Estate of Kathryn L. Menges, Deceased v. Miller
MEMORANDUM (Order to follow as separate docket entry) re 39 MOTION for Summary Judgment filed by Estate of Kathryn L. Menges, Deceased, 41 MOTION for Summary Judgment filed by Steven T. Miller (eo)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
ESTATE OF KATHRYN L. MENGES,
STEVEN T. MILLER, Acting
Commissioner of the Internal Revenue
Hon. John E. Jones III
November 4, 2014
In this tax-related action, Plaintiff, the Estate of Kathryn L. Menges, asserts
that Defendant, the Internal Revenue Service, wrongly denied Kathryn Menges'
claim for the First-time Homebuyer Tax Credit in the amount of $8,000. The case
is presently before the Court on the parties’ cross-motions for summary judgment.
For the reasons articulated herein, the Court shall deny Plaintiff’s Motion and grant
Betty L. Menges passed away on March 3, 2009, and, in her will, devised
real property located at 29 Ridgeway Drive, York, Pennsylvania (“the property”),
to her son, N. Christopher Menges, and three grandchildren, Jonathan, Matthew,
and Kathryn Menges, in equal shares. (Doc. 37, ¶¶ 1-2). Christopher became the
executor of the Estate of Betty L. Menges (“the Estate”). (Id. ¶ 3).
On October 12, 2009, Kathryn signed a disclaimer of her interest in the
property, and the other beneficiaries executed three deeds. (Id.¶¶ 4-5). The deeds
were recorded on October 16, 2009, as follows: (1) Grantor, N. Christopher
Menges as Executor of the Estate of Betty L. Menges, to Grantees, N. Christopher
Menges, Jonathan Menges, and Matthew Menges; (2) Grantors, N. Christopher
Menges, Jonathan Menges, and Matthew Menges, to Grantee, Matthew Menges;
and (3) Grantor, Matthew Menges, to Grantee, Kathryn Menges. (Id. ¶ 5).
In addition, a Form HUD-1 was signed by Kathryn, Matthew, and the law
firm of Menges-McGlaughlin and shows Matthew as receiving the proceeds from
the sale. (Id. ¶ 7). However, Christopher Menges later testified that “it was the
estate of Betty Menges getting the funds[, a]s the property was owned by the
A total of five mortgages would be recorded on the property. The first two
were signed on October 16, 2009: one in the amount of $100,000 from Matthew to
Kathryn, and one in the amount of $50,000 from Christopher to Kathryn. (Id. ¶ 6).
However, Christopher later testified that the purpose of both mortgages was to
protect Kathryn from creditors, that he did not actually lend any money to Kathryn,
and that Matthew also did not lend any money but did receive a $100,000 lien on
the property. (Id. ¶¶ 10-11). Less than six months later, on April 10, 2010,
Christopher and Matthew verified in writing that the aforementioned mortgages
were satisfied. (Id. ¶ 13).
Subsequently, three other mortgages were executed on the property: on
April 26, 2010, Kathryn, Christopher, Christopher’s wife, and the Members 1st
Federal Credit Union signed a mortgage for $60,000, giving the Credit Union a
first lien on the property; on April 30, 2010, Matthew and Kathryn signed a
mortgage in the amount of $100,000; and, also on April 30, 2010, Christopher and
Kathryn signed a mortgage in the amount of $50,000. (Id. ¶¶ 14, 16, 17). As to
the latter two mortgages, Christopher similarly testified that the mortgages were
purposed to protect Kathryn from creditors, and, again, no money was actually
advanced. (Id. ¶¶ 16, 17). On January 25, 2012, Matthew filed a satisfaction of
mortgage, claiming that a $100,000 mortgage had been satisfied. (Id. ¶ 19).
Kathryn Menges died on June 2, 2011. (Id. ¶ 23). Before her death, on her
2008 tax return, Kathryn had claimed a First-time Homebuyer Credit in the amount
of $8,000, and the IRS determined that she was not entitled to such credit. (Id. ¶¶
21-22). After her death, the property was sold to a third party, and Matthew and
Christopher Menges split $52,078 from the sale. (Id. ¶ 18). According to
Christopher’s testimony, the two divided the proceeds because they had “left” their
money in the property. (Id.).1
The Estate of Kathryn Menges (“Plaintiff” or “the Estate”) filed a Complaint
(Doc. 1) on April 30, 2013, asserting that Kathryn Menges was wrongly denied the
Tax Credit. Defendant filed an Answer (Doc. 15), and later, the parties agreed to
submit this matter on cross-motions for summary judgment. Such motions are
presently pending before the Court (Docs. 39, 41), and the parties have also filed a
stipulation of undisputed facts (Doc. 37) and various memoranda of law (Docs. 40,
42, 43). We now proceed to disposition of this action.
