Estate of Wolf v. Commissioner

Estate of Charles B. Wolf, Charles S. Wolf, Frances G. Wolf, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent Estate of Wolf v. Commissioner Docket No. 58662 United States Tax Court 29 T.C. 441; 1957 U.S. Tax Ct. LEXIS 23; December 12, 1957, Filed *23 Decision will be entered under Rule 50. 1. The value of payments due decedent's wife on his death as a result of his naming her beneficiary of pension plans and a profit-sharing trust created by his employers in which he had enforceable vested rights is includible in his gross estate. Sec. 811 (a) and (f) (2), I. R. C. 1939. 2. Petitioners have failed to prove that decedent, after assigning to his wife an insurance policy on his life which named her as beneficiary, did not continue to pay the premiums indirectly; accordingly, the face amount of the policy is includible in his gross estate. Sec. 811 (g) (2), I. R. C. 1939. 3. (a) Certain claims against decedent were barred by the relevant statute of limitations; accordingly, they are not deductible from his gross estate. Sec. 812, I. R. C. 1939. (b) Claims against decedent which were not barred by the statute of limitations are, on the facts of this case, deductible from his gross estate. Sec. 812, I. R. C. 1939. Ralph F. Fisher, Esq., and Albert G. Blakey III, Esq., for the petitioner. Stephen P. Cadden, Esq., for the respondent. Raum, Judge. RAUM *441 Respondent determined*25 a deficiency in the estate tax of Charles B. Wolf in the amount of $ 55,714.21. As a result of various concessions and adjustments made by the parties the issues remaining in this litigation may be summarized by the following three questions: 1. Is the present value of amounts payable under a profit-sharing trust and certain retirement agreements includible in decedent's gross estate under any section of the Internal Revenue Code of 1939? 2. Is the face amount of a life insurance policy on the life of decedent naming his wife beneficiary includible in his gross estate under section 811 (g) (2), I. R. C. 1939? 3. Did the decedent's wife and children have claims deductible from his gross estate under section 812 (b), I. R. C. 1939? Some of the facts have been stipulated and are incorporated in our findings by this reference. The petitioners are the executors of the will of Charles B. Wolf, who was born on June 19, 1891, and died on January 8, 1951. His wife was Frances G. Wolf. They had four children: Frances Jane Wolf (now McCabe), Charles S. Wolf, Jessie C. Wolf (now Sherrill), and Mary Julia Wolf. Decedent, from 1932 until his death, was an officer and employee of Superior Paper*26 Products Company (hereinafter referred to as Superior). He also owned stock in Superior. *442 On October 30, 1942, Superior established a "Profit Sharing Trust" by the terms of which decedent and certain other employees (sometimes referred to as participants) became eligible to receive payments at a future date. Contributions to the trust were to be made solely by Superior; they were to be made annually and were to be in an amount equal to 15 per cent of the compensation otherwise payable to the participating employees. The trust agreement provided in part as follows: ARTICLE V FORFEITURES Section 1. A participant's interest in the Trust shall be non-forfeitable, except in case of his (a) voluntarily quitting the Company's employ, except for the purpose of immediately entering the armed services of the United States, and except in cases in which, in the judgment of the Trustees, such quitting was necessitated by injury, illness, disability or other sufficient cause, or (b) discharge for insubordination, intoxication or gross impropriety of conduct, certified to the Trustees by the Company. * * * * ARTICLE VI DISTRIBUTIONS Section 1. * * * The distribution amount*27 of each participant in respect of each fiscal year shall be paid to him, his designated beneficiaries or his legal representatives, as follows: (a) If on the date of this Trust Agreement the participant (if male) is less than 55 years old * * *, payment shall be made at the end of ten (10) years from the close of the fiscal year in respect of which said distribution amount exists, or at death, whichever shall first occur; * * * * * * * Payments at death shall be made to the persons designated by the participant as his beneficiaries, by writing filed with the Trustees, in the respective amounts or proportions so designated, or, in the absence of such designation, or in case of the pre-decease of any of such beneficiaries (as to any amount or proportion affected by such pre-decease) then to the legal representatives of the deceased participant. * * * This trust was irrevocable, but Superior was free to end its obligations to the trust after 5 years. At the time of decedent's death the present value of the benefits payable with respect to his participating in the trust was $ 12,749.57. On October 1, 1947, Superior created a "retirement and pension trust" for all of its executives. Relative*28 to this trust and also on October 1, 1947, Superior entered into an agreement with decedent, the relevant provisions of which follow: Whereas, SUPERIOR PAPER PRODUCTS COMPANY desires to retain the services of CHARLES B. WOLF for a period of 10 years. Now, Therefore, in consideration of the mutual covenants herein contained it is agreed as follows: *443 1. CHARLES B. WOLF may at his option, on attaining the age of 65, retire as an employee of SUPERIOR PAPER PRODUCTS COMPANY. 