Opinion
Docket No. 25414.
1951-05-24
ESTATE OF FREDERICKA LOEWENSTEIN, DECEASED, MAX S. LOWENSTEIN, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.*
Kenneth Carroad, Esq., and Herbert D. Cohen, Esq., for the petitioner. Pershing W. Burgard, Esq., for the respondent.
Kenneth Carroad, Esq., and Herbert D. Cohen, Esq., for the petitioner. Pershing W. Burgard, Esq., for the respondent.
1. United States Treasury bonds issued after March 1, 1941, and held in trust for a nonresident alien, held, includible in her gross estate for estate tax purposes, following estate of karl Jandorf, 9 T.C. 338, and Estate of Irene de Guebriant, 14 T.C. 611.
2. Funds held by a resident trustee in the general bank account of the trust for the benefit of a nonresident alien, the sole life beneficiary, held, not excludible from her gross estate as bank deposits ‘by or for‘ a nonresident alien, within the meaning of section 863(b), I.R.C.
3. Value of real estate determined for estate tax purposes.
This proceeding involves an estate tax deficiency of $17,436.36. The issues are (1) whether certain United States bonds with accrued interest are excludible from the gross estate under section 4 of the Victory Liberty Loan Act of 1919, (2) whether certain funds of an irrevocable trust created by decedent, a nonresident alien, are excludible from the gross estate as bank deposits by or for a nonresident alien within the meaning of section 863(b), Internal Revenue Code, and (3) the value of certain parcels of real estate belonging to decedent's estate. The facts have been stipulated in part.
FINDINGS OF FACT.
The decedent, Fredericka Loewenstein, was a nonresident alien and a citizen of Switzerland, domiciled at Lucerne, Switzerland. She died intestate July 12, 1945. Max S. Lowenstein is her sole heir and ‘executor‘ of her estate under section 930(a), Internal Revenue Code. An estate tax return was filed by the executor with the collector of internal revenue for the second district of New York.
The decedent, on October 2, 1935, created a trust to receive and hold the assets which she had already received and expected later to receive as a residuary legatee of her deceased brother, Albert Stein, who had died a resident of the State of Illinois in 1920. Another brother, Sigmund Stein of New York, New York, was named as trustee of the trust.
Under the trust agreement the trustee was given broad powers to invest and manage the trust fund in any manner he saw fit. The grantor during her lifetime was to receive all of the net income from the trust and in addition thereto such part of the principal, not to exceed 10 per cent in any one year:
* * * as the said trustee in his sole judgment and discretion may deem necessary or advisable (1) to enable the Grantor to live in the comfort to which she has been accustomed, or (2) to afford the said Grantor all necessary care, maintenance, and attention in the event of serious or protracted illness or other emergency.
Upon the death of the grantor the trust was to terminate and remaining trust funds were to be paid over to the grantor's son, Max S. Lowenstein.
The trustee, Sigmund Stein, resigned on or about June 11, 1943, and decedent's sone, Max S. Lowenstein, was named successor trustee, in accordance with the provisions of the trust deed.
Among the assets of the trust at the date of decedent's death, reported in the estate tax return under schedule G as ‘Transfers During Decedent's Life,‘ were $5,000 United State Treasury 2 1/2 per cent bonds, 12/1/42-12/15/68, purchased by the trustee on December 8, 1942, and valued at $5,131.81 at date of decedent's death, with accrued interest of $9.38, and $5,000 United States Treasury 2 1/2 per cent bonds, 2/1/44-3/15/70 (65), purchased by the trustee August 9, 1944, having a value of $5,100 at the date of decedent's death, with accrued interest of $40.63.
On the face of all United States Treasury bonds issued after March 1, 1941, including those above mentioned, there appeared the following recital relating to taxes:
The income derived from this bond shall be subject to all federal taxes, nor or hereafter imposed. This bond shall be subject to estate, inheritance, gift or other excise taxes, whether federal or state, but shall be exempt from all taxation now or hereafter imposed on the principal or interest hereof by any State, or any of the possessions of the United States, or by any local taxing authority.
