Tara C. Trent, of the Estate of Patrick R. Collins, Deceased, Cross-Appellant v. United States of America, Cross-Appellee

893 F.2d 846

• Court: Court of Appeals for the Sixth Circuit
• Decided: February 21, 1990
• Docket: 88-3740, 88-3778
• Status: Published

Opinions

BAILEY BROWN, Senior Circuit Judge.

Tara Collins Trent, executrix of the estate of Patrick R. Collins, who died in 1981, seeks a refund of $487,614.38 of federal estate taxes plus interest, which she contends was erroneously assessed and collected by the Internal Revenue Service. It is the contention of the executrix that the net taxable estate is less than is contended by the government because the estate is entitled to a larger alimony deduction than was allowed, or, alternatively, because it is entitled to exclude from the gross estate the interest of. the former wife of the deceased in certain real estate. The executrix sued in the district court for the Southern District of Ohio and was partially successful there; the district court, concluding that the estate was entitled to a larger alimony deduction than was allowed (though not as large as that claimed), granted her a refund judgment of $288,306.15 plus interest. Both the government and the executrix appealed. We conclude that the district court was in error in granting any relief to the executrix, and therefore we reverse and remand to the district court with instruction to dismiss this action with prejudice.

I

A.

Patrick and his wife, Norma Jean Collins, who had been married since 1952, determined to dissolve their marriage. Represented by the same attorney, J.R. Nieberd-ing, they obtained a decree of dissolution in the Common Pleas Court of Hamilton County, Ohio, on September 8, 1976; the decree incorporated a separation agreement, prepared by their attorney, dated July 27, 1976.

The separation agreement stated that the parties “mutually expressed a desire to settle and adjust all matters relating to their mutual property rights to which either might be entitled in the event of dissolution,” stated that the separation agreement would be included in their petition for dissolution and, if granted, in the decree of dissolution of the marriage, and further stated that it was their intention “to make an equitable distribution of their property and to settle all claims thereunder.”

The separation agreement provided for division of tangible personal property such as automobiles, motorcycles, furniture and furnishings, and for savings and checking accounts. It also provided that Patrick was to retain all of the stock in P.R. Collins Plumbing Co. and retain ownership of life insurance policies. With respect to real estate, Norma Jean received their home in Florida and Patrick received their home in Ohio. Of particular significance in this case was a provision that: “All other real estate now owned by the parties hereto, either individually or jointly, shall be transferred of record, to a trustee mutually agreed upon by the parties hereto for the use and benefit of Patrick.” ¹ Patrick assumed and agreed to pay all of their outstanding debts including mortgages on this real estate to be placed in trust. With respect to alimony, Patrick agreed to pay Norma Jean $15,000.00 prior to entry of the decree and agreed to pay $13,000.00 per year in equal monthly installments unless she remarried, in which case this amount would be reduced to $10,400.00 per year, with adjustments based on the Consumer Price Index. Patrick also agreed to pay Norma Jean an additional $5000.00 every third year. Patrick received custody of their minor daughter, Tamara Lynn Collins; the other daughter, Tara C. Trent, who is executrix of the estate and plaintiff herein, was an adult. There was no provision for subsequent modification of the agreement.

After the execution of the separation agreement but prior to obtaining the dissolution decree, Patrick, Norma Jean and their attorney, Nieberding, as trustee, executed on September 3, 1976, the trust agreement contemplated by the separation agreement. The trust agreement recites that, pursuant to the separation agreement, Patrick and Norma Jean had executed and delivered to Nieberding, as trustee, “for the use and benefit of Patrick,” general warranty deeds covering the real estate that is specifically described in the trust agreement. The trust agreement further provides that the trustee would hold title to this real estate “for the use and benefit of Patrick” and to secure payment of alimony as such is provided in the separation agreement. It still further provides that Patrick would be responsible for all debts and liabilities in connection with the real estate, that the trustee could not sell or mortgage the property without the consent of Patrick and Norma Jean and that the duties and obligations of the trustee would terminate with the death of Patrick or Norma Jean or by their agreement.

With Mr. Nieberding representing both parties, Patrick and Norma Jean obtained a dissolution of marriage decree on September 8, 1976, the separation agreement was adopted by the decree, and the parties were ordered to comply with the agreement.

