Estate of Edward H. Eddy v. Commissioner , 115 T.C. No. 10 ( 2000 )

115 T.C. No. 10UNITED STATES TAX COURT
ESTATE OF EDWARD H. EDDY, DECEASED,
NATIONAL CITY BANK, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2735-99. Filed August 16, 2000.
The executor filed the Federal estate tax return
in this case more than 18 months after the time
prescribed by law (including extensions) for filing the
return. The value of all property included in the
gross estate was reported on the return as of the sec.
2032(a), I.R.C., alternate valuation date. R
determined that decedent's gross estate must be valued
as of the date of decedent's death, because the
executor's alternate valuation election was invalid.
Furthermore, R determined that the estate is liable for
the addition to tax under sec. 6651(a), I.R.C., for the
failure to file a timely return.
Held, the estate must value all property included
in the gross estate as of the date of decedent's death
because the executor made the alternate valuation
election more than 1 year after the time prescribed by
law (including extensions) for filing the Federal
estate tax return. See sec. 2032(d)(2), I.R.C.
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Held, further, the estate is liable for the
addition to tax for the failure to file a timely estate
tax return.
Carl Wells, for petitioner.
Carol A. Szczepanik, for respondent.
OPINION
PARR, Judge: Respondent determined a deficiency of $421,214
in the estate's Federal estate tax and an addition to tax of
$58,450 for the failure to file the estate tax return timely.
After concessions,1 the issues for decision are: (1)
Whether, despite the executor's failure to make the alternate
valuation election pursuant to section 2032 within 1 year after
the time prescribed by law (including extensions) for filing the
Federal estate tax return, the value of the gross estate may be
determined by valuing all the property included in the gross
estate as of the alternate valuation date.2 We hold it may not.
1
Petitioner conceded that the adjusted taxable gifts
reported on the estate's Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return, should be increased by
$56,100; that the taxable estate should be increased by $3,556
for a Federal income tax refund; and that the attorney's fees and
executor's commissions claimed as a deduction on the return
should be reduced from $200,089 to $146,281.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the date of decedent's
death, and all Rule references are to the Tax Court Rules of
(continued...)
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(2) Whether the estate is liable for the section 6651 addition to
tax for the failure to file the estate tax return timely. We
hold it is.
Background
This case was submitted fully stipulated under Rule 122.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
Edward H. Eddy (decedent), died testate on April 13, 1993,
in Cuyahoga County, Ohio. At the time the petition in this case
was filed, Douglas Eddy (Eddy) was the executor of the estate and
resided at Bainbridge, Ohio.3
At the time of his death, decedent owned 237,352 shares of
stock in Browning-Ferris Industries, Inc. (BFI), which
represented approximately 0.014 percent of the BFI shares
outstanding during 1993. Shares of BFI are traded on an
established securities market.
The due date for filing the decedent's Federal estate tax
return was January 13, 1994, 9 months after decedent's death.
The return was not filed then. Instead, on the day before the
2
(...continued)
Practice and Procedure.
3
Eddy died on Jan. 18, 2000. Item V, par. A, of decedent's
will provided for the appointment of National City Bank as
executor in the event that Eddy was unable or ceased to serve in
this capacity. National City Bank (the bank) has been appointed
the executor of the estate. The bank's address was Cleveland,
Ohio, at the time of its appointment.
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return was due, Carl Wells, preparer of the estate's return and
counsel for petitioner herein, signed and submitted a Form 4768,
Application for Extension of Time To File a Return and/or Pay
U.S. Estate (and Generation-Skipping Transfer) Taxes, requesting
an extension for filing to July 13, 1994. A check for $2 million
was submitted with the application.4
A note attached to the application stated that the executor
was waiting for a "Major Securities Firm" to complete its
valuation of the estate's "principal asset", and that the $2
million was payment of the estate's tax liability, which was
estimated without regard to that valuation. The application was
approved; however, the executor did not file the return before
the time provided by the extended due date expired.
Eddy engaged a brokerage firm to provide its opinion of the
4
The parties stipulated that the estate remitted $2 million
"when Exhibit 1-J was filed." Exhibit 1-J is the estate's Form
706, United States Estate (and Generations-Skipping Transfer) Tax
Return, filed on Jan. 19, 1996. However, Exhibit 3-J, which is
the estate's Form 4768, Application for Extension of Time To File
a Return and/or Pay U.S. Estate (and Generation-Skipping
Transfer) Taxes, shows that the estate remitted $2 million with
the application. Furthermore, the Form 706 shows, and respondent
accepts, that the estate remitted $2 million with the Form 4768.
