Critchfield v. Commissioner

Estate of Walter O. Critchfield, Deceased, Central National Bank of Cleveland, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent Critchfield v. Commissioner Docket No. 57975 United States Tax Court 32 T.C. 844; 1959 U.S. Tax Ct. LEXIS 134; June 30, 1959, Filed *134 Decision will be entered for the respondent. 1. Held, under section 811(j), 1939 Code, the value at which shares of stock must be included in gross estate is their fair market value at the optional valuation date, rather than a lesser value based upon the amount per share for which decedent's widow was allowed to purchase the shares by a Probate Court in Ohio upon her election to purchase such property under section 10509-89, Ohio General Code. 2. Held, a marital deduction is not allowable under section 812(e) for an alleged interest in property, represented by the difference between the probate appraisers' valuation of shares of stock purchased by decedent's widow and their fair market value at the date of the distribution to her, because the alleged interest was not an interest in property such as is described in section 812(e)(1)(A), and, even if it were, it was a terminable interest under section 812(e)(1)(B). Robert T. Green, Esq., for the petitioner. William O. Allen, Esq., for the respondent. Harron, Judge. HARRON *844 The respondent determined a deficiency in estate tax in the amount of $ 1,966.07. The questions are as follows: (1) Whether the value of 184 shares of stock, for the purpose of the valuation of assets of the estate under section 811(j), 1939 Code, is the fair market value of the stock, or a lesser amount for which the shares were purchased by the widow from the estate. (2) Whether, if the first question is decided for the respondent, the estate is entitled to a marital deduction under section 812(e) in the amount of $ 1,288, which is the difference between*136 the fair market value of the stock and the amount paid to the executor by the widow. *845 FINDINGS OF FACT. The decedent, Walter O. Critchfield, died testate on July 22, 1951, a resident of Shelby, Richland County, Ohio. The petitioner is the duly appointed and acting executor of the decedent's estate. The estate tax return was filed with the collector of internal revenue in Cleveland, Ohio. Dollie W. Critchfield is the widow of the decedent; she was his sole survivor. In his last will and testament, the decedent made specific bequests to his wife of real and personal property, and he created a testamentary trust to which he devised all of his residuary estate. He designated his wife the income beneficiary of the testamentary trust during her lifetime. The decedent's will was admitted to probate on August 2, 1951, in the Probate Court of Richland County, Ohio. The decedent was a retired executive of the Shelby Salesbook Company located in Shelby, Ohio, referred to hereinafter as Shelby Company. At the time of his death, the decedent owned 1,586 shares of common stock of Shelby Company. That stock, in 1951, was an unlisted stock which was sold in Shelby in over-the-counter*137 transactions. On August 2, 1951, the Probate Court appointed H. Dale Kuhn, E. D. Hildebrant, and F. B. Stevens the appraisers of the estate. The appraisers were directed by the court, under its order, to appraise all of the decedent's property based on values as of the date of death. None of the appraisers were related to the decedent or his widow, and none had any interest in the estate. On August 31, 1951, the appraisers filed an inventory and appraisement in the Probate Court. The entire estate was appraised as having a value of $ 131,748.13, before the exemption of 20 per cent of the inventory, or $ 2,500. The 1,586 shares of Shelby Company common stock were appraised at $ 58 per share, or $ 91,988. The appraisers fixed the year's allowance of the widow at $ 10,000 in money. The executor of the estate approved the inventory and appraisement on August 27, 1951. On October 1, 1951, the Probate Court allowed and approved the inventory and appraisement after setting the matter for hearing, at which there was no objection. The hearing was a nonadversary hearing. Section 10509-89 of the Ohio General Code (sec. 2113.38, Ohio Rev. Code) gives a surviving spouse a right to purchase*138 certain specified property, if such property was not specifically bequeathed, within 1 month after the approval of the inventory. *846 On October 22, 1951, the decedent's widow filed application to the Probate Court, under section 10509-89 of the General Code, to purchase 5 shares of Carton Service, Inc., common stock at a value of $ 325, and 184 shares of Shelby Company common stock at a value of $ 10,672, or $ 58 per share. The total value of the securities listed in the application was $ 10,997. The widow elected to purchase the property described in the application at the appraised value thereof as fixed by the appraisers, and she requested the Probate Court to issue an order approving her election and directing the executor of the estate to deliver the securities to her "upon her compliance with the law in reference to payment for" the property. The executor executed the consent, made part of the application form, and requested the Probate Court to approve the application and election. On November 6, 