IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
November 8, 2012
ESTATE OF MARION DERKSEN, PLAINTIFF
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 a
material fact is "genuine" if the evidence presented "is such that a
reasonable jury could return a verdict for the nonmoving party."
In evaluating a summary judgment motion, a court "must view the facts in the light most favorable to the non-moving party," and make every reasonable inference in that party's favor. *fn38
Further, a court may not weigh the evidence or make credibility
determinations. *fn39 Nevertheless, the party
opposing summary judgment must support each essential element of the
opposition with concrete evidence in the record. *fn40
"If the evidence is merely colorable, or is not
significantly probative, summary judgment may be granted."
*fn41 This requirement upholds the "underlying
purpose of summary judgment [which] is to avoid a pointless trial in
cases where it is unnecessary and would only cause delay and
expense." *fn42 Therefore, if, after making
all reasonable inferences in favor of the non-moving party, the court
determines that there is no genuine dispute as to any material fact,
summary judgment is appropriate. *fn43
A. The Claimed Debt is Not Deductible Under Section 2053.
Section 2053 of the federal tax code authorizes a deduction for claims against or debts of an estate. If the claim is based upon a promise to pay, the estate must show that there was a bona fide contract, promise or agreement made in exchange for adequate financial consideration, *fn44 and demonstrate that the claim was an enforceable obligation that existed on the date of the decedent's death. *fn45 Generally, deductible claims must actually be paid by the estate. *fn46 If an estate does not meet this burden of establishing that it is entitled to a deduction under Section 2053, the claim is not deductible from federal estate taxes.
Defendant argues that the Estate cannot demonstrate that a bona fide agreement was made in exchange for adequate monetary consideration. "One purpose of the consideration provisions of section 2053 is to prevent the depletion of the estate for estate tax purposes by transfers couched in contractual form but serving a donative intent." *fn47 The Estate presents no evidence that Mrs. Derkson contracted for consideration. In fact, as Mrs. Derkson had significantly more wealth than her husband, any agreement to equalize their investment accounts (and ultimately their estates) would have required her to transfer her own money to her husband. There is no evidence that she received any value, rights or privileges in return, nor is there evidence that she considered this transfer to be a loan and intended to seek repayment. The evidence the Estate points to (e.g. a change in which account money was drawn from to pay expenses and fund gifts, opening trust accounts, moving money from a joint account into an individual account) does indicate that the Derksons were jointly engaged in estate planning with the intent of creating more equivalent estates; however, the evidence does not suggest an agreement to maintain equal estates which was supported by financial consideration .
Agreements between family members are viewed with particular scrutiny, even when supported by monetary consideration. *fn48
"[A]ny contract between a decedent and someone who would
be a natural object of his or her bounty is viewed with suspicion,
requiring exceptional circumstances to be treated as something other
than simply an agreement to make a testamentary disposition to persons
who are the natural objects of one's bounty." *fn49
In determining whether family members entered into bona
fide agreement, the following factors are indicative of a genuinely
(A) The transaction underlying the claim or expense occurs in the ordinary course of business, is negotiated at arm's length, and is free from donative intent.
(B) The nature of the claim or expense is not related to an expectation or claim of inheritance.
(C) The claim or expense originates pursuant to an agreement between the decedent and the family member, related entity, or beneficiary, and the agreement is substantiated with contemporaneous evidence.
(D) Performance by the claimant is pursuant to the terms of an agreement between the decedent and the family member, related entity, or beneficiary and the performance and the agreement can be substantiated.
