Kuhn v. United States
| Decision Date | 21 April 1975 |
| Docket Number | Civ. A. No. 72-H-165. |
| Citation | 392 F. Supp. 1229 |
| Parties | Bedie L. KUHN, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Southern District of Texas |
COPYRIGHT MATERIAL OMITTED
Allen E. Pye, Pye & Dobbs, Tyler, Tex., Robert L. Waters, Chamberlain, Hrdlicka, White & Waters, Houston, Tex., for plaintiff.
Edward B. McDonough, Jr., U. S. Atty., Houston, Tex., Lawrence R. Jones, Jr., Tax Div., Dept. of Justice, Dallas, Tex., for defendant.
This is a suit for tax refund. All the facts have been stipulated by the parties, and the case has been submitted to the Court for resolution. Jurisdiction is proper in this Court pursuant to 28 U. S.C. § 1346(a). The case presents one legal question: may a taxpayer-surviving spouse who with the decedent spouse transferred all community property to a trust in exchange for receipt of a life estate payable from the trust commencing after the decedent spouse's death amortize the cost basis of the life estate payments over the surviving spouse's life expectancy? This question is one of first impression in this Circuit1 and has been precisely addressed by few other courts.2
This Court has consulted available judicial and scholarly authority as well as the legislative history of the relevant statutes, and has evaluated the memoranda and affidavits submitted by both parties. After thorough consideration, and for the reasons stated herein, this Court concludes that the taxpayer is entitled to amortize the cost basis of life estate payments that she received from the trust established in this case. Accordingly, she is entitled to the refund previously stipulated to by the parties.
The material facts of this case are contained in the stipulation. See Stipulation of Facts (March 30, 1973). Where necessary, this Court will refer to other relevant documents. For purposes of clarity, plaintiff will be referred to as the "taxpayer", and the defendant will be referred to as the "Government".
This suit was filed for the refund of income taxes and interest for the calendar years 1965, 1966 and 1967. The taxpayer timely filed individual income tax returns for those years. On March 27, 1969, the taxpayer timely filed amended individual income tax returns for those years, requesting a refund of $973.46 for 1965, $954.13 for 1966 and $1,129.48 for 1967. Taxpayer premised her request for refunds on § 167 of the Internal Revenue Code, 26 U.S.C. § 167, which provides for a deduction from income tax for the expense of depreciation of a life estate.3 On February 11, 1970, the Commissioner isued a statutory notice of claim disallowance for each requested refund, pursuant to § 273 of the Internal Revenue Code, 26 U.S.C. § 273.4
During the years in issue — 1965, 1966 and 1967 — taxpayer resided as a widow in Sugarland, Texas. She and her husband (decedent) were married in 1919. They had no children, although decedent had two children by a former marriage. All of the significant property holdings of the marriage were community property.
On February 25, 1959, taxpayer's husband died leaving a will which he had executed in 1958. Reference was made in this instrument to a trust created between taxpayer and her husband in 1942. This trust agreement established a trust consisting of all the property owned by the spouses. The trust was established on July 31, 1942, to provide for the needs of the surviving spouse in the event of the prior death of the decedent spouse. The obsolescence of some of the terms and provisions of the 1942 trust agreement necessitated its modification, which was accomplished by an agreement signed on August 31, 1946. Decedent and taxpayer were trustors of this agreement, and decedent was also designated as trustee. On November 3, 1958, decedent re-stated his intentions as to the trust property in the form of a declaration of last will and testament referred to above. This latter document specifically provided for the administration of a trust which consisted of all the assets and things of value belonging to decedent's estate as well as all community property, "Mrs. Kuhn (Taxpayer) having relinquished all community rights by contract". See 1958 Will at 1, ¶ 3.
On April 6, 1959, after decedent's death, his survivors, being the taxpayer and her two step-children, Harry M. Kuhn and Nell Katherine Kuhn Wilcox, along with Mrs. Wilcox' husband, E. David Wilcox, executed a document reciting the substance of the 1942 trust agreement as revised, the foundation for the consideration and establishment of the trust between taxpayer and her husband, and the apparatus for administering the trust. Harry M. Kuhn, decedent's son, was designated as trustee.
