Getty v. Comm'r of Internal Revenue

• Decision Date: 27 July 1988
• Docket Number: Docket No. 18726-85.
• Parties: JEAN RONALD GETTY and KARIN GETTY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

91 T.C. 160

91 T.C. No. 16

JEAN RONALD GETTY and KARIN GETTY, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18726-85.

United States Tax Court

Filed July 27, 1988.

Petitioner sued the residuary beneficiary of his father's estate, claiming an unfulfilled promise for a bequest of property. The litigation was settled for a lump sum payment. HELD: (1) The form of the action filed by petitioner was not controlling. (2) The payment was not shown to be exempt under section 102(a), I.R.C., as amended. (3) The amount received is taxable at ordinary rates. Philip S. Magaram and Mark S. Levin, for the petitioners.

Charles W. Jeglikowski and John O. Kent, for the respondent.

COHEN, JUDGE:

Respondent determined a deficiency of $6,883,975 in petitioners' Federal income tax for 1980. After concessions, the issues for decision are (1) whether petitioner Jean Ronald Getty's receipt of $10 million in settlement of his claim against the residuary beneficiary of his father's estate was exempt from taxation as a gift, bequest, devise, or inheritance, and, if not, (2) whether petitioner Jean Ronald Getty's receipt of the $10 million was attributable to the sale or exchange of a capital asset.

The family members discussed in this opinion are designated by their initials as follows:

+---------------------------------+
                ¦       ¦Petitioner's grandparents¦
                +-------+-------------------------¦
                ¦GG, Sr.¦George Franklin Getty    ¦
                +-------+-------------------------¦
                ¦SCG    ¦Sarah C. Getty           ¦
                +-------+-------------------------¦
                ¦Helmle ¦Otto Helmle              ¦
                +---------------------------------+
                

    Petitioner's parents
                JPG Jean Paul Getty
                AHG Adolfine (Fini) Getty
                

    Petitioner's brothers
                GFG George Franklin Getty (born 1924, died 1973)
                EPG Eugene Paul (Paul, Jr.) Getty (born 1932)
                GPG Gordon Peter Getty (born 1933)
                TWG Timothy Ware Getty (died 1958)
                

FINDINGS OF FACT

Some of the facts have been stipulated, and the facts set forth in the stipulation are incorporated in our findings by this reference. Jean Ronald Getty (petitioner) and Karin Getty resided in California when their petition was filed.

Petitioner is the son of J. Paul Getty (JPG) and Adolfine Getty (AHG). On December 31, 1928, JPG, then 36 years of age, married AHG, an 18-year-old German national whom he had met in Europe. AHG was JPG's third wife. He brought her to live in the United States, but she returned to Germany in 1929 as a result of her mother's death. She then decided to remain in Germany. Petitioner was born in Germany on December 19, 1929.

George Franklin Getty (GG, Sr.), JPG's father, died on May 31, 1930, leaving an estate valued at approximately $10.8 million. In his Will, GG, Sr. left $500,000 outright to JPG, $300,000 in trust for George Franklin Getty (GFG) (then 5 years old), and the residue of his estate to his wife Sarah C. Getty (SCG), JPG's mother.

AHG's father, Otto Helmle (Helmle), had negotiated a prenuptial agreement for her in 1928. In December 1930, JPG and AHG began discussing divorce. AHG negotiated improvements to the prenuptial agreement in May 1931. JPG obtained a Mexican divorce in 1932. In May 1933 the prenuptial agreement was amended again. In 1934 AHG sought a further improvement in the prenuptial agreement and attacked the validity of the Mexican divorce.

By 1934, JPG had remarried and had two sons by his fourth wife. In a letter to Helmle dated November 20, 1934, discussing AHG's request for an improvement in the agreement and her attack on the validity of the divorce, JPG threatened that if AHG brought him ‘worry, anxiety, and trouble,‘ he would not be disposed to leave petitioner a large sum of money and it would be ‘most unfortunate‘ for petitioner's future. Less than one month prior to that letter, JPG had executed a codicil to his Will, reducing petitioner's bequest to $5,000. Prior to the execution of that codicil, petitioner would have been treated equally with JPG's other children under the Will and its codicils.

In 1934 JPG owned all the capital stock of a corporation then named George F. Getty, Incorporated, the predecessor of Getty Oil Company (Getty Oil). JPG's mother owned five $500,000 promissory notes made by the corporation and payable to her. On Christmas Day 1934 in Los Angeles, JPG and his mother entered into an oral agreement for the joint establishment of an irrevocable inter vivos spendthrift trust (the 1934 Trust) to which each, as a trustor, would contribute assets. JPG agreed to contribute and/or sell about $1,000,000 of his stock in George F. Getty, Incorporated; his mother agreed to contribute the $2,500,000 of promissory notes.

