Opinion
Docket Nos. 4516-67 4517-67.
1969-06-24
ESTATE OF H. B. HUNDLEY, DECEASED, GEORGE H. BEUCHERT, JR., AND WILLIAM J. MCWILLIAMS, CO-EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John S. Nolan, for the petitioners. George K. Dunham, for the respondent.
John S. Nolan, for the petitioners. George K. Dunham, for the respondent.
Following over a year of continuous intense litigation between decedent and his wife in various courts and jursidictions, they executed a negotiated agreement settling their disputes, pursuant to which decedent transferred certain securities to a trust for the benefit of the wife. The separation agreement provided that the transfer in trust was made both in consideration for the relinquishment of all past or present claims, demands, and causes of action held by either against the other (including the wife's right to support) and in consideration for the relinquishment of all property rights then owned or to be acquired in the future by the parties arising from the marital relationship. Decedent died 2 months after the transfer in trust was made. Before decedent's death neither decedent nor the wife had instituted divorce proceedings against the other and there was no evidence that either had the firm intention of bringing such an action. At the time of the transfer decedent was advised by his attorney, who later became a coexecutor of decedent's estate, that the transfer was a sale giving rise to income tax liability but not to a gift tax. Held, a substantial part of the consideration for the transfer moving to decedent was the surrender of the wife's support rights and to the extent thereof the transfer was not a gift; held, further, that the value of such support rights was the amount fixed in the alternative determination set out in the statutory notice of deficiency in the absence of allegations of error with regard thereto by either party or of evidence requiring a different value; held, further, that the transfer in trust constituted a taxable gift to the extent that the fair market value of the securities transferred in trust exceeded the value of the wife's support rights at the time the transfer in trust was made; and held, further, petitioner estate is not liable for additions to tax under secs. 6651(a) and 6653(a), I.R.C. 1954.
Respondent determined the following deficiencies in, and additions to, the gift and estate taxes of petitioner:
+-----------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦Addition ¦Addition ¦ +-----------+-----------+------+----------+-----------+-----------¦ ¦Docket No.—¦TYE ¦Tax ¦Deficiency¦to tax ¦to tax ¦ +-----------+-----------+------+----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦sec.6651(a)¦sec.6653(a)¦ +-----------+-----------+------+----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+-----------+------+----------+-----------+-----------¦ ¦4516-67 ¦ ¦Estate¦$53,097.32¦ ¦ ¦ +-----------+-----------+------+----------+-----------+-----------¦ ¦4517-67 ¦Dec.31,1963¦Gift ¦27,288.85 ¦$6,822.21 ¦$1,364.44 ¦ +-----------------------------------------------------------------+
Includes $5,128.76 paid on income tax of Mrs. Hundley.
All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. 2. The respondent determined that the fair market value of securities was $370,567.51. Petitioner has not alleged any error with regard to the value thus determined. 3. The statutes authorizing and governing a committeeship proceeding in the State of Maryland are Md. Ann. Code art. 16, sec. 123 et seq. (1966 repl. vol.). 4. The statutes authorizing and governing a conservatorship proceeding in the District of Columbia are D.C. Code Ann, sec. 21-1501 et seq. (1967). 5. Md. Ann. Code art. 46, sec. 2 (1957 repl. vol.); Md. Ann. Code art. 93, sec. 137, as amended, Acts of 1964, sec. 1 (1957, 1967 repl. vol.). These sections provide that if a spouse dies intestate residing in Maryland leaving no issue but survived by one or both parents, the surviving spouse is entitled to one half the personalty and one half of the Maryland realty of the deceased spouse. If neither parents nor issue are alive when the deceased spouse dies, and if the deceased spouse is survived by collateral relatives, the surviving spouse is entitled to $4,000 in money or property and one half of the remaining estate of the deceased spouse. District of Columbia law provides that if a spouse dies intestate leaving no issue the surviving spouse is entitled to one half of the deceased spouse's realty interests located in the District of Columbia whether or not the deceased spouse is survived by a parent. See D.C. Code Ann. sec. 19-104 (1967). We are unable to determine with certainty from the evidence presented in this case whether either of decedent's parents were alive either at the time of these negotiations or when decedent died. 6. Md. Ann. Code art. 46, sec. 2 (1957, 1965 repl. vol.); Md. Ann. Code art. 93, sec. 329, as amended, Acts of 1964, ch. 108, sec. 2 (1957, 1964 repl. vol.); D.C. Code Ann., sec. 19-113 (1967). If a surviving spouse elects against the will of a deceased spouse, under the circumstances described in fn. 2, supra, the surviving spouse is entitled to the same portion of the deceased spouse's estate as the surviving spouse would have received if the deceased spouse died intestate.
These cases were consolidated for trial pursuant to joint motion of the parties. All of the issues in docket No. 4516-67 (the estate tax case) have been settled by agreement of the parties with the exception of the question of the amount, if any, of any claim against the estate on account of gift taxes which may be determined in docket No. 4517-67 as having been owed by the deceased, and of the question of additional attorneys' fees deductible by the estate arising from this litigation. The issues for our decision in docket No. 4517-67 (the gift tax case) are (1) whether a transfer in trust by decedent of securities valued at approximately $370,000
for the benefit of his wife pursuant to a separation agreement resulted in a taxable gift, (2) if it was a taxable gift, the amount thereof, and (3) whether petitioner is liable for the additions to tax determined by respondent.
Includes $2,461.39 paid on income tax of Mrs. Hundley.
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation of facts, and the exhibits attached thereto are incorporated herein by this reference.
Petitioner is the Estate of H. B. Hundley, deceased. Mr. Hundley is sometimes herein referred to as the decedent. The coexecutors of decedent's will are George H. Beuchert, Jr., 821 Union Trust Building, Washington, D.C. 20005, and William J. McWilliams, Maryland Court of Appeals, Court of Appeals Building, Annapolis, Md. Both of them were capable and experienced lawyers who represented decedent with regard to many of the events and transactions hereinafter described.
