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

• Decision Date: 20 November 1979
• Docket Number: Docket No. 10249-76.
• Citation: 73 T.C. 290
• Parties: ESTATE of LEONIDAS C. PAPSON, DECEASED, COSTA L. PAPSON, EXECUTOR, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

73 T.C. 290

ESTATE of LEONIDAS C. PAPSON, DECEASED, COSTA L. PAPSON, EXECUTOR, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 10249-76.

United States Tax Court

Filed November 20, 1979.

Decedent died in 1973. A shopping center constituted more than 35 percent of his gross estate. Petitioner elected deferred payment under sec. 6166, I.R.C. 1954. In 1976, the primary tenant in the shopping center vacated the premises due to bankruptcy. The executor incurred a brokerage commission to obtain a new tenant. Held, the broker's commission qualifies as an administration expense under sec. 2053(a)(2), I.R.C. 1954. Costa L. Papson, for the petitioner.

H. Stephen Kesselman and Joan Ronder Domike, for the respondent.

TANNENWALD, Judge:

Respondent determined a deficiency in petitioner's estate tax of $452,632.31. Concessions having been made by both parties, the issue remaining for our resolution is whether the broker's commission of $109,708.95 incurred in the leasing of a store in the shopping center property, included in and constituting more than 35 percent of the value of the gross estate, to replace the primary tenant qualifies as an expense of administration.

FINDINGS OF FACT

All of the facts were stipulated. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.

Decedent Leonidas C. Papson died testate on July 2, 1973. At his death, he resided in Manhasset, N.Y. His last will and testament, dated February 14, 1972, was admitted into probate in the Surrogate's Court of Nassau County, N.Y., on July 20, 1973. Petitioner (the estate), whose legal address when this petition was filed was in New York City, filed its Federal estate tax return with the Office of the Internal Revenue Service at Mineola, N.Y., on March 13, 1974.

At his death, decedent was the sole proprietor of the Riverhead Plaza Shopping Center, located in Riverhead, N.Y., and was doing business there as West Side Realty Co.

Petitioner elected to have the gross estate valued as of the alternate valuation date of January 2, 1974. On the alternate valuation date, the fair market value of the shopping center was $2,311,320, and the property was subject to mortgages in the amount of $1,120,038.67. The value of this property was in excess of 35 percent of decedent's gross estate. Petitioner validly elected to pay the estate tax under the installment method of section 6166. ¹

Decedent's will names his son, Costa L. Papson (hereinafter sometimes Papson), executor and trustee. The will directed the executor to set aside approximately $66,000 for specific bequests, bequeathed his personal property to his two children, and specifically devised other property not here relevant. The residuary estate, whose primary asset was the shopping center, was divided into two equal parts: one-half for his son and the other half to be held in a spendthrift trust for his daughter. Paragraph First of the will directed that all inheritance, estate, transfer, and similar taxes were to be paid out of the residuary estate. Paragraph Eighth(d), which disposed of the residuary estate, gave discretionary authority to the trustee to pay the deferred taxes and interest allocable to this portion of the estate from the income of the trust if he deemed such action advantageous to the trust beneficiaries. The trust was to terminate upon full payment of all estate taxes and administration costs incurred by the estate and allocated to the trust.²

Insofar as pertinent, the will gave the executor and trustee the following powers:

ELEVENTH: I hereby authorize and empower my Executor and Trustee to take any action deemed by them, in their sole discretion, necessary for the handling and management of my estate and/or the trusts (sic) created hereunder and the assets or liabilities comprising same to the same extent as I personally could act in the handling of said assets and liabilities were I alive and in sole possession and ownership thereof, said authority to be without any restriction or limitation whatsoever, except that of acting in good faith for the benefit of the beneficiaries of my estate. This power and authority is intended to include all rights customarily given executors and trustees either by private document or the provisions of law, including but not limited to the right to retain, change, sell, invest and reinvest, lease or borrow against investments or other property, whether or not such be of the class in which trustees are authorized by law to invest trust funds * * *; carry out agreements; continue any business; employ agents, attorneys * * *. My Executor and Trustee may freely act under all or any of the powers hereby given to them, in such manner as in their sole discretion seems proper without the necessity of the approval or consent of any person * * * or court and despite whatever interests they might have either individually or as agents for another and all actions undertaken by them, together with the advisability thereof, shall be final and conclusive upon all parties interested in or who may become interested in my estate or the trusts created hereunder. (Emphasis added.)

