Sugerman v. Commissioner

MARK H. SUGERMAN, EXECUTOR, ESTATE OF PHILIP SUGERMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Sugerman v. Commissioner Docket No. 39415. United States Board of Tax Appeals 20 B.T.A. 960; 1930 BTA LEXIS 1997; September 24, 1930, Promulgated *1997 1. In view of all the conditions and circumstances surrounding a transfer of his partnership business by a father to his sons, it is held that such transfer was made in contemplation of death. 2. The action of the Commissioner in his valuation of certain properties at date of death sustained for lack of convincing proof to the contrary. 3. An estate tax paid the State of New York is not deductible under the 1921 Revenue Act in computing the net value of the estate for Federal estate tax. Meyer Bernstein, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. LOVE *960 This proceeding is for the redetermination of a deficiency in estate tax in the amount of $3,318.95, on the estate of Philip Sugerman, deceased. There are four assignments of error, in substance as follows: 1. That the Commissioner erred in valuing a certain piece of property at $19,000. 2. That the Commissioner erred in including in the gross estate the value of a partnership interest transferred to his two sons in contemplation of death, and valued by the Commissioner at $149,795.75. 3. In the alternative in the event that it be held that the*1998 transfer complained of in (2) is a taxable transaction, then the Commissioner erred in his valuation of the same. 4. The Commissioner erred in failing to allow a credit for the estate tax paid the State of New York. *961 FINDINGS OF FACT. Petitioner resides in the city of New York, and is the duly qualified and acting executor of the estate of Philip Sugerman, deceased. The decedent died, testate, on April 5, 1924, and was 81 years old at date of death. Letters testamentary were issued to Mark H. Sugerman and Julia Sugerman, as executors and trustees under the will. The deceased left surviving him three sons and two daughters. The decedent had long been a member of a partnership known as the Royal Co. of New York. The firm conducted a business as bankers, purchasing commercial paper, and lending money. The firm consisted of three members, Philip Sugerman, who owned a 50 per cent interest; Frank C. Straat who owned 40 per cent; and Mark H. Sugerman who owned 10 per cent. By an instrument in writing dated November 20, 1922, participated in by the members of the firm, Philip Sugerman conveyed to his two sons, Mark H. Sugerman and Lewis M. Sugerman, his 50 per*1999 cent interest in the firm. The Commissioner determined that the transfer was made in contemplation of death. On June 15, 1916, Philip Sugerman executed a will by which he divided his property, to take effect after his death, among his children, and after making certain specific bequests, bequeathed his one-half interest in the partnership known as the Royal Co. to his two sons, Mark and Lewis, and his two daughters, Julia and Sarah, share and share alike. That will, unmodified, was duly probated. The will designated Mark Sugerman and Julia Sugerman as executors and on the probate of the will, after the death of Philip Sugerman in April, 1924, they duly qualified as such executors. On November 20, 1922, the assignment hereinbefore mentioned was executed, by which Philip Sugerman assigned to his two sons Mark and Lewis, his entire 50 per cent interest in said partnership business, to be held by them share and share alike. After, and as a result of that assignment, Mark Sugerman held an interest in that business of 35 per cent, and Lewis Sugerman held 25 per cent. At the date of his death in April, 1924, Philip Sugerman was 81 years old. His death certificate gave as the*2000 cause of his death, "Senility," "Contributory chronic myocarditis." He had been under the care of physicians, and some times a nurse, for several years prior to his death, but at most times until a few weeks prior to his death he was able to go to the business office, to the park in the evenings, and play cards. *962 The written assignment dated November 20, 1922, states in the opening paragraph: WHEREAS, for a number of years, the parties of the first, second and third parts have been co-partners doing business under the name of the ROYAL CO. of NEW YORK, with place of business located at 95 Nassau Street, in the Borough of Manhattan, City of New York, and WHEREAS, the said party of the first part is about to retire from the said business and has agreed, in consideration of the long and faithful services rendered by the aprties of the second and fourth parts, to assign, transfer and convey to each of the said parties of the second and fourth parts an equal one-half part in and to the capital investment made by the said party of the first part in the said firm * * *. The party of the first part was Philip Sugerman; part of the second part, Mark Sugerman; and party*2001 of the fourth part, Lewis Sugerman. The balance sheet attached to that document and made a part of it showed: Total assets $471,658.36 Total capital account: P. Sugerman 170,858.81 M. H. Sugerman 40,573.08 F. C. Straat 142,783.23 354,215.12 Using the last named total as a basis, the capital of the new partnership, as it started in business, was stated in said document to be: Mark Sugerman $126,002.48 F. C. Straat 142,783.23 Lewis Sugerman 85,429.41 Total 354,215.12 One-half of which is 177,157.56 As a basis for computing the tax, the Commissioner valued the partnership interest that passed from the father to the two sons, at $149,795.75, which he determined was the market value of the interest so transferred. The Department of Taxation and Finance of the State of New York notified the petitioner that the estate was due a transfer tax of $1,411.65. That amount was paid as such transfer tax to the State of New York. The petitioner alleges the payment of $345.63 to the collector of internal revenue on the estate-tax return made and filed by petitioner. The payment was denied in the answer. Counsel for the respondent, in*2002 his brief, concedes such payment. However, in the computation made by the Commissioner, he computed the total tax to be $3,661.85, *963 and deducted therefrom as tax shown on the return, $342.90, and determined the deficiency as the difference, $3,318.95. Decedent, at the date of his death, owned a house and lot located at 136 West 118 Street, New York City, which cost him $21,500 about the year 1907. The building was a brown stone, of three stories and