Beginning in 1922, decedent owned and operated a corporation engaged in the selling of tires at retail in the District of Columbia, a highly competitive business. He exercised day-to-day personal control over the business and until 1959 decedent's business was quite successful due in large part to his personal abilities and efforts.
Decedent married Bertha Suzanne Hundley on June 2, 1934. No issue was born of that marriage. Decedent's death occurred on March 20, 1963, when he and his wife were 66 and 55 years of age, respectively. During the period from 1959 until his death the value of decedent's estate was in excess of $1 million and his annual income was in the range of $55,000 to $60,000. A large part of his estate was invested in growth-type blue chip securities.
In the years up to 1961 decedent and his wife resided at Clifton Farms, a valuable and attractive farm estate in Anne Arundel County, Md. Clifton Farms was a working farm in which there were large and abundant hay crops and a large beef-feeder operation. It had several barns and a large feeder shed, and a great many pieces of farming equipment. The farm pond had a wharf, and was landscaped with multiflora roses. The Hundleys' residence was a beautiful colonial home and elsewhere on the farm there were several brick tenant houses of colonial design. The Hundleys had built up and added to this property over the years.
Decedent and his wife took vacation and rest trips together to Miami Beach prior to 1961. In 1959 decedent suffered from various physical ailments including hypertension resulting from arteriosclerosis. He was then 62 years old. In addition, he was then suffering from mental and emotional disturbances for which he was undergoing shock treatment. Decedent underwent surgery in April 1961 for an aortal aneurysm in the area of the abdomen.
On June 19, 1959, decedent's wife and one George Heitmuller, an old and trusted employee of petitioner who was qualified to handle the routine activities of the tire business, brought an action in the Circuit Court for Anne Arundel County, Md., in which they asked for their own appointment as co-committees for the decedent's property.
At approximately the same time, they instituted ancillary proceedings of a similar nature in the District of Columbia. At this time, decedent was domiciled in Maryland at Clifton Farms. Decedent's business was located in the District of Columbia as was the safe-deposit box containing his securities.
Includes $1,098 paid on income tax of Mrs. Hundley.
Practically all of his property, both real and personal, was held by him in his own name alone. Initially, decedent made no objection to the creation of a committee to take over his property.
In August 1961 the decedent left Clifton Farms and his wife and did not thereafter return. On August 2, 1961, decedent began a legal action in Anne Arundel County to rescind the committeeship on the ground that he was now competent to carry on his own affairs. Efforts were made to convince Mrs. Hundley through her counsel to join in revocation of the committeeship, but she refused and sought a full plenary hearing on the matter. On August 25, 1961, after the legal action to rescind the committeeship had been commenced but before it had been tried on the merits, the Anne Arundel County Court issued an order restraining decedent's wife and her agents from interfering with decedent's person. Although Mr. Hundley had left Clifton Farms, Mrs. Hundley was seeking to locate him occasionally with the aid of police and detectives. He wished to avoid any contact with her.
After a long trial in which the conflicting contentions of decedent and his wife were vigorously presented by able counsel and after consideration of all of the foregoing proceedings, the Anne Arundel County Court on January 24, 1962, rescinded the committeeship and in a memorandum opinion stated:
Hiram Benjamin Hundley, Incompetent, filed his petition alleging that he is now competent to manage his own affairs and praying the Court to rescind its order of 15 July 1959 appointing Mrs. Berth Hundley and George Heitmuller as his committees. Filed as exhibits with the petition were the certificates of Dr. Henry E. Andren, Dr. A. Arthur Huse and Dr. Zigmond M. Lebensohn, saying that he is now competent. Two of these doctors had filed certificates with the initial petition for appointment of committee saying that he was not competent to manage his affairs.
Over a period of many days voluminous evidence was presented to the Court. All of the medical evidence presented was to the effect that the Petitioner is competent to manage his own affairs. Many of the Petitioner's business associates and friends from all over the country testified that, from their observation, he is capable of handling his own affairs. In fact, the only testimony to the contrary was by the Petitioner's wife and several employees of the farm.
For the reasons stated above, the relief sought will be granted.
The committees filed a motion to stay the effect of the court's decree and a motion for leave to prosecute an appeal to the Maryland Court of Appeals. Both motions were made in the Court of Appeals to stay the effect of the court's mandate pending reargument. Those motions were all denied. On April 19, 1962, the committees were adjudged in contempt of court by the Anne Arundel County Court for failure to return decedent's assets. The committees were arrested and brought into custody; they appealed the contempt citation and were released on $5,000 bond.
On April 30, 1962, the committees filed a petition for instructions in the U.S. District Court for the District of Columbia, where ancillary committeeship proceedings had previously been instituted invoking that court's jurisdiction with respect to decedent's assets located in the District of Columbia, including not only decedent's tire business and the real estate used therein but also the securities of decedent which constituted the bulk of his estate and which were located in a safe-deposit box in the District of Columbia. The committees sought to retain control over these properties, whose alleged situs was in the District of Columbia, until final adjudication of matters pending before the Maryland Court of Appeals. On May 22, 1962, the U.S. District Court for the District of Columbia ordered that the ancillary proceedings should continue pending final determination of all of the issues in the Maryland domiciliary cause, that the ancillary committees' bond be increased to $1 million that no further expenditures be made by the committees without prior court order, and that a special audit be made showing all expenditures by the committees and the authority therefor.
