LISA GODBEY WOOD, Chief District Judge.
Decedent Thomas H. Smoot, II ("Smoot II") passed away on February 16, 2009. Having been an insurance broker, it is unsurprising that the beneficiaries of his estate were entitled to collect on several life insurance policies, among other financial assets. Two of these beneficiaries included Smoot II's son, Thomas H. Smoot, III ("Smoot III"), and Dianne Smoot, Smoot II's ex-wife. Dianne Smoot was divorced from Decedent before he died. Smoot III, as Executor of Decedent's estate, negotiated and paid the IRS a considerable sum for taxes and fees associated with the estate, including taxes on the proceeds Dianne Smoot received on the life insurance policies and other share of the taxes and fees. In this action, Smoot III seeks to recover against Ms. Smoot the taxes he paid that are attributable to her insurance proceeds under I.R.C. § 2206 (Count I), contribution from Ms. Smoot for the portion of the taxes attributable to all other assets she received (Count II), and attorney's fees and costs (Count III). Plaintiff has filed a motion for summary judgment (Dkt. no. 31).
For the reasons stated below. Plaintiff's motion for summary judgment is
After Smoot II passed away, Smoot III was named the Executor of the estate. Plaintiff was a beneficiary of the estate, along with Decedent's ex-wife, Dianne Smoot (`"Defendant") . Defendant was named as the beneficiary of certain financial assets held by Decedent, including life insurance policies, deferred compensation/commission plan accounts, an IRA account, a 401(k) account, and an annuity. Plaintiff and Defendant agree that Defendant received approximately $5.4 million from these assets, however they do not agree on the exact amount. Plaintiff maintains that Defendant received $5,434,027, while Defendant only admits that she received $5,403,250. Dkt. no. 34-1, ¶ 1; Dkt. no. 34-2, ¶¶ 1-3.
As Executor, Plaintiff was responsible for paying the federal estate taxes due on Decedent's estate. While Plaintiff initially filed a tax return taking the position that the estate was insolvent and thus owed no taxes, the IRS disputed this position. In late 2012, Plaintiff reached a settlement with the IRS and agreed to pay $1,268,355 in federal estate taxes plus $145,425 in accrued interest, for a total of $1,413,780.
Item X of Decedent's will provides that beneficiaries will pay a pro-rata share of the taxes assessed on the estate for the assets they received:
Dkt. no. 1, p. 36 (Will, Item X). Plaintiff argues that for purposes of this calculation, three individuals received payments triggered by Decedent's death: Defendant received $5,434,027, Plaintiff received $2,248,051, and Decedent's former business partner Greg Howard received $100,625.
Plaintiff demanded reimbursement from Defendant for the portion of estate taxes attributable to the proceeds Defendant received on January 9, 2008. Dkt. no. 1, p. 13. Defendant has not yet paid Plaintiff this amount.
Defendant's initial reason for refusing to pay Plaintiff his requested amount of contribution was that the Parties had been involved in a prior lawsuit regarding the subject insurance policies. In the previous case, the Parties disputed whether Defendant must contribute to payment of the estate's tax liability. At the time, though. Plaintiff, as Executor of the estate, had taken the position that no estate taxes were due.
Initially, Defendant argued that Plaintiff was precluded from re-litigating his contribution claims because the prior claim was dismissed and the parties had reached a settlement agreement for "all remaining claims." This Court, in its December 4, 2013 Order denying Plaintiff's Motion for Partial Summary Judgment on the Pleadings and Defendant's Motion for Summary Judgment, held that Plaintiff was not barred from bringing the present action. Dkt. no. 27, pp. 1-2.
Plaintiff brings the present motion for summary judgment (Dkt. no. 31), arguing that he has now produced adequate evidence which shows there is no material dispute as to his contribution claims.
Summary judgment is required where "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A fact is "material" if it "might affect the outcome of the suit under the governing law."
The party seeking summary judgment bears the initial burden of demonstrating the absence of a genuine issue of material fact.
Plaintiff brings three claims against Defendant: Count I for contribution for taxes paid on the life insurance policies pursuant to I.R.C. § 2206; Count II for contribution under state law for taxes paid on all other assets Defendant received from the estate; and Count III for attorney's fees. Plaintiff also argues jointly for prejudgment interest on Counts I and II.
