Estate of Isaac W. Baldwin v. Commissioner
| Decision Date | 28 October 1959 |
| Docket Number | Docket No. 9446. |
| Citation | 18 TCM (CCH) 902,1959 TC Memo 203 |
| Parties | Estate of Isaac W. Baldwin, Deceased, Florence E. Baldwin and George A. Baldwin, Executors v. Commissioner. |
| Court | U.S. Tax Court |
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Allen H. Gardner, Esq., for the petitioner. Albert J. O'Connor, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent has determined a deficiency in the estate tax of the Estate of Isaac W. Baldwin, Deceased, in the amount of $656,369.94. Petitioner challenges the deficiency so determined, and, in addition, claims an overpayment. The issues, too numerous for purposeful enumeration here, will be separately set forth and treated. A number of concessions and stipulations have been made with respect to various issues, and will be given effect in the recomputation under Rule 50.
The testimony herein was taken at Erie, Pennsylvania, before a Commissioner of this Court. The Commissioner's report of his findings of fact was duly served upon both parties, and objections were made thereto by their respective counsel. We have considered those findings and objections in the light of the entire record before us, and have resolved them in accordance with our interpretation of that record.
The stipulated facts are so found, and are incorporated herein by this reference.
1. The petitioner is the Estate of Isaac W. Baldwin, Deceased, who died May 9, 1941, a resident of the Commonwealth of Pennsylvania. An estate tax return was duly filed with the collector of internal revenue for the 23rd district of Pennsylvania, reporting a total gross estate of $1,480,188.91, total deductions of $498,194.26, a net estate for the basic tax of $981,994.65, and a net estate for the additional tax of $1,041,994.65. An estate tax liability in the amount of $218,073.45 was reported.
2. In the statutory notice of deficiency respondent advised petitioner that, after making numerous adjustments to the net estate as reported, he had determined a net estate for the basic tax of $2,555,484.25, a net estate for the additional tax of $2,615,484.25, an estate tax liability in the amount of $874,443.39, and a deficiency of $656,369.94. The additions to the value of the net estate and the decreases in the deductions allowed by the respondent, were, by categories and amounts, as follows:
Real estate ...................... $ 68,716.00
Mortgages, notes and cash ........ 5,249.88
Insurance ........................ 142,314.25
Jointly owned property ........... 43,810.00
Other miscellaneous property ..... 1,004,000.00
Transfers ........................ 126,050.00
Executors' commissions ........... 10,000.00
Legal fees ....................... 5,000.00
Debts of decedent ................ 168,952.47
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Total ..................... $1,574,092.60
The foregoing categories follow in order the schedules of the estate tax return, and the issues hereinafter described tend to follow the same order. Unless otherwise stated, the terms "Schedule" and "Subschedule" refer to the estate tax return. All real properties hereinafter referred to are, unless otherwise stated, located in Erie, Pennsylvania.
3. From 1909 to 1940, the decedent, Isaac W. Baldwin (hereinafter called "Isaac"), and his brother, G. Daniel Baldwin "), carried on a real estate business in Erie, Pennsylvania, as partners, doing business under the firm name of Baldwin Brothers. Their father, James Baldwin, had first engaged in the real estate business prior to 1900.
Isaac and G. Daniel entered into their first formal contract of partnership on June 26, 1909. By this contract, they agreed to carry on the business as equal partners. This partnership continued in existence and actively carried on the real estate business under various agreements until formally terminated in June of 1940, as will be hereinafter described in greater detail.
4. The partnership agreement of June 26, 1909, provided that the partnership should engage in the purchase, improvement, lease, sale, and exchange of real estate and in a general contracting and building business. The partnership was to continue for 5 years, and the real estate owned was to be held in the names of the individual partners.
