Opinion
Docket No. 3255.
1946-04-29
ESTATE OF MARY CLARE MILNER, GUSTRINE MILNER JACKSON AND MARY CLARE MILNER MORSE, EXECUTRICES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Frontis H. Moore, Esq., and Borden Burr, Esq., for the petitioners. Frank M. Thompson, Jr., Esq., for the respondent.
The decedent was the devisee of real estate under a will of her mother which, upon being offered for probate, was contested by decedent's daughter, one of the devisees of an interest in the property under a prior will. Before trial of the issue of validity of the later will, a compromise agreement was made under which that will was probated, the contest was withdrawn, and the decedent (prior to March 3, 1931) transferred the real estate in trust to pay the net income to herself during her life, with provisions for payment of the net income after her death to her two daughters and distribution of the corpus to their lineal descendants after their death. Held, (1) the decree admitting the later will to probate, being a consent decree, does not conclusively establish ownership in fee by the decedent of the property transferred in trust; and (2) the decedent did not become the fee owner of such property, but merely acquired a life estate therein, and, consequently, she did not own an interest in the property which passed at or by reason of her death within the meaning of section 811(c), Internal Revenue Code. Frontis H. Moore, Esq., and Borden Burr, Esq., for the petitioners. Frank M. Thompson, Jr., Esq., for the respondent.
The Commissioner determined a deficiency in estate tax of $39,373.16, of which $2,287.25 has been paid. The only issue is whether the respondent erred in including in the gross estate of the decedent, Mary Clare Milner, the value of property with respect to which the decedent in her lifetime had executed an instrument of conveyance in trust to carry out an agreement settling a contest of the will of the decedent's mother. The proceeding was submitted upon oral testimony, documentary evidence, and a stipulation of facts. The stipulated facts not set forth in our findings of fact are included herein by reference.
FINDINGS OF FACT.
Mary Clare Milner, the decedent herein, was a daughter of Gustrine Key Milner. Mary Clare Milner died on December 12, 1940, and was survived by two daughters, Gustrine Milner (now known as Gustrine Milner Jackson) and Mary Clare Milner (now known as Mary Clare Milner Morse), who are the duly qualified and acting executrices of her estate and the petitioners herein. The estate tax return for the estate of Mary Clare Milner was filed with the collector for the district of Florida.
During her lifetime and on April 13, 1929, Mary Clare Milner executed an instrument by which she irrevocably transferred in trust to herself and the Birmingham Trust & Savings Co., as trustees, an undivided one-half interest in lots 2, 3, and 4, block 73; lots 1, 2, 3, 4, 5, and 6, block 50; lots 19 and 20, block 34; and an undivided one-fourth interest in lot 5, block 107-E, all situated in Birmingham, Alabama; and an undivided one-half interest in lot 16, block 8 of Palma Ceia subdivision in Tampa, Florida. The trust instrument provided as follows: The net income of the trust estate, after payment of administration expenses, was to be paid to Mary Clare Milner, the grantor, during her life. Upon her death the Birmingham Trust & Savings Co. was to apportion the trust estate then remaining in its hands into two equal parts, and to set aside one of such parts in trust for the grantor's daughter, Gustrine Milner Jackson, and the other in trust for her other daughter, Mary Clare Milner Morse. Each daughter was to receive during her natural life the net income from the part held in trust for her. If either daughter predeceased the grantor, leaving lineal descendants, then, upon the death of the grantor, such descendants were to take per stirpes the share which would have been set aside for their parent if living. If either daughter died after the grantor, leaving lineal descendants, her share then remaining in the hands of the trustee was to be paid, conveyed and delivered to such descendants per stirpes, in fee simple and free from the trust. If either daughter died either before or after the grantor without leaving lineal descendants, her share was to pass in fee simple, as directed by her in her will or to her heirs if she left no will. Paragraph 13 of the trust instrument provided as follows:
In the event that the trustee, the Birmingham Trust and Savings Company, by reason of any emergency or otherwise, should at any time deem the income from the trust estate insufficient for the proper maintenance, support and comfort of the grantor during her lifetime, it may advance to her for such purpose or purposes, so much of the corpus or principal of the trust estate as it may deem necessary or proper; and after the apportionment of the said trust estate into shares as herein above set out, the trustee * * * may, for any reason as herein above set out, in its discretion, utilize for such purposes such portion of the corpus or principal of the share set aside for such child as it may deem advisable or proper.
