Opinion
Docket No. 44830.
1954-06-22
ESTATE OF GERTRUDE P. BARRETT, ALROY S. PHILLIPS, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Owen T. Armstrong, Esq. , for the petitioner. Marvin Hagen, Esq. , for the respondent.
A settlement payment made by the executor of decedent's estate to the surviving husband to compromise his claim to a share in the estate and permit the decedent's will to be probated without contest is allowable as a marital deduction. Owen T. Armstrong, Esq., for the petitioner. Marvin Hagen, Esq., for the respondent.
This proceeding involves a deficiency in estate tax in the amount of $6,887.63. Concessions have been made on both sides so that, of the original issues, only one remains, viz., whether $10,250 paid by the executor to the surviving spouse in settlement of claims against the decedent's estate is allowable as a marital deduction in determining the net estate. The facts which have been stipulated are incorporated by this reference.
FINDINGS OF FACT.
Alroy S. Phillips is the duly qualified executor of the estate of his sister, Gertrude P. Barrett, deceased. Gertrude Barrett died on November 1, 1948, a resident of St. Louis, Missouri. She was survived by her husband, William N. Barrett, two daughters, and a stepson. The estate tax return was filed with the collector for the first district of Missouri.
On July 12, 1939, the decedent, then unmarried and known as Gertrude P. Meston, and William N. Barrett entered into a written ante nuptial agreement whereby each renounced all rights, present and future, in and to any and all property of the other ‘whether such rights be by way of courtesy, dower, widower's or widow's allowances, child's portion, or absolute rights given by law to the living or surviving spouse, and whether said property be separate estate or community property, principal or income, the part disposable of by will or the part not disposable of by will, or acquired by gift or otherwise.’
On the same date, July 12, 1939, the decedent created a trust by transferring certain intangible personal property to Alroy Phillips, as trustee, upon terms which, generally, reserved the income to her for life, with remainder in her two daughters and stepson. No provision was made for Barrett. The value of the personalty transferred in trust was approximately $240,000.
Barrett cooperated in the signing of the antenuptial agreement and was advised of the creation of the trust, but he was not told of the value of decedent's personal property.
These agreements were drafted by Phillips who is an attorney and who had managed his sister's affairs and advised her for many years. These arrangements were made on Phillips' advice to accomplish Gertrude Barrett's desire to provide for the security of her daughters and stepson in advance of her prospective marriage to Barrett.
After the couple were married in the summer of 1939, they established residence in Virginia. On September 27, 1939, the decedent executed a will in which she bequeathed the sum of $5,000 to Barrett. On the same date, she modified her trust indenture of July 12 by providing, in part, that at any time after 1 year she might terminate the trust without the consent of the trustee, Phillips, upon 1 month's notice to him.
On May 4, 1943, Gertrude Barrett modified the trust arrangement a second time by providing that her husband, after her death, should receive one-fourth of the income of the trust for life.
On August 19, 1947, Gertrude Barrett again amended her trust indenture by eliminating therefrom the provisions for the benefit of her husband which she had inserted in her second modification described immediately above.
Marital difficulties developed and in July 1948, the decedent separated from her husband, but no formal or legal separation was obtained and on the date of her death, November 1, 1948, the couple, though living apart, were still legally married.
On November 6, 1948, letters testamentary were issued by the Probate Court of the City of St. Louis, Missouri, to Alroy S. Phillips, as executor of the will of the decedent. On January 6, 1949, Joseph F. Moore, of Berryville, Virginia, qualified in the Circuit Court of Clarke County, Virginia, as administrator with the will annexed of decedent's property in Virginia.
Decedent's surviving husband retained counsel on November 16, 1948, and on the advice of his counsel that he had a valid claim against the estate left by his wife, Barrett in good faith made claim therefor. The claim was presented by counsel for Barrett on November 18, 1948, to Phillips, as executor, and in the claim demand was made for one-third of the decedent's personal estate, including the trust property, as provided under the Missouri statutes.
