Summary
In Siegel v. Commissioner, 26 T.C. 743 (1956), affd. 250 F.2d 339 (9th Cir. 1957), a surviving widow elected to accept the disposition of her interest in community property according to her husband's will and received a life estate in the entire community.
Summary of this case from Robinson v. Comm'r of Internal RevenueOpinion
Docket No. 52700.
1956-06-29
MILDRED IRENE SIEGEL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Dana Latham, Esq., and Grover R. Heyler, Esq., for the petitioner. John J. Burke, Esq., for the respondent.
Dana Latham, Esq., and Grover R. Heyler, Esq., for the petitioner. John J. Burke, Esq., for the respondent.
Petitioner's husband provided in his will that, in lieu of her taking her approximate $584,000 share in their community property under California law, she was to receive (1) a bequest of $35,000 and (2) payments for life from a residuary trust established under the will. Petitioner elected to take under the will. Respondent determined that, as a result of such election, she made a gift to the remainderman (her son) under the testamentary trust of the reversionary interest in her $584,000 share of community property. Held, a gift was made to the remainderman to the extent of petitioner's community one-half of the principal less the life estate reserved by her therein, reduced by the value of the life estate received by her in the husband's part of the community property conveyed to to the testamentary trust, plus the $35,000 bequest in cash which she received under the will.
The Commissioner determined a deficiency of $51,144.24 in petitioner's gift tax for 1950. The Commissioner's determination is based upon an adjustment explained in the deficiency notice as follows:
The transfer of the above-named donor to her son of a remainder interest in her one-half interest in community property which she transferred to a testamentary trust established under the last will and testament of Irving Siegel, Deceased, is determined to constitute a transfer by said donor without consideration in money or money's worth, and a gift within the meaning of Section 1000 of the Internal Revenue Code.
The value of such remainder interest is determined on the basis of the present worth factor, .46002, or the present value of $1.00 due at the end of the year of death of a person of the age of the donor who was born February 21, 1902. The value of such remainder interest is determined and computed as follows:
Determined value of donor's one-half interest in community property, $625,600.00, times .46002 or, $287,788.51.
Petitioner, by appropriate assignments of error, contests the Commissioner's determination.
FINDINGS OF FACT.
Many of the facts were stipulated, are found as stipulated, and the stipulation is incorporated herein by reference.
Petitioner is an individual residing in Los Angeles, California. Her gift tax return for 1950 was timely filed with the then collector of internal revenue for the sixth district of California.
Petitioner was born on February 21, 1902. She is the widow of Irving Siegel (hereinafter sometimes referred to as Irving) who dies on January 4, 1949. She and Irving had an adopted son, Richard Bruce Siegel, who was born on May 14, 1943, and who presently resides with petitioner. Irving left an estate consisting of community property, all of which was acquired by petitioner and Irving after 1927. On the date of Irving's death the gross value of that community property was $1,422,897.14, and the gross value of petitioner's one-half share therein was $711,448.57.
Irving's last will was duly probated on February 3, 1949, in the Superior Court, County of Los Angeles, California. Pertinent provisions of that will follow:
THREE: I give, devise and bequeath to my beloved wife, Mildred Irene Siegel, the property which I may be occupying at the time of my death as my home, together with the furniture, furnishings and equipment located therein, all my personal effects as well as any automobiles which I may own at the time of my death, and in addition thereto I give, devise and bequeath to my said wife, the sum of Thirty-five Thousand ($35,000.00) Dollars, which bequest is made primarily to offset the thirty-five thousand dollars which I am hereinafter bequeathing to my sisters and nephew, to the end that she may either retain this sum for her own use and benefit or divide it among her relatives in such manner as she may see fit.
