                               T.C. Memo. 2020-71



                         UNITED STATES TAX COURT



               ESTATE OF MARY P. BOLLES, DECEASED,
      JOHN T. BOLLES, EXECUTOR, Petitioner v. COMMISSIONER OF
                   INTERNAL REVENUE, Respondent



      Docket No. 4803-15.                           Filed June 1, 2020.



      William E. Taggart, Jr., and Josh P. Davis, for petitioner.

      Andrew R. Moore, and Michael Skeen, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      GOEKE, Judge: Mary Bolles died on November 19, 2010. Her son John

filed a Federal estate tax return, and respondent determined a deficiency in estate
                                        -2-

[*2] tax of $1,152,356.1 In this opinion we refer to Mary Bolles by her name or as

decedent. We refer to her sons, John and Peter, by their first names.

      This case has a long procedural history during which related cases asserting

gift tax liability were dismissed and petitioner filed numerous motions attempting

unsuccessfully to remove any consideration of whether Mary made gifts to Peter

from the docket before us. At trial respondent conceded the primary issue in the

notice of deficiency, whether the estate had undervalued Peter’s debt, and asserted

the alternative position from the notice. Accordingly, the issue remaining in

dispute is whether advances totaling $1,063,333 that Mary made over many years

to Peter should be treated as loans or as gifts. Each side sees the answer as totally

one way. We disagree with both parties as we explain herein.

                                FINDINGS OF FACT

      When John timely filed the petition, he was a resident of California. The

evidence in this case consists of stipulated facts, documents admitted by

stipulation, and testimony. The facts stated in the two stipulations of fact are

incorporated in our findings.


      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code as amended and in effect at all relevant times, and all Rule
references are to the Tax Court Rules of Practice and Procedure. Amounts are
rounded to the nearest dollar.
                                        -3-

[*3] A loving mother of her five children, Mary was determined to provide her

assets to her children equally. Her practice was to keep a personal record of her

advances and occasional repayments for each child. On the basis of her original

intent and the advice of her tax counsel, she treated the advances as loans. She

forgave the “debt” account of each child every year on the basis of the gift tax

exemption amount. Her practice would have been noncontroversial but for the

substantial funds she advanced to Peter.

      Mary married John Savage Bolles in 1935, and they divorced in 1977.

Decedent and John Savage Bolles established the Bolles Trust in connection with

the dissolution of their marriage to hold some of their jointly owned property,

including their substantial art collection and an office building in San Francisco.

At the time of her death Mary and her five children were among the beneficiaries

of the Bolles Trust. John Savage Bolles died in 1983.

      Peter was the oldest of their five children. He graduated from college with a

degree in architecture in 1965. On the basis of his academic achievements and his

father’s reputation as an architect in San Francisco, Peter’s professional career

showed great promise. He began his career in Boston. He took over his father’s

architecture practice in San Francisco in the early 1970s and enjoyed some early

success in attracting clients. Peter expanded the practice through the 1970s into
                                         -4-

[*4] the early 1980s; but despite his salesmanship he began to have financial

difficulties largely because his expectations exceeded realistic results. By 1983

Peter’s practice was not current on its bills. In July 1983 Peter, as president of

Bolles Associates and Peter B. Bolles, P.A., entered into an agreement with the

Bolles Trust to use trust property as security for $600,000 in bank loans. The

agreement also reflects that the Bolles Trust was owed $159,828 in back rent by

Peter’s practice. Within a year Peter had failed to meet the obligations of the

agreement, and the Trust was ultimately held liable for the $600,000. Mary had

contemporaneous knowledge of these events.

