Estate of Chamberlain v. Commissioner
This text of 1999 T.C. Memo. 181 (Estate of Chamberlain v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
*217 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
*219 BEGHE, JUDGE: Respondent determined a deficiency of $ 201,551 in Federal estate tax of the Estate of Theodore J. Chamberlain (decedent) and an accuracy-related penalty of $ 38,423 for negligence under section 6662(b)(1).
*220 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions, including respondent's concession of the penalty, the sole issue remaining for decision is whether, for purposes of
FINDINGS OF FACT
Some of the facts have been stipulated and are incorporated herein by this reference. At decedent's death on February 26, 1994, he resided in Portland, Oregon. When the petition was filed, the*222 personal representative, Dale Chamberlain (Dale), resided in Solana Beach, California.
Decedent was predeceased by his wife of 50 years, June L. Chamberlain, who died on December 7, 1992, at the age of 84. Decedent was appointed personal representative of Mrs. Chamberlain's estate on February 5, 1993. He served in that capacity until his death in February 1994 at the age of 87. Decedent and Mrs. Chamberlain had one child -- Dale.
Decedent was a retired engineer who had spent most of his professional career working for the water department of the City of Portland. He had some responsibility for the design of the present Portland water system. Mrs. Chamberlain had been a high school language teacher. Although the Chamberlains were not employed in highly paid positions, they lived frugally, saved, and invested. As a result, they accumulated estates sufficient to justify estate planning.
In 1987, decedent and Mrs. Chamberlain hired the Portland law firm of Meyer & Wyse to handle their estate planning and to address their concerns about estate taxes. Roger Meyer and Joshua Kadish, both partners at Meyer & Wyse, worked on the planning and administration of the Chamberlains' estates, and*223 the firm of Meyer & Wyse was the principal legal counsel for both estates. Mr. Meyer, the firm's senior partner, had known the Chamberlains for many years and used to be their next-door neighbor.
In broad outline, the estate plans of decedent and Mrs. Chamberlain were simple and consistent. Each wished the other to receive all or the bulk of his or her estate, and that, after both their deaths, Dale would inherit their property.
On January 14, 1988, Mr. Kadish wrote to decedent and Mrs. Chamberlain and explained the use of disclaimers as follows:
At your request, we have revised our previous drafts to
include a so-called Family Residuary Trust. This trust could
also be called a "bypass" or "disclaimer" trust. As I explained
to you over the phone, it will allow the surviving spouse to
analyze the family financial situation for a 9-month period
following the deceased spouse's date of death. The surviving
spouse can then make a decision regarding how much money it
would be prudent to direct into this trust for tax planning
purposes. The 9-month period gives the surviving spouse ample
time to*224 consult with us and other financial advisers and to make
a decision. This type of arrangement allows maximum flexibility
in formulating your estate plan.
What Mr. Kadish was referring to, of course, was the use of a disclaimer by the survivor of the first to die to cause an amount in the predeceasing spouse's estate up to the amount of the unified credit to pass for the benefit of Dale and thus reduce the taxable estate of the survivor for Federal estate tax purposes.
Relying on Mr. Kadish's advice that they did not have to decide during their lifetimes whether to use the unified credit in their wills, on January 25, 1988, decedent and Mrs. Chamberlain executed the mutual wills 1 that Meyer & Wyse had prepared for them. These wills were consistent with the points made by Mr. Kadish in his January 14, 1988, letter. In her will, Mrs. Chamberlain made a $ 75,000 specific bequest to Dale and bequeathed the residue of her estate to decedent, if he should survive her. Her will provided, in the event of a disclaimer by decedent, that the disclaimed portion of the residuary estate would pass to the Family Residuary Trust. Under the terms of the Family Residuary Trust, decedent*225
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*217 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
*219 BEGHE, JUDGE: Respondent determined a deficiency of $ 201,551 in Federal estate tax of the Estate of Theodore J. Chamberlain (decedent) and an accuracy-related penalty of $ 38,423 for negligence under section 6662(b)(1).
*220 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions, including respondent's concession of the penalty, the sole issue remaining for decision is whether, for purposes of
FINDINGS OF FACT
Some of the facts have been stipulated and are incorporated herein by this reference. At decedent's death on February 26, 1994, he resided in Portland, Oregon. When the petition was filed, the*222 personal representative, Dale Chamberlain (Dale), resided in Solana Beach, California.
Decedent was predeceased by his wife of 50 years, June L. Chamberlain, who died on December 7, 1992, at the age of 84. Decedent was appointed personal representative of Mrs. Chamberlain's estate on February 5, 1993. He served in that capacity until his death in February 1994 at the age of 87. Decedent and Mrs. Chamberlain had one child -- Dale.
Decedent was a retired engineer who had spent most of his professional career working for the water department of the City of Portland. He had some responsibility for the design of the present Portland water system. Mrs. Chamberlain had been a high school language teacher. Although the Chamberlains were not employed in highly paid positions, they lived frugally, saved, and invested. As a result, they accumulated estates sufficient to justify estate planning.
