Opinion
Docket No. 82521
1960-10-26
ESTATE OF CARL C. LYNCH, DECEASED, ELLA M LYNCH, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William McRae, Esq., and John E. Elliott, Esq., for the petitioner. Earl Gardner, Esq., for the respondent.
William McRae, Esq., and John E. Elliott, Esq., for the petitioner. Earl Gardner, Esq., for the respondent.
Decedent and his wife wanted their three daughters and families to have their own homes. Transfers of properties, paid for be decedent and wife, were made to the two older daughters and husbands in December 1951 and March 1952, respectively. The husband of the youngest daughter was in the service, but it was understood that when he was discharged, and he and the daughter had settled down and were able to take care of a home, one would be provided. In March 1953, the older daughters and their husbands executed notes and mortgages in favor of decedent and his wife, reciting as consideration the value of the respective homes. No money was transferred and no indebtedness was intended. At the same time decedent and his wife executed waivers of the payments of interest as long as the daughters and husbands owned the respective properties. They also executed releases of the mortgages which were turned over to an attorney to be recorded by him upon the death of either or both of them. In October 1954, decedent learned he had cancer. During the next 2 years he spent periods of time in different hospitals. On June 11, 1956, decedent insisted on executing new releases of the two mortgages which he and his wife did, and which were filed by her with the county recorder. On June 12, 1956, decedent and his wife gave $9,000 to the third daughter and husband who were then living in Lakewood, California. On September 17, 1956, decedent died at the age of 62. Respondent determined that the transfers made by the decedent to his daughters and their husbands were made in contemplation of death and that the value of decedent's one-half community interest in the property transferred was includible in his gross estate. Held, that the transfers of the properties to the older daughters and husbands were not made in contemplation of death, but that the transfer of $9,000 to the third daughter and husband was made in contemplation of death.
The respondent determined a deficiency in estate tax against the petitioner in the amount of $5,514.36. The question is whether certain transfers of property were gifts made in contemplation of death.
FINDINGS OF FACT.
Carl C. Lynch, hereafter referred to as decedent, died testate on September 17, 1956, a resident of Phoenix, Arizona. An estate tax return was filed with the district director of internal revenue for Arizona on December 16, 1957 by Ella M. Lynch, Executrix.
The estate was closed pursuant to ‘Order of Settlement of Account and of Distribution,‘ Docket No. 37640, Superior Court of the State Of Arizona, in and for the County of Maricopa, dated and filed March 21, 1958.
Under the decedent's last will and testament, executed on or about April 27, 1942, at which time none of decedent's three daughters, Jeanne, Martha, and Carol, was married, all of decedent's property was given, devised, and bequeathed to Ella M. Lynch, the wife of the decedent and who was named as executrix of the will and testament.
At the date of decedent's death Jeanne had married Jack M. Gray, Martha was married to Robert D. Cloutier, and Carol was the wife of Maurice A. Etem.
In 1951 the Cloutiers selected a lot on which their home was to be built. The lot was owned by James G. Hart, Sr., who operated a construction business under the name of James g. Hart Construction Company and who was to build the home. On August 23, 1951, Hart, Sr., and his wife, as sellers, and the Cloutiers, as buyers, entered into an escrow agreement, under which the Lane Title & Trust Company was employed to act as escrow agent and to which the property involved, described as lot 20, Milida Manor, was transferred, subject to the parties' compliance with the terms of the agreement by November 1, 1951. The purchase price was shown to be $8,300, and cash in the amount of $500 was paid as earnest money ‘direct to seller by buyer outside escrow.’ The balance of $7,800 was to be paid on or before ‘close of escrow direct to seller, outside of escrow.’