SEVEN: All the rest, residue and remainder of my estate I give, devise and bequeath to my wife, Mildred Irene Siegel, Ben Weingart and N. B. Alison, or the survivor of them, IN TRUST, however, for the uses and purposes hereinafter specified and not otherwise:
(a) To pay to my beloved wife, Mildred Irene Siegel, for the support, maintenance and care of herself and our beloved son, Richard Bruce Siegel, such sum as in the sole discretion of the majority of said trustees they deem proper to maintain at least the same standard of living in which she has been accustomed in recent years, but in no event less than the sum of One Thousand ($1,000.00) Dollars per month:
(c) In the event the net income from my trust estate is not sufficient to make the payments above provided, then and in that event I specifically authorize my Trustees to make payments from the corpus of said trust estate to the extent necessary to provide for the payments as above set forth;
(j) I specifically direct that during the life of the three trustees herein named, a majority thereof shall be authorized to act for and on behalf of said trustees, while if two living it shall require their unanimous approval, and if they are not able to agree, then either may petition the Court having jurisdiction of the probate of my estate for instructions:
EIGHT: The provisions made in this my Last Will and Testament for my beloved wife, Mildred Irene Siegel, are in lieu of her community rights and interest, and if she elects to take her community interest, in lieu of taking under this my Last Will and Testament, then the bequests made to her in Paragraph THREE hereof shall be of no force and effect and the real and personal property so bequeathed shall become a part of the rest, residue and remainder of my said estate to be distributed to my said trustees, and likewise subdivision (a) of paragraph SEVEN shall be of no force and effect and she shall take nothing as a beneficiary under said trust.
On January 5, 1950, petitioner duly executed and filed with the aforementioned Superior Court a document in which she elected to take under Irving's last will in lieu of any and all community property rights she had in the community estate. She did this in order to be able to maintain her accustomed standard of living, which she felt could not be done solely from the income from her share of the community property. On January 5, 1950, the respective net values of Irving's and petitioner's shares in the community property destined to fall into the trust created under paragraph Seven of Irving's will were as follows:
Petitioner also received an $18,000 allowance from Irving's estate in 1950.
The parties agree that hindsight may be availed of and expenditures not actually made until after January 5, 1950, should be considered in arriving at the net values as of that date. 2. Internal Revenue Code of 1939.SEC. 1002. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION.Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.
+-----------------------------------------------------------------------------+ ¦ ¦Irving's share ¦Petitioner's share ¦ +---------------------------------------+----------------+--------------------¦ ¦Gross value at Irving's death ¦$711,448.57 ¦$711,448.57 ¦ +---------------------------------------+----------------+--------------------¦ ¦Less: ¦ ¦ ¦ +---------------------------------------+----------------+--------------------¦ ¦Debts and administration expenses ¦114,886.25 ¦114,886.25 ¦ +---------------------------------------+----------------+--------------------¦ ¦Federal estate tax ¦201,840.48 ¦ ¦ +---------------------------------------+----------------+--------------------¦ ¦Inheritance taxes on bequests other ¦26,145.30 ¦ ¦ ¦than to petitioner ¦ ¦ ¦ +---------------------------------------+----------------+--------------------¦ ¦Inheritance tax on bequests to ¦ ¦9,026.88 ¦ ¦petitioner ¦ ¦ ¦ +---------------------------------------+----------------+--------------------¦ ¦Legacies other than to petitioner ¦35,000.00 ¦ ¦ +---------------------------------------+----------------+--------------------¦ ¦Legacy to petitioner ¦35,000.00 ¦ ¦ +---------------------------------------+----------------+--------------------¦ ¦Automobiles bequeathed to petitioner ¦3,500.00 ¦3,500.00 ¦ +---------------------------------------+----------------+--------------------¦ ¦Total deductions ¦$416,372.03 ¦$127,413.13 ¦ +---------------------------------------+----------------+--------------------¦ ¦Net value ¦$295,076.54 ¦$584,035.44 ¦ +-----------------------------------------------------------------------------+
Irving was a very successful businessman and he and petitioner maintained a high standard of living. In 1948, the year preceding Irving's death, their living costs were over $46,500 before income taxes. Beginning with 1950, when petitioner elected to take under Irving's will, she received and expended amounts from the trust thereunder as follows:
+------------------------------------------------------+ ¦ ¦Received ¦Total ¦ ¦ ¦ ¦ ¦Federal and ¦ ¦ +----+--------------+------------+---------------------¦ ¦Year¦from the trust¦expenditures¦State income ¦ +----+--------------+------------+---------------------¦ ¦ ¦ ¦ ¦taxes included ¦ +----+--------------+------------+---------------------¦ ¦ ¦ ¦ ¦in total expenditures¦ +----+--------------+------------+---------------------¦ ¦1950¦1 $24,000 ¦$31,720.32 ¦$4,500.00 ¦ +----+--------------+------------+---------------------¦ ¦1951¦54,000 ¦50,462.11 ¦18,524.23 ¦ +----+--------------+------------+---------------------¦ ¦1952¦54,000 ¦43,313.60 ¦20,296.83 ¦ +----+--------------+------------+---------------------¦ ¦1953¦52,000 ¦46,656.79 ¦18,413.06 ¦ +----+--------------+------------+---------------------¦ ¦1954¦48,000 ¦47,267.98 ¦22,329.39 ¦ +------------------------------------------------------+ Included in the above total expenditures were sums expended by petitioner for the support of her and Irving's son which averaged well under $3,000 per year.