In 1987, decedent and Mrs. Chamberlain hired the Portland law firm of Meyer & Wyse to handle their estate planning and to address their concerns about estate taxes. Roger Meyer and Joshua Kadish, both partners at Meyer & Wyse, worked on the planning and administration of the Chamberlains' estates, and*223 the firm of Meyer & Wyse was the principal legal counsel for both estates. Mr. Meyer, the firm's senior partner, had known the Chamberlains for many years and used to be their next-door neighbor.
In broad outline, the estate plans of decedent and Mrs. Chamberlain were simple and consistent. Each wished the other to receive all or the bulk of his or her estate, and that, after both their deaths, Dale would inherit their property.
On January 14, 1988, Mr. Kadish wrote to decedent and Mrs. Chamberlain and explained the use of disclaimers as follows:
At your request, we have revised our previous drafts to
include a so-called Family Residuary Trust. This trust could
also be called a "bypass" or "disclaimer" trust. As I explained
to you over the phone, it will allow the surviving spouse to
analyze the family financial situation for a 9-month period
following the deceased spouse's date of death. The surviving
spouse can then make a decision regarding how much money it
would be prudent to direct into this trust for tax planning
purposes. The 9-month period gives the surviving spouse ample
time to*224 consult with us and other financial advisers and to make
a decision. This type of arrangement allows maximum flexibility
in formulating your estate plan.
What Mr. Kadish was referring to, of course, was the use of a disclaimer by the survivor of the first to die to cause an amount in the predeceasing spouse's estate up to the amount of the unified credit to pass for the benefit of Dale and thus reduce the taxable estate of the survivor for Federal estate tax purposes.
Relying on Mr. Kadish's advice that they did not have to decide during their lifetimes whether to use the unified credit in their wills, on January 25, 1988, decedent and Mrs. Chamberlain executed the mutual wills 1 that Meyer & Wyse had prepared for them. These wills were consistent with the points made by Mr. Kadish in his January 14, 1988, letter. In her will, Mrs. Chamberlain made a $ 75,000 specific bequest to Dale and bequeathed the residue of her estate to decedent, if he should survive her. Her will provided, in the event of a disclaimer by decedent, that the disclaimed portion of the residuary estate would pass to the Family Residuary Trust. Under the terms of the Family Residuary Trust, decedent*225 would be entitled during his lifetime to the trust's net income, as well as "such sums from the principal of the trust as the Trustee deems necessary or advisable for his health, education, support and maintenance to enable him to maintain the standard of living which he maintained in my lifetime" (the Support Power). At his death, the principal of the trust was to be distributed to the descendants of decedent and Mrs. Chamberlain. Mrs. Chamberlain's will provided that, should decedent disclaim his interest in the Family Residuary Trust, the disclaimed property would be distributed as if decedent had predeceased her. With the exception of Mrs. Chamberlain's specific bequest to Dale, decedent's will contained provisions that mirrored the provisions of Mrs. Chamberlain's will.
*226 Within a week after Mrs. Chamberlain's death on December 7, 1992, decedent informed Mr. Meyer of Mrs. Chamberlain's death, and they began a series of conversations concerning Mrs. Chamberlain's estate. In those conversations, decedent expressed to Mr. Meyer his interest in minimizing the estate tax liability of Mrs. Chamberlain's estate in order to maximize the value of the assets that would ultimately go to Dale.
On December 14, 1992, Mr. Meyer wrote the following in a memo (Exhibit 4-D) to Mr. Kadish:
June Chamberlain passed away December 7. I am going to meet
with Ted [Chamberlain] on Saturday morning the 19th. Please
review the file and let me know what specific information, if
any, we need. I will try to get a listing of all property from
him and bank accounts. I understand everything is jointly held.
* * *
Mr. Kadish wrote his response to Mr. Meyer on Exhibit 4-D, below Mr. Meyer's text. Mr. Kadish asked Mr. Meyer to "Get a precise list of all assets & debts and how they are held", reminded him that "We have 9 mos to disclaim", and advised that "I believe disclaimer of some types of jt property are now possible. *227 "
Subsequently, Mr. Meyer accompanied decedent to the bank to help him inventory the contents of decedent's and Mrs. Chamberlain's safe deposit box. Decedent and Mr. Meyer organized the contents of the safe deposit box according to the type of ownership interest in each asset: Assets owned outright by decedent; assets that had been held jointly by decedent and Mrs. Chamberlain; and assets that had been owned outright by Mrs. Chamberlain.
Shortly after Mrs. Chamberlain's death, decedent became preoccupied with his financial security and started taking a very cautious approach to the management of his financial affairs. Decedent became hesitant to take any action concerning his financial affairs; such few actions that he did take were only after extensive consultation with Dale, and decedent made very few changes to his investments. Also, during 1993, decedent's health deteriorated to the point where he could no longer care for himself and required full- time help at home. However, decedent's mental acuity remained unimpaired; he was competent to execute a disclaimer at all relevant times.
