Kincaid v. Commissioner

• Decision Date: 12 November 1986
• Docket Number: Docket No. 14706-82.
• Citation: 1986 TC Memo 543,52 TCM (CCH) 1003
• Parties: Estate of Nelle W. Kincaid, Deceased, Jane K. Johnson and Joan D. Kincaid, Co-Executrices v. Commissioner.
• Court: U.S. Tax Court

52 T.C.M. (CCH) 1003 (1986)

T.C. Memo. 1986-543. Estate of Nelle W. Kincaid, Deceased, Jane K. Johnson and Joan D. Kincaid, Co-Executrices v. Commissioner.

Docket No. 14706-82.

United States Tax Court.

Filed November 12, 1986.

Paul E. Sullivan, James Park, Jr., Lexington, Ky., C. Christopher Trower and Scott W. Dolson, for the petitioner. Andrew W. Winkler, for the respondent.

Memorandum Findings of Fact and Opinion

COHEN, Judge:

Respondent determined deficiencies of $106,882.83 and $18,431.14 in Nelle W. Kincaid's Federal income taxes for 1978 and 1979, respectively. After concessions,¹ the remaining issue concerns the deductibility of certain legal fees paid by Nelle W. Kincaid during the years in issue.

Findings of Fact

Some of the facts have been stipulated. The facts set forth in the stipulation are incorporated in our findings by this reference.

Nelle W. Kincaid (Nelle Kincaid) resided in Lexington, Kentucky, at the time her petition was filed. She filed 1978 and 1979 Federal income tax returns with the Internal Revenue Service Center in Memphis, Tennessee. She died in June 1984, and her estate was substituted in this case as petitioner. She was survived by two daughters (the daughters), who were her sole beneficiaries.

In February 1964, Nelle Kincaid's husband, Garvice D. Kincaid (Garvice Kincaid), executed a Trust Agreement (the Trust) in which he agreed to transfer certain of his holdings and other property to Central Bank and Trust Company (Central Bank), the trustee. The trustee was bound to follow the advice and instructions of an Advisory Committee. In general, the trustee was required to "pay the net income from such property in monthly installments or otherwise as it is instructed by the Grantor Garvice Kincaid to or for the benefit of the Grantor for and during his lifetime."

Upon the death of Garvice Kincaid and if he were survived by Nelle Kincaid, the trust estate, which included the principal and income already in the Trust as well as the property passing to the Trust from Garvice Kincaid's estate, would be divided into a marital part and a nonmarital part pursuant to the instructions and directions of the Advisory Committee. The Advisory Committee would allocate the estate's assets as necessary to achieve maximum benefit of the allowable estate tax marital deduction. The marital part would then be divided, pursuant to the sole discretion of the Advisory Committee, into two separate trusts of equal shares designated Fund A and Fund B. The remainder of the trust estate, the nonmarital part, would become a trust designated Fund C.

In such case, the trustee was directed to pay the net income from Fund A to Nelle Kincaid during her lifetime. She had the additional right to receive out of Fund A as much as $20,000 of principal per year provided she executed a written request, and she also had the power to appoint the principal of Fund A upon her death. At its discretion, the Advisory Committee could direct to Nelle Kincaid (during her lifetime) the payment of any amount of principal from Fund A or any amount of net income or principal from Fund B. Upon the death of Nelle Kincaid, the accumulated income and principal of Fund B would be distributed to the executors of her estate. Distributions of income or principal out of Fund C also rested within the sole discretion of the Advisory Committee. Eligible recipients under Fund C included Nelle Kincaid, the daughters, and a few others who met specific conditions.

Pursuant to an Amendment to the Trust dated February 4, 1967, the members of the Advisory Committee, to be composed of three individuals, were specified as were three successors, none of which included Nelle Kincaid or the daughters. The amendment also included the following provision:

It is the Grantor's express desire to have as members of this Advisory Committee, persons who are employed by, represent, have financial interests in, or receive compensation from, corporations in which the trusts created by this Trust Agreement have, or are likely to have, financial interests; therefore, any such employment, representation, or financial interests shall not disqualify a person from being, becoming or remaining a member of the Advisory Committee.

Garvice Kincaid died testate in November 1975. At the time of his death Garvice Kincaid was an attorney, a businessman, and a financier who maintained stock holdings in insurance companies, finance companies, and more than 20 banks. Among the insurance companies was Kentucky Central Life Insurance Company (KCLI), in which Garvice Kincaid owned 800 of the 961 shares of voting common stock then outstanding. One of the banks, Central Bank and Trust Company (Central Bank), was the executor of his estate.

