UNITED STATES TAX COURT
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T.C. Memo. 1996-58
UNITED STATES TAX COURT
ESTATE OF PHILIP MERIANO, DECEASED, ANITA PANEPINTO,
ADMINISTRATRIX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Docket No. 26622-81.
Filed February 15, 1996.
James S. Tupitza and Ridgeley A. Scott, for petitioner.
Joellyn Cattell, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge:
This case was heard by Special Trial Judge
Daniel J. Dinan pursuant to the provisions of section 7443A(b)(4)
- 2 and Rules 180, 181, and 183.1
The Court agrees with and adopts
the opinion of the Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
DINAN, Special Trial Judge:
Respondent determined a
deficiency in petitioner's Federal estate tax in the amount of
$732,106.81 and an addition to tax of $366,053.41 for fraud
pursuant to section 6653(b).
Many of the issues have been settled by the parties pursuant
to a Stipulation of Disposition of Issues filed September 3,
1985, and a Second Stipulation of Disposition of Issues filed
November 26, 1993.
The issues remaining for decision are:
(1) Whether
petitioner is entitled to a theft loss deduction of $274,505.09
for Federal estate tax purposes; and (2) whether petitioner is
entitled to deduct for Federal estate tax purposes legal fees of
$193,004.43 allegedly paid to the law firm of Tupitza and
Marinelli for services performed from August 1990 through
December 1994.2
1
All section references are to the Internal Revenue Code
in effect as of November 14, 1977, the date of decedent's death.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
2
The invoices for legal fees introduced into evidence at
trial (Exs. 17-Q and 47) show petitioner may have overpaid legal
fees by $3,095.57.
- 3 FINDINGS OF FACT
Some of the facts have been stipulated.
The stipulations of
fact and accompanying exhibits are incorporated herein by this
reference.
Philip Meriano (Philip or decedent) died on November 14,
1977.
At the time the petition was filed, Mary Orlando, who was
then administratrix of the Estate of Philip Meriano, resided in
the Commonwealth of Pennsylvania.
On July 6, 1977, a fire occurred at the residence-office of
decedent that destroyed many of his personal business records.
The Philadelphia Fire Department and the Philadelphia Police
Department determined that the fire was caused by arson.
On
September 1, 1977, Philip told the Philadelphia Police Department
that $2 million in bonds and securities were missing from the
safe in the area of the residence-office that was destroyed by
the fire.
The Philadelphia Police Department, the Federal Bureau of
Investigation (FBI), and the U.S. Attorney's Office in
Philadelphia commenced an investigation to locate the stolen
bonds and securities but were unsuccessful.
They terminated
their investigation on November 29, 1977, after decedent's death.
At the time of Philip's death, it was thought that he had
died intestate.
He was survived by his sister, Mary Orlando, and
his brother, James Meriano.
On December 6, 1977, Mary Orlando
filed a petition for letters of administration with the Register
- 4 of Wills, Philadelphia, seeking to be appointed administratrix of
Philip's estate.
The Register granted letters of administration
to Mary Orlando on or about December 6, 1977.
She served as
administratrix of the estate until August 31, 1982.
From the time of decedent's death until the middle of 1978,
Anthony Orlando, Mary Orlando's husband, unsuccessfully attempted
to locate the securities stolen from Philip.
Anthony Orlando was
introduced to Edward J. Reardon, Jr. (Reardon), who was a stock
broker with Merrill, Lynch, Pierce, Fenner & Smith.
Anthony
Orlando asked Reardon to conduct an investigation to see if the
stolen securities could be located.
Reardon began an investigation during which he learned about
John T. Lynch Jr. (Lynch), an attorney and investment banker who
had considerable experience in the municipal bond and finance
field.
He contacted Lynch because he thought Lynch's experience
would be helpful in locating the stolen securities.
Reardon introduced Lynch to the Orlandos and Connie Kates,
the Orlandos' daughter.
Following negotiations among the
Orlandos, Connie Kates, and Lynch, on August 7, 1978, Lynch and
Mary Orlando, as administratrix of the estate, signed an
agreement, whereby Lynch was hired to locate the stolen
securities.
The agreement provided that Lynch would receive 33-
1/3 percent of the face value of any securities recovered if they
were recovered prior to suit.
Otherwise, Lynch was to receive 40
percent of the face value of any securities recovered if they
- 5 were recovered after filing suit.
The agreement was witnessed by
Anthony Orlando and Connie Kates.
When Lynch signed the
agreement with the estate, he was working as an investment banker
in New York issuing municipal securities.
An attorney by the
name of Frank Carano was the attorney for the estate.
Shortly after Lynch signed the agreement with Mary Orlando
on August 7, 1978, Lynch entered into an agreement with Reardon
whereby Reardon agreed to assist Lynch in the investigation to
see if the stolen securities could be recovered.
Reardon was to
be paid 15 percent of the face amount of any securities
recovered.
Through their diligent investigative efforts, Lynch and
Reardon discovered, in approximately March 1979, that coupons
from securities that they identified as having belonged to
decedent were being cashed at various banking institutions in San
Diego, California.
They traced the securities to an account in
San Diego held in the name of Italia Ballestrucci, the maiden
name of Italia Bossi who had been the housekeeper for Philip when
his residence-office was set afire on July 6, 1977.
Lynch and Reardon took their evidence to the U.S. Attorney
and the FBI in Philadelphia and persuaded them to reopen their
investigation of the theft of securities from Philip.
Italia Bossi and her husband were arrested by the FBI at
their home in San Diego on May 1, 1979.
Bearer bonds having a
- 6 face value of $1,823,0003 were confiscated from the Bossis'
residence at the time of their arrest.
The Bossis were returned
to Philadelphia for trial.
The trial of the case began in November 1979, before the
Honorable John B. Hannum in the U.S. District Court for the
Eastern District of Pennsylvania.
The jury was unable to reach a
verdict, and Judge Hannum declared a mistrial on November 27,
1979.
In December 1979, Lynch retained the law firm of Groen,
Smolow and Lynch (the law firm) to act as co-counsel to file any
civil suits that might be necessary to protect the estate in the
event the U.S. Attorney declined to reprosecute the Bossis.
The
"Lynch" in the name of the law firm was Lynch's brother, James E.
Lynch.
In January 1980, Mary Orlando, as administratrix of the
Estate of Philip Meriano, dismissed Frank Carano as general
counsel for the estate.
At that time, the law firm became
general counsel for the estate.
On January 16, 1980, the U.S. Attorney moved the court for
leave to dismiss the indictment against the Bossis on the ground
that the United States did not believe that further prosecution
was warranted.
The motion was granted.
Immediately thereafter,
the Bossis filed a motion in Federal court asking the court to
order the United States to return to them the $1,823,000 in
3
Some of the securities were other than bearer bonds.
- 7 bearer bonds seized by the FBI.
Lynch and the law firm then
filed three civil actions in the U.S. District Court for the
Eastern District of Pennsylvania to recover the allegedly stolen
securities.
In April 1980, the civil litigation for the recovery of the
stolen securities was settled.
Pursuant to the settlement
agreement, the estate was to receive securities in the face
amount of $1,623,000.
On April 8, 1980, the law firm rented a safety deposit box
at Provident Tradesmens Bank & Trust Co. in Philadelphia.
The
signature card for the safety deposit box was signed by Marcel
Groen, Ronald Smolow, and Lynch.
The United States Attorney's office inventoried the
securities in the Government's possession that were to be turned
over to the estate pursuant to the settlement of the litigation
between the Bossis and the estate.
The securities were delivered
to Lynch and Anthony Orlando who deposited them in the safety
deposit box at the Provident bank on April 10, 1980.
Also, on
April 10, 1980, Lynch and Reardon signed the following agreement:
HOLD HARMLESS AND INDEMNITY AGREEMENT
Dated as of this 10th day of April, 1980, in
consideration of the disbursement of certain funds
deemed earned as professional fees pursuant to prior
agreements with Mary Orlando, in her capacity as the
duly appointed Administratrix of the Estate of Philip
Meriano, Edward J. Reardon, Jr. and John T. Lynch Jr.,
Esquire, agree(s) to INDEMNIFY AND HOLD HARMLESS the
Estate of Philip Meriano and Mary Orlando, the
Administratrix of the Estate against any and all claims
- 8 and loss, which the Estate and/or the Administratrix
may hereafter suffer or pay by reason of any claims
against the Estate or the Administratrix or as a result
of the disbursement of said funds of the Estate in
payment of professional fees and hereby agree to repay
any and all amounts received that are determined by a
court of proper jurisdiction to be returnable to the
Estate.
Edward J. Reardon Jr. and John T. Lynch Jr. do(es)
hereby further agree(s) to provide legal representation
or the reasonable cost thereof to defend against any
claim which may be brought against the Estate or the
Administratrix as a result of the disbursement of such
fees including all incidental costs relating thereto.
IN WITNESS WHEREOF we have hereunto set our hand
and seal dated as of this 10th day of April, 1980.
/s/
Edward J. Reardon, Jr.
/s/
John T. Lynch Jr., Esquire
Sometime prior to April 29, 1980, an account was opened in
the name of the estate at Kidder, Peabody & Co. in Philadelphia.
The securities remaining in the safety deposit box were again
inventoried and transferred to the Kidder, Peabody account.
On
April 29, 1980, Mary Orlando, as administratrix of the estate,
authorized Lynch, as her agent, to buy, sell, and trade in the
securities in the estate's Kidder, Peabody account.
At about the same time the estate opened its account at
Kidder, Peabody, Lynch and Reardon also opened their own personal
accounts at Kidder, Peabody.
Those accounts were used to
- 9 liquidate securities transferred to them from the estate's
account as payments for their fees.
During the time he had control of the bonds, Lynch sold some
of them and used the proceeds to pay Reardon and himself the fees
they earned pursuant to their August 7, 1979, agreement with the
estate.
He also sold securities and used the proceeds to pay the
law firm $95,000--$50,000 for their legal services in the Bossi
litigation and $45,000 for other legal services performed as
general counsel for the estate.
A total of $720,761.19 was
disbursed to Lynch and Reardon.