STANDARD OF REVIEW
Summary judgment is appropriate if the moving party establishes “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 dispute is “genuine” only if there is a
sufficient evidentiary basis for a reasonable jury to find for the non-moving party,
and a fact is “material” only if it might affect the outcome of the action under the
The IRS disputes the following factual allegation, which Plaintiff holds as true:
“Christopher Menges borrowed $50,000.00 from Members First Federal Credit Union and reloaned it to Kathryn L. Menges so that she could have the $50,000.00 that she needed to
purchase the property and then when Kathryn L. Menges was able to refinance the property by
her own mortgage loan on April 26, 2010, the loan that Christopher Menges had taken out for
Kathryn L. Menges being able to buy the property was paid off in full.” (Doc. 6, p. 6). This
disagreement, however, is not material to our ultimate legal analysis and does not prevent us
from entering judgment in this matter.
governing law. See Sovereign Bank v. BJ’s Wholesale Club, Inc., 533 F.3d 162,
172 (3d Cir. 2008) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986)). A court should view the facts in the light most favorable to the nonmoving party, drawing all reasonable inferences therefrom, and should not evaluate
credibility or weigh the evidence. See Guidotti v. Legal Helpers Debt Resolution,
L.L.C., 716 F.3d 764, 772 (3d Cir. 2013) (citing Reeves v. Sanderson Plumbing
Prods., Inc., 530 U.S. 133, 150 (2000)).
Initially, the moving party bears the burden of demonstrating the absence of
a genuine dispute of material fact, and upon satisfaction of that burden, the nonmovant must go beyond the pleadings, pointing to particular facts that evidence a
genuine dispute for trial. See id. at 773 (citing Celotex Corp. v. Catrett, 477 U.S.
317, 324 (1986)). In advancing their positions, the parties must support their
factual assertions by citing to specific parts of the record or by “showing that the
materials cited do not establish the absence or presence of a genuine dispute, or
that an adverse party cannot produce admissible evidence to support the fact.”
FED. R. Civ. P. 56(c)(1).
A court should not grant summary judgment when there is a disagreement
about the facts or the proper inferences that a factfinder could draw from them.
See Reedy v. Evanson, 615 F.3d 197, 210 (3d Cir. 2010) (citing Peterson v. Lehigh
Valley Dist. Council, 676 F.2d 81, 84 (3d Cir. 1982)). Still, “the mere existence of
some alleged factual dispute between the parties will not defeat an otherwise
properly supported motion for summary judgment.” Layshock ex rel. Layshock v.
Hermitage Sch. Dist., 650 F.3d 205, 211 (3d Cir. 2011) (quoting Anderson, 477
U.S. at 247-48) (internal quotation marks omitted).
The First-time Homebuyer Credit (“FTHBC”) applied to the purchase of a
principal residence bought on or after April 9, 2008, and before May 1, 2010, and
permitted the buyer to claim a tax credit equal to 10% of the purchase price of the
home, but not to exceed $8,000.00. See 26 U.S.C. §§ 36(a), (b)(1)(a), (h)(1).
Relevantly, the statute defines the term “purchase” as “any acquisition, but only if .
. . the property is not acquired from a person related to the person acquiring such
property . . ..” Id. § 36(c)(3)(A). The definition of “related persons” includes “an
executor of an estate and a beneficiary of such estate” “[e]xcept in the case of a
sale or exchange in satisfaction of a pecuniary bequest.” See id. §§ 36(c)(5),
There are few cases interpreting the executor/beneficiary provision of the
“related persons” definition. In one such action, Zampella v. Commissioner of
Internal Revenue, No. 2488-11, T.C. Memo 2012-359 (T.C. Dec. 26, 2012), aff’d,
562 Fed. Appx. 106 (3d Cir. 2014), the petitioner and his brother were devised
equal shares of their mother’s estate and appointed co-executors. See id. at *1.
Petitioner and his brother, as grantors in their representative capacity as
coexecutors of the estate, transferred title of certain of the estate’s real property to
the petitioner as the grantee. See id. The petitioner later claimed entitlement to the
FTHBC. See id. at *2. The United State Tax Court ruled that the petitioner did not
“purchase” the home within the meaning of Section 36 of the statute because
petitioner, a beneficiary of the estate, acquired the residence from a “related
person,” namely, an executor of the estate. See id. In affirming the decision of the
Tax Court, the Third Circuit also applied the doctrine of substance over form,
noting that “aside from the fact that [the petitioner] paid one-half the value of the
property, rather than the entire value, the substance of the transaction was that [the
petitioner] acquired the Property from the Estate.” Zampella v. C.I.R., 562 Fed.
