Opinion
Docket No. 1828-65.
1967-02-20
ESTATE OF HERBERT C. TIFFANY, DECEASED, MRS. VIRGINIA TIFFANY AND HERBERT C. TIFFANY, JR., COEXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Stephen W. Craig, for the petitioners. Sheldon M. Sisson, for the respondent.
Stephen W. Craig, for the petitioners. Sheldon M. Sisson, for the respondent.
In 1942, Herbert C. Tiffany, decedent, and his wife created a trust, with themselves as cotrustees, holding certain property in trust for their children. The trust then entered into a lease agreement, leasing the property to a partnership, in which decedent was a partner. The partnership made several payments to the trust for rental and for property sold on behalf of the trust. Thereafter, for about 10 years, no payments were made to the trust by the partnership. Prior to Dec. 1, 1949, the Tiffanys borrowed $12,161.78 in cash from the trust. In that year, decedent, in his individual capacity, assumed the partnership liability to the trust in the amount of $46,268.71. Thus, on Dec. 1, 1949, the Tiffanys owed the trust a total of $58,430.49 (a community obligation), and on that date they executed a secured note in said amount in favor of the trust. When decedent died in September 1961, the assets of this trust consisted of the secured note and accrued interest thereon in the aggregate amount of $118,029.49, and cash of $2,311.90. The obligation of decedent to the trust at the time of his demise was $59,014.74, which was claimed as a deduction on his estate tax return. Held, that the claim so made against the decedent's estate was not a claim incurred for adequate and full consideration in money or money's worth within the meaning of sec. 2053(c)(1) (A) of the 1954 Code. /1/
Respondent, in his notice of deficiency, determined that the decedent's estate should be increased by $59,014.74, resulting in a deficiency in estate tax in the amount of $20,118.24 to account for decedent's one-half community obligation for principal and accrued interest totaling $118,029.49 on a promissory note dated December 1, 1949, executed in favor of the decedent and Virginia Tiffany as trustees for their children under a declaration of trust dated July 9, 1942.
Respondent concedes that the estate is entitled to a credit for State death taxes paid to the State of Arizona in the amount of $2,374.18. Respondent also concedes that in the event additional amounts are found to be includable in the estate of the decedent herein, an increased credit will be allowed by reason of any additional State estate taxes paid. Sec. 2011, I.R.C. 1954. Likewise, respondent avers that counsel for petitioners will be entitled to claim a deduction for legal fees under Rule 51, Tax Court Rules of Practice.
The principal issues presented for our consideration are: (1) Whether the promissory note, deducted on the estate tax return of the decedent, and payable to Herbert C. and Virginia Tiffany as trustees of a trust, was part of a bona fide transaction for adequate and full consideration and therefore deductible from decedent's gross estate within the purview of section 2053(c)(1)(A) of the 1954 Code; and (2) the alternative, assuming that the aforesaid note was part of a bona fide transaction for adequate and full consideration, whether Herbert C. Tiffany possessed at his death such powers as would make any portion of the trust, wherein he was a cotrustee, taxable as part of decedent's estate.
Virtually all of the facts have been stipulated. The stipulation of the parties and attached exhibits are incorporated by this reference.
FINDINGS OF FACT
Herbert C. Tiffany, the decedent, hereinafter sometimes referred to as Tiffany, died testate on September 4, 1961, in Phoenix, Ariz. His will was admitted to probate by the Superior Court of Phoenix, Ariz.
The coexecutors, Virginia Tiffany and Herbert C. Tiffany, Jr., were appointed October 4, 1961. The estate tax return for the estate of Herbert C. Tiffany, deceased, was filed with the district director of internal revenue, Phoenix, Ariz., on December 4, 1962.