In August 1980, Anita Panepinto (Panepinto), a niece of
Philip Meriano's deceased wife, found a will dated November 17,
1973, and a codicil dated December 2, 1973, that had been
executed by Philip.
The will and the codicil named Panepinto and
Elaine Hernardi (Hernardi), another niece of Philip's deceased
wife, as beneficiaries of the entire estate.
On or about August 30, 1980, Panepinto presented the will
and codicil to the Register of Wills in Philadelphia for probate.
On December 9, 1980, Mary Orlando, as administratrix of the
estate, filed a petition with the Orphans' Court Division, Court
of Common Pleas of Philadelphia (the Orphans' Court), seeking
approval of the fees paid by the estate to Lynch and Reardon.
Action on the petition was deferred by the Court until the
accounting to be filed by the estate was audited by the court.
- 10 On March 24, 1981, Mary Orlando, as administratrix of the
estate, approved the payment of fees by the estate to Lynch in
the amount of $418,250 and to Reardon in the amount of $250,950.
The approval was witnessed by Anthony Orlando and Connie Kates.
During the latter part of 1981, the relationship between
Lynch and the law firm deteriorated.
The law firm was seeking
additional fees from Lynch for its participation in the
litigation to recover the bonds.
On or about December 10, 1981,
the law firm informed Anthony Orlando that it would no longer
represent the estate.
On August 31, 1982, the Register of Wills revoked the
letters of administration issued to Mary Orlando on or about
December 6, 1977.
The will presented to the Register of Wills by
Panepinto on August 30, 1980, was admitted to probate.
On
September 1, 1982, Panepinto was appointed Administratrix, c.t.a.
of the Estate of Philip Meriano.
On September 3, 1982, Panepinto
filed a petition with the Orphans' Court seeking possession of
all the estate's assets and documents and demanded an accounting.
On March 30, 1983, Panepinto filed a petition with the
Orphans' Court for a citation directing Lynch to deposit with the
court the professional fees paid to him by the estate which
Panepinto claimed to be grossly excessive.
Panepinto also filed
a petition for a citation directing Reardon to deposit with the
Court the fees paid to him by the estate which Panepinto also
claimed to be grossly excessive.
Similar petitions for citations
- 11 were made by Panepinto as to Mary Orlando and Connie Kates.
All
such petitions for citations were denied.
On July 28, 1983, Mary Orlando, as the prior administratrix
of the estate, and Connie Kates, as Administratrix of the Estate
of James Meriano, the late brother of decedent, filed an appeal
from the decree of the Register of Wills which admitted the will
and codicil of Philip Meriano to probate and which granted
letters of administration to Panepinto.
Panepinto retained the services of the law firm of Dilworth,
Paxson, Kalish and Kauffman of Philadelphia (the Dilworth law
firm) to represent her in the will contest litigation.
The firm
also became the legal representative for the estate.
In response to the petition filed on September 3, 1982, by
Panepinto with the Orphans' Court seeking possession of all of
the estate's assets and documents and demanding an accounting by
Mary Orlando, the Orphans' Court issued a citation to show cause
why Mary Orlando should not file an account for the estate.
On November 4, 1982, the Orphans' Court issued a decree
directing Mary Orlando to file an accounting within 30 days.
In
January 1983, Mary Orlando had still not filed the required
accounting.
The Insurance Company of North America (INA) was surety on
Mary Orlando's administratrix bond.
After she was appointed administratrix of the estate on
September 3, 1982, Panepinto filed claims against INA, as surety
- 12 for Mary Orlando, stating that the estate had illegally
distributed moneys to Mary Orlando and others.
The alleged
illegality was premised on her representation that she was the
lawful beneficiary of the estate.
She also claimed that all fees
paid out to Lynch and Reardon had to be returned to the estate.
In approximately January 1983, INA retained attorney Robert
Boote (Boote) of the law firm of Wolf, Block, Schorr and SolisCohen, Philadelphia, to prepare and file an account of the estate
with the Orphans' Court for INA in its capacity as surety.
Boote determined that there were no organized records
maintained by the estate.
Boote assumed that Lynch was the
attorney for Mary Orlando, as administratrix of the estate,
although he never saw any document to confirm that assumption.
He did, however, see the agreement of August 7, 1978, between
Mary Orlando, as administratrix of the estate, and Lynch pursuant
to which Lynch had been hired to recover the stolen securities.
Boote requested Lynch to provide him with records of the
estate that would enable Boote to prepare an account for the
estate.
Lynch was not forthcoming in providing Boote with estate
records and the records that Boote did obtain from Lynch were
disorganized and not very helpful to Boote in his task of
preparing an account.
Boote's law firm had an estate accounting
department, and he assigned an experienced estate accountant to
request records from their original sources such as brokerage
houses and banks and to work with the estate's accountant at the
- 13 Dilworth law firm, which was the law firm that represented
Panepinto as administratrix of the estate, to determine from
original records what had come into the estate, what had gone out
of the estate, and where it had gone.
Boote referred Mary Orlando to an attorney and when the
account was filed with the Orphans' Court, she was represented by
Leonard S. Abrams.
As of March 30, 1983, Boote had prepared a First and Final
Account of Mary Orlando, Administratrix (the account), covering
the period November 14, 1977, to September 1, 1982, showing a
combined principal and income balance remaining in the estate of
$861,553.73.
The account, which was filed with the Orphans' Court on
March 31, 1983, listed as disbursements from the estate, fees
paid to Reardon in 1980 of $220,000, and fees paid to Lynch in
1980, 1981, and 1982 of $415,761.
The account further noted that
the status of an asset of the estate, a $50,000 U.S. Treasury
Note, 8 percent due February 15, 1983, was still to be
determined.
On April 30, 1986, INA as surety, filed an Amendment to the
Account4 showing that the $50,000 U.S. Treasury Note which was
not accounted for in the account filed March 31, 1983, had been
redeemed by Lynch.
4
record.
The amendment to the account also corrected
The Amendment to the Account was not made a part of the
- 14 the account to show that Lynch was to be charged with $15,000 in
Delaware River Bonds, $10,000 in California Toll Bridge Bonds,
and $5,061 of coupons.
A total of $500,761.19 in disbursements
was charged to Lynch.
It is common practice in the Commonwealth of Pennsylvania
for fiduciaries, personal representatives, executors and/or
administrators to pay money out of an estate for lawyers fees,
distributions to beneficiaries, etc., without court approval in
an accounting but such payments are made "at risk", i.e., one
runs the risk that if the payments are not approved by the court
in an accounting, the payments and/or distributions will have to
be returned to the estate.
On December 26, 1985, Mary and Anthony Orlando and their
daughter, Connie Kates, individually and as executrix of the
estate of James Meriano, the deceased brother of Philip, executed
a stipulation and family settlement agreement with Panepinto,
individually and as administratrix c.t.a. of the Estate of Philip
Meriano and INA.
Under the terms of the agreement, Panepinto and
Hernadi and the Estate of Philip Meriano relinquished their
rights to file a surcharge action against Mary Orlando and her
surety, INA.5
5
The stipulation and family settlement agreement was not
made a part of record.
- 15 On December 19, 1986, Mary Orlando and Connie Kates withdrew
their will contest, and the Orphans' Court approved the
stipulation and the family settlement agreement.
The First and Final Account of Mary Orlando, Administratrix,
As Stated By Insurance Company of North America, Surety and
Amendment to First and Final Account of Mary Orlando,
Administratrix, was called for audit May 2, 1986, to March 24,
1987, inclusive, in the Orphans' Court before Judge Shoyer, the
auditing Judge.
Stephen J. Mathes and John R. Latourette, Jr. of the
Dilworth law firm represented Panepinto; Leonard S. Abrams
represented Mary and Anthony Orlando, individually, and Connie
Kates as executrix of the estate of James Meriano; Frances
Sullivan represented Lynch; Joseph Moore represented Reardon and
Joseph M. Gindhart represented Marcel Groen and the Groen and
Smolow law firm.
Judge Shoyer had before him the petition filed by Panepinto
to reduce or deny all fees that had been paid out of the estate
to Lynch and Reardon.
She claimed that the contingent fee
agreement upon which Lynch and Reardon based their claim was
unconscionable as a matter of law and that the fees claimed under
the agreement were excessive and unreasonable as a matter of law.
On November 10, 1983, Lynch filed with the Orphans' Court a
petition for a citation directed to Marcel Groen and Ronald
Smolow to show cause why they should not deposit with the court
- 16 the money paid to them by Lynch pending approval of the payments
by the court.
After 14 hearings during the period May 2, 1986, to March
24, 1987, Judge Shoyer entered an adjudication on September 21,
1988.
Judge Shoyer opined that the method Lynch followed in
removing bonds and coupons from the estate and his failure to
maintain adequate records of such transactions was a breach of
ethical standards.
He stated, however, that the court was not
disposed to penalize Lynch for his several violations of the
ethical rules but would leave the disposition of such ethical
considerations to the Disciplinary Board of the Supreme Court of
Pennsylvania, and he referred the record of the Orphans' Court to
the Disciplinary Board.
There is no evidence in this record that
the Disciplinary Board ever took any action on the referral.
Judge Shoyer stated that in endeavoring to arrive at a
reasonable and fair fee, he was most conscious of the fact that
had it not been for Lynch and Reardon, there would be nothing for
the parties before him to fight about.
He found that a
reasonable contingent fee for Lynch and Reardon should be based
on a percentage of the fair market value of the recovered stolen
bonds.
He first noted that there was no allegation by Panepinto
of any impropriety by Reardon.
Reardon admitted that he had received $250,950 from Lynch in
payment of the investigatory work which he had performed.
Shoyer found that Reardon was entitled to 15 percent of
Judge
- 17 $1,146,446 (the fair market value of the recovered stolen bonds)
or $171,966.90.
He surcharged Reardon the excess of $78,983.10
plus 6 percent interest from the dates he received moneys from
the estate, i.e., $28,033.10 on May 7, 1980, $20,000 on June 17,
1980, and $30,950 on April 15, 1981.
Reardon was to be given
credit for any portion of his surcharge which might be paid by
Lynch on Reardon's behalf and so designated at the time of
payment.