Under the economic conditions existing during the years subsequent to decedent's death and prior to this hearing it would cost petitioner $45,000 per year, including income taxes, to maintain the standard of living to which she was accustomed in recent years prior to decedent's death.
OPINION.
BLACK, Judge:
Respondent's position is that petitioner's January 5, 1950, election to take under Irving's will, in lieu of asserting her community property rights in the estate acquired during coverture, resulted in her making a gift to her son of a remainder interest in her one-half interest in community property which she thus transferred to a testamentary trust established under the last will and testament of Irving.
Respondent has stipulated that the net value of petitioner's community share at the date of gift was no greater than $584,035.44 (as opposed to the value of $625,600 determined in the deficiency notice). When $584,035.44 is multiplied by the factor .46002, pursuant to Regulations 108, section 86.19(g), table A, column 3 (reversion after life estate in 48-year old person), a figure of $268,667.98 (instead of the $287,788.51 in the deficiency notice) is arrived at for the value of the remainder. Respondent now maintains that petitioner made a taxable gift in 1950 in the amount of that $268,667.98, instead of $287,788.51 as determined in the deficiency notice.
Petitioner, on the other hand, argues that she made no gift because the transaction was without donative intent and was solely motivated by consideration of her own economic advantage and that, in any event, she received ‘adequate and full consideration in money or money's worth’ for the remainder interest which, as a result of her election, was transferred to Irving's trust for her son's benefit.
We have recently enunciated the basic principles applicable to situations of this type in Chase National Bank, 25 T.C. 617. It is clear from a reading of that case that petitioner must be considered as having made a gift to the extent that the value of the interest she surrendered in her share of the community property exceeded the value of the interest she thereby acquired under the terms of Irving's will. If petitioner received more than she surrendered then, of course, no gift has been made. Our task, therefore, is to determine the value of what she received for what she gave up. In the Chase National Bank case, supra, we laid down the rule for measuring the value of the gift of the remainder interest in the testamentary trust there involved, as follows: We therefore hold that Marie's acquiescence in this trust constituted a taxable gift to the extent of her community one-half of the principal less the life estate reversed by her therein, reduced by the value of the life estate received by her in the other one-half of the trust as consideration.
The same rule should be applied here in a computation under Rule 50, except that in the instant case petitioner received an outright bequest of $35,000 under decedent's will. That $35,000 should be added as a portion of what petitioner received for what she gave up.
In fixing the valuation of decedent's one-half interest in the community property which went into the testamentary trust and in fixing the value of petitioner's one-half interest in the community property which went into the testamentary trust, the parties have entered into an extensive stipulation concerning these matters. Only one item in the matter of valuation remains to be decided. This question is whether the petitioner's legacy under the will in the amount of $35,000 should be considered as a bequest of decedent's one-half of the community property and, accordingly, not subtracted from the value of petitioner's share of the community property and thus reduce by $35,000 the value of what the petitioner contributed to the trust, as the petitioner contends.
