Estate of Stubblefield v. Commissioner

• Court: U.S. Tax Court
• Writing for the Court: BRUCE
• Citation: Estate of Stubblefield v. Commissioner, 42 T.C.M. (CCH) 342, 1981 TC Memo 353 (T.C. 1981)
• Decision Date: 06 July 1981
• Docket Number: Docket No. 3397-77.
• Parties: Estate of J. Britton Stubblefield, Deceased, Richard B. Stubblefield and Ruby Harper, co-executors v. Commissioner.

42 TCM (CCH) 342

1981 TC Memo 353

T.C. Memo. 1981-353. Estate of J. Britton Stubblefield, Deceased, Richard B. Stubblefield and Ruby Harper, co-executors v. Commissioner.

Docket No. 3397-77.

United States Tax Court.

Filed July 6, 1981.

Quentin L. Housholder and Alan C. Housholder, 420 Stahlman Bldg., Nashville, Tenn., for the petitioner. Wesley J. Lynes, for the respondent.

Memorandum Findings of Fact and Opinion

BRUCE, Judge:

Respondent determined a deficiency of $308,924.98 in the Federal estate tax of the estate of J. Britton Stubblefield. After concessions by both parties,¹ the issues for our decision are:

(1) Whether the value of two farms transferred by J. Britton Stubblefield to his children in 1955 is includable in his estate under section 2036;²

(2) Whether petitioner was prejudicially surprised by respondent's attempt to include the farms in decedent's estate by way of a tandem application of sections 2036 and 2035, when such argument was raised for the first time on opening brief;

(3) If the farms are required to be included in decedent's estate under either or both of these provisions, what was the value of the larger farm at the date of death of decedent;³

(4) Whether a gift of 300 cattle by decedent to his children was in contemplation of death and therefore includable in his estate under section 2035; and

(5) Whether the value of a house built by decedent in 1950 on land owned by his daughter and her husband is includable in his estate under section 2036.

Findings of Fact

J. Britton Stubblefield (hereafter decedent) died on March 5, 1974, a legal resident of Hartsville, Trousdale County, Tennessee, at age 95. Both Richard B. Stubblefield, decedent's son (hereafter Richard), and Ruby Harper, decedent's daughter (hereafter Ruby), co-executors of decedent's estate, were legal residents of Hartsville when the Federal estate tax return was filed for petitioner. The return was filed with the Internal Revenue Service Center in Memphis, Tennessee.

Decedent's last will and testament was executed on September 28, 1955, less than four weeks after he suffered a heart attack (myocardial infarction) on September 3, 1955, at age 77. From that date until October 1973, decedent suffered no further attacks. He was, however, diagnosed as having arteriosclerotic heart disease with angina pectoris, or, in layman's terms, hardening of the arteries accompanied by chest pains, on August 31, 1961. Twelve years later, in October 1973, at age 95, decedent suffered another heart attack (coronary thrombosis). Because of this attack, decedent was treated and attended by Dr. E.K. Bratton for the first time. After the second attack, decedent's physical activities, already restricted somewhat by his age and physical abilities, were restricted further by Dr. Bratton. Decedent soon regained most of his physical abilities and activity. Dr. Bratton later described decedent's ailment at that time as progressive and incurable, but noted that, prior to February 1974, decedent's symptoms were not severe enough to make decedent aware of the gravity of his condition. Until February 1974, the time of decedent's last illness, decedent's mental condition remained good, even though his physical activities had been limited. From February to March 1974 decedent's mental and physical condition worsened. He died of an attack of anterior myocardial infarction on March 5, 1974.

On January 15, 1955, decedent and his wife, Agnes, conveyed two farms, one of 550 acres (hereafter Halltown farm) to Richard and one of 491 acres (hereafter River farm) to Ruby. Both of these transfers were reported on a gift tax return filed by decedent for the taxable year 1955. Decedent continued to use these farms for his livestock and crops, however, from January 1955 to May 1973. Although no written agreement existed concerning decedent's continued use of the two farms, decedent did deduct as rent for the farms certain payments made one-half each to Richard and Ruby from 1968 to 1972, as follows:

  Year                    Rent
                  1968 ............... $10,000
                  1969 ...............  10,000
                  1970 ...............  12,000
                  1971 ...............  10,000
                  1972 ...............  10,000
                

No payments were made before 1968. These rentals compared favorably with rent paid by other farmers for similar acreage in the surrounding locality.