On July 9, 1942, Herbert C. and Virginia Tiffany (hereinafter sometimes called the Tiffanys) owned as community property the following equipment and items:
A Parsons trencher, a Cat 12 blade, an Austin ‘99’ blade-DS 1572, an Austin ‘99’ blade-DS 2096, an Austin ‘99’ blade-DS 1960, a P. & H. shovel, a 9 x 36 Cedar Rapids, a 1150 gal Mack dist, a G.M.C. grease truck, a Kohler light plant, a Chevy semi-truck 6YSO 6496, a Chevy dump truck 1/2 6YR01 3905, a Chevy dump truck 6YR01 3847, a Chevy dump truck jeep 6YS02 4917, a Case tractor, a Fordson tractor and accessories, a Chevy pickup 6AK 07 13222, a 1935 Dodge pickup and 12-6445, a Jaeger water pump, 3', a Seamon mixer, an Austin 6 ton roller, an Essick 3 ton roller and trailer, a welder and accessories, a buckeye trencher, a large two-wheel trailer, a Cadillac coupe and a sheepsfoot roller.
This property had an aggregate fair market value on that date of $24,000.
On July 9, 1942, Herbert C. and Virginia Tiffany executed a declaration of trust with respect to the aforesaid equipment and items. In the trust instrument, the Tiffanys were named cotrustees. The trust contained, inter alia, the following pertinent provisions:
The amount to be expended for the benefit of any of the beneficiaries at any time shall be in the discretion of the Trustees; such amount need not be equally divided among the beneficiaries, but there shall be expended for each beneficiary such amount as the particular needs of such beneficiary with respect to care, maintenance and education shall require. The discretion of the Trustees in dividing such expenditures among the beneficiaries shall not be subject to review.
In the event of the death or inability to act of either of the Trustees herein named, the survivor shall become the sole Trustee and continue with the administration of this trust as such sole Trustee.
This trust shall be irrevocable, but the Trustors reserve the right to change the successor Trustees hereinabove named by written supplement attached hereto and signed by the Trustors, and in the event one of the Trustors shall be deceased or incompetent to act, the remaining Trustor shall have the similar right to change the successor Trustees. There is also reserved to the Trustors or to the Surviving Trustor, in the event one of them is deceased or incompetent to act, the right to terminate this trust. In the event the trust is so terminated the trust property shall be paid over in equal portions to the beneficiaries, or the duly appointed guardians of such as are minors at the time of such termination, in equal portions, making allowance for any portion of the principal theretofore distributed to any of said beneficiaries.
Unless sooner terminated, this trust shall terminate when the youngest surviving beneficiary reaches the age of twenty-one years, and upon such termination, there shall be distributed to said beneficiaries equal portions of the trust property making allowance for distributions of principal theretofore made to any of the beneficiaries.
In addition the trustees had discretion as to whether or not to distribute principal at age 21 and the trust was to terminate no later than the date that the youngest beneficiary reached age 21.
On July 9, 1942, the trust entered into an agreement to lease the aforesaid equipment to Tiffany Construction Co., a copartnership composed of A. E. Tiffany and Herbert C. Tiffany. The interest of Herbert C. Tiffany in the copartnership constituted community property of Herbert C. and Virginia Tiffany, his wife.
The accounting entries made by the bookkeeper for Tiffany Construction Co. with respect to the equipment leased by the trust to the partnership are as follows:
+-----------------------------------------------------------------------------+ ¦Date ¦ ¦Dr.1 ¦Cr.2 ¦ +--------+----------------------------------------------+----------+----------¦ ¦12-31-42¦Rental on Equip. 6-31 to 12-31-42 ¦ ¦$15,000.00¦ +--------+----------------------------------------------+----------+----------¦ ¦ ¦Rental on Equip. to cover depreciation ¦ ¦7,257.57 ¦ +--------+----------------------------------------------+----------+----------¦ ¦4- 5-43 ¦Check on Account ¦$19,736.52¦ ¦ +--------+----------------------------------------------+----------+----------¦ ¦7-10-43 ¦Taxes paid by Tiffany Const. Co ¦2,521.05 ¦ ¦ +--------+----------------------------------------------+----------+----------¦ ¦7-10-43 ¦Proceeds from Sale of Austin 99 Motor Grader ¦ ¦748.40 ¦ +--------+----------------------------------------------+----------+----------¦ ¦10- 7-43¦Check on Account ¦3,500.00 ¦ ¦ +--------+----------------------------------------------+----------+----------¦ ¦12-31 ¦Proceeds from Sale of Dodge Pickup ¦ ¦1.00 ¦ +--------+----------------------------------------------+----------+----------¦ ¦12-31-43¦Rental of Equipment ¦ ¦26,000.00 ¦ +--------+----------------------------------------------+----------+----------¦ ¦12-31-44¦Rental of Equipment ¦ ¦9,500.00 ¦ +--------+----------------------------------------------+----------+----------¦ ¦5-22-45 ¦Check on Account ¦8,000.00 ¦ ¦ +--------+----------------------------------------------+----------+----------¦ ¦5-22-45 ¦Proceeds from sale of Station Wagon ¦ ¦860.00 ¦ +--------+----------------------------------------------+----------+----------¦ ¦12-31-45¦Rental of Equipment ¦ ¦3,500.00 ¦ +--------+----------------------------------------------+----------+----------¦ ¦12-31-46¦Proceeds from sale of Mack Truck ¦ ¦150.00 ¦ +--------+----------------------------------------------+----------+----------¦ ¦12-31-46¦Proceeds from sale of Case Tractor ¦ ¦1,100.00 ¦ +--------+----------------------------------------------+----------+----------¦ ¦12-31-46¦Rental of Equipment ¦ ¦3,500.00 ¦ +--------+----------------------------------------------+----------+----------¦ ¦12-31-47¦Proceeds from sale of Equipment ¦ ¦3,115.00 ¦ +--------+----------------------------------------------+----------+----------¦ ¦1-14-48 ¦Income Tax paid by T.C.C. ¦753.66 ¦ ¦ +--------+----------------------------------------------+----------+----------¦ ¦1-14-48 ¦----do ¦404.03 ¦ ¦ +--------+----------------------------------------------+----------+----------¦ ¦9- 9-48 ¦Credit ¦ ¦5,000.00 ¦ +--------+----------------------------------------------+----------+----------¦ ¦12-31-49¦Balance on account transferred to H.C. Tiffany¦40,818.71 ¦ ¦ ¦ ¦acct ¦ ¦ ¦ +--------+----------------------------------------------+----------+----------¦ ¦ ¦ ¦75,731.97 ¦75,731.97 ¦ +-----------------------------------------------------------------------------+
Proceeds from sales of equipment that were not credited to the trust account are as follows:
+---------------------------------+ ¦Jan. 7, 1948 ¦Trerber ¦$2,000¦ +-------------+------------+------¦ ¦Jan. 23, 1948¦Welder ¦450 ¦ +-------------+------------+------¦ ¦Feb. 9, 1949 ¦Cad. Coupe ¦500 ¦ +-------------+------------+------¦ ¦Feb. 28, 1949¦Motor Grader¦2,500 ¦ +-------------+------------+------¦ ¦ ¦ ¦5,450 ¦ +---------------------------------+
No cash payments were made between January 14, 1948, and September of 1961. An Internal Revenue Service audit resulted in taxing to the grantors of the trust (under the Clifford Trust doctrine), the rental payments made to the trust by the partnership.
On December 1, 1949, the partnership owed the trust $46,268.71. On that date the partnership also was indebted to A. E. Tiffany for certain equipment leased to the partnership by A. E. Tiffany.
On December 1, 1949, Herbert C. Tiffany assumed the obligation of the partnership to the trust in the total amount of $46,268.71. This assumption resulted in a community obligation of Herbert C. Tiffany and his wife to the trust. On the same date, A. E. Tiffany assumed the obligation of the partnership to A. E. Tiffany.
Prior to December 1, 1949, the Tiffanys had borrowed cash from the trust in the aggregate amount of $12,161.78. On December 1, 1949, the Tiffanys were indebted to the trust in the total amount of $58,430.49. This indebtedness was a community obligation.
On December 1, 1949, the Tiffanys executed a promissory note in the total amount of $58,430.49 in favor of the trust. As security for the payment of this note, the Tiffanys executed a realty mortgage in favor of the trust. This mortgage was recorded on April 21, 1954, in the office of the county recorder of Maricopa County, Ariz. The property covered by this mortgage, after deduction of the amount allocable to a certain parcel of approximately 12 acres, later released from said mortgage, was valued in the estate tax return at $150,000.