Judge Shoyer next found that $95,000 had been paid by Lynch
to Groen and Smolow.
There was no controversy about the first
$50,000 which Lynch had said was payable out of his fees in
connection with the litigation to compel recovery of the stolen
bonds from the Bossis.
Controversy still existed, however, as to
the remaining $45,000 which Lynch paid them as an alleged general
obligation of the estate for estate work performed by Smolow.
After reviewing the record, Judge Shoyer surcharged Groen and
Smolow $1,230 plus 6 percent interest from May 14, 1980, when
Lynch withdrew the $45,000 from the estate.
Groen and Smoler
were given credit for any portion of their surcharge which might
be paid by Lynch on their behalf and so designated at the time of
payment.
Finally, because of Lynch's failure to cooperate with Boote
in the preparation of the surety's account for the estate, Judge
Shoyer reduced his fee from 40 percent to 35 percent of the fair
- 18 market value of the recovered stolen bonds; i.e., 35 percent of
$1,146,466 or $401,256.10.
In the Amendment to the Account filed by Boote with the
Court on April 30, 1986,6 a total of $500,761.19 was credited to
Lynch.
Judge Shoyer surcharged Lynch the difference between
$500,761.19 (the amount retained by Lynch after his payment of
$220,000 to Reardon) and $401,256.10 for a surcharge of
$99,505.09.
He also specifically surcharged Lynch $7,500 which
Lynch had advanced for "costs" on February 16, 1980, because
Lynch never properly accounted for the claimed "costs".
Panepinto, Lynch, and Reardon took exceptions to Judge
Shoyer's Adjudication of September 21, 1988, and the matter was
heard by the Orphans' Court sitting en banc.
On August 1, 1989, Judge Pawelec issued the Opinion and
Order of the Orphans' Court, sitting en banc.
The Opinion and
Order provided, inter alia, as follows:
THE AMOUNT OF THE "SURCHARGES" ENTERED AGAINST LYNCH
AND REARDON, THE ALLOWANCE OF CREDITS TO LYNCH FOR
PAYMENTS TO OTHERS, AND THE INTEREST TO BE PAID ON
THE "SURCHARGES"
It is apparent from a review of the briefs and the
arguments of counsel for the exceptants that they are
unclear concerning the exact amount of the "surcharges"
imposed by the auditing judge upon Lynch and Reardon,
the credits, if any, to be allowed Lynch for his
payments to others, and the interest to be paid on the
surcharges by Lynch and Reardon. To allay counsels'
6
See supra note 4.
- 19 confusion, the Court en banc will review certain of the
actions taken by Lynch and restate certain portions of
the adjudication.
It is undisputed that all of the payments made to
anyone connected with the recovery of the bonds were
made by Lynch. Upon his recovering the bonds, Lynch
took control of them and from the proceeds disbursed a
total of $720,761.19. He made a wire transfer from his
Kidder, Peabody account to Reardon's Kidder account in
the amount of $220,000, leaving Lynch with $500,761.19.
He then paid Reardon an additional $30,950.00, which
made Reardon's total receipts the sum of $250,950.00,
and which left Lynch with $469,811.19.
From the $469,811.19, Lynch paid the law firm of
Groen & Smolow, Esquires, $95,000, and paid an
additional $7,500 in costs. Of the $95,000 payment to
the law firm, Lynch allocated the payment $45,000 for
general services to the estate on behalf of Orlando and
$50,000 for services to him in connection with the
recovery of the bonds. He does not contend that he
should be allowed a credit for the $50,000 payment and
agrees that it is an expense he must bear from his fee.
He does contend, however, that he should have been
given credit for the payment of $45,000. Deducting the
$45,000 payment and the $7,500 payment, Lynch was left
with a total of $417,311.19.
Of the payments made after the wire transfer of
$220,000 to Reardon, the auditing judge disallowed him
a credit of $7,500 because he was unable to itemize
those costs. We find no error in that disallowance.
However, the auditing judge did not allow Lynch any
credits for the payment of $45,000 to Groen & Smolow,
which payment the auditing judge found to be a
legitimate estate expense, and for the additional
payment of $30,950 to Reardon. The auditing judge's
failure to allow Lynch credits for those payments was
error and has affected the total amount of the money
which Lynch must refund to the estate.
In his adjudication, the auditing judge found that
a reasonable fee for Lynch is $401,256.10, or 35% of
the market value of the bonds he recovered. The
auditing judge then "surcharged" Lynch the difference
between $500,761.19 (the amount remaining to Lynch
after the $220,000 transfer to Reardon) and
$401,256.10, for a total surcharge of $99,505.09.
- 20 However, Lynch should have been given credit for the
payments of $30,950 to Reardon and $45,000 to Groen &
Smolow. After being given credit for those payments,
the amount of the "surcharge" should have been based
upon the difference between $424,811.19 (i.e.,
$500,761.19 less $30,950.00 and less $45,000.00) and
$401,256.10, or $23,559.09. That figure is the amount
of the refund Lynch must make as a result of the
overpayment of his fee.
Concerning Reardon's fee, the auditing judge
allowed him a fee of 15% of the market value of the
bonds recovered or the sum of $171,966.90. He
therefore "surcharged" Reardon the difference between
the amount paid to him by Lynch, i.e., $250,950.00, and
the fee he found to be reasonable, for a total
"surcharge" of $78,983.10. We find no error in the
auditing judge's finding and dismiss the exception.
However, the auditing judge was unmindful of the
fact that Reardon had been totally compensated by Lynch
for his services. When Lynch made the two payments to
Reardon, totaling $250,950.00, Reardon had received the
benefit of his bargain with Lynch. That is to say,
Reardon was paid by Lynch in accordance with the terms
of the contract he entered into with Lynch. In fact,
Reardon received somewhat more than 15% of the face
value of the bonds recovered.
Even after refunding the full amount of the
surcharge, Reardon is left with $171,966.90. His fee,
when added to Lynch's allowed fee of $401,256.10, makes
a total fee for services of $573,223.00. That amount
is exactly 50% of the total market value of the assets
recovered by Lynch and Reardon.
Although the auditing judge does not expressly
address the issue, it is clear from the amounts of
compensation awarded to Lynch and Reardon that he found
that Lynch was to receive 35% of the market value of
the bonds and that Reardon was to receive 15% of the
market value of the bonds and that each man was
compensated from the gross estate. We are of the
opinion that an allowance of 50% of the market value of
the assets recovered is unreasonable and excessive and
was error for the auditing judge to allow that amount
of compensation.
- 21 We are of the opinion that under all of the facts
and circumstances of this case a fair and reasonable
fee would be a total of 35% of the market value of the
bonds recovered, with Lynch to be responsible for the
payment of Reardon's fee of 15% of the market value of
the bonds recovered. As a result, Lynch must refund to
the estate the full amount of the compensation allowed
by the Court to Reardon. That is, Lynch must refund
the amount of $171,966.90 to the estate. In addition,
because Lynch paid Reardon's fee from estate assets
without any authority and because of our finding that
the amount of compensation taken by Lynch and Reardon
and allowed by the auditing judge is unreasonable and
excessive, Lynch must pay interest on the $171,966.90
refund at the rate of six percent from the date of
payment to Reardon until the date of the refund. Lynch
made the payment at his peril and deprived the estate
of the opportunity to earn interest on the money. It
is only fair that he now make the estate whole for the
estate's loss.
The $171,966.90 refund is, of course, in addition
to the refund of $23,559.09 which he must make on
account of the overpayment of his own fee.
Concerning the interest to be paid on the
surcharges imposed by the auditing judge on Lynch and
Reardon, it is apparent that the auditing judge imposed
interest on the full amount of the money he found that
Lynch received without subtracting from that amount the
amount of the compensation he found to be reasonable.
It was clearly error for the auditing judge to find
Lynch liable for the payment of interest on the full
amount of the money he found Lynch to have received.
Lynch's obligation for interest runs only on the
difference between the amount of money he took as his
fee and the amount of his fee which the auditing judge
found to be reasonable. That is, he need only pay
interest on the sum of $23,559.09 at the rate of six
percent from the time of receipt until the time of
refund.
Following the issuance of the Orphans' Court's opinion and
order on August 1, 1989, all parties appealed Judge Pawelec's
order to the Superior Court, which affirmed the order on June 13,
1990.
- 22 Lynch then filed a petition for the allowance of an appeal
to the Pennsylvania Supreme Court.
His petition was denied on
January 15, 1991.
Sometime during the latter part of 1989 or the first part of
1990, Reardon entered into a settlement agreement with the estate
and paid to the estate $25,000 in accordance with the terms of
the settlement.7
On August 29, 1989, Lynch filed a petition in the U.S.
Bankruptcy Court for the Eastern District of Pennsylvania,
pursuant to chapter 13 of title 11, United States Code.
In his
petition, Lynch acknowledged his indebtedness and listed the
Estate of Philip Meriano as a judgment creditor in the amount of
$225,000.
When Lynch filed his petition in bankruptcy on August 29,
1989, the estate was still being represented by the Dilworth law
firm.
Marjorie Obod (Obod), an associate with the Dilworth firm,
received an incomplete record of what was filed with the
bankruptcy court by Lynch.
Obod then filed a proof of claim with the bankruptcy court
for the estate as a judgment creditor of Lynch because of the
surcharge imposed by the Orphans' Court against him.
Shortly
thereafter, the Dilworth firm ceased to represent the estate and
took no further action against Lynch.
7
record.
The settlement agreement was not made a part of the
- 23 Lynch's bankruptcy petition was dismissed by the bankruptcy
court on August 22, 1990, because of the failure of the
bankruptcy estate to file required schedules.
After the
Pennsylvania Supreme Court denied Lynch's petition for appeal on
January 15, 1991, no one on behalf of the estate again contacted
him about the judgment owed by him to the estate.
The Dilworth firm first represented Panepinto in the will
contest with Mary Orlando, as the prior administratrix of the
estate, and Connie Kates as administratrix of the Estate of James
Meriano, in about July 1983.
The firm then represented Panepinto
as the administratrix of the Estate of Philip Meriano.
On October 19, 1983, John R. Latourette, Jr. (Latourette),
of the Dilworth firm filed with this Court an entry of
appearance.
