Opinion
Docket No. 75855.
1960-10-17
ESTATE OF LELA BARRY VARDELL, DECEASED, FIRST NATIONAL BANK IN DALLAS, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Henry C. Coke, Jr., Esq., James K. Rushing, Esq., and Leland E. Fiske, Esq., for the petitioner. John P. Higgins, Esq., for the respondent.
1. The decedent, Lela Barry Vardell, and T. W. Wardell were husband and wife, and all their property, under Texas law, was community property. The husband died February 27, 1934, leaving a will which put his wife to an election either to take her community one-half of the property or to take the income from the entire property for life with the remainder passing to a trust for their children and grandchildren. The will provided as to Lela that ‘so long as she shall remain a widow, she is to have, during such time, full and absolute authority to handle, manage, sell, and in any manner dispose of said properties, or any part thereof.’ She elected to take under the will and during her lifetime received the entire income from the community assets. At her death the remaining community assets passed to the testamentary trust provided in her husband's will. In decedent's estate tax return no part of the community property disposed of by her husband's will was included in her gross estate. The Commissioner in his determination of the deficiency in estate tax included as a part of decedent's gross estate her proportion of the value of the community property. Held: The Commissioner is sustained. Decedent's interest in the community property is includible in her gross estate under the provisions of sections 2036, I.R.C. 1954.
2. On March 10, 1955, Lela made a gift to one of her daughters of 1,000 shares of Southwestern Life Insurance Company stock which stock was a part of the community estate of Lela and her husband and in which she had been conveyed a life estate with power of disposition during her lifetime under her husband's will. No part of this property was reported in decedent's estate tax return. The Commissioner in his determination of the deficiency in estate tax included in decedent's gross estate the same proportion of the value of said property as he used in the property involved under ‘issue 1 on the ground that the gift was made in contemplation of death. Held, the gift was not made in contemplation of death and no part of the value of the property is includible in decedent's gross estate. Henry C. Coke, Jr., Esq., James K. Rushing, Esq., and Leland E. Fiske, Esq., for the petitioner. John P. Higgins, Esq., for the respondent.
The Commissioner has determined a deficiency in estate tax against the estate of Lela Barry Vardell of $873,279.44. The deficiency is due to the additions to gross estate as disclosed by the return of ‘Schedule G— Transfers $2,217,983.48.’ This adjustment is explained in the deficiency notice as follows:
It is determined the total value of trust assets was $4,119,582.99 as of the date of death. The proportionate value, 53.84% of this amount, or $2,217,983.48, is included in the gross estate. This determination is occasioned by the decedent making an election to give up the remainder value of her one-half of the community on hand at the time of the death of her husband, T. W. Vardell, on February 27, 1934, under the terms of the husband's will, and because of the retention of the income from the property for life.
By appropriate assignments of error petitioner contests the foregoing determination of the Commissioner. Included in petitioner's assignments of error is the following:
(f) In determining the gross estate of said Lela Barry Vardell, deceased, the Commissioner erroneously included in said gross estate Fifty-three and eighty-four/one hundredths per cent (53.84%) of One Hundred Forty-Seven Thousand Dollars ($147,000.00), which is Seventy-Nine Thousand, One Hundred Forty-Four and 80/100 Dollars ($79,144.80), or any part thereof, because the amount of One Hundred Forty-Seven Thousand Dollars ($147,000.00) represents the value of fifteen hundred (1,500) shares of Southwestern Life Insurance Company stock, one thousand (1,000) shares of which decedent gave her daughter, Mrs. Lela Vardell Ellis, on March 10, 1955, and five hundred (500) shares of which are a fifty per cent (50%) stock dividend received by said daughter on said one thousand (1,000) shares on April 5, 1956, making a total of fifteen hundred (1,500) shares owned by said daughter, no part of which was owned by decedent at the date of her death, and no part of which should be included in decedent's gross estate.
FINDINGS OF FACT.
Most of the facts have been stipulated and are incorporated herein by this reference.