An Estate Tax Return was filed for the estate of Garvice Kincaid in August 1976. The return reported a total gross estate of approximately $16,000,000. Schedule M of the return described the following bequests to Nelle Kincaid (surviving spouse):

                1. Residence .................... $  100,000
                2. Insurance Proceeds ...........    261,667
                3. Employment Contract ..........    350,000
                4. Interest in Marital Trust ....  3,597,111
                                                  __________
                                                  $4,308,778
                

Because Garvice Kincaid was survived by Nelle Kincaid and the daughters, the Trust provisions described above came into play. Due to the size of the estate and other outside factors, however, implementation of the estate plan described in Garvice Kincaid's will and Trust Agreement was a slow process. At the time of trial of this case in February 1986, only a portion of the estate had been distributed to the trustee.

Nelle Kincaid's personal attorney prior to and during the years in issue was Paul E. Sullivan (Paul Sullivan). Regarding Nelle Kincaid's rights under the administration of the Garvice Kincaid estate and Trust, Paul Sullivan's initial representation included attempts to gather information from the estate, to persuade the Advisory Committee and trustee to convert nonearning assets into earning assets, and to determine the extent, if any, to which there had been waste and breach of fiduciary duty and conflicts of interest. In spite of these efforts, which included negotiations and conferences with both the Advisory Committee and the trustee, Nelle Kincaid received and continued to receive proportionately less income from the Trust than she believed was her entitlement.

In about December 1977, Nelle Kincaid employed the law firm of Barnett & Alagia to assist her in asserting her rights and legal claims under the Trust. Paul Sullivan provided Barnett & Alagia with research and other background documents regarding the Trust and coordinated with Barnett & Alagia in their efforts to evaluate Nelle Kincaid's situation and make recommendations. Ultimate goals included a fair administration of the Trust to the intended beneficiaries and, concatenate thereto, an increase of Nelle Kincaid's income distribution. Prospective strategies included the possibility of litigating the Trust administration and the breaches of fiduciary duty and the possibility of obtaining independent valuations of the Trust assets.

In connection with the unsatisfactory income distributed to Nelle Kincaid, she and the attorneys were suspicious of a low valuation of certain assets as reported on the estate tax return and as transferred to the Trust, namely the KCLI stock transferred into Fund C. Nelle Kincaid and her attorneys believed that a proportionately low amount was transferred, pursuant to the Trust formula, into the marital part, from which Nelle Kincaid was entitled to annual mandatory income distributions (out of Fund A). Moreover, Nelle Kincaid believed that the Advisory Committee was acting not to benefit her but rather themselves. For example, members of the Advisory Committee placed themselves at the head of corporations in which the Trust held an interest. Also, the only member of the Advisory Committee who Nelle Kincaid felt was friendly toward her resigned in 1976 or 1977.

At some time during the years in issue, at least one company offered to buy the KCLI stock, but no offer was accepted. In 1978, Nelle Kincaid paid Davidge & Company (Davidge), a firm located in Washington, D.C., to give its opinion of the date of death value of the KCLI common stock, which was valued at $485,000 on the estate tax return. In a letter dated April 5, 1978, Davidge described three approaches to value from which it concluded respective values of the block of stock of roughly 4, 20, and 80 times the value reported on the estate tax return.

On December 12, 1978, a memorandum to Nelle Kincaid was prepared by Barnett & Alagia and initialed by Ronald A. Gaffney (Gaffney), an attorney with Barnett & Alagia. It described various aspects of a potential lawsuit against certain members of the Advisory Committee as well as certain members of the boards of directors of Central Bank and KCLI. Included in the memorandum were various options in terms of jurisdiction and venue and a discussion of proposed allegations. The proposed complaint (1) alleged, among other things, violations of the Investment Advisory Act of 1940, conflicts of interest, breaches of fiduciary duty, and mismanagement and (2) sought, among other things, a preliminary injunction ordering the KCLI stock to be sold and a declaration of the rights of the parties under the Trust Agreement. At about that time, however, Nelle Kincaid, as a result of the financial strain, the emotional strain, and the notification she received that the Internal Revenue Service intended to challenge the deductibility of her legal fees, elected to postpone any further pursuit of litigation.

During the years in issue, Paul Sullivan defended Nelle Kincaid in a lawsuit regarding title to one or more paintings. Nelle Kincaid also paid legal fees to Gess, Mattingly, Sounier & Atchinson (GMSA) during the years in issue.

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