Estate Challenges $214 Million Tax Deficiency, Penalty

ESTATE OF STANLEY E. FULTON, DECEASED, MICHAEL B. FULTON,
AND ELIZABETH FULTON JONES, CO-EXECUTORS,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION

The Estate of Stanley E. Fulton, Deceased, Michael B. Fulton and Elizabeth Fulton Jones, Co-Executors, hereby petitions for a redetermination of the deficiency in federal estate tax and penalty set forth by the Commissioner of Internal Revenue (Commissioner) in the Notice of Deficiency dated January 6, 2022 (Notice), and as the basis for this case alleges as follows:

1. Name and Address Information.

a. Petitioner is the Estate of Stanley E. Fulton, Deceased, Michael B. Fulton and Elizabeth Fulton Jones, Co-Executors. The Estate of Stanley E. Fulton's (Estate) mailing address is 2961-A Hunter Mill Road, #801, Oakton, VA 22124.

b. Michael B. Fulton (Michael) and Elizabeth Fulton Jones (Elizabeth) (collectively, Co-Executors) are co-executors of the Estate. The Co-Executors are residents of the state of Virginia, with a mailing address at 2961-A Hunter Mill Road, #801, Oakton, VA 22124.

c. Stanley E. Fulton (Decedent) died on January 4, 2018, in Nevada. At the time of his death, Decedent was a resident of Nevada. Decedent's probate proceedings were conducted by a district court in Nevada.

d. A Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, (Estate Tax Return) for Decedent was timely filed in January 2019 with the Office of the Internal Revenue Service at Ogden, Utah.

2. The Notice of Deficiency. Respondent mailed to the Co-Executors the Notice, dated January 6, 2022, from the Internal Revenue Service office in Oakland, California. Copies of the Notice mailed to each Co-Executor, including statements and schedules, are attached hereto as Exhibit A.

3. Amounts in Dispute. In the Notice, Respondent determined a deficiency in federal estate tax in the amount of $214,622,063 and an accuracy-related penalty under I.R.C. § 6662 in the amount of $42,924,413. With the exception of the Adjusted Taxable Gifts and Aggregate Gift Tax Payable on lines 2 and 5, respectively, of the Form 3614-A, Estate Tax, included in the Notice, all of the amounts are in dispute.

4. Assignments of Error. The determinations set forth in the Notice are based on the following errors:

a. Schedule K — Debts of the Decedent, and Mortgages and Liens.

i. The Commissioner erred in determining that the amount deductible under § 2053 for the claim of Decedent's children to two-thirds of the Estate pursuant to the provisions of a marital property agreement between Decedent and Elizabeth McFerren Fulton (“Betty”) dated November 26, 1977, (Schedule K, Item 18) was $0 rather than $472,530,178, as reported.

ii. As a result of the error described in paragraph 4.a.i., above, the Commissioner erred in increasing the taxable estate by $472,530,178.

iii. The Commissioner erred in determining, in the alternative, that if the Estate is entitled to a deduction under § 2053 for the claim of Decedent's children, the amount of such deduction does not include the value of property that Decedent's children were entitled to receive under the provisions of Decedent's Last Will and Testament (Decedent's Will) and the provisions of the Stanley E. Fulton Family Trust (Fulton Family Trust).

iv. As a result of the error described in paragraph 4.a.iii., above, the Commissioner erred in alternatively determining that the taxable estate is increased by the value of the property that Decedent's children were entitled to receive under the provisions of Decedent's Will and the provisions of the Fulton Family Trust, in an amount to be determined.

b. Schedule Q — Charitable, Public, and Similar Gifts and Bequests.

i. The Commissioner erred in determining that, due to the adjustment to Schedule K, Item 18, the amount allowable as a deduction under § 2055 for the charitable residuary bequest to the Stanley E. Fulton Foundation (Fulton Foundation) is $233,400,038 rather than $297,367,016 as reported on the Estate Tax Return.

ii. As a result of the error described in paragraph 4.b.i., above, the Commissioner erred in increasing the taxable estate by $63,966,978.