On November 7, 1983, Latourette filed a motion to
substitute Panepinto as administratrix of the estate, and the
motion was granted on November 14, 1983.
On April 25, 1983, this Court set this case for trial on
September 30, 1985, at Philadelphia.
On September 3, 1985, Latourette and counsel for respondent
filed with the Court a Stipulation of Disposition of Issues (the
First Stipulation), which provides:
STIPULATION OF DISPOSITION OF ISSUES
In order to resolve the issues before this Court
in the above-captioned case, the below-signed parties
agree to stipulate the tentative settlement of all
issues raised in the notice of deficiency upon which
this case is based, and all issues raised in the
- 24 Petition, Answer and Reply filed in this case. A final
Decision cannot be filed in the case at this time only
because the resolution of certain issues that have been
stipulated below are dependent upon the final
resolution of certain matters now before the Court of
Common Pleas of Philadelphia County, Pennsylvania,
Orphans' Court Division, Administration No. 2259 of
1978, Estate of Philip Meriano. Once these issues are
resolved, the tentative settlement stipulated below
will be incorporated in a final Decision document to be
filed with this Court.
In accordance with an agreement reached between
the parties, the parties agree as follows:
1. A summary of the tentatively agreed
adjustments to the taxable estate is set forth below:
Tentatively Agreed Adjustments to Taxable Estate
Taxable estate per estate tax return
$527,720.79
Tentatively agreed adjustments to taxable
estate, summarized by schedules of
the return:
Schedule A
Schedule B
Schedule C
Schedule F
Schedule G
Schedule J
Schedule K
Taxable estate as tentatively agreed
28,000.00
1,252,085.61
3,174.62
18,318.26
127,230.75
31,515.02
243.08
$1,988,288.13
The individual items comprising these adjustments
are set forth more fully in Exhibit A to this
stipulation.
2. The taxable estate as tentatively agreed has
been computed without allowance for certain deductions
claimed by the estate for items which cannot be finally
determined at this time, as follows:
(A) An administratrix's commission of
$27,500 claimed by Mary Orlando is in dispute
before the Orphans' Court of Philadelphia
County, Administration No. 2259 of 1978; Of
- 25 this amount, $13,626.51 has been deducted by
the estate for income tax purposes on Form
1041, and the balance of $13,873.49 is
claimed for estate tax purposes.
(B) Attorney's fees paid to John T. Lynch,
Jr., in the total amount of $495,700.02, and
investigative fees paid to Edward J. Reardon
in the total amount of $220,000, are
currently in dispute and are the subject of
litigation before the Orphans' Court of
Philadelphia County: Estate of Philip
Meriano, No. 2259 of 1978, Petition of Anita
Panepinto for Decree Directing the Deposit
into Court of Certain Amounts paid from the
Estate. The amount of such fees which are
finally paid and are not claimed on Form
1041, are claimed as deductions for estate
tax purposes.
(C) Attorney's fees have been charged by
Dilworth, Paxson, Kalish & Kauffman in the
aggregate amount of $231,347.50 for services
rendered to Anita Panepinto, Administratrix
c.t.a., through September 30, 1984, and
additional such fees will be charged for
services rendered thereafter. All such fees
will be stated in the account of Anita
Panepinto which will be filed with the
Orphans' Court of Philadelphia, and the
Administratrix will request that the Court
approve the amount of such fees. Such fees
will not include any amount for services
rendered to Anita Panepinto and Elaine
Hernadi in connection with any Orphans' Court
proceeding involving the probate of the will
and codicil of Philip Meriano or the appeal
from that probate. The amount of such fees
which is finally paid and approved by the
Court and is not claimed on Form 1041 is
claimed as a deduction for estate tax
purposes.
(D) The amount of interest due on the
Federal Estate Tax deficiency is dependent on
the amount of such deficiency and the time of
payment, neither of which is known at this
time. The amount of such interest which is
- 26 not claimed on Form 1041 is claimed as a
deduction for estate tax purposes.
(E) The Estate of Marie Meriano (decedent's
wife) has a claim against the decedent in the
amount of $12,021, as a debt owed by decedent
to that estate, but payment of such amount
has not yet been made. The amount of such
claim which is finally paid is claimed as a
deduction for estate tax purposes.
3. The taxable estate as tentatively agreed may
be decreased as follows:
(A) By an amount, not exceeding $13,873.49,
equal to any allowance of an Administratrix's
commission of Mary Orlando in excess of
$13,626.51, determined either under a final
decree of the Philadelphia Orphans' Court,
Administration No. 2259 of 1978, and any
appeal therefrom, or by an agreement between
Mary Orlando and the estate.
(B) By an amount, not exceeding $488,200.02,
equal to any attorney's fees which are paid
to John T. Lynch, Jr., and are either allowed
by a final decision of the Philadelphia
Orphans' Court, Administration No. 2259 of
1978, or are agreed upon between Lynch and
the estate, less the amount, if any, which
has been claimed on Form 1041.
(C) By an amount not exceeding $220,000,
equal to any investigative fees which are
paid to Edward J. Reardon and are either
allowed by a final decision of the
Philadelphia Orphans' Court, Administration
No. 2259 of 1978, or are agreed upon between
Reardon and the estate, less the amount, if
any, which has been claimed on Form 1041.
(D) By the amount of any attorneys' fees
which are paid to Dilworth, Paxson, Kalish &
Kaffman for services rendered to Anita
Panepinto, Administratrix c.t.a. of the
estate, limited however to the amount of such
fees allowed by a final decision of the
Philadelphia Orphans' Court, Administration
No. 2259 of 1978, and any appeal therefrom
- 27 and limited to the extent such fee has not
been claimed on Form 1041.
(E) By the amount of any interest paid by the
estate on the Federal Estate Tax deficiency and
not claimed on Form 1041.
(F) By an amount, not exceeding $12,021,
equal to any payment by the estate to the
estate of Marie Meriano in respect to the
claim by that estate against the decedent.
4. None of the items described in item (3) above
shall be allowed as a deduction for estate tax purposes
to the extent that the estate or any other party elects
to deduct such items for income tax purposes.
5. It is also hereby stipulated that the addition
to tax provided by Section 6653(b) of the Internal
Revenue Code shall be computed as an amount equal to
18.75% of the underpayment of tax, and not 50%.
6. It is hereby stipulated that the Pennsylvania
inheritance tax paid by the estate is $83,290.51.
On September 16, 1985, the Court ordered that the case be
stricken from the trial calendar in Philadelphia on September 30,
1985.
In its order, the Court stated:
On September 3, 1985, the parties filed their
stipulation of disposition of issues in this case. As
indicated in that stipulation the final decision cannot
be entered in the case until final resolution of
certain matters now pending before the Court of Common
Pleas of Philadelphia County, Pennsylvania, Orphans'
Court Division, Administration No. 2259 of 1978, Estate
of Philip Meriano.
Subsequent to the Court's order of September 16, 1985,
petitioner's counsel, Latourette, filed eight status reports with
the Court8 informing the Court that the case had been settled and
8
The dates on which the status reports were filed are:
Nov. 28, 1986; Apr. 13, 1987; Oct. 1, 1987; Feb. 10, 1988; Sept.
- 28 that a decision would be submitted when the litigation in the
Orphans' Court involving Lynch and Reardon was concluded.
On March 19, 1990, Latourette filed a status report with the
Court in which he informed the Court:
As requested in the Order of the Honorable Arthur
L. Nims, III, dated September 7, 1990, we are
responding with the current status of the above matter.
On August 1, 1989, the Philadelphia Orphans' Court en
banc ruled that John T. Lynch, Jr. was required to
refund to the Estate of Philip Meriano $195,525.99 plus
interest to August 1, 1989 of $100,606.03 and Edward J.
Reardon, Jr. was required to refund to the Estate of
Philip Meriano $78,983.10 plus interest of $40,638.79.
John T. Lynch has appealed the decision but we have
reached a settlement with Edward J. Reardon, Jr.
Accordingly, we are not as yet in a position to
finalize the Federal estate tax settlement. * * *
On February 12, 1990, Ridgely Abbe Scott (Scott) entered his
appearance as counsel for the estate.
Panepinto.
Scott is the husband of
He was in February 1990, and is now, Associate
Professor of Law at Widener University School of Law where he
teaches Corporate Tax I, Federal Income Tax, and Taxation of
Compensation.
He received his LL.M. in taxation in 1978 from New
York University School of Law.
He had a full schedule of courses
to teach in the fall and spring semesters in each year beginning
with the spring term of 1990.
In addition, he taught summer
school classes in 1990 and 1991.
When he filed his appearance in this case, he was not
associated with any law firm.
28, 1988; Dec. 27, 1988; Mar. 2, 1989; and Sept. 1, 1989.
- 29 On June 25, 1990, Scott filed a status report with the Court
which mirrored the status report filed by Latourette on March 19,
1990.
On August 6, 1990, Latourette withdrew himself and the
Dilworth firm as counsel for the estate.
On October 31, 1990, James S. Tupitza (Tupitza) entered his
appearance as counsel for the estate.
In a status report filed with the Court on March 9, 1992,
counsel for respondent informed the Court, inter alia:
4. Petitioner now wishes to abandon the claims
she is defending (sic) in state court litigation and be
allowed a deduction for the entire amounts paid on the
theory it is unlikely the estate will ever collect the
monies ordered to be repaid to the estate.
On November 26, 1993, Tupitza and counsel for respondent
filed with the Court a Second Stipulation of Disposition of
Issues (the Second Stipulation) which provided:
SECOND STIPULATION OF DISPOSITION OF ISSUES
In order to resolve the issues before this Court in the
above-captioned case, the parties agree to stipulate
the tentative settlement of all issues raised in the
notice of deficiency upon which this case is based, and
all issues raised in the Petition, Answer, and Reply
filed in this case, excepting, however, two issues
concerning the amounts, if any, of deductions allowable
for property taken from estate assets by John T. Lynch,
Jr. and Edward J. Reardon, respectively. Those issues
are not settled because the parties do not agree on the
legal characterization of the circumstances of such
taking.