On September 8, 1960, the Tiffanys, as trustees, executed a partial release of the mortgage. This partial release was recorded on September 12, 1960, in the office of the county recorder of Maricopa County, Ariz., and provided that certain of the property covered by the realty mortgage securing the note of Herbert C. and Virginia Tiffany was released. The purpose of the release of this portion of the property was to consummate a sale from the Tiffanys to N. Spencer Shumway, Jr., Kenneth Dale Shumway, and Donald Shumway. As part of the purchase price the buyers executed a promissory note secured by a realty mortgage on the property known as lots 1, 2, 3, and 4 of the Tiffany Tract, recorded in the office of the Maricopa County recorder, and constituting part of the originally mortgaged property. This mortgage dated July 14, 1960, was assigned by Herbert C. and Virginia Tiffany to themselves as trustees by assignment of the mortgage as collateral security.
At the time of the instant trial $22,059 had been paid to the trust, including principal and interest, on the note executed by the Tiffanys in favor of the trust on December 1, 1949. No payments on this note were made prior to the death of Herbert C. Tiffany. Payments made thereafter were made from proceeds of the sale of property to the Shumways in 1960. These payments commenced in September of 1961 and the proceeds have been paid directly by the collection agent, Phoenix Title & Trust Co., to the trust as follows:
+------------------------------------------+ ¦Year ¦Interest ¦Total amount ¦ ¦ +------+----------+--------------+---------¦ ¦1961 ¦$1,829.10 ¦$4,070.10 ¦ ¦ +------+----------+--------------+---------¦ ¦1962 ¦1,640.10 ¦4,782.60 ¦ ¦ +------+----------+--------------+---------¦ ¦1963 ¦1,451.10 ¦4,601.10 ¦ ¦ +------+----------+--------------+---------¦ ¦1964 ¦1,262.10 ¦4,412.10 ¦ ¦ +------+----------+--------------+---------¦ ¦1965 ¦1,073.10 ¦4,193.10 ¦ ¦ +------+----------+--------------+---------¦ ¦ ¦ ¦22,059.00 ¦(includes¦ +------+----------+--------------+---------¦ ¦ ¦ ¦ ¦interest)¦ +------------------------------------------+
Arrangements for the aforementioned sale of real estate, including provisions of payments by the collection agent to the trustee, were made by Herbert C. Tiffany in 1960.
On September 4, 1961, the date of the death of Tiffany, accrued interest on the aforesaid indebtedness of $58,430.49 totaled $59,599. This obligation, including principal and interest, plus cash of $2,311.90, constituted the only assets of the trust on September 4, 1961.
On September 4, 1961, the Tiffanys were indebted on the note owing to the trust in the aggregate amount of $118,029.49, all of which amount constituted a community obligation.
In January 1961, Tiffany suffered a stroke. After May 1961, he did not go to the office of the partnership, Tiffany Construction Co., or handle any of the partnership's business, except once on June 4, 1961, when he signed two or three checks at the office. After this illness, the business of the partnership functioned without him.
By June 15, 1961, Tiffany was confined to his bed, and thereafter, until his death on September 4, 1961, he was dependent for all of his needs upon other persons.
