Opinion
Docket Nos. 33867 33868 33869 34079.
1953-04-14
SAM S. BROWN, PETITIONER, ET AL.1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
David B. Buerger, Esq., and Alexander Black, Jr., Esq., for the petitioners. John J. Hopkins, Esq., for the respondent.
DEDUCTION— LOSS— OWNER— ESTATE OR BENEFICIARIES— CONVERSION OF REAL PROPERTY.— Held, no conversion of real property was effected by will and residuary legatees may deduct loss on real property which they, joined by executor, sold. David B. Buerger, Esq., and Alexander Black, Jr., Esq., for the petitioners. John J. Hopkins, Esq., for the respondent.
The Commissioner determined deficiencies in income tax for 1946 as follows:
+-------------------------------------------+ ¦Name ¦Amount ¦ +---------------------------------+---------¦ ¦Sam S. Brown ¦$1,605.50¦ +---------------------------------+---------¦ ¦William S. and Elizabeth M. Brown¦248.00 ¦ +---------------------------------+---------¦ ¦Nelle Wood Hay ¦474.00 ¦ +---------------------------------+---------¦ ¦J. Homer and Jean B. McCready ¦9,954.32 ¦ +-------------------------------------------+
The only question for decision is whether an admitted loss from the sale of real estate located at 523 Wood Street, Pittsburgh, Pennsylvania, is deductible by the petitioners, residuary beneficiaries under the will of W. S. Brown.
FINDINGS OF FACT.
The petitioners filed their returns for 1946 with the collector of internal revenue for the twenty-third district of Pennsylvania.
William S. Brown, referred to as the decedent, a resident of Pittsburgh, Pennsylvania, died testate on September 8, 1928. He was survived by his five children, William M., Edwin L., and three of the petitioners herein, Nelle, Jean, and Samuel. William M. died on January 10, 1937, survived by his son, William S., one of the petitioners herein. Edwin L. died on November 6, 1939, leaving one-third of his property to each of his sisters, Nelle and Jean, and one-third to Ida Cramer.
The decedent, at the time of his death, owned real estate, including a property at the corner of Wood Street and Oliver Avenue in Pittsburgh, known as 523 Wood Street. He also owned all of the capital stock of W. S. Brown, Inc., a sporting goods store, tenant of the Wood Street property. The decedent and his three sons were employed by that corporation on a full-time basis.
The decedent, by his will, left small amounts to three employees, $25,000 in trust for the education of four grandchildren, $13,000 in trust for his son William, and $13,000 outright to his other four children and made provision for the payment of his debts and for a cemetery lot and headstone. Other provisions of his will pertinent hereto are:
Fifth: When my said real estate on the corner of Wood Street and Oliver Avenue aforesaid shall have been sold and the proceeds received, I give and bequeath out of the proceeds of such sale to each of my children, Nelle, Jean, Edwin L. and Samuel S., the sum of Thirty-five thousand dollars ($35,000.00) and to the Union Trust Company of Pittsburgh, the sum of Twenty-three thousand dollars ($23,000.00) to be held by it for the use and benefit of my son, William M. Brown, in accordance with the same terms and conditions set forth in paragraph Fourth of this Will.
I make this difference in the amounts given to my children or for their benefit by reason of the fact that I have heretofore given to my son, William M. Brown, twelve thousand dollars ($12,000.00).
Ninth: All the rest and residue of my estate, real, personal and mixed, I give, devise and bequeath absolutely to my four children, Nelle Wood Hay, Edwin L. Brown, Jean A. McCready and Samuel S. Brown, and to The Union Trust Company of Pittsburgh in trust for the use and benefit of my son, William M. Brown, under the same conditions and trusts set forth in paragraph Fourth of this will, share and share alike, that is to say, one fifth to each.
Thirteenth: I hereby authorize and empower my executors and the survivor of them hereinafter named to bargain and sell from time to time either before or after the settlement of my personal estate any portion or all of the real estate of which I may be seised or in which I may have any interest for such prices and on such terms as to my said executors may seem best and to execute and deliver a deed or deeds therefor to the purchaser or purchasers thereof by which the same will be conveyed to the purchaser or purchasers thereof free and discharged of any trusts and without liability on the part of said purchaser or purchasers to see to the application of the purchase money provided that neither the land upon which my residence No. 5801 Aylesboro Avenue, Pittsburgh, is erected, nor the land owned by me at the corner of Wood Street and Oliver Avenue upon which is erected the building No. 523 Wood Street, shall be sold without the consent of a majority of my children then living. If at any time there shall be an equal division between my children upon the question as to the sale of either of said parcels of land, then The Union Trust Company of Pittsburgh shall decide whether or not it shall be sold and its decision shall be binding.
