Yang v. Comm'r of Internal Revenue (In re Estate of Young)
| Decision Date | 11 May 1998 |
| Docket Number | No. 20139–94.,20139–94. |
| Citation | 110 T.C. 297,110 T.C. No. 24 |
| Court | U.S. Tax Court |
| Parties | Estate of Wayne–Chi YOUNG, Deceased, Tsai–Hsiu Hsu Yang, Executrix, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
OPINION TEXT STARTS HERE
Lance M. Weagant and Randall D. Fowler, for petitioner.
Dwight M. Montgomery, for respondent.
Respondent determined a deficiency of $154,545 in petitioner's Federal estate tax and an addition to tax under section 6651(a) 1 in the amount of $38,636. After concessions by the parties, the issues remaining are:
(1) Whether decedent's property interest in the Young Property was an interest in joint tenancy or in community property. We hold that decedent held the property in joint tenancy.
(2) Whether a fractional interest discount or a lack of marketability discount is applicable to the Young Property. We hold that a discount is inapplicable.
(3) Whether petitioner is liable for an addition to tax for late filing under section 6651(a). We hold that petitioner is liable.
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated by this reference. Tsai–Hsiu Hsu Yang (Yang), also known as Tsai–Hsiu Hsu Young, is executrix of the estate (petitioner) of Wayne–Chi Young, deceased (decedent). Yang was decedent's wife (collectively the Youngs). At all material times, Yang and decedent were residents of the State of California, a community property State. At all times relevant to this case, neither decedent nor Yang was a citizen of the United States, but they were residents of the United States.
Decedent died on June 28, 1989. At the time of decedent's death, the executrix Yang knew that the assets of the estate exceeded $1,200,000. On March 21, 1990, petitioner filed Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation–Skipping Transfer) Taxes, requesting an extension of time to file the return and to pay the estate tax to March 28, 1991. On April 11, 1990, respondent approved petitioner's application for extension of time to file and pay. Before March 28, 1991, petitioner filed a second Form 4768, requesting an additional extension to file the return and to pay the estate tax to March 28, 1992. On April 4, 1991, respondent denied petitioner's application for extension of time to file, but approved the application for extension to pay. On September 6, 1991, petitioner filed the estate's Form 706, United States Estate (and Generation–Skipping Transfer) Tax Return. Wang, a certified public accountant, helped in petitioner's filing of the return.
At the time of decedent's death, decedent and Yang owned the following five real properties (collectively the Young Property), each of which they had acquired by deed as husband and wife, as joint tenants: (1) The Bixby Knolls Motel, located at 4045 Long Beach Boulevard in Long Beach, California, which was purchased by decedent and Yang on May 19, 1983; (2) a condominium located at 111 North Moore Avenue, # A, in Monterey Park, California, which was purchased by decedent and Yang on February 18, 1986; (3) the Oak Tree Inn located at 788 West Huntington Drive in Monrovia, California, which was purchased by decedent and Yang on August 25, 1987; (4) a condominium located at 3507 Birkdale in El Monte, California, which was purchased by decedent and Yang on September 2, 1988; and (5) a house located at 1635 Vallecito Drive in Hacienda Heights, California, which was purchased by decedent and Yang on March 13, 1989. At no time prior to decedent's death did decedent or Yang execute a writing to change their legal title, as husband and wife as joint tenants, in the properties.
On decedent's estate tax return, petitioner excluded one-half of the value of the Young Property, claiming decedent's property interest in the Young Property was in the nature of community property. Petitioner also claimed a fractional interest discount of 15 percent on the Young Property, citing Propstra v. United States, 680 F.2d 1248 (9th Cir.1982). Respondent determined that petitioner was not entitled to the fractional interest discount. The following table shows the value of each Young property less the proportion of value excluded from the gross estate as stated by petitioner and as determined by respondent.