The trustee, Birmingham Trust & Savings Co., under paragraph 15 of the trust instrument was given authority, in its discretion, to pay from the corpus the funeral and burial expenses and the expenses of the las illness of any direct beneficiary.
In determining the deficiency in estate tax the respondent found the property described in the trust instrument of April 13, 1929, to be worth $187,140.56 as of the date of the death of Mary Clare Milner, and he included that amount in her gross estate.
The property described in the trust instrument of April 13, 1929, formerly belonged to Gustrine Key Milner, who died a resident of Birmingham, Alabama, on March 11, 1929, at the age of 82, leaving a substantial estate. She was survived by her daughter, Mary Clare Milner, her son Henry Key Milner, and her two granddaughters, Gustrine Milner Jackson and Mary Clare Milner Morse.
Gustrine Key Milner executed a will on September 19, 1921, and thereafter executed two codicils thereto, the codicils affecting only personal property. In the will, after making numerous specific bequests of personalty, Gustrine Key Milner devised an undivided one-fourth interest in lots 2, 3, and 4, block 73 in Birmingham, to Henry Key Milner and an undivided three-fourths interest therein in trust for the benefit of Mary Clare Milner and her two daughters; and she then devised and bequeathed an undivided one-half interest in the residue and remainder of her estate to Henry Key Milner and an undivided one-half interest therein in trust for Mary Clare Milner and her two daughters. The property given in trust for Mary Clare Milner and her daughters was to be held by the Birmingham Trust & Savings Co., as trustee, until the younger of the two daughters arrived at the age of 30 years, provided Mary Clare Milner was then dead, but if Mary Clare Milner was then living, the trust was to continue and to terminate upon her death. The net income of the trust was to be paid to Mary Clare Milner during her life, but the trustee was given the discretion to limit the amount payable to her to so much as was necessary for her comfortable support and the support and education of her children and to invest the remainder, and, if the net income was insufficient for such support and education, the trustee could use so much of the corpus as was necessary for that purpose. Provision was made for the use of the income for the support and education of the children of Mary Clare Milner in case the trust continued after her death; and upon termination of the trust, the trust estate was to be distributed equally between the children of Mary Clare Milner, the children of any deceased child of Mary Clare Milner to take the share which their deceased parent would have taken if living.
After the execution of the will of September 19, 1921, Gustrine Key Milner delivered to the trust officer of the Birmingham Trust & Savings Co. for safe keeping an envelope marked ‘Last Will and Testament of Gustrine Key Milner. ‘ The envelope was sealed and the signature of Gustrine Key Milner was written across the sealed portion fifteen or more times.
Gustrine Key Milner suffered a ‘stroke‘ in February 1925, and shortly thereafter she fell and sustained a broken hip. Subsequently, while she was in Florida, Henry Key Milner requested the Birmingham Trust & Savings Co. to deliver his mother's will to him. The trust company declined to do so, and a few weeks later he presented a typewritten letter purporting to be signed by his mother and authorizing the delivery of the will to him. The trust company thereupon gave him the envelope which had been deposited with it. Sometime thereafter, upon repeated demands of the trust company, he returned the envelope, which appeared upon examination by the trust officer not to have been opened. Upon the death of Gustrine Key Milner the trust company surrendered the envelope to the attorney for Mary Clare Milner and Henry Key Milner, who filed it in the Probate Court of Jefferson County, Alabama. When the envelope was opened it did not contain any will of Gustrine Key Milner.
