Appendix — Kraft v. Commissioner

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TT lla /Y ) | Office-Supreme Court, U.S.

saat FILED

| NO. JUL 3 1984

| ALEXANDER L. STEVAS,

In The CLERK

-_<—> —. me.

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1983

FLORENCE KRAFT, and PHYLLIS

BERLIANT,

Petitioners,

vs.

COMMISSIONER OF INTERNAL REVENUE

SERVICE,

Respondent.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Richard M. Kates

Suite 3400

30 N. LaSalle St.

Chicago, I11. 60602

312/236-0267

Counsel for

Petitioners

July 2, 1984

TABLE OF CONTENTS OF APPENDIX

Page

Seventh Circuit Opinion---------- 1

Tax Court Opinion---------------- 14

Tax Court Decreen-- ee cee meee cee 67

Tax Court Decree----<-<--<--------- 68

Seventh Circuit Order---------- 69

Seventh Circuit Order Denying

Rehearing--- 9-9-9 eee ene 70

Statutes:

31 U.S.C. $191 (1975------------- 71

Ch. 110 1/2 I11l1. Rev. Stat.

18-1 2--- 9-H on nn ne 71

Jn the

United States Court of Appeals

Sor the Seventh Circuit

No. 83-1413

PHYLLIS BERLIANT, Transferee,

Petitioner-A ppellant,

Vv.

COMMISSIONER OF INTERNAL REVENUE,

Respondent-A ppellee.

No. 83-1414

FLORENCE KRAFT, Transferee, :

Petitioner-A ppellant,

VU.

COMMISSIONER OF INTERNAL REVENUE,

Respondent-A ppellee.

On Appeals from the United States Tax Court.

ARGUED NOVEMBER 9, 1983—DECIDED MARCH 5, 1984

Before CUMMINGS, Chief Judge, Woop, Circuit Judge,

and CAMPBELL, Senior District Judge.*

* The Honorable William J. Campbell, Senior District Judge

for the Northern District of Illinois, is sitting by designation.

Appendix P. 1

2 Nos. 83-1413 and 83-1414

CUMMINGS, Chief Judge. This is an appeal by Florence

Berliant Kraft (Kraft) and Phyllis Berliant (Berliant)

from a decision of the United States Tax Court finding

Kraft, Berliant and Irene Berliant Magill' liable for

unpaid taxes of the estate of decedent Rae Berliant (Rae).

Magill v. Commissioner, 51 TCM (P-H) 9 82,148 (filed

March 24, 1982) (App. 1-53). Tax Court Judge Dawson

determined that the estate tax owed was $67,294.85 plus

interest and that the parties were each liable for the tax

to the extent of the value of assets received (App. 54).

Kraft and Magill, transferees of both probate and non-

probate assets, were each held liable for the entire

amount (App. 54). Berliant, transferee? of only probate

assets, was held liable for $46,000 plus interest (App. 56).

The government, Kraft and Magill stipulated that “the

payment of the entire liability of the transferor in the

amount of $67,294.85 plus interest * * * by any one or a

) combination of the petitioners [Kraft, Berliant and

Magill] liable therefor” would discharge the liability of all

although Berliant need pay no more than $46,000 plus

interest (App. 54-57).

——————— eee

Aton Reta ON cots I sm? el Na a An a Wr mm

1 Trene Berliant Magill, executrix of Rae Berliant’s estate, did

not file a notice of appeal from the Tax Court decision and

therefore is not a party to this appeal (Govt. Br. 2).

2 Phyllis Berliant’s husband, Sidney Berliant, was a child of

Rae and a beneficiary under her will. He died on February 24,

1972, before certain probate assets of Rae (see Part II infra)

were distributed, and the assets passed to his wife Phyllis as

i the sole beneficiary under his will. As a technical matter,

Phyllis Berliant is considered a transferee of a transferee of

probate assets from Rae Berliant’s estate. However, since it is

well-settled that transferee liability may be asserted against a

transferee of a transferee, Estate of Goldsborough uv.

Commissioner, 70 T.C. 1077, 1086-1087 (1978), affirmed, 673

F.2d 1310 (4th Cir. 1982), Phyllis Berliant will be referred to

herein as a transferee as a matter of convenience.

Appendix p. 2

thls Rina ies RE och! sine ARO IOLL od. tb

Nos. 83-1413 and 83-1414 3

Rae Berliant, mother of Ernest Berliant, Sidney

Berliant (husband of Phyllis), Florence Kraft, and Irene

Magill, died testate on November 4, 1964. Although a

Federal estate tax return was due to be filed on Febru-

ary 4, 1966, none was filed until December 16, 1971. In the

tax return finally filed, Rae’s gross estate was valued at

$135,897.01 (Govt. Br. 3). On reviewing the return, the

Internal Revenue Service determined that various prop-

erties had been improperly excluded from the gross

estate® and therefore not reported on the estate tax

return nor included in calculations to determine the

amount of any estate tax due. The I.R.S. decided that

there was a $67,550.63 deficiency in Rae’s estate taxes

and, because of the late filing without reasonable cause,

an addition to tax of $16,887.66 (App. 2). The I.R.S. as-

serted that Magill, Kraft, and Berliant were each liable

for the entire amount of the tax and addition to tax.

Magill, Kraft and Berliant challenged the I.R.S. in the

Tax Court. The Tax Court decided: (1) that Magill and

Kraft as transferees and Berliant, widow of Sidney

Berliant, as a transferee of a transferee were liable under

I.R.C. § 6901(a)‘ for unpaid estate tax with respect to

3’ For example, the 1971 estate tax return did not include:

(1) $59,624.37 in bank accounts, stocks, and bonds which Rae

Berliant at her death held in joint tenancy and (2) $106,293.32

in totten trust accounts for which Rae was the sole authorized

signatory and trustee (App. 9). As surviving tenants or

beneficiaries, Irene Magill, Kraft, and Sidney Berliant took

possession and control of most of this property ($145,391.83)

when Rae died (App. 10). Ernest Berliant was evidently disin-

herited (App. 11).

4 I.R.C. § 6901(a) reads in pertinent part:

SEC. 6901. TRANSFERRED ASSETS.

(a) METHOD OF COLLECTION.—The amounts of

the following liabilities shall, except as hereinafter in this

section provided, be assessed, paid, and collected in the

(Footnote continued on following page)

Appendix pr 3

iii eaaeantiacieeaiil

4 Nos. 83-1413 and 83-1414

probate assets they received from Rae’s estate;

(2) Kraft and Magill were liable under I.R.C.

§ 6324(a)(2)5 for unpaid estate tax with respect to non-

probate assets which passed to them because of Rae’s

death; (3) the property in which Rae Berliant held a joint

tenancy interest at death and the totten trust accounts

for which she was the trustee (see supra note 3) were in-

cludable in the gross estate under I.R.C. Sections 2040

and 2036, 2037 or 2038 (App. 39-46) as well as 6324(a) (2)

which is reproduced in note 5 supra; (4) the estate was

entitled to deduct fees paid to an attorney in connection

with litigation concerning the estate administration; and

(5) the late filing of the estate tax return was without

4 continued

same manner and subject to the same provisions and limi-

tations as in the case of the taxes with respect to which

the liabilities were incurred:

(1) INCOME, ESTATE, AND GIFT TAXES.—

(A) TRANSFEREES.—The liability, at law or in

equity, of a transferee of property—

** *

(i) of a decedent in the case of a tax imposed

by chapter 11 (relating to estate taxes), * * *

in respect of the tax imposed by subtitle A or B. * * *

5 I.R.C. § 6324(a) (2) reads in pertinent part:

(a) LIENS FOR ESTATE TAX.— * **

xx *

(2) LIABILITY OF TRANSFEREES AND

OTHERS.—If the estate tax imposed by chapter 11 is not

paid when due, then the spouse, transferee, trustee

(except the trustee of an employees’ trust which meets

the requirements of section 401(a)), surviving tenant,

person in possession of the property by reason of the

exercise, nonexercise, or release of a power of

appointment, or beneficiary, who receives, or has on the

date of the decedent’s death, property included in the

gross estate under sections 2034 to 2042, inclusive, to the

extent of the value, at the time of the decedent’s death, of

such property, shall be personally liable for such tax. * * *

Appendix p. 4

Nos. 83-1413 and 83-1414 5

reasonable cause so that the addition to tax was proper.

Only the first three issues are before this Court on appeal.

The government has not appealed the Tax Court’s

determination with regard to attorney’s fees (Govt. Br.

11) and Kraft and Berliant have not challenged the Tax

Court’s ruling regarding tardy return filing resulting in

the addition to tax (Govt. Br. 8). This Court has consid-

ered seriously all the arguments raised by the parties in

this appeal but will discuss only the important ones.

The government seeks to impose transferee liability on

Kraft and Berliant for the value of the following property

acquired by them on or after Rae’s death (App. 20):

Description Date Received Kraft Berliant

Stock (probate) January 1, 1973 $ 43,000.00 $43,000.00

Proceeds in dis-

solution of

Clara’s Ltd. (an

investment com-

pany) (probate) October 1, 1974 3,000.00 3,000.00

Annuity (non-

probate) August 10, 1965 6,027.34 =

Joint tenancy

property (non-

probate) Date of death 35,920.87 _

Totten trust

accounts (non-

probate) Date of death 31,459.04

$119,407.25 $46,000.00

Preliminary to establishing petitioners’ liability as trans-

ferees for these taxes under either Section 6901(a) or Sec-

tion 6324(a)(2), it must be established that Rae in fact

owned these assets at the time of her death If Rae did not

own them then, no transferee liability can be imposed.

Appendix p. 5

Soya >

———— nn:

6 Nos. 83-1413 and 83-1414

Kraft and Berliant argue that, with only two exceptions,®

Rae did not own these assets but held them for her child-

ren who had given her money to invest for them. Although

they cannot trace to particular investments the money

they claim the children gave Rae, Kraft and Berliant con-

tend that Rae must have used the children’s money since

she had virtually no resources of her own with which to

amass the sizable estate.

In response to similar arguments below by petitioners,

the Tax Court found as facts that any contributions made

to Rae by her children “were in the nature of gifts rather

than conveyances in trust for the benefit” of the children

(App. 7) and that Rae “supplied all the consideration for

the * * * joint tenancy property and totten trust accounts”

(App. 10). These findings are amply supported in the

record. Neither Rae nor any of the children kept records

of the amounts contributed to Rae (App. 7, 39). Rae

reported on her individual income tax returns the dividend

and interest income from the contributed money; neither

her children nor their spouses did (App. 7, 27). The child-

ren never questioned Rae about the nature of her invest-

ment of their money or in any other way exercised control

over the investments (App. 7-8, 27). Because these find-

ings are amply supported by the record and certainly are

not clearly erroneous, we must sustain them on appeal.

Commissioner v. Duberstein, 373 U.S. 278; Avco Delta

Corp. Canada Ltd. v. United States, 540 F.2d 258 (7th

Cir. atin

appeal, Kraft and Berliant contend that the case of

Mende on v. Commissioner, 52 T.C. 727 (1969), supports

their claim that the estate assets are actually the child-

ren’s and not Rae’s. However, in Mendelson the Tax

Court found that the petitioner had not made a gift of her

funds, so that her retaking of them did not make her a

transferee. Since the Tax Court found that the Berliant

® Petitioners concede their liability as transferees with respect

to the Clara’s Ltd. proceeds and the annuity (Reply Br. 2).

Appendix p. 6

Nos. 83-1413 and 83-1414 7

children had made a gift to their mother, Mendelson has

no application here. Therefore, we sustain the Tax

Court’s finding that Rae owned all the probate and non-

probate assets at issue inthis proceeding.

III

In order for Kraft and Berliant to be liable as transfer-

ees of probate assets for unpaid estate taxes, there must

be a basis under state law or state equity principles for

imposing transferee liability. Commissioner v. Stern, 357

U.S. 39. Section 6901(a) merely establishes a procedure

for tax collection but does not establish transferee

liability. Since Rae Berliant’s probate estate was adminis-

tered under Illinois law, that law governs whether Kraft

and Berliant are liable, legally or equitably, for the es-

tate’s unpaid taxes. The Tax Court concluded that Kraft

and Berliant, as transferees of probate assets, could be

held liable for estate taxes up to the value of probate

assets received, or $46,000.7 We agree with this conclu-

sion but in part for different reasons than set forth by the

Tax Court.

