Estate of Hutchinson v. C.I.R.

Decision Date19 July 1985
Docket NumberNo. 84-2201,84-2201
Citation765 F.2d 665
Parties-6498, 85-2 USTC P 13,624 Estate of Russell E. HUTCHINSON, Phillip E. Hutchinson and Richard A. Hutchinson, Co-Executors, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. . Rehearing Denied
CourtU.S. Court of Appeals — Seventh Circuit

Robert G. Elrod, Elrod, Elrod & Mascher, Indianapolis, Ind., for petitioners-appellants.

Jonathan S. Cohen, Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D.C., for respondent-appellee.

Before CUMMINGS, Chief Judge, BAUER and FLAUM, Circuit Judges.

CUMMINGS, Chief Judge.

The Commissioner of Internal Revenue (the "Commissioner") assessed a notice of tax deficiency against the estate of Russell Hutchinson (the "Estate") on May 18, 1982. On June 15, the Estate petitioned the Tax Court pursuant to 26 U.S.C. Secs. 6213, 7442, to redetermine the deficiency. After a two-day trial, the Tax Court decided in favor of the Commissioner, and the Estate appealed under 26 U.S.C. Sec. 7482. We affirm.

I

Russell Hutchinson, a resident of Indiana, died on August 4, 1978 at the age of 71 of complications from surgery. He was survived by his second wife, Lillian, and seven children by his former marriage--Thomas, Phillip, Richard, Linda, Sylvia, Janet and Claire. Russell's first wife, Aletha, had predeceased him on January 29, 1975, after a lengthy illness. In addition to his immediate family, Russell was survived by a brother, age 61, and a sister, age 68. Russell's father had died at age 86, and his mother at age 87.

In previous years, Russell had made gifts of real property to his children, principally for them to build houses. In 1967, Phillip had received 1.44 acres on which to build a house. Richard received 10 acres for the same purpose in 1972, along with an additional 20 acres in 1974 to provide adequate collateral for a loan Richard needed to finish building his house. Russell's will directed Richard to convey part of this property to Phillip. In early 1975 Janet received 5 acres to build a house. In addition, in July 1975 Phillip received 5.4 acres adjacent to the 1.44 acres he already owned. When Russell retired from his seed-house business in April 1974 to care for his terminally ill wife Aletha full-time, he deeded the 6.83 acres containing the business to all seven of his children as tenants in common.

On December 30, 1976, on the advice of his attorney, Russell transferred 41.19 acres each to his daughter Sylvia, who lived in Wisconsin, and his son Tom, who lived in Missouri. Sylvia and Tom would have received this acreage eventually without the gift, through their father's will. In 1975, Russell had considered making gifts to his children of the real property he had decided to will to them, including the property he ultimately deeded to Sylvia and Tom in 1976. The gift tax liability that he would incur, however, persuaded him not to make the gifts at that time, except for the land deeded to Phillip. Russell made no substantial gifts to his children from July 1975 until December 1976 when he deeded to Sylvia and Tom the land they were to have received under his will.

Unlike the land deeded to his other children, the real estate conveyed to Sylvia and Tom was not contiguous with the main body of the Hutchinson property. It had been owned by the family for fourteen years, while the rest of the land had been in the family since the turn of the century and had a great deal of emotional significance for Russell. He deeded this property to them because they lived out of state and would not be living on the land like his other children.

In November 1976, Russell visited his regular doctor, who referred him to an internist with a particular interest in cardiology, Dr. Douglas H. White. Russell informed Dr. White he had heart disease, a malady that had resulted in his hospitalization in 1967. He complained of being tired and short of breath. Russell then was on two maintenance medicines--Lanoxin, a form of digitalis, and Lasix, a diuretic. During this first visit Russell broke down and cried, explaining to Dr. White that his wife Aletha had recently died. Dr. White prescribed Triavil, an anti-depressant, to help alleviate Russell's depression. Dr. White suggested to Russell that he be reexamined every three to six months; he also performed numerous tests, the results of which were not communicated to Russell until January 1977.

Throughout the period from his first wife's death in January 1975 to June 1977, Russell lived alone, socialized with his friends, and did not complain of his health to either family or friends. His physical appearance did not indicate that his health might be impaired. In June 1977 he began courting a lifelong friend, Lillian Maze, whom he married on December 31, 1977. They traveled, entertained, and in general enjoyed a happy, busy life together. The couple cancelled a planned trip to Europe in July 1978 due to the health problems that led to Russell's surgery and death in August.

