Estate of Kahanic v. Comm'r of Internal Revenue
| Decision Date | 21 March 2012 |
| Docket Number | Docket No. 23800-09 |
| Parties | ESTATE OF DAVID A. KAHANIC, DECEASED, EDWARD M. FIALA, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
ESTATE OF DAVID A. KAHANIC, DECEASED, EDWARD M. FIALA, EXECUTOR, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23800-09
UNITED STATES TAX COURT
Filed March 21, 2012
David Gerhard Strom, Sharon M. Buccino, and John J. Morrison, for petitioner.
H. Barton Thomas, Jr., and Angela B. Friedman, for respondent.
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VASQUEZ, Judge: Respondent determined a $1,188,974 deficiency in the Federal estate tax of the Estate of David A. Kahanic (estate). The issues for decision are: (1) whether David A. Kahanic (decedent) possessed at his death incidents of ownership in a $2,495,000 life insurance policy, thereby making the policy proceeds includible in the value of decedent's gross estate under section 2042(2);1 (2) if so, whether an agreed order entered by the Circuit Court of Cook County, in effect when decedent died, created an indebtedness in respect of the policy proceeds that entitles the estate to a deduction of $1,995,000 under section 2053(a)(4);2 (3) whether the estate is entitled to deduct, under section 2053(a)(2), accrued interest on a loan made by decedent's ex-wife to the estate to allow the estate to pay its Federal and Illinois estate taxes; and (4) whether the estate is entitled to deduct, under section 2053(a)(2), attorney's and accountant's fees
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incurred after the estate filed its Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated by this reference. Decedent died on August 11, 2005, and as of that date he resided in Schaumburg, Illinois.3 On August 23, 2005, and pursuant to decedent's will, Edward M. Fiala was appointed executor of the estate.4 Mr. Fiala is the former brother-in-law of decedent and the brother of Ms. Kahanic, decedent's ex-wife. Decedent and Ms. Kahanic married on October 22, 1988, and divorced in 2004. They had two children during their marriage. Decedent, a medical doctor, was the sole owner of Aesthetic Eye Plastic Surgery (AEPS). Ms. Kahanic worked as the office manager at AEPS for approximately 10 years, ending around 2000 or 2001.
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Decedent's Health Problems
Decedent was significantly overweight and suffered from high blood pressure. In 2000 he became severely ill and had to be admitted to the hospital, where he was diagnosed with an enlarged heart. Decedent was unable to return to work until the end of 2001.
Decedent's Life Insurance Policies
Decedent obtained the following life insurance policies before being diagnosed with an enlarged heart: (1) Security-Connecticut policy No. XXX491R with a death benefit of $495,000; (2) Security-Connecticut policy No. XXX013W with a death benefit of $2 million; (3) American General policy No. XXXXXX112L with a death benefit of $3 million (AIG policy); and (4) Prudential term life policy No. XXXX9322 with a death benefit of $2 million that he converted to Prudential universal life policy No. XXXX6899 on February 20, 2004 (Prudential policy). Following a merger of Security-Connecticut Life Insurance Co. and Reliastar Insurance Co., the Security-Connecticut policies were reissued to decedent by Reliastar as policy No. XXXX15856B with a death benefit of $2,495,000 (Reliastarpolicy or policy).5 At all relevant times the Reliastar and Prudential
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policies named Ms. Kahanic the sole beneficiary. The policies were in effect when decedent died.
Divorce Proceedings and Marital Settlement Agreement
On February 13, 2002, Ms. Kahanic filed a petition for dissolution of marriage in the Circuit Court of Cook County, Illinois (circuit court). Around that time she learned that decedent had missed a deadline to pay a premium on one of his life insurance policies. This concerned Ms. Kahanic, who believed that decedent's poor health would make it difficult for him to acquire life insurance if his policies lapsed.
On May 27, 2004, the circuit court entered a judgment for dissolution of decedent and Ms. Kahanic's marriage (judgment for dissolution). That same day the parties entered into a marital settlement agreement (MSA) that was incorporated verbatim into the judgment for dissolution. The MSA stated, inter alia, decedent's child support and spousal maintenance obligations, required decedent to secure his unpaid child support and spousal maintenance payments with life insurance proceeds, and included provisions on how decedent would
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provide proof to Ms. Kahanic that he had secured his unpaid obligations with life insurance and timely paid the premiums.
