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LaMothe v. C. I. R. T.C. Memo. 1990-63; 1990 WL 10722 (U.S.Tax Ct.); 58
T.C.M. (CCH) 1358, T.C.M. (P-H) P 90,063; 1990 PH TC Memo 90,063 Tax Court, 1990. Filed February 12, 1990. COUNSEL:
John L. Sullivan
and Joyce E. York, for the petitioner. James
A. Kutten, for the respondent. MEMORANDUM
FINDINGS OF FACT AND OPINION OPINION
BY: SHIELDS,
JUDGE: In a
notice of deficiency dated April 11, 1983, addressed to the Estate of Charles
J. LaMothe, Deceased, Ms. Joan Bebee, Personal Representative, and Mrs. Viola
A. LaMothe, Surviving Spouse, respondent determined a deficiency of $44,749 in
the Federal income tax of Charles J. LaMothe, Deceased, and his Surviving
Spouse, Viola A. LaMothe, for the year 1979. Thereafter separate timely
petitions were filed with this Court by the Estate of Charles J. LaMothe,
Deceased, Joan Bebee, Personal Representative, in docket No. 16982- 83, and by
Viola A. LaMothe in docket No. 15162-83. Pursuant
to the agreement of the parties, a stipulated decision was entered on March 3,
1986, in docket No. 16982-83 to the effect that the correct income tax
deficiency of the Estate of Charles J. LaMothe, Deceased, for the year 1979 is
$18,060. The deficiency was assessed by respondent against the Estate of
Charles J. LaMothe on April 28, 1986, and has not been paid. In a
notice of transferee liability, dated April 22, 1987, respodent determined that
Viola A. LaMothe was liable as a transferee of the assets of Charles J.
LaMothe, Deceased, for the agreed but unpaid income tax deficiency of the
Estate of Charles J. LaMothe for the year 1979 in docket No. 16982-83 of
$18,060, plus interest as provided by law. Viola A. LaMothe, as the transferee
of Charles J. LaMothe, timely filed a petition in this Court on May 15, 1987,
in docket No. 12967-87. By order dated September 28, 1987, petitioner’s
cases at docket No. 15162-83 and docket No. 12967-87 were consolidated. After
certain concessions set forth in the parties’ stipulation of settled
issues, the only issues remaining for decision are: (1) whether petitioner in
docket No. 15162-83 qualifies for innocent spouse relief pursuant to section
6013(e) [FN1] from the deficiency for 1979 which the parties agree is $18,060;
and (2) whether petitioner in docket No. 12967-87 is liable as a transferee of
the Estate of Charles J. LaMothe for the deficiency of $18,060 for 1979 plus
interest as provided by law. FINDINGS
OF FACT Some of the facts have been stipulated
by the parties and are so found. Their stipulation of facts, together with the
attached exhibits, are incorporated herein by this reference. Petitioner
was a resident of St. Louis, Missouri, when she filed her petitions in these
cases. FACTS
RELATING TO THE INNOCENT SPOUSE ISSUE. On
February 17, 1976, petitioner married Charles J. LaMothe. In April of 1980 they
filed a joint income tax return for the taxable year 1979. Mr. LaMothe died on
June 5, 1980. He was survived by his widow, petitioner herein, and two children
by a previous marriage, Joan LaMothe Bebee and Charles Rodney LaMothe. On the
joint return for 1979 deductions for losses were claimed by Mr. LaMothe with
respect to his interest in two partnerships, Colonial Partners, Ltd., and
Gateway Partners, Ltd., which were subsequently included by respondent in an
audit project known as the Cole-West Tax Shelter. The claimed deductions were
as follows: Partnership Claimed Deductions Colonial Partners, Ltd........ $37,500.00 Gateway Partners, Ltd......... 40,562.00 ------------------ Total .................... $78,062.00 In his
notice of deficiency respondent disallowed the above deductions in their
entirety. The
Cole-West Tax Shelter (also known as Dallas Realty Tax Shelter) consisted of
285 tiered partnerships, including Colonial Partners, Ltd., and Gateway
Partners, Ltd. The partnerships invested in commercial real estate. With
respect to the Cole-West Tax Shelter, respondent audited 20 of its 285
partnerships pursuant to an audit plan to be based upon a statistical sampling
which plan was agreed to in advance by respondent and the project’s
general partner. At the conclusion of his audit, the adjustments proposed by
respondent to these 20 partnerships consisted of (1) adjustments to the
depreciable basis of partnership real property and (2) adjustments to
partnership expenses such as partnership fees, management fees, guarantee fees,
interest, and start-up costs. Using
the 20 audits as a statistical sample respondent offered to settle the entire
project by conceding 56 percent of all Cole-West deductions or losses claimed
by the various partners. Neither
Colonial Partners nor Gateway Partners were included in the 20 partnerships
audited by respondent. Consequently, the record contains no evidence of the
actual items which comprise the disallowed portion of their adjustments. In the
settlement of Mr. LaMothe’s case (docket No. 16982-83), his estate
accepted respondent’s offer and the parties stipulated that Mr.
