Opinion
Docket No. 11494.
Promulgated July 7, 1948.
1. Held, on the facts, that decedent and his wife held their property in community.
2. Held, on the facts, that agreement and conveyances executed by decedent and his wife dividing their community property into tenancy in common were with intent to escape estate tax and in contemplation of death within section 811 (c) and (d) (5) of the Internal Revenue Code.
3. Held, that the agreement and transfers were not made for adequate and full consideration in money or money's worth under section 811 (c) of the Internal Revenue Code.
Charles J. Munz, Jr., Esq., and Sidney R. Reed for the petitioner.
A. J. Hurley, Esq., for the respondent.
This case involves estate tax. A deficiency was determined in the amount of $40,548.81. The questions presented, after abandonment of some minor issues, are (a) whether an agreement between the decedent and his wife on December 2, 1942, dividing their property into tenancy in common, was in contemplation of death within the meaning of section 811 (c) and (d) (5) of the Internal Revenue Code; (b) whether, if the agreement was in contemplation of death, it was made for adequate and full consideration in money or money's worth within the meaning of section 811 (c); and (c) whether the decedent and his wife, prior to December 2, 1942, held the property as community property, bringing the agreement within section 811 (c) and (d) (5) of the code. From allegations admitted and evidence adduced we make the following findings of fact.
FINDINGS OF FACT.
Petitioner is the estate of Edwin W. Rickenberg, deceased. His widow, Loraine T. Rickenberg, is the executrix. The decedent and Loraine T. Rickenberg were married on July 17, 1913, and lived together continuously mostly within the State of California as husband and wife until decedent's death on August 23, 1944, at the age of 58 years. Two children born of the marriage were 32 and 29 years old, respectively, at the date of the hearing. His death was caused by coronary thrombosis, commonly known as heart attack. He had had one previous heart attack on August 25, 1943. After the first heart attack he responded to treatment and made good recovery, and, after being confined to his room for several months, was able to be up and to go to town during 1944.
He had, at his request, been examined on October 14, 1942, by a competent physician because, as he told the doctor, he felt tired at the end of the day's work and had an occasional attack of dizziness.
No disease of the heart or other organs could be discovered by the doctor and the doctor informed the decedent that his heart was normal, with the exception of a somewhat rapid rate, a condition which decedent had had for many years and did not cause him any particular concern. His blood pressure was below normal.
The doctor obtained a reading of the decedent's basic metabolism on his examination of October 14, 1942, and found it was low. Thyroid treatment, only, was given, i. e., additional amounts of thyroid extract, and on December 2, 1942, when the doctor again examined the decedent, his basic metabolism reading was within normal limits.
The decedent did not have any old infirmity or disease of any kind which could have brought about his heart attacks. He was mentally sound and to the doctor seemed physically sound.
On December 2, 1942, decedent's general systemic condition was apparently normal and the doctor was unable to find any organic heart lesion. The anatomical condition which precedes an attack of coronary thrombosis is practically impossible to discover. The decedent had a rapid heart rate, indicating muscular fatigue and muscular weakness. He told the doctor that it was not a new thing for him; that he had had it for a good many years. The doctor assured him that he was not able to detect any evidence of organic lesion, but told him that he should slow down in his activities. This was the only advice given him.
The decedent and his wife went on a vacation in July 1943, renting a cottage above a lake, where they remained three weeks. During that time the decedent went down to the lake every day to get the mail. The path was steep. By the end of the vacation he reported to his wife that he could walk up to the cottage without noticing it.
The decedent did not on or before December 2, 1942, make any statement to the doctor to indicate that he was in fear of impending death, nor did that doctor or any other ever tell him that from his physical condition he might apprehend death in the near future. He never said anything to his wife or any of the parties who testified in the case to indicate that he anticipated dying, either on December 2, 1942, or at any other date. His eyes had given him a great deal of trouble for a number of years and for some time prior to May 16, 1943, had been very bad.