In connection with the property decedent issued checks
+-----------------------------------------+ ¦Date ¦Payee ¦Amount ¦ +--------+-----------------------+--------¦ ¦1951 ¦ ¦ ¦ +--------+-----------------------+--------¦ ¦ ¦ ¦ ¦ +--------+-----------------------+--------¦ ¦Aug. 22 ¦James G. Hart ¦$500.00 ¦ +--------+-----------------------+--------¦ ¦Sept. 25¦James G. Hart Const ¦5,000.00¦ +--------+-----------------------+--------¦ ¦Oct. 18 ¦James G. Hart Const ¦1,500.00¦ +--------+-----------------------+--------¦ ¦Nov. 26 ¦James G. Hart Const. Co¦1,601.15¦ +--------+-----------------------+--------¦ ¦Nov. 26 ¦Lane Title & Trust Co ¦15.00 ¦ +-----------------------------------------+
Each check bore a notation to the effect that it was issued on account of Robert's and Martha's residence. On the back of the November check for $1,601.15 is the statement ‘Paid in full. House on Lot 20 Milida Manor.’ The other November check, issued to the escrow agent, bears the notation on its face as follows: ‘Bob & Martha Close Out Fee.’ The payments were made directly to Hart and not to the escrow agent.
A special warranty deed conveying lot 20, Milida Manor, to the Cloutiers, signed by the escrow agent through its authorized officers on August 23, 1951, shows acceptance by the Cloutiers on November 30, 1951. The deed was recorded at the request of the escrow agent on December 4, 1951. Documentary stamps in the aggregate amount of $9.35 were attached to the deed. No promises of payment for the property were exacted of or made by the Cloutiers.
The Cloutiers moved into their home in November 1951, and have lived there since.
At an undetermined date, decedent and his wife acquired residential property described as lot 13, block 8, Montecito Tract 2, Maricopa County, Arizona, for $8,500.
On March 5, 1952, decedent and his wife conveyed the property to their daughter Jeanne and her husband, Jack M. Gray. The consideration was stated as ‘Ten Dollars.’ The deed was recorded on March 12, 1952, at the request of Jack M. Gray. It bore no documentary stamps. The Grays lived in the residence until December 1958. No promises of payment for the property were exacted of or made by the Grays.
Prior to making or having the transfers made to the Cloutiers and the Grays, decedent and his wife wanted their daughters and their families to have homes of their own. When the homes were provided for the Cloutiers and Grays, Carol's husband, Maurice Etem, was in the Navy. It was understood that when he returned from the Navy and he and Carol had settled down and were able to have a home, steps would be taken to provide them with one. Maurice was discharged from the Navy in November 1954, and in June 1956, he and Carol lived in Lakewood, California.
On March 2, 1953, the Cloutiers and the Grays signed notes and mortgages in favor of the decedent and his wife in the respective amounts of $10,000 and $8,500.
The promissory note signed by the Cloutiers provided as follows:
PROMISSORY NOTE
$10,000.00 . . . . . . . . . .Phoenix, Arizona, March 2, 1953
ON OF BEFORE March 2, 1963, for value received, we promise to pay to CARL C. LYNCH and ELLA M. LYNCH, husband and wife, or order, the sum of TEN THOUSAND DOLLARS ($10,000.00), with interest thereon from date hereof until paid at the rate of six per cent (6%) per annum, interest payable at the same time as the principal installments of this note, both principal and interest payable in lawful money of the United States of America, at Phoenix, Arizona.
The principal installments of this note are due and payable monthly as follows, together with the monthly amount of interest due hereon at the time of paying said principal installments:
$1,000.00 on or before March 2, 1954, and a like amount on or before March 2 of each succeeding year thereafter until the sum of $10,000.00 has been paid.
Should the makers fail to pay the installments hereon as above provided at the time the same become due, the holders may, at their election, declare the full amount then owing on this note, together with interest as hereinabove provided, to be immediately due and payable. And in case suit or action is instituted to collect this note, or any portion thereof, we promise to pay such additional sum as the Court may adjudge reasonable as attorney's fees in said suit or action.
This note is secured by a Realty Mortgage of even date herewith.
(s) Robert D. Cloutier ROBERT D. CLOUTIER (s) Martha L. Cloutier MARTHA L. CLOUTIER
The note signed by the Grays was similar, except the principal was $8,500 and installments of $850 were to be paid each year.
The mortgage given by the Cloutiers to secure their note was on the home they had acquired from Hart in 1951, and the mortgage given by the Grays to secure their note was on the property located in Maricopa County, which had been conveyed to them by decedent and his wife on March 5, 1952.
