T.C. Memo. 2002-216

UNITED STATES TAX COURT

ESTATE OF MARIE L. CONCORDIA, DECEASED, EDWARD C. McREADY,

EXECUTOR, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7306-00. Filed August 26, 2002.

Edward C. McReady, pro se.

William J. Gregg, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GERBER, Judge: Respondent determined a $48,695.49

deficiency in estate tax, and the following issues remain 
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1 The parties stipulated that the notice of deficiency

contained seven adjustments; only two of them remain in

controversy.

2 The parties’ stipulations of facts are incorporated by

this reference.

for our consideration:1 (1) Whether the estate may exclude onehalf of the value of a residence, of which decedent owned an

undivided joint interest, from the gross estate, and (2) whether

the estate is entitled to deduct $10,070 in mortgage settlement

fees from the gross estate.

FINDINGS OF FACT2

Marie L. Concordia (decedent) was born on November 17, 1911,

and died on June 16, 1996. Decedent’s last will and testament

provided that decedent’s two nieces were to be the sole and equal

beneficiaries of the estate. Beginning in 1951 and until

February 1987, decedent lived in a residence on Western Avenue

(Western). When decedent moved into Western, she resided there

with her mother, sister (the sole beneficiaries’ mother), and two

nieces. Initially, decedent owned Western as a joint tenant with

right of survivorship with her sister and mother.

Decedent’s mother died in 1961, and decedent’s nieces moved

from Western during 1964 and 1967 at the times of their

respective marriages. Decedent and her sister continued to

reside together at Western from 1967 until February 1987, when

decedent’s sister died, leaving decedent as sole surviving owner

and resident of Western. During the early 1970s, decedent and
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her sister purchased a rental property on Bradley Lane (Bradley). 

Decedent’s sister was responsible for managing the Bradley rental

activity. Decedent became sole owner of Bradley upon her

sister’s death.

During the period under consideration, one of decedent’s

niece/beneficiaries was married to Edward C. McReady, and during

1987 they lived with their 15-year-old son and two dogs at a

residence on Primrose Street (Primrose). The McReadys, at that

same time, also had two daughters who were away from home

attending college. Primrose was within walking distance of

Western. 

After her sister’s death in 1987, decedent was 75 years old

and in good health. Although she was independent and capable of

living alone, decedent decided that she could no longer live at

Western. She made that decision because of anguish caused by the

memories of her sister at Western and because she did not feel

safe living alone at Western. She considered living in an

apartment near Western so that her two dogs could be kept at

Western and not confined to an apartment. She located some

apartments with monthly rent in a range from $1,000 to $1,500. 

Decedent was not financially able to live in an apartment and to

maintain her dogs at Western.
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Around that same time decedent conferred with Mr. McReady

about other alternatives. Decedent inquired whether she could

live at Primrose with her dogs and pay rent that she could

finance by either renting or selling Western. The McReadys were

not willing to board her dogs, because they already had two dogs

of their own. Further discussions and negotiations resulted in

an agreement under which decedent agreed to deed Western to the

McReadys, and Mr. McReady would manage the rental activity at

Bradley for decedent. It was also understood that decedent would

live with the McReadys at Primrose, that decedent’s dogs could

remain at Western, and that the McReadys’ daughters would reside

at Western during breaks from college and after their

graduations. It was also expressly understood that as long as

the McReady children used Western, decedent would have access to

visit and care for her dogs. 

Decedent did not execute a deed to Western until November

1990, when she deeded Western to herself and her niece Mrs.

McReady as joint tenants. The transfer by deed did not take

place until almost 4 years after the agreement because of Mr.

McReady’s request for a delay. He was the subject of a lawsuit

and did not wish to have additional property in his name. Mr.

McReady was not made a joint tenant of Western. At the time of

the transfer by deed, it was agreed to make decedent a joint

tenant on Western in order to continue to take advantage of
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homestead and senior citizen deductions available in the District

of Columbia.