The auditor's report, prepared pursuant to the order of May 22, 1962, found that ‘The balance for distribution of $913,301.34, as shown in (the report), consisting of bonds valued at $100,250.00, stocks valued at $794,963.57, jewelry and old coins valued at #395.00, undeposited coupons for $1,375.00, and cash of $16,317.77 together with any collections subsequent to July 31, 1962, the closing date of the Third-and-Final Account, is distributable to Hiram Benjamin Hundley.’ The report recommended that a commission to the co-committees at the rate of 5 percent would be excessive and recommended that, instead, a commission of 2 percent of net disbursements and a commission of 1 percent of assets to be distributed be allowed. This recommendation was based on the following findings of the auditor:
It will be noted that the great majority of the disbursements were not authorized or sanctioned by this Court or by the Maryland Court, that Mrs. Hundley, along with the co-committees, drew checks to herself totaling $27,880.36 and deposited those checks in her personal checking account. The administration as a whole can hardly be designated as prudent or proper, according to accepted administration procedures in handling trust funds. Furthermore, the accounts reflect expenditures of $1,201.75 for accountant services (authorized by Court order in Maryland) which are for duties normally performed by Committees, and in such cases where accountants are employed by Committees the charge for such employment is borne by the Committees out of whatever commissions are allowed to them.
On November 5, 1962, the U.S. District Court for the District of Columbia ordered that the auditor's report be approved, that the committees accomplish delivery of decedent's assets in their control before November 26, 1962, and that the committees be discharged except for any prior defaults.
At about this same time, decedent's wife filed a bill of complaint in the Circuit Court for Anne Arundel County, Md., for separate maintenance, alleging that decedent ‘abandoned and deserted (her) without just cause or reason and has refused and continues to refuse to cohabit with (her),‘ that decedent's yearly income was in excess of $35,000 and his net worth approximately $1 million, and that her own ‘income is insufficient to support her in a manner consistent with her husband's station in life.’ The complaint asked that ‘Plaintiff may be awarded separate maintenance, temporary and permanent.’ On November 5, 1962, the court ordered that decedent pay Mrs. Hundley $1,000 per month ‘as maintenance pendente lite’ unless cause to the contrary was shown by November 28.
On November 7, 1962, counsel for decedent's wife began a new action in the District Court for the District of Columbia for the appointment of a conservator to manage decedent's property. The only issue in a conservatorship proceeding in the District of Columbia is whether the individual is incapable for any reason of managing his business affairs. The conservatorship is of property and not of the person who is the owner of property. This new litigation posed the risk of another long series of pretrial motions, hearings, trial proceedings, posttrial actions, and appeals.
Includes $2,820 paid on income tax of Mrs. Hundley.
Notwithstanding the order of the District Court dated November 5, 1962, decedent did not obtain the personal physical possession of the securities which were the principal source of his income and the most valuable category of the assets here involved. As of November 1962, the action for the appointment of a conservator was still pending in the District of Columbia and the action for separate maintenance was still pending in Maryland. Pursuant to an agreement worked out by decedent's counsel and counsel for decedent's wife, the assets subject to this order were placed in escrow with the National Bank of Washington as custodian under terms whereby they could not be released except with the consent of counsel of both parties.
Decedent's wife, through her attorneys, took the initiative in November 1962 in beginning negotiations with counsel for decedent looking toward a general settlement agreement. Mrs. Hundley's counsel was of the opinion that decedent's property was worth roughly a million dollars. Under Maryland and District of Columbia law, since there were no issue of the marriage and since decedent had collateral relatives, Mrs. Hundley as wife of the decedent would be entitled to at least 50 percent of the decedent's estate if he were to die intestate.
Mrs. Hundley's statutory share could not be defeated by will since the widow could elect to take against the will.
Includes $550 paid on income tax of Mrs. Hundley.
However, so long as he lived decedent could dispose of the personal property held by him in his own name without any legal limitation. Mrs. Hundley's counsel was aware of the fact that decedent had kept all of this property, including the farm, the business real estate, and the various securities, in his own name. No assets were held jointly and Mrs. Hundley had very little property, aside from personal effects, of her own.
Mrs. Hundley's counsel began the negotiations by asking that his client should immediately have one-half of decedent's assets. In arriving at that figure, Mrs. Hundley's counsel took into account the decedent's age and physical condition, the statutes of descent and distribution of Maryland and the District of Columbia, and also considered the amount of capital required to generate sufficient income for the support and maintenance of Mrs. Hundley in the light of her previous standard of living. Counsel for decedent gave consideration to the following circumstances: At the time these negotiations were commenced, although there were outstanding orders of the Maryland courts and the U.S. District Court for the District of Columbia in the ancillary committeeship proceeding that control of the assets be returned to Mr. Hundley, these orders had not been fully satisfied; there were appeals pending in Maryland and an appeal might be taken in the District of Columbia or the return of the assets to decedent delayed until final disposition of the Maryland appeal; the new conservatorship action in the U.S. District Court had been filed which threatened a new round of expensive and time-consuming litigation; and the suit for separate maintenance had just been filed in Anne Arundel County in which there was an order requiring payment of $1,000 per month to Mrs. Hundley for her support pendente lite, which order was subject to revision in light of evidence as to her standard of living and other relevant factors which might be offered by the wife in any action for separate maintenance or absolute divorce. He also considered that Mrs. Hundley continued to dwell at Clifton Farms, that substantial litigation expenses had been incurred which would necessarily have to be paid from decedent's assets, and that there was the risk that further actions might be brought in which decedent would be required to prove that he was competent to manage his own affairs.
After extensive negotiations, a deed in trust was executed on January 19, 1963, incorporating the terms of an ‘Agreement’ bearing the same date pursuant to which decedent transferred securities worth approximately $370,000 to the National Bank of Washington as trustee for the benefit of his wife. The agreement states, in pertinent part:
AGREEMENT
This Agreement made this 19th day of January, 1963, between Hiram Benjamin Hundley hereinafter referred to as the Husband, and Bertha Suzanne Hundley hereinafter referred to as the Wife,
WHEREAS in consequence of certain differences that have arisen between the parties hereto they are now living separate and apart from each other, and a reconciliation of their differences and resumption of marital relations are deemed unlikely; and
WHEREAS the Husband desires to make provision for the separate maintenance of the Wife; and
WHEREAS, it is the desire of the parties that an Agreement be achieved making a permanent settlement of the property rights of the Wife in the property of the Husband regardless of the kind of character of such rights that may have accrued by reason of the marital relationship to the end that the transfers and provisions made for the Wife herein shall be in lieu of any such rights or claim of the Wife in the estate or property of the Husband, whether now owned or hereafter acquired, and
WHEREAS, it is the intention of the parties that regardless of whether they resume their marital relationship, remain separated, or seek an absolute divorce in a later action following the execution of this Agreement, no testimony shall be taken with respect to support or property rights and the provisions herein contained with respect to such matters shall be forever controlling and binding on the parties, their heirs and executors and assigns.