The respective consideration of $10,000 and $8,500 recited in the Cloutiers' and the Grays' mortgages as having been ‘to them in hand paid by’ the mortgagees were not paid to the Cloutiers and the Grays.
On the same date the above notes and mortgages were executed, decedent and his wife signed waivers of the payment of the interest set forth in the respective notes and mortgages, which waivers read as follows:
KNOW ALL MEN BY THESE PRESENTS:
That for and in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration, the undersigned, CARL C. LYNCH and ELLA M. LYNCH, husband and wife, hereby waive the payment of interest as set forth in the Promissory Note and Mortgage dated the 2d day of March, 1953, as long as the MORTGAGORS therein named remain the owners of the said property. However, upon the selling of the said property, by deed or under contract of sale, the interest as set forth therein will remain in force.
On March 18, 1953, both of the above mortgages were recorded in the county recorder's office at the request of Abbott H. Goldenkoff, an attorney.
At the time the respective properties were conveyed to the Cloutiers and the Grays and at the time they respectively executed the notes and mortgages, neither of the husbands had steady, regular employment.
On April 2, 1953, the decedent and his wife executed a satisfaction of each of the above two mortgages and delivered them to Abbott H. Goldenkoff, with a letter in which he was advised that the respective satisfactions of mortgages were handed him for his safekeeping and upon the following understanding:
It is agreed between us and you are hereby authorized that upon the death of either one of us or both of us to deliver and record the said Satisfaction of Mortgages to the mortgagors therein named without any additional consideration.
It was understood by the Cloutiers and the Grays that if anything happened to the decedent they could go to Goldenkoff and have the satisfaction of each mortgage recorded.
It was the view of all the parties that by the execution of the above-described notes and mortgages the decedent's daughters and their families would to the extent of the property involved be protected from possible or probable liabilities that might arise against them.
It was not intended that either couple would pay anything on their respective notes and mortgages, and no payments were ever made on them.
Decedent, who was a rancher, had been in good health until September 1954, when he became aware of a back ailment. He thought it was due to a slipped disc which he had experienced many years before. In October, he entered a hospital for 5 days or a week for tests, at the end of which he learned he had cancer. He was in a hospital in Nogales, Mexico, from December 10, 1954, to June 20, 1955, and when released from the hospital he was in a serious condition.
In June 1955, he entered a hospital at Florence and was there until about September, when he and his wife went to Phoenix to stay with Jeanne. In April 1956, they moved to their own home. From the time he was at the Nogales hospital until April 1956, he was up and down and as his condition worsened he was confined to his bed for longer periods. He was in a local hospital again for a short time in June, and upon returning home, his condition was such that it was necessary for him to have continuous nursing care.
On June 11, 1956, the decedent and his wife executed satisfactions of the Cloutier and the Gray mortgages, and on the same date she had them recorded in the county recorder's office. Regardless of the existence of the earlier satisfactions that were being held by Goldenkoff, decedent insisted on executing the new satisfactions and having them recorded.
On June 12, 1956, the decedent and his wife gave their daughter Carol and her husband, Maurice A. Etem, $9,000 in cash. At that time the Etems were living in Lakewood, California.
On September 17, 1956, the decedent died from cancer of the prostate gland, at the age of 62.
Ella M. Lynch, as executrix of the Carl C. Lynch estate, filed gift tax returns Form 709, for the calendar years 1953 and 1956. Both returns contained the declaration under which the signatures were given subject to the penalties of perjury, and they also contained the ‘consent of spouse’ statements, which were signed by Ella M. Lynch.
The 1953 gift tax return was filed on an undetermined date and shows gifts made to the Cloutiers and the Grays on March 2, 1953, and valued at the respective amounts of $10,000 and $8,500. The date of the signature to the ‘consent of spouse’ statement is shown as April 2, 1953.
The 1956 gift tax return was filed on December 16, 1957, and showed a cash gift of $9,000 had been made to the Etems on June 12, 1956. The ‘consent of spouse’ signature was given as of the date of the gift, June 12, 1956.
Both gift tax returns appear to have been prepared by E. S. Bryant and to have been signed by him and the executrix on the same date, December 14, 1957.