In accord with the agreement, decedent resided at Primrose

with the McReadys from February 1987 through the time of her

death, June 1996. During most of that period, decedent continued

to be in good health, and she took care of her own needs. 

Decedent was also financially self-sufficient during that period. 

During that period, various of the McReady children occupied

Western in accord with the agreement. Also, Mr. McReady managed

the Bradley rental property during the period 1987 through

decedent’s death, placing tenants, negotiating leases, collecting

rents, and seeing to its maintenance.

Mr. McReady lent decedent $95,000 to enable her to pay off

an existing mortgage and refinance the Bradley mortgage to obtain

more favorable interest rates.

At the time of decedent’s death, Western had a fair market

value of $270,000, 50 percent ($135,000) of which was included in

the gross estate. The remainder of the principal assets in the

gross estate consisted of: Bradley ($280,000); securities

($227,913); and cash and bank accounts ($56,983). The deductions

from the gross estate included: Funeral expenses ($11,736);

attorney’s fees ($1,481); other expenses ($1,653); financing and

closing costs incurred to refinance Bradley ($10,070); and debts

of decedent ($109,152, $95,000 of which was due to Mr. McReady).
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Mr. McReady, as executor of decedent’s estate, decided to

refinance Bradley in order to distribute liquid assets to one of

the two heirs. Mr. McReady reasoned that Bradley was under a

long-term lease and that he would have to refinance the property

to remove equity to pay one of the beneficiaries her share in

liquid assets, rather than to deed Bradley to them as cotenants. 

Mrs. McReady and her sister, as the nieces and beneficiaries of

decedent, each received assets worth $225,800 from the estate,

and Mr. McReady received $8,400 and repayment of the $95,000

decedent owed him. 

At the time of trial, the per-month rental value of Primrose

was $4,500 to $5,000. Using the Consumer Price Index, as

published by the U.S. Department of Labor, Bureau of Labor

Statistics, the average (on the basis of $4,750 per month)

indexed rent for Primrose from March 1987 to June 1996 was

$408,560.

OPINION

The estate has contested respondent’s determinations that

the entire value of Western was includable in the gross estate

and that the estate is not entitled to deduct the closing costs

incurred to refinance the Bradley rental property. 
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3 All section references are to the Internal Revenue Code,

as amended and in effect as of the date of decedent’s death, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

A. Is the Estate Required To Include the Full Value of Western

 in the Gross Estate?

The estate tax is levied on the taxable estate. Sec.

2001(a).3 The taxable estate equals the gross estate, less

deductions. Sec. 2051. Generally, under section 2033, the gross

estate includes the value of all property to the extent of a

decedent’s interest therein at the time of death. 

In particular, the question we consider is governed by

section 2040(a), which, in pertinent part, provides:

SEC. 2040 (a). General Rule.--The value of the

gross estate shall include the value of all property to

the extent of the interest therein held as joint

tenants with right of survivorship by the decedent and

any other person, * * * except such part thereof as may

be shown to have originally belonged to such other

person and never to have been received or acquired by

the latter from the decedent for less than an adequate

and full consideration in money or money’s worth:

Provided, That where such property or any part thereof,

or part of the consideration with which such property

was acquired, is shown to have been at any time

acquired by such other person from the decedent for

less than an adequate and full consideration in money

or money’s worth, there shall be excepted only such

part of the value of such property as is proportionate

to the consideration furnished by such other person: *

* * 

If part of the consideration is found to have been

contributed by the surviving joint tenant, then the part of the

value of the property that is proportionate to such consideration 
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4 Respondent also argued that no valid agreement existed

between decedent and the McReadys because it was an unenforceable

oral agreement to convey real property. We quickly dispense with

that argument because decedent actually deeded the property to

Mrs. McReady and herself, albeit almost 4 years after the

parties’ oral agreement.

is not included in the decedent’s gross estate. Sec. 20.2040-1,

Estate Tax Regs. 