c. Accuracy-Related Penalties.

i. The Commissioner erred in determining an accuracy-related penalty under §§ 6662(b)(1) and (c) for negligence or disregard of rules and regulations.

ii. As a result of the error described in paragraph 4.c.i., the Commissioner erred in determining an accuracy-related penalty of $42,924,413.

iii. The Commissioner erred in determining, in the alternative, “that the portion of the underpayment of estate tax attributable to the adjustments to Schedule K, Item 18 and Schedule O, Item 2 for the value of the property that decedent's children were entitled to receive under the provisions of [Decedent's Will] and the provisions of the [Fulton Family Trust], which property would have passed to decedent's children even if the claim had not been made against decedent's estate, is due to negligence or disregard of rules or regulations” under §§ 6662(b)(1) and (c).

iv. As a result of the error described in paragraph 4.c.iii., above, the Commissioner erred in determining that an accuracy-related penalty under § 6662 equal to 20 percent of the underpayment of tax attributable to the adjustments applies.

d. Other.

i. The Estate and the Co-Executors have complied with the provisions of § 7491(a)(2) and the Commissioner bears the burden of proof under § 7491(a).

ii. The Commissioner bears the burden of production under § 7491(c) with respect to the accuracy-related penalty determined in the Notice.

iii. The Estate has incurred and will continue to incur additional deductible administration expenses not taken into account in the Commissioner's determinations.

iv. Certain computational adjustments may be necessary based on the Court's determination with respect to the above assignments of error and allegations in Paragraphs 4(a)-(d), above.

5. Statements of Facts. The facts upon which Petitioner relies, as the basis of Petitioner's case, are as follows:

a. Background.

i. Decedent was born on February 15, 1931.

ii. Decedent and Elizabeth McFerren (Betty) married on July 25, 1953.

iii. Between 1955 and 1961, Decedent and Betty had six children together (Fulton Children).

iv. Decedent had considerable business success during their long marriage and the family enjoyed a high standard of living.

b. The Dissolution of Decedent's and Betty's Marriage.

i. In anticipation of divorce, Decedent and Betty negotiated and entered into an agreement, dated November 26, 1977, to settle their respective property rights, the custody and support of the Fulton Children, the right of Betty to support, maintenance, and all other matters arising out of the marriage (Property Settlement Agreement).

ii. As of November 26, 1977, Decedent and Betty agreed to separate. They mutually and voluntarily agreed to live separate and apart in separate places of abode.

iii. Under the Property Settlement Agreement, Decedent and Betty agreed that Betty would receive the following upon their divorce:

1. Alimony of $2,000 per month, for 250 consecutive months (or until Betty died or remarried);

2. A lump-sum payment of $20,000;

3. A promissory note with a principal amount of $480,000 with interest due monthly at an annual rate of 5 percent and principal due upon the sale or liquidation of Decedent's business interests or on or before February 15, 2003;

4. Betty's automobile, all of her clothing, jewelry, and other personal effects; and

5. One-half of all jointly owned household goods, and furnishings and personal property in the family residence after Betty vacated the residence or the residence was sold or transferred.

iv. Betty agreed to relinquish any claim to other assets belonging to Decedent or the marital estate.

v. Under the Property Settlement Agreement, Decedent and Betty agreed that Decedent would receive the following upon their divorce:

1. Decedent's clothing, jewelry and other personal effects;

2. All presently owned joint property, both real and personal, subject to the agreement set forth in paragraph 5(d)(iii)(5), above; and

3. All other personal and real properties and other assets, including but not limited to:

a. Cash;

b. Checking and savings accounts;

c. Stocks;

d. Bonds;

e. Debentures;

f. Life insurance policies and contracts;

g. Retirement plan benefits;

h. Payments from trusts and annuities; and

i. All interests in business ventures, sole proprietorships, partnership, and corporations, which included interests in the following:

i. Tri-State Cable TV, Inc.

ii. Iroquois Cable Co., Inc.

iii. Fulton Petroleum Sales, Inc.

iv. K-Tech, Inc.

v. Maryland Park Apartments, Inc.