Most of the decedent's personal property passed according to the terms of her trust. Decedent's gross estate, as reported on the estate tax return, was $390,637.27, of which the trust property comprised $297,278.16. Barrett, through his attorney, claimed that the trust arrangement, which at the time of his wife's death no longer contained any provisions for his benefit, was invalid because it had been contrived under the influence of his wife's brother and lawyer, in order to keep the decedent's property away from him, Barrett. Also, he claimed that the third modification which had eliminated the provisions in the trust allowing one-fourth of the income to him for life specified in the second modification, was invalid.
No formal legal proceeding was commenced on Barrett's claim but his attorney did confer with Phillips and a memorandum of authorities and precedents supporting Barrett's position was submitted. Recognizing the substantial nature of Barrett's claim, negotiations looking to a settlement were undertaken and, on January 3, 1949, an agreement in settlement of Barrett's claims against decedent's estate was effected. The agreement provided that, in consideration for a total cash payment of $10,250, Barrett agreed to release the estate from any claims, to permit the will to be probated without contest and renounce his claim to his bequest of $5,000 therein, and to do certain other acts and make other releases and conveyances to facilitate the administration of his wife's estate. Payment in full through Barrett's attorney was made in February 1949.
On December 1, 1949, Phillips, as executor, filed an application for approval of the settlement with Barrett in the Probate Court of the City of St. Louis, Missouri. The court entered an order approving the settlement on December 14, 1949.
In the return for the estate of Gertrude Barrett, the sum of $10,250 the amount of the settlement paid to William Barrett, plus $36.92 paid to his attorney to facilitate the settlement, a total of $10,286.92 minus $473.84 for other deductions taken elsewhere in the return which were permitted by the settlement, left a net amount of $9,813.08 under the settlement which was claimed as a marital deduction. The respondent disallowed all except $420 of this amount.
OPINION.
ARUNDELL, Judge:
The question here is whether an amount paid to decedent's surviving husband pursuant to a settlement of his claims to a share of his wife's estate is deductible from her gross estate under the provisions of section 812(e)
of the Internal Revenue Code—the so-called ‘marital deduction’ provision.
SEC. 812. NET ESTATE.For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the rules of the group estate—* * * * * * *(e) BEQUEST, ETC., TO SURVIVING SPOUSE.—(1) ALLOWANCE OF MARITAL DEDUCTION.—(A) In General.—An amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extual that such interest is included in determining the value of the gross estate.* * * * * * *(3) DEFINITION.—For the purpose of this subsection an interest in property shall be considered as passing from the decedent to any person if and only if—* * * * * * *(B) such interest is inherited by such person from the decedent:
2 Although Lyeth v. Hoey involved a question of exemption from income tax, it is settled that the rationale applies to cases involving the estate tax. See Estate of Mary Clare Milner, 6 T. C. 874, 882, and cases there cited.
Our findings show the background of the situation in which the executor of the estate made the disputed settlement and little further elaboration is necessary except perhaps to state the respective contentions of the parties.
The petitioner takes the position that the settlement was made in recognition of the surviving husband's valid claims to a share of the decedent's estate, under Missouri law. Therefore, it is urged, the payment in settlement of the claims is an interest in property passing to the surviving husband by inheritance, citing Lyeth v. Hoey, 305 U. S. 188, and meets the requirements of section 812(e).
The respondent stands squarely on the contention that the surviving husband had no valid or enforceable claims against the decedent's estate under Missouri law. The respondent's regulations interpreting section 812(e) recognize that a payment made to a surviving spouse as a result of a controversy involving a will is an interest passing to the surviving spouse which qualifies for deduction, but the payment must be in bona fide recognition of enforceable rights of the surviving spouse in the decedent's estate. The regulations presume that the rights of the surviving spouse are bona fide if they are so found by a local court and payment is directed pursuant to a decree in a genuine adversary proceeding. However, a settlement of claims made pursuant to a local court decree entered by consent is not accepted necessarily as a bona fide evaluation of the surviving spouse's rights (Regs. 105, sec. 81.47a ( g).)
