Tiffany v. Comm'r of Internal Revenue (In re Estate of Tiffany), Docket No. 1828-65.

• Decision Date: 20 February 1967
• Docket Number: Docket No. 1828-65.
• Citation: 47 T.C. 491
• Parties: ESTATE OF HERBERT C. TIFFANY, DECEASED, MRS. VIRGINIA TIFFANY AND HERBERT C. TIFFANY, JR., COEXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

47 T.C. 491

ESTATE OF HERBERT C. TIFFANY, DECEASED, MRS. VIRGINIA TIFFANY AND HERBERT C. TIFFANY, JR., COEXECUTORS, PETITIONERS
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1828-65.

Tax Court of the United States.

Filed February 20, 1967.

[47 T.C. 491]

Stephen W. Craig, for the petitioners.

Sheldon M. Sisson, for the respondent.

In 1942, Herbert C. Tiffany, decedent, and his wife created a trust, with themselves as cotrustees, holding certain property in trust for their children. The trust then entered into a lease agreement, leasing the property to a partnership, in which decedent was a partner. The partnership made several payments to the trust for rental and for property sold on behalf of the trust. Thereafter, for about 10 years, no payments were made to the trust by the partnership. Prior to Dec. 1, 1949, the Tiffanys borrowed $12,161.78 in cash from the trust. In that year, decedent, in his individual capacity, assumed the partnership liability to the trust in the amount of $46,268.71. Thus, on Dec. 1, 1949, the Tiffanys owed the trust a total of $58,430.49 (a community obligation), and on that date they executed a secured note in said amount in favor of the trust. When decedent died in September 1961, the assets of this trust consisted of the secured note and accrued interest thereon in the aggregate amount of $118,029.49, and cash of $2,311.90. The obligation of decedent to the trust at the time of his demise was $59,014.74, which was claimed as a deduction on his estate tax return. Held, that the claim so made against the decedent's estate was not a claim incurred for adequate and full consideration in money or money's worth within the meaning of sec. 2053(c)(1) (A) of the 1954 Code. /1/

Respondent, in his notice of deficiency, determined that the decedent's estate should be increased by $59,014.74, resulting in a deficiency in estate tax in the amount of $20,118.24 to account for decedent's one-half community obligation for principal and accrued interest totaling $118,029.49 on a promissory note dated December 1, 1949, executed in favor of the decedent and Virginia Tiffany as trustees for their children under a declaration of trust dated July 9, 1942.

Respondent concedes that the estate is entitled to a credit for State death taxes paid to the State of Arizona in the amount of $2,374.18. Respondent also concedes that in the event additional amounts are found to be includable in the estate of the decedent herein, an increased credit will be allowed by reason of any additional State estate taxes paid. Sec. 2011, I.R.C. 1954. Likewise, respondent avers that counsel for petitioners will be entitled to claim a deduction for legal fees under Rule 51, Tax Court Rules of Practice.

The principal issues presented for our consideration are: (1) Whether the promissory note, deducted on the estate tax return of the

[47 T.C. 492]

decedent, and payable to Herbert C. and Virginia Tiffany as trustees of a trust, was part of a bona fide transaction for adequate and full consideration and therefore deductible from decedent's gross estate within the purview of section 2053(c)(1)(A) of the 1954 Code; and (2) the alternative, assuming that the aforesaid note was part of a bona fide transaction for adequate and full consideration, whether Herbert C. Tiffany possessed at his death such powers as would make any portion of the trust, wherein he was a cotrustee, taxable as part of decedent's estate.

Virtually all of the facts have been stipulated. The stipulation of the parties and attached exhibits are incorporated by this reference.

FINDINGS OF FACT

Herbert C. Tiffany, the decedent, hereinafter sometimes referred to as Tiffany, died testate on September 4, 1961, in Phoenix, Ariz. His will was admitted to probate by the Superior Court of Phoenix, Ariz.

The coexecutors, Virginia Tiffany and Herbert C. Tiffany, Jr., were appointed October 4, 1961. The estate tax return for the estate of Herbert C. Tiffany, deceased, was filed with the district director of internal revenue, Phoenix, Ariz., on December 4, 1962.

On July 9, 1942, Herbert C. and Virginia Tiffany (hereinafter sometimes called the Tiffanys) owned as community property the following equipment and items:

A Parsons trencher, a Cat 12 blade, an Austin ‘99’ blade-DS 1572, an Austin ‘99’ blade-DS 2096, an Austin ‘99’ blade-DS 1960, a P. & H. shovel, a 9 x 36 Cedar Rapids, a 1150 gal Mack dist, a G.M.C. grease truck, a Kohler light plant, a Chevy semi-truck 6YSO 6496, a Chevy dump truck 1/2 6YR01 3905, a Chevy dump truck 6YR01 3847, a Chevy dump truck jeep 6YS02 4917, a Case tractor, a Fordson tractor and accessories, a Chevy pickup 6AK 07 13222, a 1935 Dodge pickup and 12-6445, a Jaeger water pump, 3', a Seamon mixer, an Austin 6 ton roller, an Essick 3 ton roller and trailer, a welder and accessories, a buckeye trencher, a large two-wheel trailer, a Cadillac coupe and a sheepsfoot roller.

This property had an aggregate fair market value on that date of $24,000.

On July 9, 1942, Herbert C. and Virginia Tiffany executed a declaration of trust with respect to the aforesaid equipment and items. In the trust instrument, the Tiffanys were named cotrustees. The trust contained, inter alia, the following pertinent provisions:

The amount to be expended for the benefit of any of the beneficiaries at any time shall be in the discretion of the Trustees; such amount need not be equally divided among the beneficiaries, but there shall be expended for each beneficiary such amount as the particular needs of such beneficiary with respect to care, maintenance and education shall require. The discretion of the Trustees in dividing such expenditures among the beneficiaries shall not be subject to review.

[47 T.C. 493]

In the event of the death or inability to act of either of the Trustees herein named, the survivor shall become the sole Trustee and continue with the administration of this trust as such sole Trustee.

This trust shall be irrevocable, but the Trustors reserve the right to change the successor Trustees hereinabove named by written supplement attached hereto and signed by the Trustors, and in the event one of the Trustors shall be deceased or incompetent to act, the remaining Trustor shall have the similar right to change the successor Trustees. There is also reserved to the Trustors or to the Surviving Trustor, in the event one of them is deceased or incompetent to act, the right to terminate this trust. In the event the trust is so terminated the trust property shall be paid over in equal portions to the beneficiaries, or the duly appointed guardians of such as are minors at the time of such termination, in equal portions, making allowance for any portion of the principal theretofore distributed to any of said beneficiaries.

Unless sooner terminated, this trust shall terminate when the youngest surviving beneficiary reaches the age of twenty-one years, and upon such termination, there shall be distributed to said beneficiaries equal portions of the trust property making allowance for distributions of principal theretofore made to any of the beneficiaries.

In addition the trustees had discretion as to whether or not to distribute principal at age 21 and the trust was to terminate no later than the date that the youngest beneficiary reached age 21.

On July 9, 1942, the trust entered into an agreement to lease the aforesaid equipment to Tiffany Construction Co., a copartnership composed of A. E. Tiffany and Herbert C. Tiffany. The interest of Herbert C. Tiffany in the copartnership constituted community property of Herbert C. and Virginia Tiffany, his wife.

The accounting entries made by the bookkeeper for Tiffany Construction Co. with respect to the equipment leased by the trust to the partnership are as follows:

+-----------------------------------------------------------------------------+
                ¦Date ¦ ¦Dr.1 ¦Cr.2 ¦

...