The opinion
T.C. Memo. 2012-7
UNITED STATES TAX COURT
ESTATE OF RAYMOND J. GILL, DECEASED, SABAL TRUST COMPANY,
PERSONAL REPRESENTATIVE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12885-00. Filed January 9, 2012.
Mitchell I. Horowitz, for petitioner.
Stephen Rickio Takeuchi, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined a deficiency in
the Federal estate tax of the Estate of Raymond J. Gill (estate)
of $2,795,426. In the more than 10 years this case has been
pending, the parties have settled multiple issues. The issues
remaining for decision are:
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(1) Whether the estate is entitled to a deduction for
certain section 20531 administration expenses totaling
$884,950.57. These expenses relate to litigation between
decedent’s second wife and his children. We hold that the estate
is entitled to a deduction for a portion of those expenses; and
(2) whether the amount of the marital deduction should be
reduced by Federal estate taxes and State death taxes of
$47,752.54. We hold that the amount of the marital deduction
should not be reduced.
FINDINGS OF FACT
Raymond J. Gill (decedent) was a resident of Florida when he
died on September 19, 1996. Sabal Trust Co. is the personal
representative of his estate and has its principal offices in
Florida.
Decedent’s first wife, Joan Gill, died on January 11, 1995.
At the time of her death, Joan Gill and decedent had been married
43 years. Decedent and Joan Gill had two children, Pamela Gill
Alabaster (Ms. Alabaster) and Mark Gill (collectively referred to
as Gill children). Ms. Alabaster had two children at the time
decedent died (grandchildren).
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the date of
decedent Raymond J. Gill’s death, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
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1. Original Estate Plan
On July 5, 1994, decedent and Joan Gill each executed estate
planning documents with the assistance of counsel. Both decedent
and Joan Gill created trust structures to which they contributed
certain assets.
Decedent created a revocable living trust which would pay
income to decedent for life. All trust assets would be
distributed on decedent’s death as follows: (a) If Joan Gill
survived decedent, to a newly created credit shelter trust up to
the estate tax exclusion amount, with the residue to Joan Gill in
a newly created marital trust for life and remainder to the Gill
children, or (b) if Joan Gill did not survive decedent, to
decedent’s children and grandchildren. Hereinafter the living
trust and the marital trust are referred to as decedent’s Living
Trust and decedent’s Marital Trust, respectively. Decedent’s
Living Trust instrument also provided that upon decedent’s death
the trust would establish and pay $100,000 to trust funds for
each living grandchild (grandchildren’s trusts).
Likewise, Joan Gill created a revocable living trust which
would pay her income for life. All trust assets would be
distributed on her death as follows: (a) If decedent survived
Joan Gill, to a newly created credit shelter trust up to the
estate tax exclusion amount, with the residue to decedent in a
newly created marital trust for life and remainder to the Gill
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children (hereinafter these three trusts are referred to as Joan
Gill’s Living Trust, Joan Gill’s Credit Shelter Trust, and Joan
Gill’s Marital Trust), or (b) if decedent did not survive Joan
Gill, to Joan Gill’s children and grandchildren.
In both decedent’s and Joan Gill’s trust structures, the
trustee of the living trust would also serve as the trustee of
the credit shelter and marital trusts. Joan Gill and decedent
were named cotrustees of both living trusts. Upon the death of
either Joan Gill or decedent, the surviving spouse would become
the sole trustee of both living trusts (and therefore trustee of
the other’s marital and credit shelter trusts), with the Gill
children becoming cotrustees upon the death or inability to serve
of the surviving spouse.
Joan Gill’s Living Trust instrument provided that if
decedent survived her, upon decedent’s death all Federal estate
taxes and State death taxes attributable to the inclusion of
property of Joan Gill’s Marital Trust in the gross estate of
decedent were to be paid from the assets of Joan Gill’s Marital
Trust.
The Gill children became familiar with their parents’ estate
plans in 1994. Upon Joan Gill’s death in January 1995 decedent
became the sole trustee of Joan Gill’s Living Trust (and
therefore trustee of Joan Gill’s Credit Shelter Trust and Joan
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Gill’s Marital Trust as well). His actions taken while trustee
would be the subject of later litigation, as discussed below.
2. Decedent’s Relationship With Valerie Gill and Alteration
of the Original Estate Plan
Decedent was an executive for ITT and often traveled to
Germany because he oversaw a German company that had been
acquired by ITT. Valerie Gill was an employee of the German
company and first met decedent in 1979. At the time, Valerie
Gill was a citizen of Germany.
Two months after Joan Gill’s death, decedent informed the
Gill children that he was considering taking a “life partner”.
Decedent asked Valerie Gill to marry him and she came to the
United States, where she first met the Gill children in April
1995. Decedent and Valerie Gill entered into a prenuptial
agreement on April 19, 1995, pursuant to which decedent and
Valerie Gill each waived their applicable marital rights to the
property of the other, including any rights to the other’s estate
at death. Decedent and Valerie Gill were married in April 1995.
At the time of his marriage to Valerie Gill, decedent had lung
cancer and was undergoing debilitating chemotherapy. Valerie
Gill cared for decedent from the time she came to the United
States until his death.
On August 28, 1995, decedent amended the terms of decedent’s
Living Trust. Under the amendment, upon decedent’s death Valerie
Gill and SunTrust Bank (SunTrust) were to become cotrustees. The
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Gill children would not become cotrustees until the refusal or
inability of Valerie Gill to serve as a trustee. The amendment
further directed that all income of decedent’s Marital Trust be
paid to Valerie Gill for life, with trustee discretion to also
pay trust principal to Valerie Gill. The Gill children retained
their remainder interest in decedent’s Marital Trust.
Also on August 28, 1995, decedent executed a last will and
testament which named Valerie Gill and SunTrust as co-personal
representatives of his estate, devised decedent’s tangible
personal property to Valerie Gill, and transferred the estate
residue to decedent’s Living Trust. This will superseded a prior
will which had named the Gill children co-personal
representatives of decedent’s estate.
3. Litigation Resulting From Decedent’s Actions Taken While
Trustee of Joan Gill’s Living Trust
Upon decedent’s death in September 1996, Valerie Gill and
SunTrust became the cotrustees of decedent’s Living Trust,
according to the amended terms of the trust. In October 1996
Valerie Gill and SunTrust were also appointed co-personal
representatives of the estate by a probate court order as
decedent’s will dated August 28, 1995, provided.
In January 1997 the Gill children filed a statement of claim
against the estate alleging breach of fiduciary duties by
decedent while acting as trustee of Joan Gill’s Living Trust.
The Gill children requested complete accountings for all of the
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assets of Joan Gill’s Living Trust (which included the assets of
both Joan Gill’s Credit Shelter Trust and Joan Gill’s Marital
Trust).
