Watson v. Comm'r of Internal Revenue (In re Estate of Watson), Docket No. 31911-85.
| Decision Date | 01 March 1990 |
| Docket Number | Docket No. 31911-85. |
| Parties | ESTATE OF HENRI P. WATSON, DECEASED, HENRI P. WATSON, JR., EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
HELD, where a trust failed to provide for the disposition of the trust corpus after the termination of the trust, a beneficial interest in the trust corpus reverted to the settlor of the trust when the trust terminated and was included in his gross estate under section 2033. HELD FURTHER, the widow's allowance paid under Mississippi law to the decedent's widow qualifies for the marital deduction provided in section 2056(a). HELD FURTHER, respondent failed to meet his burden of proving that rental proceeds from the decedent's farmland were improperly omitted from the gross estate on the decedent's estate tax return. Lauch M. Magruder, Jr., for the petitioner.
Robert W. West, for the respondent.
Respondent determined a deficiency of $437,231 in the Federal estate tax liability of the estate of Henri P. Watson. After trial, respondent amended his answer to conform the pleadings to the proof. In his amended answer, respondent asserted that the correct deficiency in petitioner's estate tax is $470,370.72. After concessions, the issues remaining to be decided are 1) whether the full value of 1,073.18 acres of farmland located in Sunflower County, Mississippi, is included in the decedent's gross estate; 2) whether the widow's allowance paid to the decedent's surviving spouse qualifies for the marital deduction; and 3) whether rent proceeds from decedent's farmland were assets of the decedent's estate that were omitted from the gross estate on decedent's estate tax return.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.
When the petition in this case was filed, petitioner was an estate domiciled in and administered under the laws of Mississippi, under the jurisdiction of the Chancery Court of Holmes County, Mississippi. At the time the petition was filed, the executor, Henri P. Watson, Jr., was a resident of Jackson, Mississippi. Petitioner filed a Federal estate tax return which was prepared by Robert Wingate, the decedent's accountant. Mr. Wingate has been a certified public accountant for almost 40 years. Mr. Wingate, who had known the decedent for about 40 years, did all of the decedent's accounting work.
Decedent, Henri P. Watson, was a resident of Lexington, Mississippi, until his death on January 19, 1982. Decedent was born on August 4, 1892, which made him 89 years old at his death. Decedent had been a farmer all of his life, farming in and around Holmes and Sunflower Counties, Mississippi.
On September 27, 1927, the decedent acquired a tract of farmland in Sunflower County, Mississippi, containing 1,073.18 acres. This farmland was approximately 70 to 75 miles from the decedent's home in Lexington. Decedent farmed this land from 1927 until late 1978, which was through the 1978 crop year.
Prior to 1969, the decedent's son, Henri P. Watson, Jr., lived near his father. In 1942, Henri P. Watson, Jr. acquired approximately 1,020 acres adjoining his father's land. Prior to 1969, the decedent and his son farmed the two tracts of land (1,073.18 acres and 1,020 acres) as a partnership. However, the decedent and his son never formally conveyed their land to the partnership. Decedent and his son established a bank account in the name of ‘Watson and Watson‘ for use in the farming operation.
On October 23, 1961, the decedent executed a deed transferring an undivided one-half interest in his 1,073.18-acre tract of land to his son, Henri P. Watson, Jr., as trustee for the use and benefit of the decedent's four grandchildren. The deed stated that the trust would terminate when the youngest of the beneficiaries became 21 years of age. The youngest grandchild became 21 years old on July 31, 1981. There was no provision in the trust deed for the disposition of the corpus of the trust after the trust terminated. No subsequent conveyance of the half interest in the 1,073.18 acres of farmland was made to the decedent's grandchildren, and the record is silent as to the ultimate disposition of the property.
The October 1961 deed provided that the trustee had the authority to use any part of the income or corpus of the trust property for the support and maintenance of the grandchildren. The deed authorized the trustee to
handle, manage, operate, rent, lease for oil and gas and other mineral purposes, encumber by deed of trust or otherwise, and to sell all or any part of, or any interest in, the aforesaid property on any terms deemed proper by said trustee, all with the same authority and discretion and to the same extent as though said property was owned in fee simple by said trustee, and my trustee shall have full authority to invest, reinvest and otherwise handle any funds or other property received from any sale or other transaction involving said land with the same authority and discretion as though said funds or other property belonged to said trustee personally, and my said trustee shall have full authority to expend any part of the income or corpus from any of such funds as he sees fit for the proper support and maintenance of my said grandchildren * * *.
