Estate of Millikin v. C.I.R., 96-1012

• Decision Date: 12 February 1997
• Docket Number: No. 96-1012,96-1012
• Citation: 106 F.3d 1263
• Parties: -942, 97-1 USTC P 60,258 ESTATE OF Marguerite S. MILLIKIN, Quentin Alexander, Executor and Severance A. Millikin Trust B Society National Bank, fka AmeriTrust Company, Trustee, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1263

106 F.3d 1263

79 A.F.T.R.2d 97-942, 97-1 USTC P 60,258

ESTATE OF Marguerite S. MILLIKIN, Quentin Alexander,

Executor and Severance A. Millikin Trust B Society

National Bank, fka AmeriTrust Company, Trustee, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 96-1012.

United States Court of Appeals, Sixth Circuit.

Argued Nov. 12, 1996.

Decided Feb. 12, 1997.

Irene C. Keyse-Walker, Robert E. Glaser (argued and briefed), Arter & Hadden, Cleveland, OH, for Petitioners-Appellants.

Gary R. Allen, Acting Chief (briefed), Jonathan S. Cohen, Tamara L. Schottenstein (argued), U.S. Department of Justice, Appellate Section Tax Division, Washington, DC, for Respondent-Appellee.

Before: CONTIE, SUHRHEINRICH, and MOORE, Circuit Judges.

MOORE, Circuit Judge.

This is an estate taxation case in which the petitioners, representing the estate of Marguerite S. Millikin, appeal the decision of the United States Tax Court denying a deduction of administration expenses for the maintenance and sale of the decedent's residence incurred after the filing of the estate tax return. Petitioners assert that as a matter of Ohio law the maintenance and selling expenses were necessary for the administration of the estate beyond the filing of the tax return. We disagree and, accordingly, affirm the decision of the Tax Court.

I. FACTS AND PROCEDURAL HISTORY

The facts in this case were stipulated by the parties. Marguerite S. Millikin, a resident of Ohio, died testate on June 18, 1989. Marguerite's spouse, Severance A. Millikin, had predeceased her, leaving three trusts that he had established during his lifetime: (1) Trust A, "Endowment Fund," a charitable trust for the benefit of three Cleveland-area non-profit organizations (Cleveland Museum of Art, Case Western Reserve University, and University Hospitals of Cleveland); (2) Trust B, "Marital Trust," a marital deduction trust with general power of appointment in Marguerite under which, if not exercised at her death, any unappointed portion of the Trust B corpus would transfer to Trust C; and (3) Trust C, "Family Trust," a residuary trust for twenty-eight family beneficiaries. J.A. at 143-57. Society National Bank is the acting trustee of all three trusts, with Quentin Alexander serving as the sole advisory trustee after Marguerite's death. The trustee is empowered to sell any trust property with approval of the advisory trustee.

Marguerite executed a Last Will and Testament on November 19, 1987, in which she designated Quentin Alexander as executor of her estate. Alexander's wife was the Millikins' niece. Marguerite's will was probated in the Probate Court of Cuyahoga County, Ohio. Marguerite's gross estate included the property held by Trust B because it was subject to her general power of appointment. See I.R.C. § 2041(a). The Trust B assets, however, were not probate assets and were not subject to claims against the decedent's estate.

Marguerite's gross estate was reported in the estate tax return as $22,851,356.30, including a 150-acre estate in Gates Mills, Ohio called Ripplestone, consisting of a main house, a detached garage, various cottages, a barn, a stable, a swimming pool, and a tennis court. J.A. at 78. The main house contained a climate-controlled gallery to display the Millikins' extensive art collection (estimated at $1.5 million). In accordance with Severance's will, title to Ripplestone was transferred to Trust B on May 7, 1986, where ownership remained at all times pertinent to this action. Trust B paid the expenses to maintain Ripplestone prior to and after Marguerite's death. Even though the expenses to maintain Ripplestone were technically not part of the probate estate, Alexander elected to report the expenses to the probate court in his periodic accountings. J.A. at 44-75.

Marguerite's will authorized her executor to sell any of her estate as he deemed necessary without obtaining the approval of any person or court. She left the residue of her estate to an inter vivos trust she had previously established ("Marguerite Trust"). With respect to personal property, she granted the Cleveland Museum of Art a right to select and retain any objects of art, including paintings, books, porcelains, furniture, and silver. J.A. at 173. Marguerite also partially exercised her power of appointment over Trust B by appointing $2 million to be allocated to Trust A and distributed to the identified charitable organizations. J.A. at 174-75. Marguerite further designated in her will that all federal and state estate and death taxes owed as a result of Trust B assets being included in her gross estate for tax purposes were to be paid from Trust B itself. ¹ At the date of Marguerite's death, Trust B held assets which were worth $9,026,540.75, not including Ripplestone. ² J.A. at 102.