Litigation between the Gill children and Valerie Gill and
SunTrust (in their roles as co-personal representatives of the
estate) resulted. It was alleged that decedent had made improper
withdrawals of trust principal from both Joan Gill’s Credit
Shelter Trust and Joan Gill’s Marital Trust. A settlement was
reached in which the co-personal representatives agreed to pay
the Gill children $545,508.14 from the estate (the Joan Gill
trust settlement). The $545,508.14 included, in part,
$360,931.79 which should have been paid to Joan Gill’s Marital
Trust by decedent and $160,929.45 which should have been paid to
Joan Gill’s Credit Shelter Trust by decedent.
Pursuant to the Joan Gill trust settlement, $95,787.82
representing Federal estate taxes and State death taxes
previously paid by the estate was subtracted from the $545,508.14
as a means of reimbursing the estate for previously paying such
taxes. This $95,787.82 in taxes was generated by the $360,931.79
which should have been paid to Joan Gill’s Marital Trust by
decedent (but was included in his estate when he failed to pay it
to Joan Gill’s Marital Trust) and by an additional $358,807.26.
The additional $358,807.26 was not part of the $545,508.14
settlement but comprised assets separately distributed in
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decedent’s estate and living trust instruments to: (1) The Gill
children ($20,527 in tangible personal property, distributed to
Valerie Gill in decedent’s will but passing to the Gill children
upon her disclaimer); (2) the grandchildren ($138,280.26 in
individual retirement accounts (IRAs) payable); and (3) the
grandchildren’s trusts ($200,000 in cash, distributed under terms
of decedent’s Living Trust).
4. Litigation Resulting From Alterations to Decedent’s
Original Estate Plan
In late 1996 Ms. Alabaster contacted an attorney about
challenging decedent’s amended estate plan. In January 1997 the
Gill children filed a complaint against Valerie Gill in her
individual and fiduciary capacities and against SunTrust in its
fiduciary capacity. This litigation was brought by the Gill
children in both their individual and fiduciary capacities, as
they were successor cotrustees of decedent’s Living Trust under
both the original and amended terms of decedent’s Living Trust.
The Gill children also sued in their fiduciary capacities as
nominated co-personal representatives of decedent’s estate under
a prior will of decedent’s.
In the complaint, the Gill children sought to set aside
decedent’s will and amendments to decedent’s Living Trust,
alleging that Valerie Gill exerted undue influence on decedent
and forced decedent to amend his estate plan for her benefit. In
December 1997 Valerie Gill and SunTrust filed an answer to the
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complaint. Litigation ensued over the next 3 years and the
parties entered court-ordered mediation.
Mediation led to the execution of a settlement agreement in
September 2000 (the 2000 settlement agreement) which resolved the
undue influence issue. The 2000 settlement agreement provided,
among other things, that Valerie Gill would pay $274,906.76 to
the estate to be distributed to the Gill children and would give
$1,725,093.24 to the Gill children. Valerie Gill was also
required to resign as trustee of decedent’s Living Trust, with
SunTrust to become the sole trustee. The 2000 settlement
agreement was contingent upon Valerie Gill’s becoming a U.S.
citizen within 2 years of execution.
Valerie Gill became a U.S. citizen in February 2002 but
thereafter failed to uphold her obligations under the 2000
settlement agreement. Instead, in September 2002 Valerie Gill
and SunTrust, in their fiduciary capacities, filed a declaratory
judgment action in the Civil Division of the Circuit Court for
Sarasota County to set aside the 2000 settlement agreement. The
suit alleged the 2000 settlement agreement was “void due to
mutual mistake, unenforceable terms, [and] a complete lack of a
meeting of the minds”. This suit was found to be frivolous and
was dismissed with prejudice. Valerie Gill and SunTrust appealed
the dismissal to the Second District Court of Appeal in Lakeland,
Florida, but it was affirmed in 2004. After losing the appeal,
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Valerie Gill filed a second declaratory judgment action in
probate court, this time in her individual capacity. The court
in that case entered summary judgment in favor of the Gill
children, holding that Valerie Gill could not challenge the
validity of the 2000 settlement agreement.
Beginning in 2002 the Gill children also filed various
actions in either their individual or individual and fiduciary
capacities. These actions were taken in response to Valerie
Gill’s failure to carry out the 2000 settlement agreement and
were for the purpose of enforcing that agreement or preserving
estate assets against what the Gill children perceived to be
improper expenditures by Valerie Gill and SunTrust (because
Valerie Gill and SunTrust, as co-personal representatives of the
estate, were spending the estate’s money by initiating and then
appealing cases which were found to be frivolous). The Gill
children did not seek assets in excess of what they would have
received under the 2000 settlement agreement.
Litigation between the parties lasted several years. During
this time, Valerie Gill and SunTrust still refused to comply with
the terms of the 2000 settlement agreement. It became clear that
the best option for all parties, including the estate, would be
another round of mediation, which the parties entered into in
2006. Jack Falk (Mr. Falk) of the law firm Dunwoody White served
as the mediator. A new settlement agreement was entered into in
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June 2007 (the 2007 settlement agreement). By this time the
parties had incurred legal fees of hundreds of thousands of
dollars.
The 2007 settlement agreement was approved by the Circuit
Court for Sarasota County, Florida, in August 2007. In approving
the 2007 settlement agreement the circuit court stated:
Based upon more than 15 hearings held before the
undersigned judge since 1999, the Court specifically
finds that the professional services referred to in
paragraphs 2.a.i., ii., and iii. of the Settlement
Agreement, were and will be essential to the proper
administration and settlement of the Estate and Living
Trust, and necessary to determine the beneficiaries, to
carry out the intent of the above Decedent and to
effect the proper distribution of said Estate and
Living Trust * * *.
Paragraphs 2.a.i., ii., and iii. of the 2007 settlement agreement
provided for the estate’s reimbursement of certain legal fees
incurred by the Gill children and Valerie Gill as an individual,
as discussed further below. The court also ordered that the
mediation fees be split five ways among: (1) The Gill children;
(2) Valerie Gill as an individual; (3) the law firm of Kirk
Pinkerton (who represented the estate); (4) SunTrust; and (5) the
estate.
The 2007 settlement agreement declared the 2000 settlement
agreement null and void. It provided that the terms of
decedent’s Living Trust would undergo reformation to comply with
terms of the 2007 settlement agreement. It also provided for the
estate to make payments totaling $25,000 to the grandchildren’s
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trusts. These payments were reimbursements for attorney’s fees
and loss of income the trusts had suffered through improper
administration of the grandchildren’s trusts by the trustees,
Valerie Gill and SunTrust. However, there was no mention in the
2007 settlement agreement itself that the payments included
attorney’s fees.
Pursuant to the 2007 settlement agreement, the Gill children
received a combined $1,150,000 distribution from decedent’s
Living Trust. The 2007 settlement agreement also provided that
the estate would reimburse the Gill children $575,000 for legal
fees incurred from 1997 to 2007 and $20,000 prospectively for
their legal fees associated with court approval of the 2007
settlement agreement, reformation of the terms of decedent’s
Living Trust, and conclusion of this Tax Court case. These
amounts were less than the actual legal fees accumulated by the
Gill children during the course of litigation.