Appx. 106, 110 (3d Cir. 2014) (citing Frank Lyon Co. v. United States, 435 U.S.
561, 573 (1978) (“In applying this doctrine of substance over form, the Court has
looked to the objective economic realities of a transaction rather than to the
particular form the parties employed.”)).
At the outset, Plaintiff argues that Kathryn disclaimed her interest in the
Estate and, by doing so, was no longer a beneficiary of the estate. Even if Kathryn
could be considered a beneficiary, Plaintiff argues that Kathryn was not a “related
person” within the meaning of the statute. According to Plaintiff, pursuant to
Section 267(b)(13) and Zampella, the “related persons” exclusion applies only
where “the purchaser [is] both a beneficiary of the estate and also an executor of
the estate.” (Doc. 40, p. 4 (emphasis added)). Thus, Plaintiff continues, the
FTHBC may be obtained where “the purchaser is buying the property from an
Estate of which the purchaser is a beneficiary.” (Id.). In addition, Plaintiff argues
that the transaction qualifies as “a sale or exchange in satisfaction of a pecuniary
bequest” since “the transaction was an exchange of her twenty-five percent (25%)
share of the proceeds of the Estate, which, by definition, is a ‘sale or exchange in
satisfaction of a pecuniary bequest.’” (Id. p. 5).
We hold that Kathryn Menges is not entitled to the FTHBC because
Kathryn, a beneficiary, did not “purchase” the subject property within the meaning
of the statute but acquired it from a “related person,” the executor of her
grandmother’s estate. Applying the doctrine of substance over form, the
complicated series of legal actions at the heart of this matter were to effectuate a
simple objective: the transfer of real property from the Estate of Betty L. Menges
to Kathryn Menges, of which she was a beneficiary.
That Kathryn disclaimed her interest in the property does change our
analysis. Pennsylvania’s disclaimer statute grants a beneficiary the right to
disclaim an interest in property devised in a will. See 20 Pa.C.S. § 6201. Where a
beneficiary asserts her right to disclaim a property interest, she does not, in our
view, change her very status as a beneficiary under the will; she merely is no
longer compelled to receive the property. See id.; see also 30 STANDARD PA.
PRAC. 2d § 141:4. Further, for purposes of the FTHBC statute and as highlighted
by Defendant, “[i]f all the beneficiary had to do was disclaim an interest in
property and then purchase it, it would make the statutory language of 26 U.S.C.
§§ 36 and 267(a) prohibiting a beneficiary of an estate from claiming the Credit
when purchasing real property from the estate meaningless.” (Doc. 42, p. 4).
In addition, Plaintiff’s argument that the “related persons” exclusion applies
only where the home-buyer is both executor and beneficiary of the estate is
contravened by the plain language of the statute. Section 267, by its terms, regards
“transactions between related taxpayers,” meaning that it contemplates transactions
involving more than one person. 26 U.S.C. § 267 (emphasis added) (entitled
“Losses, expenses, and interest with respect to transactions between related
taxpayers”). Logically, the statute’s application to “an executor of an estate and a
beneficiary of such estate” suggests that the executor and beneficiary are distinct
parties. The Zampella case is in harmony with this reading. The denial of the
FTHBC in that case did not turn on the fact that the petitioner was both executor
and beneficiary, but that he purchased a residence from an estate of which he was a
beneficiary. See Zampella, 562 Fed. Appx. at 110 (“[The petitioner] does not
qualify as a first-time homebuyer because the documentation substantiates the Tax
Court's findings that he acquired the Property from his mother's Estate.”).
Finally, we also reject Plaintiff’s argument that the transaction was an
“exchange in satisfaction of a pecuniary bequest.” A pecuniary bequest is a gift of
cash, and that statutory exception would apply where certain assets must be sold or
exchanged in order to effect such a monetary distribution. The facts of this case do
not suggest that the Estate of Betty Menges conferred upon Kathryn such cash gift
It is clear that in carefully executing three deeds and entering into a total of
five mortgages, Kathryn’s family members lovingly sought to help her achieve
home-ownership, at the same time endeavoring to protect her property from
creditors. But in seeking to achieve these primary objectives, a “purchase” within
the meaning of the FTHBC statute was simply not effectuated. Accordingly, this
Court must deny Plaintiff’s Motion for Summary Judgment and grant that of
An appropriate Order shall issue.
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