Also included in the corpus of the trust was cash in the amount of $4,534.50 in the trust account at the Continental Illinois National Bank and Trust Company, and a two-seventeenths interest in another account known as the ‘Stein Joint Account,‘ in which were held all of the undistributed assets of the estate of Albert Stein. The Stein joint account at the date of decedent's death contained cash in the amount of $7,185.20 and several items of real estate located in the City of Chicago. The following table shows the location of each parcel, the values reported in the return, the values determined by the respondent, the approximate assessed valuation, the net income, before depreciation, derived from the property during the calendar year 1944, and the date of sale:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦Approximate¦ ¦ ¦ +--------------------+--------+-------------+-----------+-----------+---------¦ ¦Property ¦Value ¦Value ¦assessed ¦Net income ¦Date sold¦ +--------------------+--------+-------------+-----------+-----------+---------¦ ¦ ¦reported¦determined by¦valuation ¦ ¦ ¦ +--------------------+--------+-------------+-----------+-----------+---------¦ ¦ ¦ ¦respondent ¦ ¦ ¦ ¦ +--------------------+--------+-------------+-----------+-----------+---------¦ ¦5447 N. Clark St. ¦$10,000 ¦$15,000 ¦$10,000 ¦$217.75 ¦3- 1-47 ¦ +--------------------+--------+-------------+-----------+-----------+---------¦ ¦Green St. ¦9,000 ¦13,500 ¦9,000 ¦Vacant land¦3-18-46 ¦ +--------------------+--------+-------------+-----------+-----------+---------¦ ¦714 Independence ¦11,000 ¦15,500 ¦11,000 ¦513.53 ¦10-15-46 ¦ ¦Blvd ¦ ¦ ¦ ¦ ¦ ¦ +--------------------+--------+-------------+-----------+-----------+---------¦ ¦5156 N. Leavitt St ¦12,500 ¦15,250 ¦ ¦Not shown ¦12- 4-45 ¦ +--------------------+--------+-------------+-----------+-----------+---------¦ ¦646 W. North Ave ¦7,000 ¦10,500 ¦6,000 ¦723.11 ¦9- 5-46 ¦ +--------------------+--------+-------------+-----------+-----------+---------¦ ¦749 W. North Ave ¦7,500 ¦15,000 ¦8,300 ¦541.28 ¦9- 9-46 ¦ +-----------------------------------------------------------------------------+
The values determined by the respondent are the prices at which the properties were sold on the dates shown. All of the properties except the Green Street vacant lot were acquired by reason of foreclosures on mortgages held by the Stein joint account.
The 5447 North Clark Street property was a three-story brick and stone building with a store on the main floor and two apartments above. It was acquired in 1935. Its fair market value on July 12, 1945, the date of decedent's death, was $12,500.
The Green Street property was a vacant lot which had been acquired as an investment. It was sold in connection with a large real estate development in that locality. Its fair market value on July 12, 1945, was $11,000.
The 714 Independence Boulevard property consisted of a three-story apartment building acquired by ;he Stein joint account on April 3, 1937. Its fair market value on July 12, 1945, was $13,000.
The 5156 Nor Leavitt Street property was a three-story apartment building acquired on October 4, 1934. Its fair market value on July 12, 1945, was $14,500.
The 646 West North Avenue property was a two-story building with a store on the main floor and a single apartment above. It was acquired in 1936. The fair market value of the property on July 12, 1945, was $9,000.
The 749 West North Avenue property consisted of a lot with two buildings, one a four-story brick building located on the front of the lot, containing a store and three apartments, and the other a two-story brick building, containing two apartments. The property was acquired May 15, 1935. Its fair market value on July 12, 1945, was $12,000.
OPINION.
LeMire, Judge:
Our first question is whether the United States Government bonds, and accrued interest thereon, are includible in decedent's gross estate under section 811, Internal Revenue Code. Petitioner contends that the bonds and interest are exempt for tax under section 750 of Title 31 of the United States Code, 1940 edition.
Notwithstanding the provisions of section 745, 747, 752-754b, 757, 757b, 757c, 758, 760, 764-766, 769, 771, 778, 774 and 801 of this title, or of any other law, bonds, notes and certificates of indebtedness of the United States and bonds of the War Finance Corporation shall, while beneficially owned by a nonresident alien individual, or a foreign corporation, partnership, or association, not engaged in business in the United States, be exempt both as to principal and interest from any and all taxation imposed on July 9, 1918, or thereafter by the United States, any State, or any of the possessions of that United States, or by any local taxing authority. (July 9, 1918, ch. 142, Sec. 3, 40 Stat. 845; Mar. 3, 1919, ch. 100, Sec. 4, 40 Stat. 1311.)
Petitioner relies upon Jandorf's Estate v. Commissioner, 171 F.2d 464. In that case the Court of Appeals for the Second Circuit held that the United States postwar bonds, as well as those issued before March 1, 1941, beneficially owned by nonresident aliens not engaged in business in the United States were exempt from estate tax. In so holding the court reversed 9 T.C. 338, where we held that the statutory exemption applied to direct taxes only and not to Federal estates taxes. Jandorf's Estate v. Commissioner, supra, was followed by the United States District Court for the Eastern District of Pennsylvania in Pennsylvania Co. for Banking & Trusts v. United States, 91 F.Supp. 237, affd. (C.A.3), 185 F.2d 125, and by the United States District Court for the Southern District of New York in Chemical Bank & Trust Co. v. Pedrick, (unreported) affd (C.A.2), 185 F.2d 1022.
