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

• Decision Date: 12 April 2007
• Docket Number: No. 5639–05.,5639–05.
• Citation: 128 T.C. No. 10,128 T.C. 113
• Parties: Estate of Edward P. ROSKI, Sr., Deceased,Edward P. Roski, Jr., Executor, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

128 T.C. 113

128 T.C. No. 10

Estate of Edward P. ROSKI, Sr., Deceased,Edward P. Roski, Jr., Executor, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 5639–05.

United States Tax Court.

April 12, 2007.

The estate elected to pay its tax in installments under sec. 6166(a)(1), I.R.C. (the election). R informed the estate that it would have to secure a bond equal to twice the amount of tax deferred or provide a special lien under sec. 6324A, I.R.C. (special lien), in order to qualify for the election. R's requirement was based on a recent decision by R to make a bond or a special lien a prerequisite of the election in all cases. The estate sent R a detailed letter enumerating reasons why it was impracticable for the estate to secure a bond or a special lien and requested that R exercise his discretion and find that it was not necessary because of the minimal financial risk the estate's circumstances posed. R sent the estate a notice of determination denying the election and explaining that the estate failed to meet the requirements for the election because it failed to provide a bond or a special lien.

The estate filed a petition with this Court requesting relief under sec. 7479, I.R.C. The estate alleged that R abused his discretion in denying the election on the basis of the estate's failure to provide a bond. R moved for summary judgment on the grounds that this Court does not have jurisdiction to review R's determination because the requirement of a bond or a special lien is not within the scope of the jurisdiction granted by sec. 7479, I.R.C. The estate objected to R's motion and filed a cross-motion for summary judgment, asking this Court to find that R has no authority to impose a bright-line security requirement and that if R had exercised his discretion properly, he would not have found a bond or a special lien to be necessary in this case.

Held: We have jurisdiction under sec. 7479, I.R.C., to review R's determination. Nothing in the statute or its legislative history restricts our review of R's denial of the election. R has failed to rebut the strong presumption that an action of an administrative agency is subject to judicial review.

Held, further, R has no authority to require a bond or a special lien in every case. By doing so, R is making the furnishing of security a substantive requirement of sec. 6166, I.R.C., which Congress did not intend. Further, R's adoption of a standard that precludes the exercise of discretion is grounds to set aside R's determination.

Robert T. Carney, for petitioner.

Scott A. Hovey, for respondent.

OPINION

GOEKE, Judge.

This matter is before the Court on the parties' cross-motions for summary judgment under Rules 121(a) and 217(b)(2).¹

Respondent issued a notice of determination denying the Estate of Edward P. Roski (the estate) the election to pay Federal estate tax in installments under section 6166. The issues before us are: (1) Whether this Court's jurisdiction under section 7479 includes reviewing respondent's determination, which was based upon his imposition of a security requirement, that an election may not be made under section 6166; and (2) whether respondent abused his discretion by imposing a bright-line requirement of a bond or a special lien for every estate election under section 6166(a)(1). We hold that we have jurisdiction under section 7479, and that respondent has abused his discretion.

The following is a summary of the relevant facts that are not in dispute. They are stated solely for purposes of deciding the pending cross-motions for summary judgment and are not findings of fact for this case. See Estate of Kahn v. Commissioner, 125 T.C. 227, 228, 2005 WL 3081656 (2005) (citing Fed.R.Civ.P. 52(a) and Lakewood Associates v. Commissioner, T.C. Memo.1995–552).

Background

Edward P. Roski (decedent) died on October 6, 2000. He was a resident of Los Angeles, California, at the time of his death. The executor resided in California when the petition was filed.

