Opinion
Docket No. 78817.
1961-08-29
ESTATE OF CHARLES L. WOODY, DECEASED, CHARLES L. WOODY, JR., RHOMA WOODY GILBERT AND IRVING TRUST COMPANY, EXECUTORS, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
James F. Watson, Esq., for the petitioners. Norman L. Rapkin, for the respondent.
James F. Watson, Esq., for the petitioners. Norman L. Rapkin, for the respondent.
Held, decedent's daughter's claim against his estate was based upon ‘adequate and full consideration in money or money's worth’ (sec. 2053, I.R.C. 1954), and was deductible from the gross estate; it was not a device for making a testamentary disposition.
The Commissioner determined a deficiency in estate tax in the amount of $7,385.64. Petitioners claim a $5,318.70 overpayment.
The question presented is whether decedent's obligation to pay $14,000 to his daughter after his death, assumed in exchange for his daughter's release of his son from an indebtedness in a like amount, was ‘contracted bona fide and for an adequate and full consideration in money or money's worth’ as is required for a deductible claim for estate tax purposes under the provisions of section 2053 of the 1954 Code.
Certain other unrelated issues are no longer in contest.
FINDINGS OF FACT.
Most of the facts were stipulated. The stipulation of facts and attached exhibits are incorporated by this reference.
Charles L. Woody (hereinafter referred to as the decedent) was an attorney who died testate at the age of 87 on June 13, 1956, a resident of Port Jefferson, Suffolk County, New York. His last will and testament, dated January 25, 1950, together with a codicil thereto, dated March 28, 1951, were duly admitted to probable in the Surrogate's Court of Suffolk County, New York, and letters testamentary were issued on July 3, 1956, by said court to Charles L. Woody, Jr., Rhoma Woody Gilbert, and the Irving Trust Company, the executors under decedent's will. The estate tax return for decedent's estate was filed at the office of the district director of internal revenue, Brooklyn, New York.
Decedent was survived by his wife, Ella Rhoma Woody, his son, Charles L. Woody, Jr. (hereinafter referred to as Charles), and his daughter, Rhoma Woody Gilbert.
On or about May 18, 1948, Charles borrowed $68,000 from Rhoma in order to purchase a seat on the New York Stock Exchange. Of this amount, $54,000 had been borrowed by Rhoma from the Irving Trust Company under an agreement whereby her securities in a custodian account with the bank were pledged as security for repayment of the loan and the interest on her $54,000 loan was charged against Charles' account with the bank. The remaining $14,000 lent by Rhoma to Charles was from her own funds and was lent without interest.
Charles soon thereafter acquired a seat on the New York Stock Exchange for $68,000. On May 27, 1948, Charles and Rhoma signed a ‘Voluntary Payment Subordination Agreement’ covering the $68,000 loan which was filed with the New York Stock Exchange in accordance with the rules of the exchange. By this agreement, among other things, Charles acknowledged his indebtedness in the amount of $68,000 to Rhoma and Rhoma acknowledged that her rights as a creditor were subject to the priorities created in the existing constitution, rules, and practice of the exchange.
On or about March 2, 1951, decedent advised Rhoma that he wanted his son to own the stock exchange seat free of any encumbrances. On or about March 22, 1951, decedent and his wife wrote a letter to Charles which read in part as follows:
Today I delivered mine and your mother's check totaling $54,000.00 to the Irving Trust Company in payment of your note for that amount given to them to purchase your seat on the New York Stock Exchange.
This is a gift from your mother and I to enable you to hold your seat free and clear of any debts.
The note referred to in the letter was in fact Rhoma's note and not Charles' note, having been given in consideration of the loan from the Irving Trust Company which Rhoma obtained for her brother's benefit.
Decedent and his wife on or about March 22, 1951, paid $54,000 to the Irving Trust Company in discharge of Rhoma's indebtedness to the bank. Of this $54,000, $44,000 was paid by decedent and $10,000 was paid by decedent's wife. At the same time decedent assumed the indebtedness of Charles to Rhoma in the amount of $14,000. Decedent executed a codicil to his will
on March 28, 1951, which read in part as follows:
The terms of decedent's will, executed Jan. 25, 1950, provided that his entire estate should go to his wife for life, and upon his wife's death one-half to Charles outright and the other one-half to Rhoma for life and upon her death to Charles outright. Charles and the Irving Trust Company were named as executors.
FIRST: I acknowledge that I owe, as a debt to Rhoma Woody Gilbert, $14,000.00, which I have assumed that she paid to CHARLES L. WOODY, Jr., as part of the purchase price of his stock exchange seat on the NEW YORK STOCK EXCHANGE. Debt to be paid only after my death.
The same codicil also added Rhoma as one of the executors of decedent's will. No interest was paid to Rhoma with respect to the $14,000 indebtedness by either the decedent or his estate.
On or about March 22, 1951, Charles wrote a letter to Edwin B. Peterson, secretary of the New York Stock Exchange, stating that he had paid Rhoma the sum of $68,000 in complete satisfaction of his obligation to her under the subordination agreement in connection with his membership in the exchange. Rhoma also signed this letter, with the notation: ‘Payment received and obligation discharged.’
Gift tax returns for the calendar year 1951 were not filed until after the decedent's death by decedent's wife and the executors of his will on or about April 30, 1957. In these returns, a cash gift of $44,000 from decedent to Charles, and the assumption by decedent of Charles' indebtedness to Rhoma in the amount of $14,000 were reported with March 22, 1951, indicated as the date of each gift.
