Opinion
Docket No. 25975.
1952-07-25
ESTATE OF LESLEY DIANA WORTHINGTON, HARRY FRASER KER, IN HIS CAPACITY AS SUPERINTENDENT OF THE TRUSTEE DEPARTMENT OF BARCLAYS BANK (DC & O), AND AS SUCH THE NOMINEE OF SAID BANK, AND AS SUCH THE EXECUTOR TESTAMENTARY OF THE ESTATE OF LESLEY DIANA WORTHINGTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert G. Starr, Esq., and Walter J. Neylon, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
In determining the value of the decedent's interest in the estate of her grandfather for estate tax purposes, the respondent included in the gross estate evaluation certain cash on deposit and Federal Land Bank bonds held by the executor of the grandfather's estate as of the date of the decedent's death. The decedent was a nonresident alien not doing business in the United States at the time of her death. Held, the funds on deposit were cash on deposit by or for a nonresident alien not doing business in the United States at the time of her death and are therefore not includible in the gross estate. Held, further, that Federal Land Bank bonds are not obligations of the United States and hence not exempt under the provisions of section 861 of the Internal Revenue Code or section 4 of the Victory Liberty Loan Act of March 3, 1919, 40 Stat. 1311. Robert G. Starr, Esq., and Walter J. Neylon, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
The respondent determined a deficiency in Federal estate tax in the amount of $13,097.96, based upon the inclusion in evaluating the decedent's gross estate, of certain items owned by the decedent, a nonresident alien not engaged in business in the United States.
The questions presented are as follows:
1. In determining the value of the decedent's interest in the estate of her grandfather for estate tax purposes, is the petitioner entitled to exclude from the gross estate assets held by the executor of the grandfather's estate as to the date of decedent's death, cash on deposit in the amount of $80,522.36?
2. Should the decedent's interest in her uncle's estate, represented by cash on deposit and certain Federal Land Bank bonds coming to the uncle's estate from the estate of decedent's grandfather, be excluded for estate tax purposes?
3. Should there be included as part of the decedent's gross estate one-half of the value of certain Federal Land Bank bonds, representing assets of the estate of her grandfather in possession of the executor of such estate as of the date of death of decedent?
FINDINGS OF FACT.
The facts stipulated by the parties are found accordingly.
The petitioner is executor of the estate of Lesley Diana Worthington, a nonresident alien decedent, who died April 29, 1945. The executor filed with the collector of internal revenue for the second district of New York an estate tax return on Form 706 on February 4, 1948. Decedent was not engaged in business in the United States at the time of her death.
Lesley Diana Worthington, the decedent, was the granddaughter of Lewis Nicholas Worthington and of his wife, Emma Browne Worthington. Lewis Nicholas Worthington died July 18, 1919, survived by his widow, Emma, and his two sons, Warwick and Percy. The decedent was the daughter and only issue of Percy Worthington. Percy died testate in South Africa on August 1, 1931; his brother, Warwick, died August 28, 1931, intestate and without issue. Emma Browne Worthington, the grandmother of the decedent, died August 15, 1942.
The will of Lewis Nicholas Worthington was admitted to probate by the Surrogate's Court of New York County, New York, on February 19, 1920, and letters testamentary were issued to Marcus Goodbody.
There being some doubt in the minds of the beneficiaries as to the interest taken by Emma Browne Worthington under the will of her husband, Lewis Nicholas Worthington, an agreement was entered into between Emma Browne Worthington and Warwick and Percy Worthington, dated April 20, 1922, which provided in so far as is material here that Marcus Goodbody hold the residuary estate during the widow's lifetime and pay the income to her. The preamble of the agreement is as follows:
AND WHEREAS EMMA B. WORTHINGTON, the widow of the decedent, and WARWICK WORTHINGTON and PERCY WORTHINGTON, sons of the decedent, have requested the said MARCUS GOODBODY to hold said property and to invest the same during the life of the said EMMA B. WORTHINGTON instead of turning over said property to the said EMMA B. WORTHINGTON and exacting from her security for its redelivery to the remainder interests;
Thereafter the stock brokerage firm of Goodbody & Co., acting as agent of Marcus Goodbody, handled the securities and funds held under the above agreement by Marcus Goodbody. The above agreement grew out of article SECOND of the will of Lewis Nicholas Worthington, providing as follows:
SECOND: All the rest, residue and remainder of my property, both real and personal, I give, devise and bequeath unto my beloved wife, Emma Browne Worthington, for and during the period of her natural life, * * * and I hereby authorize, empower and direct my said wife to contract to sell, sell and convey all property I die owning, both real and personal, and to convert the same into money and to collect, receive and invest and reinvest the avails thereof, in her discretion, * * * .
