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ESTATE OF ELKINS v. UNITED STATES

September 25, 1978

ESTATE of James A. ELKINS et al., Plaintiffs,
v.
UNITED STATES of America, Defendant



The opinion of the court was delivered by: COWAN

MEMORANDUM OPINION AND FINDINGS OF FACT

James A. Elkins (hereinafter "Elkins, Sr.") was one of the founders of the banking complex which is now First City Bancorporation. Elkins, Sr. is also the founder of a law firm which is now known as Vinson & Elkins.

 Elkins, Sr., died May 7, 1972, leaving a substantial estate. Mrs. James A. Elkins died September 28, 1969. The estates of Mr. and Mrs. Elkins have paid a total of $ 1,515,834.95 in federal estate taxes.

 The issue in this case is whether or not the estates of Mr. and Mrs. Elkins are entitled to deductions for claims against their estates by their sons, James A. Elkins, Jr. and William S. Elkins. The undersigned has determined that the estates are entitled to deductions for the claims of the sons, and the purpose of this memorandum is to set out findings of fact and conclusions of law upon which the undersigned relies to arrive at this conclusion.

 Over the many years of his productive life, Elkins, Sr. was engaged in various enterprises. During the years before 1955, Elkins, Sr. and his sons, James, Jr. and William, were owners of an interest in a legal entity which held title to the Esperson Building. In 1955, the Esperson Building was sold, and this transaction resulted in the infusion of a substantial amount of cash into the accounts of Elkins, Sr., James A. Elkins, Jr. (hereinafter "Elkins, Jr.") and William S. Elkins. In 1955 Elkins, Sr. was in a higher tax bracket than his sons, and was heavily invested. At the time of the sale of the Esperson Building, his needs for cash exceeded those of his sons. Accordingly, each of his sons made to him a loan, evidenced by an interest-bearing note. Some years after the loans were made, payments of interest and principal were made, and then apparently through mutual agreement of the parties, the payments ceased.

 One of Elkins, Sr.'s most predominant assets was a block of stock in the First City National Bank.

 Starting in the mid-1950's Elkins, Sr.'s tax counselor, Marvin K. Collie, commenced efforts to persuade Elkins, Sr. to make substantial gifts to his descendants for the purpose of minimizing inheritance taxes. Elkins, Sr., until 1964, resisted this advice, stating that he did not have sufficient cash to pay gift taxes. An active, aggressive entrepreneur, Elkins, Sr. remained "fully invested," committing both his income and his borrowing power to the development of various enterprises in which he was active.

 In 1964, Mr. Collie again urged Elkins, Sr. to make substantial gifts. By this time Elkins, Sr. was over 80 years of age and in failing health. In addition, Collie, an active tax practitioner, was convinced that changes in the law were imminent which would make it more difficult for a donor to minimize estate taxes by making substantial gifts before death. Collie advised Elkins, Sr., that even if he did not have the cash to pay the gift tax, that he, Elkins, Sr. should still make the gifts, and borrow the money for the purpose of paying the gift taxes. At the time of Collie's advice to Elkins, Sr. there was no discussion concerning the source of the borrowing, and there is no evidence that Elkins, Sr. or any other person at the time of the basic decision to make the 1964 gifts, contemplated borrowing from the donees.

 In addition to the desire to minimize estate taxes, it is also inferable, and the Court does infer, that Elkins, Sr. was ultimately willing to make the 1964 gifts because of his desire to enable his two sons to maintain a substantial equity position in the First City National Bank. In this connection, at that time Elkins, Jr. was Chairman of the Board of the First City National Bank, and William Elkins, a lawyer, was in charge of the legal work for the First City National Bank.

 The initial gifts of First City National Bank stock were made in the latter part of 1964. The gift tax did not become due until April of 1965. There is no evidence that Elkins, Sr. extracted from his sons an agreement to lend him money or pay the gift tax in return for the gifts. Any such inference would be mere speculation and conjecture. The most reasonable inference is that at the time of making the initial gifts of First City National Bank stock in December of 1964, no definite decision had been made concerning where and how the funds to pay the gift tax were to be borrowed.