Presumably, if the payment had been made to the husband on the order of a Missouri court, after a fully litigated proceeding, the respondent would have accepted the order as a determination that Barrett had valid and enforceable claims against his wife's estate, and the payment would have qualified as a marital deduction. However, because the settlement was made without formal adversary litigation, and decedent's will was probated without contest, the respondent has disallowed the deduction of the settlement from the gross estate. Thus, the respondent does not dispute the rationale of Lyeth v. Hoey, supra, but he claims it is not applicable here for the reason that there was no will contest.
In Lyeth v. Hoey, supra, an heir claimed that a will was invalid when it was offered for probate. Prior to trial on the issues, a settlement was reached between the heir and the distributees under the will. The settlement allowed the will to be probated as written, but distribution of the estate followed the plan of the settlement. The question was whether the amount received by the heir was exempt from income tax under section 22(b)(3) of the Revenue Act of 1932 (now section 22(b)(3) of the Internal Revenue Code) which excluded from gross income
the value of property acquired by inheritance. The Supreme Court said, in part:
There is no question that petitioner obtained that portion, upon the value of which he is sought to be taxed, because of his standing as an heir and of his claim in that capacity. It does not seem to be questioned that if the contest had been fought to a finish and petitioner had succeeded, the property which he would have received would have been exempt under the federal act. Nor is it questioned that if in any appropriate proceeding, instituted by him as heir, he had recovered judgment for a part of the estate, that part would have been acquired by inheritance within the meaning of the act. We think that the distinction sought to be made between acquisition through such a judgment and acquisition by a compromise agreement in lieu of such a judgment is too formal to be sound, as it disregards the substance of the statutory exemption. It does so because it disregards the heirship which underlay the compromise, the status which commanded that agreement and was recognized by it. While the will was admitted to probate, the decree also required the distribution of the estate in accordance with the compromise and, so far as the latter provided for distribution to the heirs, it overrode the will.
We think that the foregoing observations are pertinent here. It is obvious, as it was in the case of the heir in Lyeth v. Hoey, that the only reason that Barrett had any standing to claim a share of his wife estate was his legal relationship to her. The merits of the claims could not be definitely determined until a final decision of a Missouri court passed on them, but such a determination was unnecessary in view of the settlement which we have found as a fact was made in good faith as a result of arm's-length bargaining. The merits of the heir's claims in Lyeth v. Hoey were never tested in actual litigation because the settlement made further contest unnecessary.
Respondent's attempt to distinguish Lyeth v. Hoey on the ground that the will here was probated without challenge we think is without merit. It is clear that there was no contest because the settlement intercepted a contest. The agreement recites that, as part consideration for the settlement, Barrett would permit the will to pass wihtout challenge. The agreement was made at a time when Barrett still had 11 months, under Missouri law, to assert his claims formally and challenge the will. (Mo. Rev. Stat. 1949, sec. 469.120.) In Lyeth v. Hoey, the Supreme Court found too formal for substance the distinction between a payment made to an heir pursuant to judgment in a proceeding contesting a will and a payment made in compromise, in advance of trial, of the claims made in the proceeding. We think, similarly, that the distinction pressed by the respondent, on the basis of his regulations, between a payment made pursuant to an order of a local court after a fully litigated proceeding and a payment made in settlement of claims that avoids a will contest is without merit. A will contest can exist without full blown legal proceedings and we have no doubt that the executor in this case recognized the threat made on his sister's will. If the proceeding had ever come to issue and trial, the executor may well have opposed Barrett's claim, though recognizing as a danger that there was a possibility that Barrett might succeed and be awarded a substantial sum of money. If Barrett had litigated his claim and been awarded a judgment, the amount received by him would qualify as a marital deduction as an interest passing by inheritance. We find nothing in the statute or in logic that would deny similar treatment to a settlement payment made in advance of the contest where there is sufficient basis for a reasonable belief that only such payment would avoid a serious and substantial threat to the testamentary plan provided by the decedent.
We do not think anything we have said or the conclusion we have arrived at is in any way inconsistent with respondent's Regulations 105, section 81.47. Our finding as a fact that Barrett's claim was a valid one made in good faith and settled as the result of arm's-length negotiations is enough to qualify it as a bona fide claim within the purview of the regulations.
Decision will be entered under Rule 60.