After the envelope had been opened, Henry Key Milner took Henry Lee Jackson, husband of Gustrine Milner Jackson, to his office. He there showed Jackson two wills, one of which was the original will of September 19, 1921, signed by Gustrine Key Milner and acknowledged by her before witnesses. The other was a will executed by her in Tampa, Florida, under date of December 6, 1927, in which, after making specific bequests of personal property, Gustrine Key Milner devised and bequeathed her residuary estate to Henry Key Milner and Mary Clare Milner, in equal shares, absolutely and in fee simple, and appointed them executors. Henry Key Milner told Jackson that the will of December 6, 1927, was the better of the two wills, in that it divided the residuary estate equally between himself and Mary Clare Milner, and it omitted the trust provisions, thereby saving the expense of management by the trust company.
On March 15, 1929, Henry Key Milner filed the will of December 6, 1927, in the Probate Court of Jefferson County, Alabama, together with his petition for its probate and a waiver of notice by Mary Clare Milner. The court ordered hearing on March 21, 1929, of testimony in proof of the will.
On March 20, 1929, Gustrine Milner Jackson, claiming as a residuary legatee and devisee under the will of September 19, 1921, filed a contest of the will of December 6, 1927, alleging want of testamentary capacity in Gustrine Key Milner at the time of making the latter will and the exercise of undue influence by Henry Key Milner, and alleging further that the will of September 19, 1921, was the last will and testament of Gustrine Key Milner. In support of her contest, Gustrine Milner Jackson attached to her petition a copy of the will of September 19, 1921. The contest was set for hearing in the probate court before a jury on July 9, 1929.
Soon after the contest was filed, attorneys representing Henry Key Milner and Mary Clare Milner entered into negotiations with the attorneys for Gustrine Milner Jackson, the contestant, for settlement of the controversy. As a result of these negotiations, they finally agreed upon a settlement whereby an undivided one-half interest in the property was to go to Henry Key Milner and the other undivided one-half interest was to be placed in a trust for Mary Clare Milner and her children. The trust instrument of April 13, 1929, hereinabove described, was accordingly prepared and the attorneys agreed that it should be executed and delivered by Mary Clare Milner in consideration of, and contemporaneously with, the dismissal by Gustrine Milner Jackson of her contest of the will of December 6, 1927. The trust instrument was executed by Mary Clare Milner on April 13, 1929, contemporaneously with an agreement between her and Henry Key Milner, running with the land covered by the trust and effective for the duration of the trust, that neither of them would force a sale or partition of the lands involved without the consent of the other. On April 13, 1929, the attorneys for all parties interested in the estate appeared before the probate judge and informed him of the above conditions of settlement, stating that the agreements covering same were to take effect contemporaneously with the entry of the decree. On the same date they also filed in the probate court the written consent of Gustrine Milner Jackson to withdrawal of the contest. On April 13, 1929, the probate court entered a decree admitting the will of December 6, 1927, to probate; and the trust instrument and the agreement not to partition the lands were recorded in the probate court on April 15, 1929, in accordance with the provisions of the decree. The decree of the probate court provided as follows:
This day came Henry Key Milner having heretofore filed his petition in writing and under oath, therewith producing and filing in this Court an instrument of writing purporting to be the last will and testament of said Gustrine Key Milner, deceased, and bearing date the 6th day of December, 1927, and attested by S. A. Cox, Lewis C. Pohl and Elva A. Pohl and praying that the same be probated as provided; that petitioner is the son of said deceased and that the names, ages, residence and condition of the next of kin are as follows: Henry Key Milner, son, over twenty-one years of age, Birmingham, Alabama; Mary Clare Milner, daughter, over the age of twenty-one years, Birmingham, Alabama. And that petitioner and Mary Clare Milner are named in said will as executors thereof; That they are resident citizens of this County and under the terms of said will exempt from giving any bond as such executors. And thereupon comes Gustrine Milner Jackson, who having in this cause heretofore filed a contest to the probate of said instrument of writing purporting to be the last will and testament of said Gustrine Key Milner, deceased, and withdraws said contest and now consents that said instrument of writing bearing date of the 6th day of December, 1927, and attested by S. A. Cox, Lewis C. Pohl and Elva A. Pohl is the last will and testament of said Gustrine Key Milner, deceased. And comes also Mary Clare Milner and her daughter Mary Clare Milner Ball and also Harry Lee Jackson Jr., infant son of said Gustrine Milner Jackson, who has no general Guardian, by and through his Guardian ad Litem, H. L. Anderton all of said parties expressly waiving all notice of the application to probate said will and consenting that the same be probated at once, and it appearing to the satisfaction of the Court, from the testimony of Elva A. Pohl, that said decedent did sign her name to the instrument of writing now shown to her, and which bears date, the 6th day of December, 1927, and which purports to be the last will and testament of said decedent; that she and S. A. Cox and Lewis C. Pohl, the other witnesses thereto did respectively sign the said instrument on the day of the date thereof, in the presence of said testatrix, and at her request as subscribing witnesses to the same; the said testatrix then declared the said instrument constituted her last will. And it being also shown by proof which is satisfactory to the Court that the said testatrix was of the full age of twenty-one years; that she was of sound mind and fully capable of making her said will at the time same was so made, as aforesaid, it seems to the Court that said application should be granted.