Pursuant to the 2007 settlement agreement, an additional
$18,000 was paid to a law firm which represented Valerie Gill in
her individual capacity for her legal fees associated with court
approval of the 2007 settlement agreement, reformation of the
terms of decedent’s Living Trust, and conclusion of this Tax
Court case.
The 2007 settlement agreement further provided that the
estate would reimburse the one-fifth shares of the 2006-2007
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mediation fees which had been assigned to the Gill children and
Valerie Gill in her individual capacity.
All legal fees reimbursed by decedent’s estate comprised
mostly attorney’s fees, although other expenses such as court
costs were also included.
5. Other Information
On September 19, 2000, respondent issued a notice of
deficiency to the estate determining a deficiency of $2,795,426
in estate tax. The estate timely filed a petition contesting the
deficiency. On Schedule J, Funeral Expenses and Expenses
Incurred in Administering Property Subject to Claims, of the
original Form 706, United States Estate (and Generation-Skipping
Transfer) Tax Return, the estate had claimed $1,533 of
administration expense deductions. In the notice of deficiency
respondent allowed additional administration expense deductions
of $411,500 as incurred and paid through July 20, 1999.
The estate now seeks to deduct an additional $884,950.57 in
administration expenses over amounts respondent previously
allowed. Those additional expenses are a result of the
protracted litigation after the death of decedent. Those
expenses include legal fees and related court costs, accounting
fees, trustee and management fees, and a total of $25,000
distributed to the grandchildren’s trusts. Respondent contests
portions of these additional deductions. An extensive statement
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of account for decedent’s Marital Trust was kept by SunTrust and
was used in determining whether certain administration expenses
are deductible, as described below.
The estate and respondent also disagree on whether a portion
of the Federal estate taxes and State death taxes reimbursed to
the estate pursuant to the Joan Gill trust settlement should
reduce the amount of Valerie Gill’s marital deduction.
In 2008 Sabal Trust Co. succeeded Valerie Gill and SunTrust
as trustee of decedent’s trusts and personal representative of
the estate.
OPINION
I. Burden of Proof
Generally, taxpayers bear the burden of proving, by a
preponderance of the evidence, that the determinations of the
Commissioner in a notice of deficiency are incorrect. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions
are a matter of legislative grace, and taxpayers bear the burden
of proving entitlement to any claimed deductions. Rule
142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
The estate has not argued that respondent should bear the burden
of proof.
II. Whether Deductions for Certain Administration Expenses
Totaling $884,950.57 Should Be Allowed
The estate claimed $1,533 of Schedule J administration
expense deductions on the original estate tax return. In the
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notice of deficiency, respondent allowed additional
administration expense deductions of $411,500. The estate now
seeks to deduct another $884,950.57 in administration expenses2
including legal fees, accounting fees, trustee and management
fees, and amounts distributed to the grandchildren’s trusts.
A. Legal Fees
The estate seeks to deduct $829,965.09 in additional legal
fees paid or reimbursed by the estate from 1999 to 2007. Those
payments were made to various lawyers of the parties involved in
the litigation which led to the 2000 and 2007 settlement
agreements. The $829,965.09 in deductions comprises $29,460.18,
$195,402.43, $18,965.62, $152.60, $6,746.50, and $579,237.76 for
years 1999, 2000, 2001, 2003, 2006, and 2007, respectively.
Respondent disputes various amounts of the deductions the estate
claims for the following reasons: (1) The estate overstated some
payments; (2) some payments are listed as distributions to/for a
beneficiary rather than as administration expenses; (3) the
estate has not proved payments to certain lawyers are properly
deductible as administration expenses to the estate; and (4) some
of the deductions sought are for amounts the estate reimbursed to
the Gill children and Valerie Gill individually for their
attorney’s fees.
2
We have corrected minor mathematical errors made by the
parties in their calculations. Those corrections have reduced
the total administration expense deductions sought by $6.
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1. Overstatement of Some Payments by the Estate
Respondent claims the estate overstated legal fees paid to
the estate’s lawyers of $13,744.18, $400, and $11,245.50 in 2000,
2003, and 2006, respectively. After examining the statement of
account for decedent’s Marital Trust kept by SunTrust, we
disagree with respondent. In his calculations, respondent took
only attorney’s fees into account and failed to include related
court costs (such as those for transcripts and depositions)
incurred by the estate’s lawyers. Such costs are deductible
under section 20.2053-3(d), Estate Tax Regs.
2. Listing of Some Payments as Distributions to/for a
Beneficiary
The estate attempts to deduct several payments made to Kirk
Pinkerton (the law firm which represented the estate) and listed
in the statement of account for decedent’s Marital Trust as
“distributions to/for a beneficiary” rather than as
“administrative expenses”. Respondent claims that distributions
to/for a beneficiary are not deductible as administration
expenses.3 Respondent therefore disputes amounts the estate
3
Sec. 2053(a) provides that the value of the taxable estate
shall be determined by deducting from the value of the gross
estate certain expenses of and claims against the estate. It
does not provide a deduction for distributions to estate
beneficiaries. See Estate of Lazar v. Commissioner, 58 T.C. 543
(1972) (estate failed to distinguish recipient’s rights as
third-party claimant from that recipient’s rights as estate
beneficiary; therefore distributions to that recipient not
deductible from gross estate).
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seeks to deduct of $8,609.70, $4,220, and $1,044 for years 1999,
2000, and 2001, respectively.
It is not clear why some payments to Kirk Pinkerton are
listed as distributions to/for a beneficiary rather than as
administration expenses. Certain payments were listed as
distributions to/for a beneficiary, even though payments made
days earlier with the same client and issue numbers were listed
as administration expenses. Neither the estate nor respondent
has elaborated on the reasoning behind that accounting. Because
the estate has not explained the accounting, we hold the estate
has not satisfied the burden of proof and may not deduct those
amounts.
C. Whether Payments to Certain Lawyers Are Deductible
Respondent claims payments to certain lawyers of $3,000 and
$11,245.50 in 2003 and 2006, respectively, are not deductible
because the estate has not established that those lawyers
provided services to the estate which are deductible as
administration expenses under section 20.2053-3(c), Estate Tax
Regs. The 2003 statement of account for decedent’s Marital Trust
lists a $3,000 payment to Nancy Gregoire representing an
“attorney retainer fee”. The 2006 statement of account lists an
$11,245.50 payment to Dunwoody White (Mr. Falk’s firm) with the
notation “Bene [sic] legal fee”.
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The estate never presented evidence on or described why
Nancy Gregoire was paid the $3,000 retainer, merely stating the
she assisted the estate. We therefore find the estate has not
met the burden of proof and is not entitled to the $3,000
deduction.
