Slocum v. Commissioner

Estate of Herbert Jermain Slocum, The South Carolina National Bank of Charleston and George L. Buist, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent Slocum v. Commissioner Docket No. 41690 United States Tax Court 21 T.C. 465; 1954 U.S. Tax Ct. LEXIS 315; January 14, 1954, Promulgated *315 Decision will be entered for the respondent. Estate Tax -- "Property Subject to Claims" -- Section 812 (b), I. R. C. -- Held, property subject to a power of appointment exercised by decedent's will not "property subject to claims" under South Carolina law. Jack White, Esq., for the petitioner. A. F. Barone, Esq., for the respondent. Tietjens, Judge. TIETJENS *466 The respondent has determined a deficiency of $ 3,689.70 in estate tax. At date of death the decedent's gross estate was valued at $ 222,801.69. Of this amount $ 191,345.94 represented the value of property subject to a general power of appointment which the decedent exercised by his will. The balance of the gross estate, or $ 31,455.75, was made up of cash and other property. Deductions totaling $ 69,412.82 were claimed for funeral and administration expenses and debts. The respondent limited the claimed deductions to $ 31,455.75 as a result of his determination that the property subject to the power of appointment was not "property subject to claims" within the meaning of section 812 (b), Internal Revenue Code. The primary issue is whether the respondent's determination in this respect is correct. In the event we decide his determination was not correct we must then decide whether the estate could enforce contribution against the surviving spouse to the extent of any part of a debt of the decedent in the amount of $ *317 43,790.82 as to which debt the decedent and his wife were jointly and severally liable. FINDINGS OF FACT. The stipulated facts are so found and the stipulation is included herein by reference. Herbert Jermain Slocum, the decedent, died on February 1, 1948, a resident of Charleston, South Carolina. Among his survivors were his widow, Anita de Saussure Slocum, and a son, John J. Slocum. The South Carolina National Bank of Charleston and George L. Buist were appointed executors of the estate by the Probate Court of Charleston, South Carolina. They filed an estate tax return with the collector of internal revenue for the district of South Carolina. Herbert J. Slocum, father of the decedent, died in 1928 having a will duly admitted to probate. Paragraph V of said will reads as follows: I give and bequeath to my Trustees hereinafter named the sum of Five Hundred Thousand Dollars ($ 500,000.00) in trust nevertheless, to invest and reinvest the same and to collect the income therefrom and to pay the net income, commencing at my death, to my wife, MARY R. SLOCUM, during her lifetime, and upon her death, I direct my Trustees to distribute the principal thereof equally between my sons, HERBERT*318 JERMAIN SLOCUM, JR., and MYLES STANDISH SLOCUM; provided that should either of my sons not survive my said wife, then I give, devise and bequeath his share, upon her death, to such *467 persons in such amounts and on such terms as he shall appoint in and by his last Will and Testament, and failing such testamentary disposition, I give, devise, and bequeath the same to such son's widow, if any and if she shall survive my said wife, and his next of kin, to be distributed among them in accordance with the law of the State of his domicile relating to intestacy; and provided further that should my said wife not survive me, then I direct that the principal of the fund so set apart for her shall fall into and be distributed as part of my residuary estate. The decedent failed to survive Mary R. Slocum, the life tenant. Item 4 of decedent's will provided as follows: Whereas, pursuant to Paragraph V of the Will of my father, Herbert J. Slocum of Washington, D. C., I am given a general power to appoint by my will a share of the trust fund created thereunder for the benefit for life of Mary R. Slocum, if I do not survive her, now in exercise of such power and in such event I do hereby *319 appoint such share of said trust fund absolutely to my wife Anita de Saussure Slocum if she shall survive me. In the event that my said wife shall not survive me, however, I do not in any way exercise the said power. The property passing under the exercise of said power of appointment was included in decedent's gross estate for Federal estate tax purposes at a value of $ 191,345.94. The remaining assets included in the gross estate for Federal estate tax purposes were $ 31,455.75. The total amount of the funeral, administration expenses, and debts of the decedent was $ 69,412.82. Part of this amount consists of a claim of John J. Slocum against the decedent in the amount of $ 43,790.82. This claim grew out of an agreement entered into between the decedent and John on March 5, 1935, whereby John loaned the decedent $ 50,000 for use in an Arizona gold mining venture. As security for this loan the decedent assigned absolutely all his right, title, and interest as remainderman in the trust created by Paragraph V of his father's will set out above. The decedent's surviving spouse, Anita, was jointly and severally liable with the decedent for the balance of the unpaid indebtedness. *320 The $ 50,000 borrowed from his son was deposited by the decedent in a joint bank account standing in the names of the decedent and Anita. It was withdrawn by the decedent for use in the mining venture for which it was borrowed. The joint account was also a depositary for other funds received regularly by the decedent from a trust fund. Anita drew checks on the account for household bills only. She received no consideration for becoming jointly and severally liable with the decedent to John for the loan and did so as an accommodation maker or endorser. Anita voluntarily turned over to the executors of the decedent's estate the sum of $ 48,715.35 which was used by the executors to discharge John's claim for $ 43,790.82, the balance due on the indebtedness, and for part payment of funeral and administration expenses. *468 OPINION. The primary issue is a narrow one. The applicable section of the Internal Revenue Code with the pertinent parts italicized appears in the margin. 