The parties agree as follows:
- 30 1. Previously Agreed Adjustments to the
Taxable Estate
In a Stipulation of Disposition of Issues executed
on behalf of the parties and filed with this Court in
1985, the parties agreed to a taxable estate
tentatively determined as follows:
Taxable estate per estate tax return
$527,720.79
Tentatively agreed adjustments to the
taxable estate, as summarized by schedules
of the return:
Schedule
Schedule
Schedule
Schedule
Schedule
Schedule
Schedule
A
B
C
F
G
J
K
28,000.00
1,252,085.61
3,174.62
18,318.26
127,230.75
31,515.02
243.08
Taxable estate as tentatively agreed
in 1985
2.
$1,988,288.13
Additional Adjustments Agreed to in Present
Stipulation Of Disposition of Issues
The parties tentatively agree on the following
additional adjustments to the taxable estate as
previously agreed in 1985:
Taxable estate as tentatively agreed
in 1985
$1,988,288.13
Additional adjustments to the taxable estate,
as summarized by schedules of the return:
Schedule
Schedule
J
K
(
(
647,652.44)
12,021.00)
Taxable estate as tentatively agreed
in this stipulation
$1,328,614.69
3.
Additional Decrease Which Depends on
Computation of Interest
The parties agree that the taxable estate as
tentatively agreed in the amount of $1,328,614.69 may
- 31 be decreased by the amount of any interest paid on the
Federal Estate Tax deficiency and not claimed on Form
1041.
4. Additional Decrease Which Depends on
Decision of the Court
The parties agree that the taxable estate as
tentatively agreed in the amount of $1,328,614.69 has
been determined without allowance for the following
item which is claimed as a deduction by the petitioner
and has not been allowed by the Commissioner:
A deduction in the amount of $274,505.09 for
the value of bonds, interest on bonds, or the
proceeds of bonds, owned by the estate and
received from the estate by John T. Lynch,
Jr.
The Petitioner claims that such amount is
deductible as a theft loss, under Code section 2054.
The Respondent argues that this item is
deductible, if at all, only as an expense of
administration, under Code section 2053(a)(2), and as
such is limited to the amount allowable under the laws
of Pennsylvania, where the estate is being
administered, and the amount so allowed has already
been considered in the tentatively agreed Schedule J
adjustments noted earlier.
5. Additional Decrease Which Depends on
Substantiation By the Petitioner
The parties agree that the taxable estate as
tentatively agreed in the amount of $1,328,614.69 has
been determined without allowance for the following
item which is claimed as a deduction by the petitioner
and has not been allowed by the Commissioner:
A deduction in the amount of $43,516.25 for
fees billed by the law firm of Tupitza and
Marinelli.
The Petitioner claims that such amount is
deductible as attorney fees, as provided in section
20.2053-3(c) of the Estate Tax Regulations.
- 32 The Respondent argues that such amount would be
deductible if the Petitioner furnishes substantiation
that the amount claimed has been paid or will be paid,
and has not been claimed on Form 1041. Such
substantiation may be provided by the use of Form 4421.
6. Addition to Tax Under Code Section 6653(b)
In the Stipulation of Disposition of Issues filed
with this Court in 1985, the parties agreed, and
continue to agree, that the addition to tax provided by
Section 6653(b) of the Internal Revenue Code shall be
computed as an amount equal to 18.75% of the
underpayment of tax.
The taxable estate as tentatively agreed in The First
Stipulation was $1,988,288.12.
The taxable estate as tentatively
agreed in The Second Stipulation is $1,328,614.69. The decrease
results from (1) an increase in Schedule J of $647,652.44 which
approximates the sum of $401,256.10, the amount of fees allowed
to Lynch and Reardon by the Orphans' Court, and the Dilworth
firm's legal fees of $231,34.50 referred to in paragraph 2(C) of
The First Stipulation, and (2) an increase in Schedule K of
$12,021, which is the amount referred to in paragraph 2(E) in The
First Stipulation.
This case was tried for 11-1/2 hours from December 5, 1994,
through December 7, 1994.
OPINION
Issue 1. Claimed Theft Loss Deduction
- 33 Petitioner contends that the estate is entitled to a theft
loss deduction for the amount of "excess fees" paid from the
estate's assets to Lynch and Reardon. To the contrary, respondent
contends that petitioner failed to prove that Lynch and Reardon
stole anything from the estate and has disallowed the claimed
theft loss deduction.
Petitioner bears the burden of proving that respondent's
determinations are incorrect. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933); Estate of Gilford v. Commissioner, 88
T.C. 38, 51 (1987).
The general rule is that deductions are
strictly a matter of legislative grace, and a taxpayer has the
burden of establishing entitlement to any deduction claimed on
the return.
New Colonial Ice Co. v. Helverinq, 292 U.S. 435, 440
(1934); Estate of Damon v. Commissioner, 49 T.C. 108, 118 (1967).
The value of decedent's taxable estate equals the value of
his or her gross estate less certain deductions. Sec. 2051.
Section 2054 allows a deduction from the value of the gross
estate for losses incurred during the settlement of the estate
arising from fires, storms, shipwrecks, or other casualties, or
from theft, when such losses are not compensated for by insurance
or otherwise.
In Estate of Shlensky v. Commissioner, T.C. Memo. 1977-148,
this Court stated, regarding section 2054:
While neither this section nor the applicable
regulations define the term "theft," the section's
language closely parallels section 165(c)(3), and under
- 34 that section the issue as to whether a loss arose from
theft is to be determined under the applicable State
law. Weingarten v. Commissioner, 38 T.C. 75, 78 (1962).
The leading income tax case of Edwards v. Bromberg, 232
F.2d 107, 110-111 (5th Cir. 1956), broadly defines
"theft" as used in section 165(c)(3) as follows:
* * * the word "theft" is not like "larceny,"
a technical word of art with a narrowly
defined meaning but is, on the contrary, a
word of general and broad connotation,
intended to cover and covering any criminal
appropriation of another's property to the
use of the taker, particularly including
theft by swindling, false pretenses, and any
other form of guile * * * [I]t has been long
and well established that whether a loss from
theft occurs within the purview of Section
23(e)(3) [the predecessor to section
165(c)(3)] of the Internal Revenue Code of
1939 and the corresponding provisions of
prior acts, depends upon the law of the
jurisdiction where it was sustained and that
the exact nature of the crime, whether
larceny or embezzlement, of obtaining money
under false pretenses, swindling or other
wrongful deprivations of the property of
another, is of little importance so long as
it amounts to theft. [Fn. ref. omitted.]
Both parties agree that "theft" is a criminal appropriation
of another's property.
The elements of "theft" under
Pennsylvania law are embodied in the Crimes Code, Act. No. 334,
section 1.6, 1972 Pa. Laws 1482, at 1612-1613.
Under the Crimes
Code, effective June 6, 1973, the intent required is a "thieving
state of mind" (citing 18 Pa. Cons. Stat. Ann., sec. 302 (1973));
Commonwealth v. Kuykendall, 318 Pa. Super. 429, 465 A.2d 29
(1983); Commonwealth v. Shaffer, 279 Pa. Super. 18, 420 A.2d 722
(1980).
- 35 Respondent contends that to prove "theft" under Pennsylvania
law "the mind of a thief" is relevant and that it must be shown
that there was a specific criminal intent to permanently deprive
the owner of his or her property.
The existence vel non of
criminal intent in the circumstances of a particular taking is a
question of fact, and one which is peculiarly within the
competence of this Court to decide.
Farcasanu v. Commissioner,
436 F.2d 146, 149 (D.C. Cir. 1970), affg. per curiam 50 T.C. 881
(1968).
Both parties quote Jones v. Commissioner, 24 T.C. 525, 527
(1955) (quoting Allen v. Commissioner, 16 T.C. 163, 166 (1951))
for guidance as to the burden of proof in a theft case:
Petitioner has the burden of proof. This includes
presentation of proof which, absent positive proof,
reasonably leads us to conclude that the article was
stolen. If the reasonable inferences from the evidence
point to theft, the proponent is entitled to prevail.
If the contrary be true and reasonable inferences point
to another conclusion, the proponent must fail. If the
evidence is in equipoise preponderating neither to the
one nor the other conclusion, petitioner has not
carried her burden.
Petitioner attempts to transmute an obvious fee dispute with
respect to Lynch and Reardon into a criminal activity, i.e.,
theft.
Thus, under the rationale of the Allen case, the
threshold question is whether the reasonable inferences from the
evidence point to a fee dispute or a theft.
If it was a fee
dispute, then we need not jump through hoops raised by
petitioner's assertions that Lynch and Reardon committed a theft
- 36 under various sections of the Pennsylvania Criminal Code, namely,
18 Pa. Cons. Stat. Ann. (1983), sec. 3927 (Theft by failure to
make required disposition of funds received); sec. 4113
(Misapplication of entrusted property and property of government
and financial institutions); sec. 3921 (Theft by unlawful taking
or disposition); sec. 3922 (Theft by deception); or sec. 3925
(Receiving stolen property).
In our judgment the overwhelming evidence contained in this
record shows that this was nothing more than a fee dispute.
It
simply does not support petitioner's belated and tenuous
assertions of a theft.
estate.
Lynch did not steal any money from the
He was paid for his work in recovering the previously
stolen bonds.
This was done pursuant to four separate agreements
with the estate regarding payment of his fees.
The first is a
contract for the work to be performed that Lynch negotiated with
Mary Orlando, then administratrix of the estate.
the Hold Harmless agreement signed by Lynch.
The second is
Certainly he would
not have signed it if he was trying to hide the full payment of
his fee under the contract.
The third is the Trading
Authorization given to Lynch by Mary Orlando so that he could
dispose of assets necessary to pay his fee.
The fourth is an
agreement signed by Mary Orlando to carry out the terms of the
contract to pay Lynch and Reardon in specified amounts for the
work they had done.
These documents clearly show the intent of
Lynch and Reardon.
To be sure, if the Orphans' Court had
- 37 enforced the precise terms of the contract between Lynch and the
estate, rather than invoking its equity powers by modifying and
reforming the contract, Lynch would not have been ordered to pay
back any funds to the estate.
He was paid the amount provided
for in the contract.
