Estate of Sternberger v. Commissioner

Estate of Louis Sternberger, the Chase National Bank of the City of New York, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent Estate of Sternberger v. Commissioner Docket No. 31348 United States Tax Court 18 T.C. 836; 1952 U.S. Tax Ct. LEXIS 128; July 31, 1952, Promulgated *128 Decision will be entered under Rule 50. 1. A contingent remainder of a trust and the residue of a will went to charity, and a charitable deduction was claimed on the estate tax return. The will disposes of decedent's residuary estate by providing that the same be held in trust during the joint lives of decedent's wife and his daughter and the life of the survivor of them. Upon the death of the survivor the principal is payable to the descendants then living of the daughter. In the event there are no descendants of the daughter the principal is payable one-half to certain collateral relatives of the decedent then living and one-half to certain charitable organizations. In the event none of the collateral relatives are then living the entire principal is payable to said charitable organizations. Held, the contingent remainders to charitable organizations can and have been valued by competent actuarial methods and the Commissioner erred in refusing to allow a deduction under section 812 (d) of the Code for the value of these contingent remainders to charity. 2. The executor sold real estate and deducted legal and brokerage expenses. Respondent argued that these were expenses*129 of the trust. The trust also had the power to sell the property. Held, that the expenses were properly allowed as administration expenses under New York State law and are deductible under section 812 (b) of the Internal Revenue Code. William F. Wolff, Jr., Esq., and Maurice C. Greenbaum, Esq., for the petitioner. Thomas R. Charshee, Esq., for the respondent. Black, Judge. BLACK *836 The respondent has determined a deficiency in estate tax against the Estate of Louis Sternberger of $ 195,035.65. *130 The deficiency is due to several adjustments made by the Commissioner to the estate tax return filed by the estate. Only one of these adjustments is contested. The contested adjustment is the disallowance by the Commissioner of $ 179,154.19, claimed as charitable bequests explained in respondent's deficiency notice as follows: Charitable, etc., Gifts and Bequests: Returned Determined Items 2 to 5 inclusive $ 179,154.19 $ 0.00 *837 Items 2, 3, 4 and 5 claimed as deductions under Schedule N, are disallowed in full since their actual present value cannot be determined by any known data. The petitioner assigned error as to the foregoing adjustment. It also assigned as error the failure to allow deductions not claimed on the return. Petitioner's two assignments of error still pressed are as follows: (a) The Commissioner has erroneously disallowed a deduction for Charitable, Public and Similar Gifts and Bequests in the amount of $ 179,154.19. * * * * (c) The Commissioner has erroneously failed to allow as a deduction from the gross estate, additional administration expenses in the sum of $ 3,315.15. The remaining grounds of error assigned in the original petition*131 have been settled by stipulation and will be given effect under Rule 50. FINDINGS OF FACT. Some of the facts have been stipulated and are found accordingly and the stipulation of facts is incorporated herein by reference. The petitioner is the executor of the last will and testament of Louis Sternberger, deceased. The decedent Louis Sternberger died June 25, 1947, a resident of Scarsdale, New York. The Federal estate tax return was filed on September 24, 1948, with the collector of internal revenue for the 14th district of New York disclosing a gross estate of $ 2,406,541.71, a net estate for purpose of the basic estate tax of $ 2,024,346.55 and a net taxable estate for purpose of additional estate tax of $ 2,064,346.55. Issue 1. The gross estate of the decedent for Federal estate tax purposes consisted of certain assets which he owned at the date of his death and certain other assets held in a revocable trust of which the decedent was the settlor and primary life beneficiary. The revocable trust was created on January 20, 1931, and was amended from time to time by the decedent. The last will and testament of the decedent is dated July 24, 1944, and the codicil thereto is dated*132 October 20, 1945. Paragraph FIRST of the codicil to decedent's last will and testament disposes of decedent's residuary estate by providing that the same be held in trust during the joint lives of decedent's wife, Eunice E. Sternberger, and decedent's daughter, Eunice P. Sternberger, and the life of the survivor of them. Upon the death of the survivor the principal is payable: to the descendants then living of said Eunice P. Sternberger in equal shares, per stirpes. In the event there are no descendants of the decedent's daughter, Eunice P. Sternberger, surviving the decedent's widow and daughter, *838 the principal is payable, one-half to certain collateral relatives of the decedent then living, and one-half to certain charitable organizations. In the event none of the collateral relatives are then living the entire principal is payable to said charitable organizations. The dispositive provisions of the inter vivos trust, effective at the date of the decedent's death, are (after a specific bequest of $ 5,000) in all respects identical with the dispositive provisions of the residuary clause of decedent's last will and testament. In the Federal estate tax return *133 of the decedent a charitable deduction was claimed in the amount of $ 180,154.19, of which $ 1,000 represented an outright bequest to the Seamen's Church Institute of New York. The sum of $ 179,154.19 represented the alleged value of the contingent charitable remainders provided for in decedent's last will and testament, and in the inter vivos trust of January 20, 1931. The decedent's wife, Eunice E. Sternberger, survived the decedent and was 62 years of age at the date of decedent's death. She has always resided in the United States. The decedent's daughter, Eunice P. Sternberger, survived the decedent and was 27 years of age at