During the period of the marriage the parties accumulated the properties involved in this proceeding, consisting of four parcels of real estate of an agreed total value of $70,700, 1,675 shares of common stock of the J. C. Penney Co. of an agreed value of $177,712, 40 shares of capital stock of Home Builders Loan Association of Pomona, California, of an agreed value of $9,000, U.S. Treasury bonds of an agreed value of $6,397.13, bank account in the amount of $23,988.66, two Chrysler automobiles of the respective agreed values of $1,415 and $1,280, household furniture of the agreed value of $1,500, and life insurance of the agreed value of $53,703.84.
The property was all acquired by the decedent during the marriage. For a number of years after marriage decedent and his wife had practically nothing, merely enough to pay household running expenses. None of the property accumulated by the decedent and his wife was received as compensation for personal services actually rendered by his wife or derived originally from such compensation or from any separate property of hers. The real estate stood in the name of decedent and his wife as joint tenants, with rights of survivorship, prior to December 2, 1942; and to that date the certificate of ownership of the 1,675 shares of J. C. Penney Co. stock stood in the name of the decedent. The certificate of ownership of the 40 shares of stock in Home Builders Loan Association of Pomona stood in the name of the decedent. The certificates of both stocks were kept in a safe deposit box held jointly by the decedent and his wife. The $23,988.66 cash was in a joint banking account in the First National Bank of Pomona, California.
They did not know or understand the legal differences in respect of property ownership. They never discussed a division of the property because they had accumulated it together and considered that they owned it together, half and half, so that it was theirs, and had no reason to argue about any division, for they were happily married.
The decedent had been for many years an employee of the J. C. Penney Co., and for at least five years prior to his retirement on July 1, 1943, was the manager of the company's store at Pomona, California. He worked long hours, usually from eight o'clock in the morning until nine o'clock at night and until ten or eleven o'clock on Saturday. He was rarely absent. He had for several years before his retirement on July 1, 1943, been planning to retire, often mentioning it to his friends and associates, and had been saving and building an estate to provide adequate income for himself and his wife upon retirement. He kept working after he had acquired a competency because he liked it and wished to keep busy. Retirement was compulsory at 60 years of age with J. C. Penney Co.
He has as a very close friend one Walter W. Jones, a life insurance agent, with whom for several years he had discussed the matter of retirement and the amount of insurance and annuities he would need.
Most of Jones' clients were either in the higher income brackets of the professional and executive class, or people of substantial estates. He furnished practically all of them what he called an estate analysis. He subscribed to services to keep abreast of changes in Federal and state law as to taxation, and about four times a year sent out a brief containing comments on estate planning, particularly as it concerned life insurance as it ties in with estate planning.
Jones expected to sell both decedent and his wife insurance in connection with the decedent's planned retirement. In order to properly plan a program of insurance for a client, Jones always made it a part of his service to ascertain the total amount of all property of the client and the manner in which title was held. During 1942 Jones sold decedent $20,000 life insurance on his wife's life.