When Marguerite died, Alexander and the trustee assumed control of Ripplestone and decided to sell the property as soon as possible, but not before they distributed the art collection and other items of personal property inside Ripplestone. Alexander reduced Ripplestone's staff, keeping enough people to maintain the house and grounds while the Cleveland Museum of Art selected the items it wanted. Several times during 1989 and 1990 various museum staff members went to Ripplestone to analyze the collection. By March of 1990, the museum had finished its selection process and the remaining personal property was sold. On March 20, 1990, Ripplestone was offered for sale. Because of the premium asking price (initially $4.2 million), necessary environmental remediation efforts (six underground fuel storage tanks had leaked and contaminated nearby soil, a situation which came to light only after the estate tax return was filed), and certain zoning laws that precluded subdivision of the property, Ripplestone proved difficult to sell. Ripplestone was eventually sold on April 20, 1994, for $2,301,750. Selling expenses were $142,079.70. Tax Ct. Mem. at 7; J.A. at 20.

The estate filed its federal estate tax return on March 16, 1990, asserting $3,892,355.31 total federal estate tax liability and $1,379,745.66 federal generation-skipping transfer tax liability, and claiming a credit of $1,071,656.26 for state death taxes paid. J.A. at 78, 120. The executor deducted $555,409.20 in funeral and administration expenses, including $150,000 estimated costs for selling Ripplestone. J.A. at 107, 108. In total, charitable organizations received over $12 million of Marguerite's gross estate. J.A. at 115.

The Internal Revenue Service ("IRS") audited the estate and on February 25, 1993, issued notices of deficiency showing deficiencies of $682,367 in estate tax and $67,529 in generation-skipping transfer tax arising from discrepancies in the valuation of Ripplestone. J.A. at 126, 133. Ripplestone was appraised twice after Marguerite's death: at $3.7 million as of July 19, 1989; and at $3 million as of November 22, 1991. J.A. at 74, 75. The executor valued Ripplestone at $3.2 million on the tax return. The IRS disputed the valuation, explaining that Ripplestone's value should have been reported at $3.7 million. J.A. at 132, 135.

The estate challenged the deficiency notices by filing a petition in the Tax Court on May 17, 1993, seeking redetermination of the deficiencies. In light of the environmental remediation and other selling obstacles, the parties eventually stipulated that the fair market value of Ripplestone at the time of Marguerite's death was only $2.4 million, thereby mooting the valuation dispute. J.A. at 39.

In the meantime, however, Alexander notified the IRS of additional administration expenses for maintaining and selling Ripplestone incurred after the 1990 filing of the estate tax return. See J.A. at 13. This is where the present dispute arose, for the IRS claimed that the estate was not entitled to deduct such expenses.

The issue of deductibility of these additional administration expenses went to trial before the Tax Court on February 10, 1994. The Tax Court determined that deductibility was governed by Ohio law and that an Ohio probate court would allow an estate to pay administration expenses only to the extent that those expenses were necessary, reasonable, and just. Tax Ct. Mem. at 13-14; J.A. at 26-27. The Tax Court decided that the executor could deduct administration expenses incurred to maintain and sell Ripplestone prior to March 16, 1990, but not after that date. Tax Ct. Mem. at 2; J.A. at 15. According to the Tax Court, the sale of Ripplestone was not "necessary" to insure that sufficient assets were in reserve for contingent tax and other liabilities, as Ripplestone had been intended for sale long before the notices of deficiency, and Trust B held over $9 million in liquid assets that could have been used to pay any deficiencies. The Tax Court concluded that based on the stipulated reduction in value of Ripplestone, there had been overpayments of $422,289.31 in estate tax and $168,000.66 in generation-skipping transfer tax. Tax Ct. Dec.; J.A. at 34. On September 26, 1995, the Tax Court entered a decision that disposed of all issues and was, therefore, final and appealable. Id.

II. ADMINISTRATION EXPENSES

As the facts are not in dispute, and the only question presented in this appeal is whether the law was correctly applied to those facts by the Tax Court, our review is de novo. Mitchell v. Commissioner, 73 F.3d 628, 631 (6th Cir.1996). The Tax Court's determinations of state law are likewise reviewed de novo. See Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991) (holding de novo review of district court's state law determinations is required in diversity case).

A. Federal Law

The estate seeks to deduct as administration expenses under I.R.C. § 2053 amounts expended by the executor with respect to the maintenance and sale of decedent's residence incurred after the estate tax return's filing date of...