All in all, the reasonable inferences to be drawn from these
facts and from the record as a whole are that this was merely a
fee dispute between Lynch and the present administratrix of the
estate.
The facts establish that petitioner never asserted a
theft by Lynch in the Orphans' Court proceedings or in the
appeals; that no criminal action for theft has ever been brought
against Lynch by the district attorney; that no charges of
unprofessional conduct have been filed against Lynch; and that
the administratrix has filed no claim with the Pennsylvania
Lawyers Fund for Client Security charging that Lynch stole or
otherwise defalcated the estate's funds.
We think it is
important to point out that Arthur Littleton, the general counsel
for the Client Security Fund, testified that in circumstances
similar to this case a claim would have been considered a fee
dispute for which the Client Security Fund would not have paid.
On August 7, 1978, Mary Orlando, then administratrix of the
estate, entered into an agreement with Lynch to locate securities
stolen from Philip Meriano on or about July 6, 1977.
The
agreement provided that Lynch would receive 33-1/3 percent of the
- 38 face value of any securities recovered if they were recovered
prior to suit.
Otherwise Lynch was to receive 40 percent of the
face value of any securities recovered after filing suit.
Lynch then entered into an agreement whereby Reardon agreed
to assist Lynch in the investigation to recover the stolen
securities.
Reardon was to be paid 15 percent of the face amount
of any securities recovered.
Lynch's and Reardon's investigation was successful, and the
estate recovered stolen securities in the face amount of
$1,623,000.
As Judge Shoyer, the auditing judge of the Orphans'
Court, noted in his Adjudication of September 21, 1988:
In endeavoring to arrive at a reasonable and fair
fee, the auditing judge is most conscious of the fact
that had it not been for Reardon and Lynch, there would
be nothing here for the parties to fight about.
Judge Shoyer noted that:
Counsel for Panepinto claim that it is "clear that
any impropriety by Reardon may be subject to the
sanctions of the court, and compensation should be
denied." There is, however, no assertion of any so
called "impropriety" by Reardon.
At the trial of this case, petitioner called Reardon as a
witness to inquire whether he had paid to the estate the amount
he was surcharged by the Orphans' Court.
Reardon replied that he
had entered into a settlement agreement with the estate.
BY MR. TUPITZA:
Q You entered into -- what type of settlement
agreement did you enter into with the estate?
- 39 A A negotiated amount less than the charged
amount.
Q
And what was the amount of that agreement?
A
I don't have a copy of it.
Q Is it your testimony you received a
release from the estate?
A
Yes.
*
*
*
*
*
*
*
MR. TUPITZA: I'm somewhat surprised, Your Honor.
THE COURT: I can see that.
MR. TUPITZA: I have never heard this before nor
ever seen any evidence of this in any of the
documentation.[9]
*
*
*
*
*
*
*
BY MR. TUPITZA:
Q Did you make whatever payment was required to
be made pursuant to the agreement that you allege you
had with the estate?
A
I made an initial payment of $25,000.
Q
And did you pay the balance?
A
I did not.
I did not have any more money.
Q So you did not fully comply with the terms of
whatever settlement you had reached with the estate?
A That's correct, and I never got called by
anybody on the estate, or never received a letter from
anybody. I believe my attorney communicated with the
9
In a status report filed with the Court on March 19,
1990, Latourette informed the Court that the estate had reached a
settlement with Reardon.
- 40 Dillworth (sic) firm that I did not have any more
liquid assets and I never heard anything on that matter
again in eight years, nine years.
After the Orphans' Court, sitting en banc, issued its
opinion and order on August 1, 1989, all parties appealed the
order to the Superior Court, which affirmed the order on June 13,
1990.
Lynch then filed a petition for the allowance of an appeal
to the Pennsylvania Supreme Court, which was denied on January
15, 1991.
As to Lynch, therefore, the Orphans' Court litigation
was concluded on January 15, 1991.
In the meantime, on August 29, 1989, Lynch had filed a
petition in the U.S. Bankruptcy Court for the Eastern District of
Pennsylvania, pursuant to Chapter 13 of Title 11, United States
Code.
In his petition Lynch, acknowledging his debt, listed the
Estate of Philip Meriano as a judgment creditor in the amount of
$225,000.
On August 22, 1990, Lynch's bankruptcy petition was
dismissed by the bankruptcy court because the bankruptcy estate
failed to file required schedules.
No further steps were taken by the estate to collect the
judgment debt from Lynch.
In making this finding, we are not
unmindful of Tupitza's testimony at trial that:
We spent sometime trying to do some collection
efforts on Lynch and Reardon and at one point, after a
discussion with Ms. Panepinto, we took those time slips
and purged them and did not bill for that time.
- 41 For various reasons stated, infra, we do not credit
Tupitza's testimony.
In this instance we think petitioner failed
to pursue any collection activities against Lynch and Reardon to
recover the amounts that the Orphans' Court ordered them to
refund to the estate, after the estate entered into a settlement
agreement with Reardon sometime in late 1989 or early 1990, and
after Lynch's petition in bankruptcy was dismissed on August 22,
1990.
In eight status reports filed with this Court from November
28, 1986, through September 1, 1989, the estate informed this
Court that this case had been settled and that a final decision
would be submitted when the fee dispute involving Lynch and
Reardon was concluded.
As previously noted, the fee dispute
involving Lynch and Reardon was disposed of on January 15, 1991,
when the Pennsylvania Supreme Court denied Lynch's petition for
the allowance of an appeal.
In a status report filed with the Court on March 9, 1992,
respondent informed the Court:
4. Petitioner now wishes to abandon the claims
which she is defending (sic) in state court litigation
and be allowed a deduction for the entire amounts paid
on the theory that it is unlikely the estate will ever
collect the monies ordered to be repaid to the estate.
*
*
*
*
*
*
*
9. This report has been discussed with James
Tupitza, Esquire, counsel for petitioners (sic).
- 42 On March 25, 1993, the Court set this case for an oral
status report at the Motions Session of the Court in Washington,
D.C., on June 23, 1993.
At that hearing on June 23, 1993,
Tupitza informed the Court:
The bonds that we are talking about are bonds
that, in our position, were stolen twice. They were
stolen first by the housekeeper and taken out to
California, and then, when they were recovered, the
attorney and his accountant investigator stole them a
second time. We litigated with that attorney all the
way to the Pennsylvania Supreme Court. He has been
disbarred for not returning this money.10 He has
disappeared.11 I have no idea where the man is. He
filed for bankruptcy at one point and sought to
discharge this in bankruptcy, and then that bankruptcy
was dismissed.
Our position, at some point, is going to be that
this is a theft loss to the estate, and that is
probably going to be the narrow issue that we are going
to be left with out of hundreds of other issues that we
started with.
There is no credible evidence in this record to justify
petitioner's assertion of theft by Lynch and/or Reardon. We
regard the claim as made out of whole cloth.
Whether from bias
toward Lynch or from determined obfuscation to reduce the
estate's tax liability, petitioner had tried, albeit
unsuccessfully, to make its evidence fit a Procrustean bed in its
effort to establish a theft loss.
To support its allegation that
10
Lynch has never been disbarred from the practice of law
by any jurisdiction.
11
Lynch never "disappeared" or made himself unavailable
to petitioner. In fact, he was subpoenaed by petitioner and
testified at trial.
- 43 Lynch stole some of the estate's funds, petitioner relies mainly
on fragmentary and confusing evidence that Lynch acted without
lawful authority and converted to his own use assets and funds of
the estate.
This evidence is insufficient, and we reject it.
Moreover, petitioner abandoned all efforts to collect refunds due
the estate from Lynch and Reardon.
Lynch was an attorney hired by the estate for the particular
task of locating and recovering securities stolen from Philip.
He enlisted Reardon to assist him in accomplishing the task
assigned, and they were successful in doing so.
Petitioner principally relies upon the proceedings before
the Orphans' Court to support its allegation of theft.
We have
perused the entire record of the Orphans' Court litigation to
find any mention of "theft".
There is none.
Terms such as
"overreaching", "ethical considerations", "failure to keep
adequate records", and "noncooperation" are all indicia of
shortcomings on the part of Lynch, but they fall far short of
establishing the "thieving state of mind" required to establish
the crime of "theft" under Pennsylvania law.
Petitioner's attempt to convert a fee dispute into a
criminal act of theft in order to reduce its taxable estate is
unpersuasive.
Therefore, we hold that petitioner's claimed theft
loss deduction must be denied.
Issue 2.
Attorney's Fees
- 44 Section 2053(a)(2) provides for the deduction from the value
of the gross estate of such amounts for administrative expenses
"as are allowable by the laws of the jurisdiction * * * under
which the estate is being administered".
include attorney's fees.
Administrative fees
The amount claimed must be actually and
necessarily incurred in the administration of the estate and must
be reasonable.
Sec. 20.2053-3, Estate Tax Regs.
Under Pennsylvania law, the Orphans' Court is the Court that
reviews the validity of and the reasonableness of administrative
fees.
When the fees of counsel are brought before the Orphans
Court for review, it is a function of the court to decide what is
a reasonable and just compensation under all the circumstances.
Crawford's Estate, 307 Pa. 102, 111, 160 A. 585, 588 (1931).
Factors to be considered are the size of the estate, the novelty
and difficulty of the questions involved, the extent of counsel's
labor on the case and the time the labor required, the
responsibility assumed by counsel and his professional standing.
Warden Estate, 348 Pa. 224, 225, 35 A.2d 297, 298 (1944).
Respondent contends that the attorney's fees that the estate
seeks to deduct for payments made to the Tupitza law firm are
unreasonable.
The Orphans' Court has not been asked to pass upon the
reasonableness of the Tupitza law firm's attorney's fees, and it
falls upon us to make the determination.
- 45 In order to better understand our disposition of this
matter, a brief review of the administration of this estate may
be helpful.
When Panepinto was appointed administratrix of the estate,
the Orphans' Court ordered the prior administratrix, Mary
Orlando, to submit an accounting of the estate to the court.
The
ordered accounting was not forthcoming, and Boote, the attorney
for INA, prepared and filed with the court an accounting.
