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U.S. v. BARTLETT

February 19, 2002

UNITED STATES OF AMERICA, PLAINTIFF,
V.
ELIZABETH BARTLETT, INDIVIDUALLY, AS EXECUTRIX OF THE ESTATE OF CHARLES E. GRIMES, AND AS TRUSTEE OF THE ELIZABETH J. BARTLETT FAMILY TRUST; BEVERLY J. DRUMMOND, CARL E. GRIMES, DAVID C. GRIMES, AND ALAN GRIMES, DEFENDANTS.



The opinion of the court was delivered by: Michael P. McCUSKEY, U.S. District Judge.

ORDER

EVIDENCE PRESENTED

The tax liability which forms the basis of this action arose as the transferee gift tax liability of Charles E. Grimes ("Charles") upon the death of his mother, Ressie Grimes ("Ressie"). Ressie and Jesse Grimes ("Jesse"), Charles' father, executed a joint and mutual will on January 2, 1975, and a codicil to that will on March 20, 1979. On Ressie's death, the joint will and codicil created a life estate for Jesse, Ressie's surviving spouse, in the real property passed under the will. Charles was entitled to a remainder interest in six of the nine parcels of real estate in which Jesse held a life estate.
On December 25, 1980, Charles died testate, and his will was admitted to probate in DeWitt County, Illinois on January 14, 1981. Elizabeth Bartlett ("Elizabeth"), widow of Charles, was appointed executrix of Charles' estate under their joint and mutual will. On Form 706, the United States Estate Tax Return, the Estate of Charles included in its gross estate only the value of one half of the remainder interest in the parcels of property passed upon Ressie's death.
On June 22, 1984, the Internal Revenue Service ("IRS") sent a Notice of Deficiency to Jesse. This notice of deficiency pertained to a gift tax deficiency of $164,308.43 for the year 1979. This deficiency arose as a result of the contractual obligation under Illinois law imposed on Jesse under the joint will to make a present gift to Charles of his remainder interest in the six tracts of land in which Jesse was to have only a life estate. The IRS valued the remainder interest Jesse gifted to Charles at $628,698.45. Jesse challenged the gift tax deficiency in the United States Tax Court. Jesse died on November 2, 1985, while the case was still pending.

On June 2, 1984, the IRS sent a Notice of Deficiency to the Estate of Charles because the remainder interests in real estate which resulted in the gift tax deficiency should have been included in the gross estate of Charles.*fn1 As a result of this notice of deficiency, the Estate of Charles filed a petition with the United States Tax Court. To expedite the disposition of the Tax Court cases filed by the Estate of Jesse and the Estate of Charles, the parties entered into a Stipulation to Be Bound.

In the stipulation, the parties agreed that the resolution of the case brought by Jesse would control the issue of whether the Estate of Charles was required to include in its gross estate the remainder interest in real property formerly owned by Jesse alone or by Jesse and Ressie jointly. On August 3, 1987, the Tax Court found that the IRS correctly attributed $160,136.00 in gift tax liability to Jesse as a result of the present gift of the remainder interest in real property to Charles upon the death Ressie.*fn2 This decision was upheld by the Seventh Circuit Court of Appeals on July 13, 1988.*fn3 Prior to the decision of the Seventh Circuit, Elizabeth quit-claimed to the Elizabeth J. Bartlett Family Trust all of her interests in the real property devised to her under the mutual will she executed with Charles. Elizabeth testified that she established this trust "to get away from will and probate . . . and avoid all of this mess we're in now." The Certificate of Trust for the Elizabeth J. Bartlett Family Trust allows Elizabeth, as trustee to "sell at public or private sale or to exchange any property which may at any time be in their hands, without application to court, on any terms which they may consider advisable or proper, including terms involving an extension of credit for any period of time and with or without security."
Pursuant to the Stipulation to be Bound, the Estate of Charles was required to include in its gross estate the value of the remainder interest Jesse was deemed to have given Charles. Before computing the estate tax deficiency of the Estate of Charles after the decision of the tax court, the IRS allowed the estate an estate tax deduction pursuant to 26 U.S.C. § 2053. This deduction was allowed because of the Estate of Charles' liability as transferee for the gift tax deficiency due from the Estate of Jesse. As part of the agreement between the estate and the IRS to allow the deduction, Elizabeth was required to execute a Form 870, Waiver of Restriction on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. By signing the Form 870, Elizabeth accepted liability as transferee of Jesse's gift tax deficiency.*fn4 As a result of this acceptance, the transferee gift tax liability of $160,136.00 and interest in the amount of $298,082.12 were assessed against the Estate of Charles. Following this assessment, notice of the assessment and a demand for payment was made upon Elizabeth as executrix of Charles' estate.