Section 2040 creates a rebuttable presumption that the

entire value of the jointly owned property is includable in the

decedent’s estate with the burden falling upon the estate to show

the consideration. Hahn v. Commissioner, 110 T.C. 140, 144

(1998); Estate of Heidt v. Commissioner, 8 T.C. 969 (1947), affd.

per curiam 170 F.2d 1021 (9th Cir. 1948). Finally, our

determination of whether Mrs. McReady provided consideration

adequate to exclude from decedent’s gross estate one-half the

value of the Bradley property is a factual one. Estate of Heidt

v. Commissioner, supra at 974. 

Respondent argues that the estate has not shown that there

was sufficient consideration.4 The estate counters that there

was adequate consideration in the form of property management

services with respect to Bradley and the living accommodations

provided by the McReadys to decedent, all in exchange for an

interest in Western.

In particular, respondent relies on Spaeder v. United

States, 478 F. Supp. 73, 79 (W.D. Pa. 1978). In that case the
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deceased, less than 2 years before his death at 85 years old, had

suffered a broken hip that left him unable to climb the stairs of

his residence. As a result he gave approximately $100,000 to two

friends on the understanding that they would use the money to

acquire a residence of which the deceased was entitled to occupy

a portion. The acquired residence was held by the deceased and

his two friends as joint tenants with right of survivorship. 

The estate in that case argued that the friends had supplied

some of the monetary consideration to purchase the residence and

that they provided consideration to the deceased in the form of

“care, comfort, and support”. Id. The District Court found that

the deceased had provided all of the monetary consideration and

“that care, comfort, and support to * * * [the deceased] cannot

constitute consideration furnished for the acquisition of the

real estate * * * [because section 20.2040-1(a), Estate Tax

Regs.] requires that the consideration be adequate and full in

money or money’s worth”. Id.

The estate in this case contends that Spaeder does not stand

for the absolute legal principle that the providing of living

accommodations can never be adequate consideration for purposes

of section 2040. In addition, the estate contends that

decedent’s circumstances are factually distinguishable from those

in Spaeder. 
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We agree that the holding in Spaeder is limited to the facts

of that case and that the facts we consider here are

distinguishable. In Spaeder, the deceased had put up the entire

amount of consideration and lived in the residence acquired in

joint tenancy with friends. In addition, the deceased in that

case was older than decedent here, and he was infirm and in need

of care. Decedent here exchanged an interest in Western for: 

(1) The right to reside in Primrose, (2) the right to maintain

her dogs at Western, and (3) the services of Mr. McReady in

managing Bradley. Decedent was in good health and self-reliant

at the time of the 1987 agreement. Although she housed her dogs

at Western, she was seeking a more secure place to reside after

the death of her sister, who had lived with decedent for an

extended period. 

We recognize that Mrs. McReady, along with her sister, was

the natural object of decedent’s bounty and named as the sole

heir of decedent, and that fact causes us to more closely

scrutinize their transactions. However, it does not

automatically negate their agreements. See Caligiuri v.

Commissioner, 549 F.2d 1155, 1157 (8th Cir. 1977), affg. T.C.

Memo. 1975-319; Perry v. Commissioner, 92 T.C. 470, 481 (1989),

affd. 912 F.2d 1466 (5th Cir. 1990).

It is important to note that Mrs. McReady and her sister, as

beneficiaries, each received a distribution of assets worth
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5 We observe that the original agreement between the

McReadys and decedent was to deed full fee ownership to the

McReadys. On account of Mr. McReady’s concerns about ownership

of assets in his name because of pending unrelated litigation,

the deeding of Western was delayed until 1990, and, ultimately,

only an undivided one-half interest was deeded to Mrs. McReady. 

In part, decedent remained a joint owner of Western to take

advantage of real property tax benefits. Although these

variations from the agreement may have some legal implications,

neither party has focused on this aspect. Perhaps the fact that

only one-half the fair market value of Western was excluded from

the gross estate has mooted any question about this aspect.

$225,800. The consideration received by the McReadys is outside

of that distribution. In other words, the deeding of Western in

1990, 6 years before decedent’s death, was outside of the equal

division of the probate estate. Upon the death of decedent, Mrs.

McReady became the sole owner of Western.

