Matthews v. Commissioner
| Decision Date | 04 January 1989 |
| Docket Number | Docket No. 22211-81. |
| Citation | 56 TCM (CCH) 992,1989 TC Memo 3 |
| Parties | Carla C. Matthews v. Commissioner. |
| Court | U.S. Tax Court |
Richard D. Allen, Jesse L. Burke III, and Johannes R. Krahmer, 1105 N. Market St., Wilmington, Del., for the petitioner. James P. Clancy, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's Federal gift tax for 1970 in the amount of $33,159.62. In this proceeding, petitioner claims an overpayment of Federal gift tax in the amount of $78,140.33, plus interest of $34,316.61, paid for 1970. The principal issue for decision is whether petitioner's execution in 1970 of a trust instrument in which she transferred to a trust her remainder interest in a 1927 Trust constituted a gift that year. If so, there is an issue as to the proper valuation of the amount of that gift.
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner Carla C. Matthews resided in Wilmington, Delaware at the time of the filing of the petition. On January 4, 1978 petitioner filed a Federal gift tax return with the Philadelphia Service Center for the year 1970.
Petitioner1 was born in 1937 and is one of three adopted children of a wealthy woman, Louisa d'A. Carpenter. The other adopted children are Ronald d'A. Carpenter, deceased,2 and Sonia C. Tingle (hereinafter referred to as Ronald Carpenter and Mrs. Tingle).
In 1927, a trust (the "1927 Trust") had been created in which Louisa d'A. Carpenter (hereinafter "Louisa Carpenter" or "petitioner's mother") received a life income interest. At the time the 1927 Trust was created, the settlor of the trust was R.R.M. Carpenter. Louisa Carpenter was still a minor, and most of the income was paid to R.R.M. Carpenter, her father and guardian; however, after she reached age 25 the net income was paid to her for life. Upon her death, the remainder of this trust was to go to her lawful issue, in equal shares, per stirpes and not per capita, or in default of such issue, to her sister and brothers or their lawful issue.
Louisa Carpenter legally adopted the three children as minors, between 1936 and 1942, pursuant to the laws of the State of Delaware. When the children became adults, Louisa Carpenter irrevocably assigned a certain percentage of the income interest that she received under the 1927 Trust to each of her children. Petitioner received a six percent income interest in the 1927 Trust from her mother in the mid-sixties. Petitioner's six percent interest amounted to approximately $1,500 per month.
Petitioner shared a distant but loving relationship with her mother. Although Louisa Carpenter did not spend much time with her children, the family got together for holidays, including Christmas and Thanksgiving. For the most part petitioner tried to do everything her mother asked of her. One of the few times that petitioner did not obey her mother was when she decided to drop out of school in the eleventh grade. Although her mother disagreed with this decision, her mother went along with it and petitioner continued to live at home.
When petitioner left home in 1956 to get married, Louisa Carpenter purchased the house where the couple lived, but sold the house when petitioner's husband died one year later. Petitioner then moved back home and continued to live there until she remarried in 1962. When petitioner remarried, Louisa Carpenter purchased another home for petitioner and her husband. In 1969 or 1970 when petitioner was divorced from her second husband, although petitioner was reluctant to do so, at her mother's request, petitioner sold the house and gave half of the proceeds to her husband. The husband was a policeman, whose salary was apparently less than petitioner's income. Petitioner did not ask for any alimony or child support in her divorce since her mother requested that she not ask for either. After the divorce petitioner and her daughter, Kimberly Van Sant, returned to the family home.
For eight years, from 1969 to 1976, petitioner ran a small horse breeding business. During that time petitioner was the one primarily responsible for the decision making in connection with the operation. This responsibility often included reading contracts, but with assistance from others.