On December 27, 1957, all three daughters and their husbands filed gift tax information returns, Form 710, in which each daughter and her husband reported the respective ‘cash’ gifts of $10,000, $8,500, and $9,000, and showed the donor as being ‘Carl C. Lynch Estate, Ella M. Lynch, Executrix.’ The returns show that the signatures of each daughter and her husband were made on the same date, December 14, 1957.
In the estate tax return, in Schedule G, which relates to transfers made during the life of the decedent, the executrix reported that decedent had made gifts on April 2, 1953, and June 12, 1956, in the respective aggregate amounts of $18,500 and $9,000. Attached to the schedule was a statement in which there was an explanation of each of the three gifts. As to the Cloutiers' gift of $10,000 and the Grays' gift of $8,500, it was stated that mortgages had been executed on March 2, 1953, by the Cloutiers and the Grays; that the mortgages had been recorded in the county recorder's office; that the mortgages had been ‘forgiven on April 2, 1953 by deceased and wife executing a Satisfaction of Mortgage and acknowledging payment of debt secured by mortgage’; and that the satisfactions were with Goldenkoff, an attorney, with written instructions to record them and deliver same to the respective mortgagors on the death of either Carl C. Lynch or Ella M. Lynch.
As to the $9.000 gift to the Etems, the following explanation was given:
It was the intention of the donors to treat all of their three children alike; however, inasmuch as Maurice Etem was in the service and was undecided where he wished to build a home, the gift was not executed until June of 1956. At this time the deceased and his wife were definitely not contemplating death, and their motif (sic) for making gifts were, first, enjoyment gained by seeing children have benefit of property while donors were alive, and second, to help daughter and son-in-law's financial condition and thereby help guarantee the stability of their marriage.
The estate tax return was prepared by E. S. Bryant, a tax accountant who took care of the Lynches' income tax returns and who had access to the decedent's books. Tom Fulbright was shown in the return as the attorney who was representing the estate. The return contained the usual declarations under which the agent preparing the return and the executrix executed their signatures subject to the penalties of perjury. Both signatures appear to have been made on December 14, 1957. The total gross estate reported was $357,926.19, and the total allowable deductions reported were $183,764.73.
The satisfaction of the Gray mortgage which had been in the possession of Goldenkoff was filed on December 20, 1957, in the office of the county recorder, at the request of Jack M. Gray. The corresponding satisfaction of the Cloutier mortgage was filed in the county recorder's office on December 21, 1957, at the request of Martha L. Cloutier.
Respondent has determined that the transfers made by the decedent during his lifetime to his three daughters and their husbands were made in contemplation of death, and that the value of decedent's one-half community interest in the property transferred is includible in his gross estate.
The gifts made to Robert and Martha Cloutier and to Jack and Jeanne Gray were not made in contemplation of death.
The $9,000 gift made to Maurice and Carol Etem was made in contemplation of death.
OPINION.
TURNER, Judge:
Section 2035 of the Internal Revenue Code of 1954 provides as follows:
SEC. 1035. TRANSACTIONS IN CONTEMPLATION OF DEATH.
(a) GENERAL RULE.— The value of the gross estate shall include the value of all property (except real property situated outside of the United States) to the extent of any interest therein of which the decedent has at any time made 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, in contemplation of his 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 sections 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.
The parties agree that the above section of the Code is applicable and that if the decedent made the gifts in question in contemplation of death they are includible in his gross estate. With respect to the transfers of the homes to the Cloutiers and the Grays, respondent claims the gifts were not consummated until the mortgage releases were made and recorded on June 11, 1956, just prior to the decedent's death on September 17, 1956. If such is the case, the transfers must, unless shown to the contrary, be decreed to have been made in contemplation of death. It thus appears that if respondent is correct, then not only is his determination of the deficiency presumed to be correct, but there is the additional specific statutory presumption as quoted above. Petitioner is required by this statutory presumption to carry the burden of proving that the transfers were not made in contemplation of death. McCaughn v. Real Estate Land Title & Trust Co., 297 U.S. 606; O'Neal's Estate v. Commissioner, 170 F.2d 217; Humphrey's Estate v. Commissioner, 162 F.2d 1, certiorari denied 332 U.S. 817; McClure v. Commissioner, 56 F.2d 548, certiorari denied 287 U.S. 669; and First Trust & Deposit Co. v. Shaughnessy, 134 F.2d 940, certiorari denied 320 U.S. 744.