NOW THEREFORE, in consideration of the premises, the parties hereto agree with each other as follows:
1. The Husband and the Wife shall at all times hereafter live separate and apart from the other and each shall be free from the authority and control, direct or indirect, of the other as fully as if he or she were sole and unmarried. Each may reside at such place or places as he or she may select; provided, however, that the Husband shall have sole ownership, possession, use, and right of occupancy of the Clifton Farm property at Davidsonville, Maryland.
2. The Husband and the Wife shall not molest or interfere with each other, nor shall either of them compel or attempt to compel the other to cohabit or dwell with him or her, by any means whatsoever.
3. The Husband shall forthwith irrevocably, in fee simple, transfer, assign and indorse over absolutely to National Bank of Washington, D.C., a corporate trustee, securities sufficient in amount (Exhibit A hereto) to create a trust for the benefit of the Wife which will yield an income of One Thousand Dollars ($1,000) net, per month, exclusive of District of Columbia, State and Federal income taxes. The Trustee shall apply and distribute the net income and principal of the Trust so created in the following manner as set forth in detail in the attached Trust Agreement (Exhibit B hereto) which the Husband shall execute simultaneously with the signing of this instrument:
(a) The Trustee shall pay the net income of the trust to the Wife during her lifetime.
(b) If any year the gross income is insufficient to pay the Wife $12,000.00 per year net, the Trustee is empowered to make up any deficiency from principal.
(c) If in any year the said income should be insufficient to meet the proper wants and needs of said Bertha Suzanne Hundley, the Trustee, in its discretion may pay over to her directly, or to any hospital, institution or creditor for her, such part of the principal of said trust as it may deem requisite and necessary to provide for her proper wants, needs, maintenance and comfort.
(d) Upon the death of the Wife, the trust shall cease and terminate, and thereupon the Trustee shall distribute the principal of the trust to such person or persons as the Wife shall appoint by will or, in default of such appointment, to the executor or administrator of the estate of the Wife.
4. The Wife does hereby release, relinquish, waive, surrender, grant and assign unto the Husband, his heirs, personal representatives, devisees, legatees, distributees, and assigns, all rights or claim of dower, curtesy, descent, inheritance, distribution, or the right to administer on his estate in the event he predeceases her, and all the said Wife's rights, claim or title, whether arising out of the said marriage between them or otherwise, in and to, or to participate in any way in the distribution or enjoyment of the property or estate of the said Husband, real, personal or mixed, whether now owned or hereafter acquired by him, and whether arising out of said marriage relation or otherwise, to the end that said Wife shall be forever barred from all rights in and to the property and estate of the said Husband, excepting only the properties to be expressly conveyed to her as provided in this Agreement, and excepting her interest in the deed of trust to be set up as provided in this Agreement. This shall not preclude the Husband, however, from giving, devising or bequeathing other and further property to the Wife.
11. Nothing contained in this Agreement shall in any way preclude, or be construed to prevent, either party from prosecuting any action for absolute divorce at any time or at any place by reason of any acts or conduct of either party, committed prior or subsequent to the date of this Agreement. In the event that a temporary, interlocutory, or final judgment, order or decree of divorce is rendered in any proceeding between the parties hereto, no claim shall be made therein for alimony for the Wife. The terms of this Agreement shall not be questioned by the parties hereto in any such proceeding, but shall continue to bind the parties, and if incorporated in any such decree shall be deemed to survive such decree and not become merged therein.
12. All lawsuits and legal proceedings between or involving the parties hereto, or either of them, of whatever kind or nature in the District of Columbia and State of Maryland shall be terminated and dismissed with prejudice.
13. Each party does hereby release the other, individually and as Husband and Wife, from all claims, demands, and causes of action whatsoever, past or present. In addition, the parties and each of them, hereby specifically releases each other and each and every person who, at any time during the period July 15, 1959, to the date of the execution of this Agreement, was an agent, committee, ancillary committee, trustee, director, officer, fiduciary, employee, attorney or surety in the management and conduct of the affairs of Hiram Benjamin Hundley and Bertha Suzanne Hundley, individually and jointly or of Ben Hundley Tires, Inc., a District of Columbia corporation, from any and all claims, demands, and causes of action which he or she may have against any of such persons in his individual capacity or as shareholder, officer, director, agent, committee, ancillary committee, trustee, surety, employee or other capacity.
The deed in trust provided that the trustees should make payments to or for the benefit of Mrs. Hundley in monthly installments.
Decedent died on March 20, 1963. The immediate cause of death, according to the death certificate, was myocardial infarction due to coronary arteriosclerosis associated with hypertension and pulmonary emphysema. The certificate indicated that decedent died in the Loma Linda Sanitarium and Hospital, Loma Linda, Calif., where he had been treated since November 1962. The certificate further stated that the approximate time between onset of the immediate cause of decedent's death and death was 18 days.
Article Third of decedent's last will and testament, dated November 28, 1962, provided as follows:
THIRD: No provision is made for my wife, Suzanne B. Hundley, in this my Last Will and Testament, because my said wife has been very adequately provided for in a property settlement agreement executed approximately contemporaneously with this Will.
Decedent bequeathed and devised the bulk of his estate to Frederick Stohlman and George H. Beuchert, Jr., and their successors as trustees of a trust created for the benefit of his sister and two nephews and their issue. Decedent appointed George H. Beuchert, Jr., and William J. McWilliams, both of whom had served as counsel for him in the litigation previously described, as executors under his will.
