Latty v. Commissioner

LILLIAN T. LATTY, EXECUTRIX OF THE ESTATE OF S. D. LATTY, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Latty v. Commissioner Docket No. 40484. United States Board of Tax Appeals 23 B.T.A. 1250; 1931 BTA LEXIS 1743; July 27, 1931, Promulgated *1743 1. Decedent, contemporaneously with the execution of his will leaving his estate to another, agreed to provide a trust fund for his daughter, either in his lifetime or after his death, in consideration of her promise to accept the agreement in full satisfaction of all claims, legal, moral and sentimental, growing out of her relationship to him, and to make no further claim or demand whatsoever against him or his estate, and not to contest any will theretofore or thereafter made by him. The decedent did not during his lifetime pay in trust any part of the amount mentioned in the agreement, and, after his death, his executrix made a payment directly to the daughter and claims the deduction thereof in determining the net estate. Held (assuming that, by virtue of the contract, there was a claim against the estate, and without questioning the bona fides of the transaction or the sufficiency of the consideration to support the contract as a matter of law), that the consideration was in essence a promise to refrain from claiming more, and was not in money's worth within the requirement of section 303(a)(1), Revenue Act of 1924. 2. Proceeds in excess of $40,000 of insurance on*1744 the life of decedent payable to beneficiaries other than the estate which, so far as the record shows, may be subject to the decedent's right to change the beneficiaries, are within decedent's gross estate. John T. Scott, Esq., for the petitioner. Arthur Carnduff, Esq., and Frank J. Doudican, Esq., for the respondent. STERNHAGEN *1250 The respondent determined a deficiency in estate tax of $5,275.85, (1) disallowing as a deduction $53,381.55, a claim said to be "incurred or contracted bona fide and for a fair consideration in money or money's worth"; and (2) including in the gross estate the proceeds of certain insurance policies on the life of decedent in excess of $40,000. *1251 The petitioner alleges and the answer admits that inheritance tax in the sum of $28,839.94 has been paid to the State of Ohio in respect of the property in the estate of decedent, and that, if it be determined that any additional tax should be assessed against the estate, the amount of such additional tax should be credited with an amount equal to 25 per cent thereof on account of the inheritance tax paid to the State of Ohio. FINDINGS OF FACT. *1745 S. D. Latty died on January 31, 1926, a resident of Lakewood, Ohio. He was survived by his widow, Lillian T. Latty, who was his second wife, and by a daughter by his first wife, Helen Latty Jackson, who, before her marriage, was known as Helen Marie Latty. He had no other children. The decedent left no real estate. 1. The decedent left a last will and testament, executed on December 1, 1923, which was admitted to probate in Cuyhahoga County, Ohio. After bequeathing the sum of $100 to each of any children born after the execution of his will, the decedent bequeathed and devised the residue of his estate to his wife, Lillian T. Latty, absolutely and in fee simple. The will contained the following recital: I make no provision herein for my daughter, Helen Marie Latty, for the reason that I have heretofore made ample provision for her to her full satisfaction, as evidenced by a certain agreement between her and myself, dated December 1, 1923. The agreement referred to in the above-quoted paragraph of the will is as follows: THAT WHEREAS the Father, on or about the 26th day of October, 1892, intermattied with Miss Edith Petitt, and to such union was born the Daughter on*1746 or about the 9th day of October, 1900, being the only child of such union; and thereafter, on or about the 2nd day of July, 1904, the father and the mother of the said Daughter, disagreeing on many and divers things, were divorced by action of the Common Pleas Court of Cuyahoga County, Ohio, and a decree thereof was duly entered, and a full and adequate settlement of alimony was made between the parties to the suit; and thereafter, on or about the year 1905, the mother, Edith P. Latty, inter-married with one Harry Johnson, and the Daughter went to reside with her mother in the City of South Bend, Indiana; and thereafter the said Mrs. Johnson demanded of the Father compensation for the maintenance, education and support during minority of the Daughter, and in pursuance of this demand, upon which suit was brought, a settlement was made in full for the said maintenance, education and support of the Daughter in the sum of $10,000; and WHEREAS thereafter, the said Harry Johnson died; and on or about the 9th day of October, 1918, the said Daughter became of age and the mother and Daughter have since resided together in various places in the United States, and for some time last past in*1747 southern California; and before the majority of the Daughter the Father paid her way at school, and