Boote
testified at trial that when Panepinto was appointed
administratrix of the estate, on September 1, 1982:
Ms. Panepinto wanted the money distributed to Mrs.
Orlando, the money paid out in fees, she wanted
everything. She wanted it all back in the estate and
she wanted to be paid as much as she could be paid.
Panepinto retained the services of the Dilworth law firm as
the legal representative of the estate.
Latourette was one of
the attorneys in the Dilworth firm to whom the estate matter was
assigned.
From 1982 through August 6, 1990, the Dilworth firm
represented the estate.
On September 3, 1985, Latourette and counsel for respondent
filed with the Court a Stipulation of Disposition of Issues which
resolved all issues pending between the estate and the Internal
Revenue Service, except for:
(1)
An administratrix's commission of $13,873.49 claimed by
Mary Orlando that was being disputed before the Orphans' Court.
- 46 (2)
The amount of fees paid to Lynch and Reardon that were
in dispute before the Orphans' Court.
(3)
Attorney's fees payable to the Dilworth firm by the
estate in the amount of $231,347.50, for services rendered
through September 30, 1984, and additional fees to be charged for
services rendered thereafter.
(4)
The amount of interest due on the Federal estate tax
deficiency.12
(5)
A claim by the Estate of Marie Meriano against Philip
Meriano in the amount of $12,021.
At trial, Panepinto testified that the Dilworth firm had
presented to the estate a bill for legal services in an amount of
approximately $400,000.
However, we are informed by the Second
Stipulation filed November 26, 1993, that the estate paid the
Dilworth firm only $231,347.50 for legal services rendered until
September 30, 1984.
There is no evidence in the record to
explain why the Dilworth firm was not paid legal fees in a total
amount of approximately $400,000.
Respondent has agreed to allow the estate a deduction for
legal fees paid to the Dilworth firm in an amount of
approximately $231,000.
It appears from the record that the issues remaining for
decision as set forth in the First Stipulation filed September 3,
12
This is a matter of law.
- 47 1985, were all resolved, save one, in the Second Stipulation
filed November 26, 1993.
Those were simple, uncomplicated issues
that could not have required a great amount of legal services to
resolve them.
The only issue that remained for decision on November 26,
1993, was the claimed theft loss deduction first raised by
Tupitza in 1992.
In the Second Stipulation filed November 26, 1993, the
parties also informed the Court:
5.
Additional Decrease Which Depends on
Substantiation By the Petitioner
The parties agree that the taxable estate as
tentatively agreed in the amount of $1,328,614.69 has
been determined without allowance for the following
item which is claimed as a deduction by the petitioner
and has not been allowed by the Commissioner:
A deduction in the amount of $43,516.25 for
fees billed by the law firm of Tupitza and
Marinelli.
The Petitioner claims that such amount is deductible as
attorney fees, as provided in section 20.2053-3(c) of
the Estate Tax Regulations.
The Respondent argues that such amount would be
deductible if the Petitioner furnishes substantiation
that the amount claimed has been paid or will be paid,
and has not been claimed on Form 1041. Such
substantiation may be provided by the use of Form 4421.
From November 1993 to December 1994, the Tupitza firm billed
the estate approximately $149,500 (Total Bill - $193,004.4313 -
13
Exh. 47.
- 48 43,516.25) for legal services to prepare and try one issue that
took 11 1/2 hours to try.
Panepinto is a lawyer.
Our review of the record in this
case convinces us that she kept herself fully apprised of the
fees for legal services incurred by the estate during the time
the estate was represented by the Dilworth law firm.
She testified at the trial of this case as to the
reasonableness of the legal fees charged to the estate by the
Tupitza law firm and, except for the certitude that the fees
charged were "very reasonable," she was a particularly unknowing
witness.
On cross-examination, the following colloquy took place
between counsel for respondent and Panepinto:
Q Have you discussed the issue of fees with your
attorney in preparation for today -- with Mr. Tupitza?
A
He gave me a copy of the fees.
Q Did you discuss this bill or any other subject
with respect to your testimony today?
A
Yes.
Q
When did you talk to him about it?
A
I guess this morning.
Q Do you know the amount of the deduction at
issue in this case due to the actions of Lynch and
Reardon?
A
Yes.
Q
How much is it?
A
I think it's approximately $250,000.
- 49 Q Do you know how much difference in estate tax
that deduction will make?
A
Not offhand.
Q Do you know what the estate tax bracket is now
after the stipulations have been filed with respect to
this issue?
A
No.
*
I would have to check with him.
*
*
*
*
*
*
Q Did you have any understanding with the Tupitza
firm regarding the amount of fees that you would pay
with respect to this issue, the theft loss issue?
A It was pretty much a situation where I was
trying to resolve it with the IRS and I was paying them
an hourly fee until it could be resolved. That's
basically the problem.
*
*
*
*
*
*
*
Q Did you ask them for an estimate of the
remaining fees that would be charged after the second
stipulation of disposition of issues was filed?
A
No.
Q Is there a contingency fee agreement with
respect to the theft issue?
A
No.
Q
Is there a written contract for services?
A
Between myself and Mr. Tupitza?
Q
Yes.
A
It's an hourly fee he's being paid.
Q What was your understanding as to how much the
hourly fee would be that was to be paid to Mr. Tupitza?
A
I'm not sure.
I think it's --
- 50 Q Do you know whether that's the amount that you
were charged on the bill?
*
*
*
*
*
*
*
The question is do you know whether the amount
that you agreed upon with Mr. Tupitza is the amount
that's reflected on the bill.
A I would have to review my documents to see what
I had agreed. I have it written down some place and I
would have to look it over. I did look it over after I
looked at this bill and I realized that (sic) it was,
but I don't remember exactly what it was. I think it
was approximately $100 but I'm not sure what the hourly
fee is. [Emphasis added.]
Q Did you have an understanding with Mr. Scott as
to the hourly fee that would be paid him for work done
on the theft loss issue in this case?
A Well, I had employed Mr. Tupitza and he
employed Mr. Scott.
*
*
*
*
*
*
*
Q Do you know how much Mr. Scott's part of this
bill is for the litigation of the theft loss issue?
A I would have to figure it out.
I just received one bill.
I'm not sure.
Q Do you know if there is an agreement between
Mr. Scott and Mr. Tupitza -- I'm sorry. Strike that.
Did you agree with Mr. Tupitza as to how much Mr.
Scott would be paid, or did Mr. Tupitza set that fee?
A. I spoke with Mr. Tupitza originally and he
told me what he was going to charge and then he
employed Mr. Scott and they dealt with it. I didn't
talk to Mr. Scott about this.
As a witness, Panepinto's forte seems to have been
tergiversation, and we do not credit her testimony.
- 51 The next witness called by petitioner to testify as to the
reasonableness of the fees charged to the estate by the Tupitza
law firm was Tupitza.
The direct examination of Tupitza was
conducted by Scott.14
Tupitza first explained that his firm had a policy of always
discussing fees in the first contact with the client in order to
reach an agreement on fees.
He testified that the Supreme Court
(Pennsylvania) "had dictated that we disclose what the fees are
up front."
In this case the firm agreed to represent the estate
on a fee per hour basis.
was in writing.
He was then asked whether the agreement
He responded:
We generally have a fee letter that we send to the
client and ask him to sign it and send it back. I
don't have it with me here, but I have no reason to
believe that I would have deviated from our normal
practice and not had a fee letter with her.
Tupitza then testified that he agreed with the estate to
bill his services at $225 per hour and Scott's services at $150
per hour.
We are left with Tupitza's uncorroborated, self-serving
testimony that this Court need not accept.
Geiger v.
Commissioner, 440 F.2d 688 (9th Cir. 1971), affg. T.C. Memo.
1969-159; Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992);
14
The total bill submitted to the estate by the Tupitza
firm approximates $197,000. Of that amount $67,437.50 was billed
for Tupitza's time; $115,535 was billed for Scott's time.
- 52 Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Sacks v.
Commissioner, T.C. Memo. 1994-217.
At trial, Tupitza testified that all of his firm's bills,
for probably 10 years, have been done by computer.
He was asked
by respondent how frequently entries were put into the computer.
Tupitza responded:
A
Well, I used to have a computer at my desk and
I would often put my time in each day as I did things
and then somebody else in the office came along and
thought mine was faster, so I don't have a computer
there now.
I usually gave the time to Felicia on a daily
basis, or we meet on a daily basis -- Felicia being my
secretary. We confirm what our notes are for what was
done on that day and then she enters it in. Many of
the things she enters in contemporaneously or
simultaneously with my doing the work.
Q Did Mrs. Scott ever ask you to cut your bill in
this case?
A
Yes, she did.
Q
When?
A At a point in time when I reported to her that
I didn't think we were going to be able to get any
money out of Lynch and Reardon and she didn't want to
pay for any time that related to that. We hadn't
billed for it as yet, but she asked me not to bill her
for it.
Q That would be billable time with respect to
pursuing collection efforts?
A
That's correct.
Q Other than that, there would have been no
reason for you to cut your bill in this case, correct?
A
Not that I can think of at the moment, no.
- 53 At the commencement of the trial of this case, the parties
filed a Joint Stipulation of Facts.
Attached to the joint
stipulations was, inter alia, Joint Exhibit 17-Q (17-Q).
Tupitza
identified 17-Q as a computerized printout of a bill for legal
services performed by his law firm for Panepinto as
administratrix of the Meriano Estate, covering the period August
20, 1990, through December 9, 1994.
The total bill was for
$197,008.40 and was based, in part, on an hourly fee of $225
attributable to the legal services performed by Tupitza.
It also
showed:
Date
8/13/93
12/10/93
12/15/93
4/4/94
10/10/94
Total Payments
Balance Due
Payment
$500.00
150.00
450.00
5,000.00
2,000.00
8,100.00
188,908.40
A considerable portion of 17-Q was marked through and the Court
instructed petitioner to submit a "clean" copy of the bill
presented to the estate by the Tupitza law firm.
On December 7, 1994, the third and final day of trial,
petitioner introduced into evidence Exhibit 47, a "clean" copy of
17-Q.
Exhibit 47 did not contain the first three pages of 17-Q.
