Sterling v. Commissioner

ELIZABETH H. STERLING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Sterling v. Commissioner Docket No. 74789. United States Board of Tax Appeals 34 B.T.A. 1124; 1936 BTA LEXIS 589; October 20, 1936, Promulgated *589 The petitioner's father bequeathed certain real estate to trustees to pay portions of the income to two sisters for life and to pay the balance of the income to his son. On the death of the two sisters the son was to receive the remainder of the property in fee. The son predeceased one of his two aunts, leaving a will in which he bequeathed all of his property, except a specific bequest of money, to his widow. On the undertaking of the widow to sell the real estate mentioned a question was raised by the title company as to its ownership, and thereafter a friendly agreement was entered into under which the petitioner and her mother and the son's widow all executed deeds to the property in favor of the purchaser and the petitioner received a certain portion of the selling price. Held, that the amount so received by the petitioner was not an inheritance from her father's estate and constituted taxable income to her. Edward Holloway, Esq., for the petitioner. Carroll Walker, Esq., for the respondent. SMITH *1124 This proceeding involves a deficiency in petitioner's income tax for 1930 in the amount of $5,552.71. The question in issue is*590 whether *1125 the amount received by the petitioner in 1930 from the sale of certain real estate belonging to the heirs or legatees of her deceased father constitutes taxable income of the petitioner. FINDINGS OF FACT. The petitioner is a resident of Wilton, Connecticut. Emile Heydenreich, petitioner's father, was a resident of Kings County, New York, who died testate in 1911, seized of real estate situated at 90-92 Beekman Street, New York City. He was survived by a son, Louis V. Heydenreich, a daughter, Elizabeth H. Sterling, petitioner herein, and his wife, Annabel Heydenreich, as his only heirs and next of kin. Emile Heydenreich left a will which was duly admitted to probate in the Surrogate's Court of Kings County, New York, on April 5, 1911. The will reads in part as follows: First: - I give and bequeath unto my daughter Elizabeth Sterling, bonds and Mortgages, aggregating the sum of One hundred thousand dollars, to be selected by the majority of my Executors hereinafter named, out of my estate. Second: - I give and bequeath unto my son Louis V. Heydenreich, all my interest, right, title and claim in and to, and my property in, the co-partnership or firm*591 of E. Fougera & Co. situate in the Borough of Manhattan, City and State of New York. Third: - I give and bequeath unto my wife Annabel Heydenreich Bonds and Mortgages and other Securities, aggregating sixty thousand dollars, to be selected by the majority of my Executors out of my estate, also all my household furniture, all of the above to be accepted by my wife, in lieu of her dower in my real estate. Fourth: - I give, devise and bequeath unto my Executors, hereinafter named, and to the survivors or survivor of them, or the one or more of them who may qualify and act, all my real estate, subject however to the mortgage now thereon, upon trust however, during the lifetime of my two sisters, Louise E. Zabriskie and Julia Heydenreich, to collect the income therefrom and pay over to said Julia Heydenreich the sum of Sixty dollars per month, during her lifetime, out of said income, and to pay over to said Louise E. Zabriskie the sum of Fifty dollars per month during her lifetime out of said income, and after said payments aforesaid to pay over the balance of said income to my son Louis V. Heydenreich, and upon the death of my said two sisters, I give, devise, and bequeath all my*592 real estate, to my said son Louis V. Heydenreich, subject to the mortgage now thereon. Fifth: - I give and bequeath unto my nephew, William Frederick Dress, and to my nieces, Anna Crook, May Crook and Anna C. Lent, each the sum of One thousand dollars. Sixth: - I give, devise and bequeath all of the foregoing devises, legacies and bequests, free and clear of any and all testamentary charges, taxes and expenses. Seventh: - All the rest, residue and remainder of my personal estate, I give and bequeath equally between my wife, son and daughter. Eighth: - I nominate, and appoint my wife, Annabel Heydenreich, my daughter Elizabeth Sterling and my son Louis V. Heydenreich and the survivors *1126 or survivor of them, to be the Executrices and Executor and Trustees of this my last Will and Testament. In Witness Whereof, I have hereunto set my hand and seal, this 19th day of February, in the year 1908. Louis V. Heydenreich died September 11, 1919, during the lifetime of Julia Heydenreich, mentioned in item fourth of the will. During his lifetime Louis V. Heydenreich claimed title in fee to the real property owned by his father at the date of death. This ownership*593 was subject only to the payments of portions of the income to Emile Heydenreich's sisters, namely, Louise E. Zabriskie and Julia Heydenreich. Louis