On December 4, 1962, the coexecutors of decedent's estate filed an estate tax return including, inter alia, a schedule of trust property as of September 4, 1961, as follows:
+-----------------------------------------------------------------------------+ ¦SCHEDULE OF TRUST PROPERTY SEPT. 4, 1961 ¦ +-----------------------------------------------------------------------------¦ ¦Cash ¦ ¦$2,311.90 ¦ +-------------------------------------------------------+----------+----------¦ ¦Promissory Note of H.C. Tiffany and Virginia Tiffany ¦ ¦ ¦ ¦dated 12-1-49 executed in favor of H.C. Tiffany and ¦ ¦ ¦ ¦Virginia Tiffany, Trustee, in the original principal ¦ ¦ ¦ ¦sum of $58,430.39 plus interest at 8% per annum from ¦ ¦ ¦ ¦12-1-49, secured by mortgage on property described in ¦ ¦ ¦ ¦Schedule A, Item 3, and by security assignment of Item ¦ ¦ ¦ ¦9, Schedule C. ¦ ¦ ¦ +-------------------------------------------------------+----------+----------¦ ¦Principal Balance ¦$58,430.39¦ ¦ +-------------------------------------------------------+----------+----------¦ ¦Accrued Interest ¦59,599.00 ¦ ¦ +-------------------------------------------------------+----------+----------¦ ¦ ¦ ¦118,029.39¦ +-------------------------------------------------------+----------+----------¦ ¦Total ¦ ¦120,341.29¦ +-------------------------------------------------------+----------+----------¦ ¦Less 1/2 interest contributed by surviving spouse ¦ ¦60,170.64 ¦ +-------------------------------------------------------+----------+----------¦ ¦ ¦ ¦60,170.65 ¦ +-----------------------------------------------------------------------------+
On December 4, 1962, the estate of Herbert C. Tiffany forwarded to the Arizona estate tax commissioner a check in the amount of $2,374.18, and the Arizona State Tax Department issued its receipt, dated December 5, 1962. The decedent owned real property in California and the Arizona tax constituted a prorata share of the Federal credit.
OPINION
TURNER, Judge:
Respondent determined that the decedent's estate should be increased by $59,014.74 to account for decedent's one-half community obligation for principal and accrued interest totaling $118,029.49 on a promissory note dated December 1, 1949, executed in favor of the decedent and Virginia Tiffany as trustees for their children under a declaration of trust dated July 9, 1942, under the provisions of sections 2036, 2037, 2038, and 2053(a) of the 1954 Code.
It is respondent's primary position that no deduction is allowable for the promissory note in question because under section 2053(c)(1)(A) a deduction for a claim against the estate is limited to the extent that the liability was ‘contracted bona fide and for an adequate and full consideration in money or money's worth.'
1 This column shows payments of rental and proceeds from the sale of equipment made to the trust directly or for the benefit of the trust. The final entry (on Dec. 31, 1949) reflects the assumption on that date by Tiffany of the partnership obligation to the trust in that amount.This column shows the accrued obligation for rent and proceeds on the sale of equipment.
SEC. 2053. EXPENSES, INDEBTEDNESS, AND TAXES.(a) GENERAL RULE.— For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts—(1) for funeral expenses,(2) for administration expenses,(3) for claims against the estate, and(4) for unpaid mortgages on, or any indebtedness in respect of, property where the value of the decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate,as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered. 3. SEC. 2053(c). LIMITATIONS.—(1) LIMITATIONS APPLICABLE TO SUBSECTIONS (a) AND (b).—(A) CONSIDERATION FOR CLAIMS.— The deduction allowed by this section in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded on a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth; * * *
Section 2053 of the 1954 Code provides, in pertinent part, that the value of the taxable estate is determined by deducting from the value of the gross estate, among other things, amounts representing claims against the estate and amounts for unpaid mortgages on or indebtedness in respect of property, where the value of the decedent's interest is included in the value of the gross estate undiminished by such mortgage or indebtedness. The allowance for the deduction is measured by the extent to which such amount is allowable by the laws of the particular jurisdiction under which the estate is being administered. This general treatment is limited to some extent by section 2053(c)(1)(A) which provides that the allowance for a deduction of claims against the estate, unpaid mortgages or any indebtedness, when founded on a promise or agreement, is limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. [F N3]
The correlative regulation, section 20.2053, Estate Tax Regs., states that liabilities imposed by law or arising out of torts are deductible and cross references sec. 20.2043-1 for the definition of a liability contracted bona fide and for an adequate and full consideration in money or money's worth.
This latter regulation provides that a transfer must have been made in good faith and the price must have been an adequate and full equivalent reducible to a money value in order to constitute a bona fide sale for an adequate and full consideration in money or money's worth.
Sec. 20.2053-4 (Estate Tax Regs.) Deduction for claims against the estate; in general. * * * Section 2053(c)(1)(A) provides that the allowance of a deduction for a claim founded upon a promise or agreement is limited to the extent that the liability was contracted bona fide and for an adequate and full consideration in money or money's worth. See Sec. 20.2043-1. Liabilities imposed by law or arising out of torts are deductible.
