Monroe v. Comm'r of Internal Revenue (In re Estate of Monroe)

• Decision Date: 27 March 1995
• Docket Number: No. 9819–93.,9819–93.
• Citation: 104 T.C. 352,104 T.C. No. 16
• Parties: ESTATE OF Louise S. MONROE, Deceased, Robert J. Monroe, Provisional Administrator, and Estate of J. Edgar Monroe, Executor, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

104 T.C. 352

104 T.C. No. 16

ESTATE OF Louise S. MONROE, Deceased, Robert J. Monroe, Provisional Administrator, and Estate of J. Edgar Monroe, Executor, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 9819–93.

United States Tax Court.

March 27, 1995.

Michael E. Guarisco, Paul D. Rees, and Donald H. McDaniel, New Orleans, LA, for petitioner.

Linda K. West, New Orleans, LA, for respondent.

Decedent made various bequests in her will, including generation-skipping transfers in trust. Held: (1) Renunciations of legacies followed by payments from decedent's spouse were not disclaimers under sec. 2518(b), I.R.C., and renounced amounts were not part of the marital deducation. (2) Generation-skipping transfer taxes were chargeable to the property constituting the transfer, under sec. 2603(b), and did not reduce the marital deduction. (3) The additoin to tax for negligence, under sec. 6662, applies.

COHEN, Judge:

Respondent determined a deficiency of $3,652,947.52 in petitioner's Federal estate tax and an addition to tax of $2,739,710.64 under section 6663. In the alternative, respondent determined that petitioner is liable for the addition to tax under section 6662. After trial, respondent conceded that petitioner is not liable for a section 6663 addition to tax. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect as of the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.

The issues for decision are:

(1) Whether documents executed by 29 legatees of petitioner constitute qualified disclaimers under section 2518;

(2) whether generation-skipping transfer taxes on testamentary direct skips should be charged to the property constituting the direct skips or to the residuum of decedent's estate; and

(3) whether petitioner is liable for the addition to tax under section 6662.

Use of the terms “disclaimer” and “gift” throughout this opinion is for convenience and is without indication of legal effect, except when connected to the language of the applicable statute.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference.

Louise S. Monroe (decedent), a resident of New Orleans, Louisiana, died on April 28, 1989. Decedent was survived by her husband, J. Edgar Monroe (Monroe), also a resident of New Orleans. The couple had no children or descendants.

Decedent's will named Monroe as the executor of her estate. Monroe timely filed an estate tax return for petitioner on March 23, 1990. Monroe died on May 6, 1992, prior to the filing of the petition in this case.

During their marriage, decedent and Monroe accumulated a large estate. At the time of her death, decedent's one-half interest in the couple's community estate was valued at $9,796,429. Monroe was 92 years old at the time of his wife's death. He sought the assistance of his nephew, Robert Monroe (the nephew), in the administration of decedent's estate. The nephew served in the capacity of provisional administrator for petitioner.

In her will, decedent made three specific bequests, in trust, of U.S. Treasury bonds, each with a face value of $500,000. Decedent named two grandnieces, including Kathleen Gooden Hayward (Hayward), and one grandnephew as the income beneficiaries of the trusts. The children of the three income beneficiaries were named as the remainder beneficiaries of the respective trusts. Decedent's will directed that “all federal estate taxes, state and City inheritance or estate transfer taxes or other death taxes” attributable to the foregoing bequests be paid from the residuum of decedent's estate.

Decedent also made specific cash bequests in her will to 31 individuals and to four corporate entities. The following were among the specific cash bequests: $5,000 to Marilyn Monroe Wolf (Wolf), a niece of decedent; $5,000 to Elizabeth Monroe Richardson (Richardson), also a niece of decedent; $5,000 to Helene de la Houssaye Tebo (Tebo), a friend of decedent; and $50,000 to Lawrence Lee (Lee), a household employee of decedent. To Lee and to other legatees who were household employees, decedent also left an amount of cash equal to the annual salary that each employee was receiving at the time of decedent's death.

With respect to the specific cash bequests, decedent's will provided that “each of the particular legacies * * * set forth (other than those not liable for any of such taxes) shall bear its proportionate part of all death taxes that may be attributable thereto.” Decedent left the remainder of her estate to her surviving spouse, Monroe. The remainder of her estate was to include any lapsed or renounced particular legacies.