for the last five or six years, whether in Miss Merrell's School, in New York, or while residing with *1252 her mother in California or elsewhere, the Father has supported the Daughter and has paid for her entire maintenance; and WHEREAS the said Father, after the said decree of divorce and after the marriage of said Edith P. Latty to said Harry Johnson, inter-married with Miss Lillian I. Thomas on or about the 14th day of September, 1905, with whom he has lived and is now living, and who, by her careful management and full companionship with the Father, has been of great assistance in the progress of his social life as well as his business affairs, and to whom the said Father believes himself under great obligations for making an agreeable and satisfactory home life, and for participating in the solution of his business and financial problems; and WHEREAS because the Father's home life has been so full of companionship during its long continuance while he has been deprived, by virtue of the circumstances, of the companionship of the Daughter, the Father is desirous of doing*1748 his full duty in the making of any will or other provision for the enjoyment of his property after his death by the said Mrs. Lillian T. Latty; and WHEREAS the Daughter has fully appreciated the family situation with respect to her mother and Mrs. Lillian T. Latty, but has been told that the Father's health was failing and that he was unable to make a last will and testament disposing of his property in such a manner as to stand inquiry in the courts as to his capacity to make such disposition; but nevertheless and by reason thereof, is desirous of bringing such matters to the attention of the Father for such solution as may be mutually agreeable, occupying such relations as they do, inasmuch as such questions can be better settled in this way than for them to remain in a state of mutual ignorance and distrust; and WHEREAS the Daughter has approached the father on the subject of the disposition of his property and has expressed an anxiety as to its disposition and wishes to avoid any alienation of her father's interest in her; that might result even in the cutting off of the Daughter from participation as an heir to the said property of the Father, and it has been mutually agreeable*1749 to the parties hereto to discuss these questions with a view of making some present adjustment and without permitting resort to the courts of anybody that might be interested therein in case of the death of the Father; and WHEREAS the Daughter has made an examination of the affairs of the Father and of his mental condition and capacity, and has found by conversation with him and with those around him and with his physician, that he is of absolutely sound and disposing mind and judgment and that he is not in failing health, physically or mentally, and desires to make this agreement in full view of the facts which she has found to be true, and which she herein and hereby agrees and irrevocably concedes upon the considerations hereinafter named, are true, namely, that there is not the slightest impediment of any kind of description in the health, mind or memory of the said Father precluding in any manner the fullest settlement of his relations with the Daughter as herein set forth; and WHEREAS the Daughter has further taken account of all the relationships of the Father and has advised with counsel, being in fact the same counsel as has represented her mother in relations heretofore*1750 described with the father, to wit, Mr. Andrew Squire, of Cleveland, Ohio, and has been advised and has found upon such advice the fact to be that the provision herein made and to be made for her out of the property of her father is, under all the circumstances, fair, adequate, just and complete, and that the terms of the settlement hereinafter made are not only to her advantage for the monetary provision therein made for her, but are a source of satisfaction to her and to the Father by virtue of the complete accord herein witnessed for all time, so that neither party *1253 hereto shall have any anxiety beyond the performance of this agreement with reference to the future relations during the lifetime of both or of the situation and well-being of the survivor; and WHEREAS the Daughter upon her part realizing that she is the only child of the Father and that under the peculiar circumstances she has not been able to abide with him continuously as in ordinary life, recognizes that he is fully justified in settling the claims and demands of others of his family and of Mrs. Lillian T. Latty, and that he has and should have the fullest latitude to care for any and all objects of*1751 his concern and bounty in the making of any disposition of his property that he may deem best, apart from the provision made for her herein, and also is willing to agree, and hereby does agree, that any disposition he may make of the rest of his property not covered by this contract is fair, just and proper, and that she is not concerned in any degree in his making such disposition of the