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Estate Disputes Inclusion of Settlement Proceeds

AUG. 2, 2001

Estate of Mary Davis Maggos, et al. v. Commissioner

DATED AUG. 2, 2001
DOCUMENT ATTRIBUTES
  • Case Name
    ESTATE OF MARY DAVIS MAGGOS, DECEASED, CATHERINE MAGGOS ADKINS, SPECIAL ADMINISTRATOR, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
  • Court
    United States Tax Court
  • Docket
    No. 9820-01
  • Authors
    Mukai, Stanley Y.
  • Institutional Authors
    McCorriston Miller Mukai MacKinnon LLP
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    estate tax, gross estate
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-24586 (10 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 195-114

Estate of Mary Davis Maggos, et al. v. Commissioner

 

=============== SUMMARY ===============

 

The estate of Mary Davis Maggos has challenged the IRS's determination that settlement proceeds of $1.4 million are includable in the estate. The estate insists that the $1.4 million is additional consideration received for the sale of shares of a soda bottling corporation.

The estate explains that on May 1, 1987, the decedent was redeemed of all her shares in Pepsi-Cola Alton Bottling Inc. for $3 million. After the redemption, the decedent's son, Nikita Maggos, became the sole shareholder of the bottling company. On April 25, 1998, Nikita sold all the shares of the bottling company to another corporation for $12.7 million.

On August 23, 1994, the decedent brought suit in U.S. district court against Nikita and Pepsi-Cola Alton Bottling Inc. for damages and recission of the redemption of her Pepsi-Cola Alton Bottling Inc. shares, on the grounds of fraud and breach of fiduciary duty. On August 17, 1995, the decedent brought another suit in U.S. district court against her accountants and attorneys which was subsequently consolidated with the civil suit against Nikita.

Mary Davis Maggos died on September 3, 1996 at which time the value of the claims against Nikita and the others arising out of the redemption of the decedent's shares of the bottling company was not known. In early 1998, the estate received a payment of $1.4 million from Nikita and the co-defendants in settlement of the suits brought against them by the decedent. The estate insists that this $1.4 million payment in settlement of the litigation was additional consideration for the redemption of decedent's Pepsi-Cola Alton Bottling Inc. shares and thus is not includable in the estate.

 

=============== FULL TEXT ===============

 

UNITED STATES TAX COURT

PETITION

Petitioner ESTATE OF MARY DAVIS MAGGOS, Deceased, CATHERINE MAGGOS ADKINS, Special Administrator, hereby petitions for a redetermination of the deficiency set forth by Respondent COMMISSIONER OF INTERNAL REVENUE in Respondent's notice of deficiency (Service symbols FIELD-90D) dated May 4, 2001, a true and correct copy of which is attached hereto as Exhibit A, and as the basis for Petitioner's case alleges as follows:

1. Petitioner is a fiduciary whose mailing address is R-R 2, Box 19, Chandlerville, IL 62627-9609. Decedent's taxpayer identification number is [TIN omitted]. The return for the period involved herein was filed with the Internal Revenue Service Center at Fresno, California.

2. The notice of deficiency was mailed to Petitioner on May 4, 2001, and was issued by the District Director of the Internal Revenue Service at Seattle, Washington. See Exhibit A.

3. The deficiency, as determined by Respondent, is in estate taxes at date of death of September 3, 1996 in the amount of $1,722,615, together with an addition to tax at May 4, 2001 under IRC Section 6651(a)(1) in the amount of $430,653.75. See Exhibit A. The entire amount of the deficiency and addition to tax is in dispute.

4. The determination of the estate tax set forth in such notice of deficiency is based on the following errors:

(a) Respondent erred in determining that settlement proceeds received from Nikita Maggos and certain co-defendants, of $1,400,000 are includible in the estate and do not constitute additional consideration received for the sale of the shares of Pepsi-Cola Alton Bottling, Inc.

(b) Respondent erred in determining that no additional professional fees incurred by Petitioner in resolving its gift and estate tax liability are allowable as a deduction on Schedule J of Form 706 in determining decedent's net taxable estate.

(c) Respondent erred in determining that the amount of the claim on Schedule K of Form 706 for unpaid gift taxes and interest should be based on the Tax Court decision and not as originally assessed by the Internal Revenue Service.

(d) Respondent erred in determining that the failure to timely file the estate tax return was not due to reasonable cause and, therefore, that an addition to the deficiency of $430,653.75 was applicable under IRC Section 6651(a)(1).

5. The facts upon which Petitioner relies are as follows:

(a) On May 1, 1987 the decedent, Mary Davis Maggos, was redeemed of all of her shares in Pepsi-Cola Alton Bottling, Inc. for $3,000,000.

(b) After the redemption, decedent's son, Nikita Maggos, became the sole shareholder of Pepsi-Cola Alton Bottling, Inc.