The estate did not explain why the payment was made to
Dunwoody White, but we find the payment was for mediation fees
which the probate court split five ways among the Gill children,
Valerie Gill as an individual, Kirk Pinkerton, SunTrust, and the
estate. The estate had agreed to reimburse the fees paid by the
Gill children and Valerie Gill. It appears the estate has
already deducted a portion of this payment, although the estate
did not describe which portions had already been deducted. We
hold the portion used to pay off the estate’s share of the
expenses is deductible (to the extent not already deducted) as an
administrative expense under section 2053(a). For the reasons
stated below relating to reimbursed attorney’s fees of the Gill
children and Valerie Gill individually, we also hold that the
amount reimbursed to the Gill children is deductible (to the
extent not already deducted) under section 2053(a), but the
amount reimbursed to Valerie Gill as an individual is not
deductible. We additionally hold that the estate has failed to
prove its entitlement to any other deductions as a result of the
payment made to Dunwoody White.
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D. Reimbursement of Certain Attorney’s Fees by
the Estate
Pursuant to the 2007 settlement agreement, the estate was to
reimburse certain legal fees incurred by the Gill children and
Valerie Gill in her individual capacity. All such legal fees
comprised mostly attorney’s fees, although other expenses such as
court costs were included. The reimbursements include $575,000
the estate paid to the Gill children for legal fees incurred from
1997 up to execution of the 2007 settlement agreement and $20,000
prospectively for their legal fees associated with court approval
of the 2007 settlement agreement, reformation of the terms of
decedent’s Living Trust, and conclusion of this Tax Court case.
Valerie Gill was reimbursed $18,000 for her personal legal fees
associated with court approval of the 2007 settlement agreement,
reformation of the terms of decedent’s Living Trust, and
conclusion of this Tax Court case. The estate now seeks a
deduction for those reimbursements.
Section 2053(a) requires that legal fees be allowable under
the laws of the jurisdiction under which the estate is being
administered. See Estate of Reilly v. Commissioner, 76 T.C. 369,
372 (1981). Any legal fees deducted as an administration expense
must also be reasonable in amount. Sec. 20.2053-3(c)(1), Estate
Tax Regs. Finally, regulations require that for an estate to
deduct legal fees (including attorney’s fees) as an
administration expense, the fees must be “essential to the proper
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settlement of the estate”. Sec. 20.2053-3(a), (c)(3), Estate
Tax Regs. This Court and the U.S. Court of Appeals for the
Eleventh Circuit (to which an appeal of this case would lie),
have recognized the validity of section 20.2053-3, Estate Tax
Regs., as imposing a Federal standard of necessity over and above
the State requirement of allowability. See Marcus v. Dewitt, 704
F.2d 1227, 1229-1230 (11th Cir. 1983) (citing Pitner v. United
States, 388 F.2d 651, 659 (5th Cir. 1967)); Estate of Lockett v.
Commissioner, T.C. Memo. 1998-50.
We first consider whether reimbursement of the legal fees at
issue was allowable under Florida law. In approving the 2007
settlement agreement, the Florida circuit court stated:
Based upon more than 15 hearings held before the
undersigned judge since 1999, the Court specifically
finds that the professional services referred to in
paragraphs 2.a.i., ii., and iii. of the Settlement
Agreement, were and will be essential to the proper
administration and settlement of the above Estate and
Living Trust, and necessary to determine the
beneficiaries, to carry out the intent of the above
Decedent and to effect the proper distribution of said
Estate and Living Trust * * *.
Paragraphs 2.a.i., ii., and iii. of the 2007 settlement agreement
provided for reimbursement of legal fees incurred by the Gill
children and Valerie Gill as an individual. In addition, Fla.
Stat. Ann. sec. 733.106 (West 2010) allows legal costs and
attorney’s fees to be paid by an estate. Considering these
facts, we find that reimbursement of the legal fees was allowable
under Florida law.
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We next consider whether the legal fees reimbursed by the
estate were reasonable in amount. Respondent claims the estate
has not shown the legal fees in this case were reasonable and has
therefore not met the burden of proof. We disagree with
respondent. We first consider the fact that the Florida circuit
court allowed reimbursement of the legal fees by the estate.
Because Fla. Stat. Ann. sec. 733.106(3) allows attorneys to be
awarded reasonable attorney’s fees only for services to an
estate, and the legal fees comprised mostly attorney’s fees, we
find this is strong evidence of the reasonableness of the fees.
In addition, the estate introduced into evidence voluminous
records of legal fees incurred by the Gill children over the
years in which litigation was ongoing. Considering these records
as a whole, we see nothing unreasonable about those fees. We
also consider the fact that the Gill children were reimbursed
less than their actual legal fees. Respondent offered no
evidence of his own that the legal fees were unreasonable.
Considering the evidence, we find the legal fees reimbursed by
the estate were reasonable.
Finally, we consider whether a deduction for the reimbursed
legal fees is proper under section 20.2053-3(a) and (c)(3),
Estate Tax Regs. Section 20.2053-3(c)(3), Estate Tax Regs.,
provides:
Attorneys’ fees incurred by beneficiaries incident to
litigation as to their respective interests are not
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deductible if the litigation is not essential to the
proper settlement of the estate within the meaning of
paragraph (a) of this section. An attorney’s fee not
meeting this test is not deductible as an
administration expense under section 2053 and this
section, even if it is approved by a probate court as
an expense payable or reimbursable by the estate.
Section 20.2053-3(a), Estate Tax Regs., provides in part:
The amounts deductible from a decedent’s gross estate
as “administration expenses” * * * are limited to such
expenses as are actually and necessarily incurred in
the administration of the decedent’s estate; that is,
in the collection of assets, payment of debts, and
distribution of property to the persons entitled to it.
The expenses contemplated in the law are such only as
attend the settlement of an estate and the transfer of
the property of the estate to individual beneficiaries
or to a trustee, whether the trustee is the executor or
some other person. Expenditures not essential to the
proper settlement of the estate, but incurred for the
individual benefit of the heirs, legatees, or devisees,
may not be taken as deductions. * * *
Respondent argues that the legal fees at issue are not
deductible because they were not paid for services “essential to
the proper settlement of the estate”. Instead, respondent claims
the legal fees were incurred for the personal benefit of the Gill
children and Valerie Gill. Respondent correctly notes that the
decision of the Florida circuit court approving reimbursement of
the legal fees by the estate is not determinative under section
20.2053-3(c)(3), Estate Tax Regs.
The estate argues that the legal fees are deductible because
they were incurred in litigation essential to the proper
settlement of the estate. The estate first argues that even if
the litigation involved only who would take which assets, the
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litigation was still necessary to determine the true testamentary
intent of decedent. The estate also argues that both the Gill
children and Valerie Gill owed certain fiduciary duties to
decedent and his estate. The estate claims these fiduciary
duties obligated the Gill children and Valerie Gill to defend
what they each believed to be the testamentary intent of
decedent.
We turn to caselaw to determine what litigation is essential
to the proper settlement of the estate. In Estate of Reilly v.