Beginning in 1967, Louisa Carpenter expressed her concern to her attorney, Richard C. Carvell, about the financial future of her children and grandchildren. Mr. Carvell first began serving as both Louisa Carpenter's attorney and financial advisor in 1951. After Mr. Carvell retired from the active practice of law in 1957, although he continued to represent a few clients, most of his time was spent working for Louisa Carpenter, handling both her business and personal matters. He signed all of Louisa Carpenter's business and personal checks. Mr. Carvell also served as an intermediary between Louisa Carpenter and her children. Louisa Carpenter told her children that Mr. Carvell had authority from her to manage her affairs and that they were to go through Mr. Carvell or Elmer Horsey if they needed anything from her. The adult children often needed and received financial help from their mother. Mr. Carvell helped Louisa Carpenter's son, Ronald Carpenter, with his business endeavors. He also assisted petitioner when she needed financial assistance from her mother. Petitioner would often mail her bills to Mr. Carvell who would arrange for their payment with her mother's funds. Mr. Carvell also personally endorsed a note for petitioner in the amount of $500.
Beginning in 1964 Elmer Horsey, a certified public accountant, shared an office with Mr. Carvell in Chestertown, Maryland. Mr. Horsey was employed full-time by Nylon Capital Shopping Center, Inc. as its vice president and general manager. Prior to that time, Mr. Horsey did some tax and accounting work for both Louisa Carpenter and Mr. Carvell. Nylon Capital Shopping Center, Inc. was a corporation Mr. Carvell formed for Louisa Carpenter's investment in the shopping center. Louisa Carpenter or a trust set up by or for her owned the corporation, and she controlled the corporation. Mr. Horsey handled some of Louisa Carpenter's business after Mr. Carvell retired. From time to time petitioner would also approach Mr. Horsey if she had financial problems, and Mr. Horsey would intercede with Louisa Carpenter on petitioner's behalf.
Louisa Carpenter was afraid that her children would make bad investments with their remainder interests in the 1927 Trust or would be taken advantage of so that nothing would be left for them or their own children. Thus, during the period 1967 to 1969 Louisa Carpenter discussed with Mr. Carvell a transfer of her children's remainder interests in the 1927 Trust to separate newly created trusts for each of her adult children. During the period 1967 to 1970, Mr. Carvell proceeded to draft a separate trust agreement for each adult child. The trust agreements each named one of the children as grantor and conveyed irrevocable income interests in the new trusts to that grantor and that grantor's surviving issue. The trust remainder would then go to the surviving issue of the grantor's children (i.e., petitioner's grandchildren).
Louisa Carpenter also discussed with Mr. Carvell the fact that she did not want to pay any Federal gift taxes on behalf of her children on the transfers of her children's remainder interests in the 1927 Trust to the new trusts. Mr. Carvell was also aware that the children themselves could not afford to pay Federal gift taxes on the transfers in 1970. Therefore, after a discussion with an attorney who specialized in Federal gift tax law, Mr. Carvell determined that the imposition of a gift tax might be deferred by delivering the executed trust agreements to a third party rather than to the trustee. This third party would then be given instructions to hold the agreements until Louisa Carpenter's death and then deliver them to the trustee. On December 23, 1969, Mr. Carvell sent a letter to the Wilmington Trust Company, the proposed trustee of each trust, asking that the Trust Company review both the trust agreements and a cover letter that was to be enclosed with each agreement. The cover letter, which was addressed to William Geddes, the president of Wilmington Trust Company, contained instructions for him to act as the third party and retain the trust agreements in Wilmington Trust Company's files until Louisa Carpenter's death.
In Wilmington Trust Company's response dated December 29, 1969, the vice president of Wilmington Trust Company, Henry van der Goes, expressed his concern over the effective date of the trusts. Mr. van der Goes stated that if the trusts were delivered to an officer of the Wilmington Trust Company this would be a "distinctly ambiguous situation" and might constitute delivery to the trustee, which would bring the trusts into existence in 1970, with the immediate imposition of a gift tax. In addition, if the delivery to the Trust Company's officer was intended to place the transactions beyond the control of the children, Mr. van der Goes warned that "there might be a basis for a contention by the Government that the transaction had in fact been completed at the time of delivery * * *." Finally, Mr. van der Goes suggested that if the trusts were to be effective immediately upon delivery to the Trust Company's officer, then the rule against perpetuities should run from that date rather than from Louisa Carpenter's death, as was specified in the trust agreements.
In response to Mr. van der Goes' reservations, Mr. Carvell wrote to Mr. van der Goes that he was having the children write letters to the president of the Chestertown Bank of Maryland, requesting that the president retain the trust agreements and deliver them to the Wilmington Trust Company...
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