 By April of 1965, when the gift tax became due, Elkins, Sr. was confined in the hospital, where he remained for seven years before his death. Elkins, Sr., while a very wealthy man, still found himself in essentially the same awkward position as most older persons: his income was being reduced, while his expenses were increasing dramatically. In addition, his age and ill health made him reluctant to commit himself to the definite repayment schedule which would have been required in the case of a conventional institutional loan. Accordingly, primarily for the purpose of accommodating Elkins, Sr.'s advanced years and declining health, Elkins, Jr. and William Elkins arranged to borrow the money to pay the gift tax themselves, from institutional lenders, and loaned the money to their father. These borrowings by Elkins, Jr. and William Elkins from institutional lenders were, over a period of years, repaid in full, and it is established without question that the funds in question were actually transmitted from Elkins, Jr. and William Elkins to Elkins, Sr.

 The key factual inquiry in this case is whether Elkins, Jr. and William Elkins intended for their father to repay the sums which they advanced. The fact that Elkins, Jr. and William Elkins themselves borrowed the funds to loan to their father, paid substantial amounts of interest on the borrowed money and eventually repaid the money over a period of years, is certainly strong evidence of an intent on the part of Elkins, Jr. and William Elkins that they would be repaid.

 The 1964 and 1965 loans from sons to father were not evidenced by notes, but were carried on the books of the sons as assets and on the books of the father as accounts payable.

 In 1964 and 1965 Elkins, Sr. was over 80 years of age, in failing health and actually living in a hospital. It is inferable that no one expected him to live very long. Probably to everyone's surprise, Elkins, Sr. lived seven more years. During this period he was in bad health much of the time, confined to a hospital and incurring extremely large medical expenses. Understandably, his sons did not press him for payment or require him to pay interest upon the advances; however, the evidence shows with virtual conclusiveness that the sons intended to be paid and that the father intended that the obligation would ultimately be discharged.

 During the final years of his life, Elkins, Sr. drafted, through his tax counselor Marvin Collie, a number of different wills. His ultimate will was drafted in 1968. Contrary to the contentions of the United States in its initial briefs here, Elkins, Sr. did not leave the bulk of his property to his sons. His basic testamentary plan was that the bulk of his assets would be placed in a charitable trust, that the income from the charitable trust would be dispersed to various charities over a period of 20 years, and at the end of the 20-year period, the remaining assets would go to his various descendants. His sons would be entitled to receive funds from the trust or from the assets only in the unlikely event that their financial condition was such that the sons needed the money. For all practical purposes, the sons were excluded from the father's testamentary disposition, and the sons' generation was "skipped."

 Before finally executing his 1968 will, "skipping" his sons' generation, Elkins, Sr. asked Mr. Collie to discuss the matter with both Elkins, Jr. and William Elkins. While neither of the sons objected to the father's testamentary plan, William Elkins was understandably anxious that the advances which he had made to his father with funds which he, himself, had borrowed and then paid, would be paid to him. For the purpose of insuring that these loans would be paid, the following clause was inserted into Elkins, Sr.'s 1968 will:

 
My Executors and Trustees shall pay any of my debts to my sons without regard to any statute of limitations.

 The United States contends that this provision was too vague to constitute an acknowledgement of the indebtedness to the sons, and despite this will provision, that the claims of the sons were unenforceable. The United States' contention seems unpersuasive because the will provision relates to "any debts" from the father to the sons. In addition, when the will is construed in the light of the family's circumstances, it is apparent that Elkins, Sr., the testator, was referring to the very loans which are here in controversy.

 The United States also contends that the claims of the sons are not deductible because they would not have been enforceable. While the parties briefed this question with great thoroughness and cite multiple cases, the entire answer to this aspect of the matter, in the undersigned's judgment, rests in Rule 94, Texas Rules of Civil Procedure, which provides that:

 
. . . In pleading to a preceding pleading, a party shall set forth affirmatively . . . the statute of limitations, . . . and any other matter constituting an avoidance or affirmative defense.

 The executor of Elkins, Sr.'s will was prohibited by the instrument which gave him authority from pleading the statute of limitations. The claims of the sons were fully enforceable, and the estate, had it attempted to resist payment, would have had no defense.


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