(E) All amounts paid in satisfaction or settlement of a claim or expense are reported by each party for Federal income and employment tax purposes, to the extent appropriate, in a manner that is consistent with the reported nature of the claim or expense. *fn50
Here, there is no evidence that any agreement between Mr. and Mrs. Derkson to maintain equal estates arose in the ordinary course of business, as the facts demonstrate that the parties had only a marital and not also a business relationship. *fn51 There is also no evidence that Mr. and Mrs. Derkson ever engaged in arms-length negotiation or bargaining during their estate planning. Generally, "the value of the claim settled by the estate may not be deducted if the agreement on which the claim was based was not bargained at arm's length." *fn52 Where "friendly spouses" are "of one mind" when they execute their mutual wills to advance a collective interest, the Third Circuit has found no evidence of arm's length bargaining. *fn53 The evidence before the Court shows that any plan Mr. and Mrs. Derkson made to keep their estates equal was made mutually, for the purpose of minimizing estate tax liability when their heirs ultimately inherited, and any promise to transfer funds was made pursuant to a friendly agreement between spouses to keep their estates equal. Therefore, the claim that the Estate was entitled to a deduction for an alleged debt to the estate of Mr. Derkson fails on this point. *fn54
The tax regulations also direct the Court to examine whether a debt or expense for which a deduction is sought served a donative intent or was related to an expectation or claim of inheritance. *fn55 Here, a husband and wife apparently entered into a cooperative plan to pass on their assets to their heir in a manner which minimized estate tax liability and thus maximized the assets passed on to their heir. The Court therefore concludes the agreement served a donative intent and was related to an expectation of inheritance.
The Estate's claim also suffers from the absence of any
contemporaneous evidence to substantiate the alleged agreement between
the parents. *fn56 There is no evidence that
the decedents entered into a written agreement, and the only evidence
that an oral agreement existed is Ms. Bailey's recollection of a 1994
telephone call in which her father noted the Derksons' intent to keep
their estates equal, and her mother agreed. The Government correctly
notes that there is no evidence that Mr. or Mrs. Derkson asked Ms.
Bailey to enforce this plan. Although the Derksons had accountants
managing their investment accounts and paying their bills in the years
between this conversation and their deaths, there is no evidence that
their accountants were advised of any agreement or instructed to
manage the accounts and bills so as to maintain equal investment
accounts. Other than the transfer of funds from a joint account into
Mr. Derkson's individual account in 1994, *fn57
and some trust funds set up for the education of the
Derksons' grandchildren around the same time, the Derksons did not
engage in ongoing efforts to equalize their accounts. The Estate's
claim-that Mrs. Derkson owed Mr. Derkson $200,000 pursuant to an
agreement to keep their estates equal in size-was not enforced by
either decedent during their lifetimes or by Mrs. Derkson after her
husband's death. The $200,000 at issue was never transferred to Mr.
Derkson's estate. The Court finds no contemporaneous evidence to
support an agreement warranting the $200,000 estate tax deduction Ms.
Bailey claimed after inheriting the balance of both estates upon Mrs. Derkson's death. *fn58
With regard to consistent reporting for tax purposes, Ms. Bailey did, as executrix, claim the $200,000 as an asset on Mr. Derkson's Pennsylvania estate tax return. Presumably, she would have listed it as an asset on a federal estate tax return as well, had one been required. However, the funds were never deposited into Mr. Derkson's estate. When Mrs. Derkson died, four years later, Ms. Bailey, as executrix, listed the $200,000 as a debt against Mrs. Derkson's estate on the decedent's federal estate tax return. This consistent reporting evidences only Ms. Bailey's belief that it was the intent of her parents to equalize their estates. It is insufficient in this case to outweigh the evidence that Mr. and Mrs. Derkson did not enter into a bona fide contract, promise or agreement made in exchange for adequate financial consideration, especially given the undisputed fact that the funds were never transferred.
B. The Estate is Not Entitled to an Abatement of Penalties and Interest for Late Payment
The Estate also seeks a refund for two of the three months-worth of penalties paid, arguing that the IRS had agreed to abate the penalties but has failed to issue a refund. The Government argues that no agreement to abate penalties was reached, and no refund is due.