The Tax Court first decided that Section 293, ch 3 IIL

Ann. Stat. (Smith-Hurd 1961),* provided for transferee

7 See table supra Part II.

8 § 293. Refunding by Distributees

If at any time after payment of a distributive share it

becomes necessary for all or any part of the distributive

share to be refunded for the payment of any claim entitled

to be paid from the estate distributed the probate court

upon the application of any interested person shall order

the distributee to refund that portion of his distributive

share which is necessary to pay the claim. If there is more

than one distributee the court shall apportion among the

distributees the amount to be refunded according to the

amount received by each of them, but specific legacies

need not be refunded unless the residue is insufficient to

satisfy the claims entitled to be paid from the estate

distributed. If a distributee refuses to refund within sixty

(Footnote continued on following page)

Appendix p. 7

8 Nos. 83-1413 and 83-1414

liability. In reaching this conclusion, the court relied on

the fact that under Section 293 the Illinois Probate Court

may order a distributee to return whatever share of his

distribution is necessary to pay claims “entitled to be paid

from the estate distributed.” Since tax claims of the

United States are claims entitled to be paid from the

estate (Section 202, ch 3 Ill. Ann Stat. (Smith-Hurd

1961)), the court reasoned that Kraft and Berliant as

transferees are liable to the United States. However, the

Tax Court’s reasoning is flawed because it did not consider

the nature of the transferee liability established in Section

293. By its own terms, Section 293 imposes transferee or

distributee liability only when “the probate court upon

the application of any interested person shall order the

distributee to refund that portion of his distributive share

which is necessary to pay the claim” (emphasis added).

The government contended at oral argument that Section

293’s probate court order requirement is a technical re-

quirement relating only to the procedure for collection

from the transferee and not to the establishment of trans-

feree liability in the first place. But Section 293 imposes

no transferee liability in the absence of an application to

the probate court and a probate court order, so that the

statute cannot provide a basis for transferee liability

absent such an order. There is no indication that the

government has applied to the Illinois Probate Court or

that the Probate Court has issued an order to Kraft and

8 continued

days after being ordered by the court to do so and upon

demand, * * * a civil action may be maintained by the ex-

ecutor or administrator against the distributee * * * for

the amount due together with the expenses of recovery

including reasonable attorney’s fees. The order of the pro-

bate a is evidence of the amount due. (Emphasis

added.

The Tax Court noted that it was basing its decision on Illinois

statutory law in effect at the time the transfers were made

(App. 29 n.13).

appendix p. 8

Nos. 83-1413 and 83-1414 9

Berliant to pay the estate taxes. Therefore the govern-

ment has not met its burden of establishing that petition-

ers are liable as transferees under Section 293.

Alternatively, the Tax Court decided that transferees

Kraft and Berliant are liable under Illinois equity

principles. The Tax Court is correct in this conclusion As

a matter of equity, Illinois has long imposed on estate

transferees liability to creditors of the estate. “Legatees

are always compellable to refund in favor of creditors be-

cause the latter have a priority of right to satisfaction out

of assets.” Union Trust Co. v. Shoemaker, 258 Ill. 564,

572, 101 N.E. 1050, 1053 (1913); see also In re Bird’s

Estate, 410 Ill. 390, 396-397, 102 N.E.2d 329, 333 (1951);

Snydacker v. Swan Land & Cattle Co., 154 Ill. 220, 225,

40 N.E. 466, 468 (1895). In Shoemaker, the Illinois Su-

preme Court analyzed extensively the scope of a creditor’s

equitable remedy against transferees of an estate’s

assets. Later cases have merely applied Shoemaker to the

particular facts at hand without performing further inde-

pendent analysis. See, e.g., Olsen v. Hartford Accident

and Indemnity Co., 368 IIL 194, 197, 13 N.E.2d 159, 161

(1938). In Shoemaker, the claim asserted against trans-

ferees of estate assets first arose five years after dece-

dent’s death, when judgment was entered in a case in

which decedent and his business partners had become par-

ties long before the death. At decedent’s death, that claim

was only contingent because its maturing depended on

decedent’s opponents’ obtaining judgment, “a contingency

which may or may not ripen into a liablility and [was]

dependent on an event that neither party can control,”

(Pet. Br. 7). Because Shoemaker involved a contingent

claim, the Tax Court apparently assumed that the

rationale for the decision there to allow recovery by an

estate creditor against estate distributees was limited to

cases of contingent claims. Since, as the government

insists, estate taxes are not contingent liabilities, the Tax

Court reasoned that Shoemaker’s equitable principle

should be applied analogously to petitioners’ case (App.

32). Petitioners argue that the court erred in extending

Appendix p. 9

10 Nos. 83-1413 and 83-1414

this equitable principle to cases involving non-contingent

claims and contended that the principle must be limited to

contingent claims cases.

Both the Tax Court and petitioners view too narrowly

the equitable principle explicated in Shoemaker. It is

clear that the Illinois Supreme Court established a rule

with application beyond contingent claims cases. “It is an

established doctrine of equity that creditors who have not

been guilty of laches may pursue assets into the hands of

distributees, where distribution has been made without

discharging their debts,” Shoemaker, 258 Ill. at 573, 101

N.E. at 1053. Even assuming that the defense of laches

could be asserted against the United States, petitioners

do not claim that the government unreasonably delayed in

taking action to recover the unpaid taxes. Indeed, on the

facts of this case, there is no basis for such a claim. The

estate tax return was filed over five and a half years late

on December 16, 1971 and omitted substantial assets. See

supra note 3. Nevertheless the Internal Revenue Service

completed its review of the return and filed a notice of

deficiency within approximately two and a half years, on

August 22, 1974. (I.R.S. Statutory Notice Statements to

Kraft and Berliant.)

Under Illinois equity principles, the government may

recover from Kraft and Berliant unpaid estate taxes of

Rae Berliant’s estate to the value of probate assets each

received plus interest.®

® In its argument before the Tax Court, the government relied

exclusively on Illinois Fraudulent Conveyance statutes, IIL

Rev. Stat. ch. 59, §§ 4 and 5 (1972), as a basis for establishing

transferee liability under Illinois law (App. 33 n16). The Tax

Court did not rely on these provisions in reaching its decision

but instead relied on Section 293 (supra note 8) and the equita-

ble provisions discussed in the text. Because we conclude that

transferee liwbility is based on Illinois equity principles, it is not

necessary to decide the government’s alternative argument

that liability might also be established under Illinois’ fraudulent

conveyance statutes.

(Footnote continued, on following page)

“Appen 1X Pp. _

Nos. 83-1413 and 83-1414 11

The Tax Court also decided that Florence Kraft is

liable, under I.R.C. § 6324(a) (2), for unpaid estate taxes

to the extent of the date-of-death valuation of non-

probate assets she received in connection with Rae

Berliant’s death.° As noted at Part II supra, in the Tax

Court proceeding Kraft contested liability with regard to

the joint tenancy bank property and the totten trust

accounts. On appeal, she continues to press only two argu-

ments with respect to these assets. First, she contends

that she and not Rae was the owner of the assets so that

no transferee liability could arise on Rae’s death This

argument has been considered and rejected in Part II.

Second, Kraft contends that her joint tenancy in the

bank accounts was not proved because the government

has not presented signature cards signed by her and Rae

and stating that the accounts are joint with a right of

survivorship. Kraft claims that such signature cards are

required under Illinois law to establish joint tenancy in a

bank account and that since joint tenancy has not been es-

tablished under Illinois law, the property is not includable

8 continued

Kraft and Berliant argue that the Tax Court erred in basing

its decision on theories not relied on by the government.

However, it is well-settled that where, as here, the government

was correct in its determination that petitioners were liable for

the tax, the Tax Court may approve tax liability even for a

reason not relied on by the government. Helvering v. Gowran,

302 U.S. 238, 245-246. Where, as here, the result of the lower

court is correct, it must be affirmed on appeal, even if the lower

court relied on the wrong ground or gave the wrong reason for

its decision. Id.; Panter v. Marshall Field & Co., 646 F.2d 271,

281 (7th Cir. 1981), certiorari denied, 454 U.S. 1092.

10 The government has not asserted a claim against Phyllis

Berliant with regard to the non- probate assets (Govt. Br. 7-8).

Appendix p. ll

12 Nos. 83-1413 and 83-1414

in the gross estate under I.R.C. § 2040," and transferee

liability cannot arise under I.R.C. § 6324 (supra note 5).

Kraft misinterprets Illinois law. The Illinois authorities

on which Kraft relies state merely that a joint tenancy

bank account may only be created when the parties to the

account sign a written agreement such as a signature

card. In re Estate of White, 56 Ill. 2d 265, 268-271, 307

N.E.2d 122, 124-125 (1971); Doubler v. Doubler, 412 II.

597, 600, 107 N.E.2d 789, 790 (1952); In re Estate of

Gubala, 81 Ill. App. 2d 378, 384, 225 N.E.2d 646, 650

11 1.R.C. § 2040 reads as follows:

2040. JOINT INTERESTS.

The value of the gross estate shall include the value of

all property to the extent of the interest therein held as

joint tenants by the decedent and any other person, or as

tenants by the entirety by the decedent and spouse, or

deposited, with any person carrying on the banking

business, in their joint names and payable to either or the

survivor, except such part thereof as may be shown to

have originally belonged to such other person and never to

have been received or acquired by the latter from the

decedent for less than an adequate and full consideration

in money or money’s worth: Provided, That where such

property or any part thereof, or part of the consideration

with which such property was acquired, is shown to have

been at any time acquired by such other person from the

decedent for less than an adequate and full consideration

in money or money’s worth, there shall be excepted only

such part of the value of such property as is proportionate

to the consideration furnished by such other person:

Provided further, That where any property has been ac-

quired by gift, bequest, devise, or inheritance, as a tenancy

by the entirety by the decedent and spouse, then to the

extent of one-half of the value thereof, or, where so ac-

quired by the decedent and any other person as joint ten-

ants and their interests are not otherwise specified or

fixed by law, then to the extent of the value of a fractional

part to be determined by dividing the value of the proper-

ty by the number of joint Lea ta i. x3

, im

& o ye :

re ir ae

Ly Sats Se 9 es

" =

Nos. 83-1413 and 83-1414 13

(1967); Illinois Law and Practice, Joint Tenancy § 5.

None of the authcrities state that the only way to prove a

joint tenancy in a bank account is by presenting the signa-

ture card as evidence. Here the Tax Court noted that

Kraft stipulated that at Rae’s death she received and took

possession and control of the bank accounts titled in her

and Rae’s names. The court found this behavior inconsis-

tent with the tenancy in common which Kraft now urges

on this Court (App. 33 n.19). Furthermore, Kraft stipulat-

ed that these accounts were titled “joint tenants with the

right of survivorship and not as tenants in common.” /d.

These stipulations provide sufficient proof that the bank

accounts in issue were joint tenancy accounts.!2 The Tax

Court was correct in deciding that under Section

6324(a)(2) Kraft was liable to the extent of the

$76,467.25 date-of-death value of the non- probate assets

(see table supra, Part II) she received due to Rae’s death

plus interest, for the unpaid estate taxes.

The decisions of the Tax Court involving the estate tax

liabilities of Florence Kraft and Phyllis Berliant are

affirmed.

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

12 The inclusion of the $31,459.04 totten trust accounts is not

separately challenged in petitioners’ briefs probably because

LR.C. §§ 2036, 2037 or 2038 apply to them as the Tax Court

held (App. 40). Appendix p. 13

USCA 40227—Midwest Law Printing Co., Inc., Chicago—3-5-84—400

EDITOR'S NOTE

PAGES Aes pid thr EMO WERE POOR

HARD C TIME OF FILMLNG.

IF AND WHEN A BETTER COPY CAN BE

OBTAINED, A NEW FICHE WILL BE

ISSUED.

T. C. Memo. 1982-148

UNITED STATES TAX COURT

IRENE MAGILL, TRANSFEREE, ET AL., Petitioners

v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 9094-74, Filed March 24, 1982.

9126-74,

9127-74.

Richard S$. Hartford, for the scetiticoner in

Decket No. 9094-74.