1951, the Probate Court issued an order approving the election of the surviving spouse and directing the executor to convey by a proper bill of sale the personal property*139 elected to be purchased. The court specified that payment for such property should be made by applying the "amounts due said surviving spouse as property exempt from administration and as her year's allowance." On November 8, 1951, the executor transferred the 184 shares of Shelby Company common stock and the other shares of stock to Dollie Critchfield upon receiving payment in accordance with the court's order, and reported the conveyances to the court, which, thereafter, on November 13, 1951, approved the report. The Federal estate tax return was filed by the executor on September 3, 1952. The executor elected in the return to have all of the property in the gross estate valued "in accordance with values as of a date or dates subsequent to the decedent's death as authorized by section 811(j) of the Internal Revenue Code." The property in the gross estate which was reported in the return included the 1,586 shares of Shelby Company common stock; the distribution of the 184 shares was reported; and it was shown that the balance, 1,402 shares were retained by the estate. The executor reported the value of the 184 shares as $ 58 per share, or $ 10,672, on the optional valuation date, *140 which was November 8, 1951, the date of the transfer of the shares to the widow. The parties have stipulated that the fair market value of the Shelby Company common stock on November 8, 1951, the optional valuation date for that property, was $ 65 per share. There were purchases and sales of Shelby Company common stock in Shelby, Ohio, during the months of July and August 1951, which were handled by a stockbroker, at prices ranging from $ 65 to $ 69 per share involving lots of from 4 to 100 shares. For example: On July 10, 1951, there was a sale of 100 shares at $ 67 per share; on July 11, 1951, there was a purchase of 100 shares at $ 69 per share; on July *847 13, 1951, there was a sale of 50 shares at $ 67 per share, the commission of $ 2 having been waived; on July 13, 1951, there was a purchase of 50 shares at $ 69 per share; on August 13, 1951, there was a sale of 4 shares at $ 65 per share; on August 28, 1951, there was a purchase of 14 shares at $ 69 per share; and on August 28, 1951, there was a purchase of 15 shares at $ 69 per share. In determining the estate tax deficiency, the Commissioner increased the value of 184 shares of Shelby Company common stock, part of *141 the decedent's gross estate, to $ 65 per share, or $ 11,960, from the value reported in the estate tax return of $ 58 per share, or $ 10,672. He gave the following explanation of his determination: In Schedule B, Item 1, of your Estate Tax Return, you reported 184 shares of The Shelby Salesbook Company, as having a value of $ 58.00 per share or a total value of $ 10,672.00. The values of assets included in gross estate were made under the provisions of section 811(j) of the Internal Revenue Code, relating to optional valuations. On December 3, 1951 [sic] the widow of the decedent purchased the 184 shares at $ 58.00 per share, under the provisions of section 10509-89 of the Ohio General Code, relating to the right of the spouse to purchase assets of the estate at appraised value. It is held that the fair market value at the date of sale to the widow was $ 65.00 per share, or a total of $ 11,960.00, and that this value should be used in determining the gross estate of the decedent under the provisions of section 811(j) of the Internal Revenue Code. The fair market value of the common stock of the Shelby Company on July 22, 1951, was at least $ 65 per share, in instances when *142 the number of shares purchased or sold amounted to at least 184 shares. The stipulated facts are found as stipulated; the stipulation is incorporated herein by this reference. OPINION. The first question is whether, under section 811(j)1 the value at which the 184 shares of stock of the Shelby Company shall be included in the decedent's gross estate is their fair market value, $ 65 per share, on November 8, 1951, when the shares were sold to the widow, or $ 58 per share, the price approved by the Probate Court under the widow's election to purchase the shares from the estate. *143 *848 Petitioner contends that he was required by order of the Probate Court to sell the stock at the appraised value of $ 58 per share and that, therefore, the clause in section 811(j), "shall be included at its value as of the time of such distribution, sale, exchange, or other disposition," should be construed for the purpose of this case to mean the amount per share which the executor received for the stock. He argues that he took title to the block of 1,580 shares subject to the right of the surviving spouse under section 10509-89 of the Ohio General Code 2 (Lifetime ed., which applied to estates of decedents who died before October 1, 1953) to elect to exercise an option to purchase a portion of the stock; that such option had a zero value at the time of the decedent's death; that the option could not be exercised until the appraisement of the estate had been approved by the Probate Court; and that the sale of the stock under the Ohio statute should