V. Heydenreich left a will, under item second of which it was provided: "I give, devise and bequeath unto my beloved wife ELIZABETH W. HEYDENREICH, all the remainder of my estate, both real and personal." From the date of death of Louis V. Heydenreich (September 11, 1919) to October 30, 1930, his widow, Elizabeth W. Heydenreich, collected the rents, paid the taxes, and in all other respects managed and controlled the real property formerly owned by Emile Heydenreich as the absolute owner thereof. On July 31, 1930, Elizabeth W. Heydenreich entered into a contract for the sale of the property at 90-92 Beekman Street, to which she claimed ownership in fee as devisee under the provisions of them second of the will of her deceased husband. The title company acting for the purchaser in searching the title questioned the ownership of Elizabeth W. Heydenreich to the real property located at 90-92 Beekman Street. The question was whether under the will of Emile Heydenreich, deceased, his son, Louis V. Heydenreich, took a contingent or*594 vested remainder in the real property in question. A friendly relationship existed between the petitioner, her mother, Annabel Heydenreich, and Elizabeth W. Heydenreich. All parties concerned were willing that the property should be sold pursuant to the agreement entered into by Elizabeth W. Heydenreich on July 31, 1930. Before the title company would issue a certificate of title, it required that Annabel Heydenreich, the widow of Emile Heydenreich, execute a bargain and sale deed, and that the petitioner and Elizabeth W. Heydenreich execute warranty deeds. The deeds were duly executed. Title to the property was passed October 30, 1930, and the money was held subject to the determination of the question of ownership. The property was sold subject to a mortgage. The total purchase price was $212,500. It was eventually agreed that the parties did not desire the expense or trouble of an action to construe the will and by an amicable arrangement the net proceeds were divided between Elizabeth W. Heyenreich and the petitioner. Of the proceeds the petitioner received, in 1930, $46,156.25. *1127 In her income tax return for 1930 the petitioner reported $14,906.25 as income*595 from the sale of the real property at 90-92 Beekman Street, New York City. The respondent was of the opinion that the entire amount received by the petitioner constituted taxable income. He therefore added to the amount reported from the transaction $31,250 and determined the deficiency accordingly. During 1930 the petitioner realized taxable income from the sale of the property in the amount of $46,156.25. OPINION. SMITH: The petitioner now contends that she received the amount of $46,156.25 in settlement of her claim to ownership of the property in question as the proceeds of its sale, and that the entire amount represented an inheritance from her father's estate under his will and is not taxable as income to her. There can be no doubt, we think, that upon the death of Emile Heydenreich under his will the remainder interest in the property in question vested in Louis V. Heydenreich, subject only to the payment of portions of the income to his two aunts. See , and discussion therein of vested and contingent remainders under the laws of the State of New York. See also *596 . Looking at the entire will, it was clearly the intention of the testator, Emile Heydenreich, that the real property mentioned in item second of his will should pass to his son irrevocably, subject only to the annual payments referred to above. He made no provision in his will for any other distribution of the property, nor did the will contain any provision for the devisement of the son's remainder interest upon any contingency whatever. Elsewhere in his will he made substantial bequests to his widow and both of his children. (See items first, second, and third of the will quoted above.) The stipulated facts do not disclose the terms of the agreement under which the petitioner received the payment of $46,156.25. We do not know whether that amount represented some proportional part of the price to which the petitioner was said to be entitled because of her present ownership in the property or whether it was merely an arbitrary amount paid to her in consideration for her agreement not to press her claim to all or any part of the property. We held in *597 , that an amount of money paid to an heir of a decedent by the residuary legatees in consideration for the heir's agreement not to contest the decedent's will was not a gift, devise, bequest, or an inheritance and was all taxable income to the heir. In her brief the petitioner contends that under any theory of this case the money received by her "was received by inheritance as it *1128 represented the amount received by her under or by virtue of the Will of EMILE HEYDENREICH." It is certain, however, that the petitioner did not acquire any interest in the property in question under the will of Emile Heydenreich. She was not named in the will as even a remote legatee in respect of the property. Apparently the