No action for divorce was begun by either Mrs. Hundley or decedent at any time during the period between the date of the January 19, 1963, agreement and decedent's death, nor during the period 1959 to the date of decedent's death.
The income and disbursements of the trust under the deed in trust dated January 19, 1963, were as follows:
+------------------------------------------------------------------+ ¦ ¦ ¦ ¦Distribution ¦Distribution ¦Total ¦ +----+----------+--------+-------------+--------------+------------¦ ¦Year¦Income ¦Expense ¦from income ¦from principal¦distribution¦ +----+----------+--------+-------------+--------------+------------¦ ¦ ¦ ¦ ¦to ¦to ¦to ¦ +----+----------+--------+-------------+--------------+------------¦ ¦ ¦ ¦ ¦Mrs. Hundley ¦Mrs. Hundley ¦Mrs. Hundley¦ +----+----------+--------+-------------+--------------+------------¦ ¦1963¦$13,595.12¦$149.04 ¦$10,000.00 ¦ ¦$10,000.00 ¦ +----+----------+--------+-------------+--------------+------------¦ ¦1964¦17,200.52 ¦1,891.99¦1 16,128.76¦5 $5,050 ¦21,178.76 ¦ +----+----------+--------+-------------+--------------+------------¦ ¦1965¦18,746.88 ¦2,106.23¦2 17,087.24¦3,500 ¦20,587.24 ¦ +----+----------+--------+-------------+--------------+------------¦ ¦1966¦19,161.62 ¦2,206.31¦3 16,680.82¦3,500 ¦20,180.82 ¦ +----+----------+--------+-------------+--------------+------------¦ ¦1967¦18,851.65 ¦2,151.92¦4 17,276.00¦2,000 ¦19,276.00 ¦ +----+----------+--------+-------------+--------------+------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------------------------------------------------+
In negotiating the agreement, the attorneys for petitioner discussed the tax implications of the transfer including the gift tax liabilities. George H. Beuchert, Jr., counsel for Mr. Hundley throughout the litigation previously described and later an executor of Mr. Hundley's estate, advised Mr. Hundley that the transfer in question was a sale, giving rise not to a gift tax but to an income tax. In 1963 Mr. Beuchert was an attorney of 15 years experience in corporate law and estate planning, and was experienced in gift tax matters. Thereafter neither the decedent nor his estate filed a gift tax return reporting the transfer of $370,567.51 to Mrs. Hundley. Had such a return been filed, it would have been filed with the district director at Baltimore, Md. The transfer was reported on the decedent's 1963 income tax return which was prepared by certified public accountants who had previously acted as accountants for decedent and who were fully aware of the background facts, as a sale resulting in net gain of approximately $158,000 which was included in decedent's 1963 gross income. The National Bank of Washington, trustee under the trust for Mrs. Hundley, also treated the transaction as a sale for Federal income tax purposes in assigning a tax basis to the securities received in trust.
Petitioner's estate tax return was due to be filed approximately 17
months after the transfer in trust was made. In Schedule G of petitioner's estate tax return (relating to transfers during a decedent's life), petitioner reported that the decedent had at no time made any transfer of his property ‘without an adequate and full consideration in money or money's worth,‘ and that there was in existence at the time of decedent's death a ‘Trust for separated wife as per property settlement agreement.’ In Schedule M of petitioner's estate tax return, petitioner stated as follows: ‘Decedent's spouse surrendered all right to claim a share of his estate, as part of a property settlement. She takes nothing from the estate.’
No date appears on the estate tax return, which was stipulated into evidence by petitioner. Respondent made no objection as to the authenticity of this stipulated document.
In the explanation of adjustments attached to the notice of deficiency in docket No. 4517-67, respondent stated as follows:
1. It is determined that the transfer of stocks and bonds in the amount of $370,567,51 (as shown in Exhibit A attached to your ‘Deed in Trust’ plus $550.00 accrued interest on municipal bonds) by H. B. Hundley on February 1, 1963 with the terms of the Deed in Trust dated January 19, 1963 created in favor of his wife, Bertha S. Hundley, and in furtherance of a written agreement resolving their marital and property rights, constitutes a gift within the purview of Sections 2516 and 2512 of the Internal Revenue Code and the applicable regulations thereto. The individual items of the trust corpus are valued in accordance with the applicable provisions of Regulation 25.2512-2 on the valuation date of February 1, 1963.
In the alternative, it is determined that only the commuted value of the support rights given up by Mrs. Bertha Hundley, in the amount of $102,398.92, is excludable from gift tax under the rationale of E.T. 19, 1946-2, C.B. 166, and the balance of the transfer, $268,168.59 is subject to gift tax.
The value of Mrs. Hundley's right to support from decedent which was satisfied by the transfer to the trust here in question was not less than $102,398.92 on the date of such transfer (Jan. 19, 1963). To the extent that the value of the property transferred by decedent to the trust was in excess of this amount ($370,567.51 minus $102,398.92) the transfer was not supported by any consideration in money or money's worth and constituted a taxable gift.
OPINION
KERN, Judge:
On January 19, 1963, after nearly 18 months of intensive litigation between himself and his wife, decedent H. B. Hundley transferred securities valued at $370,567.51 to a trust for the benefit of his wife pursuant to a separation agreement in which the parties settled their earlier litigation (including the wife's action for separate maintenance) and fixed all property rights arising from their marriage. The transfer was reported by decedent as a sale in his 1963 income tax return pursuant to the Supreme Court's decision in United States v. Davis, 370 U.S. 65 (1962), and neither party contends that this treatment of the transfer is incorrect for income tax purposes. Petitioner and respondent are also in agreement as to the value of the securities transferred. The parties have settled a number of issues raised by the pleadings. The only issue remaining for our determination (other than the questions relating to the additions to tax) is whether the transfer is also subject to gift tax and, if so, in what amount.