The decedent, Lela Barry Vardell, died of a cerebral hemorrhage on September 12, 1955, while visiting her daughter Lela Vardell Ellis in Virginia. A timely Federal estate tax return for her estate was filed by her executor, in which it was elected to value the assets of her estate on a date 1 year after the date of her death.
Issue 1.
The decedent and T. W. Vardell, hereinafter sometimes referred to as Vardell, were husband and wife living in Texas. At the time of his death on February 27, 1934, all of their property was community property. Vardell left a will which contained the following pertinent provisions:
ITEM TWO:
I give, devise and bequeath to my wife, Lela Barry Vardell, all property, real, personal and mixed, of which I may die seized and possessed, or in which I may have an interest at the time of my death, for the term of her life, and so long as she shall remain a widow, she to have, during such time, full and absolute authority to handle, manage, sell, and in any manner dispose of said properties, or any part thereof, and to invest and re-invest any proceeds received from the sale of any part of said properties, and no purchaser of any part of said properties shall have any obligation or duty to see to the application of the proceeds received from such sale.
If my said wife shall remarry then it is my desire, and I direct, that all of the properties owned by me, or in which I may have an interest, at the time of my death, and then remaining undisposed of, together with the proceeds then on hand received from the sale of any part thereof, and also any property purchased from any such proceeds and then in her possession, (but not including her interest in our community property), shall pass immediately to the trustees named in Item Three, and constitute a trust fund to be held, managed, administered, disposed of and distributed in accordance with the provisions of said Item Three Hereof.
ITEM THREE:
At the death of my said wife, if she shall survive me, I give and devise all of my separate property not theretofore sold or otherwise disposed of by my said wife, and all proceeds then on hand received from the sale or other disposition of any portion thereof, and all properties then on hand purchased from such proceeds, and also all community property belonging to my said wife and myself at the time of my death, and the proceeds then on hand received from the sale or other disposition of any portion thereof, and all properties then on hand purchased from any such proceeds, to the First National Bank in Dallas, Texas, and Charles F. O'Donnell, of Dallas, Texas, joint trustees, to have and to hold the same in trust, for the uses and purposes, and with the powers, hereinafter expressed. * * *
ITEM SIX:
It is my intention by this will to dispose of, and I do dispose of, all of my separate property, and also the community property of myself and wife, Lela Barry Vardell, including her interest therein as well as my own, and should my said wife survive me, then she will be required to elect whether she will accept this will and take under its provisions, * * * and if she so elects to accept under the terms hereof, then this will shall operate to include and dispose of, after her death, her interest in our community properties, as well as all properties owned by me at my death, and such election shall be irrevocable, * * *
Decedent elected to take under the will on April 27, 1934; there is no issue between the parties that she made a valid election. At the conclusion of the administration of Vardell's estate in 1935, all of the community assets were turned over to the decedent. Thereafter, during her lifetime, she managed the community assets and received all of the income therefrom. Decedent did not remarry.
Decedent was 56 years old when she elected to take under the will. She lived 21 years after the date of her election.
At the date decedent elected to take under the will the total value of the community assets placed under her management was $2,304,546.68, of which amount $1,240.783, or 53.84 per cent, was attributable to her interest in the community and $1,063,781.68, or 46.16 per cent, was attributable to her husband's interest.
Based upon her age of 56 years at the date of her election, the value at such date computed from Table A in section 81.10(j), Regs. 105, of the remainder interest, to take effect at decedent's death, in the share of the community assets attributable to her, was $683,869.96. Based upon the same age and table, the value at such date of decedent's right to receive the income during her life from the share of the community assets attributable to her husband was $454,014.36; and the value at such date of decedent's right to receive the income during her life from the total community assets was $983,571.61.
The value of the community property of decedent and her husband remaining at her death and valued on a date 1 year after her death was.$3,972,582.99, of which 53.84 per cent, or $2,138,838.68, was attributable to decedent's share of such property. None of this value was included in her gross estate on decedent's Federal estate tax return.
Issue 2.