IT IS THEREFORE Ordered, Adjudged and Decreed by the Court, that said will of the said Gustrine Key Milner, deceased, be received and the same is hereby declared to be duly proven as the last will and testament of said decedent, and as such be admitted to probate and ordered to be recorded, together with the proof thereof, and all other papers on file relating to this proceeding.
On April 13, 1929, letters testamentary were issued by the probate court to Henry Key Milner and Mary Clare Milner, as executors named in the will of Gustrine Key Milner of December 6, 1927; and, upon written consent filed by Gustrine Milner Jackson, the court approved the distribution of an undivided one-half interest in the lands, described in the trust instrument, to Henry Key Milner and an undivided one-half interest therein to Mary Clare Milner.
The trust instrument of April 13, 1929, was delivered to the Birmingham Trust & Savings Co., the trustee named therein, which took over the trust estate and managed it. Up to the time of the death of Mary Clare Milner the trustee made no expenditures or advances for her benefit out of the principal of the trust estate under the authority of paragraph 13 of the trust instrument or otherwise.
OPINION.
TYSON, Judge:
The question presented is whether Mary Clare Milner, hereinafter sometimes referred to as the decedent, made a transfer of property in trust on April 13, 1929, of the kind described in section 811(c) of the Internal Revenue Code.
There is no dispute as to the value of the property to be included in the gross estate in the event of a holding that the transfer is taxable.
SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal * * * .(c) TRANSFER IN CONTEMPLATION OF, OR TAKING EFFECT AT DEATH.— To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death * * * : except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * *
The respondent's positions are (1) that the transfer in trust by decedent was made in contemplation of death; or (2) that the transfer was one intended to take effect in possession or enjoyment at or after the decedent's death, because, by paragraph 13 of the trust instrument, authorizing advances out of the corpus for the maintenance, support, and comfort of the grantor-decedent during her lifetime, and because of the provision in paragraph 15 of the trust instrument authorizing payment of funeral expenses and the expenses of the last illness of any direct beneficiary, the trustee was empowered to invade the corpus for the benefit of the grantor. The respondent asserts that the property described in the trust instrument was owned by the decedent in fee when that instrument was executed, and bases both of his above positions on that premise. He states in his argument that ‘Obviously, under Section 811(c) of the Internal Revenue Code, there is to be included in the gross estate only the value of the interest in real and other property owned by the decedent at the time of her death. Properly, therefore, our inquiry is first directed to a determination of the question of whether the property which comprised the trust corpus in the trust established by Mary Clare Milner by the instrument of April 13, 1929, * * * was owned by her on that date.‘
The petitioners contest the positions (1) and (2) taken by the respondent, and alos contend that the transfer was made for a consideration in money or money's worth. They also oppose taxation of the transfer under section 811(c) on the further ground that under the settlement of the will contest the property never passed to decedent, but passed directly by devise or inheritance from the estate of Gustrine Key Milner to the trustees for the beneficiaries named in the trust, and that the decedent, consequently owning only a life estate in the property, was not the grantor of the property within the statute and no part of the property passed at or by reason of her death. They insist that the trust instrument was a mere means used to give effect to the settlement agreement and that whatever the decedent received was received by her coupled with and subject to the trust.