During the autumn of 1942 the decedent told Jones that he and his wife owned everything together, share and share alike. Jones asked the decedent, "Do you realize that some recent information that I have been given here that the Federal Government has been taxing that somewhat differently in the event of a man's death?"; and decedent was urged by Jones to straighten out his titles. Jones "told him how, in the event of a man's death, they would tax the whole thing as against, well * * *." These discussions went on for weeks. The decedent told Jones to put the things he, Jones, had been telling him, in writing so that decedent could digest it. At decedent's request, on October 30, 1942, Jones wrote him a letter, outlining the things they had talked about, and in pertinent part stating that in recent months he, Jones, had seen several estates arranged so that substantial savings in tax and administration costs had been made; that he was interested to see that decedent did likewise; that he wanted him to seek an attorney to do so; that in a recent case similar to that of decedent joint tenancies were terminated, community property was separated, and each spouse held his half separately, and each made a will naming the children as heirs to his half, and purchased the necessary life insurance on the other to provide cash for all estate expenses; that Jones thought it a good plan for the decedent, and if he and his wife could qualify as good insurance risks it would mean a great saving; that life insurance is considered the one best plan to provide cash for estate costs; and that he urged decedent to proceed with the matter immediately. The tax services subscribed for by Jones were not fast enough to give him the change in gift tax passed October 21, 1942. On November 11, 1942, of his own volition, he inquired by letter (with memorandum attached relating to the E. W. Rickenberg case) of an attorney named Toll whether a gift tax would be payable upon a contemplated division of property by a husband and wife, and whether the plan was practical in the light of the new estate tax, and stating that it would appear more economical than leaving the property in the husband's name or in joint tenancy. On November 13, 1942, Toll wrote Jones, referring to Jones' letter of November 11, "and the memorandum attached thereto, both relating to the E. W. Rickenberg case," advising, in part here important, that the division of community property between husband and wife thus destroying its community character seemed a desirable step in view of estate tax changes affecting community property to take effect January 1, 1943; that the benefit with respect to community property seems perfectly clear:
* * * as this will result in producing two estates of substantially equal size, the combined estate tax on which will be much less than that on a single estate in which all the property will be taxed. Furthermore, as to new community property, it seems quite clear to me that no gift tax is involved upon a division thereof which takes places prior to January 1, 1943, although possibly any division which takes place after that date will be subject to gift tax. Any division now of community property acquired prior to July 29, 1927, will constitute a taxable gift to the wife of an amount equal to the value of the portion transferred to her name. * * *
* * * * * * *
3. It would seem that the life insurance purchase which is proposed is a very good plan and that the proceeds of neither policy will be taxed in the estate of the insured. You will have to bear in mind, of course, that in all probability there will be taxed in the estate of the first spouse to die the then cash value (or substantially that value) of the policy which the decedent then owns upon the life of the other spouse.
I think the foregoing answers your questions.
Jones also advised the decedent that it was to their advantage, from an income tax standpoint, to have their community property set up as tenants in common. Jones never made a final calculation of what the estate tax would be.
On November 28 Jones wrote the decedent as follows:
In connection with your plan to divide your Community Property with Mrs. Rickenberg, I think it would be wise for you and Mrs. Rickenberg to sign an agreement which would state that you both agreed to the fact that the property involved is Community Property and that the reason for the division is so that you would each be free to make whatever disposition of it you saw fit to make in the future.
Such agreements are particularly valuable in the years to come as additional evidence in connection with any controversy that might arise.
Jones and the decedent went to decedent's attorney, Hickson, in November 1942 and Jones outlined what was to be done. They told him that they wanted an agreement drafted as suggested by Jones and stated that the husband and wife owned the property together. Decedent said they wanted it done before January 1, 1943, because the gift tax provision which affected this particular kind of transfer would go into effect at that time. Hickson, therefore, drafted an agreement reciting, omitting formal parts, as follows:
WHEREAS, the parties hereto are now and have been since the 17th day of July, 1913, husband and wife and reside together at #1200 Los Robles Place, Pomona, California, and
WHEREAS, they have accumulated and acquired certain property since their said marriage, all of which property has been and is up to this time community property, and
WHEREAS, the parties hereto have heretofore held the title to all their property, both real and personal, as joint tenants and it is their desire to divide and separate said property and hold the same as tenants in common, each an undivided one-half interest therein,
NOW, THEREFORE, IT IS AGREED by and between the parties hereto that they will convey all of the property, both real and personal which they have heretofore held as community property and held the title thereto jointly, to themselves as tenants in common so that each may have an undivided one-half interest therein and that each will execute and deliver to the other such bills of sale, deeds of conveyance and other papers and instruments necessary to convey the title to said property to each of them as tenants in common.
IT IS FURTHER UNDERSTOOD AND AGREED and the parties hereto hereby state and declare that the purpose of this Agreement is that they may each acquire and own one-half of said property in his or her individual right as his or her own sole and separate property so that each may, upon the death of the other, hold and retain the said property without any disturbance of the title thereto and that each may convey, transfer, sell, demise, will or otherwise dispose of said property without the interference or the necessity of the other consenting or signing any instruments thereto or therefor, during the time both of them shall live; furthermore, that each may receive and have the income from his or her separate property and account for the said income as his or her sole and separate property.
