Estate of Mladinich v. Commissioner

• Decision Date: 24 October 1991
• Docket Number: Docket No. 15841-89.
• Citation: 62 T.C.M. 1065
• Parties: Estate of Mary Pierotich Mladinich, Deceased, Peoples Bank of Biloxi, Administrator D.B.N. v. Commissioner.
• Court: U.S. Tax Court

62 T.C.M. 1065

T.C. Memo. 1991-528 Estate of Mary Pierotich Mladinich, Deceased, Peoples Bank of Biloxi, Administrator D.B.N. v. Commissioner.

Docket No. 15841-89.

United States Tax Court.

Filed October 24, 1991.

Lauch M. Magruder, Jr. and Charles L. Brocato, for the petitioner. Linda J. Wise, for the respondent.

Memorandum Findings of Fact and Opinion

DAWSON, Judge:

This case was assigned to Special Trial Judge Carleton D. Powell pursuant to the provisions of section 7443A(b)(4) and Rule 180.¹ The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.

Opinion of the Special Trial Judge

POWELL, Special Trial Judge:

Respondent determined a deficiency of $774,943 in petitioner's Federal estate tax and an addition to tax of $193,867 pursuant to section 6651(a)(1). The issues for decision are (1) whether the so-called Richardson property is includable in decedent's gross estate; (2) whether, if the Richardson property is includable in the gross estate the property is subject to a lien in the amount of the value of the improvements located thereon; (3) whether respondent correctly determined the value of the land and improvements, and (4) whether petitioner is liable for the addition to tax under section 6651(a)(1) for failure to timely file the estate tax return.

Findings of Fact

Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Peoples Bank of Biloxi, the administrator of the estate of Mary Pierotich Mladinich, had its principal office in Biloxi, Mississippi, at the time the petition was filed in this case.

Decedent, Mary Pierotich Mladinich, was born in 1907. Mary married Andrew Jake Mladinich (Jake, Sr.) in 1925. They had two children: Andrew Jake Mladinich, Jr. (Jake, Jr.), who was born in 1926, and John M. Mladinich (John), who was born in 1928. Jake, Sr. died on March 20, 1967, and decedent died on October 3, 1983.

The Richardson Property

Prior to 1951, the Mladinich family lived on First Street in Biloxi, Mississippi. That property was titled in Jake, Sr.'s name. Jake, Sr. owned and operated a commercial fishing vessel. Decedent worked in a cannery. While fishing, Jake, Sr. was at sea approximately 1 week at a time and was ashore 2 or 3 days before returning to sea. John and Jake, Jr. worked in various positions in their youth, such as paperboy, bellhop, and short order cook.

In 1944, decedent's brother, J.J. Pierotich, had an interest in a service station. The service station and equipment were leased from Munro Petroleum. Jake, Jr. and John worked at the station on a regular basis and Jake, Sr. occasionally worked at the station when he was ashore. During this period of time, Jake, Jr. and John lived with their parents.

The Mladinich family wanted to construct and operate a restaurant. With that in mind, Jake, Jr. and John attended an auction at the U.S. Coast Guard Air Station in Biloxi, Mississippi, in the spring of 1947. The Coast Guard was closing the Air Station and was selling equipment used at the station. Jake, Jr. and John purchased a walk-in cooler, stoves, dishwashers, potato peelers, sinks, stainless steel work tables, chairs, and other equipment for approximately $300. Jake, Jr. and John paid for the equipment with money that the family had saved. They stored the equipment under the home on First Street and in a shed behind the house.

For the next several years, the Mladinich family looked for property suitable for the restaurant. On September 1, 1950, decedent and Jake, Sr. purchased the so-called Richardson property on West Beach Boulevard in Biloxi. The deed to that property read to "Jake Mladinich and Mrs. Mary P. Mladinich, his wife, as joint tenants in entirety and not as tenants in common, but to the survivor."

The lot is roughly rectangular and is approximately 92 feet wide from east to west and some 1,000 feet deep from north to south. U.S. Highway 90 runs east-west and bisects the property. The portion of the property north of Highway 90 is over 800 feet deep and contained a residence that became the home of Jake, Sr. and decedent. The portion south of Highway 90 fronts the Gulf of Mexico. A seawall generally runs east-west through the southern portion of the property. This seawall is approximately 140 feet south of the highway.

The purchase price of the Richardson property was $23,000. Of this amount, $13,000 came from a loan from the First Bank of Biloxi that was repaid immediately when the First Street property was sold. Jake, Sr. paid the balance of the $23,000.