Commissioner, 76 T.C. 369 (1981), there was a dispute between the
decedent’s estate and the decedent’s wife involving whether
certain assets were owned by the estate or by the wife. We
allowed the estate to deduct the wife’s attorney’s fees paid by
the estate under section 20.2053-3, Estate Tax Regs., finding
that the asset litigation was essential to the proper settlement
of the estate because it determined the size of the estate. We
stated that the litigation in that case involved “more than a
dispute between ‘beneficiaries’ of a decedent in which the estate
merely occupied the position of a stakeholder.” Id. at 374.
In determining whether legal fees were for services
“essential to the proper settlement of the estate”, we have also
found legal fees to be deductible when a party incurs legal fees
while acting in respect of a fiduciary relationship between them
and the estate. In Estate of Swayne v. Commissioner, 43 T.C. 190
- 24 -
(1964), two wills executed by the decedent were sought to be
probated by different parties. The decedent’s son, Noah, was
nominated as executor under the later will, but not the earlier
will. In addition, Noah was to receive a larger share of the
estate as a beneficiary under the later will. Under Connecticut
State law, Noah, as the nominated executor, was required to
exhibit the later will for probate. Noah tried to have the later
will probated, but was unsuccessful. We held the legal fees
incurred by Noah were deductible, stating:
the fact that his personal interest coincided with his
duty as executor did not, ipso facto, render the legal
fee in question a personal expense. There is no
evidence any part of the fee was incurred by Noah in
any capacity other than as executor. Furthermore, the
litigation involving the will contest was essential to
the settlement of the estate, for until it was
determined which will should be probated, proper
distribution of the estate could not be made.
Id. at 200.
In Estate of Whitt v. Commissioner, T.C. Memo. 1983-262,
affd. 751 F.2d 1548 (11th Cir. 1985), criminal charges were
brought against the coadministrators of one estate. One of the
coadministrators was also the executor of a second estate. The
coadministrators hired a lawyer to defend them against the
charges and represent the estates. The estates each paid $5,000
of the $13,000 total attorney’s fees, then sought deductions for
those payments. The other $3,000 was allocated to one of the
- 25 -
coadministrators personally. In holding the deductions were
allowable, we stated:
We also are convinced that the payment of the
instant attorney fees meets the requirements of
respondent’s regulations. The fees were incurred in
connection with respondent’s criminal investigation of
both estates and to defend criminal charges brought
against the executors of the Estate of Audry J. Whitt
for failure to file the estate tax return. Clearly the
charges were brought against Loyd and Willard Whitt in
their capacities as co-administrators and executor, not
as individuals. * * * This is not a case where legal
fees were incurred by a beneficiary in litigation over
his own interests where the Estate merely occupied the
position of a stakeholder. * * * Rather, the fees
incurred in connection with respondent’s investigation
and in defense of these criminal charges were
“essential to the proper settlement of the estate.”
In Estate of Dutcher v. Commissioner, 34 T.C. 918 (1960),
the decedent and his wife had filed a complaint in Florida State
court to partition certain mutual fund shares. The decedent’s
son and daughter, John and Mary Jane, were named defendants in
the suit. John and Mary Jane filed an answer 8 days after the
decedent’s death, claiming that title to all the shares had
vested in them at the decedent’s death. John and Mary Jane also
counterclaimed against the decedent’s wife, alleging that she was
in possession of certain other assets of the decedent’s estate.
Before the children answered, John had been appointed special
administrator of the decedent’s estate. The estate later sought
to deduct expenditures for the partition suit and counterclaim.
In denying this deduction, we stated:
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The litigation was started by decedent in his lifetime
and after he died neither the special administrator not
[sic] the executor of his estate were made parties.
The suit was against John and Mary Jane and they
answered and counterclaimed and thereafter pleaded as
individuals. The record shows John had been appointed
special administrator of his father’s estate several
days before he filed his original answer in the Florida
suit. However, John, in his representative capacity,
never did appear by himself or his attorney in the
Florida litigation.
Id. at 924-925. It appears we would have allowed the deduction
had John appeared in his fiduciary capacity. See id.
We will separately address the legal fees associated with
the 1997 to 2000 litigation and mediation, the 2002 to 2007
litigation and mediation, and the present Tax Court case. For
each segment of litigation, we will determine whether the
reimbursed legal fees were incurred in activities essential to
the proper settlement of decedent’s estate.
The initial litigation and mediation from 1997 to 2000 was
between the Gill children and the estate, with the Gill children
suing in both their individual and fiduciary capacities (as
successor cotrustees of decedent’s Living Trust and nominated co-
personal representatives of decedent’s estate under a prior will
of decedent). This litigation addressed the undue influence
issue surrounding decedent’s will. Because the Gill children
acted in their fiduciary capacities and the litigation resolved
the undue influence issue, we hold that the litigation and
mediation from 1997 to 2000 involved “more than a dispute between
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‘beneficiaries’ of a decedent in which the estate merely occupied
the position of a stakeholder.” See Estate of Reilly v.
Commissioner, 76 T.C. at 374; Estate of Swayne v. Commissioner,
supra at 200; Estate of Dutcher v. Commissioner, supra at 924-
925; Estate of Whitt v. Commissioner, supra. The estate’s
reimbursement of the Gill children’s legal fees incurred as a
result of the 1997 to 2000 litigation and mediation is therefore
deductible as an expenditure essential to the proper settlement
of the estate. While it is true the Gill children personally
gained as a result of their actions from 1997 to 2000, “The fact
that some benefit results to the beneficiaries from an
expenditure is not a reason to disallow the expense as a
deduction”. See Porter v. Commissioner, 49 T.C. 207, 225 (1967);
see also Estate of Reilly v. Commissioner, supra at 373 (quoting
Porter v. Commissioner, supra at 225).
A more difficult question relates to legal fees incurred as
a result of the 2002 to 2007 litigation and mediation. During
that time, Valerie Gill and SunTrust, in their capacities as the
estate’s co-personal representatives, initiated a lawsuit
challenging the 2000 settlement agreement which was found to be
frivolous and was dismissed with prejudice. They appealed that
decision and lost again. Valerie Gill, in her individual
capacity, then sued to challenge the 2000 settlement agreement
only to lose on summary judgment. The Gill children defended
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against these lawsuits and initiated their own lawsuits for
purposes of enforcing the 2000 settlement agreement and
preserving estate assets from the costs associated with the
lawsuits Valerie Gill and SunTrust brought in their fiduciary
capacities. At times the Gill children litigated solely in their
individual capacities and at other times they litigated in both
their individual and fiduciary capacities.
Eventually the parties entered mediation, which led to
execution of the 2007 settlement agreement. That agreement
provided that the estate would reimburse the Gill children’s
attorney’s fees and litigation costs incurred up to execution of
the 2007 settlement agreement, plus $20,000 prospectively for
their attorney’s fees associated with court approval of the 2007
settlement agreement and reformation of the terms of decedent’s
Living Trust. Valerie Gill was reimbursed $18,000 for her
personal attorney’s fees associated with court approval of the
2007 settlement agreement and reformation of decedent’s Living
Trust. For the reasons stated below, we hold that all legal fees
reimbursed to the Gill children are deductible, while the legal
fees reimbursed to Valerie Gill as an individual are not
deductible.