Although respondent questions whether the facts in the

record support the ultimate conclusion that there was an

agreement and that consideration was exchanged, the credible and

uncontradicted testimony of witnesses and corroborating evidence

in the record support the existence of the agreement and the

exchange of consideration between the parties.

Having decided that there were an agreement and the exchange

of consideration, we must now decide the amount of “adequate and

full” consideration given by the McReadys in exchange for an

interest in Western.5 The estate contends that there are two

types of the consideration exchanged for Bradley--the rental 
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6 We note that the fair rental value was derived by

multiplying the number of years that decedent actually lived with

the McReadys by the annualized fair rental value on the basis of

Bureau of Labor Statistics indexes. Decedent survived almost 9

years from the time of the 1987 agreement with the McReadys. 

Decedent was 75 years old at the time of the agreement, and her

life expectancy, at that time, was somewhat longer than she

actually survived. Accordingly, the estate’s approach to value

was conservative.

7 Sec. 20.2040-1(a)(2), Estate Tax Regs., in pertinent part,

provides:

the entire value of * * * [jointly held] property is

(continued...)

value of Primrose and the value of Mr. McReady’s services in

managing Bradley.

With respect to the fair rental value, the estate called two

expert witnesses and through their testimony was able to

establish an indexed fair rental value for Primrose. We have

found that the fair rental value of Primrose for the period under

consideration was $408,560. With three adults sharing Primrose,

we use one-third of the rental value or $136,187 as the

consideration attributable to the decedent’s use of Primrose. 

The rental value was calculated for the amount of time that

decedent actually survived from the time of the 1987 agreement.6 

We note that $136,187 is greater than one-half the $270,000

fair market value of Western at the time of decedent’s death. 

However, the standard for evaluating the amount of consideration

in this context is specifically set out in section

20.2040-1(a), Estate Tax Regs.7 That formulaic approach to
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7(...continued)

included [in decedent’s gross estate] except such part

of the entire value as is attributable to the amount of

the consideration in money or money’s worth furnished

by the other joint owner or owners. * * * Such part

of the entire value is that portion of the entire value

of the property at the decedent’s death * * * which the

consideration in money or money’s worth furnished by

the other joint owner or owners bears to the total cost

of acquisition and capital additions. * * * 

determining the portion of the fair market value of a jointly

held asset that should be excluded from the gross estate, may be

expressed as follows: the fair market value of the property at

the date of death is multiplied by a ratio that has the

consideration furnished by the survivor as the numerator and the

total consideration paid to acquire and improve the property as

the denominator. See Estate of Young v. Commissioner, 110 T.C.

297, 315 (1998); Estate of Van Tine v. Commissioner, T.C. Memo.

1998-344.

The approach used in section 20.2040-1(a)(2), Estate Tax

Regs., measures the survivor’s contribution to the jointly owned

property against the decedent’s contribution. At the time of the

1987 agreement, decedent’s sister had just died, and decedent had

become the sole owner of Western. However, the regulation, with

respect to the denominator of the exclusionary formula, uses the

language “total cost of acquisition and capital additions.” 

It is somewhat difficult to apply the concept of cost to the

circumstances of this case. In 1987, decedent had just acquired
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the sole ownership of the property as sole surivivor of three

joint tenants culminating a 36-year period. In 1987, decedent

exchanged an undivided one-half interest for a place to live and

for services. As it relates to decedent, it could be said that

her cost might have been the amount she paid, if any, at the time

(1951) she began occupying Western. 

No matter which approach we use, the cost, plus improvements

of Western, would not exceed its $270,000 agreed fair market

value as of the time of decedent’s death in 1996. Using the

$270,000 in the denominator of the fraction clearly sets a higher

bar for the estate’s quest for exclusion of Mrs. McReady’s joint

interest. We are not called upon to decide whether an exclusion

of more than one-half of the fair market value from decedent’s

gross estate may have been warranted because the McReadys may

have paid more consideration than decedent; the parties have not

placed these aspects in issue or addressed them.