Count I of Plaintiff's complaint seeks contribution from Defendant for the amount of tax he paid on behalf of the proceeds Defendant received from insurance policies on the life of Decedent. Under I.R.C. § 2206, "the executor shall be entitled to recover from [a] beneficiary such portion of the total tax paid as the proceeds of such policies [paid to the beneficiary] bear to the taxable estate" if (1) the tax has been paid, (2) any part of the gross estate on which the tax is assessed "consists of proceeds of policies of insurance on the life of the decedent receivable by a beneficiary other than the executor," and (3) the decedent does not direct otherwise in his will. 26 U.S.C. § 2206. The gross estate's value includes the value of all property received by beneficiaries "as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership." I.R.C. § 2042(2). Therefore, for Defendant to be liable for taxes on proceeds from life insurance policies (1) Defendant must have received proceeds as the insurance policies' beneficiary and (2) the Decedent must have had some incidents of ownership over the policies at the time of his death.
In its prior Order, this Court held that Plaintiff had not established that Defendant received proceeds properly included in the gross estate's value. Dkt. no. 27, p. 22. The Defendant had admitted to receiving proceeds from life insurance policies, valued at close to $2,830,162. Dkt. Nos. 1 ¶ 10; 6 ¶ 10. However, this Court held that Plaintiff had not made a sufficient showing as to whether the Decedent had incidents of ownership over these policies at the time of this death. Dkt. no. 27, p. 27. This was because Plaintiff had only attached to his complaint a schedule of the assets Defendant received, documentation of the total amount of tax the estate owed, proof that the Executor paid that amount, and the share of that amount attributable to the proceeds Defendant received.
Thus, at the summary judgment stage, two issues remain regarding Count I: whether Decedent's will expressly sets forth a tax liability scheme that is inconsistent with that provided for in I.R.C. § 2206, and whether Decedent retained incidents of ownership over the life insurance policies such that the proceeds were properly included in his gross estate.
Plaintiff argues, and Defendant appears to concede, that Decedent's will does not contemplate an alternative tax liability scheme for its beneficiaries. The relevant provision. Item X, reads:
Dkt. no. 1, Ex. D, p. 36-37. This formula is perfectly consistent with I.R.C § 2206's provision that the `"executor shall be entitled to recover from such beneficiary such portion of the total tax paid as the proceeds of such policies bear to the taxable estate. If there is more than one such beneficiary, the executor shall be entitled to recover from such beneficiaries in the same ratio." I.R.C. § 2206. Thus, I.R.C. § 2206 applies to Decedent's will because he has not "directed otherwise."
However, Defendant objects that Plaintiff has produced no evidence that Decedent retained incidents of ownership over the life insurance policies such that the proceeds were properly included in the gross estate. While Plaintiff has produced several documents in his attempt to establish the proper incidents of ownership. Defendant argues that the various documents are either unauthenticated, improperly authenticated, or do not actually show that Decedent retained incidents of ownership over the policies in question at the time of his death. Thus, before examining the documents to see if they establish that Decedent had incidents of ownership over the policies at the time of his death, the Court must first determine their authenticity and admissibility.
Defendant argues that not a single one of Plaintiff's proffered documents showing incidents of ownership is admissible. There are two groups of these disputed documents. The first group is a collection of insurance policies, designation forms, account statements, and IRS Form 712s regarding the policies in question."
Defendant argues that none of the documents have been properly authenticated, and thus cannot be relied upon as evidence in considering Plaintiff's motion for summary judgment Plaintiff counters that the documents speak for themselves and need no authentication. However, out of an abundance of caution. Plaintiff replied to Defendant's objections by submitting the second group of affidavits, which come from representatives of the various life insurance companies that issued the policies and purport to authenticate them. Defendant objects to these affidavits as untimely. Plaintiff also included the affidavit of Decedent's personal assistant, Michelle Allbright, in order to show that Decedent had incidents of ownership over his policies at the time of his death. Below is a summary of these affidavits, what they authenticate, and what other testimony they provide:
Before an item of evidence may be admitted. Federal Rule of Evidence 901(a) requires it to be authenticated with evidence ""sufficient to support a finding that the item is what the proponent claims it is." Fed. R. Evid. 901(a). Proper authentication requires only that the proponent of the evidence make out a prima facie case that the proffered evidence is what it purports to be.
