Estate of Starkey v. U.S.

Decision Date26 April 1999
Docket NumberNo. IP 98-0343-C M/S.,IP 98-0343-C M/S.
Citation58 F.Supp.2d 939
PartiesESTATE of Kenneth E. STARKEY, Plaintiff, v. UNITED STATES of America, Defendant.
CourtU.S. District Court — Southern District of Indiana

Stephen K. Miller, Cremer Miller & Burroughs, Indianapolis, IN, for plaintiff.

Kevin P. Jenkins, Tax Division-U.S. Dept. of Justice, Washington, DC, for U.S.

ORDER

McKINNEY, District Judge.

This matter is before the Court on cross motions for summary judgment filed by the parties on December 9, 1998. At issue is whether the Estate of Kenneth E. Starkey (the "Estate") is entitled to a refund of estate taxes paid after the Internal Revenue Service (the "IRS") disallowed its claimed charitable and marital deductions. Also pending are two collateral motions, a motion to strike the testimony and report of plaintiff's expert witness, Dr. Lynn Franken, and a motion to compel responses to deposition questions, filed by defendant on March 31 and April 7, 1999, respectively. Because the Court has resolved all of the pending issues in this matter in its decision below, the collateral motions are deemed moot.

Having fully considered the arguments and evidence presented by both parties, and for the reasons given below, the Court GRANTS the defendant's motion for summary judgment with respect to all issues. The Estate's motion for summary judgment is correspondingly DENIED.

I. BACKGROUND

On February 28, 1990, Kenneth E. Starkey ("Kenneth") died after suffering an acute heart attack, following a series of strokes. Def's Ex. 3, Certificate of Death. He was survived by his spouse, Norma Jeanne Starkey, 55, three daughters, Cynthia Starkey Robinson, 30, Theresa Carole Starkey, 27, Carrie Jeanne Starkey, 17, and a son, Christopher Kenneth Starkey ("Christopher"), 29. At the time of his death, Kenneth had accumulated close to four million dollars' worth of real and personal property, a portion of which he attempted to bequeath to a church in Chicago and a college in Tennessee. Kenneth turned to his son Christopher, who is an attorney, to prepare the necessary documents to fulfill his charitable intentions. See Plf's Ex. 2, Petition for Probate of Will and Issuance of Letters. Christopher was a solo practitioner in Fort Wayne at the time he drafted his father's will, and at no point did he claim to have any estate-planning expertise. See In re Estate of Kenneth E. Starkey, 49DO8-9003-ES474, Transcript at 7-8. In addition to serving as the scrivener of the will, Christopher was also appointed as its executor and served as the attorney for the estate from 1990 until March 20, 1996, when he signed a power of attorney and declaration of appointment of outside counsel. See Def's Ex. 19, "Power of Attorney and Declaration of Representative."

Kenneth's will was executed on January 27, 1990, and amended by a codicil executed on February 4, 1990. Compl., Ex. B; Def's Exs. 1, 2 (hereafter "Will"). According to the will, Kenneth bequeathed one-third of his estate to his wife. Will, Item III, 3.01. He also made specific devises to each of his four children, and bequeathed $400,000.00 to Christopher to be held in trust for the education of the "issue of Curt and Marianne Bannister, Cynthia Starkey Robinson, Christopher Kenneth Starkey, Theresa Carole Starkey, and Carrie Jeanne Starkey." Will, Item IV. Kenneth bequeathed the residue of the estate to his wife, three daughters and Christopher to be held in trust for certain designated charitable purposes. Will, Item V. For these reasons, the Estate claimed both marital and charitable deductions on its estate tax return, filed with the IRS on July 6, 1993. Def's Ex. 3, Form 706, United States Estate Tax Return (hereafter "Form 706"). The estate tax return had been due in November of 1990, and its lateness subjected the Estate to delinquency fees. See 26 U.S.C. 6075; 26 C.F.R. 20.6075-1; 26 U.S.C. § 6651.

In its 1993 tax return, the Estate listed Kenneth's total gross estate as $3,896,670.00, from which it claimed a total of $3,717,441.00 as allowable deductions, leaving a taxable estate of $179,229.00. Form 706, ll. 1-3. After adding back any taxable gifts given between December 31, 1976, and the date of Kenneth's death, the total adjusted taxable estate was $274,129.00. Id., l. 5. Based on that amount, the Estate claimed a tentative estate tax bill of $79,004.00. Id., l. 8. A unified credit of $192,800.00 is allowed against estate taxes imposed by the tax code for the benefit of the estate of every decedent, which credit may be adjusted downward under certain circumstances. See 26 U.S.C. § 2010(a), (c). The Estate claimed an adjusted unified credit of $186,800.00. Form 706, l. 13. After deducting this credit from the tentative amount of its tax bill, the Estate reported that it owed no estate taxes. Id., l. 21.