On March 10, 1955, decedent made a gift to her daughter Lela Vardell Ellis of 1,000 shares of Southwestern Life Insurance Company stock, which stock was a part of the community property of decedent and her deceased husband. A stock dividend of 50 per cent was declared on this stock on May 13, 1956. At a date 1 year after decedent's death the 1,500 shares of this stock had a value of $98 per share, or a total value of $147,000, of which 53.84 per cent, or $79,144.80, was attributable to decedent's part of the community property.
After decedent's death, First National Bank in Dallas, as trustee, filed a suit in the District Court of Dallas County, Texas, to determine if decedent had the power under her deceased husband's will to make the gift of stock to her daughter from the community property. On March 21, 1958, the Texas Court of Civil Appeals in the case of Ellis v. First National Bank in Dallas, 311 S.W. 2d 916, decided that decedent had the power under the will to make the gift and that she exercised the power.
The decedent was a healthy woman and her mental faculties were keen. She was alert and in good health in the middle of March 1955. The decedent maintained a separate residence during her entire widowhood and did not require a companion or nurse. She operated an automobile and traveled alone by railway. The decedent was visiting her daughter in Hot Springs, Virginia, when she died suddenly on September 12, 1955, as a result of a cerebral hemorrhage which occurred as she was having dinner in the Homestead Hotel where she was staying.
Decedent's daughter Lela Vardell Ellis had no children whereas her other daughter, Elizabeth Vardell Goodman, had three children and five grandchildren. In the years 1934 through 1954 the following gifts were made to the decedent's daughters and their husbands:
+----+ ¦¦¦¦¦¦ +----+
Elizabeth Lela Vardell R. A. B. T. Kenneth Year Vardell Ellis Goodman Ellis Goodman 1934 $11,293.72 $11,293.72 1935 16,121.00 21,121.00 $5,000 1936 12,500.00 16,100.00 12,500 $5,000 1937 12,500.00 15,000.00 12,500 1938 12,500.00 17,500.00 12,500 7,500 1939 7,500.00 7,500.00 7,500 7,500 1940 9,000.00 12,000.00 10,000 7,500 1941 4,000.00 7,500.00 7,500 7,500 1942 7,500.00 6,500 7,500 1943 5,000.00 12,500.00 5,000 1944 5,000.00 12,500.00 5,000 1945 5,000.00 12,500.00 5,000 1946 5,000.00 12,500.00 5,000 1947 8,000.00 1948 6,000.00 1949 6,000.00 1950 6,000.00 1951 6,000.00 1952 6,000.00 1953 6,000.00 1954 6,000.00
105,414.72 215,514.72 94,000 42,500
The gift to Lela Vardell Ellis on March 10, 1955, was not made in contemplation of death.
Other Issues.
A Federal gift tax return was filed for decedent by her executor for the year 1955 for gifts made before her death showing a gift tax liability of $41,398.09, which was paid on April 16, 1956. This amount was a debt of decedent at the date of her death, and of this amount only $3,843 was deducted on the estate tax return as a debt of decedent, leaving the balance of $37,555.09 not deducted on the Federal estate tax return.
A Federal gift tax was paid by decedent in 1935 and 1936 for the year 1934 of $6,617.50 as a result of her exercise of her election to take under her husband's will.
Decedent's estate is entitled to a credit for Federal gift taxes paid if any part of the gifts is included in her estate, and for State death taxes, and to a deduction for the expenses of administering the estate incurred subsequent to the date of filing of the Federal estate tax return.
OPINION.
BLACK, Judge:
We shall take up the issues in their order.
Issue 1.
The decedent and Vardell were husband and wife and all of their property was community property. Vardell died on February 27, 1934, leaving a will which put his wife to an election, either to take her community one-half of the property or to take the income from the entire community estate for life, with the remainder passing to a trust for their children and grandchildren. The will provided that for the term of her life Lela shall have ‘full and absolute authority to handle, manage, sell, and in any manner dispose of said properties, or any part thereof.’ Lela elected to take under the will and during her lifetime received the entire income from the community assets. At her death the remaining community assets passed to the trust provided in her husband's will. In decedent's estate tax return no part of the community assets was included in her estate. The Commissioner in his determination of the deficiency has included decedent's proportion of the community assets in her gross estate.