We believe that this regulation is a reasonable implementation of the statute involved.
Sec. 20.2043-1 (Estate Tax Regs.) Transfers for insufficient consideration. * * * To constitute a bona fide sale for an adequate and full consideration in money or money's worth, the transfer must have been made in good faith, and the price must have been an adequate and full equivalent reducible to a money value. * * *
Petitioners have the burden of showing affirmatively the extent to which the promissory note in question was contracted bona fide and for an adequate and full consideration in money or money's worth. Edith M. Bensel, et al., Executors, 36 B.T.A. 246, 254, affd. 100 F.2d 639. In essence, petitioners contend that the claim under review qualifies as an allowable deduction from the gross estate under section 2053(c)(1)(A) because there was a valid agreement between the trust and the partnership, Tiffany Construction Co., for the lease of the equipment; there was an enforceable obligation of the partnership to the trust for rental and receipts from sales of trust property; and a community obligation of the Tiffanys to the trust in connection with the assumption by A. E. Tiffany of an equivalent partnership liability. We disagree. The formalities surrounding the creation of the promissory note, including the mortgage security given to the trust, and the accrual of interest on the obligation are not determinative of the statutory requirements. We must ascertain the true nature of the overall transaction which gave rise to the note and the pecuniary value of the consideration involved.
The record shows that prior to 1942 Herbert C. and A. E. Tiffany were partners in the Tiffany Construction Co., in Arizona. Herbert C. and Virginia Tiffany owned assets which could be used in the construction business which had an aggregate fair market value of about $24,000. On July 9, 1942, the Tiffanys created a trust with themselves as trustees. On the same date they transferred $24,000 in equipment to the trust and immediately leased the equipment to the partnership. During the next few years the partnership made some cash payments to the trust and accrued but did not pay other amounts to the trust. The parties stipulated that (at some time not shown in the record) an audit by the Internal Revenue Service resulted in the taxation of the payments to the trust to the Tiffanys as grantors, under the so-called Clifford Trust doctrine. Thereafter, the partnership ceased making cash payments to the trust, at least from early in 1948 to late in 1961, but bookkeeping entries continued to be made which increased the liability shown on the books of the partnership in favor of the trust.
Sometime prior to December 1949, the Tiffanys borrowed at least $12,161.78 in cash from the trust. There is no evidence that they ever sought, as trustees of the trust, to collect on the outstanding obligation from the partnership.
In December 1949, they assumed the obligation to the trust in the amount of $46,268.71 shown on the partnership books and apparently added the amount of $12,161.78 previously borrowed and gave the trust a note in the amount of $58,430.49. They then executed a mortgage to secure the note but the mortgage was not recorded until 4 years later.
Nothing was paid in the way of principal or interest on the note for more than 10 years. In late 1960 the Tiffanys as trustees released part of the property held as security and sold the parcel in their individual capacities. Then as individuals, they assigned the mortgage received on the sale to the trust as additional security. The payments from the 1960 sale were to be paid to the trust but no payments were made until after Tiffany's death.
From these facts the only conclusion we can draw is that the claim subsequently made against the estate of the decedent based on the note was not incurred in a bona fide transaction for an adequate and full consideration in ‘money or money's worth’ as required by section 2053(c)(1)(A). We are mindful that intrafamily contracts and similar understandings, cloaked in the guise of a promissory note, as in the instant case, invite special scrutiny. Estate of Charles L. Woody, 36 T.C. 900, 903; see Willcuts v. Douglas, 73 F.2d 130, 132, affd. 296 U.S. 1. To allow deductions for promissory notes without valuable consideration in money's worth to those who would be the natural objects of a decedent's bounty would afford an easy means of escaping death duties.
