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Estate of Bowgren v. Commissioner of Internal Revenue

January 24, 1997

ESTATE OF HELEN E. BOWGREN, DECEASED, WARREN D. BOWGREN, EXECUTOR,

PETITIONER-APPELLEE,

v.

COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT-APPELLANT.



Appeal from the United States Tax Court. No. 23115-93 Theodore Tannenwald, Jr., Judge.

Before EASTERBROOK, RIPPLE and ROVNER, Circuit Judges.

RIPPLE, Circuit Judge.

ARGUED SEPTEMBER 17, 1996

DECIDED JANUARY 24, 1997

Helen E. Bowgren, deceased, created an Illinois land trust in 1975 and divided the trust's beneficial interest into ninety-eight units. Between 1975 and 1979, she transferred some of those units to her three children. She died testate on April 8, 1990. Mrs. Bowgren's estate disclosed the transfer of those units but excluded their value from the gross estate. The Commissioner of Internal Revenue ("CIR") issued a notice of deficiency to the estate, and the estate petitioned the Tax Court for a redetermination of the deficiency. The Tax Court granted the estate the relief it requested. For the reasons that follow, we reverse the judgment of the Tax Court and remand the case for further proceedings consistent with this opinion.

I. BACKGROUND

A. Facts

In 1975, Mrs. Bowgren inherited property in Kane County, Illinois. On December 30, 1975, she entered into an agreement with the State Bank of St. Charles to create an Illinois land trust and deeded the real estate to the bank as trustee. The trust agreement provided:

[T]he interest of any beneficiary hereunder shall consist solely of a power of direction to deal with the title to said real estate and to manage and control said real estate as hereinafter provided, and the right to receive the proceeds from rentals and from mortgages, sales or other disposition of said real estate, and that such right in the avails of said real estate shall be deemed to be personal property, and may be assigned and transferred as such; . . . and that no beneficiary hereunder at any time shall have any right, title or interest in or to any portion of said real estate . . . .

. . . .

While the State Bank of St. Charles is the sole owner of record of the real estate . . ., it is understood and agreed by the parties . . . that said Bank of St. Charles will . . . convey title to said real estate, execute and deliver deeds for or otherwise deal with said real estate only when authorized to do so in writing and that it will (notwithstanding any change in the beneficiary or beneficiaries hereunder, unless otherwise directed by the beneficiaries) on the written direction of Helen E. Bowgren or on the written direction of such person or persons as may be beneficiary or beneficiaries at the time, make deeds for, or otherwise deal with said real estate . . . . Trust Agreement, Joint Ex. 1-A at 1-2.

The trust agreement also divided the beneficial interest in the trust into ninety-eight units.

Between December 30, 1975 and January 4, 1979, Mrs. Bowgren assigned twenty-seven units of the beneficial interest to her three children -- nine units each *fn1. On its federal estate tax return, her estate disclosed the transfer of these units to her children and attached copies of the Quarterly Gift Tax Returns to the federal estate tax return. The estate did not, however, include the value of these gifts in Mrs. Bowgren's gross estate. By notice dated July 28, 1993, the CIR informed the estate of a $152,080 tax deficiency. According to the Internal Revenue Service ("IRS"), under sec. sec. 2036 and 2038 of the Internal Revenue Code ("I.R.C.") *fn2, the value of the ...


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