      Mary transferred $1,063,333 to or for the benefit of Peter from 1985

through 2007. The annual amounts are shown below:

                            Year         Annual amount
                            1985               $7,000
                            1986               98,121
                            1987               35,500
                            1988            155,500
                            1989               40,500
                            1990               89,075
                            1991            105,682
                            1992            210,126
                                       -5-

[*5]                       1993              24,780
                           1994              10,685
                           1995                 833
                           1996               3,750
                           1997               8,850
                           1998              14,750
                           1999              40,790
                           2000              24,200
                           2001              22,450
                           2002              43,653
                           2003              44,650
                           2004              72,390
                           2005               7,200
                           2006               ---
                           2007               3,348

We note these numbers exceed the amount in dispute by $500, but respondent has

conceded this additional amount.

       Peter did not repay decedent after 1988 although he did hold gainful

employment for many years after that and attempted to revive his practice in Las

Vegas.
                                        -6-

[*6] Decedent directly transferred money to Peter, deposited money into

accounts to which Peter had access, and made payments on loans taken out by

Peter. Decedent also issued a letter to American Asian Bank in September 1986

allowing Bolles Associates to withdraw funds totaling $27,121 to pay interest on a

loan. Later, in April 1992 decedent paid $196,928 to settle the balance of a bank

loan Peter owed.

      Decedent was the settlor of the Mary Piper Bolles Revocable Trust dated

October 27, 1989. Under the revocable trust decedent specifically excluded Peter

from any distribution of her estate upon her death.

      In late 1994 or early 1995 decedent began working with Karen Hawkins, an

attorney who assisted decedent in organizing her financial affairs and prepared

various documents for decedent, including estate planning documents. As part of

her estate planning, decedent signed a “First Amendment to Mary Piper Bolles

Trust” (First Amendment) which, in article five, “Distributions After Settlor’s

Death”, no longer explicitly excluded Peter from any distribution but provided a

formula to account for the “loans” made to him during Mary’s lifetime.

      Among the documents Ms. Hawkins drafted was a one-page document

captioned “Acknowledgement [sic] and Agreement Regarding Loans”

(Acknowledgment). The Acknowledgment is dated May 3, 1995, and signed by
                                         -7-

[*7] Peter. The Acknowledgment recites that Peter “has received, directly or

indirectly, loans from Mary Piper Bolles in a total amount of $771,628” and as of

May 3, 1995, “he has neither the assets, nor the earning capacity, to repay all, or

any part, of the amount previously loaned, directly or indirectly, to the

undersigned by Mary Piper Bolles.” As a result Peter “acknowledges and agrees”

that,

        irrespective of the uncollectability or unenforceability of the said
        loans, or any portions thereof, the entire amount specified
        hereinabove, $771,628.00, plus an imputed amount of interest
        thereon, computed at the Applicable Federal Rate for short-term
        indebtedness determined as of the end of each calendar year, shall be
        taken into account for purposes of any and all calculations to be made
        pursuant to Article Five, paragraph 5.3, of the First Amendment to
        Mary Piper Bolles Revocable Trust executed on November 8, 1994.

        Contrary to the recital in the Acknowledgment, the First Amendment was

not executed until August 27, 1996. The calculations found in article five of the

First Amendment describe the manner in which advances, described as loans, are

to be taken into account in dividing the trust assets among decedent’s children

upon her death. In essence, under subparagraph (b), the value of the trust assets

after allowance for expenses such as estate tax is divided equally; however, each

child’s share is reduced, and that amount redistributed pro rata among the other
                                        -8-

[*8] beneficiaries, by the amount of the child’s outstanding loans, if any, plus

accrued interest.

      The explanation of adjustments to the notice of deficiency states:

      I. Schedule C, Items 2 and 3

      It is determined that the fair market value of the Promissory Note and
      receivable due from Peter P. Bolles under IRC section 2031 is
      $1,063,333 instead of zero as reported and that interest on the
      Promissory Note and receivable is includible in the gross estate under
      IRC section 2033 in the amount of $1,165,778. Therefore, the value
      of the gross estate is increased by $2,229,111.

