1980 Tax Ct. Memo LEXIS 119 | Tax Ct. | 1980
Decedent executed a will leaving substantially all his estate to his son and naming his son as executor. Subsequently, he guaranteed bank loans made to his son and pledged securities as collateral for the loans. The bank filed no claim against the estate during its probate, but the securities were distributed to the son subject to the security interest of the bank.
MEMORANDUM FINDINGS OF FACT AND OPINION
SIMPSON,
FINDINGS OF FACT
Some of the facts have been stipulated, and those facts are so found.
Francis Ned Scofield (the decedent) died testate a resident of California on November 14, 1973. Granville O. Scofield (Mr. Scofield) was executor of the estate of the decedent and resided in Santa Cruz, Calif., when the petition in this case was filed. A Federal estate tax return was filed for the estate with the Internal Revenue Service Center, Fresno, Calif.
The decedent was the father of Mr. Scofield. On July 8, 1968, the decedent executed a will in which he bequeathed his stock in the Southern Pacific Railway Co. (Southern Pacific stock) to his granddaughter and all the remainder of his estate to Mr. Scofield. During 1968, the decedent also made gifts to Mr. Scofield of securities having a value of $59,098.
Sometime prior to 1970, Mr. Scofield received loans from the County Bank of Santa Cruz (the bank) totaling approximately $30,000. On March 23, 1970, the decedent 1980 Tax Ct. Memo LEXIS 119">*121 executed and gave to the bank a guaranty, which in part provided:
This is a continuing guaranty relating to any indebtedness [of Mr. Scofield], including that arising under successive transactions which shall either continue the indebtedness or from time to time renew it after it has been satisfied. This guaranty shall not apply to any indebtedness created after actual receipt by Bank of written notice of its revocation as to future transactions. * * *
In conjunction with the guaranty, the decedent pledged securities to the bank as collateral. Initially, the decedent's liability on the guaranty was limited to $32,074. On January 11, 1971, he agreed to raise the limit to $50,000, and later, he agreed to raise the limit to at least $193,674. The decedent received no consideration in money or money's worth for the guaranty.
After the decedent executed the guaranty, the bank periodically renewed the loans that it had made to Mr. Scofield. In addition, the bank loaned Mr. Scofield additional amounts and renewed such loans periodically. Mr. Scofield used a large part of the borrowed funds to purchase stock, and between early 1968 and his father's death, Mr. Scofield incurred realized 1980 Tax Ct. Memo LEXIS 119">*122 and unrealized losses of approximately $79,000 in his investments in stock. Mr. Scofield also used some of the borrowed funds for personal expenses.
When his father died, Mr. Scofield's debt to the bank was $193,674. Such debt was fully collateralized by securities of the decedent. The debt was comprised of four separate loans, and during the administration of the estate, each loan was renewed as follows:
Interest Rate | |||
Principal | Renewal Date | Pre-Renewal | Post-Renewal |
$156,674 | 6/1/74 | 9-1/4 | 11-1/4 |
20,000 | 2/12/74 | 9-1/4 | 9-3/4 |
7/29/74 | 9-3/4 | 11-3/4 | |
10,000 | 1/14/74 | 7-1/2 | 9-3/4 |
7,000 | 1/17/74 | 8-3/4 | 9-3/4 |
7/13/74 | 9-3/4 | 11-3/4 |
The decedent's will was admitted to probate by the Superior Court of the State of California, County of Santa Cruz, on November 30, 1973. At that time, the Southern Pacific stock was included in the collateral held by the bank. To secure release of such stock, Mr. Scofield, as executor of the estate, entered into an agreement with the bank, whereby he transferred all the other securities of the decedent to the bank and agreed to reduce the total indebtedness by $10,000. Such reduction was accomplished by the estate paying $2,500 and by Mr. Scofield paying the remaining $7,500 to the bank.