petitioner based her claim to ownership of some part of the property, or some part of the proceeds from its sale, on her rights as an heir at law of the testator rather than as a devisee under the testator's will. Undoubtedly such a claim would have had validity if there had been a failure of the testator's will and a distribution of the property under the intestacy laws of the State of New York. The facts do not*598 indicate that this is what took place. It is not shown that the petitioner was ever adjudged the owner of any part of the property itself, or that as owner she ever sold any interest in the property. Apparently she was required to execute the deed, as was also her mother, out of an abundance of caution on the part of the purchaser. It is provided by statute under the Real Property Law of the State of New York, L. 1909, ch. 52, par. 57, McKinney's Consolidated Laws of New York, Annotated, Book 49, p. 83, that: "an expectant estate may be defeated in any manner, or by any act or means which the party creating such estate, in the creation thereof, has provided for or authorized." As stated above, Emile Heydenreich, in creating the remainder, or "expectant", estate in Louis V. Heydenreich, did not provide for the defeat of the estate in any manner or by any means whatever. It is further provided by the New York statutes, supra, ch. 52, par. 59, p. 85, that: "Qualities of expectant estates. An expectant estate is descendible, devisable and alienable, in the same manner as an estate in possession." In *599 ; , the testator devised the residue of his estate to his executors in trust to pay certain of the income to a named beneficiary for life, with the remainder of the income to his son for life, and on the death of the son the remainder to certain nephews and nieces. The court held that the nephews and nieces took vested remainders on the death of the testator and that the interests or shares of those dying passed to their estates. The opinion reads in part as follows: The will under consideration in , is very similar to the one now being passed upon. In that case the testator gave to his daughter the use of a share of his estate during her natural life, "and after her death" gave and devised the same to her two children, and it was held that the two children took vested remainders upon the death of the testatrix, and upon the death of one of the children before the death of his mother that child's interest passed to his issue. *1129 The Court of Appeals held in *600 , that the remainder was vested under a will which placed the residuary estate in trust to pay the income to one during his lifetime and to pay the principal or so much thereof as then remained to another (the trustee having been given discretion to invade the principal for the life tenant's use), and that, the remainderman having predeceased the life tenant, the corpus descended to the remainderman's issue. The use of words of time such as "at," "on," and "after" usually refer to the time of the enjoyment of an estate and not to the time of its vesting in interest. ; New York Law of Wills, section 955, Remsen, Preparation of Wills, 196. It is therefore held that the named nephews and nieces of the decedent took vested remainders, and that, some of them having since died, the interests or shares of the latter pass to their estates, for vested remainders may be alienated, inherited, and devised. Real Property Law, sec. 59; *601 . The remainder estate in the property in question was vested in Louis V. Heydenreich at the time of his death and passed under his will to his widow, Elizabeth W. Heydenreich, and not to the petitioner. To prove her contention that the amount of $46,156.25 which she received under the settlement agreement was a tax-free inheritance from her father's estate, the burden is upon the petitioner in this proceeding to show that the amount represents that part of the estate which she received, or was entitled to receive, as the lawful owner. The stipulated facts offer no basis for this conclusion. It does not appear that this was the substance of the agreement under which the amount was paid to the petitioner. On the other hand, we have determined from the facts of record, and under the Real Property Laws of the State of New York, that the petitioner owned no interest whatever in the property itself. It follows, we think, that the amount received by the petitioner was in no sense an inheritance from her father's estate. Since there was admittedly a valid consideration for the payment, namely, the petitioner's relinquishment of*602 any and all claims to the property, and the proceeds from the sale thereof, the payment was not a gift to her. We must conclude that the entire amount of $46,156.25 received by the petitioner is includable in her taxable income under section 22 of the Revenue Act of 1928 as "gains or profits and income derived from any source whatever." Reviewed by the Board. Judgment will be entered for the respondent. STERNHAGEN, VAN FOSSAN, MURDOCK, ARNOLD, and HARRON concur only in the result. LEECH and MELLOTT dissent.