96-2 USTC ¶60,2351, U.S. District Court for the District of Maryland
Estate and income taxes: Jointly owned property: Qualified joint interests:
Effect of TRA 176 and ERTA on the contribution test
(May 29, 1996)
Code Secs. 1014 and 2040
An estate was entitled to an income tax refund with respect to a taxable gain erroneously reported from the decedent's sale of jointly held real property acquired before 1977 because the decedent received a stepped-up basis in the entire property upon the predeceased spouse's death. The effective date of the Economic Recovery Act of 1981 (ERTA) did not expressly or impliedly repeal the effective date of the Tax Reform Act of 1976. Accordingly, the contribution test, as it existed before 1977, was applicable in determining the amount of the jointly held property includible in the gross estate of the predeceased spouse, regardless of the fact that the spouse died after the effective date of ERTA. Pursuant to the contribution test, the entire value of the jointly held property was includible in the predeceased spouse's estate because the spouse provided all the consideration for purchasing the property.
NICKERSON, United State District Judge:
Pending before the Court are the cross-motions for summary judgment filed by Plaintiffs Marvin H. Anderson and Richard G. Anderson (Paper No. 9) and Defendant United States of America (Paper No. 16). The issues have been briefed and are ripe for consideration. Upon a review of the pleadings and the applicable case law, the Court determines that no hearing is necessary (Local Rule 105.6) and that Plaintiffs' motion will be granted and Defendant's motion will be denied.
I. BACKGROUND
Plaintiffs Marvin H. Anderson and Richard G. Anderson are brothers and co-personal representatives of the probate estate of Geneva H. Anderson, their deceased mother ["decedent"]. Plaintiffs have filed suit against Defendant United States of America alleging that Defendant erroneously collected taxes from Plaintiffs, decedent by refusing to refund her overpayment of 1990 Federal Income Tax related to the sale of real estate. The facts in this case are not in dispute.
In 1958, Geneva H. Anderson and her husband Marvin I. Anderson purchased real property in Annapolis, Maryland, known as 92 Franklin Street, for the sum of $10,500.00. The property was held by decedent and Marvin I. Anderson as tenants by the entirety with rights of survivorship between them. On January 2, 1987, Marvin I. Anderson died, leaving Plaintiffs' decedent as the sole owner of the property. On December 31, 1990, decedent sold the real property for $370,000.00. Under the terms of the sale, decedent received $74,000.00 of the total purchase price in 1990, with the remainder to be paid in installments over seven years.
On September 26, 1987, the estate of Marvin I. Anderson filed a Federal Estate Tax Return reporting 50% of the value of the real property on the date of Marvin I. Anderson's death as the value of his interest in the real property. The value of the real property on the date of Mr. Anderson's death was reported as $330,000.00. Subsequently, the Estate of Marvin I. Anderson filed an Amended Federal Estate Tax Return on which 100% of the value of the -real property on the date of Mr. Anderson's death was reported as the value of his interest.
In April 1990, Plaintiffs' decedent filed her 1990 Federal Income Tax Return on which she reported and paid income tax on a capital gain from the sale of the real property. Plaintiffs' decedent reported that net proceeds from the sale were $370,000.00 and that her adjusted basis in the property was $159,895.00, resulting in a taxable gain of $210,105.00. Plaintiffs' decedent paid $68,316.00 as income tax on the entire amount of the gain for 1990. Decedent died on October 21, 1991.
On February 9, 1994, in response to the filing of an Amended Federal Estate Tax Return by the estate of Marvin I. Anderson on which 100% of the value of the real property was included as his interest, Plaintiffs Marvin H. and Richard G. Anderson filed a 1990 Amended Federal Income Tax Return (Form 1040X) on behalf of their mother's probate estate. Plaintiffs asserted that the adjusted basis for the real property sold should have been $298,654.00, and not $159,895.00 as was originally reported. Plaintiffs reported that this amended adjusted basis of $298,654.00 left decedent with a resulting gain of $71,346.00, in contrast to the originally reported $210,105.00 taxable gain. Plaintiffs claimed that the amended 1990 income tax liability resulting from the adjustment was $27,948.00, or $40,368.00 less than the income tax paid by Plaintiffs' decedent on the gain, and that therefore, a refund in this amount was owed to the decedent's probate estate.
Plaintiffs' claim was denied on June 27, 1994. On July 14, 1994, Plaintiffs filed an administrative appeal of the denial with the IRS Office of Appeals. The Appeals Office disallowed Plaintiffs' administrative appeal and claim for refund on March 24, 1995. Plaintiffs subsequently brought this action, seeking a refund of federal income taxes in the amount of $40,368.00, plus interest, on behalf of decedent's probate estate.