LaMothe was entitled to 56 percent of the deductions claimed for partnership
losses on the 1979 joint return. The settlement was computed as follows: Amounts Disallowed in Portion to be Portion to be Statutory Notice of Disallowed Per Allowed Per Partnership Deficiency Settlement Settlement Colonial Partners, Ltd......... $37,500.00 $16,500.00 $21,000.00 Gateway Partners, Ltd.......... 40,562.00 17,847.00 22,715.00 --------------------- -------------- ------------- $78,062.00 $34,347.00 $43,715.00 --------------------- -------------- ------------- --------------------- -------------- ------------- In
their stipulation of settled issues the parties in this matter have agreed that
if respondent prevails on the innocent spouse issue in docket No. 15162-83, the
correct amount of the deficiency for 1979 is $18,060, a duplication of the
amount agreed to by the parties in docket No. 16982-83. After
her husband’s death, petitioner received the following as the
beneficiary of insurance payable at his death, as the surviving tenant of
property held jointly with her husband, or by bequest under his will: Description Value House and lot, 4 Country Aire, Town and County, MO 63131 (family residence), joint property....................................... $190,000.00 10 units First Trust INSD Municipal Bonds, 52 Series, Semi-Annual, OTC, joint property................................................ 10,529.75 Joint checking account: Acct. No. 23-27-139 Mercantile Trust Company National Association, 8th and Locust, St. Louis, MO 63166.............................................................. 21,865.23 Anchor National Life Insurance Company, single premium deferred annuity, policy number 294891, insurance........................... 24,338.77 Cash bequest........................................................ 225,000.00 ----------- Total .......................................................... $471,733.75 ----------- ----------- After
Mr. LaMothe’s death, petitioner also received per year $27,000 for
seven years, or a total of $187,000, pursuant to two employment contracts which
Charles J. LaMothe had with former employers. FACTS
RELATING TO THE TRANSFEREE ISSUE. Mr.