One challenge Defendant makes to several of the affidavits listed above is that they go beyond simply authenticating documents and instead make substantive assertions about those documents such as, for example, that Decedent maintained control of those policies at the time of his death. Defendant argues that this testimony is inadmissible if the witnesses were not previously disclosed under Federal Rule of Civil Procedure 26. Other federal courts have held that where an affidavit of a previously undisclosed witness is exclusively used to authenticate documents already known to exist to a party, the fact that the witness was not previously disclosed is harmless and the affidavit may properly be considered by the court.
Here, it is uncontested that Defendant knew of the various documents creating the life insurance policies, annuities, IRAs, and other assets by which she received $5.4 million upon the death of her ex-husband. Thus, the affidavits of Navin, O'Malley, Taylor, Pascarella, and Terry are admissible insofar as they merely authenticate the documents in question in this case. However, several of these affidavits go further than mere authentication, and state that Decedent owned and controlled the policies at the time of his death.
Unlike the other affiants, Ms. Albright was disclosed to Defendants, but not until parties filed the proposed pre-trial order.
Here, Defendant had ample notice that Ms. Albright had exactly the information she produces in her affidavit. In fact. Defendant, through the same counsel representing her in the present case, solicited the exact same information Ms. Albright presents in her affidavit during a deposition in a prior case involving both parties and the same insurance policies in question here.
Dkt. no. 51-1, 25:20-26:3; 42:4-13. Plaintiff solicited this very testimony in a prior proceeding. She will not be surprised at all to see it in the current proceedings regarding the same policies. Ms. Albright's affidavit, then, is admissible in its entirety because it is harmless under Rule 37(c)(1).
Thus, Plaintiff has properly authenticated all of the plans, policies, and other documents provided in Galis's affidavit (Dkt. no. 34) via the affidavits of Navin, O'Malley, Taylor, Pascarella, and Terry (Dkt. nos. 52, 54, 56-58). While these five affidavits are not admissible to show that Decedent had any incidents of ownership over the policies (insofar as such incidences cannot be gleaned from the face of the policies and other documents themselves), the affidavit of Ms. Albright, which was admitted in its entirety, may be put to that use. With this admissible evidence, the Court now turns to Defendant's specific objections to whether each document actually establishes Decedent's incidents of ownership,
Proceeds from a life insurance policy are considered part of an estate for federal estate tax purposes as long as the decedent possessed incidents of ownership over the policy. I.R.C. § 2042 (including in the gross estate the value of all property received by beneficiaries to insurance policies on the decedent's life "with respect to which the decedent possessed at his death any of the incidents of ownership . . ."). "Incidents of ownership" generally refers to the right of the insured or his estate to the economic benefits of the policy. 26 C.F.R. § 20.2042-1(c)(2). This includes "the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc."
The most sweeping evidence in the record establishing that Decedent held incidents of ownership over all of the policies in question in this case is the affidavit of Decedent's former personal assistant, Ms. Albright. As Defendant established through examining Ms. Albright in 2009, Ms. Albright, at Decedent's request, prepared a memorandum for Decedent two months before he died so that he may consider who would remain a beneficiary of one of his many life insurance policies and other financial assets. Albright Aff. ¶ 9. While Decedent only elected to change the beneficiary of one policy, it was Ms. Albright's understanding that "he could have changed the beneficiaries designated for those various life insurance policies and other financial assets."
The Court need not rely on Ms. Albright's testimony alone to conclude that Decedent held incidents of ownership over each of the insurance policies in question. Those policies themselves reflect the incidents in various ways.
The New York Life Insurance Policies each indicate that Decedent was either the Owner or, in the case of Policy 62 800 622, which was owned by Satilla Community Bank, that Decedent had the power to (and did) use the policy to obtain a loan;
Each of these documents states, on an endorsement page at the end of the policy, "This policy is issued in place of a previously issued policy with the same policy number which was lost, as shown in the evidence file with us."
The Cincinnati Life Insurance policies, authenticated by Terry, each include a copy of the application for the policy along with a "specimen" document detailing its terms. Defendant argues that because these "specimen" documents list "John Doe" as the owner and are marked with fictitious policy numbers, there is no way to tell if the specimen policies' terms match those of the original policies. However, "when a lost or destroyed insurance policy is involved, the terms of the policy can be shown by secondary evidence."
The Unum Group Policy was not a policy that Decedent owned himself. The group policy was one provided by his employer as a benefit. While Decedent did not "own" the policy, he did exhibit other incidents of ownership over the policy by designating its beneficiaries.
