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Estate of Marion Derksen v. United States of America

November 8, 2012

ESTATE OF MARION DERKSEN, PLAINTIFF
v.
UNITED STATES OF AMERICA, DEFENDANT



The opinion of the court was delivered by: Rufe, J.

MEMORANDUM OPINION AND ORDER

The Estate of Marion R. Derksen, through Lyn Bailey, executrix for and heir to the Estate of Marion R. Derksen (the "Estate"), has filed this action against the United States of America. The Complaint alleges that the Estate overpaid estate taxes to the Internal Revenue Service ("IRS") due to the IRS's disallowance of a valid debt, and seeks a refund of $103,326.09 for these allegedly overpaid estate taxes. The Estate also alleges that the IRS agreed to abate two months of late fees but did not do so, and now seeks reimbursement of the allegedly abated amount.

Defendant has filed a Motion to Dismiss or in the Alternative for Summary Judgment. Because both parties have completed discovery, and both parties rely on evidence beyond the pleadings, the Court will treat this as a Motion for Summary Judgment. For the reasons set forth herein, Defendant's Motion will be granted.

I. FACTUAL BACKGROUND

In 1992, Marion and Willard Derkson, a married couple and the parents of Lyn Bailey, each had separate investment accounts with Merrill Lynch, as well as a joint investment account. *fn1

Mrs. Derkson successfully played the stock market as a hobby, *fn2 and her individual account was valued at over $400,000 in January 1992, *fn3 whereas Mr. Derkson's individual account was valued at approximately $25,000. *fn4 Their joint account was worth approximately $175,000 in 1992. *fn5 During that year, Mrs. Derkson suffered several strokes, which resulted in short-term memory loss, *fn6 and Mrs. Derkson turned over management of her stock portfolio to Merrill Lynch. *fn7 She also paid approximately $191,000 to live with her husband at Heron Point, a life care facility in Maryland. *fn8 Despite this expense, her investment account continued to grow, and in April of 1994, Mrs. Derkson's individual account was valued at approximately $435,000. At this time, the couple's joint account was worth approximately $260,000, *fn9 and Mr. Derkson's individual account was valued at approximately $27,000. *fn10 In May 1994, the couple moved the assets in their joint account into Mr. Derkson's individual account, increasing the value of his account to approximately $290,000. *fn11

Ms. Bailey has testified that her parents called her in the spring of 1994 after meeting with an attorney for the purpose of estate planning. *fn12 During the conversation, Mr. Derkson mentioned to his daughter that they intended to keep their estates equal, and Mrs. Derkson agreed. *fn13 Ms. Bailey testified that Mrs. Derkson would have agreed to such a plan because "[s]he did not like the estate tax" and would wish to "keep their estate tax as low as would be legitimate to do," *fn14 and also because she generally considered and accepted her husband's suggestions. *fn15 The Estate has admitted that there is no written evidence of an agreement between Mr. and Mrs. Derkson to maintain equal estates, and there is no evidence that the couple engaged in any negotiations before entering any such agreement. *fn16 Ms. Bailey points to the transfer of assets from the couple's joint account into Mr. Derkson's individual account as evidence of a formal agreement to equalize their respective estates, supported by consideration. *fn17 However, despite the transfer, there was still a fairly large discrepancy between the amounts in Mr. and Mrs. Derkson's accounts, and in any case, the transfer does not, by itself establish the existence of a formal agreement. Ms. Bailey's testimony about the phone call from her parents remains the only evidence of an agreement to keep their estates equivalent in size.

In late 1996 or early 1997, Ms. Bailey reviewed her parents' trust account statements and noticed that they were not equal in size. *fn18 Mr. Derkson's account contained under $300,000, *fn19 and Mrs. Derkson's account contained over $500,000. *fn20 Because the accounts were not equal, Ms. Bailey encouraged her mother to sign a $200,000 promissory note to Mr. Derkson, and drafted such a note for Mrs. Derkson to sign. *fn21 She did not discuss this with Mr. Derkson, who was dying at the time. *fn22 Mrs. Derkson signed the promissory note on April 16, 1997. *fn23 Mr. Derkson died, on June 24, 1997. *fn24 About nine months later, Ms. Bailey encouraged Mrs. Derkson to sign a $200,000 check payable to her husband's estate, which she did. *fn25 The $200,000 promissory note was listed as a receivable on Mr. Derkson's state estate tax return. *fn26
However, the $200,000 check was never deposited and the funds were never transferred into Mr. Derkson's estate. *fn27 Mrs. Derkson was the heir to Mr. Derkson's estate in any event, and would have received the $200,000 back, free of federal estate taxation, once Mr. Derkson's estate was settled. *fn28

Mrs. Derkson died on September 16, 2001, almost four years after her husband died. Her entire estate, which by that time included the assets she inherited from Mr. Derkson's estate, passed to Ms. Bailey, the couple's only child. *fn29 On August 23, 2002, the Estate filed an federal estate tax return which included a deduction for a $200,000 debt Mrs. Derkson allegedly owed to the estate of her late husband. *fn30 The IRS conducted an inquiry into the propriety of that deduction, during which Ms. Bailey informed the IRS that the debt was owed pursuant to agreement between Mr. and Mrs. Derkson to keep their estates equal in size, and a promissory note for $200,000 pursuant to that agreement which Mrs. Derkson signed prior to Mr. Derkson's death. The Internal Revenue Service ("IRS") disallowed a deduction for the $200,000 debt, citing lack of consideration for the agreement which created the debt. The Estate paid the IRS $103,326.09 based on the IRS's disallowance of the debt, but then challenged the disallowance. After exhausting administrative remedies, the Estate brought this suit to recover that amount, arguing that there was adequate consideration for the claimed debt.

The parties agree that the Estate filed its estate tax return more than two months late. *fn31

Accordingly, the IRS assessed penalties against the estate for late filing and late payment. On December 3, 2002, the Estate requested a partial or full abatement of the penalties. *fn32 In February 2004, before receiving a ruling on the abatement request, the Estate paid $8,115 to cover the full penalty. A two month abatement of penalties was offered by IRS Estate Tax Attorney Penelope Green, in a letter dated December 2, 2004 (the "Letter"). *fn33

II. STANDARD OF REVIEW

Summary judgment is appropriate if "the materials in the record" show "that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." *fn34 Summary judgment may be granted only if the moving party persuades the district court that "there exists no genuine issue of material fact that would permit a reasonable jury to find for the nonmoving party." *fn35 A fact is "material" if it could affect the outcome of the suit, given the applicable substantive law. *fn36 A dispute about ...

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