The Supreme Court in the Davis case has intimated in footnote 6 of the opinion (p. 68) that transfers of property pursuant to a negotiated settlement between husband and wife in return for the release of valuable rights are inherently not gifts but ‘in the contemplation of the gift tax statute they are to be taxed as ‘gifts' because of the language and consideration ingrained in the gift and estate tax statutes.’ The obvious implication of this footnote is that a transfer such as that involved in the instant case is to be taxed as a gift only to the extent required by the interplay of the gift and estate tax statutes as interpreted in the three cases cited in this footnote: Merrill v. Fahs, 324 U.S. 308 (1945); Commissioner v. Wemyss, 324 U.S. 303 (1945); and Harris v. Commissioner, 340 U.S. 106 (1950).
A transfer of property is required to be taxed as a gift by reason of the interplay of the gift and estate tax statutes where and to the extent that the consideration for the transfer is ‘less than an adequate and full consideration in money or money's worth.’ Sec sec. 2512(b), I.R.C. 1954;
Merrill v. Fahs, supra. Transfers for insufficient consideration include transfers for considerations not reducible to a value in money or money's worth (see Commissioner v. Wemyss, supra; Gift Tax Regs. sec. 25.2512-8) and transfers in consideration of ‘a relinquishment or promised relinquishment of dower or curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in * * * property’ (see sec. 2043(b);
SEC. 2512. VALUATION OF GIFTS.(b) Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.
Harris v. Commissioner, supra).
SEC. 2043. TRANSFERS FOR INSUFFICIENT CONSIDERATION.(b) MARITAL RIGHTS NOT TREATED AS CONSIDERATION— For purposes of this chapter, a relinquishment or promised relinquishment of dower or curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the decedent's property or estate, shall not be considered to any extent a consideration ‘in money or money's worth.’
The law as it stood prior to the enactment of what is now section 2516, I.R.C. 1954, may be stated as follows: A release of or promise to release dower or curtesy or a statutory substitute therefor, falling under the generic classification ‘inheritance rights' in property, does not constitute consideration in money or money's worth within the meaning of the estate and gift tax provisions of the Code, and accordingly transfers of property made under property settlement agreements in consideration of the release of or promise to release such rights are not supported by full and adequate consideration in money or money's worth and the properties transferred are included in computing the gifts made during the calendar year. This rule was not applicable with regard to transfers of property made pursuant to a decree of the divorce court and not pursuant to an agreement negotiated between the husband and wife prior to divorce, and it was not applicable to transfers made pursuant to a settlement agreement of husband and wife where the consideration was the surrender of or promise to surrender support rights as distinguished from inheritance rights, see E.T. 19, 1946-2 C.B. 166; Rev. Rul. 68-379, 1968-, C.B. 414, or to a settlement incident to a divorce where the consideration was ‘the relinquishment of a presently enforceable claim to an outright portion of a spouse's property upon divorce,‘ see Estate of Robert Rodger Glen, 45 T.C. 323, 342.
The determination of whether transfers were made pursuant to the settlement agreements of husband and wife prior and incident to the divorce or were made pursuant to the decree of the divorce court was not without difficulty. See Harris v. Commissioner, supra. In order to obviate, under certain circumstances, the necessity of making this difficult determination Congress enacted as section 2516 of the 1954 Code the following provision:
SEC. 2516. CERTAIN PROPERTY SETTLEMENTS.
Where husband and wife enter into a written agreement relative to their marital and property rights and divorce occurs within 2 years thereafter (whether or not such agreement is approved by the divorce decree), any transfers of property or interests in property made pursuant to such agreement
(1) to either spouse in settlement of his or her marital or property rights, or
(2) to provide a reasonable allowance for the support of issue of the marriage during minority,
shall be deemed to be transfers made for a full and adequate consideration in money or money's worth.
In this case respondent's primary determination was that the value of the entire property transference to the trust is taxable to decedent as a gift. He argues that the consideration was the release of or promised release of dower or of a statutory estate in lieu thereof and therefore must be deemed to have no value in money or money's worth under section 2043(b). He points out that section 2516 was enacted for the purpose of obviating, under certain specified circumstances, the difficulties incident to the decision of whether property passed pursuant to an agreement of husband and wife requiring consideration or pursuant to a divorce decree as to which consideration is irrelevant and that by its terms it is applicable only when there is a written agreement by husband and wife relative to their marital and property rights and divorce occurs within 2 years thereafter. Thus it cannot be applied to the facts of the instant case since there was no divorce. Therefore respondent concludes that the transfer is not to ‘be deemed to be * * * made for a full and adequate consideration in money or money's worth’ and therefore constitutes a taxable gift under the established law.
This alternative determination was ‘that only the commuted value of the support rights given up by Mrs. Bertha Hundley, in the amount of $10,398.92 is excludable from gift tax * * * and the balance of the transfer, $268,168.59 is subject to gift tax.’ In spite of the fact that he has made no allegation in the pleadings herein that he erred in this alternative determination with regard to the commuted value of Mrs. Hundley's support rights and has introduced no evidence herein that he has so erred, respondent in his reply brief contends that the value of Mrs. Hundley's support rights was $93,000 on as assumption that ‘the annual value of Mrs. Hundley's support rights was $12,000.’ Regardless of the value of these support rights respondent argues on brief that the relinquishment of these rights was not a quid pro quo obtained by decedent in return for the transfer and even if ‘Mrs. Hundley's support rights played some part in consideration for the transfer’ petitioner has failed to prove ‘what part of the transfer is grounded in that consideration.’
Since respondent's contentions with regard to the support rights may be disposed of without lengthy discussion we shall take them up at this point.
