Estate of Adelina Cheng Van, Deceased; Michael Van, Trustee, Petitioners

T.C. Memo. 2011-22 UNITED STATES ;TAX COURT ESTATE OF ADELINA CHENG VAN, DECEASED, MICHAEL VAN TRUSTEE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondente e DocketsNo. 5456 04.

Filed January 27, 2011.

Benjamin Sanchez, for pe.titioner.

Aaron Stonecash, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HOLMES, Judge: Adelina Van lived in a house, got title to the house, and then tried to give the house away when she began to. think about her -own death.

She did not actually move out of the house before she died, and the question before us is whether the value of the house should be included in her estate .

SEflVED JAN 2 i 2011

FINDINGS OF FACT

In 962, Adelina Cheng Van emigrated to the United States from China as a divorced 41-year-old mother of four.

She eventual y settled in San Mateo, California, with three of her children--Norma, Robert, and Michael.

From 1965 to 1973 the Vans lived in a house that they had scraped money together to buy in Foster C ty. But then Van started courting a man named Marcel Periat, ho in June 1973 bougl t a house for her on Capistrano Way in San Mateo, very close to his own home. Periat incurred all !

the cost s himself and kept title to the property in his own name.

Van mov d into the Capistrano house and began living- there expense fred.

Ov r the years, Van developed an interest in the real- estate udiness and became an.informal agent and manager. After Van' s d ughter Norma grew up and married, both she and her shusband, James Hu, relied on Van' s advice in buying real 'estate in the (an Francisco Bay area.

In 1988, the Hus asked Van to see if Periat would sell the Capistrano house to them. Pekiat it first seemed interested in the pro osal; but Van then demanded a commission if he sold the house t the Hus . Periat began to worry that Van was angling to bring a palimony claim and instead negotiated a "Mutual Agreement and Release" with her.

The Agreement required him to sell the Capistr no house to Van for $250,000, with $170,000 as a downpayment and a secured promissory note to him for the remaining $80,000.

Van, however,-'was not using her own money.

The Hus webe the source of her funds, boths of the downpayment and of the payments on the note.¹ Title passed to Van on August 3, 1989.

But that title didn't rest with her for long Within hours of recording the deedtwith San Mateo County, Van redorded a grant deed conveying title, to the house to herself and two of her.

grandchildren--the Hus' daughters Virginia and Arleen, as joint tenant's. Without telling her daughter and sontin-law, Van then had Virginia and Arleen reconvey.sole title back to her in 1994.

Then in August 1997 Van created the Adelina Cheng -Van Revocable Trust and deeded the "Capistranoahouse to ihersellf as trustee in December~1997:

Two years later, she transferred 'title to the house from herself as trustee to her daughter +Norma and three granddaughters: Virginia, Arleen, and Christina Hu. All of these transfers were gratuitous.

Van died on May 1, 2000. Her son, Michael Van, served as her estate's personal representative~and-filed the estate tax returns The return disclosed the~existence of the Capistrano house but did not list the house as an asset of the e'state.

The Commissioner sent the estate a notice of deficiency that included The final purchase price of the Capistrano house ended up being $230,000: Periat $80,000 promissory note in April 1994 and February 1995.

forgave two $10 000 ayments on the the Capi trano house as a taxdble asset of Van's estate.

The estate f led its petition to contest the inclusion.

We tried the case in San Francisco," though IMichael. Van was -a New: York resident when he rought the case .

The Commissioner claims tihat Van retained possession or enjoymen of the Capistrano house until she died, even after title t it began ducking andiweaving throughout her extended family.

He argues that this means the value of the house should be part f her taxable estate Th estate argues that it is really the Hus who owned the house .

hey gave the- money t Van under swhat they claim was an agreemer t that they were to be the legal purchasers -of the .house even tho gh Van would take title to placate Periat .

The estate argues that the Hus' past dealings with Van, in which she served as their agent for real-estate purchases, - support this characterization.

I I.

Burden of Proof

OPINION

We begin with the burden of proof .

cA taxpayer norma]:ly bears that burden.

See Rule 142 (a) .2 However, section 7491(a) shifts t he burden to the Commissioner when a taxpayer introduces

5 - credible evidence regarding the facts of the case, reasonably cooperates with the IRS, and maintains required records .

Although it--is uncommon for the burden to. shift to the Commissioner, the estate has convinced us that it is reasonable to -dos so in this c~ase.

The estate cle'arly -flagged the issue in its return:t It" listed the Capistrano house and its fair market value on "Schedule A- aReal Estate" and then deducted the value, explicitly noting, the estate's belief that Van,had no ownership interest- in the house as the. Hus had provided the purchase money and title had passed to Norma Hu and her three daughters before Van' s death.

