TAX COURT OPINION

Case: Emery L. Miller
Docket Number: 11621-11
Judge: Gustafson
Opinion Type: bench
Filed: 04/24/2012
Pages: 19

UNITED STATES TAX COURT WASHINGTON, DC 20217 RMM EMERY L. MILLER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 11621-11. ) ) ) ) ) ) ) ) ) ORD E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge David Gustafson at Boston, Massachusetts, on April 11, 2012, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) David Gustafson Judge Dated. Washington, D.C. April 24, 2012 SERVEDApr242012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Judge David Gustafson April 11, 2012 Miller v. Commissioner Docket No. 11621-11 THE COURT: The Court has decided to render oral Findings of Fact and Opinion in this case. The following represents the Court's oral Findings of Fact and opinion, which shall not be relied on as precedent in any other case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice and Procedure. By a statutory notice of deficiency dated April 28, 2011, the Internal Revenue Service (IRS) determined a deficiency in the Federal income tax of petitioner Emery L. Miller for the year 2008, in the amount of $89,247. Mr. Miller timely filed? his petition in this Court on May 17, 2011. Trial of this case was conducted on April 11, 2012, in Boston, Massachusetts. Mr. Miller represented himself, and respondent was represented by Mary Hamilton. Two witnesses testified--Mr. Miller and his daughter Jane Miller Weber. The issue in dispute is the inclusion in Mr. Miller's income of the value of a remainder interest he received in 2008. We hold that the remainder interest was taxable income to Mr. Weber, and that the IRS's notice of deficiency must be Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 sustained. FINDINGS OF FACT Beginning in 1982, Mr. Miller was the companion of Mary Louise Wilding-White, known as "Mary Lou". He lived with Mary Lou at her house on Raymond Street in Manchester-by-the-Sea, Massachusetts, until Mary Lou's death in 2007 at age 88. There was great mutual love and affection between Mr. Miller and Mary Lou. Since Mary Lou's death, Mr. Miller has continued to reside at the Raymond Street house. Mary Lou had established a revocable trust to hold her property, and she established a real estate trust to hold the Raymond.Street house, with the revocable trust as the beneficiary of the real estate trust. In 1998, she amended the revocable trust document to provide that/ upon the death of Mary Lou, Mr. Miller would have the right to live in the Raymond Street house for the rest of his natural life (which right we refer to as "the Life Estate"), and to receive a distribution of $100,000. Only portions of the trust documents are in the record, and not the provisions as to how the trusts can be amended. Sometime before August 2000, Mary Lou told Mr. Miller that she wanted him to receive the Raymond House outright at her death. However, one of Mary Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Lou's children disapproved of that idea, and pressured her not to revise the trust to make such a provision. However, she did write by hand an undated note that read as follows: So 10 Raymond St property goes to Mr. Emery Miller not my children if I go first. All other property I now own would stay as is Condo-Heywood, SWHAA etc etc. Emery would own and be able to give 10 Raymond St to himself and his children. I believe you.all understand this now-- Sincerely, . .. Mary Lou Wilding-White P.S. Emery Miller please sign underneath that you understand this. Mr. Miller subscribed her note with the following: Thanks. Emery Miller 26 Aug 2000 Under Mr. Miller's subscription, Mary Lou wrote, "notarize X X dup.", apparently meaning that she intended for the document to be notarized. However, the document was never notarized or recorded in any fashion, and no individual other than Mary Lou and Mr. Miller ever signed the letter. It was not Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 probated as a will, and it manifestly was not treated as an amendment to either the revocable trust or the realty trust. When Mary Lou died in 2007, her estate and the trust--both managed by her children--acknowledged Mr. Miller's life estate in the·Raymond Street house but did not agree that he owned the house outright. Mr. Miller's daughter, Jane Miller Weber, advised Mr. Miller and.represented him in subsequent dealings with the trust and the estate. Ms. Weber is a retired attorney, having worked in the past in the Judge Advocate General Corps of the Air Force and for General Electric. In that legal work she did have responsibility to assist in drafting and reviewing contract language. She has never been a trust and estates attorney. On Mr. Miller's behalf Ms. Weber complained to the law firm representing the trust and the estate, arguing that the August 2000 letter was a valid holographic will. She also told the attorneys . who represented the trust and the estate that her father had rendered services to Mary for the last ten years of her life that, if valued in a commercial context, could be worth up to a million dollars. However, Ms. Weber considered the value of the services.to be a secondary argument, subordinate to Heritage Reporting Corporation (202) 628-4888 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Mr. Miller's right