Soon after the Richardson property was purchased, John began to fill in a ravine on the property. Jake, Sr., Jake, Jr., John, and their acquaintances then constructed a brick building on the southern portion of the Richardson property and installed the kitchen equipment they purchased from the Coast Guard. They opened the Fiesta Restaurant and Lounge in this building in April 1951.² The funds for the materials used to build the Fiesta were borrowed from the suppliers and paid for from the profits of the business. During 1952 the building was enlarged and changed to a lounge called "The Fiesta Sand Bar."

Jake, Sr., Jake, Jr., and John ran the business as a partnership under the name of Jake Mladinich and Sons. The partners in Jake Mladinich and Sons never executed a written partnership agreement.

In 1954 Jake, Sr. and decedent acquired several more pieces of property. One parcel was the beach side of Lot 8 of the L.A. Frederick Survey adjacent to the Richardson property. Another parcel was acquired from Charles and Derinda Frazier on Pat Harrison Avenue. A third parcel, also on Pat Harrison Avenue, was acquired from Gustave and Mrs. Lou Wellbat.

In 1955 the partnership constructed and began operation of the Party Store on the north side of the Highway 90 in front of the Mladinich residence. The Party Store was a retail package liquor store. Also in 1955, the partnership began operation of the Hot Stop restaurant on Pat Harrison Avenue.

In 1957, the partnership began construction of the Cabana Beach Motel on the southern portion of the Richardson property between the Fiesta Lounge and the beach. It started operation of the motel in 1958.

In 1959, a wing was added to the Fiesta Lounge for a restaurant named the Sirloin Room which commenced business about September 1, 1959. The restaurant was renamed the Sea `n' Sirloin Restaurant. During the 1960s, this restaurant was moved to a new building west of the Fiesta and was not on the Richardson property.³

At some point in time the northernmost portion of the Richardson property was leased to the owners of the adjacent property, and tennis courts were built by the tenants.

For the tax year 1951, Jake Mladinich and Sons filed a partnership tax return under the name of the Fiesta Restaurant and Lounge. The return indicates the partnership was formed on April 9, 1951, and was a "new business firt [sic] partnership return." The return listed Jake, Sr., Jake, Jr., and John as equal partners. The partnership filed a partnership tax return for 1952 under the name of the Fiesta Sand Bar which set forth the claimed expenses in detail. No expenses were claimed for depreciation on the building, and no land is included in the partnership assets on the balance sheet. This return also identified Jake, Sr., Jake, Jr., and John as equal partners.

While the Federal information returns for the partnership and the Federal joint income tax returns of decedent and Jake, Sr. for the subsequent years are not paradigms of consistency, none of the partnership returns filed from 1951 to 1956 list the Richardson property as a partnership asset. For example, the partnership and individual returns for 1953 and 1954 show rent deducted on the partnership return and rental income on the joint return of decedent and Jake, Sr. On its partnership return for 1955 the partnership (using the name Jake Mladinich & Sons) reported income and expenses from the Fiesta Sand Bar, the Party Store, and the Hot Stop restaurant. No rent expenses were claimed. The depreciation schedule shows a total cost of depreciable assets of $38,227.82 and does not include any buildings. The balance sheet includes assets of $38,227.82 under the heading "Buildings and other fixed depreciable assets." No land is included in the partnership assets. The partnership again identified Jake, Sr., Jake, Jr., and John as equal partners.

The 1956 partnership return presents a different pattern. A partnership return was filed using the name Fiesta Restaurant and Lounge for 1956. A rent expense of $3,600 was claimed and no depreciation expense was claimed. Only Jake, Jr. and John are listed as partners on this return. A second partnership return using the Party Store name was also filed for 1956. A rent expense of $600 was claimed. The depreciation schedule provides, "All fixed assets leased." The balance sheet does not include any depreciable assets or land as assets. Decedent is listed as a partner in the partnership in addition to Jake, Sr. and Jake, Jr. A third partnership return using the name Hot Stop restaurant was filed for 1956. A rent expense of $2,800 was claimed. The depreciation schedule provides, "All fixed assets leased." The balance sheet does not include any depreciable assets or land as assets of the partnership. An individual identified as A.L. Rice and John are shown as equal partners.

Jake, Sr. died intestate on March 20, 1967. Under Mississippi law, his estate generally passed to his wife and two sons in equal shares. Legal title to the Richardson property, however, as property owned by tenants by the entireties, passed to decedent. A Federal estate tax return filed for Jake, Sr.'s estate reported ownership by him of one-third of the partnership of Jake Mladinich and Sons, the Party Store and a "Family residence, West Beach, Biloxi". The residence and Party Store...