Richard M. Kates, for the petitioners in

Bryan R. Sullivan, for the respondent.

Cases of the following petitioners are consolidated herewith:

Irene Magill, docket No. 9094-74; Floranmce Kraft, dockec No. 9126-74;

Phyllis Berliant, docket No. 9127-74.

Appendix p. 14

SERVED MAR 2 4 S82

-2-.

MEMORANDUM FINDINGS OF FACT AND OPIN=ICN

DANSON, Judce: Respondent has determined chat the

petitioners in these consolidated cases are liable as

transferees (or, in the case of petitioner ?hylli

Serliant, as a transferee of a transferee) for the unpaic

estate tax of the estata of Rae Serliant, as follcws:

Estate Tax Addition to Tax

Petitioner Docket No. Deficiency Under Section 6651(a) 13

rene Magill 9094=74 $67,550.63 $16,387.66

orence Kraft 9126-74 67,550.63 16,387.66

Phyllis Berlianc 9127-74 67,550.63 15,887.66

After concessions we are left with the following

issues for decision:

(1) Whether petitioners Irene Magill and Florence

Kraft are liable as transferees under section 6901(a)

for any unpaid estate tax with respect to the value cf

Respondent determined that each petiticner vas liable for che

full amoumt of the estate tax deficiency and addition to tax.

All section references are to the Incernal Revenue Code of

| 1954, as amended and in effect at the time of Rae 3erliznt’'s

death, unless otherwise indicated.

Appendix p. 15

= 3-

stock and liquidation proceeds they received as beneficiaries

of the estate.

(2) Whether petiticner Phyllis 3erliant is liable

as a transferee of a transferee under section 6301(a)

for any unpaid estate sax with respect to the value of

stock and liquidation proceeds she received {following

the death of her husband, who was a beneficiary of the

estate.

(3) Whether petitioners Florence Kraze and izene

Magill are liable uncer section 6324(a) (2) for any unpaid

estate tax with respect to certain joint tenancy property,

sotcen trust accounts and annuity proceeds which passed

to them cutsice the probate estate by reason of Rae

Berliant's death.

(4) Whether cercain stocks, bonds and savings accounts

in which decedent held an interest as a joint tenant are

includgable in the gross estate uncer secticn 2040.

(S$) Whether certain totten t-ust accounts, of which

Sececent was trustee and her children or grandchildren

beneficiaries, are includable in the gross estate under

secticns 2036, 2037, of 2038. .

Appendix p. 16

-i4i-

(6) Whether the estate is entitled to deduct a fee

paic to an attorney who represented cercain beneficiaries

in litigation concerning the administration of the estate.

(7) Whether the late filing of the estate tax return

was due to reasonable cause.

PINDINGS OF FACT

Some of the facts have been stipulated and are found

accordingly. ‘The stipulations of fact and the attached

exhibits are incorporated herein by reference.

Rae Berliant (decedent) died testate on November ¢,

1964, a residen= of Chicago, Illinois. Decedent was

massied to Julius Berliant, a doctor, who died on or

about December 3:1, 1933. Four children were born of

Shis marriage, Sidney Berliant, Ernest Berliant, and

petiticners Irene Magill and Florence React (hereinatte>

individually referred to as Sidney, Ernest, Irene and

Plorence) .

Eznest was born in 1907, married in 1944, and fathered

two children curing the 1940's or 1950's. Irene was

bers in 1910, married in 1929, and gave birth to three

chiléren during the 1930's. Florence was born in 1915,

married in 1939, and gave birth to five children foam

1940 to 1954. Sidney was born in 1917, married petitioner

Phyllis Serlianc (Phyllis) in 1940, and had four children

igh Appendix p. 17

- 5-

with Phyllis in the 1940's and 1950's. Each of decedent's

childzsen resided with decedent until he or she married.

Petitioners Irene, Florence anc Phyllis residec in

Wilmette, Chicago: and Skokie, Illinois, respectively,

when they filed their petitions in these consclidated

cases.

Decedent's father, Nathan Rosenblat, died in 1931.

He lett assets valued at $42,930.31, most of which

were placed in a trust which named his wife |

and their five children as life income beneficiaries.

Under the terms of the trust the income was generaliv

required to be divided equally among the surviving income

beneficiaries. Upor the death of the last surviving income

beneficiary she corpus of the trust was to be distributed

to- Nathan Rosenblat's grandchildren. During her lifetime

Gecedens received at least $9,356.52 from this trust.

Decedent's mother, Clara Rosenblat, died in

i937 and left assets valued at $8,975. These acsets

were placed in an investment company operating under the

name of Clara's, Ltd., and each of Clara Rosenblat's

children, including decedent, received an interest in the

company. During her lifetime decedent receivec income

from Clara's, Lsd., totaling at least $2,4 35.39.

Appendix p. 18

- 6-

Upon the death of her husband, Julius Berliant,

decedent received she proceeds of a $19,000 life

insurance policy and certain other assets of an

undetermined amount fran his estate.

Decedent was never formally employed during her

litetime. She was, nevertheless, an excellent business-

woman anc regularly traded in the bond and stock markets.

During the 1920's and 1930's she also actively ssaded in

so-callec “gold bonds,” which were commonly issued by

private individuals during that era in order to finance

the construction of real estate. Her shrewd investment

dealing and extracrdinarily frugal nature enabled her to

amass a substantial amount of cash anc other assets before

she died in 1964.

All four of decedent's children began working

fulltime jobs by aces 16 or 17. Until they married and

moved out of decedent's home <hey regularly surned over

a portion of their earnings to decedent, who savad or

invested some of the money and used the rest to defray

the family's living expenses. The children continued to

give money to the decedent “=cem scime co time after shey

marsied and moved suc of the ‘family residence. To the

excent she money was not needed fcr her support decedent:

invested it in stocks, bonds, o> intarest-Searin¢e savinss

accounts and certificates. Florence anc her husband

also supplied decedent with free food from their grocery

Appendix p. 19

“Je

store <rom time sc time until her death in 1964. None

of the children maintained any records of the amounss

which he or she had con<ributed to the decedent. Nor

@ic decedent maintain any such records. None of the

children was aware of the total amounts which had been

contributed by the other siblings. The contributions

were in the nature of gifts sather than conveyances in

csust for the benefit of the respective transferors.

Decedent reported the dividend and interest income

on all of the money she invested, including the money

she received from her children, on her individual income

tax returns. None of the children or their spouses ever

reported any interest or dividends attributable tc the

investments on their personal income tax returns,

izsespective of whether the underlying investment property

was held solely in decedent's name, in decedent's name

and the name of any of her children as joint tenants, or

in the name of decedent as trustee for her children or

grandchildren.

The chilcren never questicned deceden= about any

assets she purchased or about she various bank accounts

in which she deposited money. Thus, prior to her death

Shey knew litcile or nothing about the nature, value or

state of ownership cf these investments, including those

bank accounts established by ceceden= in which the

Children were named as =rsust beneficiaries or joint

Appendix p. 20

- 8 -

tenants. At no time prior so deceden='s death dic the

children exercise any control over che inves=ments or

make any withdcrawals from any of the savings accounts.

Whenever a signature of one of the children was required

on a bank document, such as a signature card on a joint

account, deceden= would bring she document to the child

for signature and then return it to the bank hersel.

Beginning in the mid-1950's all of the savings

accounts maintained by decedent (including jointly held

accounts and totten trust accounts) were located at either

Chicago Pederal Savings & Loan (CFSL) or Bell Federal

Savings & Loan (BPSL). She visited these banks at least

once a month *o make deposit=s, cpen new accounts or

transfe= funds between acounts. Although she occasionally

made cash deposits, the bulk of the deposits were dividend

checks she received from her stock investments.

At her death, decedent was a joint tenant with respect

to the following joint tenancy property, none of which

was reported on her estate tax retusa:

Appendix p. 21

Date of Death

iren Joint Tenan: Balance cr Value

CFSi. Savings Accounts:

# 70260-5 Florence $27,894.87

# 30818 Ernest 9,000.00

# 30847 Irene 7,000.00

# 30887 Florance 7,000.00

# 30848 Sidney 7,000.00

U.S. Gov'c. 3onds Ernest 175.00

Montgomery Ward Scock—

24 Shares Florence 1,026.00

Cities Service Stock-—

7 Shares Florence $28.50

$39,624.37

At her death, decedent was the scle authorized

signatory and trustee of the following totten “rust

accounts, none of which was reported on her estate tax

return:

Surviving Date of Death

item Benefictarv(ies) _ 3alance

BFSL Savings Accounss:

# 338388 (Grandchiid) $ 9885.i8

# 338389 (Grandchild) 885.18

# 338390 (Grandchild) 885.18

# 338385 (Grandchild) 885.18

# 338386 (Grandchild) 497.91

# 338387 (Grandchild) 663.88

# 16379 (Grandchild) 663.89

# 24521 (Grandchild) 553.24

# 3682 (Grandchild) 400.00

# 3683 (Grandchild) 700.00

# 250173 (Grandchild) 387.27

# 233495 Florence 12,638.26

# 19228 Sidney 1,097.94

# 107141 Sidney 11,595.28

# 107139 Florence 16,006.72

CTSL Savings Accounts:

# 95207-7 Irene, Florence,

Sidmey and imnest 11,256.22

# 107181 E>nest 1,129.89

# 65648-8 Sidney 24,737.83

# 129730-8 Irene 20,404.27

$106. 293.32

Appendix p. 22

= 10 -

Decedent supplied all the consideration for sche fore-

going joint tenancy property and totten trust accounts.

By virtue of their rights as surviving tenants or

beneficiaries Sidney and petitioners Irene and Florence

teok possession and control of the following assets upon

the death of decedent:

Surviving Joint Tenant Date of Death

ices Balance oF Value

Irene . CFSL Sav. Acc. # 30847 $ 7,000.00

Irene CYSL Sav. acc. # 129730-8 20, 404.27

BEVERY S

Florence CFSL Sav. acc. # 70260-5 © $27,894.87

Florence CYSL Sav. acc. # 30887 7,900.00

Florence BFSL Sav. acc. # 213455 12,638.26

Florence BFSL Sav. acc. # 107139 16,006.72

Florence Montgomery Ward Stock-24 Shares 1,026.00

Florence Cities Service Stock- 7 Shares __ 528.50

$67 .4

Sidney CPSL Sav. acc. # 30848 $ 7,000.00

Sidney CFSL Sav. acc. # 95207-7 2,814.05

Sidney CFSL Sav. acc. # 65648~-8 24,737.83

Sidney BFSL Sav. Acc. # 19228 1,097.94

Sidnay BFSi Sav. acc. # 1LO7141 ah 525.28

Appendix p. 23

-lleé-

Decedens was survived by all four of her children.

However, only Irene, Florence anc Sidney were named as

beneficiaries in her will. Irene was also named executrix

of the estate and served in that capacity from January 18,

1965 until the estate was closed on June 30, 1972. Prior

to her appointment as executrix Irene had never before

acted as a perscnal representative for an estate. She

had only a high-school education. Sometime in November

cf 1964 she enlisted the services of Caplow & Zimmerman,

a law fiz, to assist her in the administration of the

es=ate.

The probate of the estate generated a considerable

amount of litigation among the estate and decedent's

chilézen. In 1965 Esnest, who hac been disinherited by

decedent, commenced litigation to contest the will and

to establish ownership of certain stock titled in his

name which Izene had attempted to include in the probate

inventory. In connection with shis litigation Irene,

Florence and Sidney filed an answer with thie probate cour:

on May 12, 1969, in which they allegec that decedent

held ‘legal title to approximately $200,000 of property

at her death, of which approximately $60,000 “arose out

of dizrec= contributions by [them] to the decedent in

trust and safekeeping and represented (their) savings."

Appendix p. 24

In another paragraph of their answer shey admitted shat

"decedent made substantial sitts to [them] during her

lifetime” in the course of establishing the savings

accounts of which thev became she sole owners upon her

death. On December 10, 1969, the probate court, pursuant

to an agreement of the parties, dismissed Ex=nest's peciticn

to set aside the will. It also cetermined that Ernest

had paid full consideration for she disputed shares of

stock pursuant to a4 purchase agreement entered into with

the decedent in 1964, and decreed thas he was the scle

owner of the property.