He also provided for members of his family to occupy his residence on Aylesboro Avenue rent free and with all taxes, insurance, and repairs paid out of the residuary estate but ‘Until the said land and building No. 523 Wood Street, Pittsburgh, Pennsylvania, shall be sold as herein provided, I hereby authorize and empower my said executors to lease and demise the same in whole or part from time to time for such term or terms and for such rentals as they shall deem proper. The net rents received therefrom shall be applied to the payment of taxes and other charges against my residence property so long as it shall remain unsold and the residue shall be paid to‘ Nelle, Jean, Edwin L., Samuel S., and the trustee for William M., children of the testator. The executors named in the will were Edwin L. and The Union Trust Company.
The value of the Wood Street property at the date of the death of the decedent, as agreed upon by the Commissioner and the executors for Federal estate tax purposes, was $330,000. The decedent, at the time of his death, owned personal property substantially in excess of his debts, funeral and administration expenses, and all specific bequests.
The executors leased the Wood Street property to the sporting goods store until 1938, and thereafter until January 26, 1946, from time to time leased a part or all of that property to other tenants. The rents from the Wood Street property over and above the taxes and expenses of that property were applied by the executors prior to 1940 to the payment of taxes, insurance, and other operating charges against the Aylesboro Avenue residence and the remainder was distributed among the decedent's children and the trustee for William M., except that nothing was available for distribution to the children after 1934.
William S., Edwin L., Nelle, Jean, and Jean's husband, entered into a contract with an engineering company on January 6, 1939, for alterations to be made to the building at 523 Wood Street at a cost of $17,000.
Nelle, Jean, Jean's husband, William S. Brown II and his wife, Ida M. Cramer, Samuel S. Brown, and The Union Trust Company of Pittsburgh, surviving executor and trustee under the will of the decedent, entered into an agreement with Alvin J. Williams in November 1945 for the sale to Williams of the property at 523 Wood Street subject to the payment by Williams of delinquent taxes totaling $26,417.06, for the purchase price of $100,000, part of which was to be secured by a purchase money mortgage for $67,843.46. The same parties executed a deed dated January 26, 1946, transferring the property to Williams. The individuals gave a general warranty and The Union Trust Company agreed that it had done nothing to encumber the estate or affect title to the property. Williams gave a purchase money mortgage dated January 26, 1946, to Nelle, Jean, William S. II, Samuel S. Brown, and Ida M. Cramer.
It is stipulated that ‘the Wood Street property was sold at a loss of at least $112,000‘ and each petitioner's share of the loss, if they are sustained in their contention, is stipulated.
The Union Trust Company, as surviving executor of the decedent, at the request of the beneficiaries, filed a final account on March 29, 1946, showing the receipts and disbursements of rentals collected on the Wood Street property and the proceeds of the sale.
The petitioners claimed their respective shares of the loss on their returns for 1946 but the Commissioner, in determining the deficiencies, disallowed those deductions with the explanation that the beneficiaries under the will of the decedent received interests in the Wood Street property ‘only in terms of money; title to the property passed to the estate and not to the beneficiaries.‘
All facts stipulated by the parties are incorporated herein by this reference.
OPINION.
MURDOCK, Judge:
The parties agree that decision of this case turns entirely upon the question of whether the will of the decedent equitably converted the real property at 523 Wood Street into personalty so the title thereto was in the estate of the decedent and the loss was the loss of the estate rather than the loss of the residuary beneficiaries under the will. They also agree that that question is to be determined by interpreting the will itself under the laws of Pennsylvania to determine the intention of the testator. Arrott v. Heiner, 92 F.2d 773. They both cite and rely upon Hunt's Appeals, 105 Pa. 128, 141, in which the court said that:
in order to work a conversion, there must be either
1st. a positive direction to sell; or
2d. An absolute necessity to sell in order to execute the will; or
3d. Such a blending of real and personal estate by the testator in his will as to clearly show that he intended to create a fund out of both real and personal estate, and to bequeath the said fund as money.
The Commissioner's argument is that the facts ‘fall squarely within the ambit of the second test quoted above.‘ That is, ‘There is here an absolute necessity to sell in order to execute the will.‘ There was a power but no positive direction to the executor in the will to sell the property. Shaffer v. Shaffer, 354 Pa. 517, 47 A.2d 702. There was no blending of real and personal estate by the testator in his will. Thus the determination of the Commissioner must stand or fall, as he contends, on the question of whether or not there was an absolute necessity to sell in order to execute the will.