Here, in substance, the initial transfer of the construction equipment to the trust and lease back to the partnership in 1942 was in the nature of an unsuccessful attempt to shift income for the benefit of their children. No consideration of any ascertainable value in money or money's worth was involved with respect to this initial transfer, and no claim is made by the petitioners that there was. Thereafter, the trust lay dormant for more than 10 years with no attempt on the part of the Tiffanys as trustees or fiduciaries to enforce collection from the partnership. However, credits to the trust continued to be made on the partnership's books. Then, in 1949, the Tiffanys attempted to change the character of the initial transfer by giving the promissory note to the trust which represented amounts owed to it by the partnership plus amounts the Tiffanys had borrowed from the trust in their private capacities with the approval of themselves as trustees. The alleged consideration for the assumption of the partnership's debt was that A. E. Tiffany would assume an obligation of the partnership to himself for certain equipment he had leased to the partnership. Nothing in the record shows whether the debt to A. E. Tiffany was bona fide or whether it was for adequate consideration.
It seems clear to us on these facts that the Tiffanys assumed an indebtedness created by mere book entries and gave the trust a promissory note, which included funds previously appropriated to themselves as trustees. This note and the trust remained dormant until it was decided to sell some of the property securing the note. It was only after the Shumway sale in 1960 that the trust received any income. Thus, we have a claim which had its origin in a depletion of the estate in 1942 coupled with a device to shift income which failed followed by a trust dormant for a decade. Unquestionably, the transaction which gave rise to the claim in question was not contracted bona fide and for an adequate and full consideration within the intendment of the statute. Estate of Julius C. Lang, 34 B.T.A. 337; Henry Adams Ashforth, et al., Executors, 30 B.T.A. 1306.
Petitioners, citing 14 Ariz.Rev.Stat.Ann.,ch. 5 sec. 577, contend that the debt owed to the trust was enforceable and collectible under Arizona law, and that the mortgage securing the indebtedness provided more than adequate security. They argue in this connection that the consideration for the assumption by them of the partnership obligation to the trust was the concomitant assumption by A. E. Tiffany of partnership liabilities running to A. E. Tiffany for equipment leased by A. E. Tiffany from the partnership. We disagree with petitioners. It is now well settled that a claim against an estate for Federal estate tax purposes is not deductible merely because it is enforceable under the State laws governing the validity of contracts. Estate of Hugo Goldsmith, 36 B.T.A. 1201, 1205; Carney v. Benz, 90 F.2d 747; United States v. Mitchell, 74 F.2d 571. In the Goldsmith case we pointed out that we had not been able to discover a holding that ‘a claim based on a promise of a gift or contemplated bounty was a claim incurred for money or money's worth within the meaning of the statute, even though under local law the claim might be enforceable.’ We noted that the courts in the Mitchell and Carney cases were definitely of the opinion that Congress had in mind the exclusion of family contracts and similar understandings made as a cloak to cover gifts. And with respect to the phrase ‘adequate and full consideration in money or money's worth,‘ we pointed out in Estate of F. A. Gray, 44 B.T.A. 545, that the phrase is not ambiguous, referring to the construction of that phrase in Latty v. Commissioner, 62 F.2d 952, where the court construed the term as evidencing an intent on the part of Congress to permit the deduction of claims only to the extent that they were contracted for a consideration which at the time either augmented the estate of the decedent, granted him some right to privilege he did not possess before, or operated to discharge a then existing claim, such as breach of contract or personal injury. As the Supreme Court in Taft v. Commissioner, 304 U.S. 351, 356, while tracing the history of section 303(a) (1) of the Revenue Act of 1926, the predecessor of section 2053(c)(1)(A), supra, pointed out, it was the evident purpose of Congress, in its successive changes of this provision of the Code, to narrow the class of deductible claims. Therefore, in the instant case, it was incumbent upon petitioners to show not only that there was a claim against the estate recognized by the laws of Arizona, but that such claim was supported by adequate and full consideration in money or money's worth as that term is used in the statute. Estate of Rosalean B. Ottmann, 12 T.C. 1118, 1121. It is now well established that the claims referred to by section 2053(c)(1)(A) are those claims against the property of the deceased which are allowed by and enforced under the laws of the administering State and not those claims created by the decedent's ‘gratuitous assumption of debts attaching to the property of another,’ notwithstanding that the promise or claim is legally enforceable under the State laws governing the validity of contracts and wills. United States v. Stapf, 375 U.S. 118, rehearing denied, reversing and remanding 309 F.2d 592; Estate of Emma Earle, 5 T.C. 991, 1000, affirmed per curiam 157 F.2d 501, certiorari denied 330 U.S. 822. Assuming arguendo that the note was an enforceable claim and was adequately secured by the mortgage in favor of the trust, these factors, standing alone, are not controlling for purposes of deciding the pivotal issue of whether the promissory note was contracted bona fide and met the statutory consideration.