Plaintiffs filed the instant motion for summary judgment arguing that §2040 of the Internal Revenue Code ("I.R.C."), as amended in 1976, and as further amended in 1981, requires inclusion, for federal estate tax purposes, of 100% of the value of the real property in Marvin I. Anderson's estate. Plaintiffs argue, relying primarily on the Sixth Circuit decision of Gallenstein v. United States [92-2 USTC ¶60,114], 975 F.2d 286 (6th Cir. 1992), that the 1976 amendment to §2040 is controlling, and accordingly, that decedent would receive a 100% stepped-up basis in the property at the time of her husband's death. Thus, Plaintiffs argue, decedent's tax liability would only encompass the additional gain between the time her husband died and the time the property was sold.
Defendant United States of America has opposed Plaintiffs' motion and has filed a cross-motion for summary judgment. Defendant argues that it is not the 1976 amendment, but the 1981 amendment to §2040, providing that only 50% of the value of the real property is includible in the estate of decedent's husband, that is controlling in this case.
This Court agrees with Plaintiffs.
II. LEGAL STANDARD
It is well established that summary judgment is proper if the evidence before the court, consisting of the pleadings, depositions, answers to interrogatories, and admissions of record, establishes that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Rule 56 mandates the entry of summary judgment against a party who, after reasonable time for discovery and upon motion, "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322. "[A] complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial [and] [t]he moving party is 'entitled to judgment as a matter of law.' " Id. at 323 (citations omitted).
If the evidence favoring the non-moving party is "merely colorable, or is not significantly probative, summary judgment may be granted." Anderson v. Liberty Lobby Inc., 477 U.S. 242, 249-50 (1986) (citations omitted). Unsupported speculation is insufficient to defeat a motion for summary judgment. Felty v. Graves-Humphreys Co., - 818 F.2d 1126, 1128 (4th Cir. 1987) (citing Ash v. United Parcel Serv., Inc., 800 F.2d 409, 411-12 (4th Cir. 1986). Moreover, the mere existence of some factual dispute is insufficient to defeat a motion for summary judgment; there must be a genuine issue of material fact. Anderson, 447 U.S. at 247-48. Thus, only disputes over those facts that might affect the outcome of the case under the governing law are considered to be "material." Id.
With these principles in mind, the Court will address the arguments presented by the parties.
III. DISCUSSION
Section 2040 of the Federal Tax Code 1 provides the formulation for determining the percentage of the value of jointly held property includible in the value of a decedent's gross estate for purposes of federal estate taxes. In order to understand the issues being litigated in the instant case, it is necessary to review the history of §2040. The original provisions of §2040 have been retained, substantially unchanged, in §2040(a). 2 Until 1976, §2040 provided that the deceased tenant's gross estate included the full value of all jointly held property, including property held as a tenancy by the entirety, except to the extent that the surviving co-owner could establish that he or she contributed toward the purchase price of the property. Under this so-called "contribution rule," the survivor, thus, had to "trace" the amount he or she contributed to the purchase price in order to keep part of the jointly held property out of a decedent's gross estate.
This rule was amended, however, in 1976, when Congress added subparagraphs (b)(1) and (b) (2) to §2040 regarding certain jointly held property co-owned by spouses.3 This amendment, found in § 3 002(c)(1) of the Tax Reform Act of 1976 ("TRA 76"), Pub. L. No. 94-455, 90 Stat. 1520, 1855, provided that a decedent was to include only 50% of the value of a "qualified joint interest" in the decedent's gross estate for federal estate tax purposes, irrespective of how much each co-owner actually contributed. Under the 1976 amendment, a "qualified joint interest" was defined as a joint tenancy held by husband and wife, or a tenancy by the entirety, if (1) the interest was created by the decedent, or the decedent's spouse, or both, and (2) the creation of the joint interest constituted a gift subject to federal gift taxes. It is important to note that this amendment, establishing
the qualified joint interest rules, was applicable to "joint interests created after December
31, 1976 " TRA 76 §2002(d)(3), 90 Stat. 1856 (emphasis added).
Congress amended §2040 again in 1978, 4 and yet again, in 1981. In the Economic Recovery Tax Act of 1981 ("ERTA"), §403(c)(1), Pub. L. No. 97-34, 95 Stat, 172, Congress repealed 1978 subsections (c), (d), and (e) to §2040 and expanded the definition of "qualified joint interests" in subsection (b)(2). ERTA amended §2040(b)(2) to define "qualified joint interest" as follows:
any interest in property held by the decedent and the decedent's spouse as--
(A) tenants by the entirety, or
(B) joint tenants with right of survivorship, but only if the decedent and the spouse of the decedent are the only joint tenants.