Plorence and Sidney also filed a petition with the

probate court in March 1970 calling for the removal of

Isene as executrix and the appointment of Sidney as a

successcr executor. The petition complained of Irene's

failure to (1) file a Final Account by August 31, 1965,

as required in a previous order of the court, and (2)

cimely file Federal estate an¢ Illinois inheritance tax

returns. In particular, the petition alleged in par>< as

sane Appendix p. 25

- 13 -

3. That om July 16, 1965, am Order was entered

in the above entitled cause, directing the Executor

to file «a Final Account by Auguse 31, 1965.

That che said [IRENE MAGILL, Executor, has failed

and refused and still fails and refuses to file a

Pinal Account, in accordance with Section 289 of the

Probate Act.

4. Theat the said Executor has failed and

refused, and still fails and refuses, to file an

Estate Tax Return and an Inheritance Tax Recurn withic

the time prescribed by law; the Estate may be surcharged

for penalties and interest for failure to file said

Teturnus; thac in the event there is a2 surcharge, chen

said surcharge should be charged to the Executor and

deducted from her share of said Estate; that said

Estate should not be penalized for the failure and

refusal of the Executor to file said returns.

5. That by reason of the failure of the Executor

to file am accounting and to file the returns, herein-

above set forch, she should be removed as Executor,

in accordance with Section 276 of the Probate Acc.

222

On April 19, 1971, the probate court entered an

order which directed Irene to file a Final Account and

the necessary tax returns within 90 days. The order

also contained several directives pertaining to the payment

of the estate's Yederal estate and Illinois inheritance

tax obligations, including penalties and interest, if anv.

Specifically, the order called fcr Irene, Florence and

Sidney to establish a $25,000 escrow account to be used

solely for the payment of those obligations. Any

penalties and interes* were to be surcharged against Irene

to the extent of the amount of her executrix fees, but

only in the event that total taxes and penalties exceeded

the $25,000 escrow balance. In the event the escrow

account plus any surcharge proved to be insufficient to

Appendix p. 26

- l4e-

pay all taxes, penalties, interest and costs of administration,

each of the beneficiaries was ordered to pay one-third of

the cictSerence, which liability was to be secured by the

beneficiary's share of stock held by the estate. Finally,

the order provided that upon compliance with the directives

contained therein all moticns, citations and other matters

pending against the executrix would be dismissed.

Plorence and Sicney were represented in this litigation

by an attorney named Aaron Jacobs. For his services he

charged a fee of $3,500. On December 21, 1971, an order

was issued by the probate court which approved the amount

c= the fee and ordered it paid out of estate assets. The

osder stated that the services rendered by the attorney

were “for and on behal*" and “in the best interests" of

the estate.

Although the Federal estate tax return was due 15

months a=ser decedent's death,on February 4, 1966, it was

not filed until December 16, 1971. No extensions of

the filing deadline were ever obtained from she Internal

Revenue Service. Initially Irene entrusted Maurice

Zimmerman (c= Caplow & Zimmerman) with the responsibility

for handling all estate legal matters, including the

filing of tax returns. In September 1967 Irene retained

Gregory Gelderman and his associate, William McMillan, to

Appendix p. 27

represent the estate in connection with the probate

lisigation commencec by Exmmest. Thev were not asked

to prepare any estate <ax returns, however, and their

representation of the estate was concluded on March Li,

1369. At scme point Irene also hired attorney Jchn Vosnos

to assist her in discharging he> Cuties as executrix and

handling the tigation with Ernest. He died on July 8,

1s71. The Federal estate “ax return was eventually

prepared and filed by Maurice Saban, an accountant

whom Mr. Vosnos had hired for this purpose.

Ivene was aware that a Federal estate tax return

was required to be filed, but she did not ascertain the

@ue date or determine whether filing extensicns had been

requested or obtained. Instead, she relied exclusively

on her attorneys to make sure that any filing deadlines

were complied with. She became aware that the return was

Gelinquent ne later than March 1970, when the petition *s

oust her as executrix was filed by Florence and Sidney,

but even shen she assumed no personal responsibility for

filing the return in an expeditious manner. She did act

monitsr the progress of the attorneys in the preparaticn

of the return or otherwise attempt to minimize any furcher

delays. Appendix p. 28

ES SS SS eS eee

- 16 =

On August 10, 1965, Sidney and petitioners Irene and

Florence each received 4 check for $6,027.34 which

Tepresentec his or her share of an annuity owned by

decedent worth $23,440.53 at the date of death. On

January 1, 1973, one-third ct the stock in deceaden='s

probate estate was distributed to each petitioner. This

stock was she same stock which decedent owned at her death,

with the exception of minor srading activity and stock

Gividends and splits occursing after the date of death.

Each petitioner'< stock had a fair market value cf $43,000

on the date of cistrisuticn. On October l, 1974, each

petitioner received $3,000 as her respective share of

decedent's equity in dissolution of Clara's Ltd. Petitioners

irene and Florence received the foregoing distributicns of

liquidation proceeds and stock as beneficiarcies umier deceden='s will.

Petitioner Phyllis, on she cther hand, acquired the stock

anc licuidation proceeds indireccly as the sole beneficiary

unde> the will of her husband, Sidney, who diec testate on

February 24, 1972. Neither Irene, Florence, Sidney nor

Phyllis provided any consideration for the transfers.

All the assets in the Rae Berlian= estate have been

distributed.

Appendix p. 29

OPINION

Rae BSerliant died on November ¢, 1964, a resident

o= Chicago, Illinois. She was survived by four chiidren,

Irene, Florence, Sidney and Ernest. Only Irene, Florence

and Sidney were named as beneficiaries in her will. Her

estate was closed on June 30, 1972, although the final

Gistribution of assets to the beneficiaries did not take

place until October 1, 1974. Sidney died on February 24,

1972, leaving his wite Phyllis as the sole beneficiary

under his will. We must decide whether petitioners Irena

and Florence are liable as transferees, and Phylli

as a transferee of a transferee, for any

unpaic estate tax of the estate of Rae Berliant.

i. Issues pertaining to vetitioners'

transferee liabilisy ,

Section 6903 (a) states that the unpaid estate tax

liability of an estate may be assessed against and collected

SEC. 6901. TRANSFERRED ASSETS.

(a) METHOD OF COLLECTION.—The amouncs of the following

liabilities shall, except as hereinafter in this section

provided, be assessed, paid, and collected in the same manner

and subject co che same provisions and iimitations as in the

case of the taxas with respect to which the liabilities were

incurred:

(1) INCOME, ESTATE, AND GIFT TAXES.—

(A) TRANSFEREES.-—-The liability, at law or in

equity, of a transferee of property—

(id) of a decedent in the case of a tax

imposed by chapter 1l (relating to estate

taxes), x *k

in respect of the tax imposed by subtitle A or 38.

xe ek

Appendix p. 30

- 18 -

srom a transferee of its assets in the same manner as the

estate itsel:. However, section 690i(a) does not actually

Teate transferee liability; it merely provides an alternative

procedure for collecting the unpaid taxes of the transferor.

The substantive liability of the transferee must be determined

under state law with respondent being viewed in the same

Light as any other creditor of the transferor. Commissioner

v. Stern, 357 0.S. 35 (1958). since decedent was a resident

of Illinois at her death and her estate was acministered

under its laws, we must look to Illincis law to determine

whether the petiticners were liable, at law or in equity,

for the estate's taxes. Respondent bears the burden of

proving that the petiticners were liable as transferees

of the estate, whereas the petitioners bear the burden

ef proving that the estate did not owe the underlying tax.

Section 6902(a); Rule 142(d), Tax Court Reles of Practice

and Procedure.

Somewhat diferent principles apply, however, where

the property received by =he transferee passes outside

Appendix p. 3l

- 19 -

the probate estate. Section 6324(a) (2) states that where

propesty is included in the gross estate pursuant to

sections 2034 through 2042, the transferee of the property

(such as a surviving joins tenant or remainderman beneficiary)

automatically beccmes personally liable for the estate tax

to the extent of the date of death value of she property

receivec. Such a person is also considered a transferee

under section 6901 (h) be thereby pe=mitting the liability

created by section 6324(a) (2) to be assessed and collected

according to the rules specified in section 6901. Thus,

The pertinent porcion of section 6324(a)(2) reads as follows:

SEQ. 6324. SPECIAL LIENS FOR ESTATE AND Girt TAXES.

(a) LOZSS FOR BSTATE Tax.-——* * *

x ak

(2) LIABILITY OF TRANSFEREZS AND OTHERS.-—-If che estate

tax imposed by chapter 11 is not paid when due, chen the

spouse, transferase, trustee (except the trustee of an

exployees'’ trusc wnich meets the requirements of section

40l(a)), surviving tenant, person in possession of che

property by reason of the exercise, nonexercise, or

Telease of a power of appointment, or beneficiary. who

receives, or has on the date of the decedent's death,

property inciudea in the gross estate under sections 2034

to 2042, inclusive. to the extent of the value, at the

time ol che decedent's death, of such property, shall be

personally liable for such tax. * * *

SEC. 6901. TRANSFERRED ASSZTS.

(h) DEFINITION OF TRANSFEREZ.—As used in this seccicr,

the term “cransferee” includes donee, heir, legatee, devises,

and distributee, and with sespess to estate taxes, also includes

any person who, under section 6324(a)(2), is personally liable

for any parc of such tax.

Appendix p. 32

- 20 =

substantive transferee liability with respect to nonprobace

assets is ordinarily supplied by section 6324(a) (2), makine

an examination of state law unnecessary. See Schuster v.

Commissionez, 312 F.2d 311, 314-316 (9th Cir. 1962), atig.

32 T.C. 998 (1959) and revg. on another issue 32 T.C. 1017

(1959); Groetzinger v. Commissioner, 69 T.C. 309, 316-317

(1977); Bergman v. Commissioner, 66 oes 887, 892 (1976).

Based on the foregoing provisions, respondent

contends <hat the petitioners are liable as transferees

Zor she value of the following property acquired on or

after the date of decedent's death:

Desc=tption =8©=©6_ Date Received §§ Irene j§ Flozence Phyllis

Stock January 1, 1973 $43,000.00 $43,000.00 $43,000.00

Proceeds in

dissolution of

Clara's, Led. October 1, 1974 3,000.00 3,000.00 3,000.00

Joiat tenancy

property Dace of death 7,000.00 35,920.87 =

Trust accounts Dace of death 23,228.32 _31,459.04 =

$82 245.66 $129,407.25 $46,000.00

We should point out chat, although Irene was che executriz of

the estate, respondent has not attempted to asser= against her the

personal liabilicy imposed on fiduciaries by R.S. sec. 3467 (1878),

31 U.S.C. sec. 192 (1976). See section 6901(a)(1)(3). der liabilicy

is predicated solely on her status as a cransferee of the assets of

the decedent pursuant to section 690l1(a)(1)(A) (it) amd section 6324(a) (2).

Appendix p. 33

od sonar

A. siabilitv with resect so orobate assets

We will fizs< conside> chose assets which were part

of the probate estate, namely, the stock and proceeds in

G@issclution of Clara's, Ltd. The petitioners concede

that these assets were acministered as part of the probate

estate arc were reported on the Federal estate tax return

as part of decedent's gross estate. They also concede

that they received the assets on the cates indicated above

as the named beneficiaries of the estate (or in Phyliis'

case, 4s the scle beneficiary under the will of her husband,

who was in tuzsm a beneficiary of the estate). Thus, on

the face of it, there would appear to be no question that

Sidney ard petitioners <crene and Florence quality as

transferees of the estate under section 6901(h) as well

as section 301. 6901=1(b) , Proced. & Admin. Regs., which

defines the term “transferee” to include an heir, legatee,

devisee or a distributee of an estate. Phyllis, ix turn,

would be considered a transferee c= a transferee, since

she received the property as the sole legatee under

Sidney's oiea.

It is well-settled that liability under seccion 6901 can be

asserted against a cransferee of a transferee. See Escsace of

Goldsborough v. Commissioner, 70 T.C. 1077, 1086-1087 (1978),

affd. F.2d (4ch Cis. 1982); Fibel _v. Commissioner, 44

T.C. 647, 658-660 (1965); see also section 6901(c) (2).

