1941 BTA LEXIS 1313 | B.T.A. | 1941
Lead Opinion
OPINION.
The Commissioner determined a deficiency in estate tax in the amount of $17,914.41. In the petition it is alleged that there has been an overpayment of tax. At the hearing the parties filed a stipulation in which respondent concedes that certain deductions, aggregating several thousand dollars, which were not included in the original estate tax return should be allowed. On the basis of the stipulation respondent concedes that there has been an overpayment of tax in the amount of $3,956.02.
There is no substantial dispute between the parties as to the facts. All of them—except the fair market value of the real estate on April 20,1931, which we find from the evidence was $125,000—were admitted in the pleadings or at the hearing or are contained in exhibits, received in evidence without objection. We find the facts to be as admitted or shown in the exhibits, but set out herein only those necessary for an understanding of the questions to be decided.
In schedule J-l of the return, under the heading of “Mortgages”, a deduction from gross estate in the amount of $206,666.67 was claimed, with the following explanation:
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In the petition it is claimed that deduction under schedule J-l should be allowed in the amount of $209,868.06. Inasmuch as the only witness who testified upon the subject placed the value of the real estate at $125,000 on April 20, 1931, petitioners upon brief concede that this is the maximum amount which may be allowed as a deduction.
On April 20,1931, the decedent executed a trust agreement naming
The trust agreement contained a provision obligating the settlor “on or before the date of his death to repurchase from the Trustee for the sum of Two Hundred Thousand ($200,000) Dollars * * * the above described interest in said real estate * * It also contained a provision requiring the settlor to pay $25,000 to be applied upon the agreed repurchase price within one year after the death of certain of the named beneficiaries in the event they, or any of them, should predecease the settlor. The trust, according to its terms, was to be regarded as consisting of eight equal parts of $25,000 each. Since none of the beneficiaries died prior to the death of decedent, none of the $25,000 payments could be required and none had been made. The decedent had made no payments upon the “repurchase” of the real estate and after his death, on December 26, 1935, the Probate Court of Jackson County, Missouri, directed the executors to pay over to the trustees the sum of $200,000 in cash, “plus rent at the rate of Ten Thousand ($10,000) Dollars per year for the period from November 1, 1935, to the date such payment is actually made, in full payment of all obligations of the estate under said trust agreement and deed * * Pursuant to this order the executors paid to the trustees $100,000 on December 31, 1935, $50,000 on May 27, 1936, $50,000 on June 29, 1938, $4,166.67 on May 4, 1936, and $5,701.39 on June 29, 1938, a total of $209,868.06.
While petitioners originally contended that they were entitled to deduct from gross estate $209,868.06 on the theory that it was an “unpaid mortgage upon, or an indebtedness in respect to property” within the purview of section 303 (a) (1) of the Revenue Act of
Petitioners contend that the decedent divested himself of a portion of his interest in the real estate and on the same date, for a valid consideration, agreed to repurchase the same interest. Recognizing that the transaction fits into no well established category, they say that, “in general, it is similar to a mortgage.” This seems to have been the theory under which the deduction was claimed in the return. Petitioners do not seriously urge upon brief that there was any conveyance of property to secure the performance of an obligation, the conveyance to be void on the due performance thereof, or that there was any real pledge of property as security for a debt. It is obvious that there was no mortgage. But was there an obligation which may be classified as a claim or indebtedness incurred or contracted bona ■ fide and for an adequate and full consideration in money or money’s worth ?