basement, 17 feet wide and 100 feet long. It had 11 rooms and 2 baths, and was heated with a hot-air plant. For awhile the family lived in the building, and during that time made some improvements, among which, electric lights were put in. In 1927 the executor sold the property for $19,000, of which amount $2,200 was paid in cash and the balance secured by mortgage with contract to pay $50 per month until February, 1937, at which time all the balance will become due. A commission of $450 was paid an agent on the sale. OPINION. LOVE: Counsel for petitioner contends that by reason of the fact that decedent died on April 5, 1924, and the estate tax was not due until one year thereafter, April 5, 1925, and*2003 that the 1924 Revenue Act was enacted and became effective on June 2, 1924, and repealed the 1921 Revenue Act, the liability for this tax must be governed by the 1924 Act when it "accrued," and that coming under the 1924 Act, and the assignment by the father to the sons having occurred prior to the enactment of the 1924 Act, the case is controlled by the case of . We hold that, by reason of the fact that the death occurred during the period when the 1921 Act was in force, the 1921 Act governs the case. Death is the "generating source" that brings into being the tax liability, and the date when that liability is generated must be used to point out the applicable statute. The assignment here involved, as well as the death, occurred during the period when the 1921 Act was in force. . The next issue to be considered is whether or not the transfer of the partnership interest by the father to the sons was made in contemplation of death. Was it testamentary in character and purpose? The Commissioner determined that it was, and, it being within two years before death, the statute*2004 presumes that it was. Revenue Act of 1921, sec. 402(c). The burden is on the petitioner to prove that it was not so made. We do not believe that he has sustained that burden of proof. It is true that the document presents a completed transaction. It was not to take effect after death. It was to be effective at once. However, we must look to and take into consideration all the circumstances, the motivating causes that brought about that transfer. The father, in 1916, had executed a will by which he *964 disposed of all his property among his children. At that time he was 74 years old and active in business. In that will he stipulated that each of the two sons, Mark and Lewis, should get a one-fourth interest in the partnership business, and the two daughters, each a one-fourth. In 1922 he was 6 years older and, being afflicted with myocarditis (a serious heart trouble), he desired to retire from business. Evidently it was then intended as a permanent retirement. Under such circumstances, he wanted to shift the burden of that business upon the sons whom he desired to have it. He did not change his will in any particular, but anticipated its effective date by superseding*2005 one of its provisions, by taking one item out of provisions of the will by disposing of it, inter vivos, and by giving to each of those two sons a one-half interest in his 50 per cent of that partnership business, instead of a one-fourth interest as the will provided. The conclusion is inescapable that the document transferring that interest at that time was testamentary in character and purpose, and made in contemplation of death in the near future. We sustain the Commissioner's action on that issue. With reference to the value of the partnership interest transferred, it will be noted that at the date of such transfer the total assets of the business were put, by the parties themselves, at $471,638.36. The admitted amount of liabilities deductible from assets in order to determine net worth was $117,443.24. That would indicate a net worth of $354,215.12, 50 per cent of which is $177,107.56. The Commissioner determined the value at date of death to be $149,795.75. We believe that the evidence fully justifies the value determined by the Commissioner and hence sustain his action in regard thereto. With reference to the value, at the date of Philip Sugerman's death, of*2006 the house and lot at 136 West 118 Street, the evidence is very unsatisfactory. About all the positive information furnished us is that in 1907 it cost $21,500. In 1927, three years after the decedent's death, it was sold by the executor for $19,000. The Commissioner valued it at date of death at $19,000. Mark Sugerman was the only witness. Why one or more of the other brothers and sisters did not appear or why an expert real estate man was not produced as a witness, was not explained. Mark Sugerman did not attempt to qualify as an expert on values of such properties. He did state that he did not believe the mortgage debt of $16,800 forming a part of the sale price could have been sold for more than 70 per cent of face value. But giving full credence and force to that testimony, it has but little pertinent probative weight. The sale took place three years after the pertinent date. The market value of the notes representing a part of a sale price may or may not be evidence of the value of the property. The sale price, when all in *965 cash, while evidentiary in character, and usually given considerable weight, is not at all conclusive of market value. The*2007 market value may be greater or less than the sale price. The Commissioner has placed the market value in 1924 at the same figure that the property sold for in 1927. What he based his market value on in 1924, we do not know. We only know that the evidence submitted by the petitioner is not convincing that he erred. We sustain the action of the Commissioner on that point. The petitioner, as executor, paid $1,411.65 to the State of New York as an inheritance tax on the estate here involved, and claims that he is entitled to deduct that amount from the gross estate in computing the net estate. As heretofore pointed out, the tax liability in this case must be determined under the 1921 Revenue Act. That act, in prescribing how the net estate shall be determined, denotes a number of deductions from gross estate, as appear in section 403 of that act. The last phrase of (a)(1) of that section specifically prescribes, "but not including any income taxes upon income received after death of the decedent, or any estate, succession, legacy, or inheritance taxes." Sections 303(a)(1) of the 1924 and 1926 Acts, have the same provision. Reviewed by the Board. Judgment will be*2008 entered for the respondent.