During his use of the two farms decedent deducted taxes and insurance payments relating to the farms, farm buildings and farm equipment, and, at least from 1968 to 1972, he also deducted depreciation on the farm buildings, a well and some fences. Until 1973 decedent was shown on Department of Agriculture records as owner and operator of the single tobacco allotment of 30,000 pounds assigned between the two farms. Rental value of the allotment was approximately $7,500 during the years in question. Operation of the tobacco allotment, that is, raising and selling of the tobacco quota, was in the name of the decedent until July 6, 1973, when it was changed to Richard and Cecil (Ruby's husband). Ownership of the allotment, synonymous on the records with land ownership, was listed in decedent's name until it was divided between Richard and Cecil in January 1974.

While decedent was using the Halltown farm, a tenant house on the property was destroyed by fire. The structure was rebuilt to Richard's specifications and at his expense in 1972. Later that year Richard was reimbursed by decedent for the construction expenses, which amounted to $8,351.26. In 1968, Richard sold 30 acres of the Halltown farm, without decedent's permission, and executed a warranty deed for the conveyance. Prior to 1973 Richard made repairs to buildings and fences on the Halltown farm and used the Halltown farm for grazing some of his cattle and pigs. Further, from 1968 to 1973 Richard tended all of decedent's cattle on the Halltown farm, as decedent lost interest in farming. After May 1973 decedent completely ceased working the crops and livestock on the Halltown farm and no longer received any income from the property.

In 1968, Ruby and Cecil sold timber from the River farm. Some of the proceeds from the sale were reinvested in the River farm. All other income from the River farm was received by the decedent until May 1973. Approximately two years prior to that time, Cecil took over the operation of the River farm for decedent's benefit, because decedent began to lose interest in the farm. Decedent returned to the River farm only once or twice in those years before his death. After May 1973 all income from the farm was received by Ruby and Cecil. The value of the River farm at decedent's death was $172,400.

On May 14, 1973, decedent transferred his 300 head of cattle, 150 head each, to Richard and Ruby. The 300 head of cattle had a fair market value of $60,000 at the date of decedent's death. The transfers of the cattle were made in contemplation of death.

During 1950, decedent had a house built, at his expense, on land owned by Ruby and Cecil. Prior to construction a house on the lot had to be torn down. Decedent used some of the salvaged materials to build other buildings on land that he owned in another part of the town. In 1951, decedent and his wife, Agnes, moved into the new house on the land of Ruby and Cecil and lived there until decedent's death and Agnes' subsequent move to a nursing home. At no time did decedent or Agnes pay rent to Ruby and Cecil for the house or the land on which it was situated. Decedent was not reimbursed by Ruby and Cecil for the new house, the value of which was $25,000 at decedent's death.

Opinion

The first issue for our decision is whether the value of the Halltown and River farms must be included in decedent's gross estate. In his statutory notice of deficiency respondent specified section 2036⁴ as the sole basis for inclusion of these properties, as follows:

(a) It is determined that the value of 550 acres of farm property the Halltown farm, deeded by decedent on January 15, 1955, to his son, Richard B. Stubblefield, is includable in the decedent's gross estate under the provisions of section 2036 of the Internal Revenue Code, since the decedent retained the possession, enjoyment of, and the right to the income from the property during his lifetime. It is further determined that the fair market value of the 550 acres of property was $467,500.00 or $850.00 per acre, at date of death on March 5, 1974.

(b) It is also determined that the value of 491 acres of farm property the River farm, deeded by decedent on January 15, 1955, to his daughter, Ruby S. Harper, is includable in the decedent's gross estate under the provisions of section 2036 of the Internal Revenue Code, since the decedent retained the possession, enjoyment of, and the right to the income from the property during his lifetime. It is further determined that the fair market value of the 491 acres of property was $341,245.00, or $695.00 per acre, at date of death on March 5, 1974.

Neither the pleadings nor respondent's opening statement at trial gave any indication that anything other than section 2036 was applicable with respect to the farms. On opening brief, however, respondent conceded that a literal application of section 2036 would not trigger inclusion of the farms in decedent's gross estate because decedent did not retain a possessory or income interest therein "for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death," as required by section 2036(a). Having realized the legal insufficiency of his argument, respondent then sought to include the farms in decedent's gross estate by way of a tandem application of sections 2036(a) and 2035.⁵ Under this approach respondent contends that decedent relinquished his interest in the properties in contemplation of death under section 2035, and that the value of the interest required to be included in the gross estate is...