It is further understood and agreed that each of the parties hereto may make whatever provision he or she may desire for their children, by Will, gift or transfer, without the consent of the other, to the end that said children may have the maximum benefit of exemption under the Inheritance Tax Laws of the State of California and the Federal Estate Tax of the United States, and furthermore, either of said parties hereto may convey, transfer, devise or bequeath to the other the maximum amount of property in the manner that would grant to such transferee, donee, devisee, or legatee, the greatest exemption and the minimum tax under the inheritance or transfer tax laws of the United States and/or the State of California.
The agreement, deeds, transfers of certificates of stock, and new wills were drafted by Hickson sometime between November 28, 1942, and December 2, 1942, and executed at his home on December 2, 1942.
On May 16, 1943, the decedent wrote to J. C. Penny Co. a letter of resignation. The only reason given for resignation was trouble with his eyes, which he stated had given him trouble for a number of years and lately had been very bad; and that the doctor had advised retirement to get away from the nervous strain of the work.
On December 2, 1942, and for some time thereafter prior to his retirement on July 1, 1943, the decedent owned group insurance which J. C. Penney Co. carried with the Prudential Insurance Co. in two $10,000 policies. Jones requested that the decedent allow him to submit him for life insurance with the Mutual Life of New York instead of the decedent's converting the $20,000 group insurance to ordinary life insurance. At that time Jones sold decedent's wife $20,000 of life insurance, to defray expenses of administration and taxes, including income of her estate on her death. The decedent, because the rates with the Mutual Life of New York were $5 higher, refused to take out the $20,000 life insurance upon his own life suggested by Jones to defray the costs of administering his estate; and the decedent converted only $10,000 of the group insurance into ordinary life and allowed the other to lapse.
The decedent had a retirement fund with J. C. Penney Co. in the amount of about $17,000 or $18,000, payable to him upon retirement. On August 25, 1943, he went to Jones' office and, without previous discussion of the matter, purchased a refund annuity on his life for $20,000. The experience of Jones is that a person who does not expect to outlive the average does not buy an annuity. It was payable to decedent for life, but in case he did not live long enough to receive the original purchase price, the company would continue the payments until the principal was paid. In such case only the interest on the money would be lost.
The decedent and his wife each had written identical wills early in their married life when their children were very young, providing that all the property of one should go to the survivor.
Later, on March 14, 1939, the parties again wrote identical wills, which provided that the survivor was to get all the property of the other if he or she survived the other for a period of thirty days, otherwise to the children.
The last wills of the parties, executed December 2, 1942, were identical and provided for a life estate in all the property to Mrs. Rickenberg in his will and to Rickenberg in her will, with remainders over to their two children, share and share alike.
The petitioner has incurred certain additional expenses and legal fees in connection with this appeal. Said amounts are as yet indeterminate.
The petitioner has agreed to pay counsel appearing in the case not to exceed one-third of the amount of tax that may be saved to the taxpayer.
Possibly additional fees will be charged by the attorney for the estate.
The estate tax return filed by petitioner included one-half of the real estate, one-half of the 1,675 shares of stock of J. C. Penney Co., all of the 40 shares of stock of the Home Builders Loan Association of Pomona, California, all of the Treasury bonds, all of the cash in the joint bank account, the two automobiles and the life insurance. The household furniture was not included in the return.
The petitioner paid estate tax in the amount of $32,150 in behalf of the estate of decedent on May 29, 1945.
The decedent was not, on December 2, 1942, in fear of immediate death.
The transfers were made on December 2, 1942, in contemplation of death, and the primary motive was to avoid estate taxes and not to save income taxes or Federal gift taxes, except that the execution of the instruments took place before January 1, 1943, rather than later, in order to escape gift taxes to become effective on that date. The property of the decedent and his wife had been held in community prior thereto. The agreement of December 2, 1942, dividing the property into tenancy in common did not constitute a bona fide sale for full and adequate consideration in money or money's worth.