to receive the house under the August 2000 letter. In her correspondence, Ms. Weber characterized Mr. Miller's claim as being against both the trust and the estate (which were represented by the same attorneys), and the parties in this case have not emphasized any distinction between the estate and the trust. The trust and estate's attorneys initially proposed that Mr. Miller's claims be settled by his receiving the Raymond Street house outright and foregoing the $100,000 bequest. At Ms. Weber's urging, Mr..Miller declined that proposal. Ms. Weber . informed the attorneys that she would attempt to go to court and prove that the letter was a valid holographic will and would also make an additional claim against the estate for the value of Mr. Miller's services, unless the estate would allow Mr. Miller both the $100,000 bequest and title to the Raymond Street house. Her lengthy email described "the very reasonable demands my father is making" as "just compensation in accordance with the clearly stated wishes of their mother" and urged "a settlement 23 . agreement that encompasses the full compensation that 24 25 your mother wanted my father to have". The lawyers informed Ms. Weber that they would settle the case. Heritage Reporting Corporation (202) 628-4888 . 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 In April 2008 they presented to Ms. Weber and Mr. Miller a "Settlement Agreement" that provided in part: 8 Whereas Mary Louise Wilding-White ("Mary Louise") and Emery Miller ("Emery") were companions and spent considerable time together at the residence located at 10 Raymond Street, Manchester, Massachusetts (the "Property"); * * * Whereas, the Realty trust owns the Property; * * * Whereas, the Revocable Trust * * * grants him, upon Mary Louise's death, the rights to live in the property for the rest of his natural life (the "Life Estate") and to receive a distribution of one hundred thousand dollars ($100,000) (the "Beguest"); Whereas, the Revocable Trust directs the Trustee to pay the debts of the Estate of Mary Louise Wilding-White (the "Estate"); Whereas, Emery * * * asserts that he provided Mary Louise care, support, and assistance having a value of up to One Million Dollars ($1,000,000) and that he is contractually entitled to compensation from the Revocable Trust and/or the Estate (the "Services Claim"); Whereas the parties desire to settle the Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Services Claim as set forth below; Now, therefore, the parties agree and state as follows: * * * 2. * * * [T]he Trustee of the Realty Trust shall release and grant to Emery all of the right, title and interest of the Realty Trust and the Revocable trust in the property to Emery by deed in the form attached as Exhibit C * * *. * * * 6. Emery and Jane represent and warrant that Emery, fully aware of his right to engage separate counsel and after an ample opportunity to do so, authorized Jane to negotiate this Agreement in his behalf and enters into the Agreement fully understanding its terms and ramifications. 7. This Agreement sets forth the entire understanding of the parties and all other discussions and representations are merged herein. No representation has been made by any party concerning the financial, regulatory, or tax consequences of this Agreement except as expressly stated above. Mr. Miller and Ms. Weber both signed the agreement, as did an individual identified as the trustee of both Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 the revocable trust and the realty trust. Attached to the agreement was the proposed form for the Deed. The opening paragraph of that form stated that the deed was granted "in consideration of a claim for services rendered". A deed according to that form was then executed by the trustee of the realty trust and recorded. On February 6, 2009, the lawyers sent Mr. Miller a letter transmitting a Form 1099-MISC, reporting payment of "Miscellaneous Income" of $304,206.60 to Mr. Miller by the revocable trust. The letter explained that that amount consisted of the value of the Raymond Street house (stated to be $355,000) minus the value of Mr. Miller's life estate (stated to be $50,793.40). The letter stated, "The balance represents payment for services rendered which was confirmed in the Settlement Agreement signed by you, dated April 25, 2008". On Mr. Miller's behalf, Ms. Weber spoke to the executrix and objected to the characterization of the house as payment for services, but Mr. Miller did not ever commence against the estate a suit to reform the Settlement Agreement, nor any other suit or proceeding. Mr. Miller filed his Form 1040, "U.S. Individual Income Tax Return", for the taxable year Heritage·Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11 2008 on April 15, 2009. To that return he attached a copy of the February 6, 2009, letter from the estate and the Form 1099-MISC. On that form he wrote: "Wrongfully issued - see attached statement." Mr. Miller did not include in his 2008 income the $304,206.60 reported on the Form 1099-MISC. The IRS examined Mr. Miller's return, adjusted his income upward by the amount on the Form 1099-MISC, made other computational adjustments (which Mr. Miller has not disputed), and issued the notice of deficiency in April 2011. Mr. Miller filed his petition in this Court to