It seems obvious to us that Mrs. Hundley's surrender or promise to surrender her rights to support constituted a material part of the consideration supporting decedent's obligations under the settlement agreement and the transfers made by him pursuant thereto. There can be no question as to the existence of these rights. They were asserted by her in the action for separate maintenance brought by her in the Maryland court on or about November 5, 1962. On that date the court tentatively translated her rights into money by ordering decedent to pay her ‘as maintenance pendente lite $1,000 per month subject to cause being shown to the contrary by November 28.’ Between November 5 and November 28, negotiations were begun between decedent and his wife looking toward a settlement of all of their difficulties. These negotiations culminated in the agreement of January 19, 1963, which recited the desire of decedent ‘to make provision for the separate maintenance of the Wife,‘ the intention of the parties that no testimony should ever be taken with respect to either support or property rights since the provisions of the agreement with respect to these matters were to ‘be forever controlling and binding on the parties,‘ and set out the agreement of the parties that all law suits between the parties in the District of Columbia and the State of Maryland should be terminated and dismissed with prejudice, and that each released the other ‘from all claims, demands, and causes of action whatsoever, past or present.’ While the agreement places more emphasis on the wife's release of her rights in the estate or property of the husband (inheritance rights) we conclude without doubt that the agreement called for the surrender of the wife's support rights and that the surrender of these rights constituted a material part of the consideration for decedent's transfer in trust dated January 19, 1963.
As we have stated, respondent in his statutory notice of deficiency determined ‘in the alternative’ that the commuted value of the support rights given up by decedent's wife was the amount of $102,398.92. Such a determination, even though in the alternative, is presumed to be correct. See Nat Harrison Associates, Inc., 42 T.C. 601, 617. Neither petitioner nor respondent has alleged error with regard to this determination and neither party has proved that the value of $102,398.92 placed by respondent on these support rights in his notice of deficiency is erroneous.
Accordingly we accept this figure as the value of the support rights of Mrs. Hundley surrendered by her on January 19, 1963.
Petitioner suggests that a proper computation of the value of the wife's support rights should start with a figure representing all of the payments made by the trust to or on behalf of the wife-beneficiary including the payments of State and Federal taxes. While the amounts actually paid in satisfaction of these rights might be relevant to an ascertainment of their value, it is not clear on the record in this case exactly what amounts were paid or would be paid by the trust in satisfaction of the wife's support rights. In the absence of evidence of a predictable annual payment of a certain amount in satisfaction of the support rights, we are of the opinion that petitioner has failed to prove a basis of computation which would result in a value of the wife's support rights in excess of the value of such rights determined by respondent.
With regard to the excess of the value of the property transferred by decedent in trust over the value of the support rights surrendered by decedent's wife, respondent continues to argue that to the extent of such excess the transfer was not made in return for full and adequate consideration in money or money's worth since the only other consideration which was reducible to a value in money or money's worth was the relinquishment of inheritance rights (dower or curtesy or a statutory property right in lieu thereof) expressly declared by section 2043(b) not to be a consideration in money or money's worth, and was consequently a taxable gift under section 2512(b).
Petitioner contends that no part of the value of the property transferred by decedent to the trust constitutes a taxable gift and advances several arguments supporting this contention.
One of these arguments may be disposed of summarily. It is to the effect that section 2516 is operable here since ‘There was a de facto divorce in the present case plus an intent to obtain a court decree of divorce, frustrated only by decedent's unexpected death’ and therefore, ‘The intent and substantive requirements of section 2516 were satisfied, if not the language.’ This argument is without merit. Without deciding that under no circumstances could section 2516 be operative without a divorce or a divorce decree (although we would be inclined to this view), we are of the opinion that the record herein does not furnish a factual support for petitioner's contention outlined above. It may be that the evidence would support findings that the possibility of a divorce was considered by the attorneys for decedent and his wife, that the decedent wistfully considered the possibility of instituting such an action at some undetermined future time, and that he was advised by his attorney that theoretically he had legal grounds for divorce, but the record does not support a finding that decedent and his wife, at the time the settlement agreement was signed or at any other time, were agreed that they should be divorced, and does not support a finding that decedent intended to institute divorce proceedings absent such agreement. In view of the forensic tribulations decedent had gone through during the years immediately prior to January 19, 1963, it would be surprising if decedent (or his attorney) were reckless enough to jump into the morass of a contested divorce suit against Bertha Suzanne Hundley.
Petitioner urges that the provisions of the settlement agreement coupled with the fact that after the agreement the parties lived apart constitute a de facto termination of their marital status which satisfied the purpose of section 2516. We disagree. In our opinion there was not a de facto divorce or termination of the decedent's marital status and the purpose of section 2516 was not satisfied.
We point out that petitioner's position on this point is inconsistent with his later argument that one of the principal reasons of decedent in entering into the settlement agreement was to put an end to the litigation between him and his wife because of its expense and its injurious effect on his health.
Petitioner next argues that the transfer must be deemed to have been made for full consideration since it was a transaction ‘in the ordinary course of business (a transaction which is bona fide, at arm's length and free from any donative intent).’
We point out that in this case the transferee wife did not have or assert any unliquidated claims on behalf of herself personally to any money or property of the transferor husband with the exception of those based on her rights of inheritance in his property which section 2043(b) specifically provides ‘shall not be considered to any extent a consideration in money or money's worth’ and of those based on her support rights which did constitute valid consideration under the estate and gift tax statutes (see E.T. 19 and Rev. Rul. 68-379, supra); and that she did not have or assert any ‘presently enforceable claim to an outright portion of (decedent's) property upon divorce.’ (See Estate of Robert Rodger Glen, supra.)
The only claim asserted by the wife transferee other than those based upon inheritance rights and support rights, was the claim that she or some other person should be named as a committee or conservator of the husband's property for the purpose of managing it for his benefit on the ground that he was incapable. This claim was not asserted on account of any right to money or property which she claimed to own although a byproduct of the appointment of a committee or conservator might be the protection of her support rights and her rights of inheritance.
Whether we consider that the institution and prosecution by the wife of an action for the appointment of a committee or conservator was done for the husband's own good or constituted a form of marital harassment or was part of the tactics pursued by her or her attorney in connection with the negotiations, we feel sure that a substantial motive for the husband's transfer to the trust was to put an end to these actions and avoid them, if possible, in the future. Similarly we recognize that additional motives of the transferor were to avoid the expenses and annoyances of litigation and to have the pleasure of living in Clifton Farms without his wife. However, a motive does not serve in itself as a consideration. 1 Williston, Contracts, sec. 111 (3d ed. 1961). We consider that these desiderata were motives and did not constitute considerations moving to the transferor. Even if they did constitute considerations to the transferor they were not reducible to a value in money or money's worth and therefore cannot be considered either separately or collectively as adequate and full consideration.