Finally, there are a number of other life insurance policies that Decedent owned at the time of his death, but which were held on the life of his Defendant. The Form 712's allocating the value of these plans to Decedent's estate are authenticated in the Taylor Affidavit. Dkt. no. 54. While the value of the death benefits of these policies was not included in Decedent's estate because no death benefit will be paid until Defendant passes away) the "ownership interests" of $7,085 were nevertheless included in the state tax return. Because these policies reverted to Defendant, this amount of ownership interest in these policies is attributable to her. Each of these policies is a New York Life Insurance Company policy.
Finally, Defendant argues that even if these Documents show that Decedent had incidents of ownership over the policies at some point prior to his death, they do not prove that he held incidents of ownership at the time of his death. Defendant suggests that Ms. Albright's testimony that Decedent requested a summary of the beneficiaries to policies on his life two months before he died is two months too soon to establish that he had incidents of ownership when he actually passed. The Court is not persuaded by Defendant's argument. Ms. Albright testified that Decedent held incidents of ownership in the weeks preceding his death. Nothing in the record suggests that this fact changed in Decedent's final weeks.
Defendant raises two challenges against Plaintiff's calculation of the taxable estate the "denominator" in the formula that determines Defendant's liability). First, Defendant argues that Plaintiff incorrectly calculated the taxable estate to be roughly $7.7 million, when in fact Decedent's tax return demonstrates that there was $9.1 million of "Insurance on the Decedent's Life."
Second, Defendant argues that because Decedent was required under the divorce decree to maintain a $1 million policy on his life for her benefit, that amount should have been deducted from the taxable estate as indebtedness pursuant to I.R.C. § 2053(a)(4). Defendant raised this issue in her initial reply brief, and Plaintiff countered that, as Executor of the estate, he had considerable discretion in how he resolved the tax debt on behalf of the estate. However, Plaintiff says that out of an abundance of caution, he nevertheless presented Defendant's § 2053(a) (4) argument to the IRS after briefing on the motion for summary judgment was complete. Dkt. no. 74, ¶ 6. The IRS agreed with Defendant's argument and approved an adjustment of the estate's tax return.
This refund, of course, changes the amount that Defendant will be liable for if Plaintiff prevails on all of his claims. Specifically, Defendant's share of the principal estate tax was reduced from $885,589 to $586,807, her share of the interest paid to the IRS was reduced from $101,538 to $67,281, and the prejudgment interest on these amounts (as of March 19, 2015, by Plaintiff's calculations) was reduced from $149,745 to $100,729. Dkt. no. 74, ¶ 8. Defendant agrees with Plaintiff that, assuming Plaintiff can prove liability. Plaintiff's damages claim should be reduced by $382,055. Dkt. no. 76, p. 2.
Defendant argues that, to the extent she is liable for contribution under I.R.C. § 2206, she should still not be liable for the interest and fees paid to the IRS in addition to the principal debt. However, § 2206 allows an executor to collect from each beneficiary who received benefits on the decedents' life insurance policies "such portion of the total tax paid as the proceeds of such policies bear to the taxable estate." I.R.C. § 2206. The I.R.C. states that taxes paid on an estate and the interest imposed on such tax are one and the same:
I.R.C. § 6601(e)(1). Plaintiff is liable for the interest and fees on her share of the taxes to the same extent she is liable for the tax itself. This amount, after taking into consideration the IRS's recent adjustment on the estate's tax liability, is $67,281.
Finally, Defendant raises res judicata and collateral estoppel arguments against Plaintiff's claim for I.R.C. § 2206 contribution. As Defendant acknowledges, the Court has already rejected these arguments in its prior Order.
Count II of Plaintiff's Complaint seeks recovery of $353,879, the portion of the tax attributable to all non-life insurance Assets Defendant received (i.e., the deferred compensation/deferred commission plan accounts, the IRA account, the 401(k) account, and the annuity, which are not covered by I.R.C. § 2206). Defendant argues, first, that there is no right of contribution under Georgia law and, second, that even if there is such a right, the fact that Defendant and Decedent were divorced renders the terms of the will inapplicable to her. The Court need not discuss Defendant's first challenge because she prevails on the second.