The Government argues that while Sections 7121 and 7122 of the Internal Revenue Code allow the Government to enter into a written settlement agreement regarding a taxpayer's liability, *fn59 the IRS is not bound by agreements which do not comply with the formalities Congress requires, including authorization from the Secretary of the Treasury. *fn60 The Government further argues that the Secretary of the Treasury did not endorse a binding closing agreement regarding the Estate's request for an abatement of late penalties in this case. The Estate does not put forth any evidence demonstrating that it executed the documents that the IRS indicated were needed to create a formal closing agreement.
Some courts have held that an informal agreement between the IRS and a taxpayer, even if not endorsed by the Secretary, may in some circumstances become binding on the parties by equitable estoppel when executed. *fn61 Therefore, the relevant questions here are: 1) whether the Letter noting that the IRS would grant a two-month abatement of penalties created an agreement between the parties; and 2) if, there was an agreement, whether it was executed in a manner which raises issues of equitable estoppel.
The Estate argues that Ms. Bailey's December 3, 2002 letter requesting an abatement was an offer, and that Ms. Green's December 2, 2004 Letter on behalf of the IRS was an acceptance. The Court disagrees. Ms. Bailey's letter reads: "I wish to have [the assessment of penalties and interest] reduced by the entire amount, or at least one month, and believe that my reasons are acceptable." She then described the advice she had received from an accountant which had caused the late filing. This letter asks the IRS to consider her request for an abatement and the reasons she believes one is warranted. It does not constitute an offer.
The IRS Letter did offer a two month abatement of penalties. It also informed Ms. Bailey, as Executrix of the Estate, that the IRS was disallowing the $200,000 deduction for the debt to Mr. Derkson. *fn62
The Letter advised:
"I have enclosed the Waiver (form 890) which states the
deficiency and penalty amount due and payable. If you agree with the
adjustments, sign the Waiver and return it to my attention, no later
than December 22, 2004. A check or money order for the deficiency
amount should accompany the Waiver to stop the accrual of the
interest. . . . Once I have received these documents duly executed the
estate will receive a federal estate tax closing letter. . . . If you
disagree with the adjustments, contact me immediately so that we can
discuss how you would like to proceed."
Ms. Bailey did not sign and return the waiver, did not pay the deficiency by December 22, 2004, and did not timely contact Ms. Green to indicate any disagreements about the adjustments set forth in the Letter.
Plaintiff makes much of the fact that the waiver form the IRS provided for her signature did not offer her the opportunity to accept only the abatement, and not the disposition of the deficiency issue. However, Plaintiff puts forth no evidence that she contacted the IRS to discuss her agreement or disagreement with either issue, so there is no way of knowing whether the IRS would have entered into an agreement as to the abatement without a waiver on the deficiency issue.
The Court finds no evidence that the Estate timely accepted any terms set forth in the Letter. In fact, the Estate did not correspond with the IRS again until ten months later, on October 7, 2005, when Ms. Bailey sent a letter to the IRS indicating her belief that the Letter entitled her to an abatement. *fn63 Given the plain language of the IRS's Letter, which required signed waivers by December 22, 2004, or "immediate" communication with the IRS if a dispute remained, and noting that it is clear from the Letter that the IRS had found that the Estate was not entitled to an abatement as a matter of law, *fn64 but issued a time-limited abatement offer in an attempt to settle the tax disputes in spite of this adverse finding, the Court cannot view the Estate's December 7, 2005 letter as an acceptance of the abatement offered ten months earlier.
The Court further finds that neither the exchanged letters nor the financial transactions between the IRS and the Estate raise issues of equitable estoppel. The Estate payed unabated penalties for late filing of the return prior to the issuance of the Letter offering a two month abatement. Therefore, the Estate did not incur additional late fees, penalties, or interest due to underpayment of those penalties in reliance on the letter. Accordingly, the Court finds that the Government did not enter into a binding agreement to abate the penalties charged for late filing of the Estate's tax return, and principles of collateral estoppel do not apply.
For the reasons set forth above, the Government's Motion for Summary Judgment will be granted. An appropriate Order follows.