The trustee appointed under the October 1961 deed, Henri P. Watson, Jr., did not maintain any trust books or records and did not file any Federal income tax returns for the trust. No distributions of the original trust corpus were made to the beneficiaries. However, the decedent's four grandchildren reported rental income from farmland on their Federal income tax returns as follows:
+------------------------------------------+
¦Year ¦Norman ¦James ¦Mary ¦Henri III ¦
+------+--------+-------+------+-----------¦
¦ ¦ ¦ ¦ ¦ ¦
+------+--------+-------+------+-----------¦
¦1982 ¦$9,250 ¦$14,250¦$2,900¦ ¦
+------+--------+-------+------+-----------¦
¦1981 ¦ ¦ ¦ ¦ ¦
+------+--------+-------+------+-----------¦
¦1980 ¦ ¦ ¦ ¦ ¦
+------+--------+-------+------+-----------¦
¦1979 ¦1,250 ¦1,250 ¦1,250 ¦ ¦
+------+--------+-------+------+-----------¦
¦1978 ¦1,250 ¦1,250 ¦1,250 ¦$1,250 ¦
+------+--------+-------+------+-----------¦
¦1977 ¦1,250 ¦1,250 ¦1,250 ¦(1 ) ¦
+------+--------+-------+------+-----------¦
¦1976 ¦1,250 ¦1,250 ¦1,250 ¦ ¦
+------+--------+-------+------+-----------¦
¦1975 ¦1,250 ¦ ¦1,250 ¦1,250 ¦
+------+--------+-------+------+-----------¦
¦1974 ¦4,250 ¦4,250 ¦4,250 ¦4,250 ¦
+------+--------+-------+------+-----------¦
¦1973 ¦4,250 ¦4,250 ¦4,250 ¦4,250 ¦
+------------------------------------------+
Mr. Wingate prepared Federal income tax returns for each of the beneficiaries. The rent to the grandchildren was paid from the Watson and Watson bank account. Rental income from the property placed in trust was paid into accounts for the benefit of or directly to the beneficiaries. A 1,077-acre farm in Sunflower County similar to the Watson land, but of better quality, was rented for about $13 an acre from approximately 1963 to 1968, around $18 an acre from approximately 1968 to 1973, and about $27 an acre from 1973 to 1978.
Mr. Wingate prepared gift tax returns for the decedent and his wife reflecting a gift to the decedent's four grandchildren of a half interest in the decedent's 1,073.18 acres of farmland. The gift tax returns reflected no reservation of any interest in the property. However, the Atlanta Service Center of the Internal Revenue Service, where the returns should have been filed, has no record that the decedent ever filed gift tax returns for the transfer at issue.
The trust deed was drafted by Lee Spence, an attorney who worked for the trust department of Deposit Guaranty National Bank in Jackson, Mississippi. Mr. Spence came to the office of Pat Barrett, the decedent's lawyer, in Lexington, Mississippi, to draft the trust deed. Mr. Spence held himself out to Mr. Barrett as an expert in trust instruments. After Mr. Spence drafted the trust deed, it was typed by Mr. Barrett's secretary. Mr. Spence went over the draft with the secretary very thoroughly before the draft was typed. After Mr. Spence left the office, the draft was typed and Mr. Barrett read the typed document. After Mr. Barrett read the document, he mailed it to Mr. Spence. Mr. Spence then wrote Mr. Barrett a letter stating that in Mr. Spence's opinion, the document was sufficient for Mr. Watson's purpose.
The decedent's son, Henri P. Watson, Jr., also conveyed a portion of his own land to his children in trust. The form of this conveyance was similar to the form of the decedent's trust deed. However, Henri P. Watson, Jr. never paid any rent to his children for his use of the property.
In approximately 1969, Henri P. Watson, Jr. moved to Jackson, Mississippi, which is about 125 to 130 miles away from the two parcels of farmland. From the time Henri P. Watson, Jr. moved to Jackson until 1980, all of the income and expenses associated with farming both parcels of land were reported by the decedent on his Federal income tax returns. The decedent and his son agreed that after Henri P. Watson, Jr. moved to Jackson, the decedent would get the income from the two parcels and Henri P. Watson, Jr. would get improvements to his 1,020 acres. The improvements to Henri P. Watson, Jr.'s land consisted of land-leveling of his 1,020 acres to a grade that could be flood irrigated. After 1967, at the suggestion of the Watsons' accountant, Mr. Wingate, no partnership tax returns were filed by the decedent or his son. Mr. Wingate's recommendation that the Watsons stop filing partnership returns was based on the fact that as Henri P. Watson, Jr. became less...
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