the date of decedent's death. She had been previously married, which marriage terminated in divorce on March 31, 1944. At the date of decedent's death she was then unmarried and had had no children. Said daughter is a white female and has always resided in the United States. The probability of a divorcee remarrying may be measured by established and accepted actuarial principles based upon known and reliable data. The probability of a white female, age 27, having children may be measured by established and accepted actuarial principles based upon *134 known and reliable data. The value of a remainder interest contingent upon a person dying without issue may be measured by established and accepted actuarial principles based upon known and reliable data. The computation of the value of the charitable remainders provided for by decedent's last will and testament, and the inter vivos trust of January 20, 1931, was prepared by a recognized firm of actuaries in accordance with established actuarial principles based upon known and reliable data. In making the computation of the present value of the charitable remainders it was assumed that if the decedent's daughter, Eunice P. Sternberger, married and became the mother of a child, the child would survive her. In making the computation of the present value of the charitable remainders it was assumed that there would be someone in the group *839 of collateral relatives who would be living at the date of death of decedent's wife and daughter so that not more than 50 per cent of the principal of the residuary trusts would pass to the named charitable organizations. The computation of the present value of the charitable remainders by petitioner's actuaries was based upon the following*135 factors: (a) Joint life expectancy of the decedent's wife and daughter, as determined by the Combined Experience Mortality Table prescribed in Section 81.10 of the Estate Tax Regulations promulgated by the Commissioner of Internal Revenue. (b) The probability of the remarriage of decedent's daughter, Eunice P. Sternberger, as determined from the American Remarriage Table, published by the Casualty Actuary Society, Volume 19, pages 279-394-which table is accepted as valid for estate tax purposes by the United States Treasury Department. (c) The probability of a child being born to decedent's daughter, Eunice P. Sternberger, as determined from a table prepared in accordance with accepted actuarial principles based upon known and reliable data derived from the Vital Statistics of the United States, 1940, published by the Bureau of the Census. The experience data from which the probability of issue being born to decedent's daughter Eunice P. Sternberger was computed, were compiled by the United States Bureau of the Census in connection with the 1940 Federal Census. At the date of death of the decedent the present value of the charitable remainders provided in decedent's last will and*136 testament and in the inter vivos trust of January 20, 1931, based on legitimate descendants only was $ .24094 per dollar of trust corpus. At the date of death of decedent the present value of the charitable remainders provided in decedent's last will and testament and in the inter vivos trust of January 20, 1931, based upon the same actuarial computations and data used in arriving at the values set forth above, except that the term "descendants" was deemed to include illegitimates, was $ .24058 per dollar of trust corpus. The present value of the charitable remainders at the date of death of decedent, assuming that the remarriage of decedent's daughter alone would defeat the charitable remainders, is $ .18384 per dollar of trust corpus. The computation of the present value of the charitable remainders on the assumption stated just above is based upon the same use of the Combined Experience Mortality Table and the American Remarriage Table, without referring to the probability of issue. This computation assumes that if decedent's daughter remarried, the probability of issue would be 100 per cent. *840 Issue 2. Decedent owned improved realty known as 2 Oak Lane, Scarsdale, *137 New York, which property was included in the Federal estate tax return at a valuation of $ 65,000. This realty had a fair market value on the optional valuation date, June 25, 1948, of $ 55,000. Under the terms of decedent's last will and testament decedent's wife and daughter were given the right to occupy the residence at 2 Oak Lane, Scarsdale, New York, rent free, for their joint lives and the life of the survivor of them. Paragraph EIGHTH of decedent's last will and testament gives to the executor the power to sell all of decedent's real and personal property including the property known as 2 Oak Lane, Scarsdale, if decedent's wife and daughter do not live in it. The executor of the decedent's estate sold said real property and paid from funds of the estate in connection with the sale (a) brokerage commissions in the amount of $ 2,750 on April 12, 1950, and (b) legal fees in the amount of $ 565.50 on May 3, 1950. The proceeds of the sale of the realty were paid to the executor of decedent's estate and distributed in accordance with the terms of the last will and testament of decedent. Deductions to be settled under Rule 50. The deduction for the amount of additional legal*138 fees paid or to be paid by the petitioner for legal services rendered or to be rendered and disbursements shall, by agreement of the parties, be determined under Rule 50 of the Rules of Practice of The Tax Court. The New York estate tax return of the decedent was filed with the New York State Tax Commission in Albany, New York, on October 28, 1948, and no final order has been entered in said proceeding. The following New York estate taxes have been paid to the State of New York in respect of property included in the gross estate of the decedent: Dec. 10, 1947 $ 154,137.50 Feb. 3, 1948 1,920.00 Total $ 156,057.50 OPINION. There are two issues in this proceeding involving the estate tax. The major question concerns whether a contingent remainder to charity is deductible under section 812 (d) of the Code and, if so, the amount of the deduction. The other issue is whether brokerage and legal fees incurred in connection with the sale of realty are deductible administrative expenses under section 812 (b) (2). *841 Issue 1. The applicable statute to Issue 1 is printed in the margin. 