While stipulations are not to be set aside lightly, we have
broad discretion in determining whether to hold a party to a
stipulation. See Blohm v. Commissioner, 994 F.2d 1542, 1553
(11th Cir. 1993), affg. T.C. Memo. 1991-636. The evidence in the
record demonstrates that the stipulation is simply incorrect. We
are not bound by stipulations of fact that appear contrary to the
facts disclosed by the record. See Rule 91(e); Blohm v.
Commissioner, supra. We, therefore, find as a fact that the
estate remitted $2 million with its Form 4768, not with its later
filed Form 706.
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value of the estate's BFI shares. Sometime before the extended
due date, the brokerage firm informed the executor that it would
not complete the valuation on time. Another firm was engaged,
and it completed the valuation on November 29, 1994. The firm
opined that to dispose of the estate's block of shares on the
alternate valuation date, October 13, 1993, the estate would have
had to accept 75 cents per share less than that day's mean
trading price (the discount for blockage).5 The firm did not
offer its opinion of the appropriate discount for blockage or the
fair market value of the shares on the date of decedent's death.
On January 19, 1996, the executor filed the estate tax
return, which reported the alternate value of all the assets
included in the estate. The estate reported $5,988,440 as the
alternate value of the gross estate and showed $6,604,782 as the
date-of-death value. The estate reported $5,721,987 as the
alternate value of the taxable estate, including $5,370,089 as
the value of the BFI stock (reflecting the discount for
blockage).
In the notice of deficiency, respondent allowed the 75-cent-
per-share discount for the estate's BFI stock. However,
respondent determined that the estate must report the fair market
value of all the assets as of the date of decedent's death,
5
The total value of the discount for blockage is $178,014
(75 cent-per-share discount times 237,352 shares).
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because the executor's election to value the property as of the
alternate valuation date was untimely and therefore invalid.
Respondent determined that the date-of-death value of the
taxable estate, without consideration of the issues conceded by
petitioner, see supra note 1, is $6,399,230,6 including
$6,052,251 as the value of the BFI stock (reflecting the discount
for blockage).
Petitioner asserts that Rev. Proc. 92-85, 1992-2 C.B. 490,
and the regulations provide respondent discretionary authority to
allow the executor to make an untimely election to use the
alternate valuation date, and that the estate qualifies for the
relief provided by the revenue procedure.
Discussion
Issue 1. Whether the Executor May Elect Alternate Valuation Date
Treatment for the Estate
In general, a decedent's gross estate is valued for Federal
estate tax purposes as of the date of the decedent's death. See
sec. 2031(a).7 However, if the executor so elects, the value of
the gross estate may be determined by valuing all the property
6
Respondent's determination reflects the lower date-of-death
value of the estate's other stocks ($4,919).
7
SEC. 2031. DEFINITION OF GROSS ESTATE.
(a) General.--The value of the gross estate of the
decedent shall be determined by including to the extent
provided for in this part, the value at the time of his
death of all property, real or personal, tangible or
intangible, wherever situated.
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included in the gross estate as of an alternate valuation date,
which is the earlier of the date on which the property is
disposed of or the date 6 months after the decedent's death. See
sec. 2032(a)(1) and (2).8 The election to determine the value of
the property on the alternate date must be made on the estate tax
return, and the election may not be made if the return is filed
more than 1 year after the time prescribed by law (including
extensions) for filing the return. See sec. 2032(d)(1) and (2).9
The return in this case was due no later than July 13, 1994,
8
SEC. 2032. ALTERNATE VALUATION.
(a) General.--The value of the gross estate may be
determined, if the executor so elects, by valuing all
the property included in the gross estate as follows:
(1) In the case of property distributed, sold,
exchanged, or otherwise disposed of, within 6 months
after the decedent's death such property shall be
valued as of the date of distribution, sale, exchange,
or other disposition.
(2) In the case of property not distributed,
sold, exchanged, or otherwise disposed of, within
6 months after the decedent's death such property
shall be valued as of the date 6 months after the
decedent's death.
9
Sec. 2032(d) provides:
(1) In general.--The election provided for in this
section shall be made by the executor on the return of
the tax imposed by this chapter. Such election, once
made, shall be irrevocable.