The question for decision is: Were all of the community assets owned by decedent and her husband at the time of the husband's death in 1934 and disposed of by the husband in his will in the manner aforesaid properly excluded from decedent's estate in the estate tax return which was filed, or should they be included to the extent determined by the Commissioner in his deficiency notice?
At the outset it would perhaps be well to note that in the estate tax return filed by decedent's estate, certain property was included which had no connection with the community property interest which the Commissioner has included in decedent's gross estate. Decedent's estate paid the tax shown on said return. There is no issue herein concerning the value of the property thus included. It should also be noted that the Commissioner in his determination has included only Lela's share of the community property in her gross estate. Ordinarily, that community interest would be one-half but in the present instance 53.84 per cent has been included in decedent's estate. That fact has been explained in petitioner's brief as follows:
While decedent's interest in the community estate was at time of her election equal to her husband's, her interest became 53.84% and his, 46.16% after payment of taxes and other charges payable from his part. Therefore, ‘one-half’, when used, will mean 50% at time of her election and the appropriate percentage thereafter. The term ‘community property’ not only refers to the common property at time of election, but all mutations thereof occurring thereafter.
The Commissioner does not contest the correctness of the above statement.
The petitioner contends that in 1934 after her husband's death Lela elected to take under the will and that by doing so there was a sale or exchange by her of her interest in the entire community estate for a life interest in the entire community estate. Petitioner further contends that this action of Lela was a sale or exchange of her interest in the community estate for a full and adequate consideration in ‘money or money's worth’ within the meaning of section 2036, I.R.C. 1954, and hence none of her community interest in the property is includible in her estate at the time of her death.
Respondent's primary contention is that the transaction in 1934 by which Lela elected to take under the will was an incompleted gift of her remainder interest in the community property which did not become complete and effective until Lela's death in 1955 and hence the value of her interest is includible in her gross estate at the time of her death under section 2036, I.R.C. 1954. Alternative contentions are made by both parties but due to our decision on Issue 1 herein made, we do not deem it necessary to state them here.
Both parties argue their respective positions at length and cite and discuss many cases which they say support their respective contentions. It would make this opinion too long to take up and discuss these cases which have been cited by the respective parties and we shall not attempt to do so. We think the applicable and controlling statute is section 2036 of the 1954 Code printed in the margin.
SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.(a) GENERAL RULE.— The value of the gross estate shall include the value of all property * * * to the extent of any interest therein of which the decedent has at any time mace a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), 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.(b) LIMITATION ON APPLICATION OF GENERAL RULE.— This section shall not apply to a transfer made before March 4, 1931; nor to a transfer made after March 3, 1931, and before June 7, 1932, unless the property transferred would have been includible in the decedent's gross estate by reason of the amendatory language of the joint resolution of March 3, 1931 (46 Stat. 1516.)
Were it not for the language in Vardell's will which provided ‘and so long as she shall remain a widow, she to have, during such time, full and absolute authority to handle, manage, sell, and in any manner dispose of said properties, or any part thereof,‘ it might well be that none of the property in question should be included in decedent's gross estate. This precise language was before the Court of Civil Appeals of Texas in the proceeding of Ellis v. First National Bank in Dallas, supra. The question before the court in that case was whether Lela Vardell Ellis of certain shares of Southwestern Life Insurance Company stock which were owned as community property by Vardell and Lela at the time of Vardell's death in 1934. It is this same gift of shares in Southwestern Life Insurance Company which is involved in Issue 2 which we shall discuss later. The Court of Civil Appeals of Texas held that Lela did have the power to make the gift in question and that it was a valid gift and that Lela Vardell Ellis, her daughter, thereby became the owner of the property. It seems to us that in view of this decision of the Texas court that Lela, at the time of her death, possessed the power to dispose of, by inter vivos gifts as distinguished from testamentary disposition, her entire community interest in the property and the testamentary trust established by Vardell's will would take nothing for the remaindermen. Doubtless it was very improbable that she would do this. Nevertheless, owing to this provision in Vardell's will we think that respondent is correct in his contention that the transaction in 1934 by which Lela elected to take under her husband's will resulted in an incompleted gift to the remaindermen which did not become complete until Lela's death in 1955. We think that because of the provisions of section 2036, 1954 Code, Lela's interest in the community property upon her death was includible in her gross estate.