2. CHARLES B. WOLF agrees, after retirement, not to engage either directly or indirectly in any business which in any way competes with SUPERIOR PAPER PRODUCTS COMPANY. 3. CHARLES B. WOLF agrees, after retirement, and for a period of 10 years, to act as consultant for SUPERIOR PAPER PRODUCTS COMPANY, without any compensation, and to devote such time and attention to the business of SUPERIOR PAPER PRODUCTS COMPANY, as he, in his discretion, may deem necessary. 4. In the event CHARLES B. WOLF elects to retire at the age of 65, but before October 1, 1956, then, and in that event, SUPERIOR PAPER PRODUCTS COMPANY agrees to pay to CHARLES B. WOLF, from the date of his retirement, the sum of $ 12,600 per year, for*29 a period of 10 years in equal monthly installments. In the event CHARLES B. WOLF elects to retire after September 30, 1956, then, and in that event, SUPERIOR PAPER PRODUCTS COMPANY agrees to pay to CHARLES B. WOLF, from the date of his retirement, the sum of $ 14,000 per year, for a period of 10 years in equal monthly installments. 5. In the event CHARLES B. WOLF shall leave the employ of SUPERIOR PAPER PRODUCTS COMPANY for any reason, other than death, illness, or any injury permanently incapacitating him from rendering any service to the corporation, prior to his 65th birthday, then, and in that event, this agreement shall be null and void and CHARLES B. WOLF shall in no way be entitled to any payments whatsoever under this agreement. 6. In the event CHARLES B. WOLF shall die before he retires, then, and in that event, the SUPERIOR PAPER PRODUCTS COMPANY contributions to the pension fund shall cease and pension payments shall be made to the person or persons named by CHARLES B. WOLF in an instrument filed with the SUPERIOR PAPER PRODUCTS COMPANY for a period of 10 years in accordance with the following schedule. Payments to commence from date of death. If death occurs during 1st year of agreement $ 1,400 per year If death occurs during 2nd year of agreement $ 2,800 per year If death occurs during 3rd year of agreement $ 4,200 per year If death occurs during 4th year of agreement $ 5,600 per year If death occurs during 5th year of agreement $ 7,000 per year If death occurs during 6th year of agreement $ 8,400 per year If death occurs during 7th year of agreement $ 9,800 per year If death occurs during 8th year of agreement $ 11,200 per year If death occurs during 9th year of agreement $ 12,600 per year If death occurs during 10th year of agreement $ 14,000 per year *30 7. In the event CHARLES B. WOLF shall die after retirement but before the completion of all of the pension payments set forth in Paragraph "4" hereof, then, and in that event, the remaining payments shall be made to the person or persons named by CHARLES B. WOLF in an instrument filed with the SUPERIOR PAPER PRODUCTS COMPANY, in the same manner, and in the same amounts, as if he were still living. 8. In the event CHARLES B. WOLF shall leave the employ of SUPERIOR PAPER PRODUCTS COMPANY because of illness or any injury permanently incapacitating him from rendering any service to the corporation before he reaches the age of 65, then, and in that event, the SUPERIOR PAPER PRODUCTS COMPANY contributions to the pension fund shall cease and pension *444 payments shall be made to him for a period of 10 years in accordance with the following schedule. Payments to commence from date of incapacity. If incapacity occurs during 1st year of agreement $ 1,400 per year If incapacity occurs during 2nd year of agreement $ 2,800 per year If incapacity occurs during 3rd year of agreement $ 4,200 per year If incapacity occurs during 4th year of agreement $ 5,600 per year If incapacity occurs during 5th year of agreement $ 7,000 per year If incapacity occurs during 6th year of agreement $ 8,400 per year If incapacity occurs during 7th year of agreement $ 9,800 per year If incapacity occurs during 8th year of agreement $ 11,200 per year If incapacity occurs during 9th year of agreement $ 12,600 per year *31 In the event CHARLES B. WOLF shall die prior to the completion of all of the payments, then the remaining payments shall be made to the person or persons named by CHARLES B. WOLF in an instrument filed with the SUPERIOR PAPER PRODUCTS COMPANY. At decedent's death the present value of the amounts payable under his agreement with Superior was $ 46,399.35. The decedent was also a shareholder, officer, and employee of the Wm. D. Smith Trucking Co., Inc., which was engaged in the business of hauling products manufactured by Superior. On October 1, 1947, the Wm. D. Smith Trucking Co. created a "retirement and pension trust" for its executives. On that same day it entered into an agreement with decedent which, apart from the amounts of the payments, was substantially similar to the agreement of the same day between decedent and Superior. 