On January 4, 2002, the executor of decedent's estate filed a timely Form 706, United States Estate (and Generation–Skipping Transfer) Tax Return (the estate tax return), reporting a balance due of $32,778,372. Attached to the estate tax return was a Notice of Election Under Section 6166 of the Internal Revenue Code, in which the estate elected to defer payment of the balance on the estate tax return. On June 17, 2003, the estate filed a supplemental Form 706 reporting a liability of $28,901,454. The estate also amended its section 6166 election to reflect the new balance due. Pursuant to the election, if the estate were able to obtain the full extension, it would pay the tax due in installments as late as the 14th anniversary of the normal due date, which would be in 2015.²

In September 2003, respondent notified the estate that he had received the estate's notice of election. Respondent stated that because of the election, the estate was required to either post a bond, or in lieu of a bond, elect to provide a special lien under section 6324A. By letter dated September 8, 2004, the estate requested that “the government exercise its Congressionally mandated discretion and not require the posting of a bond or the imposition of a Section 6324A lien in this case.” The estate provided the following reasons.³

(1) The estate had explored the possibility of posting a bond but was unable to find a bonding company willing to underwrite the amount in question for the duration of the 10–year installment payment period under section 6166(a). Further, even if the estate were able to obtain a bond, the estate's advisors believed that the cost would be prohibitive.

(2) The assets of the estate are part of a well-established family-owned business, and decedent's only child has continued the ownership and management of the business. The estate's assets consist of interests in valuable, well-managed, and profitable active real estate and provide assurance that adequate funds will be available to pay the estate tax liability, therefore mitigating any default risks.

(3) Edward P. Roski, Jr., the son of decedent and the executor of the estate, is a highly respected businessman who at all times has fulfilled his tax obligations.

(4) The Government already has security for the payment of the estate's deferred taxes in the form of the statutory lien provided for under section 6324. The lien is in effect until 2010 and is a personal liability of the executor, as well as of all the other transferees of the estate.

(5) The imposition of the special lien in lieu of a bond would adversely affect the estate's ability to carry on the closely held businesses that ultimately are to provide the funds from which the estate's deferred taxes would be paid. Without the interference of the special lien, the estate will have the cashflow to pay the installments as they become due.

(6) The imposition of a special lien, in lieu of a bond, against the estate's assets would violate covenants in partnership agreements that affect the estate's interests in those assets and could lead to litigation forcing the estate to sell its properties. Such forced sales would frustrate the purpose of section 6166, which is to avoid forced sales or other actions that might jeopardize the continued operation of a closely held business.

(7) On December 28, 2004, respondent issued to the estate a notice of determination stating that the estate may not make an election under section 6166. The notice of determination stated in relevant part:

We have determined, as provided by Section 7479 of the Internal Revenue Code of 1986, that an election may not be made under Section 6166 of the Code by the above estate. * * * If you want to contest this determination in court, your petition must be filed with the United States Tax Court * * *

Attached to the notice of determination was an Explanation for Determination. The document contained the following explanation in its entirety:

It is determined that the Estate failed to fulfill the requirements for the election to pay taxes in installments pursuant to IRC Section 6166. The Estate failed to provide a bond or IRC section 6324A lien per IRC Sections 6166 and 6165.

Additionally, it is determined that the estate failed to demonstrate why the Commissioner should exercise his discretion and waive the requirement of a bond or IRC Section 6324A lien in this case.

Accordingly, the IRC Section 6166 election is denied.

The estate filed its petition for a declaratory judgment under section 7479 on March 23, 2005. In its petition, the estate seeks a redetermination of respondent's denial of the election and a judgment that it was entitled to the election. The petition, inter alia, alleges that respondent erred by determining not to exercise his discretion to allow an election under section 6166. The estate also alleges that respondent erred by requiring the estate to provide a bond or a special lien in order to qualify for the election. The estate argues that such a requirement was without basis in law, was arbitrary and capricious, and constituted an abuse of discretion.

Respondent moved for summary judgment, arguing that section 7479 does not give this Court jurisdiction to review respondent's denial of the section 6166 election because of the estate's failure to fulfill respondent's prerequisite of a bond or a special lien under section 6324A. The estate objected to respondent's motion and filed a cross-motion for summary judgment arguing that: (1) Respondent's refusal to exercise his discretion by requiring a bond in every case is an abuse of discretion; and (2) the undisputed facts establish that if respondent had properly exercised his discretion, no bond or special lien should have been required.

Discussion

I. Background of the Relevant StatutesA. Installment Payment Election

In general, Federal estate tax is due within 9 months of a decedent's death. Sec. 6075(a). Under section 6166(a)(1), a...