After the death of Emma Browne Worthington and in March 1945, Marcus Goodbody filed a petition to account for the funds he had been handling, left by Lewis Nicholas Worthington, and for a construction of the will of Lewis Nicholas Worthington. The decedent was cited as a party. However, before the hearing, the decedent herein died on April 29, 1945. As a result of her death, a supplemental petition was filed and a citation issued joining the executor of the will of Lesley Diana Worthington as a party to the proceeding.
In November 1946, Surrogate Delehanty of the Surrogate's Court of New York County, New York, filed his decision on the petition to account and for construction of the will of Lewis Nicholas Worthington, holding that the widow, Emma Browne Worthington, received a legal life estate in the residuary, and as to one of the shares of the residuary estate in remainder there was an intestacy, and as to the other it passed to the petitioner's decedent and since she had attained 21 years of age before she died she was entitled to the fund in possession. Thereafter in July 1947, the Surrogate filed his decision as to the ownership and distribution of the other half of the residuary. Under the decision of July 1947 the decedent took a remainder interest in three-eights of two-thirds of one-half of the residue of Lewis Nicholas Worthington's estate which was derived from her inheritance from her uncle, Warwick Worthington, who died intestate and without issue.
On August 1, 1947, a decree was issued by the Surrogate settling the account and directing distribution in accordance with the Surrogate's construction of the will of Lewis Nicholas Washington. However, over a year later it was discovered that a small error, not material here, had been made and the decree was resettled. No appeal was taken from the decree and as part thereof the Surrogate found that Lewis Nicholas Worthington had no creditors in New York State and that there were no claims against his estate except possible Federal estate tax.
No proceedings for the probate of the will of Lesley Diana Worthington, decedent herein, or for the administration of her estate have been instituted in the United States.
In determining the value of the decedent's interest in the estate of her grandfather, Lewis Nicholas Worthington, the respondent took the position that the decedent had a claim against the executor of such estate for an accounting of her one-half of the distributive interest in the estate. In his notice of deficiency the respondent included in the assets held by the executor of the estate of Lewis Nicholas Worthington, as of the date of decedent's death, cash in the sum of $80,522.36 and certain Federal Land Bank bonds, which items were shown on the estate tax return under the pertinent schedules but were not included as part of the decedent's taxable estate.
The bonds in question were Federal Land Bank bonds issued in 1935 under the Act of July 17, 1916 (chapter 252, 42 Stat. 1454), known as the Federal Farm Loan Act.
The firm of Goodbody & Co., agent for Marcus Goodbody, had on deposit in the Chase National Bank of the City of New York during all of the months of March and April, 1945, sums never less than $242,627.53. From April 16, 1945, until the end of that month, Goodbody & Co. had on deposit in the Bank of New York sums never less than $102,893.65. During the entire day of April 29, 1945, a Sunday, there was a deposit in the name of Goodbody & Co., in the Chase National Bank of the City of New York & Co., in the Chase National Bank of the City of New York the sum of $358,035.97, and in the Bank of New York the sum of $666,866.96. These two banks were engaged in carrying on the banking business in the City of New York at all times herein mentioned.
The customers' ledger of Goodbody & Co. showed that on April 29, 1945, the date of the death of Lesley Diana Worthington, the decedent, the cash balances standing to the credit of the estate of Lewis Nicholas Worthington were $60,276.38 in the principal amount of $20,245.98 in the income account, aggregating cash of $80,522.36. These funds were traced from the sale, redemption, tender, and call of securities held by Goodbody & Co. in the Lewis Nicholas Worthington account shortly prior to the decedent's death. The proceeds of these securities and income from all securities in the account of Lewis Nicholas Worthington were received by Goodbody & Co. and deposited in the name of the two New York banks, the Chase National Bank of the City of New York and the Bank of New York. Goodbody & Co. was at all times in a position to pay over the above funds to the decedent.
The respondent determined the value of the decedent's interest to the remainder of Warwick Worthington's interest to be three-eights of two-thirds of one-half of the residue of the estate of Lewis Nicholas Worthington, or $11,208.02. There had been included in the estate tax return filed by the petitioner as the value of such interest the sum of $6,820.08, with the explanation that the balance of the amount received was believed to be exempt as representing cash on deposit and Federal Land Bank bonds.
OPINION.
HILL, Judge:
The petitioner did not include in the gross estate of Lesley Diana Worthington, a nonresident alien who was not engaged in business in the United States at the time of her death, certain cash in the amount of $80,522.36 on deposit with two New York banking firms in the account of Goodbody & Co. Goodbody & Co. was the agent of Marcus Goodbody, the executor of the estate of Lewis Nicholas Worthington, grandfather of the decedent.
The petitioner argues that the sum of $80,522.36 represented moneys deposited with the person carrying on the banking business by or for the decedent, a nonresident, not a citizen of the United States, who was not engaged in business in the United States at the time of her death and thus tax exempt under the provisions 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.18 T.C.