OPINION.
The respondent determined in the determination of deficiency that the property transferred by the decedent on December 2, 1942, should be included in his gross estate under the provisions of section 811 (c) and 811 (d) (5) of the Internal Revenue Code. Error in such determination must be shown by the petitioner. Welch v. Helvering, 290 U.S. 111. In our opinion, the petitioner has not so shown. The respondent, on brief, does not contend that the transfers were prompted by any apprehension or premonition on the part of the decedent of imminent death. The contention is that the sole motive inducing the decedent to make the transfers was associated with death rather than life, and more particularly that the decedent's purpose was solely to avoid estate tax to which the property would otherwise be subject at his death. Considering this attitude on the part of the respondent, together with the fact that is obvious from the evidence that the petitioner had no reason, on December 2, 1942, to apprehend the heart attack which took his life about eighteen months later, we examine only, in this respect, the question as to whether there was such motive and intent to escape estate taxes as to bring the transfer within the ban of the statute. The respective briefs, in effect, agree that such motive subjects the property to estate tax, for both parties cite several cases to that effect. See Updike v. Commissioner, 88 F.2d 807; Vanderlip v. Commissioner, 155 F.2d 152, affirming 3 T.C. 358; First Trust Deposit Co. v. Shaughnessy, 134 F.2d 940. The contemplation of death is not necessarily that of imminent death. United States v. Wells, 283 U.S. 102. The petitioner contends, however, that there is no evidence to establish that the decedent's dominant motive was to escape estate taxes. The question is one of fact. We have carefully considered what transpired in the autumn of 1942, ending with the transfers in question, and we think it is self-evident on the face of the record that the controlling and dominant purpose was to escape estate taxes. It is unnecessary to reiterate the facts which we have above set forth, and we shall here only note that it is obvious that the decedent was following the advice of Jones, the insurance agent; that Jones outlined a plan by which estate taxes could be escaped; that he had this in mind when on October 30, at the decedent's request, he put the matters which he and the decedent had discussed into the form of a letter, for he therein mentioned substantial savings in tax and administration costs and arrangements of estates to effect such savings in tax and costs, and again twice mentioned estate expenses and estate costs. At that time Jones had not learned of the change in gift tax, so that the contention that gift tax saving was in mind is without foundation. This is indicated by the fact that on November 11 Jones inquired of the attorney, Toll, stating the Rickenberg case, whether gift tax would be payable. This letter too discloses the plan to save estate taxes, since it inquires whether the plan was practical in the light of the new estate tax and states that it would appear more economical than leaving the property in the husband's name or in joint tenancy. Toll's answer on November 13, 1942, goes into detail as to saving of estate tax. When Jones and the decedent went to the attorney, Hickson, it was Jones who outlined what was to be done, telling Hickson they wanted an agreement drafted as suggested by Jones. Though it is true that the desire was that the instrument be signed before January 1, 1943, this by no means demonstrates that the idea was to escape gift tax which would become effective on that date, but only that an early execution of the instruments was desired for that purpose. The idea that the object was escape of gift tax is rendered almost absurd by the fact that if no transfer had been made no gift tax would have been incurred. In Commonwealth Trust Co. of Pittsburgh v. Driscoll, 137 F.2d 653, the Circuit Court affirmed 50 Fed. Supp. 949, on the reasoning of the District Court and without further opinion. In that case the decedent, as in this one, was active in his business until long after the execution of the transfer in question, so that, as here, the element of contemplation of imminent death was not present. Five years before his death he made the transfer in question, transferring property which had been conveyed to himself and his wife as tenants by the entirety. The court, in effect, was able to see no reason for the transfer except to escape the payment of estate taxes thereon. Here there is much more positive indication that the controlling motive was to escape estate taxes. Though there is contention that escape of income taxes was also in the mind of Jones, the testimony in that regard is unsatisfactory and unconvincing, and it is clear to us that such was at most only the minor purpose. We conclude, and hold without further discussion of the facts above found, that the agreement of December 2, 1942, between the decedent and his wife was for the primary and dominant purpose of escaping estate taxes and was in contemplation of death within the purview of section 811 (c) of the Internal Revenue Code.
