Porter v. Comm'r of Internal Revenue, Docket Nos. 2084-66

• Decision Date: 13 December 1967
• Docket Number: 2085-66.,Docket Nos. 2084-66
• Citation: 49 T.C. 207
• Parties: HARRY C. PORTER, TRANSFEREE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTESTATE OF ROBERT P. PORTER, JR., DECEASED, TRANSFEREE, S. HOLT MCALONEY ANDFERN W. PORTER, COEXECUTORS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

49 T.C. 207

HARRY C. PORTER, TRANSFEREE, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENTESTATE OF ROBERT P. PORTER, JR., DECEASED, TRANSFEREE, S. HOLT MCALONEY ANDFERN W. PORTER, COEXECUTORS, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 2084-66

2085-66.

Tax Court of the United States.

Filed December 13, 1967.

William C. Schaab, for the petitioners.

Frederick B. Strothman, for the respondent.

Decedent, who died on Nov. 18, 1953, and her former husband resided in New Mexico from the time of their marriage in 1905 until the date of their divorce in 1936 and both separately resided in New Mexico thereafter. No property settlement was made at the time of divorce. After decedent's death her two sons approached their father with a view to obtaining from him as heirs of their mother a portion of the property held in their father's name at the date of his divorce from their mother on the basis that such property was community property at the time of divorce and thereafter their mother held the interest of tenant in common in the property. Litigation ensued in the course of which attorneys' fees and other necessary expenses were incurred by decedent's sons. The litigation resulted in a decision of the Supreme Court of New Mexico that all property held in the father's name at the date of divorce was community property. That court directed an accounting which resulted in further litigation culminating in a decree based on an agreement of the parties. No estate tax return was filed for decedent's estate. Held: 1. Decedent's interest in the property held in her husband's name at the date of her death is includable in her gross estate to the extent of its value at the date of her death taking into account that the property in which she had such interest was unestablished and subject to contest at that time. 2. Attorneys' fees and expenses incurred by the sons in establishing their mother's rights in the property are deductible from the gross estate in computing the taxable estate if they have not been considered in determining value of decedent's interest. 3. The respondent properly asserted an addition to tax for failure to file an estate tax return.

SCOTT, Judge:

Respondent determined a deficiency in the estate tax liability of the Estate of Alice M. Porter in the amount of $92,536.16 and an addition to tax for failure to file an estate tax return in the amount of $23,134.04.¹ Respondent asserted that petitioners are liable as transferees of the assets of the Estate of Alice M. Porter.

The issues for decision are: (1) Whether the only asset owned by Alice M. Porter at the time of her death was a claim against her former husband (Robert P. Porter, Sr.) or whether she owned an interest in various properties held in the name of her former husband; (2) if the only asset owned by Alice M. Porter at the date of her death was a claim against her former husband, what was the value of that claim at the date of her death; (3) whether legal and other expenses incurred by Harry C. Porter and Robert P. Porter, Jr., are deductible by the Estate of Alice M. Porter in computing estate tax liability and, if so, the proper amount of such deduction; and (4) whether the addition to tax for failure to file an estate tax return for the Estate of Alice M. Porter was properly determined by respondent. Petitioners have conceded transferee liability should we determine liability of the Estate of Alice M. Porter and the parties stipulated the ‘gross estate’ if the Court finds for respondent. ²

This case was submitted under Rule 30 of the Rules of Practice of the Court, the evidence consisting of a stipulation of fact with exhibits attached thereto and depositions filed with the Court.

FINDINGS OF FACT

The stipulated facts together with the exhibits attached thereto are found accordingly.

Petitioner Harry C. Porter (hereinafter referred to as Harry) is an individual whose residence at the time of filing the petition in this case was Las Cruces, N. Mex. Fern W. Porter, whose residence at the time of filing the petition in this case was Las Cruces, N. Mex., and S. Holt McAloney, who resides in Sarasota, Fla., were appointed coexecutors of the Estate of Robert P. Porter, Jr., deceased (referred to hereinafter as Robert), by the Surrogate's Court of New York, N.Y. Subsequently, Robert's will was admitted to probate by the Probate Court of Dona Ana County, N. Mex., and Fern W. Porter was appointed sole executrix of Robert's estate in that cause. Robert from before 1953 until sometime after October 31, 1956, had resided in New York.