relate back to the value at the date of death. He contends, in effect, that the Commissioner is bound by the value which was approved by the Probate Court, under the Ohio statute, and that, otherwise, the executor is placed*144 in the peculiar position of having to include the stock in the gross estate at a higher value than, under the Ohio statute, he was, in this instance, permitted to receive under an involuntary sale. Petitioner does not cite any authority in support of the construction of section 811(j) for which he urges our approval. *145 We agree with the respondent that under section 811(j) the property in question is includible in the gross estate at its fair market value on the date of the sale, $ 65 per share. There is no merit to the contentions of the petitioner. The executor elected in the estate tax return to have all of the property of the decedent valued "in accordance with values as of a date or dates subsequent to the decedent's death as authorized by section 811(j) of the Internal Revenue Code." Section 811(j) provides that if the executor so elects in the return, the gross estate shall be valued as of the date 1 year after the decedent's death, except that property included in the gross estate which, within 1 year after death, is sold, exchanged, or otherwise disposed of shall be included at its *849 value as of the time of such sale, exchange, or other disposition. The 184 shares of stock in issue were sold, exchanged, and distributed to the surviving spouse on November 8, 1951, and on that date the fair market value of the stock was $ 65 per share. Section 811(j) clearly provides that where the optional valuation date is elected, the value of property at the time of its sale, exchange, or distribution, *146 whichever occurs first, must be in lieu of any other value. There is no warrant in the statute for using the date-of-death value of the stock for which claim is made by petitioner, who assumes that such value was $ 58 per share. 3 In section 81.11 of Regulations 105, page 32, it is provided that, "Property, in the case of a sale, exchange, or other disposition within the 1-year period, is to be valued as of the date when it ceases to form a part of the estate, that is, the date when the title passes as the result of a sale, exchange, or other disposition. The terms 'distributed,' 'sold,' 'exchanged,' and 'otherwise disposed of' comprehend all possible ways by which property may be separated or passed from the gross estate." The*147 transfer, or sale, of the stock in question to the decedent's surviving spouse under the procedure allowed by the provisions of section 10509-89 of the Ohio General Code, constituted either a sale, or an exchange, or other disposition under the provisions of section 811(j). As a matter of fact, it appears that the stock was transferred to the widow in lieu of $ 10,000 to which she was entitled for her maintenance during the first 12 months following the death of the decedent, and in this respect, the transfer appears to have been a disposition of the stock in lieu of payment of $ 10,000 in cash, and in lieu of the executor's selling property in the gross estate to a stranger for the purpose of obtaining $ 10,000 in cash. Under the regulation, the petitioner's contention cannot be sustained. Considerable weight is to be given to the regulation in view of the fact that it has been in existence without substantial change since 1936. Helvering v. Winmill, 305 U.S. 79. Furthermore, even if it were to be assumed that $ 58 per share was the fair market value of the stock at the date of the decedent's death, as is stated in the appraisers' report, it*148 would be clearly contrary to the provisions of section 811(j) to include the stock in the gross estate at such value. It is immaterial and irrelevant that the executor received only $ 58 per share for the stock and that the widow was allowed to purchase the stock for that price. In the following cases involving analagous situations there was rejected a similar claim that the value of property for inclusion in a gross estate, under Federal estate tax law, should be determined on the basis of a transaction which occurred *850 after the decedent's death, rather than by the fair market value of the property at the date required by section 811 or 811(j). See Claire Giannini Hoffman, 2 T.C. 1160, affirmed sub nom. Giannini v. Commissioner, 148 F. 2d 285, certiorari denied 326 U.S. 730; Estate of George Marshall Trammel, 18 T.C. 662; and Estate of Robert R. Gannon, 21 T.C. 1073. The rationale of these cases is that property must be included in the gross estate at its full fair market value, even though the executor may be bound *149 to sell the property after the decedent's death at a lesser price. It is noted, further, that the widow's application to the Probate Court to purchase the stock for $ 58 per share was approved by that court in a nonadversary proceeding. We have held frequently that determinations made in a nonadversary proceeding by a local court are not binding upon this Court in determining questions under the provisions of the applicable Federal statute. Estate of Arthur Sweet, 24 T.C. 488, affd. 234 F. 2d 401, certiorari denied 352 U.S. 878; Estate of Ralph Rainger, 12 T.C. 483, affd. 183 F. 2d. 587, certiorari denied 341 U.S. 