remainder of his property, looking only to this contract and the provisions herein made for her full, complete and adequate participation in any and all of the property of the said Father, wheresoever situate, whenever acquired and howsoever disposed of; NOW, THEREFORE, being fully advised in the premises and agreeing, upon the conditions hereinafter named, that the situation is as above described, the said Daughter upon her part agrees to accept and does hereby accept the agreement of the Father hereinafter contained as a full settlement and discharge of all claims, legal, moral and sentimental, which she has or ought to have or any time in the future may have against the Father growing out of her relationship as a daughter to him; and she further agrees that he is of sound and disposing mind and*1752 memory, that this contract was made while he was in the fullest possession of his faculties, that it is a fair and just provision under all the circumstances surrounding his life and condition, and that she will make no claim or demand against the Father either during his life or after his death for any support, maintenance or distribution to her as an heir-at-law or in any other way, shape or manner, that she will respect and abide by any last will and testament that the said Father may have made or may hereafter make, that she will enter into no suit to contest any such will, and will permit any court of competent jurisdiction to enjoin her fully and completely from so doing, and that she does hereby preclude herself by solemn agreement from making any demand against the estate or property of the said Father, from making any contest of any last will and testament he may leave, and to protect his estate free, clear and harmless from any such claim or demand made through or under her or by her authority or in her behalf. In consideration of all of the said agreements of the said Daughter and in full settlement of all of his obligations as a Father, legal, moral and sentimental, *1753 and in full settlement of any right which, but for this agreement, might vest in the Daughter during the lifetime of the Father, or might exist against his estate after his death, the Father does hereby agree to make the following provision for the Daughter, to wit: He will pay or cause to be paid to The Union Trust Company, of Cleveland, Ohio, or such other Trust Company as he may at the time of such payment select, and in accordance with the following conditions, and for her benefit, either in cash or in such securities as may be acceptable by The Union Trust Company as of the amount herein mentioned, the sum of Fifty Thousand Dollars ($50,000.00), and that until such time as he shall make such payment, he will pay to her as income thereon Twenty-five Hundred Dollars ($25,000.00) per year, or five per cent. (5%) upon such amount, payable semi-monthly on the first and fifteen day of each month, by mailing a check to her order or *1254 to the order of any bank that she may from time to time designate, it being understood that said sum of Fifty Thousand Dollars ($50,000.00) may, at the election of the Father, be paid in installments from time to time as may be convenient to*1754 him, and that to the extent of such payments from time to time, said yearly payment of Twenty-five Hundred Dollars ($2500.00) to the Daughter shall be proportionately reduced. Said sum of Fifty Thousand Dollars ($50,000.00) or any part thereof when so paid by the Father or his estate to said Trust Company in cash or securities, together with the income therefrom, shall be by said Trust Company held in trust for the said Daughter, subject to the following terms and conditions: 1. The trustee shall have full power and authority to assign, sell, transfer and deliver the said trust property, to invest, reinvest, mortgage, manage, control and deal therewith upon such terms and conditions as in its judgment it may see fit as full and absolute owner, and in the execution of said trust, to comply with all legal requirements as to writings, deeds, mortgages or other formalities. All statutory limitations or requirements as to the investment of trust funds are hereby expressly waived. The trustee shall have full power and authority to decide as to what is income and what is principal as to any of the obligations of the said trust, and the decision of said Trustee shall be final. A liberal*1755 allowance, however, in favor of income shall be made by the trustee. Said trustee shall not be liable in carrying out the terms of this trust for any act or misconduct of its agents or attorneys, but only for its own willful misconduct. 2. The trustee shall pay the net income to said Daughter at least semiannually and shall make at least annual statements of the investments, income, etc., such payments shall be made to her during the period of her natural life, without power of anticipation, except as hereinafter provided, and without any right or power in the said beneficiary to assign, sell, mortgage or otherwise alienate the said income or the principal of said trust fund. At the death of the said beneficiary, the trust fund shall be distributed by the said Trust Company as she may have by last will and testament appointed, or should she die intestate, as the laws of the State under which her estate shall be administered shall direct. 