In late December 1992 and early January 1993, decedent prepared 12 8-
Exhibit 5-E listed all*228 property (consisting of securities, bank accounts, and the family residence) that decedent: (1) Owned outright; (2) was entitled to as surviving joint tenant; or (3) would receive as part of the residue of Mrs. Chamberlain's estate. Five of the pages contain information on marketable securities, mostly bonds, and are organized by the months in which interest payments were to be received. The first page, for example, was entitled "JANUARY & JULY TALLY 1992". On each page, decedent drew several columns to record information about each security, including columns for the security name, account number, payment date, par value, interest rate, maturity, and location of the security. There was also a column in which decedent marked each asset with a "T" "JT" or "J" to identify the original source of the asset. Under the column headings, decedent grouped the securities into 3 headings: Treasury, coupon, and registered. The succeeding pages followed this same approach but contained two tables on each page, each covering two calendar months. The second page, for example, contained tables entitled "1993 FEB & AUGUST TALLY" and "MARCH SEPT". None of the pages were signed, but decedent had initialed*229 and dated the bottom right corner of the first page "1/12/93". The following is an example of the information presented in Exhibit 5-E for treasury bonds paying interest in January and July 1992:
JANUARY & JULY TALLY 1992 TREAS
Payment Treas. Time Account To Bank
Dates Amount No. T.D.
_________________________________________________________________
1/16/92 20K T.Bill 52 week 9900-xx WSNB JT
1/23/92 80k T.Bill 26 week 9900-xx WSNB JT
1/23/92 45k T.Bill 26 week 9900-xx WSNB J
1/30/92 45k T.Bill 52 week 4400-xx WSNB T
_________________________________________________________________
Total = 190k TREASURIES
On or around January 1, 1993, when Dale was in Portland for the holidays, he sat down with decedent at the kitchen table to discuss decedent's estate plan and reviewed the first 5 pages of Exhibit 5-E. Decedent had prepared Exhibit 5-E, identifying which assets had been Mrs. Chamberlain's property, which*230 assets were decedent's property, and which assets were jointly owned by decedent and Mrs. Chamberlain, and discussed it with Dale as a step in effectuating his estate plan. While reviewing Exhibit 5-E, decedent told Dale that he planned to disclaim the assets that were in Mrs. Chamberlain's name, which were marked on Exhibit 5-E with a "J". On December 7, 1992, Mrs. Chamberlain's date of death, the assets marked "J" on Exhibit 5-E by decedent had a fair market value of $ 257,745. Decedent failed to designate $ 13,100 of assets listed in Exhibit 5-E and designated an additional $ 48,247 and $ 29,818 worth of assets as "JT" and "T", respectively, that were subsequently listed on Mrs. Chamberlain's probate inventory ("Probate Inventory") (referred to collectively with Exhibit 5-E as "the Documents") as being part of her probate estate.
During Dale's visit to Portland, he and decedent jointly produced an additional 3 pages of Exhibit 5-E that reflect decedent's and Dale's efforts to determine the total value of decedent's and Mrs. Chamberlain's property. The first of these 3 pages, which is in decedent's handwriting, is entitled "TALLY". The top half of the page contains tables summarizing*231 bank account, stock, and credit union information, with details similar to those found in the first 5 pages, such as account number or security name, ownership interest or value, and an identification of ownership. On the bottom half of the page, under the heading "DEC. 1992", decedent summarized the values of each type of asset in which he had an interest, such as "Treasuries", "Stock", and "House", and calculated a total value of $ 1,525,000. An additional page entitled "TALLY 12/29/92", contains totals for treasury, coupon, and registered bonds and appears to be the worksheet decedent used to determine the values of the 3 categories of bonds that he used to calculate his gross assets. Both pages were initialed "TJC" and dated "1/1/93" in the top right corner.
The third page was written on a piece of paper from a yellow legal pad and is in Dale's handwriting, except the title "TOTAL WORTH 1992" and page number, which are in decedent's. On this page, under headings for "Treasuries", "Coupon Bonds", "Registered Bonds", "Bank Accounts" and Stock", Dale listed certain assets, identified them with a "T", "JT" or "J", and listed their values. In addition to the $ 257,745 worth of assets*232 designated "J" by decedent, Dale designated an additional $ 149,799 worth of assets on this page as "J" assets that decedent had not previously identified as "J" assets. The top right corner of this page had been initialed "DGC" and dated "1/1/93" by Dale; it did not contain decedent's signature or initials. Throughout the pages of Exhibit 5-E, many items were marked or circled in various colors of pen and pencil. Some of the pages also bear reminder notes for decedent's use. For example, near the bottom of the first page, in blue pen, decedent wrote "Working On 2 8-
First Optional Call Date 4/1/2001
Watch for Call Date
Check with USNB
In March 1993, while Mr. Meyer was obtaining valuation figures for use in the Probate Inventory, Mr. Kadish prepared a disclaimer that he and Mr. Wyse had intended decedent to sign (Exhibit 8-H). Page 1 of Exhibit 8-H listed all the classes of Mrs. Chamberlain's property; page 2 of Exhibit 8-H stated a specific amount, $ 525,000, as being disclaimed. Exhibit 8-H did not list any assets because Messrs. Meyer and Kadish planned to wait until the values of all of Mrs. Chamberlain's probate assets had*233 been determined before deciding which assets to include in the disclaimer. To that effect, in a memo to the June Chamberlain Probate File, Mr. Meyer wrote:
Attached is the file. You can see a very nice memorandum from
John about disclaimers. I will need to make up a total list of
joint bonds as well, but we won't pick those up right now, but
we're going to have to make a quick decision. Let's get what
were [sic] talking about, we'll value them and then see how many
more we want to add to the pile.