Monroe retained the accounting firm of Touche Ross to serve as petitioner's accountants. Monroe's and the nephew's primary contacts at Touche Ross regarding the preparation of petitioner's estate tax return and post mortem tax planning were with Laura Pebbles (Pebbles) and David J. Bourg (Bourg).

Pebbles reviewed decedent's will and made initial projections of petitioner's Federal estate tax and State and local death tax liabilities. Her projections also included the calculation of projected generation-skipping transfer taxes. Pebbles reported these projections to the nephew, who subsequently discussed them with Monroe. Monroe was upset by the tax effect of the particular legacies. Pebbles and the nephew proceeded to run a computer-based tax projection based on the assumption that the nephew disclaimed his specific bequest from petitioner of $5,000, and they noted that the amount of tax due decreased significantly.

Monroe and the nephew thereafter concluded that the use of disclaimers would be an effective post mortem estate planning tool to decrease Federal estate and generation-skipping transfer taxes. With the guidance of petitioner's accountants, Monroe and the nephew identified 29 legatees whom they would ask to renounce their bequests. These legatees included Hayward, Wolf, Richardson, and 13 additional relatives; Tebo and three other close friends; eight household employees, including Lee; and one corporate legatee. Before deciding to request disclaimers from these legatees, Monroe sought the assurance of petitioner's accountants that he could continue to make inter vivos gifts to these legatees and make bequests in his will to them if he chose to do so. Monroe was told by the accountants that a disclaimer by a legatee did not preclude his ability to give or donate money to these individuals.

After Monroe and the nephew decided to request disclaimers from the 29 identified legatees, petitioner's accountants advised the nephew that, to have a valid disclaimer for Federal estate tax purposes, the person renouncing could not receive or be promised any benefit for renouncing. The nephew explained this requirement to Monroe. The nephew then rehearsed with Bourg a presentation to make to the legatees when asking them to renounce their respective bequests.

The nephew's rehearsed presentation included the following general points: Monroe was upset over the high rate of taxes being imposed upon petitioner and the legatees; each legatee's bequest would be reduced significantly by estate and other taxes, which was not what decedent had intended; Monroe would like each legatee to disclaim the bequest; by disclaiming, each legatee would be giving up a right; and any disclaimer had to be totally voluntary and without consideration.

Monroe personally asked Hayward and four household employees to renounce their respective bequests. At the request of Monroe, the nephew contacted the remaining 24 legatees concerning disclaimers. Each legatee who was asked to disclaim renounced the bequest by signing a document of renunciation. These documents constituted valid disclaimers under Louisiana law. Each document was substantially similar and stated the following:

appearer has not accepted the aforesaid legacy left to appearer by said decedent, nor has appearer received any benefits from decedent's estate and hereby refuses to accept and does hereby expressly, irrevocably, publicly, unqualifiedly and formally renounce and disclaim any and all interests that appearer has or may have in the aforesaid legacy left to appearer by the said decedent. * * *

The total amount disclaimed was $892,781. Petitioner included this amount in the marital deduction for its Federal estate tax return as property passing to Monroe.

There was no single motive that prompted all of the legatees to disclaim their bequests. Some of the disclaimants were told by the nephew that Monroe had always taken care of them and had never cheated them or that Monroe was a generous man. Many of the disclaimants anticipated that Monroe would continue to care for them financially or was likely to make a bequest to them in his will. Some disclaimants believed that executing the disclaimer would be in their best long-term interest, because they did not wish to upset Monroe by refusing to renounce.

Richardson had an ill daughter and was concerned that her daughter's health insurance policy would not cover all of her daughter's anticipated medical expenses. She agreed to renounce her bequest because she did not wish to irritate Monroe in case she needed financial support from him for her daughter's health expenses. Wolf disclaimed her bequest because she did not want to be removed from Monroe's will.

Tebo had been upset by an incident in which decedent had indicated anger with her approximately 1 year before decedent's death. Decedent had later sent a note of apology, but Tebo was concerned that the bequest was an added apology. She told the nephew that she could not accept the bequest before he suggested that she renounce it.

Hayward renounced her income interest in the $500,000 face value bond trust on December 28, 1989. Hayward received a personal check dated January 11, 1990, in the amount of...