Rhoma made demand upon the executors of decedent's estate for payment to her of the amount of $14,000 which decedent acknowledged as a debt to her in the first paragraph of the codicil to his will, and the executors paid $14,000 to Rhoma on January 15, 1957.
On the estate tax return filed by the decedent's estate on August 14, 1957, the $14,000 paid to Rhoma was deducted as a debt of the decedent in arriving at decedent's taxable estate. This deduction was disallowed by the Commissioner as ‘an obligation not based on consideration in money or money's worth.’
Rhoma's claim against the decedent's estate in the amount of $14,000 was contracted bona fide for an adequate and full consideration in money or money's worth.
OPINION.
RAUM, Judge:
To be deductible for estate tax purposes under section 2053 of the 1954 Code,
a claim against an estate must be ‘contracted bona fide and for an adequate and full consideration in money or money's worth.'
SEC. 2053. EXPENSES, INDEBTEDNESS, AND TAXES.(a) GENERAL RULE.— For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts—(3) for claims against the estate, * * *as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.* 0 * *(c) LIMITATIONS.—(1) LIMITATIONS APPLICABLE TO SUBSECTIONS (a) AND (b).—(A) CONSIDERATION FOR CLAIMS.— 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 the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth; * * *
The only matter in controversy in the instant case is whether the $14,000 claim which Rhoma held against the decedent's estate was in fact contracted for such statutory consideration. We think that it was.
This precise language has been a part of the revenue laws since it was first introduced in section 303(a)(1) of the Revenue Act of 1926, 44 Stat. 72. The earlier Revenue Acts of 1916, 1918, and 1921 made deductibility of claims depend only on their being allowed under State law irrespective of the nature of the consideration. The Revenue Act of 1924 added the requirement that claims be ‘incurred or contracted bona fide and for a fair consideration in money or money's worth.’ The successive changes thus consistently narrowed the class of deductible claims which would be allowed for estate purposes. Cf. Taft v. Commissioner, 304 U.S. 351, 355-356.
Since this case involves what was essentially an intrafamily transaction, the alleged obligation which resulted therefrom bears special scrutiny. It has been said that the statutory consideration requirement herein in issue was specifically drafted ‘to prevent deductions, under the guise of claims, of what were in reality gifts or testamentary distributions. * * * The things which the statute was intended to disallow were colorable family contracts and similar undertakings made as a cloak to cover gifts.’ Carney v. Benz, 90 F.2d 747, 749 (C.A. 1). We have viewed the facts herein with this statutory purpose in mind.
The obligation of the decedent to pay the debt in question arose in 1951 when he promised Rhoma he would pay her $14,000 in consideration for her discharging his son Charles from a bona fide indebtedness in a like amount. Rhoma agreed, released her brother from the debt, and the decedent executed a codicil to his will in which he acknowledged the indebtedness to Rhoma and provided that it be paid only after his death. For Rhoma, the transaction amounted to little more than a novation, an exchange of debtors; she was to gain nothing. For Charles, the transaction amounted to the receipt of an inter vivos gift from the decedent which, along with the simultaneous gift of $54,000 paid in his behalf by decedent and his wife to the Irving Trust Company, freed his seat on the New York Stock Exchange from all existing encumbrances in the amount of $68,000. For the decedent, the transaction meant that he was able to consummate the gift in praesenti to his son, using a $14,000 asset of his daughter Rhoma for that purpose and undertaking to repay her that amount at his death.
It seems clear to us on these facts that Rhoma's claim against the estate was based on ‘adequate and full consideration in money or money's worth.’ In no sense was decedent's obligation to Rhoma a device for making a testamentary gift to her. She received not a cent more than she was entitled to prior to the transaction, and Charles' preexisting debt to her was based upon a bona fide $14,000 loan which she had made to Charles out of her own funds.
In substance the decedent contracted a debt in order to make an inter vivos gift to his son. Had he borrowed the $14,000 from a bank or from Rhoma herself for that purpose, there could hardly be any serious question that the debt would have been supported by the requisite statutory consideration. The situation is not changed merely because the transaction was carried out by means of having Rhoma cancel Charles' obligation to her and accepting the decedent as obligor in his place.
The Commissioner presses upon us the argument that the statutory requirement was intended to prevent one from diminishing his taxable estate by creating obligations which are not correspondingly offset by the consideration received in exchange for such obligations. Cf. Estate of John M. Goetchius, 17 T.C. 495, 502, 505; Paul, Federal Estate and Gift Taxation, sec. 11.20. But the fundamental error in the Commissioner's position here is the assumption that the decedent or his estate did not benefit by Rhoma's release of her $14,000 claim against her brother. The evidence shows that the decedent intended to and did make an inter vivos gift to his son. Had he made that gift out of his own funds, his estate would have been depleted by $14,000. He achieved the same result by inducing Rhoma to cancel Charles' $14,000 debt to her in exchange for his undertaking to pay a like amount to her. By thus obtaining Rhoma's release of Charles' debt, the decedent's estate was $14,000 richer than it would have been had he made the gift directly out of his own funds. In very real sense, therefore, the decedent's obligation was supported by ‘adequate and full consideration in money or money's worth,‘ and the principle relied upon by the Commissioner is inapplicable to the facts of this case.
We conclude that the claim here in question, though payable only after the decedent's death, meets the statutory test.
Decision will be entered under Rule 50.