Petitioner in this part of his argument cites Rosenthal v. Commissioner, 205 F.2d 505, reversing 17 T.C. 1047; Catherine S. Beveridge, 10 T.C. 915; Estate of Gertrude Friedman, 40 T.C. 714; Shelton v. Lockhart, 154 F.Supp. 244; and William Barclay Harding, 11 T.C. 1051.
All of these cases are distinguishable from the one before us. The facts in none of them were such as to make section 2043(b) (or its predecessor statute) applicable. Only one, the Harding case, involved a transfer pursuant to a settlement agreement between a husband and wife.
In that case it was specifically found as follows (p. 1954):
The opinion of the Court of Appeals in Rosenthal v. Commissioner, is concerned only with transfers made for the benefit of the transferor's children.
The basis of the offers and counteroffers (leading to the agreement) was * * * (the husband's) financial condition and what was considered * * * (the wife's) needs for the support of herself and children. The intention was that the $350,000 (the amount transferred) apply to support the wife and children.
The execution of the agreement in that case was followed by a divorce and was made a part of a divorce degree.
In Edward B. McLean, 11 T.C. 543, cited by petitioner later in his argument, the spouses executed an agreement incident to a pending divorce which was ratified, approved, and confirmed by the divorce degree. Part of the consideration for the payments called for by the agreement which were determined by petitioner to be gifts was the compromise of the wife's demand for a lump sum in addition to contributions to her support. We held in that case (p. 549) that the holdings of the Supreme Court in Commissioner v. Wemyss, and Merrill v. Fahs, supra, did not cover ‘a situation in which divorce has converted the wife's marital rights into immediately enforceable claims' and that in considering questions under the estate and gift tax statutes involving the existence of full and adequate consideration ‘transfers made to settle presently enforceable claims' should be considered, as in the case of transfers made to settle support rights, as being supported by adequate consideration. We again point out that those ‘presently enforceable claims' were construed by us in Estates of Robert Rodger Glen, supra at 342, to be presently enforceable claims ‘to an outright portion of a spouse's property upon divorce.’
In the instant case there was no divorce, no agreement between the spouses that a divorce action would be brought, no evidence that the wife desired a divorce or contemplated instituting a suit for divorce, and no evidence even that decedent intended to bring such an action. It follows that decedent's wife did not relinquish as any part of the consideration for the transfer here in question a presently enforceable claim to an outright portion of decedent's property upon divorce. Except in a divorce decree and even then limited to certain circumstances Maryland courts have no power to adjust the property rights of spouses. See Brown v. Brown, 204 Md. 197, 103 A.2d 856, 863.
The absence of donative intent is immaterial. Returning to the case of United States v. Davis and the footnote thereof referred to at the beginning of this opinion, it is apparent that in circumstances such as are present in the instant case the resolution of the question of the taxability of transfers under the Federal gift tax statute depends not upon the subjective intent, of the parties, e.g., the presence of a donative intent, but upon ‘the interplay of the gift and estate tax statutes' with reference to objective facts. As Judge Tannenwaid pointed out in his dissent in Estate of Robert Rodger Glen, supra at 353, it is not necessary for us to decide in a case such as this ‘whether the relationship between husband and wife reflects the romantic waltz or the violent apache dance’ since ‘The gift and estate tax provisions of the Internal Revenue Code set forth an objective standard by which consideration is to be measured.’ The fact that our findings reflect the cacophony and erratic tempo adapted to an apache dance cannot preclude the application of sections 2043(b) and 2512(b), I.R.C. 1954, if the objective facts of record fall within their ambit as marked out by the courts.
We consider that the facts of the case before us, unlike the facts of the Harris, Rosenthal, and Harding cases, fall exactly within the provisions of section 2043(b) and consequently of section 2512(b). In this case there was no divorce, no divorce decree, and no presently enforceable claim incident to a divorce. We recognize that there has been ‘a course of in the divorce situation.’ Estate of Robert Rodger Glen, supra at 336. However, we are not aware of any event or court opinion which has so emasculated section 2043(b) that it can be held to be inapplicable to a transfer in return for the relinquishment of dower or curtesy or other marital rights in property where no divorce action has been brought and there is no proof that it will ever be brought. Since section 2043(b) is specifically and unambiguously applicable to the facts here, an inquiry into the existence of the subjective elements essential to the existence of a transfer made in the ordinary course of business would be irrelevant.
In the instant case the only consideration reducible to a value in money or money's worth received by the transferor-decedent in addition to the surrender of the support rights of the wife was the relinquishment of her inheritance rights in and to the decedent's property which according to the express provisions of section 2043(b), held by the Supreme Court to be applicable to gift tax matters, is not to be considered to any extent a consideration in money or money's worth. Therefore the value of the property transferred which exceeds the value of the support rights surrendered is to be deemed a gift pursuant to the provisions of 2512(b).
With regard to the additions to tax determined by respondent we have found that decedent during the negotiations leading to the transfer here involved discussed with his capable and experienced attorney the tax implications of the transfer including any gift tax liabilities and was advised by his attorney that the transfer was a sale which was not subject to a gift tax. Upon decedent's death in the subsequent year this attorney became a coexecutor of decedent's estate together with the Honorable William J. McWilliams of Maryland, who later became a Judge of the Maryland Court of Appeals. The reliance by decedent on the advice of competent counsel was not negligence. It is obvious that the estate relied upon the same counsel. We consider the fact that the attorney is also a coexecutor and thus identified for certain purposes with the petitioner estate is, under the facts of this case, a technicality which should not force us to uphold the penalties here imposed under sections 6651(a) and 6653(a).
Decisions will be entered under Rule 50.