challenge that deficiency. At the time Mr. Miller filed his petition, he resided in the State of Massachusetts. The petition asserted that the value of the house was not taxable income to him, but rather a non-taxable bequest. The petition also stated that the estate valued "the remainder interest * * * without any detailed explanation of their allocation at $304,206.60", but to the extent this statement constituted a contention that the value of the remainder interest was lower than that reflected in the notice of deficiency, that was a contention not advanced at trial, and we deem it to have been abandoned. Therefore, the only issue in dispute is Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 12 the inclusion of the remainder interest in Mr. Mi}ier's taxable income. I. General principles DISCUSSION Compensation is income, see sec. 61(a) (1); but bequests are excluded from income, see sec. 102(a). Mr. Miller received the remainder interest as a settlement payment; and the tax consequences of a settlement payment are determined by examining the nature of the underlying action. See Vincent v. Commissioner, T.C. Memo. 1992-21 (holding a settlement payment to be excluded under section 102 because it was in lieu of what should have been paid as gi.ft, or bequest). Thus, if Mr. Miller received the remainder interest in settlement of a claim for compensation for services,. then the remainder interest was in the nature of compensation and was income; but if he received it in settlement of a claim for a bequest, then it was in the nature of a bequest and was excluded from income. As petitioner, Mr. Miller has the burden of proof. See Rule 142. Both the Settlement Agreement and the deed executed pursuant to it are explicit that he received the remainder interest "in consideration of a claim for services rendered". If we give effect to that Heritage Reporting Corporation (202) 628-4888 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 language, then the remainder interest is taxable income. However, Mr. Miller contends that this language should be disregarded, first, because Mary Lou intended that he receive it as a gift or bequest and not as compensation for services and, second, because he intended the Settlement Agreement to settle a claim for a bequest and not a claim for compensation for services. II. Whether Mary Lou intended a bequest Although the August 2006 letter is indeed evidence that Mary Lou wanted Mr. Miller to receive the remainder interest as a bequest, the actual means for Mary Lou to effectuate a desire to give Mr. Miller a bequest would have been, of course, to so provide in her trust or will. She did not do so. Mr. Miller refers to Mary Lou's letter of August 2006 as a "holographic will". It is true that a handwritten instrument may be a "holographic will" valid under state law--but the August 2006 letter was not probated as a will and did not qualify under state law. Under Massachusetts law as then in effect, a person could make "his last will in writing, signed by him * * ·*, and attested and subscribed in his presence by two or more competent witnesses". Annotated Laws ·of Mass., GL ch. 191, sec. 1. There were not two Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 14 witnesses to the August 2006 letter, so it fails as a will. (New Hampshire law had a similar requirement, see N.H. Rev. Stat. sec. 551:2, so bringing an action in New Hampshire, as Ms. Weber threatened the estate, would have been no more successful.) A bequest that is provided in a valid will will be effective unless the will is revoked or superseded, but someone who has expressed mere intention to make a bequest need only change her mind, and there will be no bequest. Consequently we cannot know, from a mere letter in August 2006, what Mary Lou's testamentary intentions were at the time of her death in 2007. . . It may be true, :as Mr. Miller and Ms. Weber testified, that Mary Lou wa's under pressure from her children not to execute a·revision to her estate plan in Mr. Miller's favor, but her decision to yield to that pressure (or her failure ever to resist that pressure sufficient to hire her own lawyer to help her revise her estate plan) resulted in Mr. Miller not getting the remainder interest by bequest. Mr. Miller testified that Mary Lou was forcibly prevented by her children from amending her trust or will in the manner reflected in the August 2006 letter, but the one- sided, self-serving testimony in our record--lacking Heritage Reporting Corporation (202) 628-4888 15 any testimony from Mary Lou's children or attorneys-- will not support a finding to that effect here. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). Thus, on our record we cannot say whether Mary Lou intended Mr. Miller to receive the remainder interest at her death. Moreover, it is not clear how Mary Lou could have granted a.bequest, by will, of property that was owned not by her but by the realty trust--an issue the parties did not address. The record does not include enough of the trust documents to determine whether Mr. Miller could have argued that the August 2006 letter was a valid amendment of either the revocable trust or the realty trust, but in any event he did not so argue either to the trust or to this Court. However, Mr. Miller had a plausible basis for asserting that Mary Lou intended him to receive the remainder interest as a bequest, and based on that belief he asserted to the lawyers for the estate and the trust his right to such a bequest. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 16 III. Whether the Settlement Agreement settled a claim for a bequest Mr. Miller contends that the real source of his claim that was settled in the Settlement Agreement was a bequest under the supposed holographic will, not compensation for services, and that the estate and the trust defrauded him by trickery in inducing him to sign the Settlement Agreement which provided that he received the property not as a bequest but in payment of a claim for services. We believe that Mr. Miller and Ms. Weber were indeed surprised to receive a Form 1099-MISC and to realize that the property would be subject to income tax, and we accept that this is not what they expected to result from their negot'iation with the estate. However, we do not find that they were defrauded by the agreement's characterizing the property as compensation for services. On Mr. Miller's behalf, Ms. Weber had certainly made arguments that he was entitled to compensation for services, and it appears likely that this was the only claim that would have seemed colorable to the estate. (His other claim--that the August 2006 letter was a holographic will--was without merit, as we have shown.) The Settlement Agreement was explicit in Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 lb 16 17 18 19 20 21 22 23 24 25 17 reciting the "Services claim" as the basis for the settlement and in providing that the deed would be issued "in consideration of a claim for services rendered". Ms. Weber admits that she noticed this language at the time they signed the agreement, so we know that the language was not slipped past her and her father surreptitiously. She testified that she explained an alternative interpretation of the language at the time of signing--i.e., that the "Services Claim" was a claim that Mary Lou could have asserted that the lawyers owed her the "service" of effectuating her intentions stated in the August 2006 letter--and that the lawyers for the trust and the estate assented to this interpretation by nodding. The contention is simply not plausible. Ms. Weber's interpretation is flatly at odds with the actual language. And in any event, especially in light of the merger provision in paragraph 7, she could not unilaterally alter the agreement by her oral statements. Notwithstanding his contentions here that he was defrauded, Mr. Miller has not brought suit against the trust or the estate to reform the contract, or to obtain any other equivalent relief. Rather, he in Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 18 effect asks this Court to reform the agreement only as to his end of the deal. Under the Settlement Agreement, the remainder interest was taxable income to Mr. Miller under section 61(a) (1), but for the estate it was apparently deductible for estate tax purposes under section 2053(a) (3). If the remainder interest had been a bequest, it would have been non- taxable to Mr. Miller for income tax purposes, sec. 102(a), but would not have been deductible to the estate for estate tax purposes, see Estate of Huntington v. Commissioner, 100 T.C. 313, 316 (1993), aff'd, 16 F.3d 462 (1st Cir. 1994). Under either scenario, one side of the transaction would be subject to tax. However, if we were to grant Mr. Miller his request and recharacterize his end of the deal--the only end over which we have any jurisdiction--his receipt of the property would be exempt from income tax as if it had been a bequest, but the estate's deduction for the property as if it were a debt (and its non-payment of estate tax on it) would be undisturbed. The law abhors such asymmetry or "whipsaw" and consequently puts a heavy evidentiary burden on a party to a contract who seeks a tax treatment at odds with the terms of the contract. See Muskat v. United Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 19 States, 554 F.3d 183, 188-189 (1st Cir. 2009) (to alter an allocation in a written agreement for tax purposes, "the proponent must adduce 'strong proof' that, at the time of execution of the instrument, the contracting parties actually intended the payments to compensate for something different"); Harvey Radio Laboratories, Inc. v. Commissioner, 470 F.2d 118, 119-120 ·(1st Cir. 1972) ("rule of intention"). Mr. Miller, however, does not contend that the parties mutually intended to characterize the property as a bequest but rather that the estate cheated him by proffering an agreement that provided otherwise. Even if such a contention were proved (as was not the case here), that contention would not satisfy the First Circuit's rule of intention. None of Mr. Miller's arguments can overcome the clear language of the agreement. He received the remainder interest in the Raymond Street house as compensation for services. We therefore sustain the notice of deficiency, and will enter an order and decision to that effect. This concludes the Court's oral Findings of Fact and Opinion in this case. // Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon, at 5:18 p.m., the bench opinion in the above-entitled matter was concluded.) 20 // // // // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888