The -estate also went out of its way to cooperate with the IRS--it allowed thee IRS to interview the -Hus in its * counsel's óffice; provided the IRS with all the relevant documents before a Branerton conference was held, see Branerton Corp. v. Commissioner, 61 T.C. 691 (1974),; and even translated Van's letters into English for the IRS.a II.

Inclusion of the Capistrano House in the Estate Section 20363 -includes in a. decedent' s gross estate the value of all property that a decedent gives away but which she keeps ir her possession or in which she continues to enjoy an interest until her death.

The paradigm is a sale with a retained life est te, but the Code stat es the rulermore generally.

A.

California Law The estate begins by corfectly noting that we must look ,to Californ a law to decide what interests' Van held at death:

"State 1 w creates legal interests and rights . " Morgan vs.

Commissioner, 309 U..S. 78, 809 (1940) .

If,¡ therefore, California law gave Van a legal or beneficial inte'rest in the Capistrano house at some point during hef life, it might be included in her estate under the Code..

The estate also argues that under 'California law, Van never had an interest in the Capist ano -house because the Hus--and here

3 SÈC. 2036.

TRANSFERS WITH RETAINED LIFE ESTATE.

(a) General Rule . - -The value of the gross estate shall (except the decedent has at any time made include the value of all property to the extent of any interest therein of whicli a tkansfer adeþuate and full considération in money or money' s worth) , by grust or otherwise, under which he has retained for his lifþ or for any period not ascertainable without reference to his death or for any period which does not bef re his death-- in case of a bona fide sale for an in fact end (1) the possession or enjoyment of, or the right to the income from, the property * * *.

we refer to Norma Hu and her husband--themselves were the real owners and Van "had taken title onlycas their lagent.. To .back up this claim athe estate pointed to other reallestate transactions where Van served as the Hus' agent. But we find that this deal was different:

Van took legal title to thetCapistrano house in her own name and actually lived there.

In all the other deals where Van helped:them, the Hus themselves took legal title and rented theehouses to unrelated tenants.

They also gave.Van a written power of attorney to act -on their behalf in managing the properties.. Although wes find it was the Hus -who gave Van the money ahe-used -for ther dowh payment on that house., and then gave her still more sto make the payments on the note,.this in itself doesn't prove Van was merely their agent..

The Hus'' reliance on California law actually undermines the estate's position.

" California Evidence CodenSection 662 states that " [t]he owner of thea legal title to property is presumed to be the owner of the full beneficial title.

This presumption may be rebutted only by clear andiconvincing proof." This statute puts a heavy burden on the estate to prove that Van did not- own the house.

The Hus did testify that they put the house in Van's name because they were worried that -creditors of- Mr. Hu's Taiwanese business might someday take it.

The fact,« however, that all the Hus' other California properties were titled in their own names reduces our willingness to-believe this part of their te timony.

The Hus have not convinced rus that Van was acting mërely as "their - agent in acquiring the Capistrano house .

She -did ot, after all, just hold title in her name--she lived there.

e therefore rfind that Van did acquire a beneficial interest in the house during lier lifetime.

B.

Resulting Trust ,As fallback position, the estate urges us to find a resulting trust .

.

Its argument is that because the Hus supplied the purc ase money, the Hus" tliemselves had a beneficial interest in the house because California law imposes a resulting trust for their be efit against, the interest of the titleholder.

This concept f a resulting trust does exist in California law.

As a state co rt of appeals descrilŠed the doctrine in LloVds Bank Cal.

v. Wells Fargo Bank, 232 Cal. Rptr. 339 (Cal.- Ct. App. 1986) * * * law from a [it] a¾ises in favor of intended to take the beneficial the payor of A r sulting trust arisesáby operation. of tra sfer of property undår circumstances showing that the transferee was not int rest [;] the purchase price ofe the property where the purchase pri e, or a part thereof ; tit e is -taken in the name of another [;] the natural presumption in such a case that it was their intention that theiostensible purchaser should acq ire and hold the proyerty for the one with whose means it was acquired.

is paid by one person and the * it is * * Id. at 1 42-43 -(quotation marks omitted) .

Th first problem here is that Van noteonly "intended to take th beneficial interest"iin the Capistrano home, she actuali did t ke a beneficial interestrafter all, she was living there until she died.

And even if the Hus' invocation of the doctrine would otherwise ebe persuas:Lve, their relationship to Van would undermine it :

* * to this [resulting There are, however, *exceptions, It is well settled that one exception trust] doctrine. to the "rule is found in transactions between parent .and child. the nature of gifts, advancements or bounties. short, child is a circumstance which prima facie establishes the presumption of an advancement and thereby rebuts the presumption of a resùlting trust.