Exhibit 8-H also contained a provision that was designed to ensure that, if decedent should disclaim his survivorship interest in any joint tenancy property, it would not pass to him as part of the residue of Mrs. Chamberlain's estate:
3. To the extent that property passes by reason of this
disclaimer to the residue of my deceased spouse's estate, and to
the extent that I have an interest in the residue of my deceased
spouse's estate pursuant to Section 5.1 of her Will, I hereby
make the following further disclaimer with respect to the
residuary provision of Section 5.1:
*234 I disclaim the right to receive the sum of $ 525,000
from the residue of my wife's estate, as provided in
Section 5.1, and acknowledge that this disclaimed sum shall
be distributed to the trustee, to be held as described in
the Family Residuary Trust established in that section.
Due to inadvertence, Messrs. Meyer and Kadish never completed Exhibit 8-H by listing the assets to be disclaimed therein, and decedent never signed Exhibit 8-H or its equivalent. According to Mr. Meyer, "It was intended to have been done and wasn't done."
Other than Exhibit 8-H, no other document specifically identified as a written disclaimer was prepared by decedent or by anyone else on his behalf. None of the documents admitted into evidence, including the pages of Exhibit 5-E and the Probate Inventory refer to any specific disclaimed assets of any kind.
On April 30, 1993, acting in his capacity as personal representative of the Estate of Mrs. Chamberlain, decedent signed the Probate Inventory and caused it to be filed with the local probate court, which was done in May 1993. The Probate Inventory had been prepared by*235 Messrs. Meyer and Kadish with the assistance of decedent and listed the assets included in Mrs. Chamberlain's probate estate as valued on December 7, 1992, her date of death. Total values of the assets listed were as follows:
Cash and equivalents $ 248,195.87
Bonds 157,543.45
Stocks 69,581.63
_________________________________________
Total inventory 475,320.95
The Probate Inventory filed with the probate court did not refer to any disclaimer of any assets by decedent.
On September 30, 1993, a Federal estate tax return, Form 706, was filed with the Internal Revenue Service by decedent on behalf of the Estate of Mrs. Chamberlain. 5 On the Form 706, Line 1, decedent reported a gross estate of $ 883,006, including $ 385,319 of jointly owned property, and on Line 2, total allowable deductions of $ 390,245, which included a marital deduction of $ 385,319. Decedent reported a taxable estate of $ 492,761 and calculated a tentative tax of $ 153,339 and an allowable unified credit of $ 192,800. Subtraction of the allowable unified credit*236 from the tentative tax amount produced an amount less than zero; accordingly, decedent reported zero estate tax liability on Line 27 of the Form 706 because the entire tentative tax had been absorbed by the unified credit.
In April 1994, subsequent to the death of decedent in February 1994, Mr. Meyer met in chambers with Judge Lee Johnson of the Oregon Circuit Court for Multnomah County, Probate Department, to discuss a proposed order of distribution for Mrs. Chamberlain's estate different from that provided by her will. Mrs. Chamberlain's will provided that the residue of her estate was to pass to decedent or, to the extent disclaimed, the Family Residuary Trust. Because decedent had died, Messrs. Meyer and Kadish considered it unnecessary to distribute*237 the assets to a trust and then redistribute them from the trust to Dale. On April 8, 1994, the Probate Department of the Oregon Circuit Court for Multnomah County, in an order signed by Judge Johnson, authorized an order of distribution for Mrs. Chamberlain's estate under which all remaining assets of the estate, after payment of expenses, were to be distributed to Dale.
On November 21, 1994, a Federal estate tax return, Form 706, was timely filed with the Internal Revenue Service by petitioner, the estate of decedent. On the Form 706, line 1, petitioner reported a gross estate of $ 1,104,352. On part 5, of the Form 706, the recapitulation of the gross estate showed the following date of death value amounts:
Schedule A -- Real Estate $ 151,558
Schedule B -- Stocks and Bonds 129,337
Schedule C -- Mortgages, Notes, and Cash 818,707
Schedule F -- Other Miscellaneous Property 4,750
__________________________________________________________
Total gross estate 1,104,352
On the Form 706, Line 2, the*238 estate reported total allowable deductions of $ 56,678, and on Line 3, a taxable estate of $ 1,047,674. These amounts did not include the assets of Mrs. Chamberlain's estate that, petitioner claims, were disclaimed under
ULTIMATE FINDINGS OF FACT
At no time did decedent execute a written disclaimer of any kind within the meaning of
At no time did decedent execute any written document by means of which he irrevocably refused to accept assets otherwise passing to him from the estate of Mrs. Chamberlain.