On the other hand, petitioner contends that these two gifts were consummated more than 3 years prior to the death of the decedent. Petitioner first took the position, as shown in the estate tax return and also in the original petition filed in this case, that the gifts were consummated on April 12, 1953, when the ‘mortgage debts' were ‘forgiven’ by the decedent and his wife in executing the satisfactions of the mortgages and acknowledging payment of the debts secured by the mortgages. Petitioner's position was changed at the trial herein, and it is now argued that the gifts were consummated upon the transfers of title to the properties in question, in the case of the Cloutiers in 1951 (the deed was recorded December 4, 1951), and in the case of the Grays in 1952 (their deed being recorded March 12, 1952). In either position, the dates precede the 3-year period ending with the death of the decedent, and at both times the decedent, insofar as he knew, was in good health.
We are of the opinion that the decedent and his wife made inter vivos gifts when the respective homes were transferred to and received by the Cloutiers in 1951 and by the Grays in 1952. The essentials of an inter vivos gift in each instance were present. That is to say, there were capacity and intention to make a gift, an irrevocable present transfer of title, dominion, and control, delivery, and valid acceptance by the donees. Adolph Weil, 31 B.T.A. 899, affd. 82 F.2d 561, certiorari denied 299 U.S. 552.
Respondent contends that the decedent held strings to both transfers when in March 1953, he received from his respective daughters and their husbands their notes and mortgages, which strings were to continue until his death, at which time the gifts would be completed by the recording of the executed satisfactions by the attorney in whose hands they were placed for safekeeping. This, he argues, shows that the donees did not have dominion and control over their respective properties and that the decedent's compelling motive was associated with death rather than with life. In answer to petitioner's argument that the notes and mortgages were nullified for lack of consideration, respondent states that the advancement of funds for the acquisition of the properties created an indebtedness and the preexisting indebtedness in each case was the consideration. The record shows that the decedent and his wife gave ‘homes' to their daughters and their husbands without any obligation or intention for the latter to pay for them.
The Cloutiers for more than a year and the Grays for approximately a year had title to, possession of, and dominion and control over their respective homes. After the passage of that much time the notes and mortgages were executed in the view of all parties that to the extent of the homes involved such action would protect the daughters and their families from liabilities that might arise against them and that the homes would be preserved to them. If such purpose could be said to be consideration, or if the consideration could be said to be love and affection, the record is quite clear that no consideration in money or money's worth passed between the parties and that at no time was any indebtedness intended. It has been held that where a woman gave a benefactor a mortgage in the amount of money he paid to her for the services she had rendered, so as to protect her home from the importunities of her husband, the mortgage was not enforcible by the executor of the benefactor's estate because the mortgage was executed without consideration. Colt v. McConnell, 19 N.E. 106. Here, as in Colt v. McConnel, the mortgages were not executed to secure any sum of money paid, but for an entirely different purpose, that of securing to the daughters and their families their homes and protecting them from liabilities that might arise against them.
Whether the execution of the notes and mortgages could have successfully served the purpose intended, we need not decide, since we have found as a fact that the decedent and his wife made the inter vivos gifts to the Cloutiers and the Grays at the times the transfers of the respective properties were made, and that the making of the gifts was not in contemplation of death.
As to the $9,000 gift to the Etems in June 1956, 3 months prior to the death of the decedent, we are of the opinion that the gift was made in contemplation of death. While it might have been understood that all three daughters would be given homes at some time by their parents, the fact is that the third daughter and her husband understood they would not be given a home until he got out of the Navy and they had settled down and were able to have a home. Although Maurice Etem was discharged from the Navy in 1954, and he and Carol were living in Lakewood, California, in June 1956, there is no showing as to why the gift was not made prior to the date it was made. At the time it was made decedent was practically bedridden, in a worsened condition from his cancerous disease, and apparently aware that his death was imminent. The timing of the gift was so closely related to decedent's impending death that we are unable to say here that the compelling motive in making the gift was associated with life rather than death. Respondent is sustained on this issue.
Decision will be entered under Rule 50.