904; James S. Reid Trust, 6 T.C. 438. It is held that the stock in question is includible in the gross estate at the value of $ 65 per share. The petitioner contends, next, that the estate is entitled to a deduction under section 812(e)4 in the amount of $ 1,288, which represents an increment of $ 7 per share, the difference between the appraised value and the fair market*150 value per share of the 184 shares of stock. Petitioner's theory is that the spouse acquired her option to purchase the stock from the estate by reason of the death of her husband; that the option constituted an interest in property in the estate; and that since the respondent allegedly has included an increment of $ 7 per share in the gross estate (according to petitioner's view), then it follows that the spouse received an interest in property having a value of $ 1,288 from and through the estate by reason of the death of her husband. The petitioner cites no authority in support of this theory, and we find none. *151 *851 Petitioner's theory represents a novel attempt to inject section 812(e) into a situation to which it was not intended to apply. Section 812(e)(1)(A) deals with any interest in property which passes or has passed from the decedent to his surviving spouse. In this case, the decedent left a will and its provisions determine what passed from the decedent upon his death to his surviving spouse. The decedent directed his executor to pay his debts and funeral expenses; he bequeathed the family residence to his surviving spouse and gave her all of the contents of the home, his automobile, and all his personal effects; he directed the executor to pay from the residue of the estate all estate and inheritance taxes; he devised all of the rest of the residue to the Central National Bank of Cleveland in trust; and he named his wife the income beneficiary of the trust for life. Under Ohio law, the widow was entitled to receive from the estate money to provide her support for 1 year. The appraisers of the estate certified that $ 10,000 in money was sufficient for 1 year's support. The cash in the estate amounted to $ 21,935.13. When the widow made an election under section 10509-89*152 of the Ohio General Code to purchase the 184 shares of stock of the Shelby Company from the estate, the Probate Court directed the executor to apply the year's allowance for support and amounts due the widow as exempt from administration to the price she was to pay for the stock. The widow's right to receive money for 1 year's support and her right to purchase shares of stock from the estate within 1 month after the approval of the inventory were founded in Ohio statutes, and such widow's rights were related to and involved in the administration of the estate. Under section 10509-89 of the Ohio General Code the right given to the surviving spouse was a right to purchase certain specified property. The provisions of section 10509-89 deal with property of the decedent which is not specifically devised or bequeathed. We think it is abundantly clear that the right of a surviving spouse, under a statute, to purchase property from the estate is not an interest in property which passes from the decedent to his surviving spouse within the meaning and intendment of section 812(e) (1)(A), and that, therefore, petitioner is not entitled to a marital deduction under that Code provision. Furthermore, *153 even if it could be held that such interest in property as is described in section 812(e)(1)(A) were involved here, and whatsoever kind of interest decedent's widow had under the Ohio statute, the interest constituted a terminable interest within the meaning of section 812(e)(1)(B), and, therefore, fails to qualify for a marital deduction. The decedent's will provides that upon the death of his widow, the corpus of the testamentary trust is to be divided into 5 equal shares, each of which is to be distributed to five named individuals. Therefore, under the decedent's will, the 184 shares of *852 stock, if they had remained in the gross estate and had been distributed to the trustee of the testamentary trust, would eventually have passed to persons other than the surviving spouse. Where a surviving spouse elects to take property against the will, the interest received by her is considered to have passed only if it otherwise qualifies for the marital deduction. Regs. 105, sec. 81.47a(f). An interest in an estate which passes to a surviving spouse pursuant to State law will qualify for the marital deduction only if, in the event of her death as of any moment following the*154 decedent's death, it will survive as an asset of her estate. Rev. Rul. 55-419, 1955-1 C.B. 458. In Jewell v. Chiles, 37 Ohio Op. 33, 79 N.E. 2d 710 (1947), an issue was whether the right of the surviving spouse to purchase assets at their appraised value under section 10509-89, Ohio General Code, was personal to such spouse, or whether, in the event of her death after filing application but before completion of the action, the right to purchase survived and passed to her heirs at law, devisees, or personal representatives. The Probate Court held: When the surviving spouse of a decedent filed a petition to purchase real estate under Section 10509-89, G.C., and dies before the action is completed or conveyance made, such right of action abates and the estate of the first decedent will be administered as if no petition to purchase by the surviving spouse had been filed. 