At no time did decedent execute a document that specifically identified any interest in property disclaimed by him.
OPINION
The Chamberlains' estate plan provided that the bulk of the estate of the first of them to die would be bequeathed to the surviving spouse, and then to Dale after the death of the survivor. Because of the 100-percent marital deduction for property passing to the surviving spouse, such a plan by its terms fails to take advantage of the unified credit in the estate of the first spouse to die. This causes the taxable estate of the surviving spouse to be larger*239 than it would have been if an amount equal to the unified credit in the estate of the first spouse to die had passed directly to the object or objects of their joint bounty.
The technique for using the unified credit in the estate of the first spouse to die that Meyer & Wyse discussed with decedent and Mrs. Chamberlain was to have the surviving spouse disclaim all or part of his or her interest in the estate of the first to die. Using this technique would ensure that the unified credit would be fully used in the estates of both spouses. By bequeathing the residuary estate to the surviving spouse and providing for the disposition of any property disclaimed, the wills enabled the surviving spouse, with the benefit of current asset valuations, to evaluate his or her financial needs and decide whether to disclaim, and if so, how much to disclaim, so as to use the unified credit to the extent consistent with his or her evaluation of his or her own needs. See Manning et al. on Estate Planning, 2-63 through 2-64 (5th ed. 1998).
Petitioner contends that decedent disclaimed his interests in the probate property of Mrs. Chamberlain by substantially complying with
the term "qualified disclaimer" means an irrevocable and
unqualified refusal by a person to accept an interest in
property but only if --
(1) such refusal is in writing,
(2) such writing is received by the transferor of the
interest, his legal representative, or the holder of the legal
title to the property to which the interest relates not later
than the date which is 9 months after the later of --
(A) the day on which the transfer creating the
interest in such person is made, or
(B) the day on which such person attains age 21,
(3) such person has not accepted the interest or any of its
benefits, and
(4) as a result of such refusal, the interest passes
without any direction on the part of the person making the
disclaimer and passes either --
*242 (A) to the spouse of the decedent, or
(B) to a person other than the person making the
disclaimer.
Decedent's compliance with
"In general, a disclaimer (or renunciation) is a refusal to accept the ownership of property or rights with respect to property." H. Rept. 94-1380, 65 (1976), 1976-3 C.B. (Vol. 3) 735, 799. A "'qualified disclaimer' means an irrevocable and unqualified refusal to accept an interest in property that satisfies four conditions", including the condition that "the refusal must be in writing."
The person making the disclaimer must in the written disclaimer instrument affirmatively and unequivocally renounce his right to a property interest in a manner that is not subject to revocation or retraction. The evidence in the record does not satisfy this standard.
Neither of the Documents, nor any other writing in the record, contains any language manifesting the intent of decedent to renounce his interest in any of Mrs. Chamberlain's probate assets. The notations and items on Exhibit 5-E only evidence decedent's efforts, after he became preoccupied with his financial security, to inventory and classify his assets after Mrs. Chamberlain's death and to determine his gross assets. While decedent may have intended to use the information in Exhibit 5-E in planning to disclaim assets, with few exceptions, as described supra, the text in Exhibit 5-E is limited to headings for columns and entries describing or identifying the assets listed, such as "T. Bill", "Portland Water" and "PG E". The many markings and notes found on the pages of Exhibit 5-E are consistent with our conclusion that decedent prepared Exhibit 5-E for his own use, namely, a determination of his gross assets, as well as the steps he should take and when he could expect to receive income at various times during the year. What we have not found on Exhibit 5-E is an irrevocable and unqualified refusal by decedent to accept any interest in*245 property otherwise passing to him under the will of Mrs. Chamberlain.
Nor did the Probate Inventory that decedent filed in the local probate court in May 1993 contain an unequivocal irrevocable renunciation by decedent of any interest in any of the property listed therein. It was as personal representative of Mrs. Chamberlain's estate, and not in a personal capacity, that decedent was required to file a probate inventory. There was nothing unusual about the form or content of the probate court inventory that distinguished it from those that are routinely filed by personal representatives. The Probate Inventory contained no language manifesting an intent on the part of the decedent to disclaim his interest in any property listed therein. In sum, there is simply no evidence in the record that decedent irrevocably refused his interests in the residue of Mrs. Chamberlain's estate in a written instrument, if at all. Decedent therefore failed to satisfy an essential requirement of
D. NO WRITTEN DISCLAIMER DESIGNATES*246 THE PROPERTY BEING DISCLAIMED
On brief, petitioner contends that assets valued at $ 498,889 on Mrs. Chamberlain's date of death were disclaimed. Petitioner's list of assets alleged to be disclaimed by decedent does not simply include the residue of Mrs. Chamberlain's estate -- it includes all her probate assets. Inasmuch as Mrs. Chamberlain's will provided a $ 75,000 pecuniary bequest to Dale, we fail to see how decedent could have disclaimed all the probate assets.