Russell's family was generally unaware of his health problems. Lillian did not know about his heart condition, and his children were only vaguely aware of it. Moreover, his wife and children did not know Russell was on maintenance heart medication, that he had ever taken anti-depressant medication, or of his regular visits to Dr. White.

Phillip and Richard, acting as co-executors of the Estate, timely filed an estate tax return and paid the tax due on the Estate, valued at $159,077.06. They noted on the return that they were excluding the land previously deeded to Sylvia and Tom, which had a value at Russell's death of $141,800. The Commissioner determined that these two transfers were wrongfully excluded and assessed a tax deficiency against the Estate of $21,985.88 on the ground that the transfers were made in contemplation of death. The Estate paid this amount and then petitioned the Tax Court for a redetermination of the deficiency. The Tax Court ruled in favor of the Commissioner (47 T.C.M. (CCH) 1018 (1984)) and this appeal followed.

II

At issue in this case is 26 U.S.C. Sec. 2035. When Russell deeded the two tracts of land to Sylvia and Tom, Section 2035 included the value of all transfers made within three years of a transferor's death in the decedent's gross estate as transfers made "in contemplation of death," unless the estate proved otherwise. 1 Under this Section the Estate must carry the heavy burden of rebutting the statutory presumption and proving a negative--that the transfer was not made in contemplation of death. Hope v. United States, 691 F.2d 786, 791 (5th Cir.1982) (burden of persuasion on the estate); Estate of Compton v. Commissioner, 532 F.2d 1086, 1088 (6th Cir.1976) (burden of proving a negative not a light one); Berman v. United States, 487 F.2d 70, 72 (5th Cir.1973) ("essence of a three-year contemplation of death case lies in the estate's ability to prove a negative" which "is seldom a light burden"). The Estate must prove that "the dominant motive for the transfer was life-oriented and designed to accomplish some lifetime purpose of the decedent" by a preponderance of the evidence. Commercial National Bank of Peoria v. United States, 436 F.Supp. 935, 936 (S.D.Ill.1977).

Congress modified Section 2035 in the Tax Reform Act of 1976 (the "Tax Act") by converting this statutory presumption into a mandatory rule that the value of all gifts made by a decedent within three years of death, plus any gift tax thereon, be included in the decedent's gross estate. 2 This new version of Section 2035 applies to all transfers made after December 31, 1977. 3

The Tax Court held that the old Section 2035 continued to apply to transactions completed prior to the effective date of the new Section 2035 if the transferor died within three years of the transfers. In applying the former Section 2035 to the instant situation, the Tax Court agreed with the Commissioner that Russell made the two gifts in question in contemplation of death. 47 T.C.M. (CCH) 1018, 1021-1023 (1984). The Estate argues that neither the old Section 2035 nor the new Section 2035 applies. In the alternative, petitioners contend that even if former Section 2035 governs, the transfers were not made in contemplation of death.

The problem arises because generally the tax statutes in effect when a taxpayer dies govern the taxation of the estate. However that may be, the version of Section 2035 that was in effect at Russell's death cannot apply in the instant case to the transfers Russell made on December 30, 1976, because Congress explicitly restricted the new Section to transfers made after December 31, 1976. The question is whether former Section 2035 continues to apply to transfers made before the effective date of the new Section by donors who died after the effective date of that statute. Petitioners argue that the new Section repealed the old Section in its entirety, so that the previous Section does not apply even to transfers made before January 1, 1977, although the new Section does not apply to these transfers either. Because Congress could not have intended such an anomalous result, we affirm the Tax Court's decision that the old Section 2035 governs. 4

Absent ambiguity, courts must interpret statutes according to their plain meaning. Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61 L.Ed. 442; Reed v. United States, 743 F.2d 481, 484-485 (7th Cir.1984), certiorari denied, --- U.S. ----, 105 S.Ct. 2673, 86 L.Ed.2d 692 (1985). The ambiguity in the instant case arises because the new Section 2035 does not expressly state whether the old Section 2035 continues in effect vis-a-vis transfers completed prior to the effective date of the new statute. Congress' purpose in enacting, and then modifying, Section 2035 indicates the proper result.

Congress originally enacted the statute to prevent blatant evasion of...

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