LaMothe’s will directed, among other things, that his surviving
spouse, Viola A. LaMothe, was to receive a marital bequest in the amount of
$250,000. His will was admitted to probate in the Circuit Court of St. Louis
County, Missouri. His daughter, Joan LaMothe Bebee, qualified as the Executrix
and Personal Representative of the estate. In an
Inventory and Appraisement filed on June 8, 1981, with the Circuit Court, the
Personal Representative reported personal property in the estate with a value
of $420,856.46. In her
First Annual Settlement filed on June 15, 1981, the Personal Representative
reported total receipts by the estate of $878,870.06 and disbursements of
$640,884.71, leaving a balance of $237,985.35 in the estate. In her Third
Annual Settlement filed on June 27, 1983, the Personal Representative reported
receipts by the estate totaling $556,675.16 and disbursements of $556,653.21,
leaving a balance in the estate of $21.95. Included in the disbursements was a
payment of Federal estate tax of $222,951.54 and interest on the Federal estate
tax of $16,226.28. With
respect to the marital bequest to petitioner, Joan LaMothe Bebee, the Personal
Representative, recognized and did not contest the intentions of her father,
but did not immediately pay the bequest because of a lack of funds in the
probate estate. Therefore, on or about June 15, 1983, petitioner filed a will
construction action in the Circuit Court to compel the estate to pay her
bequest. On February 8, 1984, the Judge of the Probate Division of the Circuit
Court entered a Consent Order and Judgment which provides, in part, as follows:
THIS
COURT HEREBY construes the will of Charles J. LaMothe to provide that the
surviving spouse Viola LaMothe shall receive a bequest from his estate in the
pecuniary sum of $250,000.00 (the other formula provisions of the said Article
being inapplicable) and the Executrix is hereby ordered to pay from the estate
the sum of $250,000.00 to Viola LaMothe on or before March 1, 1984, in full and
complete satisfaction of her marital bequest. This Court shall retain
jurisdiction over this matter until said amount has been paid and an
acknowledgment of payment filed with this Court by Viola LaMothe, or on her
behalf. It is further ordered that if the Executrix fails to make such payment
by such date then this Court shall forthwith, upon request of counsel for Viola
LaMothe, and without further notice or hearing, enter judgment imposing a
personal surcharge upon the Executrix for such amount. On
January 19, 1984, and February 17, 1984, Joan LaMothe Bebee and her brother,
Charles Rodney LaMothe, each made a cash advance to the Estate of Charles J.
LaMothe of $112,500. From these advances Mrs. Bebee in her capacity as Personal
Representative of the estate issued two checks, each in the amount of $112,500,
to petitioner in full satisfaction of her marital bequest. The cash advances
made by Mrs. Bebee and Charles Rodney LaMothe to the probate estate to fund
petitioner’s marital bequest were loans and not gifts or
contributions. On
February 20, 1984, petitioner signed a release which provides, in pertinent
part, as follows: VIOLA
A. LaMOTHE does hereby acknowledge receipt from JOAN LaMOTHE BEBEE, Executrix
of the Estate of Charles J. LaMothe, of the sum of Two Hundred Fifty Thousand
Dollars ($250,000.00) paid to her in hand and further declares and acknowledges
that the said sum constitutes the total of all distributions, monies, bequests,
devises or other properties, of any kind whatsoever, to which she is entitled
from the estate of Charles J. LaMothe in accordance with his Last Will and
Testament dated the 7th day of October, 1977, now being probated in St. Louis
County, Missouri. In a
Fourth Annual Settlement of the estate, filed by the Personal Representative on
July 14, 1984, the advances made to the estate by Charles Rodney LaMothe and
Joan LaMothe Bebee, and the payments made by the estate to petitioner in
satisfaction of the marital bequest are reflected. The record contains no other
evidence of any consideration received by the estate for the bequest. The
Fifth Annual Settlement of the estate, filed on July 19, 1985, reflects partial
repayments by the estate of the advances made by Charles Rodney LaMothe and
Joan LaMothe Bebee in April 1985. They each received $52,500. The report also
reflects the receipt by the estate of a Federal estate tax refund of
$105,425.57 based on an amended estate tax return in which an additional
marital deduction under section 2056 was claimed and allowed. The refund
supplied the funds for the partial repayments to Charles Rodney LaMothe and
Joan LaMothe Bebee. On March
13, 1986, this Court entered the stipulated decision in the case of the Estate
of Charles J. LaMothe, Deceased, docket No. 16982-83, in which the parties
agreed that there was a deficiency in the income tax of Charles J. LaMothe,
Deceased, of $18,060 for 1979. On April 28, 1986, respondent assessed the
deficiency, plus statutory interest against the estate of Charles J. LaMothe.