After the entry of the decree, to wit on November 18, 1976, Patrick executed a will prepared by Mr. Nieberding. In Item 2 of the will, it is stated:

At the time of making this, my Last Will and Testament, I am the owner of certain real estate which is held by my attorney J.R. Nieberding, as Trustee, pursuant to the Separation Agreement executed on July 27,1976, by and between my former wife, Norma Jean Collins, and myself. ... Under the provision of Item 7 B, C and D of that Separation Agreement, I am obligated to pay alimony to Norma Jean Collins for and during the term of her natural life. Therefore, if Norma Jean Collins is living at the time of my death and does not consent to a full and complete settlement of her alimony claim, then in that event, I direct that all of said real estate held by J.R. Nieberding, as Trustee, or any successor Trustee, shall be transferred to the Trustee hereinafter named for the uses and benefits and for the term hereinafter specified.

The will further provides that Patrick’s daughter, Tara C. Trent, would succeed Nieberding as trustee. It empowers this trustee to sell trust property but only with the consent of Norma Jean. It further authorizes her, as trustee, to settle the alimony claim of her mother, Norma Jean, and also authorizes her to make the alimony payments to Norma Jean from the income of the trust with the balance of the income to be divided equally between the trustee, Tara C. Trent, and her sister, Tamara L. Collins. The will also provides that, upon the death of Norma Jean, the trust would terminate and the trust property was bequeathed to Tara C. Trent and to Tamara L. Collins.

B.

After Patrick died in 1981 and his will admitted to probate, Norma Jean moved in common pleas court to modify the alimony provision in the dissolution decree. The two daughters did not oppose the motion and the government was not notified. The court thereupon, on April 27, 1982, entered a “modifying decree” in which the court found that at the time of the dissolution decree Patrick and Norma Jean were joint owners of the real estate that they had conveyed to Nieberding as trustee and that the “appraised value of said real estate is $2,993,750.00 and that Norma Jean Collins is entitled to alimony based on said valuation.” The court further found that, prior to his death, Patrick had made alimony payments of $84,647.00 pursuant to the decree. The court thereupon modified the dissolution decree by awarding Norma Jean “the sum of $1,496,875.00 as and for her alimony as of September 8, 1976” less $84,647.00 that had been paid to her under the separation agreement, or a net amount of $1,412,228.00. In short, the court awarded Norma Jean alimony in gross in an amount equal to one-half the claimed value of real estate in the trust (without respect to mortgages), less the amount of alimony that had been paid to her.

Then, on April 30, 1982, the estate, by Nieberding, filed an estate tax return for Patrick’s estate. The estate claimed a deduction for alimony owed to Norma Jean in the amount of $1,412,228.00. The estate did not, however, claim in the return that the real estate that had been conveyed to Nieberding as trustee and which Tara C. Trent had received as successor trustee had been jointly owned by Norma Jean and Patrick after they had placed the property in trust. In other words, the return did not show this property as being jointly owned by Patrick’s estate and Norma Jean; it reflected that all of this property had been owned by Patrick at his death. In fact, the only jointly owned real property included in the return was property in Arizona valued at $3000.00.

The Internal Revenue Service determined that the estate was not entitled to an alimony deduction in an amount, as claimed, of $1,412,228.00. Instead, it determined that the estate was entitled to an alimony deduction of $273,190.00, which is the actuarial value of the alimony payments to be made to Norma Jean under the separation agreement following Patrick’s death.² Therefore, a deficiency of $487,624.38 was determined; the estate paid the deficiency and sued for a refund in the district court.

II

In her complaint filed in district court, the executrix alleged that her mother, Norma Jean, had continued to own a half-interest in the property conveyed by her and Patrick to the trustee and that: “In order to avoid partition of the property, the Trustee sought to have the Court of Common Pleas determine the interest of Norma Jean Collins in the property and requested that the Court award her a sum certain in lieu of partitioning the property.” The complaint further alleges that the common pleas court determined that Norma Jean “was entitled to the sum of $1,496,875.00 in lieu of her interest in the property less payments previously made of $84,647.00.” The complaint further alleges that the Internal Revenue Service erred in disallowing a claim against the estate of $1,139,038.00 to the extent that it exceeded $273,190.00 (the actuarial value of the periodic payments). Thus the theory of the complaint is that, while Norma Jean had actually owned a half-interest in the real estate in the trust at the time of Patrick’s death, this was the basis for the modification of the dissolution decree allowing Norma Jean lump sum alimony in the amount of $1,139,-038.00. Therefore, consistent with the estate tax return, the complaint actually sought a refund by increasing the alimony deduction allowed as a claim against the estate under 26 U.S.C. § 2053(a)(3), not by a decrease in the gross estate as such is defined in 26 U.S.C. § 2033.

The case was tried in the district court on “what is contained in the files,” including complaint, answer, pretrial orders, memo-randa of law, exhibits, stipulations and depositions.