With respect to child support, decedent was obligated under the MSA to pay Ms. Kahanic $7,000 per month and to secure his unpaid future payments with a life insurance policy with a minimum death benefit of $1,200,000.6 As for spousal maintenance, the parties agreed that Ms. Kahanic was to receive $672,000 to be paid in 96 monthly payments of $7,000. Decedent was required to secure payment of his unpaid spousal maintenance by naming Ms. Kahanic an irrevocable beneficiary to $500,000 of the Reliastar Policy7 proceeds for a period of 8 years.
The terms of the MSA also required decedent to do the following within 10 days of the entry of the judgment for dissolution: (1) provide Ms. Kahanic with a copy of the AIG policy; (2) notify, in writing, AIG of his obligations under the
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MSA and provide Ms. Kahanic with a copy of the notice; and (3) execute and deliver documents designating Ms. Kahanic as an irrevocable beneficiary to $500,000 of life insurance proceeds to secure his unpaid spousal maintenance payments (collectively, the "insurance requirements").
The final page of the judgment for dissolution states that "this Court expressly retains jurisdiction of this cause for the sole and exclusive purpose of enforcing all the terms of this Judgment for Dissolution of Marriage, including all the terms of the [MSA] made in writing."
Decedent's Noncompliance With the MSA and the September 16, 2004, Agreed Order
By August 2004 decedent had not complied with the insurance requirements. Ms. Kahanic, knowing that decedent had missed a life insurance premium payment in 2002,8 worried increasingly that decedent had not been paying his life insurance premiums. She believed that if decedent let his life insurance policies lapse and then passed away on account of his illness she might not be able to collect child support and spousal maintenance. Maricarol Lacy and Bernard B. Rinella, Ms. Kahanic's attorneys, attempted to have decedent comply
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with the insurance requirements on his own volition, but eventually Ms. Kahanic had to seek resolution through the circuit court.
On August 16, 2004, Ms. Kahanic filed a petition for a rule to show cause for indirect civil contempt, motion to compel and for other relief (petition to show cause). The petition to show cause stated, inter alia, that decedent had not complied with the insurance requirements. Ms. Kahanic requested that the circuit court find decedent in indirect civil contempt for his refusal to comply with the insurance requirements, and upon such finding compel decedent to comply with the insurance requirements. Ms. Kahanic also asked the circuit court to compel decedent to pay her attorney's fees.
Before the circuit court acted on Ms. Kahanic's petition to show cause, Ms. Kahanic and decedent reached an agreement with respect to his noncompliance with the insurance requirements. Ms. Kahanic agreed to not immediately pursue a finding of indirect civil contempt against decedent for his noncompliance with the insurance requirements in exchange for decedent's entering into an agreed order stating that (1) Ms. Kahanic and the children remained the sole beneficiaries on the AIG and Reliastar policies and (2) decedent would not alter the policies until he complied with the insurance requirements. Ms. Kahanic's decision was based in part on her understanding that if decedent died without complying with the
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insurance requirements she would receive the Reliastar policy's full $2,495,000 death benefit.
On September 9, 2004, Ms. Kahanic filed a motion for entry of agreed order relating to her petition to show cause and her and decedent's agreement. On September 16, 2004, the circuit court entered an agreed order (September 16 agreed order), which read as follows:
This matter having come before the Court for enforcement and compliance with the Marital Settlement Agreement and Judgment for Dissolution of Marriage:
IT IS HEREBY ORDERED;
* * * [Decedent] represents that * * * [Ms. Kahanic] and the children remain as sole beneficiaries on each of his life insurance policies as identified specifically in the parties' executed Marital Settlement Agreement at Articles V [Life Insurance Coverage For The Children] and VI [Life Insurance Coverage to Secure Maintenance] and attached as Exhibit "2" to said Agreement and that these policies have not been transferred, modified[,] altered or encumbered in any way, shape or form, and no transfers, modifications, alterations or encumbrances on said policies will occur until * * * [decedent] complies with the terms of the Settlement Agreement regarding these policies.
The attorneys for decedent and Ms. Kahanic signed the September 16 agreed order on their clients' behalf.
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On August 11, 2005, decedent passed away. He had not complied with the insurance requirements, and the September 16 agreed order had not been vacated.9
Reliastar Policy
The Reliastar policy was a universal life insurance policy. Ms. Kahanic was the Reliastar policy's primary beneficiary when decedent passed away, and accordingly she received the $2,495,000 death benefit upon his death. As of the date of decedent's death the Reliastar policy had an accumulated value of
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$31,165.8410 and a surrender charge of $43,573.16.11 Decedent's premium payments provided him with coverage through September 1, 2005.
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