(2) Exception.--No election may be made under this
section if such return is filed more than 1 year after
the time prescribed by law (including extensions) for
filing such return.
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15 months after the date of decedent's death. See sec. 6075(a)
(estate tax return due 9 months after date of death); sec.
6081(a) (the Secretary may grant a reasonable extension of time
for filing any return; such extension not to exceed 6 months,
except in the case of taxpayers who are abroad); sec. 20.6081-
1(a), Estate Tax Regs. ("unless the executor is abroad, the due
date for filing the return under any extension granted by a
district director or a director of a service center may not be
later than 15 months * * * from the date of the decedent's
death"). The estate tax return was filed on January 19, 1996--
more than 33 months after the date of decedent's death and more
than 18 months after the extended due date to file the return.
Before the Deficit Reduction Act of 1984 (DEFRA), Pub. L.
98-369, 98 Stat. 494, the election to use the alternate valuation
date had to be exercised on a timely filed estate tax return
(including extensions), or it was lost.10 See, e.g., Estate of
Bradley v. Commissioner, 511 F.2d 527 (6th Cir. 1975), affg. T.C.
Memo. 1974-17; Estate of Ryan v. Commissioner, 62 T.C. 4, 10
(1974); Estate of Downe v. Commissioner, 2 T.C. 967, 970-971
(1943); Estate of Dixon v. Commissioner, T.C. Memo. 1990-17;
10
Sec. 2032(c), 1954 I.R.C. (as amended), provided:
(c) Time of Election.--The election provided for
in this section shall be exercised by the executor on
his return if filed within the time prescribed by law
or before the expiration of any extension of time
granted pursuant to law for the filing of the return.
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Estate of Archer v. Commissioner, T.C. Memo. 1984-57. DEFRA
amended section 2032(d),11 to effect Congress' intent that "an
election may be made on a late-filed return only if the return is
filed within one year of the due date." H. Conf. Rept. 98-861,
at 497 (1984), 1984-3 C.B. (Vol. 2) 1, 497; see supra note 9; see
also sec. 301.9100-6T(b)(1), Temporary Proced. & Admin. Regs., 49
Fed. Reg. 35489 (Sept. 10, 1984) ("no election shall be allowed
unless made on a return filed within one year of the due date
(including extensions) of such return").
The opportunity to elect to value property of a decedent's
estate as of a date after the decedent's death is one of
"legislative grace" and therefore must be made in the manner and
the time prescribed by Congress. Estate of Flinchbaugh v.
Commissioner, 1 T.C. 653, 655 (1943). It is clear that the
statute, the temporary regulation, and the legislative history
all provide that the alternate valuation election may not be made
later than 1 year after the due date (including extensions) of
11
Sec. 1023(a) of the Deficit Reduction Act of 1984 (DEFRA),
Pub. L. 98-369, 98 Stat. 494, 1030, added subsec. (c) to sec.
2032, and former subsec. (c) was redesignated subsec. (d). DEFRA
sec. 1024(a), 98 Stat. 1030, designated the existing text of
redesignated sec. 2032(d) as par. (1) and substituted "shall be
made by the executor on the return of the tax imposed by this
chapter" for "shall be exercised by the executor on his return if
filed within the time prescribed by law or before the expiration
of any extension of time granted pursuant to law for the filing
of the return", added the sentence providing that an election,
once made, is irrevocable, and added par. (2). See supra note 9.
Sec. 2032(d)(2) is effective for the estates of decedents dying
after July 18, 1984. See DEFRA sec. 1024(b)(1), 98 Stat. 1030.
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the estate tax return. Petitioner, however, asserts that
respondent has discretionary authority under Rev. Proc. 92-85,
1992-2 C.B. 490,12 to allow the executor to make an untimely
election to use the alternate valuation date. We disagree.
Rev. Proc. 92-85, supra, applies, inter alia, "to extensions
of time when a statute provides that an election be made by the
due date of the taxpayer's return or the due date of the
taxpayer's return including extensions."13 However, the date of
expiration of the 1-year period of grace after the "time
prescribed by law (including extensions) for filing * * * [the
estate tax] return" is not the due date of the taxpayer's return
or the due date of the taxpayer's return including extensions.
12
Rev. Proc. 92-85, 1992-2 C.B. 490, was amended by Rev.