(c) On or about April 25, 1988, Nikita Maggos sold all of the shares of Pepsi-Cola Alton Bottling, Inc. to Pepsi-Cola Metropolitan Bottling Company, Inc. for $12,689,097.44.

(d) In 1990, Respondent initiated an examination of decedent's 1987 gift tax return, and assessed decedent with a gift tax deficiency.

(e) A petition to the Tax Court, No. 20877-93, was filed on September 27, 1993, seeking a redetermination of an asserted deficiency in gift tax of $2,229,350.

(f) On August 23, 1994, decedent commenced an action entitled Maggos v. Maggos, et al., (Civil No. 94-00649 ACK) in the U.S. District Court for the District of Hawaii against Nikita Maggos and Pepsi-Cola Alton Bottling, Inc. for damages and rescission of the redemption of decedent's Pepsi-Cola Alton Bottling, Inc. shares, based upon various allegations, including fraud and breach of fiduciary duty. On August 17, 1995, decedent commenced suit in the Circuit Court of the First Circuit of Hawaii against accountant Lawrence Helm and Ring Helm & Co., attorney Victor Bezman, and Katten Muchin & Zavis (Civ. No. 95-2973-08), which was removed to Federal District Court in Hawaii (Civil No. 95-00784 SPK), and ultimately was consolidated with Civil No. 94-00649 ACK.

(g) On decedent's date of death, the value of the claims against Nikita Maggos and others arising out of the redemption of decedent's shares of Pepsi-Cola Alton Blottling, Inc [sic]. was not known.

(h) In early 1998, Petitioner received as the result of an out of court settlement of Maggos v. Maggos a payment of $1,400,000 from Nikita Maggos and certain co-defendants. In addition, Petitioner was conveyed a partial interest in an apartment in Honolulu, Hawaii, from Nikita Maggos and Barbara Maggos.

(i) On April 11, 2000, the Tax Court rendered its decision in Estate of Mary Maggos v. Commissioner, T.C. Memo 2000-129, in which it determined the value of decedent's stock of Pepsi-Cola Alton Bottling, Inc. was $4,900,000 as of the date such stock was redeemed.

(j) The Tax Court's decision is now on appeal by Petitioner to the United States Court of Appeals for the Ninth Circuit, No. 00- 71424.

(k) The $1,400,000 payment received from Nikita Maggos and the co-defendants, in settlement of the litigation (as described in Paragraph 5(h) above) was additional consideration for the redemption of decedent's Pepsi Cola Alton Bottling, Inc. shares.

(l) Petitioner incurred additional professional fees in connection with the gift and estate tax assessments. Fees incurred in contesting an asserted gift and estate tax deficiency are allowed as an estate tax deduction under Reg. Sec. 20.2053-3(c )(2).

(m) The late filing of the estate tax return was due to reasonable cause, including the fact that, due to the complexity of the issues involved with the pending Tax Court gift tax case and the settlement of the civil litigation against Nikita Maggos and the others, the estate tax return could not be filed by December, 1997. Petitioner's request for a further extension from Respondent was denied and it was not possible to estimate the outcome of either the Tax Court case or the civil litigation.

(n) The final determination of the estate taxes and additions to tax, if any, due cannot be determined until the pending appeal of the Tax Court decision is concluded.

WHEREFORE, Petitioner prays that this Court may try this case, determine that there is no deficiency in estate tax at the date of death on September 3, 1996, determine that IRC Section 6651(a)(1) is inapplicable, and grant such other and further relief as the Court may deem fit and proper.

Date: August 2, 2001

 

 

STANLEY Y. MUKAI, MS 0341

 

Attorney for Petitioner

 

ESTATE OF MARY DAVIS MAGGOS,

 

Deceased,

 

CATHERINE MAGGOS ADKINS, Personal

 

Representative

 

 

McCORRISTON MILLER MUKAI

 

MacKINNON LLP

 

Five Waterfront Plaza, 4th Floor

 

500 Ala Moana Boulevard

 

Honolulu, Hawaii 96813

 

 

Telephone: (808) 529-7300

 

 

[attachment omitted]

[Editor's Note: The attachment has been omitted. However, this document in its entirety can be obtained through our Tax Analysts' Access Service as Doc 2001-24586 (10 pages) [PDF].]

DOCUMENT ATTRIBUTES
  • Case Name
    ESTATE OF MARY DAVIS MAGGOS, DECEASED, CATHERINE MAGGOS ADKINS, SPECIAL ADMINISTRATOR, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
  • Court
    United States Tax Court
  • Docket
    No. 9820-01
  • Authors
    Mukai, Stanley Y.
  • Institutional Authors
    McCorriston Miller Mukai MacKinnon LLP
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    estate tax, gross estate
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-24586 (10 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 195-114
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