Petitioner also claims that decedent identified the assets that he was disclaiming by marking them with a "J". Yet only $ 257,745 worth*247 of assets was designated "J" by decedent on Exhibit 5-E; another $ 149,799 worth of assets were designated "J" by Dale. That leaves close to $ 100,000 of assets that was marked "JT", that were not marked at all, or that were merely listed on the Probate Inventory. Thus, even if designating certain assets as "J" was sufficient for purposes of
Prior to enactment of
The enactment of
Nevertheless, a disclaimer will not be treated as a qualified disclaimer under
Under Oregon law, the common-law right to disclaim has been supplanted by the Uniform Disclaimer of Transfers by Will, Intestacy or Appointment Act. See
For essentially the same reasons that decedent has failed to satisfy
On brief, petitioner acknowledges -- and correctly so -- that we are not bound by the April 8, 1994, order of distribution of Mrs. Chamberlain's estate issued by the local probate court. Legal rights and interests in property and transfers thereof are created and determined by State law, but the manner in which and the extent to which such rights and interests shall be subjected to Federal tax are determined by Federal law. See
Petitioner argues, despite decedent's failure to comply with the literal requirements of
This Court has applied the substantial compliance doctrine and excused taxpayers from strict compliance with procedural regulatory requirements, provided that the taxpayer substantially complied by fulfilling the essential statutory purpose. See, e.g.,
*256 Federal tax questions of substantial compliance have arisen only on rare occasion outside the election context. Compare
In other cases in which a substantial compliance claim has been raised, we have consistently required "specific, contemporaneous, and incontrovertible evidence of a binding election to accept the tax consequences imposed by the section. We are not at liberty to infer that an election existed when the unequivocal*257 proof required by Congress does not exist."
We have examined the specific requirements of
Congress enacted
We had similar concerns in
That Congress fixed a deadline of December 31, 1965, for making
the election suggests that a taxpayer was not to be allowed to
file an ambiguous statement which would permit him to wait and
see whether the benefits would outweigh the burdens of the
election in his individual case. Rather, as a minimum, the
taxpayer is required to definitely commit himself as to whether
he elects to have section 172(b)(1)(D) apply * * *. * * *
From the inception of this case, petitioner's counsel has characterized respondent's determination not to recognize decedent's alleged disclaimer as a reliance on technicalities. According to petitioner, "the government's approach to these*261 cases * * * is always an approach which wants to find some minute defect in what the taxpayer did and then deny congressionally granted tax benefits based on that minute defect." In the absence of a written disclaimer, petitioner has relied on the testimony of Dale, with that of Messrs. Meyer and Kadish, the attorneys who handled the estates of the Chamberlains (collectively, "witnesses"), to establish that decedent substantially complied with
1. PETITIONER'S INTENT TO DISCLAIM
According to petitioner, "everyone agrees that Mr. Chamberlain [decedent] intended to disclaim." Petitioner apparently believes that the mere showing of intent, without any actions on the part of the decedent in furtherance of his intent, is sufficient for a showing of substantial compliance. We disagree. See
At trial, Dale testified that decedent had discussed disclaiming the probate assets with him for a long time and that decedent planned to disclaim "the amount that would absolutely minimize taxes down to the last dollar." No part of Dale's testimony, however, concerned his actual knowledge of a disclaimer. Dale never witnessed the decedent take any actions to disclaim, and there is no indication that decedent ever told Dale that he had done something that he intended to be legally operative as a disclaimer. Dale could not remember asking decedent whether he was going to have a specific disclaimer document prepared and did not remember decedent's saying that he was going to have a written disclaimer prepared for him. Finally, when asked by the Court whether he had discussed the alleged disclaimer with Meyer & Wyse, Dale equivocated and backtracked in his testimony, first saying that he did not have a conversation about the disclaimer until after September 7, 1993 (the due date for filing the estate tax return for Mrs. Chamberlain); in further questioning, *263 Dale admitted that he could not recall being aware of the alleged disclaimer at the time he signed the Form 706 estate return for decedent's estate, which had been prepared by Mr. Kadish, and could not recall whether he first became aware of the alleged disclaimer in connection with the audit of petitioner's Form 706, or at some earlier date.
The testimony offered by Messrs. Kadish and Meyer regarding decedent's intent is also unpersuasive. Mr. Meyer testified that decedent told him he was disclaiming the J assets when they met in December 1992. Mr. Kadish testified that he and Mr. Meyer considered this in taking the position that decedent had disclaimed:
based upon his rather detailed outline of June's separate assets,
which he signed, and also the probate inventory, which he
signed, and coupled with his intention, which was repeatedly, I
believe, expressed to Mr. Meyer that he wished to disclaim all
these assets, we took the position that that constituted in
effect a disclaimer.
Mr. Kadish admitted in testimony that he had never discussed the topic of disclaimer with decedent, but that instead he had relied on what Mr. Meyer told*264 him about decedent's intentions. If Messrs. Meyer and Kadish were confident that decedent's expression of intent to disclaim in December 1992 constituted a disclaimer, then why did they prepare Exhibit 8-H, a draft of a written disclaimer, in March 1993? If Exhibit 8-H were superfluous, why would Mr. Meyer admit in testimony that his firm had been negligent in failing to see to it that decedent executed Exhibit 8-H? If petitioner's position carried any weight, which it does not, a great portion of it would fall on petitioner's contention that Exhibit 5-E satisfied the written disclaimer requirement of
To identify which assets were Mom's [Mrs. Chamberlain's]
property, which were his [decedent's] property, and which were
joint property to effect the plan to settle the estate, the
estate plan.