The cases cited by both parties show that conversions of this kind are not favored and will not be found except where a sale of the real estate is absolutely necessary to the execution of the will. The following quotation from Yerkes v. Yerkes, 200 Pa. 419, 423, 50 Atl. 186, approved by the Supreme Court in Shaffer v. Shaffer, supra, 518-519, is illustrative:
It should never be overlooked that there is no real conversion. The property remains all the time in fact realty or personalty as it was, but for the purpose of the will so far as it may be necessary, and only so far, it is treated in contemplation of law as if it had been converted. Few testators have any knowledge of the doctrine or any actual intent to change the nature of their property except when and to the extent that may be required to carry out the special purpose of the will. The presumption therefore, no matter what the form of words used, is always against conversion; and even where it is required it must be kept within the limits of actual necessity.
There was ample personal estate and the Commissioner, in order to show the necessity for the sale, relies principally upon the provisions in the fifth and thirteenth paragraphs of the will. He argues that the requirement of a consent of a majority of the children was merely a condition as to the time when the executor could exercise his right to sell, and an intention that the executor should sell is shown by the fact that the specific bequests out of the proceeds of the sale of the Wood Street property required a sale of that property by the executor in order to pay those bequests. The petitioners point out that in paragraph Thirteenth the decedent gave his executor power to sell the Wood Street property only with ‘the consent of a majority of my children then living,‘ that was a limitation on his power to sell and was not a mere limitation on the time of sale, Henry v. McCloskey, 9 Watts 145, and it has been held under substantially similar circumstances that such a provision does not result in a conversion. Nagle's Appeal, 13 Pa. 260; Caldwell v. Snyder, 178 Pa. 420, 35 Atl. 996; Tomb's Estate, 155 Pa.Super. 605, 39 A.2d 367; Cf. Scott's Estate, 37 Pa.Super. 198; Greenough v. Small, 137 Pa. 128, 20 Atl. 396.
The petitioners also argue that the purpose of paragraph Fifth was merely to make provision for the adjustment of the advancement to William M. when and if the Wood Street property was sold, and there are substantially similar cases which show that such a provision does not result in a conversion where, as here, the beneficiaries were the same persons to whom the real estate would go in equal shares were it not sold. If the beneficiaries under Fifth were not the persons to whom the property would go in equal shares if it were not sold, the sale would probably be necessary and a conversion would follow. Cf. Fahnestock v. Fahnestock, 152 Pa. 56, 25 Atl. 313; Kurinec Estate, 46 Sch.L.R. 100. However, where, as here, the persons are the same, those persons have a choice of selling or of not selling and a sale is not necessary. The testator in the Nagle case, supra:
devised all his estate to his wife, during widowhood; ‘at her decease it is my desire, if the majority of my children be agreed, that my executors shall sell all my real estate * * * and give unto my son John $500, money borrowed from him.‘ He then directed his executors to give $500 to each of his seven children, out of the proceeds of his real estate, and directed the residue to be equally divided between them, in three years after receiving the $500. If any of the children did not make a good use of the $500, the executors were to keep the residue, to administer it as their necessities required.
The court stated at page 264:
It has also been urged upon us that, by the subsequent direction to pay a debt and legacies out of a fund arising from a sale of the realty, is necessarily given a power to sell, for the purpose of raising that fund, which there is nothing to qualify or render contingent. It would be difficult to support this proposition in face of the express provision, that a sale has only to be made in the event of the assent of those who otherwise would take the land. It may be, that where a sale is absolutely required to effectuate a well-ascertained paramount intent, that otherwise would be frustrated, the necessity will afford a controlling reason in the construction of the instrument creating the power. But there is no such overruling necessity here. As for the so-called legacies, they represent but the value of the land which, unsold, goes to the legatees.
It was held in that case that no conversion was effected. The testator, in Caldwell v. Snyder, supra, directed his executors to sell real estate ‘at any time that it may be advisable, and by the agreement of my wife and a majority of my heirs.‘ The court, in that case, said in part:
There was no active trust created and no restriction on the individual right of disposition. Neither the interest of the widow nor the advancements is any obstacle to partition; for the law makes provision for the adjustment of such matters. There is therefore no occasion for the services of the executors; and no conversion. True, there is power of sale vested in the executors; but that can only be called into life by the agreement of the widow and heirs.
Cf. Scott's Estate, supra; Greenough v. Small, supra.
The Pennsylvania authorities have been studied in order to learn what the courts of that state have held under circumstances as similar to those here present as have been discovered. No exact parallel to the terms of the will in this case has come to light and the intent of the decedent must be determined from the provisions of his own will. The decedent had a number of ways in which he could have offset the $12,000 advancement to his one son and it is not clear why he provided as he did. However, the matter of that advancement could have been settled by the children without the executor selling the Wood Street property. The conclusion has been reached that the decedent did not intend to require its sale by the executor and since there was no necessity for its sale by the executor there was no conversion. That decides the only question between the parties.
Decisions will be entered under Rule 50.