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, tangible or intangible, wherever situated, except real property situated outside of the United States —
(a) DECEDENT'S INTEREST. — To the extent of the interest therein of the decedent at the time of his death.
* * * * * * *
(c) TRANSFERS 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 death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this subchapter:
* * * * * * *
(d) (5) [As added by section 402 (a) of the Revenue Act of 1942, effective as of October 22, 1942.] TRANSFERS OF COMMUNITY PROPERTY IN CONTEMPLATION OF DEATH, ETC. — For the purposes of this subsection and subsection (c), a transfer of property held as community property by the decedent and surviving spouse under the law of any State, Territory, or possession of the United States, or any foreign country, shall be considered to have been made by the decedent, except such part thereof as may be shown to have been received as compensation for personal services actually rendered by the surviving spouse or derived originally from such compensation or from separate property of the surviving spouse.
The petitioner contends, however, that the contract here in question comes within the exception stated in section 811 (c), that is, it was a bona fide sale for an adequate and full consideration in money or money's worth. This we hold to be untenable for two reasons. First, in our view, there was no sale. In its ordinary sense the term means transfer for a fixed price in money or its equivalent. United States v. Benedict, 280 Fed. 76, 80, quoted in Hale v. Helvering, 85 F.2d 819; Estate of Frank K. Sullivan, 10 T.C. 961. The act does not include the word "exchange," and the fact is significant. Second, under section 812 (b) (5) of the Internal Revenue Code, relinquishment of marital rights in the decedent's property shall not be considered to any extent a consideration in money or money's worth. We have found as a fact that the property had been held in community. Therefore, the agreement of division of property rights on the part of the wife was an agreement to relinquish "marital rights in the decedent's property," since the right to community property arises under California law because of the marital estate.
Though the wife's community property interest is not acquired from the estate of her deceased husband, Estate of James F. Waters, 3 T.C. 407, her interest during the lifetime of herself and husband is a beneficial right extending to all the property, that is, to his interest as well as hers. For instance, he may not dispose of the community real estate, or encumber it (except to lease for less than a year) without her joinder in the conveyance. Sec. 172 (a), California Civil Code. It was as to just this interest in his portion of the community estate that the relinquishment by the agreement here in question went; therefore, clearly there was relinquishment of marital rights in the husband's property. Moreover, any community property acquired prior to July 29, 1927, belonged to the husband, the wife having only an expectancy, and was subject to administration in his estate. Rosenberg v. Commissioner, 115 F.2d 910. The record here does not show that the property was not acquired prior to July 29, 1927, showing only that it was acquired during the period of marriage. Our reasons for holding that the property was community require no lengthy discussion; for, since the entire property was acquired during marriage, and, so far as the record shows, in California — and certainly largely in California — and there is no contention or proof that any part of it was received by the wife as compensation for personal services actually rendered by her or derived originally from such compensation or from separate property of the surviving spouse, within the language of section 811 (e) (2) of the Internal Revenue Code (as added by section 402 (b) (2) of the Revenue Act of 1942), we find nothing in this record to indicate that the property was other than community. The agreement of December 2, 1942, calls it community property. The parties are not in disagreement that the mere fact that the title was formerly held in joint estate, the survivor to take, does not affect the real nature of the holding. There is some testimony that they considered that they held it "share and share alike" or "fifty-fifty," but with other expressions that they owned it "together," it is clear that there is no negation of community property, as we have concluded and find.