79 N.E. 2d at 711. Although section 10509-89, Ohio General Code, contains no express provision as to whether the surviving spouse's right thereunder would survive her death, the Ohio*155 Revised Code, effective October 1, 1953, does contain such express provision. In enacting the Revised Code, it was the intent of the Ohio General Assembly not to change the law as expressed in the General Code. Sec. 1.24, Ohio Rev. Code. Section 2113.38 of the Revised Code provides: The death of the surviving spouse prior to the filing of the court's entry fixing the terms of payment for property elected to be purchased shall nullify the election with respect thereto. Such property, whether real or personal, shall thereafter be free of the right granted in this section. Section 2113.38 of the Revised Code also provides: The application or petition provided for in this section shall be filed any time within one month after the approval of the inventory * * *. Failure to file such application within such time nullifies the election with respect to the property required to be included therein and such property, whether real or personal, shall thereafter be free of the right granted in this section. Whatever "interest," therefore, that the surviving spouse may acquire by virtue of the Ohio statute, it is apparent that it will terminate upon a lapse of time (1 month after approval*156 of the inventory), or upon the occurrence of an event or contingency (death of the surviving spouse prior to entry of the Probate Court's order). It must be concluded here, that in either event, an interest in the 184 *853 shares of stock would pass to the remainder beneficiaries, without consideration, and that by reason of such passing the remainder beneficiaries could possess or enjoy a part of such property after the termination or failure of the surviving spouse's "interest." Therefore, the surviving spouse's right to elect to purchase certain assets of the estate at their fair market value at the time of the exercise of the option is clearly a terminable interest as defined by section 812(e) (1)(B), and no deduction can be allowed with respect thereto. Decision will be entered for the respondent. Footnotes 1. SEC. 811. GROSS ESTATE. (j) Optional Valuation. -- If the executor so elects upon his return (if filed within the time prescribed by law or prescribed by the Commissioner in pursuance of law), the value of the gross estate shall be determined by valuing all the property included therein on the date of the decedent's death as of the date one year after the decedent's death, except that (1) property included in the gross estate on the date of death and, within one year after the decedent's death, distributed by the executor (or, in the case of property included in the gross estate under subsection (c), (d), or (f) of this section, distributed by the trustee under the instrument of transfer), or sold, exchanged, or otherwise disposed of, shall be included at its value as of the time of such distribution, sale, exchange, or other disposition, whichever first occurs, instead of its value as of the date one year after the decedent's death, * * *↩ 2. Ohio General Code: Sec. 10509-89. Right of surviving spouse to purchase property at appraised value; procedure. At any time within one month after the approval of the inventory, the surviving spouse, if any, whether acting as executor or administrator, or not, shall have the right to purchase the following property, if left by the decedent and if not specifically devised or bequeathed: * * * * (b) Stocks, bonds and other securities listed on an approved stock exchange, as defined in sub-section 4 of section 8624-3 of the General Code, at the market price at the time of purchase. (c) Any other real or personal property of the decedent, not exceeding, with the mansion house and land used in conjunction therewith and such household goods as the spouse may elect to purchase, one-third of the gross appraised value of the estate, at the appraised value as fixed by the appraisers.↩ 3. It is assumed by petitioner that the date-of-death value of 184 shares was $ 58 per share, the appraised value per share as of that date of a block of 1,586 shares. The evidence establishes that on July 22, 1951, the date of death, the fair market value of 184 shares was $ 65 per share.↩ 4. SEC. 812. NET ESTATE. (e) Bequests, Etc., to Surviving Spouse. -- (1) Allowance of marital deduction. -- (A) In General. -- An amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate. (B) Life Estate or Other Terminable Interest. -- Where, upon the lapse of time, upon the occurrence of an event or contingency, or upon the failure of an event or contingency to occur, such interest passing to the surviving spouse will terminate or fail, no deduction shall be allowed with respect to such interest -- (i) if an interest in such property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to any person other than such surviving spouse (or the estate of such spouse); and (ii) if by reason of such passing such person (or his heirs or assigns) may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving spouse; * * *↩