In 1959, taxpayer transferred her interest in the community property belonging to herself and her husband to the trust and received a life estate in all of said property. See Gift Tax Return for Calendar Year 1959, Mrs. Bedie Lee Kuhn, Taxpayer at 2-4 (April 29, 1960). Gift tax liability arose as the result of this transfer, Commissioner v. Siegel, 250 F.2d 339 (9th Cir. 1957), and the taxpayer paid a gift tax on $113,496.12, representing the excess of the value of her community property interest transferred to the trust ($156,266.12) over the value of her actuarially computed right to the life estate (15 year life expectancy) in the entire trust ($42,770). Both sides agree that a finding in favor of taxpayer in this action will entitle the taxpayer to recover $3,041.79, plus statutory interest. A finding in favor of the Government will result in no recovery for taxpayer and a dismissal of her cause with prejudice.
On any journey through the labyrinth of the Tax Code, each judicial step must be carefully taken. The Court's awareness of the need for exercising caution in this area has been expressed previously.5
The Court must first determine which Code provision properly applies in this case. The taxpayer correctly points to § 167(h), 26 U.S.C. § 167(h), as the Code provision authorizing amortization deductions to reduce a life tenant's taxable income from the life estate. But the wording of § 273, 26 U.S.C. § 273, suggests to the Court that its application takes precedence in determining whether, in the first instance, the taxpayer as life tenant is entitled to an amortization deduction. As will be seen, it is the interpretation of § 273 around which this decision actually turns.
The legislative history of § 273 is of only limited assistance. Early v. Commissioner, supra, 445 F.2d at 168 n. 3. When the statute was enacted in 1921,6 Congress was concerned with a problem separate and distinct from that involved in this case. The particular problem discussed in the legislative history was that of the holder of a life estate setting up his expected future payments as a corpus and then claiming a deduction for the exhaustion thereof due to the lapse of time. H.R.Rep. No. 350, 67th Cong., 1st Sess. 12 (1921); S.Rep. No. 275, 67th Cong., 1st Sess. 15 (1921); 1954 U.S.Code Cong. & Admin. News, pp. 4206, 4867. The 1921 committee reports indicate that § 273 was enacted to prohibit the amortization of the gift value of a life estate. Id. But § 273 does not prevent the amortization of a beneficiary's own investment in such a life estate. Estate of Kissel, 15 B.T.A. 705 (1929).
The United States Supreme Court has held that the Congress intended to incorporate into § 273 terms in common usage in other tax statutes. Lyeth v. Hoey, 305 U.S. 188, 194-95, 59 S.Ct. 155, 83 L.Ed. 119 (1938). As the Supreme Court saw it, § 273 was designed to prevent amortization of income by a taxpayer who had received the life estate income without cost and therefore without tax consequences — i. e., when received by virtue of a gift, bequest or inheritance.
In Lyeth, an heir contested his grandmother's will. As a result of the compromise of that contest, the heir received property which would not have been received if the will had gone uncontested. The Court would not permit the taxpayer to reduce by deduction income thus received which was not subject to tax liability. 305 U.S. at 195-97, 59 S. Ct. 155. Instead, the Court established as a standard the need of a taxpayer seeking to amortize to demonstrate the presence of adequate consideration. For example, merely labelling a will agreement as a "contract" and implying the presence of an "offer" and an "acceptance" would not establish the presence of consideration. Implicit in the Court's decision was the premise that a taxpayer wishing to amortize a life estate must demonstrate consideration based on ordinary concepts of the exchanging of rights to property.
Lyeth demands that courts closely scrutinize the amortization deduction claims of life estate recipients to verify the underlying foundation of their entitlement to the amortized property. The United States Court of Appeals for the Fifth Circuit has exhibited such scrutiny. In Early v. Commissioner, supra, 445 F.2d 166, taxpayers entered into an agreement whereby they compromised a will contest and surrendered stock securities in exchange for a joint life interest. The Court of Appeals held that the life interest had been acquired as the result of a compromise of a disputed right to stock and that the taxpayers were to be deemed as donees. Accordingly, the appellate court interpreted § 273 as precluding amortization of the cost basis of this life interest.
In Early, the Court of Appeals adopted the Supreme Court's reasoning in Lyeth v. Hoey and went on to note that Lyeth even governs circumstances in which a sale or exchange of property has...
To continue reading
Request your trial