In the instant case we fail to see anything in the original 1942 transfer which would qualify the claim of the trust against the estate as a liability contracted bona fide and for an adequate and full consideration in money or money's worth, thereby constituting a deductible claim against the estate. Nor do we see anything of substance in the events since that time which would change the nature of the liability which the estate now seeks to deduct. We believe that the initial transfer to the trust and later the assumption by the Tiffanys of the obligation of the partnership to the trust was in the nature of a family contract or understanding which cloaked a gift to the Tiffanys' children in the form of a provision in the trust for their care, maintenance, and education. The realistic view of what this was to accomplish, we think, was the application of the trust assets and income accruing thereto toward the discharge of the legal obligation of the Tiffanys under State law to provide support for their dependents.
The allowance for deductions is a matter of legislative grace, and the one seeking a deduction must show that he comes within the statute allowing it. New Colonial Co. v. Helvering, 292 U.S. 435. Here, the original transfer to the trust and later the assumption of the obligation of the partnership to the trust by the Tiffanys and their transfer of a mortgage to the trust as security for the note does not meet the statutory condition of having been incurred or contracted bona fide and for an adequate and full consideration in money or money's worth. There is no indication that the original transfer to the trust or the later assumption of the partnership obligation constitute claims which were contracted for a consideration which augmented the Tiffanys' estate at the time. Nor is there any evidence that the initial transfer and the assumption of the partnership obligation granted the Tiffanys any right or privilege they did not possess before or operate to discharge a then existing claim against them. If anything, these transactions had the effect of diminishing the estate of the decedent and if they operated to discharge anything it was Tiffany's obligation to support his children, an obligation he already had by State law. In fact, the record is silent as to whether any payments were made in accordance with the terms of the trust for care, maintenance, and education of the Tiffany children or if the trust served any other purpose than as a device to deplete the Tiffany estate and as a convenient purse from which the Tiffanys could withdraw funds as needed. The record shows that after the first 7 years of the life of the trust, or December 1, 1949, the Tiffanys had borrowed an aggregate of $12,161.78 from it. While this amount was covered by the note executed by the Tiffanys in favor of the trust when the assumed the partnership obligation to the trust on that date, there is no indication in the record that any part of this amount or any accrued interest was ever paid from the time the trust was created in 1942 until Tiffany died in 1961. In our opinion not even the most minimal consideration in money or money's worth ever actually passed from the trust to the decedent during the time which elapsed from the creation of the trust in 1942 to Tiffany's demise in 1961. Nothing of money or money's worth ever passed from anyone except from the Tiffanys to the trust and we do not believe that the facts explaining the growth of and accretion to the trust assets over the years alter the result. The burden of proof, as stated above, was on the petitioners. The one person who might have shed some light on the reason for the giving of the promissory note to the trust was Virginia Tiffany. For some reason, not explained in the record, she was not called as a witness by petitioners. Wichita Terminal Elevator Co., 6 T.C. 1158, 1165, affd. 162 F.2d 513.
Under the circumstances, we conclude that the claim in question does not meet the statutory test under section 2053(c)(1)(A). Accordingly, we hold for respondent on this issue.
We have found as facts the stipulation of the parties pertaining to the last illness of decedent which relate to the alternative issue under sections 2036 and 2038 of the Code. However, in view of our conclusion hereinabove with respect to the principal issue, we find it unnecessary to discuss the alternative issue.
To allow for concessions of the parties,
Decision will be entered under Rule 50.
1. Unless otherwise indicated, all references are to the Internal Revenue Code of 1954, as amended.