3. In the event of any pledge, assignment, legal process, or attempted alienation, voluntary or involuntary, affecting the income or principal of this trust, or of any rights of beneficiary hereunder, or in the event of any attempt by any*1756 creditor or other person or persons to subject the said income or principal to any claim or demand whatsoever, the said trustee or its successor in trust, shall have the right to terminate any and all payments hereunder, and are authorized to retain the said income allowing it to accumulate and be added to the principal for distribution, providing, however, the Trust Company may, if desirable in its full discretion, apply the said income to the support and maintenance of the said beneficiary, the Daughter, or to the support, maintenance and education of any child or children which she may have at that time, but such application shall be in amount and manner subject to the sole and uncontrolled discretion of the Trustee, and shall in no event accrue; directly or indirectly, for the benefit of any other person or persons, except the said beneficiary or her children. Should the beneficiary, by reason of age, sickness or other casualty, be in a position where, in the judgment of the trustee, an allowance of principal should be made for her care, support and maintenance, or that of any child or children she may have, they are authorized to use such part as in their judgment may be desirable, *1757 with the view of seeing that the amount may out-last the life of the beneficiary, and may be wisely used for her comfort and contentment, to the end of her natural life. *1255 4. The obligation of the Father hereunder, until the trust fund herein provided for shall have been established, is subject to all the foregoing terms and conditions made applicable herein to the management of the trust estate. The meaning and intent of this agreement is to finally and for all time settle the relations between the parties hereto as to all property matters so that all anxiety of either party as to the future relationships of each to the other shall be definitely and finally determined, and the said Father, recognizing the relationship between the Mother of the said Daughter and the Daughter, hereby agrees that in case of the death of the said Daughter before his decease, without leaving a valid last will and testament, he will assign and transfer to the Mother of the said Daughter, should she be living, any right, title and interest that he may have in the estate of the said Daughter, and especially in any fund that may have been created by him under the trust provisions of this*1758 agreement. However, should the said Daughter die before said fund shall have been created, no heirs or legatees of the said Daughter shall have any rights in and to this agreement, except for any installment that may be at that time due, provided, however, that should the said Daughter at the time of her decease leave a child or children surviving her, the provisions of this contract shall inure as fully to said child or children and shall be strictly performed in their behalf, except that the said sum which is provided for herein for the said Daughter shall be paid to any guardian that may be legally appointed for their use and benefit absolutely. In view of the mutual desire of the parties hereto to settle and dispose of all questions between them that now exist or may hereafter arise, the said Daughter agrees that, in the event of any claim or demand being made by her or in her behalf for any further part of the property of the said Father, or in the event of any attempt by her or in her behalf to contest any will, contract, trust agreement, or other form of disposition of his property, or any part thereof that may be made after the date hereof, she will forfeit all right and*1759 interest in this agreement and trust fund created and to any part of the assets or property of the said Father which he may have now or may dispose of by such last will and testament, or other form of disposition. She makes this agreement voluntarily to forestall the effect of any influence that may be brought to bear upon her from any source whatsoever, or that may be made effective by virtue of any guardianship or other person acting in her behalf, and desires to preclude any such act or action by the imposition of the completest forfeiture of any and all claims and demands under any will or as heir at law in the disposition of the Father's property. The Father in making this agreement is actuated by a desire to arrange money matters definitely and irrevocably so that all future relationships with the Daughter may be free from any suspicion of sordid motives on either side, and feels that by the provisions hereof which make her a preferred beneficiary of his property without