From the foregoing statement of the contentions of the parties, it is apparent that the primary question for decision is whether decedent had any such interest in the property embraced in the trust instrument as passed at the time of and by reason of her death.
Section 811(c) refers to ‘any interest‘ in property ‘of which the decedent has at any time made a transfer, by trust.‘ The respondent contends that the entire right, title, and interest, in the real estate described in the trust instrument vested in the decedent under the decree of the probate court of April 13, 1929, sustaining the will of December 6, 1927, and admitting it to probate; and that, as the decree was entered upon testimony concerning the competency of the testatrix and the proper execution of the will, it is an adjudication on evidence adduced of the rights of all parties, and as such must be accepted as conclusively establishing the decedent's complete ownership of the property. He cites Freuler v. Helvering, 291 U.S. 35, and kindred cases. The decree in question refers to the contest of Gustrine Milner Jackson and her withdrawal of the contest and the consent by her and all other parties to the probate of the will of December 6, 1927. The attorneys who represented the opposing parties appeared as witnesses. They testified that the trust instrument and the agreement restricting sale or partition were intended to give effect to the terms of the compromise agreement and were executed in consideration of the dismissal of the contest, that it was understood by all parties and the court that the contest would be dismissed contemporaneously with the execution and delivery of those instruments and that the will of December 6, 1927, should then be admitted to probate, and that this arrangement was carried out on April 13, 1929. The proceedings in the probate court were, therefore, by consent, and the decree was not a decree entered upon a real controversy regularly submitted for determination. We, therefore, are not required to accept it as a conclusive determination that the decedent owned an undivided one-half interest in fee in the real estate of Gustrine Key Milner, as contended by the respondent. Francis Doll, 2 T.C. 276; affd., 149 Fed.(2d) 239; certiorari denied, 326 U.S. 725; Tatem Wofford, 5 T.C. 1152.
Upon the facts shown by the record, we think the decided cases require us to hold that the decedent d-d not become the owner of the property described in the trust instrument of April 13, 1929, as contended by the respondent, but that she acquired only a life estate in that property and, consequently, she did not own any interest therein which passed at or by reason of her death.
In the leading case of Lyeth v. Hoey, 305 U.S. 188, the Government sought to tax as income a distribution to Lyeth under a compromise agreement settling a contest in the state court of the will of his grandmother, who had bequeathed a large residuary estate to an endowment trust. Her heirs, including Lyeth, opposed probate of the will on the grounds of want of testamentary capacity and undue influence, and, after issue had been framed for a jury, a compromise was affected under which the will was probated, but the residuary bequest to the trust was disregarded and, in lieu thereof, the residuary estate was divided between the trust and the contesting heirs. The state court decreed administration of the estate ‘in accordance with the terms of said will and said agreement of compromise.‘ The United States Supreme Court upheld Lyeth's contention that the distribution received by him was a distribution of property acquired by him as an heir through inheritance within section 22(b)(3), Revenue Act of 1932; and it held that the value thereof was exempt from income tax under that statute. The Court said:
In passing it may be noted that the transfer here under consideration is not affected by the Joint Resolution of March 3, 1931, amending the counterpart of section 811(c) in the earlier revenue acts so as to include within the gross estate transfers under which the transferor has retained for his life or any period not ending before his death the possession or enjoyment of, or the income from, the property, since it was made prior to the effective date of such amendment. Hassett v. Welch, 303 U.S. 303; Hugh M. Beugler Trust, 2 T.C. 1052; affd., 147 Fed.(2d) 946.
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. So far as the will became effective under the agreement it was because of the heirs' consent and release and in consideration of the distribution they received by reason of their being heirs. * * * The portion of the decedent's property which petitioner obtained under the compromise did not come to him through the testator's will. That portion be obtained because of his heirship and to that extent he took in spite of the will and as in case of intestacy. The fact that petitioner received less than the amount of his claim did not alter its nature or the quality of its recognition through the distribution which he did receive.