ERTA §403(c)(2), 95 Stat. 302. Congress made this reform applicable "to the estates of decedents dying after December 31, 1981." ERTA §403(e)(1), 95 Stat. 305.
Plaintiffs argue that the December 31, 1981 effective date of the ERTA Amendment did not expressly nor impliedly repeal subsection (b)(1) nor its effective date of December 31, 1976. Plaintiffs assert that the plain language of the amendments creates two different effective dates which are "not mutually repugnant," and may operate together effectively. Plaintiffs assert that since the 1976 amendment's effective date stated that it did not apply to joint interests created before December 31, 1976, and since the real property in question held by Marvin I. Anderson and decedent, Geneva H. Anderson, was a joint interest created in 1958, the 1976 amendment, which created the 50% inclusion rule for spousal joint interests, did not apply. Plaintiffs argue that the real property at issue is controlled by §2040(a), or the original 100% inclusion contribution rule.
Furthermore, Plaintiffs claim that since Marvin I. Anderson paid the entire consideration for the purchase of the real property, 100% of value of the property should have been included in his gross estate.
Defendant United States of America argues, in contrast, that when Congress amended §2040(b)(2) to change the definition of "qualified joint interest" in 1981, "it necessarily affected section 2040(b)(1), which contains the 50 percent inclusion rule." Def.'s Opp. at 11. Defendant contends that since "Congress provided explicitly that the new definition would apply to the estates of all decedents dying after 1981," id., it acts to repeal the effective date of subsection (b) (1). Defendant further argues that since Marvin I. Anderson died in 1987, the 50% inclusion rule provided by subsection (b) (1), therefore, applies to the real property in this case. In support of its argument, the Government points to the legislative history indicating that Congress desired to eliminate the tracing rule in favor of an easily administered, simpler 50% inclusion rule for all qualified joint interests, not only those created after 1976.
Upon consideration of the parties' arguments and the Sixth Circuit's decision in Gallenstein v. United States, involving a strikingly similar factual situation, this Court concludes that Plaintiffs are correct. Section 2040(b)(2) did not expressly nor impliedly repeal the effective date of subsection (b) (1). Therefore, 100% of the value of the real property at issue is includible in Marvin I. Anderson's gross estate; decedent is entitled to a stepped-up, date-of-death basis for the entire property and should be given a tax refund for the capital gains tax she previously paid.
Gallenstein v. United States involved a similarly-situated plaintiff who, like decedent Geneva H. Anderson, became the sole owner of real property that she had held in joint tenancy with her husband. The real property at issue in Gallenstein was a farm that the plaintiff, Mrs. Gallenstein, and her deceased husband purchased in July 1955. After her husband's death in 1987, Mrs. Gallenstein sold the property, receiving net proceeds in the amount of $3,659,596. After first reporting gain from the sale of $3,556,596 - derived from a reported adjusted basis of $103,000 - Mrs. Gailenstein later reported the full sale price of the real property, $3,663,650, as her adjusted basis in the property on her 1988 federal income tax returns. 5 This amended stepped-up basis reflected the amended estate tax return filed by her deceased husband's estate which included the full value of the property in the decedent' gross estate.
The IRS denied Mrs. Gallenstein's second amended tax return, stating that she could not receive a stepped- up basis for 100% of the property, but only for 50% of the property pursuant to §2040(b)(1). Mrs. Gallenstein thereafter brought suit against the Government seeking a refund of federal income taxes on the grounds that she should have received a stepped-up basis for I 00% of the value of the farm property she owned jointly with her deceased husband, and therefore, no taxable gain from the sale of the property. The Sixth Circuit 6 concluded that the effective date of the 1981 amendments did not repeal the effective date of the 1976 amendment, and accordingly, granted summary judgment in Mrs. Gallenstein's favor. It followed that pursuant to §2040(a), because the farm property at issue was a joint interest created in 1955 and because Mrs. Gallenstein did not contribute toward the initial purchase of the farm property, 100% of the value of the property was includible in Mr. Gallenstein's gross estate, entitling the plaintiff to a stepped-up, date-of-death basis for the entire property.