Appendix p. 34

DCE PR OO AR EEE I shit,

1 ORLY LA AAPL ARNT ONES ETL PY NOTE

- 22 -

The petitioners acree shat they are transferees with

respect to the proceeds in liquidation of Clara's, Lea.,

and that the property was properly includable in the sross

esvate. However, they take a contrary position with

respec= to the stock, claiming that they, rather than

decedent, were the true owners of the property when she

Gied. The gist of thei= claim is that decedent's chilcren

regularly gave her money to invest on their behal‘, and

the stock in question was acquired with those funds with

the ¢ecedent assuming the role of a “nominee" titleholder.

Although they do not specifically say so in their

sketchy and confusing briefs, the petitioners

apparenvly believe that the stock was ezronecusly included

im both the probate estate anc the Federal gross estate,

and that the property shey received was not “property of

a decedent” within the meaning of section 6901(a) (1) (A) (ii).

In cur view the fact chat the stock was titled in the

deceden='s name and administered as part of the sorobate

Appendix p. 35

- 23-

ehinaee raises, at the very leas=, a strong presumption

that the property was actually owned by the decedent.

The other evidence in schis case, such as it is, does little

to undermine that presumption. Irene, Florence and

Phyllis each testified that decedent's children regularly

turned over all of their wages, sifts and other income ‘o

their mother while they resided at she family residence,

anc continued to make regular contributions to her out of

thei> salaries or business income after they married and

moved elsewhere. Florence also testified that she and her

husband regularly supplied decedent with free food from

their grocery store. Irene, Florence and Sidney allecedly

continuec ts make these contributions until their mother

Gied in 1964. The witnesses characterizec these trans‘ers

not as gifts to be used for their mother's support and

maintenance, hut rather as transfers in trust with the

intention that the funds be invested by decedent ‘for

their benefit. They stated that theiz> mother repeatedly

assured them that the money she was investing was theirs,

and that eventually they would get the money back, plus

a return on their investment. Florence was also allecedly

promised that she would be repaid for she food she and her

husband provided.

We have made a care*ul study of the lengthy and

confusing record in this case and have net found any

competent, reliable evidence to suppor: “he petitioners’

story. Although we are willing to accept that the childcren

Appendix p. 36

- 24 <-

gave the deceden= money on occasion, we are not about =o

Six a dollar figure based cn the flimsy evidence which

we have before us. None of the children maintained anv

records of the amounts which he or she had contributed

to the dececent. As a result, the principal evidence of

the size and frequency of the contributions is the

petitioners' testimony, which we found to be vague, self-

serving and generally aeaibinin.” Moreover, they

admitted to having no knowledge of the total amcunts

which the children had given the decedent. To set around

this glaring weakness in their case, the petitioners

Maintain that Rae Berliant had no other scurces of income

after her husband died in 1933, and therefore the

The testimony of the petitioners was frequently contradicted

by other evidence. For example, [rene and Florence both testified

chat they never received any gifcs from the decedert, and yee in

the probate litigation chey (along with Sidney) admicted that the

decedent had made “substantial gifts" to her children when she

established the joincly owned and totten trust savings accounts.

Appendix p. 37

Le Lee

- 28 -

substantial investment portfolio which she accumulated was

necessarily derived from their contributicns. We do not

accept this explanation. To begin with, sche record

indicates that decedent received property or income ‘rom

several d:sferen= sources other than her cnrildren. For

example, she received at least $10,000 in lite insurance

preceeds and inherited a certain amount of cther aa

when her husbanc died. She also was a beneficiary of a

trust established by her grandfather and heid an interest

in an investment company (Clara's, Ltd.) which had been

funded with the assets of her grandmother's estate. From

these latter two sources decedent had documented receipts

of at least $11,781.91 during her lifetime, and she may

well have received considerably more than this amount.

More importantly, however, it appears likely that much of

decedent's accumulated wealth was actually generated by

he= own efforcs. The record reveals her to have been

both a sharp businesswoman and an inveterate miser who

lived without luxuries and even scrimped on necessities

in order to save money. Although she never held a formal

job, she did trade in the bond anc stock markets on her

Own account and apparently was quite successful at it.

10.

We are somewhat skeptical of Irene'’s testimony thac decedent's

husband, who was a praccicing physician, left only $100 in a checking

account when he died.

Appendix p. 38

- 26 -

Thus, we are unwilling <o accept she proposition thas

Geceden= rode completely on the backs of her children as

she amassec he= for=une.

Even if the petisioners had established to our

satisfaction the amounts of their respective concributions,

we would still take issue with thei= characterization of

the payments as transfers in trusts rather than outrigh<

gitcs. As we have stated, the child=en kept no records

of theiz contributions and made no attempt to ascertain

the extent of their interests in decedent's assets relative

to one ancther. They never questioned decedent about the

size of theiz respective shares in the alleged investment

pool. They rarely, if ever, inquired as to the size or

natcure cf the investments. [It stcains credulisy to chink

that the children would routinely turn ove- large sums

of money to their mother over 4 period of many years,

particularly after they moved out cf the family hcusehold

and began raising families of their own, and yet remain

sotally in the dark as to the amount of their relative

contributions, the nature and soundness of the investzencs,

and the amount of investment income which was being generated.

Appendix p. 39

- 27 -

Others facts belie the existence of the fiduciary or

custodial relationship alleged by the sitioners, not

the leas= of which is that the stock was titled solely ix

the decedent's name. There is absolutely no evidence to

support petitioners’ claim that the decedent was merely

a “nominee” titleholder. Rather, it appears to us that

she exercised complete dominion and control over the

property and was at all times its true owner. This is

borne out by the fact that the children never requested

or received any distributions of investment income or

corpus from the decedent before she died. In addision,

the income earned on the investments was consistently

reported on the decedent's income tax returns rather than

those of the child ven.

Teasons we rejec= the petitioners’ contencicn

was imposed on the stock at the moment if

-" Hanley v. Saniey, 14 Til.

2d 566, 152 N.E.2¢ 879, 883 (1958); see also In re Estate of dabei,

88 Tll. App.2d 194, 231 N.£.2d 616 (Il. app. Cz. 1967); Hocking rv.

76 Tll. app.3d 29, 394 N.E.2d 653 (Ill. App. Ce. 1975).

The evidence in this case falls far short of chis standard.

Appendix p. 40

- 28 -

Pinally, the petitioners have failed to explain why

the stock was reported on the estate tax return. If the

joint tenancy property and sotten trust accounts were

lefs off the retu=n on sche theory that the surviving

tenants and beneficiaries had supplied the consideration

for the property, why then was the stock not omitted for

the same reason? Moreover, while she petitioners contend

that all of the stock owned by decedent (valued at

$126,651.35) was acquired with the children's funds,

zene, Florence and Sidney took a markedly different

position in she probate litigation, where s<hey argued

that only $60,000 of the property to which decedent held

legal title was derived from their contributions. We

have been given no explanation for this inconsistency,

either.

The foregoing discussion highlights only the major

points which we think require us to hold for respondert

om this issue. We have not a<tempted to dissect the

record and comment on the relevance of each and every

bit of documentary or testimonial evidence contained

therein, as respondent has so painstakingly done on brie.

Suffice it to say that afcer carefully sifting through

che evidence and weighing the credibility of the witnesses,

we are satisfied that respondent has met his burden cf

proot. Accordingly, we hold that the petitioners are

Appendix p. 41

— ——

transferees of the stock received from the decedent's

estate for purposes of section 6901.

The next issue to be decided is whether the petitioners

are liable as transferees under Illinois a for any

taxes due from the estate. In most jurisdictions

creditors are provided scme form cf recourse agains< the

legatees or devisees of a decedent where the assets of

the estate are cistributed before all claims are fully

satisfied. See generally 97 C.J.S. Wills sec. 1325 (1957).

creditor may have either legal or equitable remedies or

both, depending on the particular circumstances involved.

According to sec. 293, ch. 3, Ill. Ann. Stat. (Smith-furd

i2.

This also means, of course, that the stock was properly

included in the gross estate for Federal estate tax purposes.

The parties have stipulated that the correct valuation of che

stocks as of the date of death was $126,651.35 racher than

$126,457.76. as originally reported on the estate tax raturn.

13.

All references to Illinois statutory law are to the

statutes in effect at the time of che transfers in question.

Appendix p. 42

The

- 30 -

1961) bes the Illinois probate cour>t may, upon she petition

of any interested person, order a distributee to refund

all or a part of his distributive share in order to pay

any claims “entitled to be paid from the estate distributed."

Normally claims are not “entitled to be paid" unless they

are filed within the nine-month claims period provided

under the Illinois nonclai=m statute. See sec. 204, ch. 3,

Z1ll. Amn. Stat. (Smith-Hurd 1961). However, claims of

14.

§ 293. Refunding by Discrtbutees

Té at any time after payment cf a distributive share

it becomes necessary for all or any part of the

distributive share *o be refunded for the payment

of any claim ene‘tied co ce paid from the estate

distributed “he probate court wpon the application of

any interested person shall order the discributae

to refund chat portion of his distributive share which

is necessary to pay the claim. [If there is more than

one distributee the cours shall apportion among the

distributees the amount co be refunded according to

the amount received by each of them, but specific

legacies need not be refunded unless che residus is

insufficience to satisfy the claims entitled to be paid

from the estate distributed. If « distriburee cafuses

to refund within sixty days after owing ordered by

the court to do so and upon demand, * * * 4 civil

action may be maintained by the executor or administrator

against the distributee * * * for tne wmount dus

together with the expenses of recovery including

reasonable attorney's fees. The order of the probate

-court is evidence of che amount due.

Appendix p. 43

- 31 -

the United States are nct subject tc this limitacion.

See Unitec States v. Summerlin, 310 U.S. 414 (1940);

In re Estate of McBride, 110 Ill. App.2d 200, 249 N.E.2¢

266 (Ill. App. Ct. 1969); see also Dillmar v. Commissioner,

64 T.C. 797 (1975). Thus, we think the petitioners

would be liable as distributees under this provision ‘for

che Feceral estate tax Owed by the Rae Berlian= es<ace.

In addition, Illincis law also affords an equitable

remedy to creditors wnose claims were contingent and

@id not mature until after the expiration of the clains

period. In the event the undistributed assets of the

estate are insufficient to discharge such claims, the

creditcr may seek relief in equity against the beneficiaries

ts the extent of the value of the asses previously

Gistributed to them. See In re S3ird's Estate, 410 Ill. 390, die

Under [illinois law che Federal escate tax liabilicy is

considered to be a claim against the estate and is assigned

third=-class paymenc priority behind funeral and administration

expenses and the surviving spouse's or child's award. See

In re Estate of Grant, 83 Til.2d 379, 415 N.Z.2d 416, 419 (1980);

sec. 202, ch. 3, DLl. Amn. Stac. (Smith-urd 1961).

APPendix p. 44

- 32 -

102 N.E£.2€ 329, 333 (1951); Olsen v. Sars#sora Accidens

& Indemnity Co., 368 ZTll. 194, 13 N.5.24 159, 161 (1938);

Union Trust Cs. v. Shoemaker, 258 Ill. 564, 101 N.E.

1050, 1052-1053 (1913); Snydacker v. Swan Lane & Cattle

Co., 154 Tll. 220, 40 N.E. 466, 467-468 (1895). We

think respondent's claim would be similarly enforceable.

Although the liability fcr estate saxes is not, striccly

speaking, contingent, since she obligation to pay

becomes fixed as of the date of death, the actual amount

eof the liability may not be ascertainable util months

Oz even years later. In addition, as we pointed out

earlie>, the normal claims limitation period does not

apply to claims of the United States. Thus, we thick the

rationale for allowing ecuitable relie* with regard to

contingent claims which mature after the claims period

has expired and the estate is distributed would apply

with equal force ts cutstanding estate tax clains.

Accordingly, we hold that under Illinois law the petiticners

are liable as transferees for any unpaid estate tax to

the extent cf the value of the stock and liquidation proceeds

Appendix p. 45

which shey received.

16.

Arguably petitioners’ transferee liability could also be said

to derive from the Illinois fraudulent conveyance statutes, which

provide as follows (secs. 4, 5, ch. 59, Til. am. Scat. (Smith-

Burd 1972)):

§ 4- FRAUDULENT CONVEZANCES, E=C.