Harry and Robert (hereinafter referred to as petitioners) were the only children of Alice M. Porter (hereinafter referred to as Alice). Alice died intestate on November 18, 1953, leaving Harry and Robert as her sole heirs. Robert was appointed administrator of her estate by the Probate Court of Dona Ana County, N. Mex., on November 5, 1959. Harry was appointed successor administrator of Alice's estate on February 25, 1965, following Robert's death. No inventory was ever filed in connection with the administration proceedings and no Federal estate tax return has been filed for the Estate of Alice.

Alice married Robert P. Porter, Sr. (hereinafter referred to as Porter), on December 20, 1905, and they lived at all times during their marriage in New Mexico, a community property State. Petitioners were the only children of the marriage of Alice and Porter. On July 31, 1936, Alice and Porter entered into a ‘Contract and Agreement’ which recited that they had permanently separated and no longer lived or intended to live together as husband and wife, that Alice should continue to occupy the house which had been the family home, and that Porter would furnish her support. The final paragraph of this contract stated:

This agreement is not intended to be a property settlement between the parties hereto, but the status of the property rights of the respective parties shall remain unchanged by any of the provisions hereof.

Alice was granted a divorce from Porter by decree entered on the same date the contract was executed but after its execution. This decree was silent concerning support and property rights and made no reference to the support agreement which the parties had executed.

Porter on October 30, 1936, married Violet P. Porter (hereinafter referred to as Violet) and was married to her at the time of his death on October 20, 1958. No children were born to Violet and Porter.

Until her death, Alice lived in the house which she and Porter had used as the family home prior to their divorce, and Porter provided her ample support, increasing his payments to her when necessary. Alice did not claim at any time after the date of the divorce decree a division of property or any other property settlement.

On the date the divorce decree was entered the following assets were held by Porter in his name only:

(a) 708 of 1,000 shares issued and outstanding of Robert Porter and Sons, Inc. (referred to hereinafter as Porter & Sons);

(b) A lot and warehouse located at the corner of Organ and Compress Streets, Las Cruces;

(c) A lot on Church Street south of Griggs Street, in Las Cruces;

(d) Property four blocks east of the Catholic Church in Las Cruces;

(e) Five life insurance policies with an aggregate cash surrender value of $7,605.43; and

(f) $573.79 in cash.

After the divorce Porter retained sole possession of all these assets.

The following transactions affecting these properties through the year 1954 must be considered to trace the properties owned by Alice and Porter as of July 31, 1936, together with the proceeds and income therefrom to the date of Alice's death:

Stock dividends.

(a) Porter & Sons declared a stock dividend of $25 per share, payable in cash or stock, on April 24, 1937. Porter elected to take 132 shares (equal to $13,200) and $4,400 in cash.

(b) Porter & Sons declared a 57 percent stock dividend on August 27, 1943. Thereafter, Porter owned 1,336 of 2,000 shares issued and outstanding.

(c) Porter & Sons declared a stock dividend of $24.82 per share on October 24, 1944. Porter received 282 shares.

Stock transfers.

(d) Porter transferred 40 shares of his stock in Porter & Sons to Harry on December 27, 1939, in payment of a $4,000 debt to his brother Henry P. Porter, which had been bequeathed to Harry.

(e) Porter transferred 200 of his shares of Porter & Sons to Violet on March 4, 1944.

(f) Spin-off. On February 7, 1954, Porter & Sons transferred real property to Robert Porter Investment Company a New Mexico corporation (referred to hereinafter as Porter Investment) in exchange for 20,000 shares of stock, par value $10, which was distributed to the shareholders of Porter & Sons on March 1, 1954, at the rate of 8 shares for each Porter & Sons share.

(g) Property transfers. Porter & Sons conveyed to Porter, without consideration, real property in Las Cruces at 226 W. Picacho, at 920 N. Alameda and at the corner of N. Alameda and W. Picacho (a 54-foot lot). The 920 N. Alameda property was conveyed by Porter to Robert on December 30, 1940.

Property sales.

(h) The property four blocks east of the Catholic Church was apparently sold for cash on August 19, 1938.

(i) The insurance policies had been surrendered for cash before Alice's death.

(j) Cash dividends. Dividends were paid by Porter & Sons from 1937 through 1953.

(k) Rents. The warehouse and Church Street properties were leased by Porter to Porter & Sons. Porter received net rentals of $33,505.39 through the end of 1953, after deduction of insurance, taxes and repairs.

(l) Income tax. Porter reported income received by him for Federal and state tax purposes.

Shortly after Alice's death on November 18, 1953, Harry sought legal advice on the possibility of seeking a property settlement for himself and Robert, as Alice's sole surviving heirs, against their father. The attorney whom Harry consulted initially was of the opinion that...