Estate of Melville v. Commissioner
| Decision Date | 20 October 1993 |
| Docket Number | Docket No. 22027-90. |
| Citation | 66 T.C.M. 1076 |
| Parties | Estate of Kate Clark Melville, Deceased, Bank of New York, Executor v. Commissioner. |
| Court | U.S. Tax Court |
Jon Holden Adams, 35 Market St., Poughkeepsie, N.Y., for the petitioner. Pietra Pastore, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's Federal estate tax of $53,744 and an addition to tax under section 6651(a)(1) of $13,436.1 The deficiency was due to the disallowance of certain administration expense deductions.
After concessions,2 the issues for decision are:
(1) Whether petitioner, the estate of Kate Clark Melville, is entitled to deduct the full amount of executor's "receiving and paying" commissions allowed by the Surrogate's Court; specifically, the issue is whether the value of real property, which was specifically devised by the decedent's will to the decedent's grandchildren but which was later deeded to two of her children (the parents of those grandchildren) pursuant to a settlement of a will contest, should be included for purposes of computing executor's "receiving and paying" commissions under New York State law; and
(2) Whether petitioner is liable for an addition to tax under section 6651(a)(1) for failure to timely file an estate tax return.
Unless othervise indicated, all section references are to the Internal Revenue Code in effect for the date of the decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated herein by this reference.
Kate Clark Melville (the decedent) died testate on July 24, 1985, a resident of the Town of Pleasant Valley, County of Dutchess, State of New York.
In 1961 the decedent had executed a will, the dispositive provisions of which left the bulk of her estate to her three children, David Melville, Sheila Traver, and John Melville (hereinafter referred to as David, Sheila, and John, respectively). However, all real estate was devised to David and Sheila. The 1961 will appointed the decedent's brother, Benjamin S. Clark, and the Bank of New York as executors of and trustees under that will. In 1968 the decedent executed an inter vivos trust, naming her brother, Benjamin S. Clark, and the Bank of New York as cotrustees. The Bank of New York was also the trustee of two other trusts for the decedent's benefit. The inter vivos trust gave the decedent an income interest for life, and directed that, upon her death, the principal, primarily stocks and bonds, go to beneficiaries as designated in her will. The trust agreement was amended in 1973.3
On or about February 10, 1978, the decedent's children, David and Sheila, commenced a proceeding to appoint a conservator for her, alleging that she was no longer able to manage her own affairs. The decedent's physician had diagnosed her as suffering from an organic brain syndrome and manic depressive illness.
Soon after commencement of the conservatorship proceeding, the decedent consulted attorney John J. Gartland, Jr. (Gartland) for advice.4 Gartland arranged to have the decedent discuss the conservatorship proceeding with a litigator in Gartland's firm who undertook her defense.
Soon thereafter, the decedent again consulted Gartland. She was quite upset that her children, David and Sheila, were pursuing the conservatorship proceeding. She stated that she wanted to change her will so that David and Sheila would not receive any of her assets upon her death. Gartland prepared a new will, following the decedent's instructions that her grandchildren (the children of David and Sheila) be substituted for David and Sheila. On April 14, 1978, while the conservatorship proceeding was pending, the decedent revoked her 1961 will and executed this new will in which she left her testamentary estate to her grandchildren, with a life estate for her son, John (the 1978 will).
The 1978 will made substantial changes. All real property was devised to the decedent's grandchildren surviving the decedent, as tenants in common in equal shares, with a life estate to John Melville as to that parcel of real property owned and occupied by the decedent as her and John's residence. All personal property was to be divided among the grandchildren, with the reservation of a life estate to John Melville of any personal property in her residence. The residuary estate, including property over which the decedent had a power of appointment, was given in equal one-third shares to John Melville, to the then living children of Sheila Traver, and to the then living children of David Melville, subject to trusts. The trusts for the children of Sheila Traver and David Melville were to accumulate until each beneficiary attained 35 years of age, at which time the beneficiary would obtain the remaining principal. As to the trust created for John Melville, it would be held for his lifetime, and upon his death, would go to his then living descendants, if any, and if none, to the decedent's grandchildren subject to the terms of their trusts.