1 The purpose of section 812 (b) as amended, was thoroughly discussed in Estate of Samuel Hirsch, 14 T. C. 509. The question in this case is whether the property subject *321 to the power of appointment which the decedent exercised in his will was property "subject to claims" which "under the applicable law" would bear the burden of the payment of the claimed deductions in the final adjustment and settlement of the estate. "The applicable law," according to Regulations 105, section 81.29 means the "laws of the jurisdiction under which the estate is being administered." Both parties agree, therefore, that we must look to the law of South Carolina for the answer. *322 The petitioner contends that this particular proposition of law has not been directly passed upon by the South Carolina courts and he cites United States v. Field, 255 U.S. 257, and the cases collected and *469 commented on in 41 Am. Jur., Powers, sec. 15, as authority for the "general rule" that property, which is the subject of a general power of appointment, is in equity assets for the payment of creditors of the donee's estate if his own estate is insufficient to pay them, where he exercises the power by deed or will, and appoints the property to others. Our study of the problem indeed convinces us that there is a so-called general rule as contended for by the petitioner. 41 Am. Jur., supra; and cases annotated in 59 A. L. R. 1510, 97 A. L. R. 1071, and 121 A. L. R. 803. Also see American Law Institute Restatement, Property, vol. 3, sec. 330; 27 Va. L. Rev. 1052. Nevertheless, there is also a minority rule, and among the cases supporting this rule we find Rhode Island Hospital Trust Co. v. Anthony, 142 Atl. 531,*323 and St. Matthews Bank v. De Charette, 83 S. W. 2d 471. In these cases the Supreme Court of Rhode Island and the Court of Appeals of Kentucky, respectively, carefully analyze the proposition of law here under consideration and both refer to the South Carolina decisions as being contrary to the so-called general rule. Humphrey v. Campbell, 59 S. C. 39, 37 S. E. 26, appears to be the leading South Carolina case. Though the petitioner argues that this decision can be distinguished on its facts, we are of the opinion it is pertinent here. That case involved property in which the donee of the power of appointment also held a life estate. In deciding that the appointed property was not subject to payment of the debts of the decedent the court said: Further, a power of appointment by will is provided under the deed of trust to said shares by Miss Mary Butler Campbell, whereby it is apparent that said Miss Mary Butler Campbell can exercise such power of appointment by will alone. Such being the case, it is manifest that Miss Campbell, or her estate itself, can derive no control of such trust estate, *324 for the simple reason that her exercise of appointment is by will alone, which operates only after her death, and the appointees under her will are not such as the law of descent would provide. Suppose proceedings had been commenced in Miss Mary Campbell's lifetime to compel the execution of a will by her to her executor to pay her debts; would not the court have dismissed such a complaint the moment it was presented? Then, if her power of appointment could not have been coerced while in life, with how much more reason is it manifest that such power of appointment could not be controlled by a court after her death! In a concurring opinion, McIver, C. J., indicated a preference for the "well-settled English rule" (the general rule) but he stated that there were at least three South Carolina cases which, as he understood them, sustained the conclusion reached by the court. We are not called on to make a choice between the "general" or the "minority" rule. Our function is to determine what the South Carolina law on the subject is. *470 So far as we can ascertain the Humphrey case is still the law of South Carolina and pursuant to our understanding of what it holds, we are *325 of the opinion that the appointed property in this case was not subject to the claims of decedent's creditors. Accordingly, the respondent's action in limiting the claimed deduction is correct. The petitioner argues further that the property over which the decedent held the power of appointment could under the facts in the present case be subjected by a court of equity to the debt for which it was "assigned" as security by the decedent before his death, since in addition to the assignment "the volunteer to whom decedent appointed such fund was an accommodation maker of the notes representing the debt." This may be true, but it seems to us to beg the question. If the property could be reached to satisfy the debt here involved, it would be because the property became Anita's by virtue of the decedent's exercise of the power of appointment in her favor coupled with the fact that she herself was also liable for the debt. In other words, it would be because the property was subject to the claim of Anita's creditor and not because it was subject to a claim against the decedent or his estate. Our disposition of the primary issue makes it unnecessary for us to pass on the subsidiary question*326 set out in our preliminary statement. Decision will be entered for the respondent. Footnotes 1. SEC. 812. NET ESTATE [As amended by Pub. L. No. 18, Mar. 17, 1941; secs. 403, 405, 406, 407, 408, 409, 1942 Act; sec. 511 (a), 1943 Act]. 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 -- * * * * (b) Expenses, Losses, Indebtedness, and Taxes. -- Such amounts -- (1) for funeral expenses, (2) for administration expenses, (3) for claims against the estate, (4) for unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, and (5) reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent, as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, but not including any income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate, succession, legacy, or inheritance taxes. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth; except that in any case in which any such claim is founded upon a promise or agreement of the decedent to make a contribution or gift to or for the use of any donee described in subsection (d) for the purposes specified therein, the deduction for such claim shall not be so limited, but shall be limited to the extent that it would be allowable as a deduction under subsection (d) if such promise or agreement constituted a bequest. There shall be disallowed the amount by which the deductions specified in paragraphs (1), (2), (3), (4), and (5) exceed the value, at the time of the decedent's death, of property subject to claims. For the purposes of this section the term "property subject to claims" means property includible in the gross estate of the decedent which, or the avails of which, would, under the applicable law, bear the burden of the payment of such deductions in the final adjustment and settlement of the estate↩; and, for the purposes of this definition, the value of the property shall be reduced by the amount of the deduction under the next sentence attributable to such property. There shall also be deducted losses incurred during the settlement of estates arising from fires, storms, shipwrecks, or other casualties, or from theft, when such losses are not compensated for by insurance or otherwise and if at the time of the filing of the return such losses have not been claimed as a deduction for income tax purposes in an income tax return.