Proc. 93-28, 1993-2 C.B. 344. These revenue procedures were made
obsolete by secs. 301.9100-1T through 301.9100-3T, Temporary
Proced. & Admin. Regs., 61 Fed. Reg. 33365 (June 27, 1996), which
adopted and revised the standards of granting relief stated in
Rev. Proc. 92-85, supra. See T.D. 8680, 61 Fed. Reg. 33365,
33366 (June 27, 1996) (Explanation of Provisions).
The temporary regulations were effective for all requests
for relief under consideration by the IRS on June 27, 1996, and
for all requests for relief submitted on or after June 27, 1996.
See sec. 301.9100-1T(h), Temporary Proced. & Admin. Regs., 61
Fed. Reg. 33368 (June 27, 1996). Secs. 301.9100-1 through
301.9100-3, Proced. & Admin. Regs. (the final regulations), apply
to all requests for an extension of time submitted to the IRS on
or after the effective date, Dec. 31, 1997. See sec. 301.9100-
1(e), Proced. & Admin. Regs. The final regulations adopted with
no significant change the provisions of the temporary regulations
(and Rev. Proc. 92-85, supra) relevant to the issue in the
instant case. See id.
13
See also sec. 301.9100-1T(d), Temporary Proced. & Admin.
Regs., 61 Fed. Reg. 33367 (June 27, 1996) (same); sec. 301.9100-
1(a), Proced. & Admin. Regs. (same).
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Thus, Rev. Proc. 92-85, supra, does not apply to the 1-year
period of grace provided by section 2032(d)(2), during which time
the alternate valuation election may be made.
Accordingly, we find that the executor's failure to make the
alternate valuation election on a Federal estate tax return filed
on or before the date that is 1 year after the time prescribed by
law (including extensions) for filing the return precludes the
election.
Issue 2. Whether the Estate Is Liable for the Addition to Tax
for the Failure To File Its Return Timely
Section 6651(a)(1) imposes an addition to tax for the
failure to file a required return timely unless the failure is
due to reasonable cause and not due to willful neglect.
"Reasonable cause as applied in section 6651 has been defined as
the 'exercise of ordinary business care and prudence.'" Estate
of Duttenhofer v. Commissioner, 49 T.C. 200, 204 (1967) (quoting
Southeastern Fin. Co. v. Commissioner, 153 F.2d 205 (5th Cir.
1946), affg. 4 T.C. 1069 (1945)), affd. 410 F.2d 302 (6th Cir.
1969); see also sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
("If the taxpayer exercised ordinary business care and prudence
and was nevertheless unable to file the return within the
prescribed time, then the delay is due to a reasonable cause.").
Whether the failure to file on time was due to reasonable
cause is primarily a question of fact to be decided from all the
circumstances in a particular case. See Estate of Duttenhofer v.
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Commissioner, supra. Petitioner bears the burden of proving that
the failure to file timely was both due to reasonable cause and
not due to willful neglect. See Rule 142(a); United States v.
Boyle, 469 U.S. 241, 245 (1985). The fact of submission of a
case fully stipulated under Rule 122(a) does not alter the burden
of proof, or the requirements otherwise applicable with respect
to adducing proof, or the effect of failure of proof. See Rule
122(b).
The estate tax return was filed more than 18 months after
the extended due date. Petitioner has not shown that the
delinquent filing was due to reasonable cause. Furthermore, we
find the fact that the executor was waiting for an opinion of the
size of the discount for blockage is not reasonable cause for the
failure to file a timely return. The record shows that both the
value of the gross estate and the estate tax liability were less
on the alternate valuation date than on the date of decedent's
death without consideration of the discount for blockage. See
sec. 2032(c). Moreover, the estate tax return was not filed
until more than 1 year after the executor received the firm's
valuation report.
It is clear that the executor should have filed the estate
tax return on time, electing alternate valuation (and attaching
whatever explanation was appropriate), continued to seek the
necessary information, and then filed a supplemental return with
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additional information that decreased the estate tax liability.
See Estate of Ryan v. Commissioner, 62 T.C. 4, 10 (1974); Estate
of Archer v. Commissioner, T.C. Memo. 1984-57; sec. 20.6081-1(c),
Estate Tax Regs. Accordingly, we find the estate is liable for
the section 6651(a)(1) addition to tax as determined by
respondent.
In reaching our holdings herein, we have considered each
argument made by the parties and, to the extent not discussed
above, find those arguments to be irrelevant or without merit.
To reflect the foregoing,
Decision will be entered for
respondent.