vi. Partnership interests in Maryland Park Apartments.

vi. Under the Property Settlement Agreement, Decedent and Betty agreed that two-thirds of each of their respective net estates (after payment of expenses and taxes) would go to the Fulton Children.

vii. The Property Settlement Agreement provided that it would be incorporated into any decree of divorce approved by a court in a subsequent divorce proceeding.

viii. The terms and provisions of the Property Settlement Agreement were binding on and inured to the benefit of Decedent's and Betty's personal representatives, heir, executors, successors, and assigns.

ix. Decedent and Betty agreed that the terms of the Property Settlement Agreement were fair and equitable, and acceptable to each of them.

x. The Property Settlement Agreement was signed by Decedent and Betty in the presence of a witness and a Notary Public.

xi. Betty gave up substantial, valuable rights and claims to a greater share of Decedent's property and to support sufficient to sustain the standard of living she had enjoyed during marriage in order to obtain the agreement that Decedent and Betty would each leave two-thirds of their respective net estates to the Fulton Children.

xii. Under Nevada law, in the absence of the Property Settlement Agreement, Betty would have received significantly more property and financial support than the parties agreed to in the Property Settlement Agreement.

xiii. In foregoing her rights to a larger property settlement and additional financial support, Betty provided adequate and full consideration for Decedent's promise to leave two-thirds of his net estate to the Fulton Children.

xiv. On April 25, 1978, the Eighth Judicial District Court of the State of Nevada, in and for the County of Clark, entered a Decree of Divorce dissolving the marriage between Decedent and Betty (Divorce Decree).

xv. The Divorce Decree provided that the Property Settlement Agreement was ratified, confirmed and approved, and made a part of the Divorce Decree.

xvi. At the time the Divorce Decree was entered, Decedent and Betty resided in Nevada.

c. Betty's Death.

i. Betty died on March 5, 2017.

ii. In her estate plan, Betty complied with her obligation under the Property Settlement Agreement and the Divorce Decree to leave at least two-thirds of her net estate to the Fulton Children.

d. Decedent's Will and Death.

i. On October 13, 2017, and after Betty's death, Decedent executed Decedent's Will and the Total Amendment and Restatement of the Trust Agreement of the Stanley E. Fulton Family Trust (Fulton Family Trust Agreement), which amended and restated the June 12, 2007, instrument that created the Fulton Family Trust.

ii. Decedent's Will left his household and personal effects equally to the Fulton Children and the balance of Decedent's estate to the Trust.

iii. The Fulton Family Trust Agreement directed the trustee to make the following distributions:

1. Monetary gifts of $1,000,000 each to six of Decedent's friends.

2. The Fulton Family Trust's voting interests in Sunland Park Racetrack & Casino to another trust, with such interests to be divided equally into separate shares for each of the Fulton Children then living.

3. Any remaining property to the Stanley E. Fulton Family Foundation (Foundation), to be established by the trustee as a qualified, tax-exempt foundation.

iv. Decedent died on January 4, 2018, in Nevada. At the time of his death, Decedent was a resident of Nevada.

v. Decedent's estate plan did not comply with the obligation under the Property Settlement Agreement and the Divorce Decree to leave at least two-thirds of his net estate to the Fulton Children.

e. Decedent's Probate Proceedings.

i. On March 2, 2018, the District Court for Clark County, Nevada (District Court) admitted Decedent's Will to probate and the Co-Executors were appointed in the matter captioned In the Matter of the Estate of Stanley E. Fulton, Deceased, Case No. P-18-094384-E (Probate Case).

ii. On May 31, 2018, each of the Fulton Children timely filed creditor claims in the Probate Case and virtually identical creditor claims with the trustees of the Fulton Family Trust to enforce Decedent's obligations under the Property Settlement Agreement and the Divorce Decree (Creditor Claims).

iii. The Creditor Claims were based on the Fulton Children's status as third-party beneficiaries of the Property Settlement Agreement and Decedent's breach of the Property Settlement Agreement by failing to fulfill his contractual obligation to leave two-thirds of the net value of his estate to the Fulton Children.