Every gift, grant, conveyance, assigument or transfer

of, or charge upon any estate, real or personal, or

right or thing in action, or any rent or profic thereof,

made with the intent to disturb, delay, hinder or defraud

creditors or other persons, and every bond or ocher

evidence of debt given, suit commenced, decree or judgment

suffered, with like intent, shall be void as against

such creditors, purchasers and other persons.

§ 5. TDMNOCENT PURCHASER

The foregoing section shall not affect che title of a

purchaser for a valuable consideration, wnless it appear

that he had nocice of the fraudulent intent of his

iomediate grantor, or of che fraud rendering void the

ticle of such grantor. (Fa. ref. omicred.]

Under Illinois jurisprudence the fraudulent intent referred to

im these statutes must be specifically proved if the conveyance ia

supported by adequate comsideration. On the other hand, if there is no

consideraticn or insufficieut consideration and the transéer impairs

the rights cf creditors (which we find to be tie case here), chen

fraud is presumed and no inquiry Into cne debtor's aotives is necessary.

See Stovka v. commercial Embroidery, inc., Til. App.3d

428 N.E.2d 1130, 1132 (Ll. app. Cc. 1981); wi v. Wax, 82 Til.

App.2d 67, 225 N.Z.2d 813, 814 (Iii. app. Ce. 156 j see also Hendelscn

v._Commisstoner, 52 7.°. 727, 734 (1969), and Tchereonia v. franz, «/5

ve Supp. 92 (B.D. Tl. 1979).

Respondent has relied exclusively on these provisions as che

source of petitioners’ transferee liubilirty. Y"owever. while we do not

necessarily disagree with respondent's <heory, we preter to rest our

holding om the statutory and case law shich we think was specifically

aimed at protecting the rights sf creditors where a distribution to

beneficiaries cakes place before all allowable claims are satisfied.

Compare Hamar v. Commissioner, 42 1.C. $67, 873-875 (1964°.

Appendix po. 4

B. Liability with resvecs =o nonprobate assets

“We next examine the transferee liability of peticicners

Isene anc Florence . with respecs to their receipt ct the

jointly held stocx and savings accounts, <ten trust

accounts ané amnuity proceeds. They acquired this property

by vircue of theiz> rights as surviving joint tenants or

beneficia=ies rather than as legatees under dceceden='s will.

If the property received is includabie in “he sross estate

under one or more of sections 2034 through 2042, then secticn

6324(a) (2) imposes personal liability upon Irene and Florence

for any tax cue from the estate to the «extent of the

value of such property at the date of decedent's death.

Under section 6902(a) respondent has the burder of

proving <hat the property was required to be included under

one of the specitied Code sections. The joint tenancy

i/.

Respondent has conceded that petitioner Phyllis is noc liable as

a transferee with respect to the jointly held savings accowrs, totter

trust accounts and annuity proceeds received by her husband before his

death in 1972.

18.

For reasons which we do not fully understand, respondent has

conceded shat Florence is noc liable as a transferee with respect to

the Cities Service stock valued at $528.50, although he continues co

maintain thac che property is includable in che gross escacte under

section 2040 and therefore constitutes parc of che underlying estace

tax deficiency. We accept chis concession, notwichscanding chat ic

appears co fly in che face of the parcies’ stipulation chat Florence

took possession and comcrol of che stock ac decedent's death by

virtue of her rights as 4 surviving cenant.

Appendix p. 47

property is, by virtue of the form of ownership,

includable under section 2040 except to the exten= that

irene anc Florence can prove that they contributed so she

1S.

Ou brief the petitioners contend that the jointly owned savings

accounts were aot held as joint tenants with rights of survivorship, but

rather as tenants in common, 4 form of ownership to which section 2040

does not apply. See section 20.2040-1(b), Estate Tax Regs. This a>gument

is without meriz. The parties stipulated that the savings accounts were

titled in the asmes of "Rae Berliant or [one of the children], as joint

tenants with the right of survivorship and not as tenants in common.”

They also stipulaced chac Irene, Florence and Sidney received and tock

possession and control of their respective joincly held savings accounts

upon the death of decedent, and presumably Ernesc did the same thing with

Fespect to his jointly held savings account. This is hardly consiscent

with the legal characteristics associated with a tenancy at common.

20.

SZC. 2040. JOINT INTERESTS.

The value of the gross estate shall include the value of

all property cto the extent of the interes< therein held as

joint cemancs by the decedent and any other person, or as

temancs by che entirecy by the decedenc and spouse, or

deposited, with any person carrying on the banking business,

in their joint names and payable to either or che survivor,

except such pars thereof as may be shown to have originally

belonged to such other person and never to have been received

or acquired by the latter from the decedent for less chan an

adequate and full consideration in money or money's worth:

ded, That where such property or any par= thereof, or parc

of the consideration with which such property was acquired, is

shown to have been at any time acquired by such other person

from che decedent for less than an adequate and full consideration

in money or money's worth, there shall be excepted only such

part of che value of such property as is proporcicnmate to the

consideration furnished by such other person: Provided furcher,

That where any property has been acquired by gitt, dequest,

devise, or inheritance, as a tenancy by che entirety by che

decedent and spouse, then to the extent of one-nal® of che value

thereof, or, where so acquired by the decedent and any other

person as jcinc tenants and theiz> interests are not ocherwise

specified or fixed by law, then co the extent of the value of a

fractional pars to be ‘determined by dividing che value of che

property by she aumber of joint tenants.

Appendix pv. 48

- 36 <-

cost cf the propersy. In the case of the sotten truss

accoun=s, she pecitioners have asreed that che amcucts

are inclucable under sections 2036, 2037 and 2038 unless

they can prove that either (1) they were the actual

owners of the property during decedent's lifetime, which

is another wey of saying shat decedent never had an

interest in the property which could be the subject of

a transfer described in those secticns, or (2) that they

gave adequate consideration for the interests transferred.

To simplify the presentation, we will defer consideration

o= these issues until the section of this opinion dealings

with the deficiency issues, where we must decide whether

the value of all the joint tenancy property and trust

accounts (not just the property received by Irene and

Plorence) is includable in the gross estate. We should

poist cut, however, chat in our judgment respondent has

met his burden of sroof on she question of transferee

liability by establishing shat the joins tenancy property

ané tottcen trust accounts are inclucable uncer sections

2040 and 2036-2038, respectively, assuming Irene and

Flcorence are unable to prove that the source of che preper=:

was their own contributions.

The receipt of the annuity proceeds presen=s a ditferent

situation. The parties have stipulated shat the value o=

the annuity at che date of death ($23,440.53) shoule have

Appendix p. 49

- 37 -

been inclucec in the gross estate, but was not. Althoush

shey dic not stipulate which inclusion secticn applies, it

seems reasonably clear to us that the governing provision

would have to be either section 2039 or section 2042. The

recore gives no indication that the annuity was at any

time subject to estate administration, nor does it suggest

chat Iisenme and Flerence received the cash ¢ist=ibutions

as beneficiaries under decedent's will. Rather, it appears

to us that they became entitled to tue proceeds because

they were named as beneficiaries in the annuity contract.

Instead of accepting the benefits in the ‘Scorm of monthly

Payments, the beneficiaries each received a lump-sum

payment c= $6,027.34, presumably through the exercise of

a settlement option provided in the contract. While we

Go not have enough information about the contzac< to

pinpoint precisely the operative Code secticn, we are

satisfied, under’ the cizrcumstances, that it is section

2039 or section 2042, and not section 2033, which provides

the apororriate basis for inclusion. Since section

6324(a) (2) specifically applies to property included in

the gross estate by way of sections 2039 or 2042, we hole

that Irene and Florence are liable as <ransferees ‘or any

umpaid estate taxes to the extent of the amount of the

Appendix p. 50

annuity proceecs they received.

2. Issues vertaininsc to the underlvinc

deficiency and addition to tax

A. Inclusion of the joint tenancy property

and tstten Ssust accounts in the cross esta<e

In his notices of liability responden= determined

that the following property was improperly omittec ‘>om

decedent's estate tax return:

Date of Death

Description Balance or Value

Jointly held stocks, bonds and

savings accounts $ 59,624.37

Totten trust accounts 106,293.32

Upon the death of decedent this property passed by operation

of law to the respective surviving joint tenants (decedent's

Children) and trust beneficiaries (deceden='s children anc

Since liability under section 6324(a)(2) is measured by the

value of che property ac date of deach, ic would seem chac [rene

and Florence would each be personally liable to che extent of

one-third of che amnuity value on chat date, or $7,813.51, rather

than the lesser amount of the subsequent cash discributiocns.

However, because respondent has made no argument to chac effect,

we will infer a concession on this issue and limic peticioners'

liability co the actual cash received.

Appendix Dp. 51

- 39 =

grancchilésen). Respondent maintains that the joins

tenancy property is includable under section 2040,

which provides that the value of property held bv a

Gecedent and any other person as joint tenants is included

in his estate except to the extent that it can be shown

that the surviving tenant contributed to the cost of the

propersy. The estate has she burden of proving such

conzributions, and in this case that burden also fall

upon che petitioners. Secticn 6302(a).

The petitioners’ arguments on shis issue paralle.

the arguments they presented ix their attempt to insulate

themselves from transferee liability with the respect to

Gecedent's solely held stock: the children supplied the

consideration for the jointly neld property throush

regular ccntributions to the decedent out of sheir separate

Property, decedent had no other sources of income so the

property must necessarily be theirs, etc. We reject these

arguments on the same grounds we discussed earlier.

There is no reliable evidence to indicate how much the

chicdren com==ibuted, or that che children intended she

transfer=ed funds to be used in the acquisition of jointly

held property. On this record we conclude that any

contributions were gifts to the decedent and the joint

tenancy property was accuired with the decedent's own ‘funds.

Thus, che S212 value of she prope>tv must be included in

the ¢rsss estate.

Appendix p. 52

- 40 -

We reach a similar conclusion with respect to the

sotten t>uss eccounss. OSecedent secained “ull use and

enjoyment of the Sunds until her death, ac which cime che

property passed Sy operation of law tc the beneficiaries

named is the trust agreements. This property is includable

under secticrs 2036, 2037, or 2038 except to the extent

the petitioners can demonstrate that deceden= never

owned the amounts in question, cr, alternatively, that the

children gave adequate consideration for the interests

transferred so them. They have done neither.

Accordingly, we hold that the petitioners have failed

to meet cheiz burden of proof with respect to both the

joint tenancy property and trust accounts and the date of

Geath value of such property must be included is the gross

estate.

B. Deduct:bilicy of attsormev's fee

This issue concerns she deductisil.sy of the $3,500

fee paid to attorney Aaron Jacobs, who represented flcrence

and Sidney in theiz= petition to remcve Irene as executrix

of the estate. The probate court approved she ‘ee and

ordered it paid cut of she assets of the estate, stating

that the services rendered by the attorney were “for anc

on behal*” anc “in the best interests” of <he estate.

The pe=-ticners maintaic thas the payment is deduct‘sle

Appendix p. 53

Sail 22

by the estate under secsion 2053(a), which authorizes a

Gecuction 2s> administration exvenses allowable under «he

laws of the jurisdiction where the estate is beins

acminiscered. Respondent contends that the legal fee

is nondecuctible because it was a direc= consecuence

of Irene's failure to discharge her duties as executrix in

@ competen= manner. In other words, respondent's position

is that the Peceral Governien= should not be required to

subsicize Izene's incompetence through che allowance of

an estate tax deduction. We disagree.

SEC. 2053. ECPENSES, CNDESTEDNESS, aND TAXES.

(a) GENERAL RULE.—fFor purposes of the tax imposed by

section 2001, the value of the taxable estate shall be

determined by deducting from che value of the gross estate

(3) for claims against the estate, and

(4) for umpaid mortgages on, or any indebtedness in

Tespect of, property where the value of the decedent's

interest therein, undiminished by such aorcgage oz

indebtedness, is included in che value of che gross

estate,

as are allowable by che laws of the jurisdiction, whether

withia or without the Uniced States, umder which the estate

is being administered. ;

Appendix p. 54

The position cf this Coust is that adminiserasicn

expenses =ust pass two hurdles in order <o be deductisle:

(1) they muss be allowable unde> state law, and (2) they

must satisfy the conditions set forth in respondent's

regulations. Estate of Posen v. Commissioner, 75 T.C.