The third reason for our holding that the transfer on December 2, 1942, to the decedent's wife was not a bona fide sale for adequate and full consideration in money or money's worth is that such consideration has been held to be one which leaves intact the estate of the decedent. In short, the intent of the exception stated in section 811 (c) is that if the transfer of property from a decedent brought into his estate the equivalent thereof, the estate, of course, was not diminished. Latty v. Commissioner, 62 F.2d 952; Commissioner v. Porter, 92 F.2d 426; Phillips v. Gnichtel, 27 F.2d 662; Helvering v. Robinette, 129 Fed. 2d 832; Estate of Frank K. Sullivan, supra. The petitioner's estate here, had there been no transfer of December 2, 1942, would have included the community property. It would have included the property even though it was regarded as joint estate. After that transfer, decedent's estate, except for the application of section 811 (c), consisted of one-half of the property transferred. The diminution of the estate and the lack of the necessary consideration in money or money's worth can not be doubted. We, therefore, hold that the transfer does not come within the exception stated in section 811 (c).
The parties have agreed upon all values involved. We find, therefore, no error in the determination of the Commissioner. However, because of expenses incurred in connection with the administration of the estate and this appeal which are not yet determinable, and as to which the parties seem to be in no disagreement,
Decision will be entered under Rule 50.
Reviewed by the Court.
In the majority opinion, under the heading "Findings of Fact," appears the following conclusion of law: "The property of the decedent and his wife had been held in community prior thereto." I accept this conclusion as correct, whether it be called one of fact or of law. Also under the heading "Findings of Fact" in the majority opinion appears the following:
The agreement of December 2, 1942, dividing the property into tenancy in common did not constitute a bona fide sale for full and adequate consideration in money or money's worth.
In view of my concurrence with the dissent of Judge Johnson entered herein, I shall confine my discussion to that phase of the majority opinion indicated in the above two quoted statements therefrom and shall be content with pointing out little more than what to me appears to be a fundamental misconception of the character of title to community property. Such misconception is manifest from the following excerpt from the majority opinion:
* * * First, under section 812 (b) (5) of the Internal Revenue Code, relinquishment of marital rights in the decedent's property shall not be considered to any extent a consideration in money or money's worth. We have found as a fact that the property had been held in community. Therefore, the agreement of division of property rights on the part of the wife was an agreement to relinquish "marital rights in the decedent's property," since the right to community property arises under California law because of the marital estate.
The majority opinion proceeds to its conclusion on the incorrect theory that the property right of decedent's wife in the community property was a "marital right in decedent's property." The community property here in question derived its community character from the law of California applicable to the fact that it was acquired by decedent and his wife while resident in that state. But under the law of California neither the decedent nor his wife had any interest, title or ownership, marital or otherwise, in the other's interest in the community property. While the community character of the property arose from the marriage relationship of decedent and his wife, their respective interests in such property were individually wholly owned. The wife had no interest whatsoever in decedent's interest in the community property and decedent had no interest whatsoever in his wife's interest in such property.
In the instant case there were living two children of the spouses. Therefore, neither decedent nor his wife had an inheritable interest in the other's interest in the community property. Certainly there were no common law marital rights of either the decedent or his wife in the other's property.
The foregoing statements are so fundamental in the concept of rights in community property that they are axiomatic and need no citation of authorities in their support.
Since decedent's wife had no interest whatsoever in his interest in the community property, marital or otherwise, there was and could be no "relinquishment of marital rights in decedent's property" by his wife in the transfers whereby the rights of decedent and his wife in the community property were converted to rights held by them as tenants in common. This being true, we have no question here of whether there was a relinquishment of marital rights for an adequate and full consideration in money or money's worth.
It has been uniformly recognized by the courts, including this Court, that spouses in a community property state may by contract between them convert their separate property into community property and convert their community property into separate property. In the case of Samuel Friedman, 10 T.C. 1145, we held that the right to convert separate property into community property was supported "by an array of authority that neither writing nor consideration is necessary to support such a transfer." Specific cases cited in support of that text were Kenney v. Kenney, 30 P.2d 398, and Estate of Joe Crail, 46 B. T. A. 658.