The assessment has not been paid. In her
Sixth Annual Settlement of the estate, filed on June 26, 1986, the Personal
Representative reported that the estate has no assets remaining. On April 28,
1987, respondent timely mailed his notice of transferee liability to
petitioner. Prior
to his death, Charles J. LaMothe as grantor had on November 6, 1967, entered
into a Living Trust Agreement with his then wife, Margaret Virginia LaMothe,
and his two children, Joan LaMothe Bebee and Charles Rodney LaMothe, as
trustees. Upon its creation, Mr. LaMothe placed in the trust 5,910 shares of
the common stock of Mid- West Terminal Warehouse Company and 14,010 shares of
St. Louis Terminals Corporation. The trust, with an Addenda dated November 28,
1967, and amendments dated October 25, 1974, and January 30, 1975, continued
until the death of Mr. LaMothe when, under the terms of its last amendment, the
trust was to terminate with any accumulated income being distributable to his
estate and with the corpus being distributable to Joan LaMothe Bebee and
Charles Rodney LaMothe. OPINION ISSUE 1
-- INNOCENT SPOUSE. Section
6013(a) allows a husband and wife to file a joint return even though one of
them has no gross income and claims no deductions. In such case, the liability
of each spouse is joint and several. Sec. 6013(d)(3). However, one of the
parties to a joint return may be relieved of his or her liability for certain
items attributable to the other spouse if the following requirements of section
6013(e)(1) are met: (A) a
joint return has been made under this section for a taxable year, (B) on
such return there is a substantial understatement of tax attributable to
grossly erroneous items of one spouse, (C) the
other spouse establishes that in signing the return he or she did not know, and
had no reason to know, that there was such substantial understatement, and (D)
taking into account all the facts and circumstances, it is inequitable to hold
the other spouse liable for the deficiency in tax for such taxable year
attributable to such substantial understatement * * *. The
burden is on petitioner to prove that she is entitled to innocent spouse relief
under section 6013(e). Ratana v. Commissioner, 662 F.2d 220, 224 (4th Cir.
1981); Adams v. Commissioner, 60 T.C. 300, 303 (1973). Petitioner contends that she
has carried her burden of proof that she has established and meets all four
requirements of the statute. Respondent
agrees that petitioner filed a joint return with her husband for 1979.
Furthermore respondent does not dispute that there was a substantial
understatement of tax on the joint return which is attributable to the
partnership losses claimed by Mr. LaMothe and that in signing the joint return
petitioner did not know, and had no reason to know, of the substantial
understatement. Respondent contends, however, that petitioner has failed to
prove that the partnership losses claimed by her husband and disallowed by
respondent are grossly erroneous items within the meaning of section 6013(e)(2)
and that, taking into account all the facts and circumstances of this case, it
would be inequitable to hold her liable for the deficiency in tax attributable
to the underpayment. ‘Grossly
erroneous items’ are defined in section 6013(e)(2) as being items
omitted from gross income and claims for deduction, credit, or basis in an
amount for which there is no basis in fact or law. Under the plain wording of
the statute the mere proof of an item of omitted income qualifies as a grossly
erroneous item, but the same is not true with respect to a deduction. To
qualify as a grossly erroneous item a deduction must be shown not only to be
erroneous, but also to have no basis in fact or law. As we stated in Douglas
v. Commissioner,
86 T.C. 758, 763 (1986), ‘it simply does not follow that because
deductions lacking in a factual or legal basis will be disallowed, all
deductions which are disallowed lack a factual or legal basis.’ The
burden of proving that an erroneous deduction has no basis in fact or law is on
petitioner. Purcell v. Commissioner, 86 T.C. 228, 240 (1986), affd. 826 F.2d 470 (6th Cir.
1987). There
is no statutory definition of the phrase ‘no basis in fact or law.’