Contrary to the precise theory of the complaint, the estate really presented a double-barreled attack to the district court. The opinion of the district court states:

Plaintiff argues that the commissioner’s decision to disallow as a deduction from the gross estate of Patrick Collins $1,412,228 pursuant to the modification of a divorce decree is incorrect for either of two reasons. First, the amount deducted represents the value of the property in the Collins Trust owned by Norma Jean and therefore not properly included in the gross estate of Patrick Collins pursuant to § 2033. Alternatively, plaintiff argues that the amount deducted constitutes a settlement of Norma Jean’s claim against the estate for alimony, and is therefore a debt deductible from the gross estate pursuant to § 2053.

The district court expressed doubt as to the validity of the estate’s first theory but agreed with the second theory, saying:

Plaintiff’s first proposition is problematic, principally because the estate tax return does not list any property as being held jointly by Norma Jean and Patrick, except a lot in Arizona worth $3,000. However, we need not dwell on this issue because we conclude, for reasons discussed below, that the state court judgment modifying the consent decree did establish a viable debt for estate tax purposes, but a higher state court would hold it was mistaken as to the amount.

The district court determined that, contrary to the government’s contention, the state court decree, modifying the dissolution decree, created a valid debt because the executrix was authorized to settle her mother’s alimony claim and because she believed that her mother had an “enforceable claim for alimony in gross for $1,412,-228.00.”³ The district court then determined that the state court’s modifying decree was in accord with state law except that the amount of the alimony deduction claimed should be reduced by an amount equal to one-half the outstanding mortgages on the involved real estate; that is, that Norma Jean’s interest that was the basis of the increased alimony claim was limited to her “equity” in the real estate in trust.⁴

In determining that, under Ohio law, the grant of the alimony in gross by the state court was proper, the district court relied on the proposition that Norma Jean, at the time of Patrick’s death, owned a one-half interest in the real estate in the trust. In concluding that Norma Jean had such a retained interest, the court in part relied on the proposition that this was the intention of Norma Jean and Patrick. But the district court’s opinion also concluded: “Thus, it is of no consequence whether Norma Jean technically [legally?] relinquished her interest in the trust property since Ohio law recognizes her interest in the property, on the basis of her rights as the former spouse of Patrick Collins.” Thus, the district court actually determined that the award of the alimony in gross by the modification decree was in accord with Ohio law because, whether or not Norma Jean and Patrick had intended that she retain her interest in the real estate in trust, under Ohio law Norma Jean had such an interest “on the basis of her rights as the former spouse of Patrick Collins.” ⁵

The district court also held that the common pleas court retained jurisdiction to modify the alimony award.

The opinion of the district court concludes by holding that “the state court judgment awarding alimony in gross to Norma Jean Collins created a viable debt for federal estate tax purposes,” but that the debt should be reduced because of the mortgages on the trust property.

Accordingly, while the opinion of the district court is not a model of clarity, it is completely clear that its holding is that the estate is entitled to an estate tax deduction based on the decree of the common pleas court in 1982, modifying its former decree of 1976. It determined that the modified decree created a valid indebtedness of the estate, reduced, however, by one-half the mortgages on the property.

Ill

As has been stated, on appeal the estate claims that it is entitled to a refund of estate taxes because it is entitled to a deduction of a debt created by the grant of alimony in gross by the modifying decree of the common pleas court or, alternatively, because Norma Jean Collins owned, at the time of Patrick’s death, a one-half interest in the realty that had been placed in trust and this interest must therefore be excluded from the gross estate.

The government contends that .there are several reasons why the modified alimony decree did not create a deductible debt, citing Ithaca Trust Co. v. United States, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647 (1929) (the modified decree is a post-death event and therefore irrelevant) and Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967) (the modified decree was not grounded on an enforceable right under state law).

We conclude, however, that we need not resolve those contentions because the government is clearly right in its contention that the modified alimony decree was itself void under Ohio law. It was void because the common pleas court, under that law, was without jurisdiction to render the decree.

The Ohio Supreme Court decided just this question in McClain v. McClain, 15 Ohio St.3d 289, 473 N.E.2d 811 (Ohio 1984).

McClain distinguished between a decree of marital dissolution, in which the parties negotiate the. amount of alimony, and divorce, in which the court decrees it. See Ohio Rev.Code Ann. § 3105.63 (1989). Because marital dissolution requires the parties’ consent, and because the terms of alimony payments may involve very delicate compromise, it follows that the court may not modify those terms. The statutory history, as the Ohio court pointed out, supports this interpretation. As enacted, § 3105.65(B) of the Ohio Code read, in pertinent part: “(B) * * * The court has full power to enforce its decree, and retains jurisdiction to modify all matters of custody, child support, visitation, and periodic alimony payments.” 135 Ohio Laws, Part II, 603, 616 (emphasis added). However, in 1975, one year before the Collins’ marriage was dissolved, the legislature deleted the final clause referring to periodic alimony payments. The McClain court believed this modification deprived Ohio courts of jurisdiction to modify the amount of alimony payments in marital dissolution cases. The court stated: “Just as a court lacks authority to set the original amount of alimony payments in a dissolution case, a court also lacks authority to modify the amount of alimony payments originally agreed to by the parties.” 473 N.E.2d 811, 813 (Ohio 1984).

