Rocker-Citizens Nat'l Bank v. Comm'r of Internal Revenue (In re Estate of Sparling) , Docket Nos. 1307-70

• Decision Date: 05 June 1973
• Docket Number: 1309-70.,Docket Nos. 1307-70
• Citation: 60 T.C. 330
• Parties: ESTATE OF ISABELLE M. SPARLING, DECEASED, CROCKER-CITIZENS NATIONAL BANK, TRUSTEE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

60 T.C. 330

ESTATE OF ISABELLE M. SPARLING, DECEASED, CROCKER-CITIZENS NATIONAL BANK, TRUSTEE, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 1307-70

1309-70.

United States Tax Court

Filed June 5, 1973.

[60 T.C. 331]

Alton G. Harmon, for the petitioner

Earl Goldhammer, for the respondent.

Decedent's husband died leaving his portion of community property to a testamentary trust. Under the terms of his will decedent could elect to have her share of the community property pass into the testamentary trust. If she so elected, she would receive for her life the income from the entire corpus of the trust. Furthermore, when decedent died she held participating 10-year life agreements in ISTF, an open-end, diversified management company. Petitioner valued these agreements for estate tax purposes at their liquidation value. Held, participating agreement shares in open-end investment companies or mutual funds were properly valued for estate tax purposes at the liquidation value and not at the public offering price on the date of death, United States v. Cartwright, 411 U.S. 546 (1973), followed. Held, further: The election by decedent to allow her share of the community property to pass into the trust created by her husband was a transfer with a retained life estate which did not constitute a bona fide sale for an adequate and full consideration in money or money's worth. The amount includable in decedent's estate by virtue of sec. 2036 is reduced according to sec. 2043 only by the value of the life estate received by decedent in her husband's portion of the community property transferred to the trust. The value of that life estate is measured from the time of the actual transfer of the community property to the trust. Held, further, consideration for purposes of sec. 2043 does not include the following items which decedent was entitled to receive from her husband's estate regardless of whether she decided to elect the benefits of her husband's will: (a) Family allowance, (b) joint property, (c) life insurance. Held, further, decedent is entitled to an estate tax credit under sec. 2013. Held, further, decedent's contribution to the trust is not reduced by a portion of the State death taxes and Federal estate taxes attributable to property which was includable in her husband's gross estate and passed to decedent either by survivorship (joint property) or contract (life insurance). Held, further, petitioner is responsible for gift tax deficiencies based on her transfer of community property to the testamentary trust established by her husband's will. Held, further, petitioner's failure to file a gift tax return was negligent.

OPINION FAY, Judge:

Respondent determined a deficiency in the Federal estate tax of petitioner as follows:

+----------------------------------------------------+
                ¦Docket No. ¦Date of death ¦Estate tax deficiency ¦
                +------------+---------------+-----------------------¦
                ¦1309-70 ¦12/17/65 ¦$20,173.27 ¦
                +----------------------------------------------------+
                

Respondent also determined a deficiency in the Federal gift tax and a penalty for failure to file as follows:

+----------------------------------------------------------------+
                ¦Docket No. ¦Year ¦Gift tax deficiency ¦Sec 6651 (a) penalty ¦
                +------------+------+---------------------+----------------------¦
                ¦1307-70 ¦1957 ¦$4,643.20 ¦$1,160.80 ¦
                +----------------------------------------------------------------+
                

Certain concessions having been made, the issues remaining for decision are:

(1) Whether participating agreements in a mutual fund owned by decedent at her death should be valued for estate tax purposes by adding to the liquidation value, a portion of the sales load attributable to such agreements. Essentially the validity of sec. 20.2031-8(b), Estate Tax Regs., is in question.

(2) Whether the value of decedent's interest in a trust fund created in the will of her husband, and includable in her gross estate by virtue of section 2036,¹ is subject to a reduction under section 2043 for the following items:

(a) A life estate received by decedent in her husband's portion of the property transferred to the trust, valued as of the day of election to take under the will.

(b) A family allowance decedent received from her husband's estate.

(c) Joint property decedent received by virtue of her husband's death.

(d) Life insurance.

[60 T.C. 332]

(3) Whether decedent is entitled to an estate tax credit under section 2013.

(4) Whether decedent's total contribution to the testamentary trust established in her husband's will is affected by a proration of the Federal estate tax and the State death tax imposed on her husband's estate.