* * * * * * *
He had for a long time [discussed disclaiming J assets], and
while we were going over this document, he was talking about
these would be the assets he would disclaim.
Petitioner's testimony*265 was in the subjunctive future tense and does not say that Exhibit 5-E was a disclaimer or even intended to be one. If decedent had intended Exhibit 5-E to be a disclaimer, we believe that he would have considered it important enough to show it to Mr. Meyer, decedent's longtime acquaintance and a trusted adviser. Mr. Meyer was in frequent contact with decedent after Mrs. Chamberlain's death; yet, at trial, Mr. Meyer had no specific recollection of speaking with decedent about Exhibit 5-E. If decedent intended to disclaim using Exhibit 5-E, why did he total the values of the assets listed on Exhibit 5-E to determine his gross assets but not reduce those totals by the values of the assets that he intended to disclaim? We think that decedent intended Exhibit 5-E to serve: (1) As the "list of all assets * * * & how they are held", that Mr. Kadish referred to in his response to Mr. Meyer on Exhibit 4-D that they needed to prepare Form 706 for Mrs. Chamberlain's estate and to plan decedent's disclaimer, and (2) as a worksheet that enabled decedent to track his gross assets and determine when he would be receiving interest and dividend payments. This explains why decedent began preparing Exhibit*266 5-E after meeting with Mr. Meyer and organized the listing of assets according to the dates that interest and dividend payments would be made, rather than grouping the assets according to their source; i.e., "J", "JT", "T". Our conclusion is also supported by testimony about decedent's personality, by Mr. Meyer, who had known decedent for many years, as well as by Dale:
[Decedent] was very methodical. He was an engineer. He took very
careful care of his finances. He took pride in his ability to
maintain control over his life and his assets, and so he would
keep careful records of them, and I was familiar with those
records and would see them.
According to Dale, after Mrs. Chamberlain's death, decedent became increasingly cautious in the management of his finances:
He got to the point where he would check with me before he
did anything, and he did very little. He owned stock. He kept
stock. He owned bonds. He held them. * * *
He continually became more and more cautious. He wouldn't
do anything without checking*267 with me. He made very few
investment changes.
2. WHAT ASSETS WERE DISCLAIMED?
Even assuming for the sake of argument that decedent had disclaimed something, the question of what assets had been disclaimed would still be unresolved. Rather than resolving this question, the inconsistencies in the testimony of the witnesses further convince us that decedent did not disclaim. Each of the witnesses has testified that decedent intended to disclaim all the probate assets; yet there is just as much evidence that decedent had actually intended, in order to maximize the use of the unified credit, to disclaim much more than just the probate assets. According to Dale, decedent "had planned to disclaim the amount that would absolutely minimize taxes down to the last dollar." A basic step in any effort to minimize estate taxes is the use of the unified credits of each spouse, which allow property to pass to heirs without inclusion in the taxable estate. See sec. 2010; Manning et al., supra at 1-22. If decedent sought to minimize his estate taxes "down to the last dollar", he would have wanted to disclaim enough property to use fully the unified credit in Mrs. Chamberlain's estate. In contradiction*268 to his own testimony, Dale testified that while he and decedent were reviewing Exhibit 5-E, "he [decedent] was talking about these [the probate assets] would be the assets he would disclaim." The probate assets, including the $ 75,000 that would be used to pay Dale's specific bequest, had a date of death value of $ 492,761 yet the unified credit available for Mrs. Chamberlain's estate was $ 600,000. Thus, unless decedent also disclaimed a portion of his survivorship interests in joint tenancy property, $ 107,239 of the unified credit would be wasted.
At trial, Mr. Meyer testified that decedent had expressed his intent to disclaim the probate assets. This statement, however, contradicts Exhibits 4-D and 9-I, memoranda written by Mr. Meyer and Mr. Kadish's responses thereto, and Exhibit 8-H, the disclaimer document that was prepared by Mr. Kadish. All 3 exhibits clearly contemplate a disclaimer of joint tenancy property to the extent necessary to use the full amount of the unified credit, after taking into account the probate assets. In Exhibit 4-D, Mr. Kadish's response to Mr. Meyer illustrates that they were of the view that joint tenancy property could be disclaimed, 8 and*269 were indeed considering it. Thus, when drafting Exhibit 8-H, Mr. Kadish used $ 525,000 as the amount that would be disclaimed, which exceeded the value of the probate assets after deducting the $ 75,000 needed to pay the specific bequest. Mr. Kadish did not identify the specific assets to be disclaimed when he drafted Exhibit 8-H because he and Mr. Meyer planned to determine which assets would be disclaimed after all the probate and joint tenancy assets were identified and valued. As described in Exhibit 9-I, Mr. Meyer planned to value Mr. Chamberlain's survivorship interests in jointly held bonds and then disclaim however many bonds would be necessary to use fully the unified credit:
*270
I will need to make up a total list of joint bonds as well, but
we won't pick those up right now, but we're going to have to
make a quick decision. Let's get what were [sic] talking about,
we'll value them and then see how many more we want to add to
the pile.