Petitioner continued the business of West Side Realty Co., filing a business certificate with the Clerk of Suffolk County, N.Y., on August 7, 1973.

The shopping center included facilities for 18 tenants with building space of 196,000 square feet. On both July 2, 1973, and January 2, 1974, the principal tenant in the shopping center was W. T. Grant Co. (hereinafter Grant), which occupied 128,000 square feet. Grant's lease was to run until January 31, 1981, with options to extend it. At the date of death, the annual total base rent for all tenants of the shopping center was $362,000, of which Grant paid $196,300. The real estate taxes on the shopping center for the calendar year 1976 were $145,599, of which Grant was to have paid (pursuant to its lease) $93,564, in addition to its aforementioned rent.

During October 1975, Grant voluntarily instituted chapter 11 proceedings under the Bankruptcy Act. Subsequent to October 1975, Grant was adjudicated bankrupt. Because of its bankruptcy, Grant vacated the Riverhead Plaza Shopping Center on April 1, 1976.

On February 18, 1976, petitioner engaged Huberth & Huberth (hereinafter Huberth), a New York real estate concern, as its exclusive rental agent to obtain a tenant for the space left vacant by Grant. In March of that year, petitioner applied for a deferment in the payment of the then-current installment of estate tax, due on April 2, on the ground of extreme hardship brought about by the Grant bankruptcy. The extension was granted by respondent on April 6, 1976. In March 1976, petitioner also applied for a 3-month moratorium on the payment of principal on the first mortgage on the shopping center property due to the Grant bankruptcy. Queens County Savings Bank, the mortgagee, granted this request, as well as subsequent moratorium extensions deferring both principal and interest through April 1977.

Huberth succeeded in obtaining a tenant for the vacant store; a lease was executed by the estate, doing business as West Side Realty Co., with the F. W. Woolworth Co. on October 1, 1976. Woolworth occupied the site on April 1, 1977, and commenced paying rent on that date. The lease, calling for a minimum annual rental of $307,308 (including real estate taxes subject to indexing), had an initial term until January 31, 1993, with four options to renew for successive 5-year terms. As a result of the execution of this lease, Huberth became entitled to a commission of $109,708.95.³

During petitioner's fiscal year, June 1, 1976, to May 31, 1977, its gross rents and royalties collected totaled $212,944.19. Its operating costs were $103,397.75, interest paid was $32,906.08, and various taxes, including real estate tax payments on the shopping center, totaled $126,510.79. Petitioner also had dividend income of.$1,731.25 and interest income of $6,108.45 that year.

ULTIMATE FINDING OF FACT

The broker's leasing commission incurred in the letting of the premises formerly occupied by Grant to Woolworth qualifies as an expense of administration in the amount of $109,708.95.

OPINION

The issue for decision is whether the broker's commission incurred in replacing the tenant of the primary store in a shopping center property included in, and constituting more than 35 percent of the value of, the gross estate, qualifies as a deductible administration expense under section 2053(a).⁴

Respondent has advanced a variety of arguments, many of them based upon New York law, to sustain his position that his disallowance of the deduction in question should be sustained.

One such argument is based upon the proposition that the broker's commission is not a deductible administration expense because the shopping center belonged to residuary beneficiaries rather than the estate and the expense was therefore incurred for their benefit. Cf. Estate of Smith v. Commissioner, 57 T.C. 650, 661 (1972), affd. 510 F.2d 479 (2d Cir. 1975), cert. denied 423 U.S. 827 (1975); sec. 20.2053-3(a), Estate Tax Regs. Respondent asserts that, under New York law, title to undevised real property passes directly to the residuary beneficiaries and the executor, as such, does not “receive” it. Irrespective of the reach of the cases relied upon by respondent, they dealt with the situation which existed before changes made in New York law and, in our opinion, are not relevant to the instant case. The New York Estates, Powers & Trusts Law was substantially revised in 1966 and by subsequent amendment in 1967, especially section 11-1.1(b)(5). Those revisions eliminated the distinction previously drawn between personal property and real property not specifically devised, for purposes of management, lease, sale, and mortgage and extended to executors the power to take possession of and to manage, lease, sell, and mortgage real...