* These transactions are presumed to be in the relationship of parent and the existence of In * * * Id.

We can't presume an agency hereabecause the parent-child relationship leads us to infer that the; Hus' purchase .money was a gift to Van that resulted in her takinga at least ia-beneficial interest in the Capistrano house .

- And the uniqueness of Van' s treatment of the Capistrano house compared to the . Hus's other properties, and the implausibility of the Hus' claimed~ motivation for not putting themselves on the t·itle, lead us 'to find that neither they nor Van intended merely that -she take title to; the, house on their behalf..a See also Altramano v. Swan 128 P.2d 353, 356 (Cal. 1942) (transfer between parent and child is gift unless manifest intent otherwise) .

Because the estate has not sufficiently rebutted the presumption of a gift, we hold that no resulting trust was created.

C.

Possession or En-joynent We o think that Van wantjed sto leave the house to her daughter s family in some way. But having found that Van had a benefici l interest in the house, our next task is to see if- her divestment of -title to the ho se acted to remove the value from her esta e.

Even where a decedent has transferred property before d ath, the value of such transfers can be included in the estate i she kept some sort df continuing interest in the property Sec. 20.2036-1, Estate Tax Regs.

The next question is therefor whether Van retained;sufficient ."possession or enjoymen " of the Capistrano 1 ouse until her death so as to require þhat the house be includëd in her estate.

We have previously considered what "possession or :enjoyment" is.

For example, in Estate of Rapelte v. Commissioner,, 73 T.C.

82, 86 ( L979) a case involving a similar- situation where. the decedent transferred his pers nal residence to his two daughters but cont nued living there, we held that:

Pos ession or enjoyment Åf gifted property is retained when there is an express ior implied understanding to tha effect among the .parties at transfer. * * * The burden is on tide petitioner to disprove the exi tence of any impliedlagreement or understanding, an that burden is parti ularly onerous when intrafamily arrangements are involved".. * .*, * - the time of Because the decedent in Rapel e maintained exclusive occupancy of the residence until his death and did not pay rent, even absent an express agreement we found that possession and enjoyment were I I preserit because all that had happened in the4relationship between the parties safter the transfer was a change natitle.

There is no'disputetthat ¿Van lived in the Capistrano house from 19731untiil her death in 2000-;3 durincj ithåt time she never paid Ány rent, either"to Peritat or to -the 'Hu .

'We shave found on numerous occasions -that the type' of possession or enjoyment Van had was suf ficient to--i'nclude theavalues of the résidence in the decedént's estate.« See; e.g., Eétat e of Disbrow v. Commissioner,

T. C.

'Memö. 2006234 (implied agreement for spossession ,of residence where decedent made- irregular rentspayments fortless than amount stated in lease agreement) ; Estate of Trotter< v.

Commissioner, T.C. Memo. 2001-250 s(continued ocaupation of condominium after transfer of title to donee andano payment of rènt caúsed inclusiori- of res~idencer in estat e) .

The es'tate' s response is that possession of: legal title should be the controlling factor.

The Hus' daughters shared' title with their mother when Van passed away so they argue the estate (quite possibly divided with Van' s other children) should not be forced to include the value of the house in calculating the tax due.

We must disagree.

As in Commissioner v. Estate of Church, 335 U.S. 632, 644 (1949) , the "passacje 6f the mere technical legal title to a trustee is not necessarily crucial in determining whether and when a gift becomes coinplete' for estate tax purposes." Although Van had dispossessed herself of legal title to the Capistrano property., she continued to live there--a key indi ator of the operative "possession or enjoyment" element To avoid the reach of section 2036, a. transfer must,be made so that the decedent is "left with no present legal title in the property no possible reversionary interest in that title, sand no right-to possess or to enjoy the property then or thereafter."

Id. at 6 5.

The facts here ,cómpel us to find that the Commissioner correctly ,included -the Capistrano house in Van',s estate.

We express no opinion on how this might or should affect the ulti ate disposition of t13e house or thes remainder of the estate . t Van' s legatees .

Conclusion We onclude that Van hadja beneficial interest in the Capistra io house and displayed a sufficient,degree- of "possession or enjo ent" urder section 2036 for it to.be included in her taxable state. Therefore, Decision will be entered f or respondent .

2. U less otherwise indicated, all section referencès are to the Internal Revenue Code in Áffect for the date of Adelina Van's to the Tax Court ,Rules of Practice death, a id Rule references ar and Procedure .