      II. Adjusted Taxable Gifts

      In the event it is determined that the fair market value under IRC
      section 2031 of the Promissory Note and receivable from Peter Bolles
      and interest on the Promissory Note and receivables is zero then it is
      determined that Mary P. Bolles transferred property to Peter Bolles
      during her life such that “adjusted taxable gifts” in the amount of
      $1,063,333 is included in computing taxpayer’s estate tax liability
      under IRC section 2001(b).

                                     OPINION

      Respondent has conceded the primary position in the notice of deficiency

that the estate tax return undervalued the debt from Peter and now relies solely on

the alternative argument that Mary’s advances to Peter were gifts. The first

question presented by the alternative argument is whether interest on the advances

may be included in the adjustment such that the adjustment exceeds the amount
                                         -9-

[*9] stated in the notice of deficiency’s explanation of the alternative adjustment.

The inclusion of interest on the alleged gifts is not stated in the notice of

deficiency or the answer. Also, respondent has not amended his answer to expand

the simple text of the notice of deficiency. While the alternative position in the

notice of deficiency is at issue, there is no procedural basis to expand that position

beyond its own terms and only $1,063,333 is at issue.

      The second issue is petitioner’s argument that under Rule 142 respondent

has the burden of proof on the gift issue. While petitioner’s position has merit, we

do not need to resolve the issue because the evidence in this case permits a

resolution on the record of trial, and we do not rely on the burden of proof to

decide this case.

      Finally, we address the issue of whether the advances were loans or gifts.

Both parties rely on the analysis of Miller v. Commissioner, T.C. Memo. 1996-3,

aff’d, 113 F.3d 1241 (9th Cir. 1997), for the traditional factors used to decide

whether an advance is a loan or a gift. Those factors are explained as follows:

(1) there was a promissory note or other evidence of indebtedness, (2) interest was

charged, (3) there was security or collateral, (4) there was a fixed maturity date,

(5) a demand for repayment was made, (6) actual repayment was made, (7) the

transferee had the ability to repay, (8) records maintained by the transferor and/or
                                         - 10 -

[*10] the transferee reflect the transaction as a loan, and (9) the manner in which

the transaction was reported for Federal tax purposes is consistent with a loan.

      These factors are not exclusive. See, e.g., Estate of Maxwell v.

Commissioner, 98 T.C. 594 (1992), aff’d, 3 F.3d 591 (2d Cir. 1993). In the case

of a family loan, it is a longstanding principle that an actual expectation of

repayment and an intent to enforce the debt are critical to sustaining the tax

characterization of the transaction as a loan. Estate of Van Anda v.

Commissioner, 12 T.C. 1158, 1162 (1949), aff’d per curiam, 192 F.2d 391 (2d Cir.

1951).

      While Mary recorded the advances to Peter as loans and kept track of

interest, there were no loan agreements or attempts to force repayment.

Respondent focuses on the lack of security for the loans to Peter. We agree that

the reasonable possibility of repayment is an objective measure of Mary’s intent.

The estate maintains that during her life Mary always considered these advances

as loans. We cannot reconcile this argument with the deterioration of Peter’s

financial situation and the ultimate failure of his practice in San Francisco and

later in Las Vegas.

      Peter’s creativity as an architect and his ability to attract clients likely

impressed Mary. We find she expected him to make a success of the practice as
                                         - 11 -

[*11] his father had, and she was slow to lose that expectation. However, it is

clear she realized he was very unlikely to repay her loans by October 27, 1989,

when her trust provided for a specific block of Peter’s receipt of assets at the time

of her death. Accordingly, in 1990 the “loans” lost that characterization for tax

purposes and became advances on Peter’s inheritance from Mary. In conclusion,

we find the advances to Peter were loans through 1989 but after that were gifts.

We have considered whether she forgave any of the prior loans in 1989, but we

find that she did not forgive the loans but rather accepted they could not be repaid

on the basis of Peter’s financial distress.

         In reaching our holding, we have considered all arguments made, and, to the

extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.

         To reflect the foregoing,


                                                  Decision will be entered under

                                        Rule 155.