The 1934 Trust was created as a vehicle to transfer control of the Getty family oil business to JPG, who was named trustee of the Trust, while providing his mother with assurance as to the financial security of JPG and his issue. The trust provided that the income would be paid to JPG during his lifetime and then to his children or their descendants in certain proportions. The 1934 Trust also provided that JPG could waive income in whole or in part. Should he so renounce his income interest during his lifetime, and with respect to all of the 1934 Trust's income following JPG's death, such income was to be allocated annually as follows: $9,000 each to his third and fourth sons, Eugene Paul Getty (EPG) and Gordon Peter Getty (GPG) (or their respective issue); $3,000 to petitioner (or his issue); and the remainder of the 1934 Trust's income equally to EPG, GPG, GFG, and any after-born child of JPG (or their respective issue). Thus, petitioner's half brothers (or their issue) shared equally in income distributions from the 1934 Trust after distribution of the first $21,000. GFG did not share in the first $21,000 of income from the 1934 Trust because he was the only grandchild provided for in the Will of GG, Sr. Petitioner's income interest was limited in all events to $3,000 per year.

The 1934 Trust provides that it will terminate upon the death of the last to survive of JPG's sons. The then corpus of the 1934 Trust will be divided among all of JPG's grandchildren, per stirpes, with the same share to petitioner's children as to the children of the other sons.

On December 31, 1934, JPG executed a document waiving his right to income from the shares of stock he sold and/or contributed to the 1934 Trust. The effect of the waiver, under the terms of the 1934 Trust, was that approximately 20 percent of the income of the 1934 Trust was paid to income beneficiaries other than JPG during JPG's lifetime.

In 1935, at JPG's request, AHG and petitioner returned to California from Germany. On July 27, 1935, JPG executed a new Will providing equally for petitioner with his other children.

JPG's mother, SCG, developed a close relationship to AHG and petitioner from 1935 until SCG's death on December 26, 1941. In 1941 JPG and SCG executed a supplement to the 1934 Trust. The supplement stated that the reason for petitioner's income interest being limited to $3,000 per year while his half brothers basically shared equally in the 1934 Trust's income (the Inequality) was that petitioner was expected to inherit directly or indirectly from Helmle, who was then reputed to be wealthy.

At the time of AHG's marriage to JPG, Helmle was wealthy by German standards, but he lost his position as Director General of a public utility known as Badenwerks when the Nazis came to power in January of 1933. He was jailed in the Fall of 1937 and turned his assets over to the German government to avoid a prison term. He never regained his wealth. Petitioner never inherited anything from or through Helmle.

JPG was generally aware of Helmle's financial situation and of his problems with the Nazis when the 1934 Trust was executed, but SCG may not have been. When the 1934 Trust was executed, JPG was upset with AHG's financial demands and her attack on the validity of their divorce. He was also unhappy about petitioner's living in Germany.

In 1940 it was discovered that the 1934 Trust did not contain language declaring it to be irrevocable. If the 1934 Trust was revocable, SCG's contribution to the 1934 Trust might have been included in SCG's estate for Federal estate tax purposes. SCG wrote a letter (drafted by SCG's attorneys) to JPG in 1940 indicating that it was her intention at the time of the creation of the 1934 Trust that the 1934 Trust be irrevocable; but that, if the 1934 Trust was revocable, SCG wanted to revoke the 1934 Trust and dispose of her share of the trust estate ‘in a manner which is more pleasing to me at present than now provided by the Declaration of Trust.‘ In 1940, the value of the 1934 Trust was approximately $9,400,000. By 1940 both SCG and JPG knew of Helmle's loss of income and assets.

On May 20, 1940, JPG, individually and as trustee of the 1934 Trust, brought an action (Getty I) against SCG and his four sons to declare the 1934 Trust irrevocable. Petitioner, then 11 years old, was represented in Getty I by his mother, AHG, as his guardian ad litem. Getty I was ‘friendly‘ litigation and was instituted and decided in only 11 days. The 1934 Trust was declared irrevocable on May 31, 1940.

AHG, as guardian for petitioner, learned for the first time about the 1934 Trust and the Inequality in Getty I. At JPG's request, she consulted with the law firm of Gibson, Dunn & Crutcher. AHG refused to sign and deliver pleadings in Getty I that JPG asked her to sign until after she obtained JPG's assurance that he would see to it that the Inequality was eliminated.

Soon after Getty I, JPG's attorneys drafted a new Will for SCG. Correspondence between David Hecht (Hecht) (attorney for JPG and Getty Oil), David Staples (Staples) (in-house counsel for Getty Oil), and Thomas Dockweiler (attorney for JPG and SCG) in June, July, and August 1940 dealt with SCG's Will and a proposal to eliminate the Inequality.

SCG executed a Will on August 7, 1940, providing for...