The question was again before us in Estate of Irene de Guebriant, 14 T.C. 611. There we adhered to our ruling in the Jandorf case, saying:
* * * After a thorough and comprehensive discussion of the issue, we there decided that the exemption provided for nonresident aliens not engaged in business in the United States applies to direct taxes on the principal or interest of United States bonds and does not apply to the Federal estate tax, which is an excise tax imposed upon the transfer of property at death. This view is supported by a long line of authority, including Plummer v. Coler, 178 U.S. 115; Murdock v. Ward, 178 U.S. 139; Phipps v. Commissioner, 91 Fed.(2d) 627; Hamersley v. United States, 16 Fed.Supp. 768; and United States Trust Co.of New York v. Helvering 307 U.S. 57. We are aware that our decision was reversed by the Court of Appeals for the Second Circuit in Jandorf v. Commissioner, 171 Fed.(2d) 464, but, with due deference to its views, we remain convinced of the soundness of our position as expressed in our own decision therein and adhere to it in this proceeding. * * *
While we are reluctant to reassert our disagreement with the views expressed by the courts in those cases, we nevertheless feel that we must do so. There is nothing in what the courts have said to afford any basis for a re-examination of our position on the question; and while our conclusion may be wrong we are at the present time unwilling to adopt the contrary one.
The respondent argues that there are factual differences which distinguish the case now under consideration from the other cited cases, namely, that the bonds in question were:
* * * purchased by a United States trust doing business in the United States with surplus funds having their origin in the United States. The decedent had never possessed the beneficial ownership of these bonds. She was not at any time entitled to the income therefrom, only the net income from the trust itself after the deduction of the trustee's commissions and other expenses.
The only condition which the statute imposes as to the ownership or source of the bonds is that they be ‘beneficially owned by a nonresident alien individual.‘ Since decedent at the time of her death was the sole beneficiary of the trust in which the bonds were held it must be recognized, we think, that she was the beneficial owner of the bonds. For reasons fully discussed in our prior opinions involving the question of the exemption of the bonds, however, we hold that they are not exempt from estate tax.
Our next question is whether the cash deposits held in the bank accounts of the trust are excludible from the gross estate under section 863(b), Internal Revenue Code.
The decedent being a nonresident alien not engaged in business in the United States, the question is whether the funds were ‘deposited with any person carrying on the banking business, by or for ‘ her. We think that they were not. The funds were not profits or distributable income of the trust but were funds which the trustee had deposited in the bank account of the trust for his use as trustee. They had never been segregated from the general funds of the trust. They had not been ‘deposited‘ for the decedent as the income beneficiary of the trust. The funds here, like those in City Bank Farmers Trust Co. v. Pedrick (C.A.2), 168 F.2d 618, certiorari denied, 335 U.S. 898, were held in an active trust. The trust there had been created by a nonresident alien for himself and his wife. The grantor had the power at any time to revoke the trust, with the consent of the trustee, and recover all or part of the trust funds, although at the date of his death he had not done , so. The court held that the funds were not a bank deposit within the meaning of section 863(b).
SEC. 863. PROPERTY WITHOUT THE UNITED STATES.The following items shall not, for the purpose of this subchapter, be deemed property within the United States:(b) BANK DEPOSITS.— Any moneys deposited with any person carrying on the banking business, by or for a nonresident not a citizen of the United States who was not engaged in business in the United States at the time of his death.
The de Guebriant case, supra, also contained a question of exempt bank deposits. The funds there had been held by a trust but at the time of decedent's death the trust had been terminated and the funds were subject to her unconditional use. It was on that ground that we distinguished City Bank Farmers Trust Co. v. Pedrick, supra, in holding that the funds were exempt under section 863(b).
The petitioner cites Estate of Karl Weiss, 6 T.C. 227. That case too, is readily distinguishable from the instant case. There the funds in question had been deposited in a New York bank for the nonresident alien by a friend and, for reasons of security, in the friend's name. We found that the funds were intended for the exclusive use of, and belonged to, the nonresident alien and were therefore exempt from estate tax under section 863(b). However, we pointed out in our opinion that the friend ‘did not deposit the money for himself as a regularly constituted fiduciary or trustee.‘ Cf. also Estate of F. Herman Gade, 10 T.C. 585, where the money was held by the bank in an ‘agency‘ account subject to the owner's instructions. Also distinguishable is Estate of Elizabeth Hawxhurst Davey, 10 T.C. 515, where the funds had belonged to a trust which a nonresident alien had revoked and, at the time of her death, were being held by the bank in its own name ‘as trustee‘ for transmittal to her.
Thus, the cases all seem to be agreement that funds held in an active trust for the benefit of the nonresident alien are not ‘monies deposited * * * by or for‘ him within the meaning of section 863(b).
The final issue relates to the valuation of the six parcels of real estate held in trust. We have determined the value of each property, as set out in our findings of fact above, in accordance with the evidence before us. The value determined by the respondent in each instance was the price at which the property was sold by the trustee subsequent to the date of decedent's death.
The evidence as a whole shows, we think, that the prices at which the properties were sold, one in 1945, four in 1946 and one in 1947, were somewhat higher than the value at the date of decedent's death, July 12, 1945. One of the reasons for this, according to the evidence, was a sharp advance in real estate prices, particularly of apartment properties such as most of these were, after the close of the was with Japan in the latter part of the summer of 1945. Taking all the factors shown by the evidence into consideration, we have determined the values of the several parcels as set out above in our findings of fact.
(Opinion vacated, June 21, 1951.)