On 1980 Tax Ct. Memo LEXIS 119">*123 September 6, 1974, the Superior Court entered an order distributing the decedent's property in accordance with the will. The bank had not filed a claim in probate; nevertheless, the securities which the bank held were distributed to Mr. Scofield "subject to the security interest" of the bank. In October or November 1974, title to the securities was transferred to Mr. Scofield's name, but the bank retained possession of most of them. In 1975 and 1976, Mr. Scofield repaid all his loans.
As executor of the estate, Mr. Scofield elected to value the decedent's gross estate for Federal estate tax purposes as of May 14, 1974, the alternate date provided by section 2032. Ignoring the bank's lien and any Federal estate taxes that may be owed by the estate, the value of the distribution to Mr. Scofield on the alternate valuation date was $307,404 and on the date of distribution was $258,624. Mr. Scofield's net worth, excluding his liability to the bank and his distribution from the estate, was $91,100 on the date of the decedent's death, $83,100 on the alternate valuation date, and $46,500 on the date of distribution.
His net worth also included a fee of $7,674.91 from the estate for 1980 Tax Ct. Memo LEXIS 119">*124 serving as executor. The decline in Mr. Scofield's net worth after the date of the decedent's death was attributable in part to a decline in the value of his stock and in part to sales of some of such stock without retaining or reinvesting the proceeds thereof.
On the Federal estate tax return, Mr. Scofield deducted $193,674 because of the bank's lien. In his notice of deficiency, the Commissioner disallowed the deduction.
OPINION
The sole issue to be decided is whether the estate is entitled to any deduction as a result of the bank's lien, but to decide that issue, we must first resolve a number of subsidiary questions. In part,
(a) General Rule.--For purposes of the tax imposed by
(4) for unpaid mortgages on, or any indebtedness in respect of, property where the value of the decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate,
as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered. 1980 Tax Ct. Memo LEXIS 119">*125
To support the disallowance of the deduction claimed by the estate, the Commissioner has advanced a variety of arguments, and his positions appear to have shifted with time and the events. At the outset, it is helpful to point out several matters which are not in dispute. First, the Commissioner recognizes that at the time of the decedent's death, the bank's lien was a mortgage or indebtedness on property which was includable in the estate. Second, the deduction is not to be disallowed because Mr. Scofield was the principal obligor and the decedent's liability was secondary or contingent, for section 20.2053-7, Estate Tax Regs., 2 acknowledges that a lien on which the estate is only secondarily liable is to be taken into consideration in computing the taxable estate. Third, the Commissioner does not argue that the deduction is barred by the fact that the encumbered property was bequeathed to the principal obligor, Mr. Scofield, who could use the property to repay the loans. Finally, the Commissioner does not contend that the eventual repayment of the loans by Mr. Scofield in 1975 and 1976 bars the deduction. Neither
Throughout these proceedings, the Commissioner has contended that the deduction was not allowable since the bank never filed a claim against the estate in probate. He 1980 Tax Ct. Memo LEXIS 119">*127 relies on section 707, Cal. Prob. Code (West Supp. 1980), which provides that "all claims [against a decedent] arising upon contract, whether they are due, not due, or contingent," must be timely filed with the executor after the publication of notice to creditors, or else be "barred forever." The petitioner concedes that the bank never filed a claim against the estate; accordingly, the Commissioner concludes that the liability of the estate to the bank was extinguished during its administration and that, therefore, no deduction was permissible. See
No holder of a claim against an estate shall maintain an action thereon, unless the claim is first filed with the clerk or presented to the executor or administrator, except in the following case: An action may be brought by the holder of a mortgage or lien to enforce the same against the property of the estate subject thereto, where all recourse against any other property of the estate is expressly waived in the complaint. * * *
In
In his brief, the Commissioner contends, for the first time, that the entire lien of the bank was extinguished by the renewal of the loans and by the increase in the interest rates. The petitioner argues that such contention should not be considered because it was raised too late and because the untimely raising of the issue prevented it from offering evidence which otherwise would have been presented. In the alternative, the petitioner maintains that under California law, the renewal of the loans did not result in extinguishing them in view of the circumstances surrounding their renewal.