Exhibit 47 showed some costs in addition to those shown on 17-Q
- 54 and also showed a payment allegedly made the night before; i.e.,
on December 6, 1994, in the amount of $188,000.15
Respondent called as a witness Howard Switkay (Switkay), who
is employed as an Appeals officer by the Internal Revenue
Service.
He was assigned as an Appeals officer to handle the
disposition of this case.
He was called as a witness for the
sole purpose of identifying Exhibit T, which respondent
introduced into evidence.
Exhibit T is a computerized printout of a bill for legal
services performed by the Tupitza law firm for Panepinto as
executrix of the Meriano Estate, covering the period from June 6,
1993, through November 8, 1993, and is dated November 8, 1993.
It was submitted to Switkay by Tupitza during settlement
negotiations, and it was understood between Switkay and Tupitza
that it was documentation in support of charges for legal
services that Tupitza was seeking to deduct on the estate tax
return.
Legal services performed by Tupitza for the estate were
charged at the rate of $150 per hour on Exhibit T.
After Switkay
testified about Exhibit T, Tupitza put himself back on the stand
and was questioned on redirect examination by Scott:
Q Mr. Tupitza, does the bill just entered into
evidence by the Internal Revenue Service accurately
reflect the charges which were submitted to the client?
15
No documentary evidence of the alleged $188,000 payment
was introduced into evidence apart from the $188,000 credited to
the account on Exh. 47.
- 55 A This particular bill was actually never mailed
to the client. Mr. Switkay and I were going back and
forth on some things and I had sent him this bill.
I had never actually looked at what the billing
rate was on it. Sometime in -- I think it was probably
even this summer, we re-ran this same bill and when we
ran the bill the time frames went considerably beyond
this. I think the last time slip on this one is
November of '93. They went into '94 and the '94 time
slips had the 225 on them, so the discrepancy picked up
between the two of the time rates, the 225 and 150 an
hour.
We then went back in and adjusted the slips that
had the wrong billable rate on them, and when we
actually submitted a bill to the client we submitted it
with the proper billable rate.
Q
So the document was a mere draft?
A It was a draft for our discussions with the
Internal Revenue Service. At that point we were
talking about a settlement of the entire issue.
This was a draft and it also had on it some
notations about projected additional time and things of
that nature.
We do not credit Tupitza's testimony.
Having observed him
as a witness and after having thoroughly reviewed all the
evidence, we are convinced that Tupitza agreed to charge the
estate $150 per hour for his legal services, and we so find.
During the last day of trial, the Court briefly examined
Exhibit 47 and noted that the Tupitza law firm had billed the
estate $115,535 for legal services allegedly performed by Scott.
When the parties informed the Court that they had no further
evidence to submit at trial, the Court called Scott as a witness
- 56 pursuant to rule 614(a), Federal Rules of Evidence, without
objection from either party.
Scott is the husband of Panepinto, the administratrix of the
estate.
He entered his appearance in this case in February 1990.
At that time, and through the time of trial, he was an associate
professor of law at Widener University.16
He had a full schedule
to teach in the fall and spring semesters of each year beginning
with the spring term of 1990.
In addition, he taught summer
school classes in 1990 and 1991.
He had 6 hours of classes a
week in the spring and fall semesters during each year.
He
informed the Court that since he had been teaching his tax
courses for so long he only had to spend 2 to 3 hours per week
for class preparation in order to keep current with new
developments in the tax area.
When he entered his appearance in this case in February
1990, Scott was not associated with any law firm.
He associated
himself with Tupitza in July or August 1990, in connection with
this case.
He testified that the estate is billed $150 an hour
for his legal services and that he is paid at the rate of $150
per hour.
Incredibly, the Tupitza law firm realized no income
from the legal services performed by Scott, a "contract
employee".
16
(More hereinafter about Scott's billable hours.)
Scott has an LL.M. in Tax from NYU and teaches
Corporate Tax I, Federal Income Tax and Taxation of Compensation.
- 57 The Court then invited either party to examine Scott and
Tupitza inquired of him:
TUPITZA Are you in fact paid by the law firm of
Tupitza and Marinelli?
(SCOTT)
Yes, I am.
TUPITZA And do you in fact expect to get a 1099
for all that you're paid from the firm?
(SCOTT) Yes, I do. In fact, if I didn't get a
1099 I would complain to you.[17]
The following is a summary of Exhibit 47:
Hours
Charges
Scott
Tupitza
760.70
302.10
$115,535.00
67,437.50
Ericsson (Attorney)
Paralegal
16.20
25.00
2,025.00
1,500.00
$182,972.50
3,525.00
Projected Trial Time:
Scott
Tupitza
Additional charges
10:00
10:00
1,500.00
2,250.00
3,750.00
2,756.93
$193,004.43
17
When Scott was questioning Tupitza on direct
examination, Scott asked: "What year did you first pay fees to
Mr. Scott? And Tupitza answered: "I think the first fees I
actually paid to Mr. Scott or remitted to Mr. Scott were probably
in 1994."
We note that from the first billing date on Exhibit 17-Q,
August 20, 1990, (Scott billed $2,187.50 for 12-1/2 hours to
"Organize file for Tax Court") until December 6, 1994, when the
estate, during trial, allegedly paid the Tupitza law firm
$188,000, the estate had only paid the law firm a total of
$8,100.
- 58 Scott's billings account for 60 percent of the total amount
charged to the estate by the Tupitza law firm and the number of
hours charged by him constitute 68 percent of the total hours
billed by the law firm to the estate.
The following table is compiled from Exhibit 47 and is
alleged to reflect the hours expended by Scott in rendering legal
services to the estate:
Date
8/7/93 (Sat.)
8/8/93 (Sun.)
8/9/93
8/10/93
8/14/93 (Sat.)
8/15/93 (Sun.)
11/20/93 (Sat.)
11/21/93 (Sun.)
11/22/93
11/23/93
11/24/93
11/25/93 (Thanksgiving day)
11/26/93
11/27/93 (Sat.)
11/28/93 (Sun.)
11/29/93
11/30/93
12/1/93
12/2/93
12/3/93
12/4/93 (Sat.)
12/5/93 (Sun.)
12/6/93
12/7/93
12/10/93
12/11/93 (Sat.)
12/12/93 (Sun.)
12/13/93
12/15/93
12/16/93
1/29/94 (Sat.)
1/30/94 (Sun.)
Activity
Hours
Amount
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
6
10
9
9
10
9
5
6
10
9
10
$900
1,500
1,350
1,350
1,500
1,350
750
900
1,500
1,350
1,500
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
Research
11
10
6
4
9
10
2
7
10
9
9
11
8
9
10
8
7
8
10
9
8
1,650
1,500
900
600
1,350
1,500
300
1,050
1,500
1,350
1,350
1,650
1,200
1,350
1,500
1,200
1,050
1,200
1,500
1,350
1,200
- 59 1/31/94
2/1/94
2/2/94
3/15/94
3/21/94
3/22/94
3/31/94
4/1/94
Research
Research
Research
Research
Research
Research
Research
Research
11
10
5
9
9
7
9
4
1,650
1,500
750
1,350
1,350
1,050
1,350
600
Date
Activity
Hours
Amount
10
1,500
7
1,050
8
9
10
9
8
6
10
10
8
10
8
8
5
6
11
10
10
9
9
10
8
9
10
9
10
9
10
9
8
1,200
1,350
1,500
1,350
1,200
900
1,500
1,500
1,200
1,500
1,200
1,200
750
900
1,650
1,500
1,500
1,350
1,350
1,500
1,200
1,350
1,500
1,350
1,500
1,350
1,500
1,350
1,200
Locate Webb Estate18 and
704 Issues; locate
addresses, witnesses
9/8/94
Locate Webb Estate
and 704 Research
9/12/94
Research/Trial Prep.
9/13/94
Research/Trial Prep.
9/14/94
Research/Trial Prep.
9/15/94
Research/Trial Prep.
9/16/94
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18
In its opening brief, petitioner cites Estate of John
Webb, Deceased, 138 A.2d 435 (Pa. 1958), a 4-page opinion by the
Supreme Court of Pennsylvania.
- 60 -
Attorney's fees in an estate case must be based on the
reasonable value of the services actually rendered.
Hughes, 353 Pa. Super. 129, 509 A.2d 369 (1986).
Dorsett v.
Attorneys
seeking compensation from an estate have the burden of
establishing facts that show the reasonableness of their fees and
entitlement to the compensation claimed.
In re Estate of
Sonovick, 373 Pa. Super. 396, 400, 541 A.2d 374, 376 (1988).
The number of hours billed by Scott to the estate in this
case is excessive and unreasonable.
Under these circumstances we
do not accept the self-serving, uncorroborated evidence of
Tupitza, Scott, and Panepinto.
In particular, we have no
credible evidence in the record that details the work allegedly
performed by Scott.
We are not unmindful of the peculiar circumstances in this
case where $115,535 in legal fees billed to the estate by Scott
would pass from the administratrix and sole beneficiary of the
estate (Scott's wife) to the Tupitza law firm and return to
Scott, to be reported on a joint Federal income return with
Panepinto.
We are left with the uneasy feeling that Scott and
Panepinto, with the concurrence of Tupitza, engaged in a
concerted effort to generate estate tax deductions to minimize
the estate's Federal estate tax liability.
The proof as to the reasonableness of the legal fees billed
by Scott is unsatisfactory from the standpoint of showing the
nature, character and extent of the services rendered.
To be
- 61 sure, based on the meager evidence in this record, his claimed
legal fees are excessive and unreasonable.
Accordingly, we hold that petitioner has failed to prove
that the estate is entitled to deduct as reasonable legal fees to
the Tupitza law firm an amount in excess of the $100,000 conceded
by respondent in her brief.19
The deduction is of course subject
to proof of payment, as required by section 20.2053-3(c)(1),
Estate Tax Regs.
To reflect the stipulations pertaining to the disposition of
issues and our conclusion with respect to the deduction for legal
fees to the Tupitza law firm,
Decision will be entered
under Rule 155.
19
If respondent had not conceded $100,000 as reasonable
legal fees, the Court would have been inclined to allow a lesser
amount in view of the facts and circumstances present in this
case.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.