The Lyeth case differs from the instant case in that the Lyeth case involved application of the income tax law and the contestants were heirs of the testator, who would have taken by intestacy if the will had been declared invalid, while here the estate tax law is involved and the contestant did not stand in the relationship of heir, but claimed as a beneficiary under an earlier will. The fact that the Lyeth case involved application of the income tax law does not stand in the way of applying it here. The principle of that case has been applied in cases arising under the estate tax law. Helvering v. Safe Deposit & Trust Co., 316 U.S. 56; Sage v. Commissioner, 122 Fed.(2d) 480, affirming 42 B.T.A. 1304; certiorari denied, 314 U.S. 699; Thompson's Estate v. Commissioner, 123 Fed.(2d) 816; and Dumont's Estate v. Commissioner, 150 Fed.(2d) 691, reversing 4 T.C. 158. In the Sage case the Circuit Court of Appeals said:
It does not seem possible to distinguish the Lyeth case from the present, in principle. But, the petitioner points to the fact that the Lyeth case involved a question of income, and not estate, tax liability. That is hardly more than a difference in words. Certainly, it is not a distinction material to the rationale of the rule involved. In each instance, the word ‘inheritance‘ describes, for purposes of tax attachment, a mode of acquisition common to both cases. Petitioner also points out that, in the Lyeth case, the compromise agreement was made a part of the probate proceedings, while here it was not. The answer to that is that the probate proceeding was patently immaterial to the question involved. The heir in the Lyeth case did not take under the testator's will * * * . Like the widow here, he took in spite of the will and not because of it. It is equally certain that he did not take under the intestate law. As here, there was no intestacy. Yet, he took by ‘inheritance‘. And, what he received he took because of his standing as heir,— ‘the status which commanded that (compromise) agreement and was recognized by it‘.
Nor is the Lyeth case inapplicable by reason of the fact that the contestant of the will in the present case was not an heir of the testatrix. The contestant, Gustrine Milner Jackson, was a beneficiary of the trust provided for in the earlier will of Gustrine Key Milner, and the rule of the Lyeth case applies where the will contestant has no standing as an heir, but has a standing as a beneficiary under a prior will. Dumont's Estate, supra (an estate tax case); Charlotte Keller, 41 B.T.A. 478 (an income tax case).
As in the Lyeth, Sage, Dumont, and Keller cases, so here the contestant, Gustrine Milner Jackson, and her sister, Mary Clare Milner Morse, had a claim to a portion of the estate of Gustrine Key Milner had the contest of the second will been successful. They received that portion through the compromise settlement because of their standing as legatees and devisees under a prior will, as was true in the Dumont and Keller cases. Under the settlement, their mother, the decedent herein, acquired nothing more than the right to the net income from an undivided one-half interest in the real estate during her life, or, in other words, a mere life estate, and the remainder after such life estate was acquired by Gustrine Milner Jackson and Mary Clare Milner Morse and their lineal descendants. If, as the foregoing cases hold, the latter two acquired such remainder interest from the estate of Gustrine Key Milner, we see no reason for holding that, within the meaning of section 811(c), such remainder interest constituted ‘any interest‘ in property of the decedent, Mary Clare Milner, or any interest in property with respect to which she did or could make a transfer of the kind described in section 811(c), supra. We think that the reasoning of the Lyeth and other cases referred to above is applicable here, and, upon the authority of those cases, we hold that the value of the property described in the trust instrument of April 13, 1929, is not includible in the gross estate of the decedent.
In view of our conclusion that the decedent did not make a transfer of any interest in property within the meaning of section 811(c), it is unnecessary to consider the contentions of the respondent that the purported transfer of April 13, 1929, was made by the decedent in contemplation of death, or that it constituted a transfer to take effect in possession or enjoyment at or after her death.
Reviewed by the Court.
Decision will be entered under Rule 50.