The respondent bases his position in opposition to the petitioner upon the technical ground that the decedent, at the time of her death, had no interest in the funds on deposit with Goodbody & Co. as such, and that her sole claim was a mere right to demand an accounting from the executor of the estate of Lewis Nicholas Worthington. Clearly, says the respondent, the decedent had no direct enforceable claim to the assets of her grandfather's estate at the time of her death. The basis of the respondent's argument is not clear. However, he probably takes this position as the result of a suit for a construction of the will of Lewis Nicholas Worthington brought by the executor of that estate in 1945.
As early as April 20, 1922, as evidenced by the agreement entered into by them, Emma Browne Worthington and Warwick and Percy Worthington were convinced that Emma Browne Worthington took a legal life estate under the will of Lewis Nicholas Worthington. Both Warwick and Percy predeceased Emma Browne Worthington. Warwick died intestate and without issue. Percy died testate survived by the decedent herein. As later found by Surrogate Delehanty, in his construction of the will in 1946, upon the death of Emma Browne Worthington the decedent was unconditionally entitled to one-half of the assets making up the estate of Lewis Nicholas Worthington. Surrogate Delehanty found that ‘Since his (Percy's) daughter had attained the age of twenty-one before she died she had become entitled to the fund in possession and so her estate representative may take it.‘
The fact that the executor of the estate of Lewis Nicholas Worthington had made no accounting and had not distributed the assets of Lewis Nicholas Worthington's estate at the time of the decedent's death in no way affected the unconditional right of the decedent to the funds on deposit with Goodbody & Co.; hence, our holding that the $80,522.36 was money deposited ‘for‘ the decedent. Estate of Mertyn S. Bradford-Martin, 18 T.C. 544; Estate of Irene de Guebriant, 14 T.C. 611, reversed on another point, 186 F.2d 307; Estate of Anna Floto de Eissengarthen, 10 T.C. 1277.
Respondent argues that the facts of this case bring it within the rationale of the City Bank Farmers Trust Co. v. Pedrick, 168 F.2d 618. We can not agree. In the City Bank Farmers Trust Co. case the funds deposited in the bank were held by the trustees of a trust which was still active, and to terminate the trust by revocation and thus distribute the trust assets it was necessary for the settlor to gain the consent of the trustees, whereas in the instant case at the time of the decedent's death the estate of Lewis Nicholas Worthington was completely free from debts and in a state which would have permitted immediate distribution of the assets to the beneficiaries entitled to take thereunder. The fact that the executor of the estate of Lewis Nicholas Worthington may have had doubts as to the extent of the interest taken by the decedent or any other beneficiary under the estate which he was administering is of no importance. The legal realities of the situation had been sealed at the time of Lewis Nicholas Worthington's death. The fact that the will was not construed until 1946 is not sufficient to change the interest of the parties taken originally under the will.
The respondent also relies upon the case of Estate of Elizabeth Hawxhurst Davey, 10 T.C. 515, wherein the accounting was completed by the trustee and acknowledged by the decedent's execution of the receipt and release agreement immediately prior to her death. There we concluded that at the time of her death the decedent had a direct enforceable claim to the amount on deposit with the bank and that such funds were held for her ultimate use and benefit. The distinction sought by the respondent is nonexistent, for such is here the case. After the death of Emma Browne Worthington the decedent could have at any time brought suit to compel the executor of the estate of Lewis Nicholas Worthington to render an accounting and pay over to her her share of remainderman. We conclude, therefore, that as to the $80,522.36 on deposit with Goodbody & Co., the decedent had a direct and enforceable claim and that they were, therefore, funds on deposit ‘for‘ her ultimate use and benefit.
In addition to her one-half distributive interest in the assets belonging to the estate of her grandfather at the time of her death, the decedent also had a remainder interest in three-eights of two-thirds of one-half of the residue of her grandfather's estate, amounting to $11,208.02, which latter interest she had inherited from her uncle, Warwick, who died intestate and without issue. The petitioner reported in his estate tax return $6,820.08 of the decedent's three-eighths of two-thirds of one-half share, representing the value of the decedent's interest in the estate of her uncle, with the explanation that the balance of the amount to be paid to the petitioner on account of such interest was believed to be nontaxable as representing cash on deposit and certain Federal Land Bank bonds.
The decedent's claim to the cash portion outlined above was uncontested, as was her right to the bonds. Warwick Worthington had died in 1931. The decedent's share in Warwick's estate was subject only to the expenses of administration. Now, as pointed out in the Guebriant case, the mere fact that these expenses might slightly reduce the total amount eventually transferred to the decedent does not detract from her unconditional right to the cash on deposit. We thus hold that the cash on deposit taken by the decedent from her uncle's estate is tax exempt under the provisions of section 863(b).