Consequently, we believe that Norma Jean’s claim against the estate for alimony would be the actuarial amount allowed by the government.

The estate also contends, as heretofore stated, that it is entitled to exclude from the gross estate for estate tax purposes Norma Jean’s claimed one-half interest in the real estate that was placed in trust. This contention presents an anomalous situation in that the estate tax return — which has never been amended by the estate in this respect — shows this real estate as being the property solely of Patrick at the time of his death. That is to say, this property is listed and given valuation under “Schedule A — Real Estate” as being the property only of Patrick. The only realty listed on the return in “Schedule E — Jointly Owned Property” is a lot in Mohave County, Arizona, valued at $3000.00, and Norma Jean is shown as having a “lk interest.” Nevertheless, the government does not argue that the estate is thereby estopped as a matter of law to contend that Norma Jean owned a one-half interest in this real estate at the time of Patrick’s death. The government does argue, however, that the estate’s return of the property as having been solely that of the deceased is, at the least, evidence that it was his property. We agree. The estate is, after all, the party plaintiff here, not Norma Jean.

While Norma Jean testified in district court that it was her intent to -retain a one-half interest in the property placed in trust,⁶ the documents executed by the parties at or about the time the property was conveyed by Patrick and Norma Jean to the trustee demonstrate beyond doubt that Norma Jean retained only a security interest to guarantee payment of her alimony payments. It is, of course, the intent of the parties to the transaction that controls the result. Central Trust Co. v. Bovey, 25 Ohio St.2d 187, 267 N.E.2d 427, 429 (Ohio 1971).

The trust instrument provides, as the separation agreement provides, that the property was to be held by the trustee “for the use and benefit of Patrick” and to secure the payment of alimony to Norma Jean. Further, Patrick assumed all debt and liabilities with respect to the trust property. While the property could only be sold with the consent of Norma Jean, this is consistent with her security interest. Moreover, if Norma Jean had continued to own a one-half interest in the trust property, it would have been somewhat incongruous to provide, as it was provided in the separation agreement, that her alimony would substantially decrease upon remarriage.

Patrick’s will, prepared by their attorney and executed shortly after the dissolution of the marriage, states that “I am the owner of certain real estate which is held by my attorney, J.R. Nieberding, pursuant to the Separation Agreement_” The will further provides that the trustee of the property can settle Norma Jean’s alimony claim and that, if Norma Jean declines to settle, the trust would continue with Tara C. Trent as trustee. The will further provides that, upon the termination of the trust either by Norma Jean’s settlement of her alimony claim or her death, the entire trust property was devised to their two daughters. In short, the will makes clear that Norma Jean would either receive a settlement of her alimony claim or the periodic payments provided in the settlement agreement until her death, after which the trust property would devolve to the two daughters. There is no indication in the will that any part of the trust property belonged to or would revert to Norma Jean.

Under these circumstances, we believe that a determination by the district court, if it had made such a determination, that Norma Jean owned one-half of the trust property (subject to the mortgages) at the time of Patrick’s death and that therefore such interest of Norma Jean should be excluded from the gross estate, would have been clearly erroneous.

IV

Accordingly, we find and determine that the executrix of the estate of Patrick R. Collins is not entitled to a refund of estate taxes paid, and therefore the decision of the district court is REVERSED and the cause is REMANDED for dismissal.

1 . It is Norma Jean’s claimed retained interest in this property that, the executrix contends, should not have been included in the gross taxable estate.

2 . The estate does not contest this computation of actuarial value.

3 . Inexplicably, however, while the district court apparently recognized that Norma Jean’s claim, to be deductible as a valid debt, must be supported by adequate consideration, it determined that it was not so supported because Norma Jean had never executed a deed conveying her claimed interest in the trust property to the executrix.

4 . This decrease in the alimony deduction by the district court is the basis of the estate's appeal.

5 . Nevertheless, the estate does not contend on appeal that Norma Jean would have had, "as the former spouse,” a continuing interest in this real estate if she had effectively conveyed her interest when the trust was created.

6 . The government argues that Norma Jean’s testimony is, in effect, a post hoc rationalization. Cf. Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 419, 91 S.Ct. 814, 825, 28 L.Ed.2d 136 (1971).