Elfreth v. Commissioner

EMILY ALLEN ELFRETH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Elfreth v. Commissioner Docket No. 17552. United States Board of Tax Appeals 15 B.T.A. 147; 1929 BTA LEXIS 2912; January 30, 1929, Promulgated *2912 Held that a certain transaction consummated by the petitioner with other beneficiaries of her father's will, resulted in a taxable profit in 1920 of $9,500. Charles S. Baker, Esq., and George R. Jackson, Esq., for the petitioner. Frank S. Easby-Smith, Esq., for the respondent. ARUNDELL *147 This proceeding was instituted to redetermine a deficiency in income tax for the year 1920 in the amount of $1,430.28. The issue is whether the petitioner realized a profit from the sale of certain property in which she had a remainder interest. FINDINGS OF FACT. Petitioner's father, Samuel L. Allen, died testate March 28, 1918, leaving surviving him, a wife, Sarah H. Allen, and four children, viz, the petitioner, Elizabeth R. Allen, Susan J. Allen, and Charles J. Allen, all five of whom were named executors of his estate. Under his last will and testament, the testator left his residence and the land appurtenant thereto, located at 255 East Main Street, Moorstown. N.J., and an adjoining lot of about four acres, improved by a frame cottage, together with certain personal property, to his wife for life, and upon her death, to his four children, *2913 "their heirs, executors, administrators, assigns in equal shares." The will provided further, as follows: In the event of death of either of my said children during the lifetime of my said wife, leaving any child or children surviving my wife then the part and share of this devise intended for the one so dying shall go to and I give, devise and bequeath the same to such child or children in equal shares, and in the event of the one so dying leaving no child surviving my wife, then the part and share of this devise intended for the one so dying will go to such person or persons upon the death of my wife as would have been entitled thereto under the testate laws of the State of New Jersey, had the one so dying departed this life at that time intestate and seized thereof in his or her right and in the event of a desire at any time on the part of all my four children or survivors of them to sell the above mentioned real estate, I do hereby give and grant to my executors and the survivors of them full power and authority under the general power of sale hereinafter mentioned to sell and dispose of the same at public or private sale, and to sign, seal and execute and deliver good and sufficient*2914 deed or deeds of conveyance thereof to such purchasers or purchaser without obligations, on the part of such purchaser to see to the application of the purchase money the proceed from such sale to be reinvested by said executors for the use and benefit of my wife so long as she may live, and after her death to be distributed as hereinbefore indicated as to the said *148 real estate. The said real estate, as well as the proceeds arising from the sale shall for distributive purposes retain its quality as realty. At some undisclosed time after the death of the testator, a dispute occurred among certain beneficiaries of the will as to estate matters, particularly concerning the sale of the Main Street property, causing an estrangement in the Allen family. The petitioner declined to consent to the sale of the Main Street property unless some provision was made for the protection of her interest in the estate. After some negotiations, the petitioner agreed with her brother and two sisters to the sale of the property in consideration of the payment to her before sale of $15,000, an amount equivalent to one-fourth of the then appraised value of the property, and the same proportion*2915 of any sum received for the premises in excess of $60,000, the second payment to be made at the time of closing the sale. Any amount paid the petitioner under the agreement was to be repaid by her estate in the event she predeceased her mother. It was understood by the parties to the agreement that upon the completion of the sale the persons who had made the payments to the petitioner would be reimbursed by the executors of the estate from the proceeds of the sale. Pursuant to this agreement, on December 12, 1919, the petitioner's mother and two sisters paid her the sum of $15,000, and in or about August, 1920, a short time after the property was sold for the net price of $98,000, they paid her the additional amount of $9,500. In November, 1925, the executors of the estate reimbursed Mrs. Allen and her two daughters for their payments to the petitioner under the agreement. The petitioner's mother died in March, 1928. Two or three months after her death, the fund created from the proceeds of the sale of the property in question, less the sum of $24,500 theretofore used by the executors to reimburse Mrs. Allen and her two daughters, was divided equally among petitioner's*2916 brother and two sisters in accordance with the terms of her father's will. The respondent determined that the petitioner's interest in the property, having a value at the time of acquisition of $12,500, was sold in 1920 for $24,500, resulting in a taxable profit of $12,000. OPINION. ARUNDELL: The position of the petitioner is that the sum of $24,500 paid to her in two installments by her mother and sisters represents an advance on behalf of the estate and that no part of it is taxable prior to the year in which the estate was settled. The respondent is now arguing that the sum represents consideration paid to the petitioner for her agreement to execute a deed of conveyance of the property, and that the whole amount of the consideration paid is *149 taxable in the year 1920. We are unable to concur in either of these views. The effect of the transaction was a sale of the petitioner's one-fourth remainder interest in the property subject to a condition subsequent. By the terms of the will, upon the termination of the life estate in the widow, the four children were to receive the property or the money received on any previous sale thereof, one fourth each, and in*2917 case any child predeceased the life tenant, his or her share should pass to the issue of such child, or failing of issue, to his or her heirs at law. The negotiations conducted after a request had been made upon the petitioner to consent to the sale of the property, resulted in an agreement whereby she would receive certain payments of money to protect her one-fourth remainder interest in the whole of the property. Pursuant to this agreement, in 1919 she received $15,000, and in 1920, after the sale of the property, she received an additional payment of $9,500. That the petitioner intended, and did, make a sale of her property right, subject to the condition that she survive her mother, appears evident from the fact that the two payments made to her under the agreement were based, respectively, upon the appraised value and sales price of the property and her proportionate interest therein, and upon the settlement of the estate after the death of Mrs. Allen in March, 1928, the balance in the fund created from the proceeds of the sale was divided equally among petitioner's brother and two sisters. The petitioner does not question the respondent's valuation of $12,500 upon her*2918 remainder interest at the time of its acquisition. Of the whole amount received for her property right, the petitioner was paid $15,000 in 1919 and $9,500 in 1920. The year 1919 is not before us and we are not concerned with the amount paid during that period. The amount paid in 1920 represents profit realized on the sale of property and is taxable in the year of its receipt. Judgment will be entered under Rule 50.