regard to the risks, industrial and otherwise, to which his property is subject, he has provided for her in a way to meet his full responsibility in the premises even though with good fortune attending, his*1760 estate at the time of his demise might be more than is represented apparently by this gift. Under all the circumstances and feeling the greatest affection for the Daughter he satisfies himself that he has done and herewith is doing the best thing for her welfare, peace of mind and happiness. The decedent did not during his lifetime pay over any part of the principal sum of $50,000 as provided in the agreement and the petitioner, as executrix of the estate, paid to Helen Latty Jackson the sum of $53,381.55. *1256 In her Federal estate-tax return the petitioner deducted as debts of the decedent two items of $50,000 and $3,381.55, which were designated in the schedule of debts as "Helen L. Jackson, contract debt." The respondent disallowed the deductions. 2. At the time of the death of decedent there were in force the following policies of insurance on his life in which Lillian T. Latty was named as beneficiary: Company Amount Taken out Beneficiary named Bankers Life Co $2,000 June, 1909 June, 1909. Bankers Life Co 2,000 June, 1909 June, 1909. Aetna Life Ins. Co 3,000 May, 1919 May, 1919. Connecticut General Life Ins. Co 90,000 October 11, 1920 October 11, 1920. Cleveland Accident Ins. Co 2,000 December 13, 1890 July 12, 1911. *1761 The amount of these policies, together with the proceeds of another policy, was reported in the estate-tax return as insurance receivable by beneficiaries other than the estate, and the excess over $40,000 was included in the gross estate. OPINION. STERNHAGEN: 1. The estate contends that the amount paid to decedent's daughter was a deduction in determining the net estate Section 303(a)(1) of the Revenue Act of 1924 governs. It permits the deduction of "claims against the estate * * * to the extent that such claims * * * were incurred or contracted bona fide and for a fair consideration in money or money's worth * * *," and the question is whether the amount represents such a claim. There appears at once the question whether this is a "claim" within the contemplation of the Act. If one contracts in life to make a legacy or to permit property to descend by law, is the amount of such legacy or distribution a claim against the estate merely because it was contractually obligatory? Here the decedent agreed to provide a trust fund for his daughter either in life or after death. He failed to do so in life, so his estate became charged with the obligation. Instead of placing*1762 the money in trust, the executors paid the entire principal directly to the daughter. It may be doubted, without deciding, whether this was such a claim as was intended by the Act. But passing that, and assuming that by virtue of the contract there was a claim against the estate, it may only be deducted if "incurred or contracted bona fide and for a fair consideration in money or money's worth." It is not suggested that there was any lack of bona fides, nor is there need to inquire whether the contract was valid or the consideration fair enough to support it. If the consideration *1257 was not both fair and in money or money's worth, the claim is not deductible. The consideration for the alleged claim was in essence merely a promise to refrain from claiming more. The daughter gave up no money and nothing which could be called moneys' worth. Her right to contest any will which her father might make was not the equivalent of cash to her or to any one else. To hold it to be a fair consideration in money's worth would not only shock the common understanding of ordinary language, but would frustrate the plain purpose of the statutory limitation of the deduction. There*1763 is no sense in taxing testamentary transfers and yet permitting the deduction of such sums as are transferred at death pursuant to a contract with a natural beneficiary who has agreed not to contest the will. Such a plan should only be found in clear, impelling language. The transfer is still testamentary and the primary object of the tax, and the tax is not to be reduced by calling it a claim based on an antecedent consideration. The phrase "fair consideration in money or money's worth" appears not only in section 303, but several times in section 302, and to construe it broadly enough to cover the daughter's promise would result in defeating the clear purpose of its use throughout the Act. 2. The petitioner contends that no part of the amount of the insurance policies set forth in the findings is part of the decedent's gross estate. The argument is in substance the same as that rejected by the Supreme Court in . For all that appears, the policies were subject to decedent's right until his death to change the beneficiary; and under such circumstances, the amount thereof in excess of $40,000 is by section*1764 302(g) properly included in the gross estate. . 