+-------------------------------------------------------------------+
¦ ¦PROPERTY ¦Petitioner's ¦¦Respondent's ¦
+---+-------------------+------------------------++-----------------¦
¦ ¦ ¦Calculations ¦¦Determination ¦
+---+-------------------+------------------------++-----------------¦
¦ ¦ ¦ ¦¦ ¦
+---+-------------------+------------------------++-----------------¦
¦ ¦ ¦Value of Property ¦¦Value of Property¦
+---+-------------------+------------------------++-----------------¦
¦(1)¦Bixby Knolls Hotel ¦$ 565,000 ¦¦$ 508,500 ¦
+---+-------------------+------------------------++-----------------¦
¦(2)¦Condo–Monterey Park¦193,000 ¦¦193,000 ¦
+---+-------------------+------------------------++-----------------¦
¦(3)¦Oak Tree Inn ¦3,300,000 ¦¦3,300,000 ¦
+---+-------------------+------------------------++-----------------¦
¦(4)¦Condo–El Monte ¦160,000 ¦¦160,000 ¦
+---+-------------------+------------------------++-----------------¦
¦(5)¦House in Hacienda ¦555,000 ¦¦570,000 ¦
+---+-------------------+------------------------++-----------------¦
¦ ¦Heights ¦ ¦¦ ¦
+---+-------------------+------------------------++-----------------¦
¦ ¦ ¦ ¦¦ ¦
+---+-------------------+------------------------++-----------------¦
¦ ¦Less: ¦1/2 Community Interest ¦¦1/2 Interest ¦
+---+-------------------+------------------------++-----------------¦
¦ ¦Less: ¦Propstra Discount of 15%¦¦None ¦
+-------------------------------------------------------------------+
Petitioner filed a spousal property petition in the Superior Court of California, County of Los Angeles, alleging that the Young Property was community property. After a hearing, the Superior Court of California, County of Los Angeles, in a spousal property order dated October 8, 1991, found that the Young Property was “community property or quasi-community property belonging one-half (1/2) to each spouse and passing one hundred percent (100%) to TSAI–HSIU HSU YOUNG, the surviving spouse.”
OPINIONIt has been established that what constitutes an interest in property held by a person within a State is a matter of State law. Fernandez v. Wiener, 326 U.S. 340, 355–357, 66 S.Ct. 178, 90 L.Ed. 116 (1945); Poe v. Seaborn, 282 U.S. 101, 51 S.Ct. 58, 75 L.Ed. 239 (1930). In Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967), the Supreme Court held that State law as announced by the highest court of the State is to be followed. Id. at 465 (citing Bernhard v. Polygraphic Co. of Am., Inc., 350 U.S. 198, 76 S.Ct. 273, 100 L.Ed. 199 (1956)). On the other hand, once property rights are determined under State law, Federal law is utilized to decide the tax consequences. Aquilino v. United States, 363 U.S. 509, 512–513 (1960); Morgan v. Commissioner, 309 U.S. 78, 60 S.Ct. 424, 84 L.Ed. 585 (1940).
In this case with the Young Property being situated in California, California property law determines the nature of decedent's interest in the Young Property. Under California law, a husband and wife may hold property as joint tenants,2 tenants in common, or as community property.3 Cal. Civ.Code sec. 5104 (West 1984). However, property cannot be both joint tenancy and community property, as these two types of interests are mutually exclusive. Sandrini v. Ambrosetti, 111 Cal.App.2d 439, 244 P.2d 742, 750 (Cal.Dist.Ct.App.1952); Schindler v. Schindler, 126 Cal.App.2d 597, 272 P.2d 566, 568 (Cal.Dist.Ct.App.1954).
Under California law, property acquired by spouses during wedlock is statutorily presumed to be community property. Cal. Civ.Code sec. 5110 (West 1986). However, where a husband and wife take property by deed as joint tenants, the presumption of community property is rebutted. Schindler v. Schindler, supra at 568; Siberell v. Siberell, 214 Cal. 767, 7 P.2d 1003, 1005 (Cal.1932). Property held by husband and wife in joint tenancy form is subject to a rebuttable presumption that the character of the property is as set forth in the deed. Schindler v. Schindler, supra at 568. The presumption created by the deed may be rebutted by evidence that the character of the property was changed or affected by an agreement or common understanding, or inferred from the conduct and declarations of the spouses. Estate of Herzog v. Commissioner, T.C. Memo.1992–193 (citing Estate of Blair v. Blair, 199 Cal.App.3d 161, 244 Cal.Rptr. 627 (1988); Estate of Levine v. Levine, 125 Cal.App.3d 701, 178 Cal.Rptr. 275 (1981); Estate of Wilson, 64 Cal.App.3d 786, 134 Cal.Rptr. 749 (1976)). Parol evidence may be admitted to establish that the real property was intended to be community property though title was taken by husband and wife as joint tenants. United States v. Pierotti, 154 F.2d 758, 762 (9th Cir.1946). However, there must be a mutual intent of the spouses to transmute their interests in the land into community property. Petersen v. Commissioner, 35 T.C. 962, 967, 1961 WL 1271 (196...
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