The Gill children’s involvement in the 2002 to 2007
litigation was an extension of their involvement in the 1997 to
2000 litigation. Upon Valerie Gill’s attack on the validity of
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the 2000 settlement agreement, the Gill children were forced to
defend and seek to enforce that agreement. The Gill children
also sought to protect the estate from improper expenditures by
Valerie Gill and SunTrust, who were initiating petty and
frivolous lawsuits as the estate’s personal representatives and
charging attorney’s fees to the estate. When it became clear
that an additional round of mediation would be the best option
for all parties, including the estate, the Gill children agreed
to enter mediation again.
The Gill children’s reimbursed legal fees are a deductible
expense to the estate because the Gill children’s involvement in
the litigation, mediation, and reformation of the terms of
decedent’s Living Trust from 2002 to 2007 was necessary to
enforce the result of the 1997 to 2000 litigation and mediation.
Valerie Gill’s actions forced the Gill children to defend and
seek to enforce the 2000 settlement agreement, which was the
result of the 1997 to 2000 litigation and mediation. Although
the Gill children both defended against and initiated civil
lawsuits and participated in mediation, all their actions taken
from 2002 to 2007 were reactionary and necessary to defend and
enforce as much of the 2000 settlement agreement as they could.
Importantly, the Gill children did not seek estate assets in
excess of what they would have received under the 2000 settlement
agreement. We also note that the Gill children did not initiate
- 30 -
frivolous lawsuits and did not seek to unnecessarily prolong
litigation.
Because the 1997 to 2000 litigation was essential to the
proper settlement of decedent’s estate and the Gill children were
seeking only to enforce the outcome of that litigation from 2002
to 2007, we hold that the estate’s reimbursement of the Gill
children’s legal fees incurred in connection with the 2002 to
2007 litigation is deductible as an expense essential to the
proper settlement of the estate.
On the other hand, reimbursement of Valerie Gill’s
individual legal fees associated with court approval of the 2007
settlement agreement and reformation of the terms of decedent’s
Living Trust is not a deductible expense to the estate because:
(1) Valerie Gill’s individual involvement in the litigation,
mediation, and reformation of the terms of decedent’s Living
Trust from 2002 to 2007 was not an attempt to enforce the result
of the 1997 to 2000 litigation and mediation, and (2) her
individual involvement from 2002 to 2007 was not otherwise
essential to the proper settlement of the estate. Valerie Gill
was not seeking to enforce the result of the 1997 to 2000
litigation and mediation as the Gill children were. Indeed,
Valerie Gill was the party who failed to comply with the 2000
settlement agreement and initiated lawsuits to have it declared
void. To this end she filed lawsuits which were combative and
- 31 -
frivolous; it seems these lawsuits had no purpose other than to
extend litigation and force the Gill children into another round
of mediation. In addition, Valerie Gill sought estate assets in
excess of those she would have received under the 2000 settlement
agreement.
Valerie Gill’s individual actions did not challenge the
validity of decedent’s will or fulfill a fiduciary duty she owed
to the estate. Unlike the Gill children, Valerie Gill was not
seeking to enforce the 2000 settlement agreement. All her
individual actions were only attempts to obtain assets which had
been assigned to the Gill children in the 2000 settlement
agreement. We find Valerie Gill’s individual legal fees
associated with court approval of the 2007 settlement agreement
and reformation of the terms of decedent’s Living Trust were
incurred for her individual benefit rather than for the benefit
of the estate and were therefore not essential to the proper
settlement of the estate. See sec. 20.2053-3, Estate Tax Regs.
The estate argues that even if Valerie Gill’s individual
actions taken from 2002 to 2007 relate only to how much she
personally takes from the estate, those actions are still
essential to the proper settlement of the estate because they
helped to determine the proper testamentary intent of decedent.
We reject this argument as inconsistent with section 20.2053-3,
Estate Tax Regs., and the standard that a case involve “more than
- 32 -
a dispute between ‘beneficiaries’ of a decedent in which the
estate merely [occupies] the position of a stakeholder.” Estate
of Reilly v. Commissioner, 76 T.C. at 374. We hold the estate
may not deduct reimbursements for Valerie Gill’s individual legal
fees associated with court approval of the 2007 settlement
agreement and reformation of the terms of decedent’s Living
Trust.
Because respondent has already allowed legal fee deductions
for actions taken by SunTrust and Valerie Gill, purportedly in
their capacities as the estate’s representatives, from 2002 to
2007, we need not address whether deductions for those legal fees
are allowable.
With respect to legal fees prospectively reimbursed in the
2007 settlement agreement to the Gill children and Valerie Gill
for concluding this Tax Court litigation, we find those fees are
not deductible. The estate has not explained why, and we do not
believe, involvement by attorneys for the Gill children and
Valerie Gill as an individual in the instant litigation was
essential to the proper settlement of the estate. We therefore
hold reimbursements for those legal fees are not deductible by
the estate.
B. Accounting Fees
The estate seeks to deduct $17,112.25 in accounting fees
paid by SunTrust, as co-personal representative of the estate, to
- 33 -
accountants for services rendered to the estate in 1999, 2000,
and 2008. Respondent disputes $8,826 of the $17,112.25 because
two payments made to Kerkering Barberio & Co. (Kerkering
Barberio) for professional services provided to decedent’s
Marital Trust in 1999 and 2000 were listed as distributions
to/for a beneficiary rather than as administration expenses.
Other payments made to Kerkering Barberio were listed as
administration expenses.
It is not apparent why these two payments to Kerkering
Barberio were listed as distributions to/for a beneficiary rather
than administration expenses. Neither the estate nor respondent
has elaborated on the reasoning behind such an accounting.
Because the estate has not explained the accounting, we hold the
estate has not satisfied the burden of proof and may not deduct
those amounts.
C. Trustee and Management Fees
The estate also seeks to deduct $12,873.23 in additional
trustee and management fees paid to SunTrust from 1999 to 2008.
The estate seeks to deduct $12,034.81, $6,069, $1,884, $390,
$391.46, $4,322.84, $5,301.54, and $1,082.13 for years 1999,
2000, 2001, 2002, 2003, 2005, 2006, and 2007, respectively. The
sum of these deductions is offset by a reduction taken in the
2004 deduction of $18,602.55. Respondent disputes deductions of
$2,432.63, $6,069, $1,884, $390, $391.46, $4,322.84, $1,252.57,
- 34 -
and $1,082.13 for years 1999, 2000, 2001, 2002, 2003, 2005,4
2006, and 2007, respectively, for the reasons that the estate
overstated some payments and some fees are not sufficiently
explained.
For 1999 respondent claims the estate overstated trustee and
management fees by $2,432.63. A payment of $2,432.63 is listed
as a distribution to/for a beneficiary in the statement of
account. The payment description is “TRANSFER PRINCIPAL CASH TO
ACCOUNT 58-01-214-5801758 GILL, R.J. FBO ALABASTER CO-TA TO
CORRECT 10/19/99 PAYMENT FROM INCORRECT ACCT RE: MATTER 10135”.