In Georgia, "[a]ll provisions of a will made prior to a testator's final divorce or the annulment of the testator's marriage in which no provision is made in contemplation of such event shall take effect as if the former spouse had predeceased the testator . . ." Ga. Code Ann. § 53-4-49. Defendant argues that because the will was written while she and Decedent were still married. Item X, which requires contribution for the tax debt paid on the proceeds she received from the estate, does not apply to her and she therefore does not have to contribute to the portions of the tax debt not already accounted for under I.R.C. § 2206. Plaintiff has responded to this argument with secondary authority that shows, he claims, that the General Assembly did not intend section 53-4-49 to operate as Defendant argues it should.
Because there is no ambiguity in Georgia Code section 53-4-49, this Court's inquiry into its meaning begins and ends with its terms: "All provisions" of Decedent's will made prior to his final divorce with Defendant "in which no provision is made in contemplation of such event shall take effect as if the" Defendant had predeceased Decedent.
The Internal Revenue Code and Georgia's probate laws both contemplate extremely intricate networks of estate tax schemes. Unsurprisingly, the state and federal tax schemes may not dovetail perfectly in all circumstances. And here. Plaintiff appears to be caught in a gap between the two systems: while the Internal Revenue Code requires him, as Executor of the estate, to pay taxes on the value Defendant received from Decedent's non-life insurance policies without any provision for contribution, the one provision that would fill that gap—Item X—is excluded by operation of Georgia's probate law. Undoubtedly, this is perhaps an unintended outcome of Georgia's probate code. But because the language of the statute is unambiguous, the outcome is inescapable in this case. Thus, Count II of Plaintiff's motion for summary judgment must be
In addition to contribution for the taxes paid on the assets Defendant received under Decedent's will, the Plaintiff also seeks prejudgment interest from Defendant. In Georgia, "[a]ll liquidated demands, where by agreement or otherwise the sum to be paid is fixed or certain, bear interest from the time the party shall become liable and bound to pay them . . ." Ga. Code Ann. § 7-4-15.
As noted in
Finally, Plaintiff alleges that he is entitled to attorney's fees and costs pursuant to Georgia Code section 13-6-11 "because by refusing to reimburse Executor for the portion of the estate taxes attributable to the Proceeds she received, Dianne has acted in bad faith, been stubbornly litigious, and has caused the Executor unnecessary trouble and expense." Compl. ¶ 43.
While the costs of litigation are generally not allowed under Georgia law, Georgia Code section 13-6-11 allows "a jury to allow" attorney's fees and costs "where the plaintiff has specially pleaded and has made prayer therefor and where the defendant has acted in bad faith, has been stubbornly litigious, or has caused the plaintiff unnecessary trouble and expense . . ." Ga. Code Ann. § 13-6-11.
As to federal law, I.R.C. § 2206 does not specifically address the issue of attorney's fees. The Supreme Court has expressed a preference for the "American Rule," which prohibits the imposition of the prevailing party's attorney's fees on an opponent except when authorized by statute or under certain traditionally recognized exceptions.
Here, Defendant's defense was not vexatious, conducted in bad faith, or even overly litigious considering the stakes. In fact. Defendant's perseverance on the argument that $1 million of her insurance proceeds were improperly included in the taxable estate proved to be correct and saved the entire estate $476,986. Thus, while Defendant has not prevailed on all of her claims, her ardent defense cannot be considered `"vexatious" or done in "bad faith" where it is based on legitimate contentions. Summary judgment is
Having determined that there is no genuine dispute of material fact as to Defendant's challenges to Plaintiff's request for contribution under I.R.C. § 2206, all that is left to do is calculate the amount of Defendant's liability.
Plaintiff has provided a calculation of Defendant's liability in its latest brief.
Thus, because the variables pertinent to Defendant's liability have changed over the course of summary judgment briefing and the parties have proffered multiple (and unreconciled) calculations that could not contemplate the conclusions outlined here, the Court directs the parties to file their own final calculations in light of this Order. Specifically, the parties are directed to submit, with supporting pin-cites (document, page, and, if applicable, line or paragraph number) to the record, one document referencing every variable in a calculation of Defendant's liability under Count I (contribution under I.R.C. § 2206), including amounts for fees and interest paid to the IRS but excluding prejudgment interest.
Plaintiff is directed to file its final calculation within 10 days. Defendant will have 10 days to respond. Defendant may, in its response, challenge Plaintiff's calculation or specific variables thereof for which it argues a material issue of fact remains, even after accounting for this Order's holdings.
Plaintiff's Motion for Summary Judgment is