3. The credit of 25 per cent on account of State inheritance tax will be adjusted. Reviewed by the Board. Judgment will be entered under Rule 50. VAN FOSSAN VAN FOSSAN, dissenting: I find myself in disagreement with the majority of the Board on the first point involved in this case. The question is whether or not the failure of the decedent to perform fully his agreement with his daughter gave rise to a valid, enforceable claim against his estate, the amount of which is deductible from the value of his gross estate. Section 303(a)(1) of the Revenue Act of 1924 is applicable to this question. Pursuant to that section the value of the decedent's *1258 net estate is to be determined by deducting from the value of the gross estate certain items, specified in the section, including claims and indebtedness which were incurred or contracted "bona fide and for a fair consideration in money or money's worth." The respondent does not contend that there was any lack of good faith in the agreement executed December 1, 1923, by the decedent and his*1765 daughter. He contends, however, that the decedent's obligations as set forth in the agreement were not supported by a fair consideration in money or money's worth. Examination of the terms of the agreement discloses that the daughter not only contracted to make no further claims or demands against her father during his life or against his estate after his death, but also covenanted to "respect and abide by any last will and testament" executed by her father and not to enter into any suit "to contest any such will." On his part the decedent agreed to pay over for his daughter's benefit the sum of $50,000 and to pay her an income at the rate of $2,500 per year until such time as the principal sum should be paid by him. While it is true that at common law a mere possibility could not be assigned, equity recognized the force of such agreements as the one now in question and gave them effect and validity. ; . In Story's Equity Jurisprudence, vol. 2, sec. 1040(c), it is stated that: The naked possibility or expectancy of an heir to his ancestor's estate may become the subject of a contract of sale or*1766 settlement, and in such case if made bona fide for a valuable consideration it will be enforced in equity after the death of the ancestor; not indeed, as a trust attaching to the estate but as a right of contract. In ; ; , the court held that: An heir at law may for a sufficient consideration release to his father the share which he might have at the parent's decease in the latter's estate, either or personal, so that he will thereby be estopped from establishing any claim thereto as one of the heirs at law or next of kin. There has never been any question about agreements made between the heirs or next of kin and the representative of an estate, after the death of the testator, concerning compromises and settlements. These have always been sustained by the courts when made in good faith and not against public policy. ; ; ; *1767 ; ; . The present proceeding, however, is not such a case. In ; , the court discussed the enforceability of an agreement essentially similar to the one in question in this proceeding. In that case the court said: *1259 We are not here dealing with agreements made after the death of the testator, but agreements made before the death of the testator regarding the future disposition to be made of an estate and the claims of the parties thereto. Such agreements are akin to those implied in the taking of a legacy bequeathed upon the conditions stated in the will that no contest shall be made. Such provisions have been recognized as good. ; 2 Jarmon on Wills *902; 2 Redfield on Wills *298; ; * * *. Every consideration of justice would demand that such an agreement fairly and openly made while the testatrix was alive, and relied upon in disposing of her property, should*1768 be supported. Under the agreement in this proceeding the decedent's daughter, Helen Marie Latty, became as a stranger to his estate. In consideration of her father's promise she parted with a valuable right, namely, her right as heir as next of kin to endeavor, if she chose, by means of a contest of her father's will, after his death, to secure a large share of his estate, which, as the facts show, amounted to more than $900,000. Whether or not there were grounds for such a contest is a question of no moment. The right to contest her parent's will after his death was of itself a right of value, ; , and in my opinion the surrender of this right by the daughter constituted a fair consideration in money or money's worth to support the promise made by the decedent. . For the foregoing reasons I am of the opinion that, because of the decedent's failure to perform the terms of the agreement on his part to be performed, there arose an enforceable claim against the decedent's estate for the sum of $50,000 with interest. Since*1769 the executrix settled this claim by its payment in full, the amount thereof is deductible from the gross estate of the decedent under the provisions of section 303(a)(1) of the Revenue Act of 1924. For these reasons I must dissent from the conclusion reached.