Gartland was unaware of the existence of the 1968 inter vivos trust and the other two trusts under which the Bank of New York was the trustee. Gartland and Marine Midland Bank were named coexecutors of the estate and cotrustees of the testamentary trusts in the decedent's 1978 will. The decedent named two executors and two trustees because she was concerned about her son, John, who was mentally incompetent: Gartland's duty was to make sure that the corporate fiduciary took care of John.5
On August 15, 1978, the conservatorship proceeding was concluded, and conservators (State Senator Jay P. Rolison, Jr. and Marine Midland Bank, later changed to the Dutchess Bank and Trust Company) were appointed to manage the decedent's affairs. On September 28, 1978, in a codicil to her 1978 will, the decedent changed the designation of the institutional executor and trustee under her will to the Dutchess Bank and Trust Company. The conservators continued to manage the decedent's affairs until her death on July 24, 1985.6
On or about September 5, 1985, after the decedent's death, Gartland and Owen T. Clarke (Clarke), vice president and trust officer of the Dutchess Bank and Trust Company, as the executors designated by the 1978 will, filed a petition for the probate of the 1978 will and codicil with the New York State Surrogate's Court of Dutchess County (the Surrogate's Court). On October 16, 1985, the decedent's children, David and Sheila, demanded oral examination of the witnesses to the 1978 will and codicil. Under section 1404 of the New York Surrogate's Court Procedure Act, examination of the witnesses to a will is the first of several steps to be observed in the commencement of a will contest.
It became clear to Gartland early on that the will contest could extend over a long period of time. He contacted Clarke to advise him that they should obtain preliminary letters testamentary from the Surrogate's Court in order to pay current obligations and maintain whatever assets of the estate that became available. Specifically, in the request for preliminary letters testamentary, Gartland stated:
That in order to pay the aforesaid obligations your petitioner prays that Preliminary Letters Testamentary be issued to him jointly with the Dutchess Bank & Trust Company for the purposes of enabling them to pay the current obligations and to proceed to marshall and preserve the assets of the estate, including the care of the real property.
On October 24, 1985, Gartland and the Dutchess Bank and Trust Company were issued preliminary letters testamentary by the Surrogate's Court.
Clarke assumed the function of attempting to collect and preserve the assets of the estate. In a letter dated October 16, 1985, Edward Dolan, senior trust administrator of the Bank of New York, the trustee of the decedent's 1968 inter vivos trust and the other two trusts for her benefit, provided Clarke with a list of the trust assets of the decedent. The Bank of New York as trustee would not relinquish control of any of those assets pending the outcome of the will contest. At the time of the decedent's death, the value of the assets of the inter vivos trust was $1,325,665. The values of the assets of the other two trusts over which the decedent had a power of appointment were $306,746 and $76,691. The balance of the decedent's gross estate was primarily attributable to the value of her residence and adjacent parcels of land that the decedent occupied with her son, John.7 Under the decedent's testamentary disposition, the real estate was subject to a life estate for the benefit of John. An appraisal, dated February 6, 1986, determined that the fair market value of the real property owned by the decedent as of the date of her death was $626,840.8 The total tangible personal property, as of the date of death, was appraised at $24,768.50.
Clarke also assumed some duties of managing the decedent's real estate holdings during the will contest. After receipt of the preliminary letters testamentary, Clarke undertook to maintain the decedent's and John's residence by paying the insurance fees, real property taxes, and the other expenses of maintaining the property. He would visit periodically, and the resident caretaker would report to Clarke on a regular basis. Clarke had available to him the cash flow from the income of the inter vivos trust to pay the caretaker and maintain the property.9
On February 19, 1986, David and Sheila filed objections to probate of the decedent's 1978 will and codicil, claiming that the 1978 documents were not executed properly, that the decedent was not competent in that she was not of sound mind and memory at that time to execute the documents, that there was a mistake by the decedent in the...
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