The phrase “adequate and full consideration in money or money’s worth” is not ambiguous. In Latty v. Oom/missioner, 62 Fed. (2d) 952, the court construed it “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 to 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.” This language was quoted with approval in Glaser v. Commissioner, 69 Fed. (2d) 254, and has recently been followed by this Board. See e. g., Estate of Louis D. Markwell, 40 B. T. A. 65, 10; affd., 112 Fed. (2d) 253; Bennet B. Bristol, 42 B. T. A. 263 (on appeal C. C. A., 1st Cir.). In Taft v. Commissioner, 304 U. S. 351, the Supreme Court discussed the requirement of consideration for deductible claims, holding that not all valid and enforceable claims against an estate are deductible. It pointed out that the change in the act from “fair consideration” to “adequate and full consideration” indicated that there was an evident intent to narrow the class of deductible claims. The effect of this decision was to overturn the view which several Circuit Courts and the Board had
It seems to be clear that if the rule enunciated in Latty v. Commissioner, supra, be correct—and we do not intimate that it is not— the claim which this decedent’s trustee had against his estate had not been contracted for a consideration which, at the time, either augmented his estate or granted to him any right or privilege which he did not possess before. On the contrary such effect as it had— indeed the effect which petitioners insist it had—was to diminish the estate of the decedent or to take away from him a right which he possessed before. Nor can it be said to have operated to discharge a then existing claim against his estate. If the reality of the transaction is kept in mind, the agreement, at most, was that there should be taken out of decedent’s estate $200,000 to be the corpus of a trust which he had created for relatives of his wife and himself. As petitioners state upon brief “he obviously desired all the beneficiaries to have a fixed and regular income of 5% per annum” upon $200,000. No doubt this was a laudable ambition and, as petitioners point out, had he seen fit to give the beneficiaries, or a trust created for their benefit, the sum of $200,000 during his lifetime, his estate would have been diminished to that extent and no such controversy as that now before us would have arisen. But he did not choose to do so. What he actually did was to make a voluntary promise, without consideration, to create a trust estate in the future to the extent of $200,000 and in the meantime to pay over to the trustee 5 percent upon that amount or $10,000 per annum. If any interest in the real estate passed from him by the deed, which is doubtful, it amounted to no more than a pledge that his promise to give the trust a corpus of $200,000 would be fulfilled. At no time did any actual consideration in money or money’s worth pass from the trustee to the decedent. When his executors made the payments to the trustee they were carrying out his promise; but in our opinion they were not paying a claim or indebtedness contracted “for an adequate and full consideration in money or money’s worth.”
Upon brief petitioners cite Charles Steele, 38 B. T. A. 589, which, though it involved a question of gift tax liability, they contend is somewhat analogous. In the cited case the petitioner, possessed of
One of the purposes of section 303 (a) (1), <supra, if not its main purpose, was “to prevent deductions, under the guise of claims, of what were in reality gifts or testamentary distributions.” Carney v. Benz, 90 Fed. (2d) 747. Cf. Phillips v. Gnichtel, 27 Fed. (2d) 662. The deduction in issue in the instant proceeding falls within this category. It is unimportant that the decedent may have had no intention to diminish his estate by making the anticipatory arrangement disclosed by the exhibits. Inasmuch as the claim, in our opinion, was not incurred or contracted “for an adequate and full consideration in money or money’s worth”, it must be and is, held that the Commissioner committed no error in disallowing the claimed deduction.
Petitioners’ alternative contention is that there should be excluded from decedent’s gross estate the fair market value—$30,000—of the real estate at the time of his death. Admitting that the decedent held the legal title to the property at the time of his death, they contend that he “had no substantial beneficial interest therein, being obligated to pay therefor $200,000 when the value thereof at that time was only $30,000.” This contention can not be sustained.
It is clear that decedent had an interest in real property which must be included in his gross estate under section 302 (a) of the Revenue Act of 1926 as amended by section 404 of the Revenue Act of 1934.
In Henry Adams Ashforth et al., Executors, 30 B. T. A. 1306 (affd. July 19, 1937, C. C. A., 2d Cir., without opinion) a somewhat similar state of facts was before this Board. The decedent had executed and delivered to her husband, without monetary consideration, a mortgage for $700,000 on real estate which, at the date of her death, had a fair market value of $766,000. It was found that
In accordance with the stipulation of the parties,
Decision will be entered, that there is am, overpayment of tax in the amount of $3,9-56.02.
Sec. 303. For the purpose of the tax the value of the net estate shall be determined-» (a) In the case of a resident, by deducting from the value of the gross estate—
(1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to property, * * * to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth. * * *
Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the United States—
(a) To the extent of the interest therein of the decedent at the time of his death; * * *