We have decided this difference between the parties in accordance with respondent's contention. Accordingly, in our Findings of Fact we have reduced decedent's share of the community property which otherwise would have gone into the testamentary trust of this $35,000. It seems clear to us from this provision in decedent's will that he realized that if Mildred took under the will she would not receive any lump-sum payment in cash and it was his desire that this $35,000 should be paid to her in order that she could give a like amount to her relatives, as he was bequeathing to his relatives, or, if she preferred, she could use the $35,000 in any manner that she desired. So it seems to us that when all the provisions of the will are considered it is reasonable to conclude that decedent intended that this $35,000 should be paid out of his share of the community property and we have so treated it in our Findings of Fact. However, it also seems equally clear that this $35,000 became a part of what petitioner received for what she gave up when she elected to take under decedent's will. To add this $35,000 to what petitioner received does no violence to the rule used in Chase National Bank, supra, in valuing the amount of the gift. It simply adds another factor, which was not present in that case, to be used in determining the value of the gift.
There is another issue which petitioner raises which we think we must discuss and that is the effect of that provision in decedent's will which reads as follows:
SEVEN: * * *
(a) To pay to my beloved wife, Mildred Irene Siegel, for the support, maintenance and care of herself and our beloved son, Richard Bruce Siegel, such sum as in the sole discretion of the majority of said trustees they deem proper to maintain at least the same standard of living to which she has been accustomed in recent years, but in no event less than the sum of One Thousand ($1,000.00) Dollars per month: Petitioner in effect argues that this provision in the will was tantamount to giving petitioner an annuity at least large enough to maintain the standard of living which she enjoyed in the recent years prior to decedent's death, which she contends was not less than $46,000 annually, and that this right should be valued as was done in Estate of Sarah A. Bergan, 1 T.C. 543, and that when this is done, the rights which petitioner received under the terms of the testamentary trust are considerably in excess of the remainder interest in her share of the community property which went to her son under the terms of the trust. Hence petitioner contends there was no gift because she received considerably more than she gave up.
We are not persuaded by this argument. True, in our Findings of Fact we have a finding based on the evidence which says:
Under the economic conditions existing during the years subsequent to decedent's death and prior to this hearing it would cost petitioner $45,000 per year, including income taxes, to maintain the standard of living to which she was accustomed in recent years prior to decedent's death. But we do not think this finding helps petitioner. Under the terms of paragraph Seven of the will, what was to be paid to petitioner was ‘such sum as in the sole discretion of the majority of said trustees they deem proper to maintain at least the same standard of living to which she has been accustomed in recent years, but in no event less than the sum of One Thousand ($1,000.00) Dollars per month,’. We do not think it would be possible to construe this provision in the will as spelling out an annuity such as petitioner claims. The large income of the trust seems to us to make very improbable the invasion of principal in order to provide the minimum payments of $1,000 a month. Hence, it seems to us that we would not be justified in adding the value of the right of petitioner to have the principal invaded as one of the things which she received for what she gave up.
In Chase National Bank, supra, in the testamentary trust there involved, the trustee was given a broad discretionary power to distribute principal to any beneficiary. It was requested to exercise such discretion liberally but its decision was made final and conclusive. In that case we said:
In determining the value of the gift made by Marie in respect of the Testamentary Trust we have not ignored the provision conferring upon the trustee the discretionary power to distribute principal. This power is one which the trustee has the right to use or not to use, as it wishes, but it does not represent anything given to or received by Marie that is capable of valuation. * * * The amount of the taxable gift may not be reduced by reason of a possibility, over which Marie had no control and which is incapable of valuation, that the corpus or a part of it might be paid over to her. Cf. Robinette v. Helvering, 318 U.S. 184, 188-189.
We think we must so hold in the instant case. While there is some difference in the power of the trustees in the instant case to invade the corpus for purpose of making payments to petitioner from the power which was given the trustee to invade the corpus in Chase National Bank, supra, we think we would be unable to spell out a valid distinction between the two cases. We hold against petitioner on this issue.
Decision will be entered under Rule 50.