Other written agreements were entered into after 1909, the last of which was executed on November 15, 1923. This contract was similar to the original agreement of June 26, 1909, covered a 3-year period, and provided that partnership real estate should be "held in the names of the individual partners, each party to have and carry in his name such proportionate part in valuation of the firm real estate as his share or investment is of the whole capital of the said partnership." This contract was extended by endorsement to November 15, 1927. With certain modifications hereinafter described with greater particularity, made on December 1, 1938, it apparently was the contract under which the partnership continued to operate until its termination on June 5, 1940.
5. The original and primary business of Baldwin Brothers was the construction of small, low-priced houses for sale. The partnership would both build houses on the land of others and buy land and construct houses thereon. The houses were usually sold for cash plus either first or first and second purchase-money mortgages. Sometimes a house was taken in trade, and rented. In some cases, the houses constructed could not be immediately sold, and were rented.
The partnership carried mortgages for an average of 30 days or less, until it could find a buyer. It occasionally repossessed and rented houses on which the purchasers had failed to make agreed payments.
During the late 1920's, more than 300 houses a year were built. At other times, as in the depression of the 1930's, there was little or no construction, and the handling of rental properties constituted the firm's main business activity.
The partnership also owned and rented some commercial property, including two large Erie markets, respectively known as the Twelfth Street Market and the Central Market. It held many rental properties, and the maintenance of these properties and the collection of rentals was an important part of its business.
6. Isaac's brother, G. Daniel, took charge of the financial end of the business. He was in charge of purchases of land, sales of houses, legal work, and maintenance of records. Isaac was in charge of construction, and hired and fired men, designed the buildings, and purchased materials. In the late 1920's, when the partnership was building about 300 houses a year, Isaac advertised in various European newspapers for building tradesmen and brought them to Erie. He would occasionally perform other functions, but normally confined his activities to construction.
7. G. Daniel had a strong, overpowering personality, and dominated almost everyone with whom he came in contact. Isaac was several years younger, and especially susceptible to domination by G. Daniel. Almost without exception, he yielded to G. Daniel in partnership matters. In addition, G. Daniel's control over Isaac extended to personal and family matters, and was so complete that he dictated what Isaac's children should do in purely personal affairs.
8. The partnership's extensive real properties were held in the individual names of Isaac and G. Daniel. Their agreement called for each of them to hold in his name partnership real estate in proportion to his capital investment, and there were many property transfers between them to cause their respective individual holdings to conform thereto.
Isaac and his wife, Florence, one of the co-executors herein, immediately upon their marriage in June of 1911, executed a power of attorney in favor of G. Daniel. On December 13, 1911, Isaac and Florence executed another power of attorney authorizing G. Daniel to collect and sue for all sums of money payable to them, to give discharges for all such collections, to compromise all such claims, to release mortgages due them, to lease, sell, and convey realty upon such terms as he should see fit, to borrow money on their names and execute evidence of indebtedness therefor, and to perform other specified acts. Under this power, G. Daniel transferred many properties out of the name of the decedent and performed other acts until Isaac's death.
9. In the latter part of 1935 or early in 1936 G. Daniel became critically ill with appendicitis and peritonitis, and was hospitalized for some time. As a result, he was unable to perform his partnership duties for a year or more, or until about the spring of 1937. During this period, Isaac was in complete charge of all phases of the business, including those which had previously been performed by G. Daniel alone.
G. Daniel's illness left him with a fistula, and his doctors cautioned him not to engage in certain forms of physical activity to which he had been accustomed. He was irritated by his condition and by the restraints imposed, and frequently disregarded them, causing further physical difficulties and discomfort.
After his illness and as a result of his physical condition and its aggravation due to his disregard of medical advice, G. Daniel became increasingly disagreeable and uncompromising. Whereas he and Isaac had previously gotten along fairly well, in spite of G. Daniel's domination and criticisms, increasing friction now began to develop between them.
10. George A. Baldwin (hereinafter called "George"), one of decedent's sons and co-executor of the estate, was in his second year at Colgate University when G. Daniel became ill. He feared that his uncle's illness would prevent him from finishing the school...
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