a general power of appointment, such transfer, relinquishment, exercise, or release shall, unless shown to the contrary, be deemed to

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