On April 3, 1989, the Tax Court entered a decision with respect to the case brought by the Estate of Charles.*fn5 The Tax Court found a deficiency of $159,054.00 in estate taxes owed by the estate. This deficiency reflected an allowance by the IRS of a deduction from the estate tax liability of the transferee gift tax that Elizabeth, as executrix of the Estate of Charles, agreed to pay. This estate tax deficiency was assessed against Charles' estate on August 7, 1989. Subsequent to the decision of the Tax Court, Charles' estate sought administrative relief pursuant to Regulation § 301.9100-1T with respect to the assessment of these estate taxes. This relief was granted by the IRS. As a result, all but approximately $10,000.00 of the estate tax deficiency of Charles' estate was abated. This administrative relief did not include the transferee gift tax liability owed by Charles' estate.*fn6

On April 17, 1989, the IRS filed a proof of claim with the DeWitt County Probate Court in the amount of $458,218.72. This amount consisted of the Estate of Charles' transferee gift tax liability in the amount of $160,136.60 plus interest in the amount of $298,082.12. Elizabeth testified that she saw the proof of claim filed by the IRS and immediately called her attorney. No proof of claim was filed with regard to the estate tax liability of the Estate of Charles. On September 15, 1989, the Probate Court entered an Order allowing the IRS claim for transferee gift tax liability and interest.*fn7
Revenue Officer Maureen Maloney testified that the IRS did not actively seek collection of the allowed claim. Rather, the case was monitored by the Insolvency Unit and Special Procedures Branch of the Collection Division of the IRS in Springfield, Illinois. Maloney testified that monitoring the case consists of pulling the case for periodic reviews to insure that the case is still pending in the Probate court and sending periodic status letters to the probate attorney asking for the status of the proceedings. According to Maloney, no collection efforts were made because the IRS cannot enforce collection after the claim is filed in the probate court. The IRS simply waits to be paid through distribution of the assets of the estate once probate is complete. A transaction code of "520" is entered into the computer system to indicate that no collection action is to be initiated. This transaction code indicates that the claim is in "litigation."
The claim filed in the Estate of Charles was monitored by Revenue Officers Joe Nolan, Karla Bartels, and Maureen Maloney. Bartels testified that she reviewed a status letter which was sent to Maurice Barry ("Barry"), counsel for Defendants, on February 15, 1995. Bartels indicated that she received Barry's name from the circuit clerk's office in the county in which the probate estate was pending.*fn8 Bartels testified that this letter was a "request for payment, or at least a status of when we [the IRS] can expect payment," and the letter served as a reminder to the attorney that payment was owed.
Bartels testified that she received a letter from Barry in response to the status letter. This letter stated as follows:
I have received your letter of February 15, 1995, and upon review of all relevant documents am somewhat confused. I was under the understanding that the contingent liability has been resolved upon proper correction being made. I understand you had dealt with Rex L. Schaeffer*fn9 of our office who was successful in obtaining a relinquishment of the indebtedness.*fn10 If the records I have reviewed are incorrect or if you have access to additional information please transmit same to my office as soon as possible so that we may address this problem accordingly.

In response to this letter, Bartels sent a second letter to Barry, stating:

We are in receipt of your February 28, 1995, letter. A review of our file still shows an outstanding liability on the above case for gift taxes. A proof of claim was filed April 17, 1989, in the amount of $458,218.72. The executrix agreed to the assessment of this deficiency. I believe the liability you refer to in your letter was for the estate tax. This has been abated. Enclosed please find a transcript for the gift tax liability. Again, we would request an update on the status of this case and the date you will pay the related proof of claim . . . .
Bartels further testified that she had phone conversations with Schaeffer and Barry regarding the gift tax liability. Revenue Officer Maureen Maloney testified that she also sent a status letter to Schaeffer on May 7, 1997. According to Maloney, she had several conversations with Schaeffer in which he expressed his belief that the gift tax liability of Charles' estate had been abated with the resolution of the estate tax issue.
As a result of reorganization of the IRS, the case involving Charles' estate was transferred to the IRS collection division in Chicago, Illinois in 1998. Probate was still open at this time. On January 20, 1998, David Choi, an attorney at the District Counsel's office in Chicago, sent a letter to Shaeffer regarding the continued liability of Charles' estate for the transferee gift tax. This letter set forth in detail the basis for the estate's liability. In response to the letter, Schaeffer asserted that the closing letter issued to Charles' estate in 1995 resolved the gift tax issue, that the final payment of the estate tax covered the gift tax as well, and the estate had been closed. However, the estate was not closed at that time.
The docket sheet from the probate court indicates that Barry failed to appear on numerous occasions before the probate court. In April 1998, Barry requested a hearing for a final accounting of the probate estate. At a subsequent hearing in August 1998, Barry indicated that there were problems with the final accounting. On October 15, 1998, Elizabeth filed a Motion for Leave to File Final Accounting and Report Without All Corresponding Documentation. In the motion, Elizabeth asserted that the probate proceedings involved a significant claim by the IRS for estate taxes, and all claims to the estate had been paid. Elizabeth made no reference to the allowed claim for gift taxes. On October 30, 1998, the Probate Court granted Elizabeth's motion, discharging her as executrix and closing the estate.
In January 1999, the case was assigned to Karen Van Note ("Van Note") for collection. Van Note testified that, when assigned a case, she looks to see whether an assessment is correct, whether a notice has been issued, and whether assets to affect collection are available. Based upon the Certificate of Assessments and Payments, Van Note determined that an audit deficiency in the amount of $160,136.60 and interest in the amount of $298,098.12 were assessed and a first notice issued on March 22, 1989. Van Note testified that this first notice, which consists of a demand for payment and contains the balance due, was sent to the address on the account for the Estate of Charles Grimes. ...

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