23.

The pertinent regulations provide, in perc, as follows:

§ 20.2053-1. Deduccions for expenses, indebtedness, and

taxes; in general—

eee

(b) (2) E&Sece of cours decree. The decision of 4

local court as to the amount and allowability uider

locai law of a claim or administration expense vill

ordinarily be accepted if che court passes upon

the faccs upon which deductibilicy depends. If the .

court does no= pass upon those facts, ics decree

will, of course, not be followed. For example,

if the question before che courc is whether a claiz

should be allowed, che decree allowing i= will

ordinarily be accepted as establishing she validicy

and amount of che claim. However, the decree will

mot necessarily be accepted even chough ic purports

to decide che faccs upon which deduccibilicy depends.

It must appear chat the court actually passed upon

the merits of the claiz. * * *

§ 20.2053-3 Deducsion for expenses of admizistering

estate—

(a) In general. The amounts deductible ‘rom a

deceden='s gross estate as "aczinistration expenses”

of the firse category (see paragraphs (a) and (c)

of § 20.2053-1) are limited to such expenses as

are actually end necessarily incurred in the admin-

istration of the deceden=’s estate; chat is, in che

collection of assets, payment of debts, and distribution

of property co the persons extitled co ic. The

expenses contemplated in che law are such only as

accend the sectlemen= of an estate and the sransfer of

the property of che estate to individual beneficiaries

or to a trustee, whecher the crustee is che executor

or some ocher person. Expenditures noc essential co the

proper sectlemenc of the estate, sus incurred for the

sadividual benefic of che heirs, legatees, or devisees,

may aot be taken as deduccions. administration expenses

CONTINUED Appendix p. 55

- 43 -

355 (1980). Zowever, <he Course of Appeals for the Seventh

Cizcust, to which the appeals in shese cases would lie,

has stated shat "[a]s a general rule the decree of a sroba-e

court approving expenditures as proper administrative expenses

under state law will cmtcol.” Estate cf Jemer v. Comissicer,

577 F.2d€ 1100, 1106 (7th Cir. 1978), revg. a Memorandm

Opinion cf this Court; see also Ballance v. Commissioner,

347 7.24 419, 423 (7th Cis. 1965), and ous disccssion ian Estate of

Posen v. Commissioner, supra at 366-367. This test is

FOOTHOTS 23 CONTINUED

include (1) executor's commissions; (2) attorney's ‘fees;

acd (3) miscellaneous expenses. Each of chese classes is

considered separately in paragraphs (b) through (d) of

this section.

za2e

22s

(3) Attorneys’ fees incurred by beneficiaries incident

to litigation as to their respective interests are not

deductible if the litigarion is noc essential to the

proper setclemenc of the estate within the meaning of

paragraph (2) of chis section. an attorney's ‘ee cot

meeting chis test is acc deductible as an adminiscracior

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.

Appendix p. 56

Clearly satisfied ina she present case, since the actorney's

fee was specifically approved for paymens in a probace

cours ei There is some uncertainty, though, as to

whether the Court of Appeals consicers allowability under

local law to be the conclusive scest of deductibility. In

Estate of Jenner v. Commissioner, supra at 1105, n. 12,

the Coust expressly reserved judsment on the quessicn of

whethe> the regulations “improperly add to or override”

the requirement in the Code that administration expenses

be allowable under local law. It would appear, then,

tnat this is not a case which would call for the application

of our rule in Golsen v. Commissicner, 54 T.C. 742 (1970),

24.

Ie detarzining whether an expense is allowable wader local

law for Federal estate tax purposes, this Cours is not necessarily

bound by the decision of che probate court which approved che

expense for payment, and is free co make an independent examination

= seams Sap -Se. Seneumaen: 68 the allowance was proper. See Estate

sionez, 76 T.C. 369, 372 (1981); Estate of —

sete v. Cee peg va £6. 355, "359 (1980). However, respondent

has act shown us any authority, nor have we been able so locate any,

— would indicate that che probate court overstepped its bounds

in approving the Aaron yacobe, pendix D. 57

_———— ee ss—

- 45 -

afte. 445 F.2d 985 (10th Cis. 1971), and obviate the

necessity of testing the claimed deduction against

respondent's segulations.

In our judoment, hcwever, there is nothing in the

regulations (see w=%e 23, supra) which would require

that the decuction be cisallowed. Section 20.2053-

1(5) (2), Estate Tax Regs., states that the decision of

a local court as to the amount and allowability under

local law will ordinarily be accepted if it appears that

the court actually passed on the merits cf the clain.

The recoré leads us to believe that the Illinois probate

court did exactly that. In addition, we think that the

See was “essential to the proper settlement of the estate,”

as required by section 20.2053-3(a), Estate Tax Regs.,

because the related legal services were aimed at expediting

Irene's filing of the Final Account and the required tax

seturns. The end product of the litigation was a court

order dissecting Irene to take care of those matters within

$0 days. The probate court later characterized Aaron

Jacobs’ fee as “in the best interests” of the estate, anc

we can perceive of no sound basis for holding otherwise.

Accordingly, the estate is entitled to deduct the $3,500

fee as an acminist=ation expense under section 2053(a).

Appendix p.

CC. Late filine addision

Secticn 6651(a) (1) imposes an addition to tax where

the taxpayer's return is filec after the prescribed due

date unless the delay is due to reasonabie cause. Section

301.6651-lLic) (1), Proced. & Admin. Regs., provides that

reasonable cause exists where the taxpayer exerc:ses

ordinary business care anc prudence anc is still tumable

to file the return within the statutory time pericc.

It is well established that ignorance of the need

to file a tax return will not, in and of itself, excuse

a taxpayer from liability for the addition to tax for late

filing. Estate of Lammerts v. Commissioner, 54 T.C. 420,

445 (1970), affd. per curiam on this issue 456 F.2d 681,

$83 (2d Cir. 1972). It is also well established that a

rsoral representative has a positive duty *o ascertain

the nature of his or her responsibilities as the fiduciary

of the estate and that chis duty is not satis<tactorily

discharged by delegating the entire responsibility for

filing the estate tax returcn to the attorney for the

estate. Estate of Lammerts v. Commissioner, supra at

446; Estate of Geraci v. Commissioner, T.C. Memeo. 1973-94,

affd. per curiam 502 F.2d 1148 (6th Cir. 1974); see Estate

of Dutteshofer v. Commissioner, 49 T.C. 200, 204=206 (1967),

Appendix p. 59

° 47 «-

altd. per curiam 410 F.2d 302 (6th Cir. 1969). Rather,

the personal representative must, at a minimum, ascertain

the due date of the return ane take appropriate steps to

insure that the attorney acts diligently to fulfill the

filing obligation. Estate of DiRezza v. Commissioner,

78 7.C. (1982) (slip op. p. 25); Estate of Ravelije v.

Commissioner, 73 T.C. 82, 89-90 (1979); Estate of Lillehei

v. Commissioner, T.C. Memo. 1979-464, affd. per curiam

638 F.2d 65 (8th Cir. 1981); Estate of Maver v. Commissioner,

43 T.C. 403, 466 (1964), affd. per curiam 351 F.2d 617

(2 Cir. 1965); Estate of Geraci v. Commissioner, supra.

The seventh Circuit has also taken a fairly strict

stance on this issue, holding that “when there is no question

that a return must be filed, the taxpayer has a personal,

nondelegable duty to file the tax return when due." See

United States v. Kroll, 547 F.2d 393, 396 (7th Cir. 1977),

as well as the more recent opinion in Fleming v. United

States, 648 F.2d 1122, 1126 (7th Cir. 1981). At the same

time, however, the Seventh Circuit has recognized that in

the final analysis each case must turn on its own particular

facts and circumstances. See Rohrabauch v. United States,

11 F.2d 211, 217 (7th Cir. 1979).

Appendix p. 60

ea)

- 48 -

Dececent cied on November 4, 1964. On January 18,

1965, decedent's will was admitted to probate ané Irene

was appointec executrix. The estate tax return was due

On February 4, 1966, 15 months after decedent's death,

but was not filed until December 16, 1971, over 5-1/2

years late. As a result, respondent imposed on the

estate the maximum 25 percent adcition authorized bv

section 665i(a) (1).

The petitioners contend that the celingquency was due

to reasonable cause for the following reasons: Irene

had only a high-school education and never before served

as an executrix of an estate; she regularly communicated

with the attorneys concerning the status of the estate

tax return; she was variously told by the attorneys that

the return was on extension, that it could not be filed

until the probate litigation was concluded, and that there

was no cause for concern; and she did not become

aware that the return was overdue until after it was filed.

25.

See section 6075(a). For decedents dying after December 31,

1970, the period specified in section 6075(a) has deen changed to

nine months. ;

Appendix p. 6l

- 49 -

Were these allegations acecuately supporsed bv she evidence,

the petitioners would have a fairly respectable argumert

that the late filing was excusable under the circumstances.

However, in our judgment they have completely failed to

carry theirs burden of proof on this issue and we are

constzained to hold for respondent.

The only evidence which the petitioners produced in

supports of their position was Irene's testimony. She

attempted to portray herself as a conscientious executrix

whe kept in constant touch with her attorneys regardins

the status of the return. She testified that she was

cold by Maurice Zimmerman, her first attorney, that a

filing extension had been sranted by the Internal Revenue

Service. She further testitied that after Mr. Zimmerman

was discharged she hired attorneys Gregory Geldemman and

William McMillan to prepare the estate tax return and also

handle the probate litigation between Ernest and the

estate. She later hired attorney John Vosnos to prepare

the return, but he allegecly told her shat nothing could

be done until the probate litigation was settled. She

indicated “nat she was reassured by Mr. Vosnos on a

numbe> of occasions that “everything was all right” and

that there was no need tc worry about she filing of the

return. Appendix p.

- 50 -

To put it simply, we do not believe much of Irene's

selt-serving testimony. Her story was confusing, disjointed

and not corroborated by any other competent evidence.

M>. Zimmerman, whose testimony would have been particularly

revealing, was not called as a witness. The only attorney

who cid testify, Mr. Gelderman, stated that he anc his

associate were hired solely to represent the estate in

the prcbate litigastion, and flatly denied any responsibilicy

for the preparation or filing of the estate tax return.

Purthermore, concerning Mr. Zimmerman's purported assurances

that an extension had been obtainec, we think it strange,

to say the least, that such a highly significant matter

was nowhere mentioned in a previous explanation of the

late filing contained in an interrogatory response which

was reac into the record at trial. Finally, we fine it

aisficult, if not impossible, to believe that until 1972

Irene was unaware that the return was delinquent. Even

if she had no suspicions on this score during the first

five years after decedent's ceath (anc we hasten =o adc

that we doubt that tc be “he case), she surely must have

been alerted to the problem when Florence and Sicney filed

Appendix p. 63

- Sl - "

26 ;

cthei> petition co oust her as executrix in March 1970.

The petitisn complained specificaliy of her “failure and

refusal" to file the estate tax return, and warned that

the estate might be penalized for the delay. This

promptec the probate court to issue an orders directing

26.

The Seventh Circuit has recognized thac if the executor

continues to delay filing the return after becoming aware that

it is overdue, the imposition of the penalty may be warranted

even though the initial delay.was supported by reasonable cause ‘

(Jetted States v. Kroli, 547 F.2d 393, 396 (7th Cis. 1977)): ;

Whether or not [the executor] kmew the date of the

deadline (October 13, 1968) before it passed, he ’

was apprised on January 9, 1969 that che deadline

had passed three months previously. His reliance

eon (the attorney] from this date onwards was not

am exercise of ordinary business care and prudence.

(Fa. ref. omitted. ]

27.

It appears that Florence, and presumably Phyllis as well,

have undergone a drastic change of heart since the time of the

proceeding on the question of whether Irene's delay in filing the

return was justified.

Appendix p. 64

- 52 -

Irene to file the returns in 90 days or face removal as

executrix anc a possible surcharge for any penalties and

interes: which might be owing. Under these circumstances

we think Irene's plea of ignorance simply cannot be taken

seriously.