1 At decedent's death the present value of the amounts payable under his agreement with the Wm. D. Smith Trucking Co. was $ 11,931.26. *32 Decedent's wife, Frances G. Wolf, was named as beneficiary under the foregoing retirement agreements and profit-sharing trust. An insurance policy on decedent's life in the face amount of $ 15,000 was issued by the Travelers Insurance Co. of Hartford, Connecticut, on December 18, 1937. By written request dated December 28, 1943, decedent applied for a new contract naming his wife beneficiary. On January 17, 1944, decedent made an absolute assignment of the new policy to his wife. The yearly premium on the policy was $ 649.35. Checks signed by Frances G. Wolf and drawn on her personal account were used to pay the yearly premium for the years 1944 through 1950. The assignment of the insurance policy recites that it was made for "value received." Frances G. Wolf did not pay any money for the assignment. Decedent made various money gifts to his wife throughout each year. *445 On the date of decedent's death 25 documents in the form of demand notes (hereinafter referred to as notes) were in his safe-deposit box. The notes were all signed by decedent as maker; the following table shows the dates, payees, and face amounts: Date Payee Amount Aug. 14, 1941 Frances G $ 1,000 Frances J 1,000 Charles S 1,000 Jessie 1,000 Mary 1,000 Mar. 12, 1943 Frances J [250] Charles S [250] Jessie [250] Mary [250] Mar. 15, 1943 Frances G 15,000 Frances J 15,000 June 7, 1943 Frances J [250] Charles S [250] June 7, 1943 Jessie $ 250 Mary [250] Aug. 31, 1943 Frances J [250] Charles S [250] Jessie [250] Mary [250] Dec. 14, 1943 Frances G 4,000 Frances J 4,000 Nov. 29, 1944 Frances J 1,000 Charles S 1,000 Jessie 1,000 Mary 1,000 *33 The following typewritten statements appear in the lower lefthand corner of the notes naming Frances J. Wolf as payee: Notes Dated August 14, 1941 This money from Alloy Rods preferred Stock redeemed today. (Interest 4%) March 12, 1943 This money represents (50 cents) fifty cents paid on Common Stock of Superior Paper Products Co. paid 3/12/43. (Interest 3%) March 15, 1943 This money loaned CBW today out of Alloy Rods distribution of $ 20,121.04. (Interest 3%) June 7, 1943 This loan covers check of May 29, #543 from Superior Paper Products Co. a 50 cents per share Common Stock dividend loaned CBW that day. August 31, 1943 This loan is money received as dividend from Superior Paper Products Co. Check #731 dated 8/31/43 for 50 cents per share on Common Stock dividend. December 14, 1943 This loan is money received from Alloy Rods Co. account distribution. (York Trust Co. Check #57084) November 29, 1944 Check #1610 received for Common Stock dividend in Superior Paper Products Co. Statements similar in all relevant respects appear on all the other notes with corresponding dates. On the date of decedent's death, and for some time *34 prior thereto, decedent, his wife, and their children were the owners of the following total percentage interests in the following companies: Name Per cent Alloy Rods, Inc [25] Superior Paper Products Company [25] Wm. D. Smith Trucking Co., Inc [20] *446 Frances J. Wolf owned one-seventeenth interest in Alloy Rods, Inc., which she had purchased with money inherited by her from her grandmother. She was also the owner of stock in Superior which she had received from her father as gifts at various times during the 1930's. She was a member of the Women's Army Corps from February 1943 to November 1944. Charles S. Wolf was graduated from college in June 1943 and was a member of the United States Army from June or July of that year until March 1946. Jessie was born in 1925. Mary was born in 1933. Frances J. and Charles each attained majority more than 6 years prior to decedent's death. The records of Alloy Rods, Inc., show $ 5,000 representing checks drawn in 1941 to the order of decedent's wife and four children on account of that corporation's preferred stock issued in their names. The records of Alloy Rods, Inc., also show $ 38,000 representing checks drawn in 1943 to *35 the order of Frances G. Wolf and Frances J. Wolf on account of distributions made by that corporation. The records of Superior show $ 7,000 representing checks drawn in 1943 and 1944 to the order of decedent's four children on account of common stock standing in their names. The above-mentioned checks drawn by Alloy Rods, Inc., and Superior were turned over to decedent by his wife and children for his own use. In exchange for these checks decedent signed the 25 demand notes. The face amount of each note was equal in amount to that turned over to him by the payee of the note. Frances G. Wolf and her four children were aware of the existence of the notes, and were usually shown the notes on the occasion of giving the checks to decedent. Decedent spoke of, and his family looked upon, these transactions as loans. Decedent kept a separate envelope for each of his children in his safe-deposit box. Each envelope was marked with the name of a child, and all the notes naming that child as payee were kept in the envelope. Decedent did not give the payees of the notes any security, nor did they ever receive an interest payment. No record of these transactions was kept by decedent's wife *36 or her children. They never made a demand on decedent for payment, and no suit for payment was ever contemplated. On October 11, 1954, the executors paid the face amounts of the 25 notes to the respective payees. Petitioners claim a deduction from the net estate equal to the face amounts of the notes and $ 12,026.84 representing interest accrued in connection therewith. Respondent contests the deductibility of interest and principal. *447 OPINION. 