The accounting was not explained by either the estate or
respondent, and we therefore hold the estate has not met the
burden of proof and may not deduct this $2,432.63.
For 2000 respondent claims the estate overstated trustee and
management fees by $6,069. This overstatement is due to amounts
listed in the statement of account as fees for real estate
services paid to the fiduciary and to taxes paid to the State of
Florida on behalf of the fiduciary. We hold these payments are
4
There is a discrepancy in the estate’s opening brief and
respondent’s reply brief with respect to the amount of trustee
and management fees the estate already deducted on Form 1041,
U.S. Income Tax Return for Estates and Trusts, for 2005.
Respondent states the estate already deducted $40,969.57, while
the estate states only $39,076 was already deducted. Because
Forms 1041 for the estate were not submitted and the numbers were
not stipulated, there is no way to tell which party is correct.
The parties must resolve this discrepancy in their Rule 155
calculations.
- 35 -
deductible. See sec. 20.2053-3(d)(1), Estate Tax Regs.
(“Expenses necessarily incurred in preserving and distributing
the estate * * *, including the cost of storing or maintaining
property of the estate, if it is impossible to effect immediate
distribution to the beneficiaries” are deductible).
For 2001 respondent claims the estate overstated trustee and
management fees by $1,884. This overstatement is due to amounts
listed in the statement of account as fees for real estate
services paid to the fiduciary and to taxes paid to the Internal
Revenue Service on behalf of the fiduciary. We hold these
payments are deductible. Id.
For 2002 respondent claims the estate overstated trustee
and management fees by $390. The $390 overstatement is due to
amounts listed in the statement of account as payments made to an
account of Raymond Gill “to correct [a] legal bill payment”. The
payments were listed as distributions to/for a beneficiary. The
accounting was not explained by either the estate or respondent,
and we therefore hold the estate has not met the burden of proof
and may not deduct the $390.
For 2003 respondent claims the estate overstated trustee and
management fees by $391.46. It is unclear what payment(s) listed
on the statement of account the overstatement is attributable to.
Part of the overstatement appears to be for unexplained base and
- 36 -
management fees paid for an IRA. We hold the estate has not met
the burden of proof and may not deduct the $391.46.
For 2005 respondent claims the estate overstated trustee and
management fees by $4,322.84. It is unclear what payment(s)
listed on the statement of account the overstatement is
attributable to. Part of the overstatement appears to be for
unexplained base and management fees paid for an IRA. We hold
the estate has not met the burden of proof and may not deduct the
$4,322.84.
For 2006 respondent claims the estate overstated trustee and
management fees by $1,252.57. The $1,252.57 overstatement is
attributable to various payments made for property insurance
liability, property inspections, and property appraisals for real
property owned by the trust. We hold those payments are
deductible. See sec. 20.2053-3(d)(1) and (2), Estate Tax Regs.
(expenses necessary for preserving or selling property of the
estate are deductible).
For 2007 respondent claims the estate overstated trustee and
management fees by $1,082.13. The $1,082.13 overstatement is
attributable to various electric and association fees paid as a
result of the trust’s ownership of a condo in New York City. We
hold those payments are deductible. See sec. 20.2053-3(d)(1),
Estate Tax Regs. (expenses necessary for preserving property of
the estate are deductible).
- 37 -
D. Distributions to Grandchildren’s Trusts
The estate also seeks to deduct $25,000 paid to the
grandchildren’s trusts from the estate pursuant to the 2007
settlement agreement as an administrative expense. The two
$12,500 payments were made as reimbursements for attorney’s fees
incurred by the trusts during the course of the will contest
litigation and to compensate the trusts for loss of income due to
mismanagement of funds by the cotrustees, Valerie Gill and
SunTrust. The estate contends those payments are deductible
administrative expenses under section 20.2053-3, Estate Tax Regs.
Respondent claims the distributions are not deductible
administration expenses.
We disagree with the estate with respect to the reimbursed
attorney’s fees portion of the payments. Section 20.2053-3(c),
Estate Tax Regs., requires that “the amount [of the attorney’s
fees] claimed * * * [as a deduction may] not exceed a reasonable
remuneration for the services rendered”. The estate made no
argument and offered no evidence to establish that the attorney’s
fees were reasonable. The amounts of these attorney’s fees were
never mentioned in either the 2007 settlement agreement or other
evidence; in fact, the 2007 settlement agreement does not even
mention that the $12,500 distributions included reimbursement for
attorney’s fees. It appears even the Florida circuit court which
approved the 2007 settlement agreement was unaware that such
- 38 -
attorney’s fees existed; the circuit court did not specifically
find these fees were “essential to the proper administration and
settlement” of the estate, as it did the attorney’s fees
reimbursed to the Gill children and Valerie Gill. We hold the
estate has not met the burden of proving the reasonableness of
the fees and therefore may not deduct the reimbursed attorney’s
fees.
We also disagree with the estate with regard to the portion
of the payments the estate paid to the trusts for loss of income
due to mismanagement of trust funds by Valerie Gill and SunTrust
while they were acting as cotrustees of the grandchildren’s
trusts. Such compensation was not necessary to the proper
settlement of the estate because it did not arise from a claim
the grandchildren’s trusts had against the estate. See Estate of
Reilly v. Commissioner, 76 T.C. at 377-378. Rather, the proper
claim would have been against Valerie Gill and SunTrust for
breach of fiduciary duties and mismanagement of funds. We
therefore hold the portion of the $25,000 representing
mismanagement compensation is not deductible.
III. Whether the Amount of the Marital Deduction Should Be
Reduced by Estate Taxes Paid of $47,752.54
Section 2056(a) provides for the allowance of a marital
deduction to “be determined by deducting from the value of the
gross estate an amount equal to the value of any interest in
property which passes or has passed from the decedent to his
- 39 -
surviving spouse, but only to the extent that such interest is
included in determining the value of the gross estate.”
Decedent’s Marital Trust was set up in such a way that all assets
passing to it from the estate or decedent’s Living Trust would
increase the marital deduction, as if the assets had so passed to
the surviving spouse (Valerie Gill) herself. The parties agree
that the estate is entitled to a marital deduction under section
2056(a) with respect to decedent’s Marital Trust; however, they
do not agree on the size of the marital deduction. Respondent
contends that under section 2056(b)(4), the amount of the marital
deduction should be reduced by a portion of the $95,787.82 in
Federal estate taxes and State death taxes reimbursed to the
estate pursuant to the Joan Gill trust settlement. The estate
argues the reimbursement should not reduce the marital deduction.
Pursuant to the Joan Gill trust settlement, $95,787.82
representing Federal estate taxes and State death taxes
previously paid by the estate was reimbursed to the estate. This
$95,787.82 in Federal estate taxes and State death taxes was
generated by the $360,931.79 which should have been paid to Joan
Gill’s Marital Trust by decedent and by an additional $358,807.26
which was distributed to the Gill children, grandchildren, and
grandchildren’s trusts from the estate.