(5) Whether decedent is responsible for gift tax deficiency based on her transfer of community property to a testamentary trust pursuant to her election under her husband's will.

(6) Whether decedent's failure to file a gift tax return was negligent.

All of the facts have been stipulated and are found accordingly.

Isabelle M. Sparling (sometimes hereinafter referred to as Isabelle or decedent) was born on November 3, 1887, and died testate on December 17, 1965, a resident of Orange County, Calif. The Federal estate tax return of the Estate of Isabelle M. Sparling was filed with the district director of internal revenue, Los Angeles, Calif., on March 17, 1967. An amended Federal estate tax return of the Estate of Isabelle M. Sparling was filed with the district director of internal revenue, Los Angeles, Calif., on June 30, 1967.

The will of Isabelle was admitted to probate in the Superior Court of Orange County, Santa Ana, Calif. On February 18, 1966, the Crocker-Citizens National Bank, Pasadena, Calif., the petitioner herein, was duly appointed as executor of the Estate of Isabelle M. Sparling by the Superior Court of Orange County, Calif.

Isabelle's husband, Raymond Walter Sparling (sometimes hereinafter referred to as Raymond) died testate on February 5, 1956. Raymond's will, which was executed on September 5, 1947, was duly probated in the State of California, a community property State. On May 3, 1957, a Federal estate tax return for the Estate of Raymond Walter Sparling was filed with the district director of internal revenue in Los Angeles, Calif.

A testamentary trust was provided for in Raymond's will. The corpus of this trust was to include, upon the election of Isabelle, all of the community estate.

The essence of this will provided that Isabelle was to be the principal income beneficiary of the trust during her lifetime, after which the corpus of the trust was to be divided among named beneficiaries.

The pertinent provisions of Raymond's will read as follows:

THIRD: * * * If my wife, prior to the probate of this Will, shall not have elected whether she shall take under this Will or the rights given her by Law, she shall in due course make that election. She shall in any event, however, be entitled to Probate Homestead exempt property and family allowances out of my Estate. * * *

FOURTH: My beloved wife and I have discussed the provisions herein made

[60 T.C. 333]

for her and said children, and I believe that this instrument expresses our mutual agreement, and my desire to so provide for her and divide my estate so that she shall have the benefit of approximately one-third of the total value thereof (including certain life insurance) during her lifetime * * *

SIXTH: I give, devise and bequeath the residue of my Estate, real and personal, wherever situated, hereinafter termed the Trust Estate to my said beloved wife. Isabelle MacLean Sparling, to my said son, Raymond Carter Sparling, my said daughter, Margaret May Sparling Kingman, my said adopted daughter, Jean Norris Sparling DeGolia, and my brother, Maurice C. Sparling, IN TRUST, to hold, manage, and distribute as follows:—

C. I direct my said Trustees to at least annually, and preferably monthly if conveniently possible:

(a) Pay my said wife, Isabelle MacLean Sparling, an average of one thousand dollars ($1,000.00) per month from the net income of my Estate, as long as said net income is sufficient for said purpose.

ELEVENTH: The provisions herein made for my said wife are made in lieu of any and all other rights, including her rights to Community Property which she may have under the laws of the State of California or elsewhere (other than the Life Insurance, joint tenancy property, or Government bonds) and as a condition precedent to receiving any portion of my Estate under this instrument she must in writing elect as to whether she will inherit under this instrument or under any and all laws in her favor. In the event she does not elect to accept the provisions made for her herein, she shall not act as a Trustee of my Trust Estate or otherwise receive any benefits under the terms of this instrument, but shall only receive such portions of the community property as she may be entitled to by law. In such event, I give, devise and bequeath all of my Estate over which I have a testamentary power to my two children, Raymond Carter Sparling and Margaret May Sparling Kingman, share and share alike and free from any and all trust provisions herein contained. (Emphasis added.)

On February 10, 1956, 5 days after Raymond's death, Isabelle elected to take in accordance with Raymond's will. She waived all claims to her share of the community property.

From February 1956 through and including December 1957 Isabelle received a family allowance totaling $23,000.

On December 23, 1957, the community property comprising the corpus of the trust created in the will of Raymond was distributed to the trustees named in Raymond's will to hold in trust.

Soon after the distribution to the trust, the trust corpus was converted into cash, and the cash was deposited in accounts in several savings and loan associations.

The total value of the community property forming the corpus of the trust created by the will of Raymond was computed at the time of the trust's creation at...