Among the deductions claimed against the gross estate were the marital and charitable deductions at issue in this dispute. Specifically, the Estate claimed a total charitable deduction of $1,365,051.00, and a marital deduction of $1,298,890.00, based on the specific and residuary bequests in the Will. Id., Scheds. M, O. The marital deduction included the value of one-half of the Starkey's residence in Indiana, the Florida condominium and its contents, and a 1989 Buick automobile, all of which were specifically included in the devise of one-third of Kenneth's estate to his wife. Id., Sched. M. Included in the charitable deduction were amounts representing the present value of a trust established during Kenneth's lifetime, and an amount equivalent to the residuary of Kenneth's estate, which was intended for a "charitable trust" for religious purposes. Will, Codicil, Item I.

On June 26, 1996, the IRS issued a "Notice of Deficiency" to the Estate, detailing adjustments the agency made to the taxable estate and assessing $520,178.00 in estate taxes, as well as a late filing penalty of $130,045.00 (25% of the taxes owed). Def's Ex. 4; see 26 U.S.C. § 6651. Among those adjustments, the IRS disallowed the entire charitable deduction claimed as a result of the testamentary trust, as well as the deductions claimed for the Florida condominium, its contents and the automobile. Approximately one year later, on June 6 and July 31, 1997, the Estate paid the additional assessed taxes, along with the corresponding penalties and interest, totaling $1,166,638.34. Compl. Ex. H, IRS Form 843, Claim for Refund.

More than two years prior to receipt of the IRS deficiency letter, the Starkeys had attempted to obtain a determination of federal tax exempt status under § 501(c)(3) for the "charitable" trust created by Kenneth's will. In response to that application, the IRS sent a letter, dated February 14, 1994, in which it informed the "Kenneth E. Starkey Religious Trust Fund" that the IRS required more information before it could determine the trust fund's status under federal tax laws. Plf's Ex. 2 at 26, Letter from Annette Klear dated Feb. 14, 1994. According to the letter, the information required to complete the trust fund's application for exempt status included an amendment to its "organizational document," which would clearly reflect that the trust fund was organized for exempt purposes. The relevant portions of the required amendment are:

Said organization is organized exclusively for charitable, religious, educational or scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) .... No part of the net earnings of the organization shall inure to the benefit of, or be distributable to its members, trustees, officers or other private persons ....

Upon the dissolution of the organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) ....

Plf's Ex. 2 at 27. In addition to making the required amendments to the trust document, the trust fund was directed to show that the amended document was "filed with the appropriate probate court." Id.

The 1994 letter also advised the trust fund that it would not qualify under § 509(a)(3) of the Internal Revenue Code because it was not "prohibited from benefiting organizations other than those listed in the Trust." Id. Another deficiency was that the beneficiaries of the trust were not empowered to enforce the trust and compel an accounting. Id. at 28. Unless the required information was submitted to the IRS within a specified period of time, the trust fund would be designated as a private foundation. Id. To overcome these problems in the "trust instrument," the Estate filed a Motion to Amend Testamentary Trust with the Marion Superior Court on June 21, 1994. Def's Ex. 5, In re Estate of Kenneth E. Starkey, 49DO8-9003-ES 474, Motion to Amend. In it, the Estate sought to add the required language from the IRS's February letter to amend the "charitable trust contained in Item V of decedent's will," and to further modify the section by naming only specific beneficiary organizations and granting them the right to demand an accounting for the trust's income and assets. Id. Deleted from section 5.02 was the language at issue in this dispute, "missionaries preaching the Gospel of Christ." Id.

Neither party has provided the Court with documents that indicate the disposition of this motion by the Marion County Superior Court. However, the evidence submitted by the defendant includes subsequent correspondence between the Estate's attorney, Christopher, and an IRS attorney, P. Steven Ley, regarding the taxability of the bequest to the alleged religious charitable trust. Def's Ex. 5; Def's Reply Brf. in Further Supp. of its Mot. for Sum. J., Ex. 20, Decl. of P. Steven Ley. The result of that correspondence was that the IRS sought and obtained a National Office Technical Advice Memorandum on the issue of whether the charitable remainder interest in the...

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