1. We hold that the Commissioner correctly included in the decedent's gross estate the present value as of the date of death of the amounts payable under the profit-sharing trust and the two pension trust agreements. This result is required either by subsection (a) or subsection (f) of section 811, I. R. C. 1939. 2 At the date of decedent's death he had enforceable vested rights in the three trusts, procured by the rendition of services and by continuing in the employ of the respective corporations. He could be deprived of those rights only by deliberately terminating his employment or being discharged for cause. He had unlimited power to designate or change beneficiaries, and payments to his named beneficiaries were obligatory. *37 The rights thus created were valuable property rights, capable of valuation, and in fact valued by the parties. The decedent's death was the decisive event that resulted in the passage of those rights to the beneficiary. It seems clear to us that they are includible in his gross estate either under the sweeping provisions of section 811 (a) or under the more specific provisions of section 811 (f) (2). Cf. Estate of William L. Nevin, 11 T. C. 59. *38 This case is to be sharply distinguished from cases such as Dimock v. Corwin, 19 F. Supp. 56 (E. D., N. Y.), affirmed on other issues 99 F. 2d 799 (C. A. 2), 306 U.S. 363, where the employer retained the unfettered right to withdraw or modify the pension plan and where it was thought that the employee's interest could not rise above that of a mere expectancy. Cf. Estate of Emil A. Stake, 11 T. C. 817; Estate of William S. Miller, 14 T. C. 657; Estate of M. Hadden Howell, 15 T. C. 224; Estate of Albert L. Salt, 17 T. C. 92. Accordingly, it is a matter of no moment here whether the Treasury correctly or incorrectly determined in G. C. M. 27242, 1952-1 C. B. 160, 3 not to accept Dimock v. Corwin in the case of a decedent dying after June 30, 1952. For here, the rights of the decedent and his named beneficiary were not subject to any such plenary control by the employer as was present in Dimock v. Corwin. Nor is the present controversy*39 governed by such cases as Estate of Eugene F. Saxton, *448 12 T. C. 569, where the Court rested its decision on the inapplicability of section 811 (c) and (d), and explicitly noted that a different result would be required under section 811 (f). See 12 T. C. at 574. We do not consider whether the decedent herein made a "transfer" under section 811 (c) or (d), because, in our opinion, he had property rights that passed within the meaning of section 811 (a) and in any event he had a general power (created after October 21, 1942) to name a beneficiary with respect to these rights -- a power that was in substance a general power of appointment within the meaning of section 811 (f) (2) and (3). He in fact exercised that power, and property rights passed to his wife thereunder at his death. Plainly, this type of situation is covered by subsection (f) (2). *40 2. Petitioners raise the question whether one-half of the $ 15,000 policy of life insurance should be excluded from the decedent's gross estate. It was reported in its entirety on the estate tax return. The policy was taken out in 1937 by the decedent. In 1943, after having paid premiums for 7 years, he assigned the policy to his wife. Thereafter, and for the 7 years until his death, the premiums were paid by checks drawn upon her account. Petitioners contend that only that portion of the proceeds allocable to premiums paid by the husband is properly includible in the gross estate. However, it is the Government's position that all of the premiums were paid by the husband, "directly or indirectly," and that therefore the entire proceeds were correctly reported on the return. Sec. 811 (g) (2), I. R. C. 1939. 4 *41 The burden of proof was on petitioners. In response to leading questions of petitioners' counsel the wife testified that she paid premiums from her "own personal funds." However, it is by no means clear what she meant by her "own personal funds." Her testimony in general was vague and unconvincing, and it is quite possible that she may have regarded as her own personal funds any money that her husband may have given her to be used for the purpose of paying the premiums. Moreover, on cross-examination, the matter was left highly in doubt. Respondent's counsel asked her whether her husband had given her money with which to pay the premiums, and she replied evasively that he had given her money gifts through the year *449 "to pay bills with, etc." No effort was made to clarify the situation by means of redirect examination. Bearing in mind the burden of proof, we cannot find on this state of the record that the husband did not pay all of the premiums "directly or indirectly," and we must therefore rule in favor of the Commissioner on this issue. 