In Gallenstein, the Sixth Circuit Court of Appeals rejected the government's argument that §2040(b)(2) expressly repealed the effective date of §2040(b)(1) by changing the definition of "qualified joint interests." An express repeal "requires that Congress overtly state with specificity that the subsequent statute repeals a portion of the former statute." Gallenstein, 975 F.2d at 290. The Sixth Circuit observed that Congress did so in ERTA, where it expressly repealed subsections (c), (d), and (e) of §2040. In contrast, the Court found that it was clear on the face of the statute that Congress did not expressly repeal the effective date of §2040(b)(1). The Sixth Circuit further reasoned that insofar as the issue of an express repeal is concerned, "the government's appeal to legislative history is inappropriate" because it is irrelevant to the interpretation of an unambiguous statute. Id.
Furthermore, the Sixth Circuit found the government's argument for an implied repeal to be lacking. There are certain circumstances under which repeals by implication are allowed: "[w]here provisions in the two acts are in irreconcilable conflict," or where the "later act covers the whole subject of the earlier one and is clearly intended as a substitute." Id. at 291 (citing Radzanower v. Touche Ross and Company, 426 U.S. 148, 154 (1976)). The Sixth Circuit concluded that neither category was met. The Court also found that the two provisions at issue, §2040(b)(1), which applies to qualified joint interests created after 1976 and §2040(b)(2), which redefines "qualified joint interest" for estates of decedents dying after 1981, are not "irreconcilably in conflict," in that "[n]either statute prohibits the other from working." Gallenstein, 975 F.2d at 291.
Moreover, the Court of Appeals in Gallenstein found that the second category of implied repeal was also not met, noting that the statutes at issue are "far from mutually exclusive" in the manner necessary to conclude that a later statute fills the entire area of law so as to render the prior statute ineffective. Although the two subsections may be in some tension in some cases where the property was acquired before 1977 but passed to a surviving spouse after 1981, the Sixth Circuit reiterated that the two subsections are not totally irreconcilable. In response to the government's extensive discussion of the legislative history of the statute, the Sixth Circuit simply found "the fact that Congress chose not to change §2040(b)(1)'s operative effective date dispositive of this case." Id., citing Chiles v. United States [88-1 USTC TI 3,7631, 843 F.2d 367, 370 (9th Cir. 1988). The legislative history was not clear enough to indicate that a direct repeal of §2040(b)(1)'s effective date was intended. See Posadas v. National City Bank, 296 U.S. 497, 504-505 (1936) (requiring that the intention of the Legislature to repeal a statute be clear and manifest).
The Sixth Circuit's analysis and reasoning in Gallenstein applies here, where the identical issue is in dispute and where the facts are essentially the same. This Court is persuaded by the reasoning of the Sixth Circuit's holding that under the 1976 amendment to §2040, a spousal joint interest in real estate created before 1977 is exempted from the 50% rule of §2040(b)(1). This Court concludes, as the Sixth Circuit in Gallenstein did, that ERTA does not, on its face nor by implication, repeal the effective date of §2040(b)(1). There has been no showing that the statutory provisions at issue were in irreconcilable conflict nor that Congress had a "clear and manifest" intent to repeal by implication the effective date of TRA 76.
Furthermore, this Court rejects Defendant's assertion that Gallenstein was wrongly decided. While this Court recognizes that the 1981 ERTA amendments to §2040 were designed to eliminate the hardships involved in the tracing process, the plain language of the statutes unambiguously states the separate effective dates of subsections (b)(1) and (b)(2). The legislative history of ERTA does not indicate an intent by Congress to repeal the prospective application of the TRA 76 treatment of spousal joint interests in subsection (b)(1). See Legislative History of ERTA, Public Law 97-34, Plaintiffs' Exhibit L. In addition, as Plaintiffs point out, "this goal (reducing the need for tracing to avoid excessive estate taxation) is still achieved by ERTA without repealing the watershed date of December 31, 1976." Plaintiffs' Mem. at 25.
The Court also rejects Defendant's contention that there is an issue of disputed fact in the instant case regarding whether the real property in question was initially purchased solely with the earnings of Marvin I. Anderson, or whether Plaintiffs, decedent, Geneva Anderson, also contributed to the purchase. As stated earlier, under §2040(a)'s contribution rule, the value of all property held in joint tenancy by the decedent is includible in the decedent's gross estate except to the extent that such property was shown to have been acquired through consideration paid by the surviving joint tenant. Plaintiffs, in tracing the amount that decedent Geneva Anderson contributed to the purchase price of the real estate, provide evidence that shows that Plaintiffs' decedent did not, in fact, contribute monetarily to the initial purchase of the real property in 1958.
