Opinion ID: 3010690
Heading Depth: 2
Heading Rank: 2

Heading: The Margin Transactions

Text: In August 1983 the estate funded the trusts by transferring tax-exempt municipal bonds worth approximately $3 million to brokerage accounts held in the name of the trusts through the E.F. Hutton and PaineWebber brokerage firms. See app. at 130-32. Because the estate had not settled all of its liabilities, the personal representatives required all beneficiaries of the trusts to execute consents permitting the estate to recall all trust assets to the estate as necessary to satisfy the estate's obligations, even if the recall completely depleted the trusts.2 In December 1983 the estate entered into a Settlement Agreement resolving lawsuits pending against it. During the same month, the trusts began brokerage borrowing on margin at rates of 11.50% to 13.25% using their municipal bond assets as collateral and transferring the funds borrowed to the estate. See app. at 178-92; 131. The trusts borrowed $74,950.97 in December 1983, see app. at 154, $870,000 on January 5, 1984, see app. at 192, and $300,000 on January 9, 1984, see app. at 152, for a total of $1,244,950.97 by January 9. On January 17, 1984, the representatives met and issued the following memorandum of their meeting: The Settlement Agreement . . . was ratified. . . . The actions necessary to pay or transfer estate assets needed for the settlement was also ratified, however, there was lengthy discussion on the issue as to the ratification of the borrowing from the stockbroker by using trust assets as collateral as opposed to the sale of estate assets to pay the sums due for the settlement. The action which had been taken to borrow was ratified, however it was acknowledged that Paul Creedy had dissented from the decision to borrow for purposes _________________________________________________________________ 2. Because Geftman was a minor, his mother executed his consent in her capacity as his legal guardian. 4 of carrying out the settlement agreement, however Paul Creedy agreed to the ratification of the action. App. at 135a. The estate received additional transfers from the trusts during 1984 for a total of $2,850,408 as of August 31, 1984, which represented the maximum amount that could be borrowed on margin against the trusts' $3 million municipal bond collateral. See app. at 131. The trusts' E.F. Hutton account statements reflected the monthly interest which the broker charged on the margin loans. On the statements for the months of April through July 1984, handwritten notations indicated that a portion of the margin interest charges was attributable to the amounts forwarded to the estate while a portion was attributable to funds which the trusts lent to Edith Kermer. See app. at 160-99. The loan to Edith Kermer was secured by a first mortgage in favor of the trusts and was repayable pursuant to the terms of an installment note which provided for monthly payments of principal plus interest at a rate of 1% above the rate charged to the trusts by E.F. Hutton. See app. at 416. On four occasions the estate paid the trusts an amount equal to the notation on the prior month's statement indicating the amount of margin interest attributable to the estate. During the period from April through August 1984, the handwritten notations and corresponding payments were as follows: Statement Notation of Estate's Deposit Into Date Share of Interest Account 4/84 $16,086 -- 5/84 $20,538 $16,086 6/84 $21,580 $20,538 7/84 $24,560 $21,580 8/84 -- $24,560 __________________________________________________ total $82,764 $82,764 See Geftman v. Commissioner, 72 T.C.M. (CCH) 816, 818 (1996); app. at 179, 181, 183, 185, 187.