Section 2056(b)(4) provides:
In determining for purposes of subsection (a) the value
of any interest in property passing to the surviving
- 40 -
spouse for which a deduction is allowed by this
section--
(A) there shall be taken into account
the effect which the tax imposed by section
2001, or any estate, succession, legacy, or
inheritance tax, has on the net value to the
surviving spouse of such interest; and
(B) where such interest or property is
encumbered in any manner, or where the
surviving spouse incurs any obligation
imposed by the decedent with respect to the
passing of such interest, such encumbrance or
obligation shall be taken into account in the
same manner as if the amount of a gift to
such spouse of such interest were being
determined.
Joan Gill’s Living Trust instrument provided that all
Federal estate taxes and State death taxes attributable to the
inclusion of property of Joan Gill’s Marital Trust in the gross
estate of decedent were to be paid from the assets of Joan Gill’s
Marital Trust. Respondent concedes the portion of the $95,787.82
in estate taxes attributable to the $360,931.79 which should have
been paid to Joan Gill’s Marital Trust by decedent should not
reduce the marital deduction, as the estate tax obligation on
that amount fell on Joan Gill’s Marital Trust (rather than on the
estate). As the $95,787.82 in estate taxes was generated by the
$360,931.79 which should have been paid to Joan Gill’s Marital
Trust by decedent plus an additional $358,807.26 which was
distributed to the Gill children, grandchildren, and
grandchildren’s trusts, the portion which respondent concedes is
- 41 -
[$360,931.79 / ($360,931.79 + $358,807.26)] x $95,787.82, or
$48,035.28.
However, respondent argues the $47,752.54 balance of the
$95,787.82 should reduce the marital deduction since it was
attributable to $358,807.26 which was distributed to the Gill
children, grandchildren, and grandchildren’s trusts from the
estate and decedent’s Living Trust. The $358,807.26 comprises:
(1) $20,527 in tangible personal property devised to Valerie Gill
in decedent’s will but passing to the Gill children upon her
disclaimer; (2) $138,280.26 in IRAs payable to the grandchildren;
and (3) $200,000 paid to the grandchildren’s trusts pursuant to
the terms of decedent’s Living Trust.
Respondent claims that unlike the $360,931.79, Joan Gill’s
Marital Trust had no obligation to pay the Federal estate and
State death taxes on the $358,807.26 in distributions. Instead,
respondent claims that the estate and decedent’s Living Trust
were obligated to pay those taxes. As a result, respondent
argues the tax obligation ultimately fell on decedent’s Marital
Trust (as residuary beneficiary of the estate and recipient of
the property of decedent’s Living Trust). If respondent is
correct that the tax obligation ultimately fell on decedent’s
Marital Trust, a $47,752.54 reduction in assets passing to
decedent’s Marital Trust (with respect to which the estate is
entitled to the marital deduction) results, and a corresponding
- 42 -
reduction in the marital deduction is required by section
2056(b)(4).
The estate argues that the Federal estate and State death
taxes were generated by assets passing from the estate and
decedent’s Living Trust to the Gill children, grandchildren, and
the grandchildren’s trusts. The estate claims that as a result,
the tax obligation “should have” fallen on those parties as
recipients of the property generating the taxes. The estate
notes that, in fact, the tax burden ultimately did fall on the
Gill children because pursuant to the Joan Gill trust settlement
they reimbursed the estate for previously paying those taxes. As
a result, the estate claims that none of the tax burden fell on
assets passing to decedent’s Marital Trust, and the marital
deduction amount should not be reduced under section 2056(b)(4).
We agree with the estate. Absent a controlling Federal
statute, State law determines who will bear the burden of the
Federal estate tax. Riggs v. Del Drago, 317 U.S. 95 (1942);
Estate of Leach v. Commissioner, 82 T.C. 952, 962 (1984), affd.
without published opinion 782 F.2d 179 (11th Cir. 1986). The
Code provides no general rules for the apportionment of estate
taxes. Estate of Fine v. Commissioner, 90 T.C. 1068, 1072
(1988), affd. without published opinion 885 F.2d 879 (11th Cir.
1989). State law also determines who will bear the burden of
State death taxes. Under Florida law effective at the time of
- 43 -
decedent’s death, taxes attributable to amounts passing under a
will or trust instrument were to be charged to and paid from the
residuary estate or from the corpus of the residuary share of the
trust unless the governing will or trust instrument directed
otherwise. Fla. Stat. Ann. sec. 733.817(1).
We turn to decedent’s will and trust instruments to
determine whether they directed which property estate and death
taxes were to fall on. Decedent’s will states:
estate taxes assessed by reason of my death, shall be *
* * paid by the Trustee of my Trust as directed in my
Trust, except that the amount, if any, by which the
estate taxes shall be increased as a result of the
inclusion of property transferred by me by gift prior
to my death or property in which I may have a
qualifying income interest for life * * * or property
over which I may have a power of appointment or control
shall be paid by the person holding or receiving such
property * * *. [Emphasis added.]
Decedent’s Living Trust agreement similarly directs that estate
taxes assessed by reason of decedent’s death be paid out of the
trust principal, but that increases in estate taxes from
inclusion of property transferred as a gift before decedent’s
death, property in which decedent has an income interest, or
property over which decedent has “a power of appointment or
control” shall be paid by the person holding or receiving that
property. Because the parties have not argued the effect of the
will and trust instrument terms regarding who is obligated to pay
the contested taxes, we are left with our own interpretation of
the somewhat confusing terms quoted above.
- 44 -
No evidence was presented that the assets at issue were
transferred by decedent as a gift before his death or that
decedent held any qualifying income interest in such assets.
However, we believe the emphasized “appointment or control”
language quoted above places the Federal estate and State death
tax burden on the recipients of the $358,807.26. The Gill
children, grandchildren, and grandchildren’s trusts received the
$358,807.265 which decedent had controlled as a result of
decedent’s failure to pay that amount to Joan Gill’s Marital
Trust. Our interpretation of the quoted terms is reinforced by
the fact that the Gill children (rather than the estate or
decedent’s Living Trust) ultimately paid the taxes by reimbursing
a portion of the Joan Gill trust settlement amount.
Under Florida law, the Federal estate and State death tax
burden falls on the party specified in the will and trust
instruments. We find these instruments placed the tax burden on
the recipient of distributed property rather than on the estate
and decedent’s Living Trust. Because the estate or decedent’s
Living Trust were not obligated to pay these Federal estate and
State death taxes, the obligation did not ultimately fall on
decedent’s Marital Trust. We therefore hold there is no
reduction in the marital deduction under section 2056(b)(4).
5
This amount was paid to the Gill children, grandchildren,
and grandchildren’s trusts as a result of the Joan Gill trust
settlement.
- 45 -
IV. Conclusion
We find the estate is entitled to deductions for certain
additional administration expenses as described above. We
further find the amount of the marital deduction should not be
reduced by Federal estate taxes and State death taxes paid of
$47,752.54.
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we
conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.