However, we have previously stated that a
deduction has no basis in fact when the expense for which the deduction is
claimed was never, in fact, made. A deduction has no basis in law when the
expense, even if made, does not qualify as a deductible expense under well-
settled legal principles or when no substantial legal argument can be made to
support its deductibility. Ordinarily, a deduction having no basis in fact or
in law can be described as frivolous, fraudulent, or, to use the word of the
[Ways and Means] committee report [on the Tax Reform Act of 1984], phony. Douglas
v. Commissioner, supra at 762-763. See also Purcell v. Commissioner, 826 F.2d 470, 475 (6th Cir.
1987), affg. 86 T.C. 228 (1986). Petitioner
merely asserts that ‘the deductions taken for Colonial Partners, Ltd.
and Gateway Partners, Ltd. have no basis in law or fact and are grossly
erroneous.’ The record, however, does not support the assertion
because it contains no evidence tending to show the nature of the deductions or
that they were ‘phony’ or had no basis in law. In fact,
petitioner alleged in paragraph 5 of her petition as follows: a. The
business conducted by Colonial Partners, Ltd. and Gateway Partners, Ltd.
consisted entirely of transactions entered into for profit. b. The
expenditures and deductions reported on the partnership returns reflect
deductible charges included in the conduct of the business. c. The
adjusted basis of Charles J. LaMothe in the partnerships are as reported during
the calendar year 1979. Furthermore,
in his explanation of how the parties arrived at their agreement to allow 56
percent and disallow 44 percent of the partnership losses, the appeals officer
who coordinated the Cole-West Tax Shelter audit for respondent stated that in
some categories of partnership expense respondent made significant concessions
ranging from 50 percent to 80 percent. The settlement in which 56 percent of
the losses were allowed as deductions clearly indicates that respondent
concluded that the claimed deductions had a substantial basis in fact or law.
The mere disallowance by respondent of deductions in his notice of deficiency
does not permit petitioner to leapfrog to the conclusion that the deductions
have no factual or legal basis. Douglas v. Commissioner, supra; Hawbaker v. Commissioner, T.C. Memo. 1988-406. We
conclude, therefore, that petitioner has failed to prove that the deductions
claimed by the partnerships had no basis in fact or law. We are
also satisfied from the record as a whole that it would not be inequitable to
hold petitioner liable for the income tax deficiency for 1979. Mr. LaMothe died
about two months after the 1979 return was filed. After his death she received
a total of over $650,000 directly or indirectly from his estate in the form of
a cash bequest, insurance proceeds, jointly owned property, and employment
contracts. Under these circumstances it is logical to assume that if Mr.
LaMothe had not died shortly after the return for 1979 was filed, the
deficiency of $18,060 for 1979 would have been paid from either his separate
assets or assets held jointly with petitioner. In either event it would be
reasonable to further assume that the payment of the deficiency would have reduced
the assets received by petitioner upon his death by a corresponding amount.
Therefore, she significantly benefited from the understatement. Sec.
1.6013-5(b), Income Tax Regs. See also Estate of Krock v. Commissioner, 93 T.C. ___ (Dec 11, 1989). ISSUE 2
-- TRANSFEREE LIABILITY. A
transferee has been defined as ‘one who takes property of another
without full, fair and adequate consideration to the prejudice of creditors.’
First National Bank of Chicago v. Commissioner, 255 F.2d 759, 762 (7th Cir. 1958).
At least to the extent of the cash bequest petitioner is clearly a legatee and
as such meets the classic definition of a transferee under section 6901. Sec.