In the custody of the executor of the estate of Lewis Nicholas Worthington were certain Federal Land Bank bonds, a part of the assets in which Emma Browne Worthington had a legal life estate and half of which on her death became the property of the decedent as remainderman, and a part as beneficiary of Warwick's intestacy. The petitioner argues that these bonds are exempt from the Federal estate tax by reason of section 4 of the Victory Liberty Loan Act of March 3, 1919, 40 Stat. 1311, providing as follows:
Sec. 4. That section 3 of the Fourth Liberty Bond Act is hereby amended to read as follows:
‘Sec. 3. That, notwithstanding the provisions of the Second Liberty Bond Act or of the War Finance Corporation Act or of any other Act, 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 now or hereafter imposed by the United States, any State, or any of the possessions of the United States or by any local taxing authority.‘
It will be noted that this section exempts from taxation bonds, notes, and certificates of indebtedness of the United States and bonds of the War Finance Corporation owned by a nonresident alien not engaged in business in the United States. And section 861(c)
of the Internal Revenue Code, effective with respect to the estates of decedents dying after February 10, 1939, excludes from the gross estates of such decedents ‘obligations issued by the United States.‘ It thus becomes pertinent to inquire into the nature of the Federal Land Bank bonds.
SEC. 861. NET ESTATE.(c) UNITED STATES BONDS.— For the purposes of subsection (a), the value of the gross estate (determined as provided in section 811) of a decedent who was not engaged in business in the United States at the time of his death—(1) shall not include obligations issued by the United States prior to March 1, 1941; and(2) shall include obligations issued by the United States on or after March 1, 1941, but only if the decedent died after the date of the enactment of the Revenue Act of 1951.
Section 931 of Title 12 of the United States Code, Annotated, defines the Federal Land Bank bonds in the following language:
EXEMPTION FROM TAXATION
Sec. 931. Federal land banks; national farm loan associations; mortgages and bonds as instrumentalities of Government.
Every Federal land bank and every national farm loan association, including the capital and reserve or surplus therein and the income derived therefrom, shall be exempt from Federal, State, municipal, and local taxation, * * * . First mortgages executed to Federal land banks, or to joint stock land banks, and farm loan bonds issued under the provisions of this chapter, shall be deemed and held to be instrumentalities of the Government of the United States, and as such they and the income derived therefrom shall be exempt from Federal, State, municipal, and local taxation. July 17, 1916, c. 245, Sec. 26, 39 Stat. 380.
A copy of a circular under which these bonds were offered to the public had the following to say:
SECURITY— These Consolidated Bonds are the joint and several obligations of the twelve Federal Land Banks. The law requires that these Bonds be issued only against collateral security of at least an equal principal amount of obligations of the United States Government, and/or first mortgages on farm properties, * * * .
LEGAL FOR TRUST AND OTHER FUNDS— The Federal Farm Loan Act provides that the Bonds shall be lawful investments for all fiduciary and trust funds under the jurisdiction of the United States Government. The Bonds are eligible under the laws of a majority of the states for investment by savings banks, and are made eligible by statute for the investment of trust funds in more than twenty states.
ACCEPTABLE BY TREASURY— These Bonds are acceptable by the United States Treasury as security for Government deposits, including Postal Savings Funds.
Although these Bonds are not Government obligations, and are not guaranteed by the Government, they are the secured obligations of Banks operating under Federal charter with Governmental supervision by the Farm Credit Administration.
The Supreme Court of the United States has upheld the constitutionality of the Act creating the Banks and the provision exempting their obligations from Federal, State, municipal and local taxation. The exemptions include exemption from surtaxes on income from the Bonds. The transfer of the Bonds by inheritance or gift, etc., is, of course, subject to taxation under any applicable valid laws providing for the taxation of transfers of personal property.
In view of the fact that section 4 of the Victory Liberty Loan Act provides only for the exemption of bonds, notes, and certificates of indebtedness of the United States and bonds of the War Finance Corporation, and section 861(c) of the Internal Revenue Code exempts only ‘obligations issued by the United States,‘ it appears at once that the Federal Land Bank bonds involved herein are not exempt under the provisions of that section, for the Federal Land Bank bonds are the obligations of the Federal Land Banks and not of the United States. Section 4 of the Victory Liberty Loan Act and section 861 of the Internal Revenue Code are exemption statutes and as such should be strictly construed. Only those securities falling within the plain definitions set forth in these sections may be considered to be exempt. The Federal Land Bank bonds do not qualify. The case of Jandorf's Estate v. Commissioner, 171 F.2d 464, has no application to the facts before us for the bonds therein were United States obligations. We hold, therefore, that the respondent was correct in including within the gross estate of the decedent the Federal Land Bank bonds in controversy.
Decision will be entered under Rule 50.