A surety is exonerated, except so far as he may be indemnified by the principal, if by any act of the creditor, without the consent of the surety the original obligation of the principal is altered in any respect, or the remedies or rights of the creditor against the principal, in respect thereto, in any way impaired or suspended. 3
It has been held in California1980 Tax Ct. Memo LEXIS 119">*130 that an "increase in the rate of interest on an obligation constitutes an alteration within the meaning of this provision."
Despite
It is well settled that issues raised for the first time on brief will not be considered when to do so prevents the opposing party from presenting evidence that he might have if the issue had been timely raised.
We deal next with the Commissioner's contention that the decedent's guaranty and pledge were "in the nature of gifts or testamentary dispositions" to the extent they secured loans used by Mr. Scofield for personal living expenses. The argument derives from the cases construing
The deduction allowed by this section in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded on a promise or agreement, be limited to 1980 Tax Ct. Memo LEXIS 119">*133 the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth * * *
In construing this provision, 41980 Tax Ct. Memo LEXIS 119">*134 this and other courts have consistently held that the consideration in money or money's worth need not pass to the decedent.
In view of such decisions, it is clear that the estate is not to be denied the deduction merely because the decedent received no consideration in money or money's worth for the guaranty.However, 1980 Tax Ct. Memo LEXIS 119">*135 the Commissioner relies on dicta in some of such cases and argues that, in part, the deduction should be disallowed because the guaranty arrangement was used by the decedent as a means of making testamentary gifts to Mr. Scofield. The petitioner responds that by this argument, the Commissioner is seeking, indirectly, to challenge the holding that the deduction is not to be disallowed merely because the decedent received no consideration in money or money's worth for the guaranty.
In
In the present case the guaranty which the decedent gave * * * was a purely commercial undertaking. * * * It does not appear that Benz expected to loss by giving the guaranty * * * [
The court made it clear that "colorable family contracts and similar undertakings made as a cloak to cover gifts" do not give rise to deductions.
the stipulation does not say that, when the guaranty was given, the son-in-law was insolvent or that 1980 Tax Ct. Memo LEXIS 119">*137 the guarantor had no reasonable expectation of reimbursement [from the son-in-law] if he should be called upon to pay. So far as appears, it was an ordinary business transaction by which an accommodation guarantor, if required to pay, would acquire rights equal in value to the obligations he had assumed. [
If the guarantor had not possessed a right of subrogation or had not had a reasonable expectation of reimbursement, the court concluded, "the guaranty would be in substance a gift."
The Commissioner failed to refer to any cases in which such dicta was applied, but our independent research reveals one such case.In
It is true, as petitioner contends, that consideration within the intendment of the statute here involved [the predecessor 1980 Tax Ct. Memo LEXIS 119">*138 of
The record before us indicates that at the time of the death of Edmund B. Jermyn, Jr. [the son] more than two years prior to the death of the decedent, and for a long time prior thereto, the son was hopelessly insolvent, and any reasonable consideration of the relations between father and son leads to the conclusion that the father must have known the son's financial condition. * * * it is apparent that the petitioner has not shown that the father had any "reasonable expectation of reimbursement if he should be called upon to pay * * *." We therefore conclude and hold that no error has been shown in the action of the Commissioner in denying the deduction claimed by the petitioner.
Since the Commissioner did not assert this position until the time of the trial, he has the burden of proof with respect to it.
In this case, as in the
Inasmuch as the Commissioner has failed to prove that gifts were intended, he has failed to bring his case within the dicta of
So far, we have concluded that the entire lien of the bank is to be considered in computing the deduction allowed the estate; now we turn to the questions concerning the right of subrogation. On brief, the petitioner makes two concessions which reduce the allowable deduction: first, that because $10,000 was paid to the bank during the administration of the estate, the maximum deduction is $183,674 1980 Tax Ct. Memo LEXIS 119">*142 7; and second, that the deduction is to be reduced by the value of the estate's right of subrogation against Mr. Scofield. The parties agree that to determine the value of such right, it is necessary to ascertain Mr. Scofield's net worth and the net value of his distribution from the estate.The parties disagree over the date for determining such values. The petitioner contends that such values should be ascertained as of the date of the distribution of the assets of the estate; whereas, the Commissioner argues that the right of subrogation was an asset of the estate and should be valued as of the alternate valuation date.