Decedent never signed Exhibit 8-H -- not because a disclaimer was otherwise accomplished -- but because, as petitioner's counsel acknowledged at trial -- of the "inadvertence and oversight and negligence at [Myer & Wyse] . . . this [signing Exhibit 8-H] was not carried through."
Petitioner's counsel has tried to cure the effects of the inadvertence by cobbling together a series of nondispositive documents and events.
These efforts are unavailing because substantial compliance cannot be predicated on lack of compliance. Contrary to petitioner's characterizations of the situation, we do not find respondent's refusal to recognize the alleged disclaimer to be "a rigid, inequitable application of the regulations." In the case at hand, decedent failed to make an irrevocable and unqualified refusal in writing of an interest in property. *271 This was hardly a failure to comply with procedural or directory requirements. Decedent failed to execute a written document containing a manifestation of his intent to disclaim the assets marked "J", or any other interests in property, and he therefore failed to comply with the essential requirements of
The common law doctrine of substantial compliance should not be
allowed to spread beyond cases in which the taxpayer had a good
excuse (though not a legal justification) for failing to comply
with either an unimportant requirement or one unclearly or
confusingly stated in the regulations or the statute. * * *
Petitioner's evidence, explanations, and argument do not provide any valid substitute for decedent's failure to comply with
To reflect the foregoing,
Decision will be entered under Rule 155.
Footnotes
1. The use of the term "mutual wills" does not imply that the wills were executed pursuant to any type of contract. See
McGinn v. Gilroy, 178 Ore. 24, 165 P.2d 73↩ (Or. 1946) ; Dukeminier & Johanson, Wills, Trusts & Estates 292 (3d ed. 1984).5. The Form 706 was due Sept. 7, 1993. See sec. 20.6075-1, Estate Tax Regs. No extension request was filed, presumably because it was clear that Mrs. Chamberlain's estate would not be taxable because of the availability of the marital deduction and the unified credit.↩
6. See, e.g., secs. 2041(a)(2), 2514(b) (disclaimers of general powers of appointment); secs. 2055(a) and 2056(d) (estate tax charitable and marital deduction provisions); sec. 25.2511-1(c), Gift Tax Regs. (disclaimer must comply with local law in order to be valid for gift tax purposes). with the intention of providing definitive rules for disclaimers that could be uniformly applied among the States, with all three of the Federal transfer taxes. Id.↩
7. See, e.g.,
Prussner v. United States, 896 F.2d 218 (7th Cir. 1990) ;Fischer Indus., Inc. v. Commissioner, 843 F.2d 224 (6th Cir. 1988) ;Kerry v. Commissioner, 89 T.C. 327 (1987) ;Young v. Commissioner, 783 F.2d 1201 (5th Cir. 1986) , affg.83 T.C. 831 (1984) ;American Air Filter Co. v. Commissioner, 81 T.C. 709 (1983) ;Tipps v. Commissioner, 74 T.C. 458 (1980) ;Penn-Dixie Steel Corp. v. Commissioner, 69 T.C. 837 (1978) ;Taylor v. Commissioner, 67 T.C. 1071 (1977) ;Hewlett Packard Co. v. Commissioner, 67 T.C. 736 (1977) ;Columbia Iron & Metal Co. v. Commissioner, 61 T.C. 5 (1973) ;Valdes v. Commissioner, 60 T.C. 910 (1973) ;Hoffman v. Commissioner, 47 T.C. 218 (1966) , affd. per curiam391 F.2d 930 (5th Cir. 1968) ;Sperapani v. Commissioner, 42 T.C. 308 (1964) ;Cary v. Commissioner, 41 T.C. 214 (1963) ;Thurman v. Commissioner, T.C. Memo 1998-233 );Rockwell Inn, Ltd. v. Commissioner, T.C. Memo 1993-158↩ .8. Former disclaimer regulations in effect prior to decedent's death required a survivorship interest in a joint tenancy to be disclaimed within 9 months of the creation of the tenancy. However, by the time of Mrs. Chamberlain's death, it was generally accepted, in the case of a unilaterally severable interest in a joint tenancy, that the date of death of the joint tenant was the starting point for measuring the timeliness of a disclaimer under
sec. 2518(b)(2) . SeeMcDonald v. Commissioner, T.C. Memo 1989-140 , on remand from853 F.2d 1494↩ (8th Cir. 1988) ; IRS Action on Decision 1990-06 (Feb. 7, 1990).
Related
Cite This Page — Counsel Stack
1999 T.C. Memo. 181, 77 T.C.M. 2080, 1999 Tax Ct. Memo LEXIS 217, Counsel Stack Legal Research, https://law.counselstack.com/opinion/estate-of-chamberlain-v-commissioner-tax-1999.