Our holding that $136,187 was the indexed fair rental value

exchanged for the undivided one-half interest in Western

satisfies the estate’s burden of showing that Mrs. McReady’s

acquisition was for an adequate and sufficient consideration to

support the estate’s claim that $135,000 of the $270,000 fair

market value can be excluded from the gross estate.

Although the estate has satisfied its burden with respect to

excluding $135,000 from the gross estate, we note that we have
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not decided the value of the services performed by Mr. McReady in

managing the Bradley rental property. On this record, his

services would likely be difficult to value, but if those

services should be included in the numerator of the formula for

exclusion, it is clear that additional value would be added to

the numerator of the exclusionary equation because of his

performance over 9 years. Because the estate has shown

sufficient consideration to warrant the exclusion of one-half of

the fair market value of Western (the amount claimed by the

estate), we need not address the value of Mr. McReady’s services

in managing Bradley. 

B. Is the Estate Entitled To Deduct the $10,070 Mortgage

 Settlement Fees From the Gross Estate?

The estate claimed a $10,070 mortgage settlement fee as an

administrative expense. The $10,070 was incurred in the

refinancing/mortgaging of the Bradley rental property in order to

take value from that asset to pay the estate’s debts.

Generally, administrative expenses are deductible from the

gross estate in computing the taxable estate. Sec. 2053(a)(2). 

More specifically, deductible administrative expenses must be

actually and necessarily incurred in the administration of the

estate, which includes the payment of debts and distribution of

the property to persons entitled to it. Sec. 20.2053-3(a),

Estate Tax Regs. Expenditures incurred for the individual 
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benefit of the heirs may not be deducted from the gross estate,

if not essential to the settlement of the estate. Id.

The gross estate here, in addition to one-half of the value

of Western, consisted of cash, securities, and the Bradley rental

property. The debts, funeral expenses, and other administrative

expenses, totaling $124,022, consumed the $56,983 of cash. In

that setting the executor decided to obtain cash from refinancing

and mortgaging Bradley, rather than selling securities. Mr.

McReady, the executor, explained that he mortgaged Bradley,

“because the * * * [Bradley] was then occupied by a tenant under

a long-term lease.” 

Respondent contends that one of the factors we should

consider is that the estate’s major debt was $95,000, which was

owed to the executor, Mr. McReady, causing the estate’s lack of

liquidity. Respondent also points out that the securities (over

$200,000) or Bradley could have been sold subject to the longterm lease to pay off the $95,000 debt due Mr. McReady and the

other obligations of the estate. Respondent also argues that the

estate failed to show that a sale of Bradley would have been

insufficient to pay off the debts.

We agree with the estate that the $10,070 was necessarily

incurred in the administration of the estate. We surmise that

Mr. McReady’s explanation that Bradley was subject to a long-term

lease means that Bradley would bring less than a fair market
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value price or that the lease would cause some other impediment

to the sale. In the circumstances here, Mr. McReady, as

executor, had three basic choices: (1) Sell Bradley, (2)

distribute it in kind to the nieces as cotenants, or (3)

distribute it in kind to one niece in fee simple. Because there

was insufficient cash and liquid assets to satisfy the debts of

the estate and distribute Bradley in kind to one niece, it was

necessary to refinance it to accomplish that end. 

After Bradley was mortgaged, the estate was divided by

cashing out Mrs. McReady’s sister and transferring to Mrs.

McReady the mortgaged Bradley property and the remainder of the

estate, which likely included securities. Respondent contends

that we should be influenced by the fact that most of the

estate’s debt ($95,000) was owed to the executor, Mr. McReady. 

Respondent contends that this was more to the McReadys’ benefit

than the estate’s. We do not agree with respondent’s reasoning. 

It makes no difference that the debt was due to Mr. McReady

rather than to a bank. There is no question about the validity

of the debt, so that it makes no difference to whom it is owed.

Accordingly, we hold that the estate is entitled to reduce

the gross estate by the $10,700 in mortgage settlement fees.

To reflect the foregoing,

Decision will be entered

under Rule 155.