Generally, an estate is to be value entirely as of either the date of death or the alternate valuation date.
In
The right of subrogation in this case is like the collateral in
The Commissioner made an additional argument for increasing the net worth of Mr. Scofield to be taken into consideration for purposes of such computation. The Commissioner argued that since Mr. Scofield sold some of his stock after the death of the decedent and used some of the proceeds of such sales for personal expenses, his net worth at the time of the distribution of the estate should be increased by the gains on the sales made by him in 1975 and 1976. In explanation of his argument, the Commissioner asserted that unless such an adjustment is made, the effect will be to allow the estate a deduction for the proceeds of the sales used for his personal expenses.
There is absolutely no rational basis for increasing Mr. Scofield's net worth by the gains which he realized on sales in 1975 and 1976. There might be some merit to an argument for increasing his net worth by some part of the proceeds of sales made during the administration of the estate, but if that argument were considered, we would need to decide whether the increase 1980 Tax Ct. Memo LEXIS 119">*146 is to be based on the excess of the proceeds of sales over the proceeds reinvested or on the gains from sales made during such period or whether any adjustment should be made to reflect the taxes due on any such sales. The Commissioner's statement of his argument completely misled the petitioner and failed to focus on the questions that would have to be considered and decided by the Court. Hence, we conclude that the issue is not properly before us, and we will make no adjustment as a result of such argument.
Footnotes
1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue, unless otherwise indicated.↩
2. Sec. 20.2053-7 Deduction for Unpaid Mortgages.
A deduction is allowed from a decedent's gross estate of the full unpaid amount of a mortgage upon, or of any other indebtedness in respect of, any property of the gross estate, including interest which had accrued thereon to the date of death, provided the value of the property, undiminished by the amount of the mortgage or indebtedness, is included in the value of the gross estate. If the decedent's estate is liable for the amount of the mortgage or indebtedness, the full value of the property subject to the mortgage or indebtedness must be included as part of the value of the gross estate; the amount of the mortgage or indebtedness being in such case allowed as a deduction. But if the decedent's estate is not so liable, only the value of the equity redemption (or the value of the property, less the mortgage or indebtedness) need be returned as part of the value of the gross estate.↩
3. Under
sec. 2787, Cal. Civ. Code↩ (West 1974), there is no distinction between "surety" and "guarantor."4. The requirement of an "adequate and full consideration in money or money's worth" came into law in 1926 as sec. 303 (a) (1) of the Rev. Act of 1926, ch. 27, 44 Stat. 72.
5. In
, dismissing petn. to rev.Latty v. Commissioner, 62 F.2d 952">62 F. 2d 952, 62 F.2d 952">954 (1933)23 B.T.A. 1250">23 B.T.A. 1250 (1931), the Sixth Circuit, in dicta, expressed some doubt about such holdings by saying: "we think that ordinarily these words [the consideration requirement ofsec. 2053(c)↩ ] must be construed to evidence an intent upon the part of Congress to permit the deduction of claims only to the extent that such claims were contracted for a consideration which at the time either augmented the estate of the decedent, granted him some right or privilege he did not possess before, or operated to discharge a then existing claim, as for breach of contract or personal injury." However, our research has revealed no recent decisions on the issue, and the Commissioner has not asked us to reconsider such holdings. Under the circumstances, we decline to do so on our own initiative.6. It should be recognized that in the
Jermyn↩ case, the petitioner had the burden of proving that the decedent did not intend to make gifts. Whether we would reach the same result on the record in this case if the burden was on the petitioner is a matter not to be considered.7. The parties agree that the $2,500 payment made by the estate is deductible by it.↩