3. We reject the Government's contention that the debts reflected in the notes set forth in our findings may not be allowed as a deduction*42 from the gross estate because they were not bona fide. 5 Although the matter may not be completely free from doubt, we are reasonably satisfied that the widow and four children owned interests in the Alloy Rods and Superior enterprises, that these businesses made distributions to each of them, that the funds thus distributed were made available to the decedent, and that the notes executed by him reflect loans of such funds to him. This is not to say, however, that the deduction must automatically follow. If the claim is unenforceable at the date of death, the deduction cannot be allowed. A claim which is unenforceable under State law by reason of the running of the statute of limitations is not deductible. Wolfsen v. Smyth, 223 F. 2d 111 (C. A. 9); Brown v. United States, 37 F. Supp. 444 (Ct. Cl.). Therefore, we must examine Pennsylvania law in this connection. *43 In Pennsylvania, a suit on a demand note is barred 6 years after execution. Pa. Stat. Ann. tit. 12, secs. 31, 36 (Purdon). The most recent notes involved herein are dated November 29, 1944, and the decedent died January 8, 1951. Accordingly, suits on the notes were barred at the date of death, unless the payees were under a disability that suspended the running of the period of limitations. See Pa. Stat. Ann. tit. 12, sec. 35 (Purdon). And the only disabilities that suggest themselves as having any relevance are coverture of the decedent's wife and the possible minority of his children. As to the wife, coverture no longer appears to be regarded as a disability in Pennsylvania in connection with claims of this character. Turner v. Turner, 169 Pa. Super. 120, 82 A. 2d 320. As to the children, we are satisfied that Frances and Charles had attained their majority more than 6 years prior to decedent's death. While no direct evidence was presented as to their ages, the evidence shows that Frances, the oldest daughter, had entered the Women's Army Corps in February 1943, and that Charles had been graduated from college and entered*44 the Army in June or July 1943. In these circumstances, we have found as a fact that Frances and Charles each *450 had attained majority more than 6 years prior to decedent's death. The Pennsylvania statute of limitations had therefore run as to the notes payable to decedent's wife and to the two older children. A different situation exists with respect to the two younger children. The record discloses that Jessie was born in 1925 and Mary in 1933. Mary was a minor at the date of her father's death and Jessie had attained her majority somewhat less than 6 years prior thereto. Their claims were not barred and we know of no reason why they should not be deductible. Nor are we aware of any basis upon which to deny deductions for interest with respect to their claims which had accrued up to the date of death. Decision will be entered under Rule 50. Footnotes 1. In place of the amounts set forth in paragraphs 6 and 8 of the agreement with Superior, the Wm. D. Smith Trucking Co. agreement provided for payments in the amounts of $ 360, $ 720, $ 1,080, $ 1,440, $ 1,800, $ 2,160, $ 2,520, $ 2,880, $ 3,240, and $ 3,600 for years 1 through 10, respectively.↩ 2. SEC. 811. GROSS ESTATE. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States -- (a) Decedent's Interest. -- To the extent of the interest therein of the decedent at the time of his death; * * * * * * * (F) Powers of Appointment. -- * * * * (2) Powers created after October 21, 1942. -- To the extent of any property with respect to which the decedent has at the time of his death a general power of appointment created after October 21, 1942 * * *↩ 3. This ruling modified G. C. M. 17817, 1937-1 C. B. 281, which was regarded as supporting the result in Dimock v. Corwin↩. 4. SEC. 811. GROSS ESTATE. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States -- * * * * (g) Proceeds of Life Insurance. -- * * * * (2) Receivable by other beneficiaries. -- To the extent of the amount receivable by all other beneficiaries as insurance under policies upon the life of the decedent (A) purchased with premiums, or other consideration, paid directly or indirectly by the decedent, in proportion that the amount so paid by the decedent bears to the total premiums paid for the insurance, or (B) with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. * * *↩ 5. Section 812 (b) of the Internal Revenue Code of 1939↩ provides that the net estate "shall be determined * * * by deducting from the value of the gross estate * * * such amounts * * * for claims against the estate * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered," and further that "the deduction * * * allowed in the case of claims against the estate * * * 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 * * *."