In his affidavit, Plaintiff Marvin H. Anderson testified that, based on his personal knowledge -from conversations with his parents, decedents Marvin I. and Geneva H. Anderson, and others, as well as from his familiarity with his late father's financial records and practices, the entire purchase price paid for the property ($ 1 0,500.00), both the initial deposit and the subsequent and final payment made to the Seller thereof ... were paid for entirely out of his Father's earnings, and nothing was paid or contributed to that real estate purchase by [his] Mother.
Additional Affidavit of Marvin H. Anderson at ¶5. See also payment records, Plaintiffs' Exhibit A attached to Additional Affidavit (including, inter alia, a check signed by Marvin I. Anderson for the deposit on the property; copies of pages from two bank books showing withdrawals made by Marvin I. Anderson in order for him to pay the acquisition and improvement costs for the property; deposit slips prepared by Marvin I. Anderson from July 9, 1951 through March 12, 1976 evidencing that all of the funds deposited into said bank account were made by Marvin I. Anderson and none by Geneva H. Anderson).
Based on conversations with his parents as well as with his late mother's former colleagues and students, Plaintiff stated that his mother, Geneva H. Anderson, did not work for wages or salary after the birth of Marvin H. Anderson in 1932, except for a period of no more than two or three years when she taught several days a week at Arundel High School. 7 The wages earned by Plaintiffs' decedent from her part-time teaching job during that period were expended entirely on a combination of household expenses plus tuition and other expenses to send Plaintiff Marvin H. Anderson to private school. Geneva H. Anderson brought no assets to the marriage in 1927 between herself and Marvin I. Anderson, and prior to her own mother's death in about 1969 Plaintiffs' decedent never inherited any money nor property from anyone. See Affidavit of Marvin H. Anderson at ¶3; Additional Affidavit at ¶6(g).
This Court finds that in the instant case, Defendant United states of America fails to present any genuine issue of material fact in response to Plaintiffs' Motion for Summary Judgment. Plaintiffs have provided sufficient evidence to establish that decedent Geneva H. Anderson had not contributed monetarily to the initial purchase of the real property in question. Therefore, 100% of the value of the property was properly included in Marvin I. Anderson's gross estate, and decedent is entitled to the stepped-up, date-of-death basis of the entire property.
Finally, this. Court determines that although Plaintiffs are entitled to summary judgment in their favor, insofar as they are pro se litigants, they are not entitled to attorney's fees pursuant to 26 U.S.C. §7430. See Kay v. Ehrler, 499 U.S. 432 (1991) (pro se litigant who is also a lawyer not entitled to attorney's fees under 42 U.S.C.-§1988); United States v. McPherson [88-1 USTC T9194], 840 F.2d 244, 245 (4th Cir. 1988) (attorney appearing pro se not entitled to attorney's fees under 26 U.S.C. §7430); McCormack v. United States, 891 F.2d 24, 25 (1st Cir. 1989).
IV. CONCLUSION
The Court concludes that there are no genuine disputes of material fact. The Court will grant Plaintiffs' Motion for Summary Judgment, and will deny Defendant's Motion for Summary Judgment. A separate Order will issue.
1. 26 U.S.C. §2040.
2. Section. 2040(a) provides, in pertinent part:
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 rights of survivorship by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, ... in their joint names and payable to either or the survivor, 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.
3. The 1976 amendment left fully intact the language of §2040, but merely re-titled the original provision as I.R.C. §2040(a) "General Rule," making it the general inclusion rule for jointly held property.
4. In the Revenue Act of 1978, Pub. L. No. 95-600, §§51 I (a) & 702(k)(2), 92 Stat. 2763, 2861, 2933, Congress added subsections 2040(c), (d), and (e), which did not repeal nor amend subsection (b) or the effective date of this subsection, December 31, 1976.
5. This was reflected on Mrs. Gallenstein's second amended 1988 federal income tax return which she filed in August 1989. Mrs. Gallenstein had previously filed an amended federal income tax return in May 1989.
6. In Gallenstein, the Sixth Circuit Court of Appeals affirmed the District Court's decision, which had adopted and affirmed a United States Magistrate Judge's Report and Recommendation.
7. It should be noted that after 1931 until about 1951, Geneva H. Anderson was a substitute teacher for a day or possible a few successive days as needed in the Anne Arundel County Public School System, but did so very infrequently. In addition, as evidenced by the income tax returns filed by Marvin I. Anderson jointly with his wife, for the years 195 8, 195 8 and 1960, Geneva H. Anderson earned small amounts of fees from her service as a Notary Public. See Plaintiffs' Exhibit attached to Additional Affidavit. The source of all of the other income items was from the earnings and investments of Marvin I. Anderson only.