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By Kathleen Ford Bay, Esq.
Richards Rodriguez & Skeith LLP, Austin, TX
Where to begin in discussing Fujishima Est. v. Comr.?1 At the time of his death, Dwight Fujishima was the owner of a Conseco note that he had purchased for $10,000. His brokerage statement listed the note, but did not reflect its value. Dwight Fujishima was also the titled owner of three life insurance policies: a West Coast policy and Allianz policy naming his brother, Edmund, as the beneficiary, and a policy with Amerus naming their mother, Evelyn Fujishima, as beneficiary.
After an injury in 1992 and until his death in January 2005, Dwight Fujishima lived with his mother and she took care of him and paid his bills, in cash. She kept no records. Dwight died intestate and his mother was appointed as administrator of his estate. On the Form 706 for Dwight's estate, Mrs. Fujishima did not include the Conseco note.
Additionally, the Form 706 included the values of the Allianz policy and the Amerus policy, but listed the West Coast policy as "disputed ownership" and included no value for it. Mrs. Fujishima also claimed on the Form 706 a deduction of $94,000 for attorney's fees (and later conceded the fees to be $50,000; it is notable as an aside that there were apparently neither attorney time records nor legal bills to support the legal fees claimed). Mrs. Fujishima claimed $87,000 for her fees as administrator. She also claimed $8,500 in administrative expenses (and conceded before the trial to the disallowance by the IRS); charitable deductions of $142,000 (and conceded them to be $130,000); and claimed that Dwight owed her $175,000. However, Mrs. Fujishima provided no records to substantiate any of the deductions.
With respect to the Conseco note, Mrs. Fujishima's argued that the brokerage statement proved it had no value. However, the court stated that the "brokerage statement is [only] an indication that the value of the note was not available or not readily ascertainable … ." Moreover, there was evidence that the Conseco stock the decedent owned was valued at $19.05 a share, despite Mrs. Fujishima's oral testimony that Conseco had gone bankrupt. Without any evidence to the contrary, the court concluded that the face amount of $10,000 (i.e., the purchase price) was included in the estate.
With respect to the insurance policies, Mrs. Fujishima demonstrated that she had paid at least some of the premiums on the West Coast policy. She claimed that she was the true owner and making her son the owner was a mistake by the agent. However, she offered no evidence from the agent in support of the claimed mistake. She also made the same claims for the Allianz policy, despite having had initially included the Allianz and Amerus policies on the Form 706, but offered no evidence in support. The court did not accept her arguments and included all the policies in the estate.
With respect to the amounts claimed as deductions for the administrator's commission and attorney's fees, the court stated that "We are not persuaded that the amounts claimed by petitioner for executor's commissions or for attorney's fees are reasonable or that they have, to date, been actually and necessarily incurred. We have insufficient evidence to estimate the reasonable amount."
The support for the claimed charitable deductions was Mrs. Fujishima's statement that the contributions were consistent with conversations she and her son had while he was alive. However, there was no will directing these charitable contributions and in fact no evidence that contributions had even been made after death. Citing Engelman Est. v. Comr.,2 the court did not allow the charitable deductions, for where amounts passing to charity turn on the actions of the personal representative and not the directions of the decedent, the amounts are not permitted as deductions to the estate.
As to the claim that her son owed her monies, such a claim is allowed "when founded on a promise or agreement" and "contracted bona fide and for an adequate and full consideration in money or money's worth." Mrs. Fujishima claimed a $165,000 debt owed to her, plus interest of $10,000. There was a copy of a purported promissory note that was attached to the supplemental petition, but nothing was produced at trial. Mrs. Fujishima stated that the debt was for care of her son after his injury, including monies she spent on him. She did admit, however, that she would have cared for him without any payment. When asked how she thought it would be repaid, she said from his estate. She kept no records and could show no proof of repayment by him of any of the debt during his life despite the fact that there was enough in his brokerage account to repay the debt, if both of them really thought it was valid. Accordingly, the court held that it was not a valid debt.
The claims made by Mrs. Fujishima, none of which were validated, all seem like ideas one would have in response to a law school exam question that sets forth the facts and asks you to provide ideas for post-death minimization of estate taxes, and then discuss whether those ideas have any merit, and at the end provide the advice for a client faced with this situation. As a result of the court's conclusions, the estate will have to pay taxes in the amount of $1,956,202, with interest.
Moreover, the IRS may assert accuracy-related and underpayment due to negligence, disregard of rules and regulations, and perhaps even fraudulent penalties on the administrator and, if there was a tax preparer, penalties on him or her for understatement due to an unreasonable position.3 "Negligence" includes failure by the taxpayer to keep adequate books and records or to substantiate items properly.4 "Disregard" includes any careless disregard (little or no reasonable diligence to determine the correctness of a return position), reckless disregard (little or no effort to determine whether a rule or regulation exists where the disregard shows a substantial deviation from the standard of conduct that a reasonable person would believe), and intentional disregard of the rules or regulations.5 If the taxpayer adequately discloses the position being taken, this penalty can be avoided.6 Neither the Code nor the regulations define "fraud."7 "Fraud implies bad faith, intentional wrongdoing and a sinister motive."8 As to the attorney who helped prepare the Form 706, penalties apply only to returns prepared after May 25, 2007.9
Moral: Make sure your clients keep records and advise them to claim deductions only where they have the records to substantiate them. Advise them not to claim that a family member "borrowed" monies from them unless they have a genuine promissory note and/or evidence of repayments (or gifting as amounts became due). Note the wisdom of working with advisors who are versed in tax law, and who keep reliable time and billing records. Finally, advise against pro se representation in U.S. Tax Court.
This commentary also will appear in the March 2012 issue of the Tax Management Estates, Gifts and Trusts Journal. For more information, in the Tax Management Portfolios, see Tarr and Drucker, 634 T.M., Civil Tax Penalties, Peebles and Janes, 822 T.M., Estate, Gift and Generation-Skipping Tax Returns and Audits, and in Tax Practice Series, see ¶3830, Penalties, and ¶6260, Expenses, Debts, Taxes & Losses (Estate Tax Deductions).
1 T.C. Memo 2012-6.
2 121 T.C. 54, 70-71 (2003).
3 §§6662 and 6694.
4 Regs. §1.6662-3(b)(1).
5 Regs. §1.6662-3(b)(2).
6 Regs. §1.6662-3(c)(2).
7 Payne v. Comr., 224 F.3d 425 (5th Cir. 2000).
8 See id.
9 Small Business and Work Opportunity Act of 2007, P.L. 110-28, §8246; Rev. Proc. 2009-11, 2009-3 I.R.B. 313.
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