Since we refuse to accept Irene's testimony at face

value, we are lef= without a satisfactory explanaticn

for the over 5-1/2 year delay in filing the return. The

probate litigation with Emest may have made it difficult

to determine the exact amount of the estate tax liability,

but it did mot prevent the estate from filing a timely

return based om reasonable projections and thereafter

filing an amended return should that prove to be necessary.

See Estate cf Duttenhofer v. Commissioner, supra at 2C6-

207; Estate of Sikler v. Commissioner, 7.C. Memo. 1981-587.

The fact is that Irene knew the return had *o be fied,

and she had a positive duty sco do so on time.

We cannot say on this record that she made reascnable

efforts to carry out this responsibility. Accordiasly,

Appendix p. 695

tal he Med *

- $3 -

we mole that the petitioners have not estab.ishec reasonable

cause for the late filing and she adéision to tax is

sustained.

To give effect to concessions and our conclusions

on the disputed issues,

Decisicns will be enszered

under Rule 155.

Appendix p. 66

At the parties’ request we have left che resolution of the amounts

of interest owed by the petitioners to the computations to be submicced

under Rule 155, Tax Court Qules of Practice anc Procedure.

-<—*.

PETS A

TY TER OPV TE AE S72

ERNAL REVENUE,

Respondent,

‘ =” ORIGINAr

EXITED States TAX COURT

Se TES TAX COURT

TMOREICE KRAFT, TRANSPepre )

te 8 ped, ve Petitioner )

ie hee | ; Docket No. 9126-74

wis COMM? Ss roxen OF Int

}

- Pursuant to the O>inion of the

aad WPCOrDCrating herein the facts reci

tation as the findinss Cf the Court, j

ORDERED and DECIDED: That the

of $67,294.95 Plus interest thereon

Revenue Code of 195 rom February in

liabii; Y is Paid, due from the pe s transferee Of the

Estate of Rae Berliant, Deceased, transferor, for unpaid estate

tex ane addition to the @x Of the transferor nder the TOVisions

|. OF I.R.c, $66Sl (a), / A

Bee | OAV, .

‘ ‘ , Judge, /

ta : 2 262

Eatered: GEC ”

: i 2

idulateg that the Court ™2yY enter the foregoin

~Ve-entitleg Case

‘ it is further S*idula+ee SRat the afore jaig liability, Plus

interes: @S Provided Sy law, is a Sudlicatio. Of the liabilicy set

Porsh sn “Ne Case Cf Irene Magill, Transferee, Docket No. 2094-74,

mM which Cése a Stidulation of liebilicy is con

mth the Tax Cours

currently “Ng fj)

| SERVED DEC 2 1989

34 wm ‘

_—

-——

—

gon

MTR EABEVTZ HD SAP KES}

= No, 9126-74

; Pursuant to the esi

* and ;:

; 4 “ a mae

)

= =D: That the

of $67,294.95 Plus interest thereon as

ii Revenue Coce of j9 4 from February ”

i sadility 25 paid, due “rom the Petitioner as transferee Of the

iit Estate Of Rae Berliant, Deceased, ~ansteror, for unDaid estate

a6 6tex anc addition to the tax of the transferor nder the TOVisions

i; OF I.R.¢, $6651 (a), / A Dy

a. : : ? a Uw ‘

a¢

a; 3 : * Judge, /

Be. abl s ' 2 we2

3 -EXttereg. GEC

ia >

#f m ® 2 ® 4 2

aa s* Zt is hereby Stidulat+eg that the Court may enter the foregoing

9} eecisicn in the *bove-entitled Case,

‘ae

2 s% is “"’tiner s+ PUulatee that the @20resaig liability, Plus

¢ interes: as Proviceed Y law, is a Surlication Of the liability set

$ Sores 2 the case Of Irene Magill, Trans‘eree, Docket No, 2094-74,

Sin which Cease a Stibulation of liability is concurrently Cing fileg

g 53th the Tax Coyr- of the Uniteg States appendix Pp. 6

Pe,

eS: |

pre SERVED

ee DEC 2 1982

wo.

a «4

Tee

Opinion by fudge Cummings ‘

JUDGMENT - ORAL ARGUMENT

Hnited States Court of Appeals

For the Seventh Circuit

Chicago, Illinois 60604

Mo h 5

arch § 19 84

Before

: Hon. -_¥ALTER J. CI™MINGS, Chief Judge

' Hon. HARLINGTON woop, JR., Circuit Judge

Hon. ‘WILLIAM J, CA“PBELL, Senior Distri

ce Judge*

. 83-1413

TLORENCE KRAFT, Transferee,

Petitioner-Appellant,

vs. On Appeals from the Order and

PMISSIONER OF INTERNAL REVENUE, Decision of the United States

| Respondent-Appellee. Tax Court.

eYLIS BERLIANT, Transferee,

Petitioner-Appellant,

vs.

e“ISSIONER oF INTERNAL REVENUE SERVICE,

_ 2espondent-Appellee. ‘

RS Ar

These causes came before the

Court for decisions on the record

P-om the United States Tax Court, and were argued by ccunsel.

; On consideration whereof, IT Is ORDERED AND ADJUDGED by this

urt that the judgments of the said District Court in these

pealed from be,

causes

and the same are hereby, AFFIRMED, with costs, in

cordance with the opinion of this Court filed this date.

—__—____ _

The Honorable William J, Campbell, Senior District Judze for the

tthern District of Illinois, is sitting by designation.

Appendix p. 69

United States Court of Appeals

For the Seventh Circuit

Chicago, Illinois 60604

April 4 , 19.84 |

Before

Hon. _WALTER J. CUMMINGS, Chief Judge

Hon. — HARLINGTON WOOD, JR., Circuit Judge

Hon. WILLIAM J. CAMPBELL, Senior District Judge*

FLORENCE KRAFT, Transferee,

Petitioner-Appellant, Appeal from the

United States

T C ¢.

Nos. 83-1413, 83-1414 Vs. ax Cour

COMMISSIONER OF INTERNAL REVENUE SER-

VICE,

Respondent -Apnellee,

PHYLLIS BERLIANT, Transferee |

Petitioner-Appellant,

)

| > )

° )

COMMISSIONER OF INTERNAL REVENUE )

SERVICE, )

)

Respondent-Appellee.

On consideration of the petition for rehearing and sug-

gestion for rehearing en banc filed in the above-entitled cause

_ by appellants Kraft and Ber ant, no judge in active service

has requested a vote thereon, and all of the judges on the

original panel have voted to deny a rehearing. Accordingly,

IT IS ORDERED that the aforesaid petition for rehearing

de, and the same is hereby, denied.

* The Honorable William J. Campbell, Senior District

Judge of the Northern District of Illinois, is sitting by

designation. Appendix p. 70

31 U.S.C. 8 192 (1975)

"Every executor, administrator, or

assignee or other person, who pays,

in whole or in part, any debt due by

the person or estate for whom or for

which he acts before he Satisfies and

pays debts due the United States from

Such person or estate, shall become

answerable in his own person and

estate to the extent of such Payments

for the debts so due to the United

States, or for so much thereof as may

remain due and unpaid.

110 1/2 T1l. Rev. Stat. 18-12

(a) All claims against the estate of a decedent, except expenses of

administration and surviving spouse’s or child's award, not filed within

_ 6 months from the issuance of letters of of fice are barred as to the estate

which has been inventoried within 6 months from the issuance of letters.

If after 6 months from the issuance of letters the representative files an

iaventory listing estate not previously inventoried and thereafter the

clerk of the court publishes once each week for 3 successive weeks a no-

tice informing all persons that claims may be filed against the estate on

or before a «date as designated in the publication (the designated date to

be the first Monday in the second month following the month in which

the first publication is made), all claims not filed on or before the desig-

nated date are barred as to the estate listed in such inventory. Notwith-

Standing the foregoing, the representative may pay a claim in whole or

in part, even though the claim has not been filed, if it is paid or approved

for payment in writing within the time for filing claims. In determin-

ing the estate from which payment is made, an unfiled claim shall be

treated as if filed on the date it is paid or approved, whichever is earlier.

(b) All claims barrable under this Section are, in any event, barred

unless letters of office are issued upon the estate of the decedent within

3 years after his death.

Appendix p. 71

Chapter 76

Ill. Rev. Statutes

§ 2. Survivorsmip rights abolished—Exceptions—Bank ac-

Of I11. counts and deposits—Stocks, bonds, ete.—U. S. Gov-

ernment obligations

Except as to executors and trustees, and except also where by will or

other instrument in writing expresfing an intention to create a joint

tenancy in personal property with the right of survivorship, the right or

incident of survivorship as between joint tenants or owners of personal

Property is hereby abolished, and all such joint tenancies or ownerships

shall, to all intents and purposes, be deemed tenancies in common; pro-

vided, that the foregoing shall not be deemed to impair or affect the

rights, privileges and immunities, as set forth in the following provisos,

(a), (b), (c) and (d):

(a) When a deposit in any bank or trust company transacting busi-

ness in this State has been made or shall hereafter he made in the names

of two or more persons payable to therm when the account is opened or

thereafter, such deposit or any part thereof or any interest or dividend

thereon may be paid to any one of said persons whether the other or

others be living or not, and when an agreement permitting such pay-

ment is signed by all said persons at the time the account is opened or

thereafter the receipt or acquittance of the person so paid shall be valid

and sufficient discharge from all parties to the bank for any payments

so made;

(b) When shares of stock, bonds or other evidences of indebtedness or

of interest are or have been issued or registered by any corporation, asso-

ciation or other entity in the names of two or more persons as joint ten-

ants with the right of survivorship, such corporation, association or other

entity and their respective transfer agents may, upon the death of any

one of such registered owners, transfer said shares of stock, bonds, or

other evidences of indebtedness or of interest to or upon the order of

the survivor or survivors of such registered owners, without inquiry in-

to the existence, validity or effect of any such will or other instrument in

writing or the right of such survivor or survivors to receive the prop-

erty, and without liability to any other person whomsoever who might

claim an interest in or a right to receive all or a portion of the property

so transferred;

or of interest are or have been issued in the joint names of two or more

“Appendix p. 72°

persons or their survivors by corporations, including state chartered

savings and loan associations, federal savings and loan associations, ani

state and federal credit unions, authorized to do business in this state, all

payments on account thereof made then or thereafter, redemption, repur-

chase ar wiithdiwin! vinke we price; accumuiuons Ulercon, credits to,

profits, dividends, or other rights thereon or accruing thereto may be

paid or delivered in whole or in part to any of such persons whether the

other person or persons be living or not, and when an agreement permit-

ting such payment or delivery is signed by all said persons at the time

when the shares of stock, bonds or evidences of indebtedness or of in-

terest were issued or thereafter, the payment or delivery to any such

Person, or a receipt or acquittance signed by any such person, to whom

any such payment or any such delivery of rights is made, shall be a

valid and sufficient release and discharge of any such corporation for

the payment or delivery so made;

(d) When the title to real property is held in joint tenancy by two

Or more persons, and payment of compensation is made to any County

Treasurer for the taking or damaging of such real property pursuant

to “An Act to provide for the exercise of the right of eminent domain”,

*pproved April 10, 1872, as heretofore or hereafter amended,' or pursu-

nt to any act of the General Assembly aow or hereafter enacted for

the exercise of the sovetcign power of eminent domain, the right of sur-

Vivorship to the title in and to such real property shall be transferred to

the money so paid to and in the hands of such County Treasurer; pro-

Vided, however, upon application to such County Treasurer holding such

Money by any such joint tenant for his proportionate share thereof, he

shall receive the same from such County Treasurer without the consent

°F approval of any other joint tenant, and the person making such appli-

tion shall have no survivorship rights in the balance remaining in the

ands of such County Treasurer after deducting therefrom such propor-

Nonate share.

Provided, further, that any non-transferable United States Savings

nd, debenture, note or other obligation of the United States of Amer-

ica Now or hereatter issued made payable to a designated person and

upon his death to another person therein named shall, upon the death of

the designated person, if such bond or other obligation is then outstand-

ing, become the property of and be payable to the other person therein

named. If any such non-transferable bond, debenture, note or other

obligation of the United States of America be made payable to two

Persons, in the alternative, such bond or other obligation shall, upon the

death of either person, if such bond or other obligation is then outstand-

ing, become the property of and be payable to the survivor of them.

Appendix’ p.73 °- -

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.