6901(h). Section 6901 sets forth a collection procedure to be used by
respondent against transferees. Section 6901 does not establish or define a
transferee’s substantive liability as a transferee. The existence and
extent of such liability is determined under State law. Commissioner v. Stern,
357 U.S. 39, 41-45 (1958); Berliant v. Commissioner, 729 F.2d 496, 499 (7th
Cir. 1984); Gumm v. Commissioner, 93 T.C. 475 (1989). Thus, in the case before us,
petitioner’s liability as a transferee, if any, must be determined by
reference to the law of Missouri. However, it is clear that in Missouri it has
long been established that the distributees of a decedent’s estate
take and hold the decedent’s assets subject to an implied trust in
favor of the decedent’s creditors and that such distributees are
liable for such debts in equity to the extent of the value of the assets. Hagan
v. Lantry, 338
Mo. 161, 89 S.W. 2d 522 (1935); Walker v. Deaver, 79 Mo. 664 (1883). As we
stated in Moran v. Commissioner, 45 T.C. 528, 529-530 (1966), there are five
elements which respondent must prove in order to establish transferee
liability. The five elements are: (1)
That a transfer of assets was made from the transferor to the transferee; (2)
That the transfer was made for inadequate consideration; (3)
That the transferor was insolvent at the time of the transfer or became insolvent
as a result of the transfer; (4) The
value of the property transferred; and (5)
That the transferor presently owes the tax. From
the record before us it is apparent that respondent has proved each of the
elements necessary to establish transferee liability. First, in January and
February of 1984 the Estate of Charles J. LaMothe transferred to petitioner
$225,000 in full satisfaction of the $250,000 bequest in Mr. LaMothe’s
will. Secondly, the transfer was made for less than a full and adequate
consideration because the payment of such a bequest is a transfer that lacks
consideration. See Shimko v. Commissioner, T.C. Memo. 1972-64. Thirdly,
the transferor, the Estate of Charles J. LaMothe, was obviously left insolvent
by the transfer because in the absence of the payment of the $225,000 in
satisfaction of the bequest to petitioner the estate would have been solvent
under either the equity test of insolvency (the inability to meet obligations
as they accrue) or the bankruptcy test for insolvency (having liabilities in
excess of assets). Swinks v. Commissioner, 51 T.C. 13, 17 (1968); and Kreps v.
Commissioner, 42
T.C. 660, 670 (1964), affd. 351 F.2d 1 (2d Cir. 1965). Fourthly,
the value of the assets transferred has been shown. Finally, the transferor
presently owes the tax. The transfer took place in early 1984, long after the
liability of Mr. LaMothe for the 1979 income tax had accrued on April 15, 1980.
Although the transfer must occur after the tax liability accrues, the tax need
not be assessed at the time of the transfer. Swinks v. Commissioner, supra;
Kreps v. Commissioner, supra. Respondent has exhausted all reasonable efforts
to collect the deficiency in tax from the transferor by assessing it against
his estate which no longer has any assets. Petitioner’s
contention that she is not liable as a transferee for the income tax deficiency
because she did not receive any assets from the estate ignores the facts and is
without merit. Contrary to her contention the record as a whole clearly demonstrates
that she received the $225,000 as a bequest from the estate and not as a gift
from Joan LaMothe Bebee and her brother, Charles Rodney LaMothe. It is true
that the funds with which the bequest was paid were advanced to the estate by
Mrs. Bebee and her brother, but we have found that the advances were loans to
the estate and not gifts to the estate or to petitioner. Petitioner’s
further contention that the $225,000 was paid by Mrs. Bebee and her brother in
order to avoid a personal surcharge against Mrs. Bebee ‘for the
purported mishandling of the estate’ is also a distortion of the
record. We have found that after payment of Federal estate tax the probate
estate did not have sufficient funds to pay petitioner’s bequest. At
this point petitioner filed the action in the Circuit Court to compel the
payment of her bequest. In due course, the Probate Division of the Circuit
Court ordered the Personal Representative to pay the bequest or face the
possibility of a personal surcharge. Thereafter a payment in satisfaction of
the bequest was made. In view
of the foregoing, we conclude that petitioner is liable as the transferee of
Charles J. LaMothe, Deceased, for the deficiency in 1979 of $18,060, plus
interest as provided by law under the provisions of section 6901. Due to
concessions, and to the duplication of petitioner’s liability for the
deficiency, first under the joint return for 1979, and secondly as a transferee
of Charles J. LaMothe, Deceased, Decisions
will be entered under Rule 155. |