1 In the instant case there is no issue between the parties that the charities*139 to which the contingent bequests were made are of the class named in section 812 (d) of the Code. The only reason that respondent has denied the deduction which petitioner claims for these contingent charitable bequests is that he contends that the present value of decedent's contingent bequests to charity is too speculative and tenuous to be deductible. In support of this contention, respondent relies upon the Supreme Court's decisions in Humes v. United States, 276 U.S. 487, and Robinette v. Helvering, 318 U.S. 184. *140 Petitioner, on the other hand, contends that it has made clear and convincing proof that actuarial computations can and have been made of the present value of these contingent bequests to charity. Petitioner further contends that such actuarial computations having been made, Estate of Pompeo M. Maresi, 6 T. C. 582, affd. 156 F. 2d 929, is applicable and sustains petitioner. Petitioner points out that in the Maresi case, both the Tax Court and the Second Circuit distinguished Humes v.United States and Robinette v. Helvering, both supra, upon which respondent relies, and petitioner contends that substantially the same distinction as existed in the Maresi case exists here. We agree with petitioner. Petitioner presented reliable and conservative actuarial testimony to estimate the value of the contingent remainder to charity at the date of decedent's death to support his deduction of $ 179,154.19. We do not feel that we are at liberty to disregard this testimony of competent actuaries who have made their computations in accordance with what appear to be well recognized actuarial methods. In Estate of Pompeo M. Maresi, supra,*141 we held that the commuted value of the liability of decedent's estate for payments to decedent's wife until she should die or remarry were deductible from decedent's gross estate in an amount determinable by reference to American *842 Experience Tables reflecting life expectancy and the probability of the remarriage of widows. In that case, among other things, we said: And, of course, it can not be said here as in the Robinette case that petitioner has referred us to no method for determining the value of the interest in question. Although it is true that a marriage table was offered in the Humes case, it appeared to relate solely to experience among women in the Scotch peerage, while the table proffered here is based upon American statistics. Following the principle which we announced in the Maresi case, supra, and which was affirmed by the Second Circuit, we hold in petitioner's favor on Issue 1. In the first computation made by petitioner's actuary he determined that the present value of the charitable remainder under the will of the decedent at date of death was $ .24094 per dollar represented in the one-half of the estate which may go to charity. In*142 a supplemental valuation based upon the effect upon the remainder value of the contingency of illegitimate issue the actuary reaches a slightly lower figure. In this supplemental computation the actuary reaches the conclusion that the net result is that the increased probability of issue reduces the value per dollar of remainder to charity from $ .24094 to $ .24058. This supplemental actuarial computation concludes with this statement: "It is our opinion that the figure of $ .24058 does make full provision for the probability of issue, whether or not legitimate." In a recomputation under Rule 50 of the deduction for charitable bequests this figure of $ .24058 should be used instead of the figure $ .24094. Issue 2. The second question is whether petitioner is entitled to a deduction of $ 2,750 brokerage commissions and $ 565.50 legal expenses for the sale of decedent's residence in Scarsdale, New York, as administration expenses. Respondent contends the deduction should be disallowed on the ground that the sale was not part of the administration of the estate but was an expense of the trust. Under the decedent's will his wife and daughter were allowed to occupy the residence, *143 but they chose to live elsewhere and the property was sold. The proceeds of the sale were not needed to pay debts or expenses and consequently became part of the trust created by the residuary clause of the will. Although both the trustee and executor had the power to sell the property, the controlling fact is that the executor actually sold the real estate in the will and the proceeds subsequently became part of the residue under the will. The expenses of the sale were properly allowed as administration expenses under New York law. In re Siegel's Will, 191 Misc. 323, 78 N. Y. S. 2d 790; In re Shield's Estate, 68 Misc. 264, 124 N. Y. S. 1003; In re De Martini's Will, 81 N. Y. S. 2d 562. Section 812 (b) of the Code *843 allows deductions from gross estate "for administration expenses * * * as are allowed by the laws of the jurisdiction, whether within, or without the United States, under which the estate is being administered." See Adams v. Commissioner, 110 F. 2d 578, 584. Since these expenses were administration expenses*144 allowed by the laws of New York where the estate is being administered, the deduction is allowed. Decision will be entered under Rule 50. Footnotes 1. INTERNAL REVENUE CODE. SEC. 812. NET ESTATE. For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate -- * * * * (d) Transfers for Public, Charitable, and Religious Uses. -- The amount of all bequests, legacies, devises, or transfers (including the interest which falls into any such bequest, legacy, devise, or transfer as a result of an irrevocable disclaimer of a bequest, legacy, devise, transfer, or power, if the disclaimer is made prior to the date prescribed for the filing of the estate tax return or, in the case of a decedent dying on or before October 21, 1942, if the disclaimer is made prior to September 1, 1944), to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, * * *↩