We, therefore, sustain respondent on Issue 1. Cf. Olson v. Reisimer, 271 F.2d 623 (C.A. 7, 1959). In that case the Seventh Circuit, in reversing the United States District Court below and holding against the taxpayer, said:
The joint will embodied Nellie's and Ben's careful plan for the ultimate disposition of their property to their sole heir at law, Grover, retaining to themselves, and to the survivor of them, complete enjoyment thereof until the survivor died. It is not improper that they should establish and execute such a plan. Neither is it a hardship nor injustice that an estate tax be assessed in this case. Neither the ingenuity of the author of the plan nor its uniqueness can shield the transmission of this estate to the owner's sole heir at law from a federal estate tax. Various methods have been set up by taxpayers, especially husbands and wives, by trust arrangements and otherwise, to avoid the impact of federal estate taxes. Yet the courts have universally held that such arrangements do not defeat the imposition of estate taxes. * * *
Issue 2.
On March 10, 1955, decedent made a gift to her daughter Lela Vardell Ellis of 1,000 shares of Southwestern Life Insurance Company stock, which stock was a part of the community assets of decedent and her deceased husband at the time of his death and of which decedent had the power of disposition during her lifetime. No part of this gift was reported in her estate tax return. The Commissioner proposes to include in her estate the same proportion of this gift as her proportion of the community assets. The question for decision is: Was this gift properly excluded from decedent's estate?
Respondent in his brief relies upon section 2035 of the 1954 Code and the regulations thereunder printed in the margin.
I.R.C. 1954: SEC. 2035. TRANSACTIONS IN CONTEMPLATION OF DEATH.(b) APPLICATION OF GENERAL RULE.— If the decedent within a period of 3 years ending with the date of his death (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) transferred an interest in property, relinquished a power, or exercised or released a general power of appointment, such transfer, relinquishment, exercise, or release shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this section and section 2038 and 2041 (relating to revocable transfers and powers of appointment); but no such transfer, relinquishment, exercise, or release made before such 3-year period shall be treated as having been made in contemplation of death.In interpreting section 2035(b), section 20.2035-1 of the Estate Tax Regulations provides, as follows:Sec. 20.2035-1 TRANSACTION IN CONTEMPLATION OF DEATH.— (A) In general.— A decedent's gross estate includes under section 2035 the value of any interest in property except to the extent that the transfer was for a full and adequate consideration in money or money's worth (see sec. 20.2043-1). With the exception noted in the preceding value of any interest in property transferred within 3 years before the decedent's death, unless the transfer is shown not to have been made in contemplation of death. The result is not affected by the fact that at the time of the transfer the decedent parted absolutely and immediately with his enjoyment of and title to the property.(c) Definition.— The phrase ‘in contemplation of death’, as used in this section, does not have reference to that general expectation of death such as all persons entertain. On the other hand, its meaning is not restricted to an apprehension that death is imminent or near. A transfer ‘in contemplation of death’ is a disposition of property prompted by the thought of death (although it need not be solely so prompted). A transfer is prompted by the thought of death if (1) made with a purpose of avoiding death taxes, (2) made as a substitute for a testamentary disposition of the property, or (3) made for any other motive associated with death. The bodily and mental condition of the decedent and all other attendant facts and circumstances are to be scrutinized in order to determine whether or not such thought prompted the disposition.
After careful consideration of the evidence in the record on this issue we made a finding of fact that, ‘The gift to Lela Vardell Ellis on March 10, 1955, was not made in contemplation of death.’ We think the facts in the record fully justify this ultimate finding of fact. It is dispositive of Issue 2 which we decide in favor of petitioner.
Decision will be entered under Rule 50.