iv. Each Creditor Claim set forth $82,333,333 as the estimated value of each of the Fulton Children's share of the amount owed pursuant to the Property Settlement Agreement (one-sixth of two-thirds of the net value of Decedent's estate).

v. On June 4, 2018, similar claims were filed by Betty's estate and Betty's trust for the benefit of the Fulton Children.

vi. The Creditor Claims were resolved through a Settlement Agreement executed by the Co-Executors (in their capacity as coexecutors of the Estate), the trustees of the Fulton Family Trust, the executor of Betty's Estate, the trustee of Elizbeth M. Fulton Trust, the Fulton Children, and the Foundation (Creditor Claims Settlement Agreement).

vii. Under the Creditor Claims Settlement Agreement, the parties agreed that the Fulton Children would receive, in the aggregate, two-thirds of the “Final Settlement Value” less $18,925,000.

viii. On November 12, 2018, the Co-Executors filed with the District Court a Petition for Approval of Compromise of Claims Against the Estate Pursuant to NRS 147.180 seeking approval of the Creditor Claims Settlement Agreement (Claims Approval Petition).

ix. On December 14, 2018, the District Court granted the Claims Approval Petition ad approved the Creditor Claims Settlement Agreement.

f. The Estate Tax Return.

i. The Co-Executors timely applied for and were granted an automatic 6-month extension of time to file the Estate Tax Return.

ii. The Estate Tax Return was timely filed, on extension, in January 2019.

iii. The Estate Tax Return computed the specific bequests and residuary estate as follows:

1. Gross Estate:	$857,695,568
2. Total Incomplete Gifts:	$10,000
3. Total Specific Gifts:	$79,931,000
4. Debts, Expenses and Taxes:	$480,312,886
5. Residuary Estate:	$297,441,682

iv. Of the $480,312,886 amount for Debts, Expenses and Taxes listed on the Estate Tax Return, $472,530,178 was attributable to the Creditor Claims, $1,875,036 was attributable to administration expenses, and $5,907,672 was attributable to taxes.

v. To the extent there is any underpayment of tax, there was no negligence or disregard of any rules or regulations.

g. The Estate Tax Examination.

i. The Commissioner commenced an examination of the Estate Tax Return (Estate Tax Examination).

ii. Petitioner has complied with the requirements under the Internal Revenue Code (Code) to substantiate the items reported on the Estate Tax Return.

iii. Petitioner has maintained all records required under the Code and has cooperated with reasonable requests for witnesses, information, documents, meetings, and interviews.

iv. On September 9, 2021, during the Estate Tax Examination, the Commissioner conducted interviews of five of the six Fulton Children via remote videoconference.

v. The Commissioner issued to each of the Co-Executors the Notice, dated January 6, 2022.

vi. The Notice does not include any facts to support the negligence determination for the accuracy-related penalty under §§ 6662(b)(1) and (c).

vii. The Notice does not include any facts reflecting a failure to make a reasonable attempt to comply with the provisions of the Code.

viii. The Notice does not identify any rule or regulation that was allegedly disregarded.

ix. The Notice does not include any facts reflecting that there was any careless, reckless, or intentional disregard or a rule or regulation.

WHEREFORE, petitioner prays that the Court hear this case and decide:

1. The Commissioner erred as alleged in each assignment of error set forth in Paragraph 4, above;

2. There is no deficiency in federal estate tax;

3. There are no accuracy-related penalties under §§ 6662(b)(1) and (c);

4. Petitioner is entitled to deduct as administrative expenses all additional fees incurred; and

5. Petitioner is entitled to such other relief as the Court may prescribe.

Dated: April 4, 2022

Jenny L. Johnson Ware
McDermott Will & Emery LLP
444 West Lake Street
Chicago, IL 60606
(312) 984-2130
jjohnsonware@mwe.com
Tax Court Bar No. JJ0442

Andrew R. Roberson
McDermott Will & Emery LLP
444 West Lake Street
Chicago, IL 60606
(312) 984-2732
aroberson@mwe.com
Tax Court Bar No. RA0371