If, however, the argument in the majority opinion to the effect that the transfers were not made for an adequate and full consideration in money or money's worth should still be deemed to merit attention, it is only necessary in refutation thereof to recite the fact that each of the spouses transferred to the other an undivided one-half interest in the community property to be held by him as a tenant in common. Whatever was the money's worth of such transfer by each spouse, it was adequately and fully met by a like transfer to him.
It will be borne in mind that before the transfers each of the spouses owned a moiety of the entire property in community, and after the transfers each of the spouses owned a moiety of the entire property as tenants in common. Both before and after the transfers each spouse had an undivided one-half interest in the entire property and the only effect of the transfers was to change the character of the title in each from that of a community interest to that of an interest of a tenant in common. It can not, therefore, be properly said that adequate and full consideration in money or money's worth for the transfer by each spouse to the other must be measured by the market value of one-half of the property involved, for no such transfer was made, since after the transfer each spouse had the same quantum of property he had before the transfers. The consideration for the change of the character of the title by which each spouse held such quantum lies in the transfer from each to the other. It was an adequate and full consideration in money or money's worth.
The fundamental misconception by the majority of the character of the interest of decedent's wife in the community property led to its conclusion which, in my opinion, is basically incorrect.
LEECH and JOHNSON, JJ., agree with this dissent.
I am unable to concur in the opinion reached by a majority of the Court. It recognizes that decedent had no reason to apprehend death at the time of the transfer, but sustains the Commissioner's determination on the ground decedent's "controlling and dominant purpose was to escape estate taxes." The facts found indicate that decedent was conscious of the tax consequences of his act, and, being conscious, chose an advantageous form of tenure in making the transfer. In Gregory v. Helvering, 293 U.S. 465, the Supreme Court recognized: "The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits * * *." California law permits the change from community to tenancy in common. See Jurs v. Commissioner, 147 F.2d 805, in which the Circuit Court of Appeals for the Ninth Circuit, so holding, cites many cases to this effect. Such a change could be made by any taxpayer, whether or not apprehensive of death and whether or not tax-conscious. The majority concludes, however, that decedent's awareness of an estate tax saving is alone sufficient to support a finding that the transfer was made in contemplation of death. In all the cases cited the finding that death was contemplated is supported by substantial other evidence; it is not predicated merely on the decedent's wish to reduce estate taxes upon eventual death. And in Commonwealth Trust Co. of Pittsburgh v. Driscoll, 50 F. Supp. 947, the only cited case involving, as here, a mere change in the form of tenancy between spouses, the transferor husband alone originally owned the land involved, then conveyed it to himself and wife by the entirety, and, after reaching 80 years of age, conveyed it to her alone. The decedent here was not at an advanced age, but only 56, and not in ill health when the transfer was made. He may have been tax-conscious, but he was not contemplating death, and in my opinion section 811 (c) was not designed to nullify tax-wise a conveyance made under such circumstances.
I can not agree with the majority opinion that it is "almost absurd" to regard escape from the gift tax as decedent's object. Decedent's lawyer had advised him that after January 1, 1943, a transfer to his wife would be taxable, and I think the facts indicate that it was in contemplation of a change in the gift tax law as applied to community property, rather than in contemplation of death, that decedent took the action when he did.
The majority rejects petitioner's alternative contention that the transfer was for a full and adequate consideration in money or money's worth. Obviously, decedent received in value the exact equivalent of what he surrendered, but the majority, viewing the change in tenure as merely a relinquishment of marital rights in property, which by section 812 (b) is not to be deemed consideration in money or money's worth, holds that decedent received no recognizable consideration for what he transferred; further, that the consideration received did not bring into the estate the equivalent of what was transferred. This reasoning is at best doubtful, for after the change in tenure petitioner had exactly the equivalent of what he had before, and the wife likewise had no more and no less, for her "interest in the community was a present vested interest," Commissioner v. Harmon, 323 U.S. 44, and the husband could not, under California law, alienate it without her consent. § 161 (a), § 172, 172 (a), Civil Code of California. But under my view that the transfer was not made in contemplation of death, questions arising out of the alternative contention become academic.
HILL, J., agrees with this dissent.