Continental Illinois Nat'l Bank & Trust Co. v. Commissioner

CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, EXECUTOR OF THE LAST WILL AND TESTAMENT OF FRED B. JONES, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Continental Illinois Nat'l Bank & Trust Co. v. Commissioner Docket No. 87203. United States Board of Tax Appeals 38 B.T.A. 220; 1938 BTA LEXIS 896; July 29, 1938, Promulgated *896 Petitioner's testator, in his will, made certain bequests to charitable organizations which constituted proper deductions from the value of the estate in computing the Federal estate tax. After the probate of the will, certain heirs at law of testator filed a suit contesting the validity of the will. The charitable beneficiaries and the contestants effected a compromise agreement, whereby the contestants were paid $75,000, made up by contributions from the beneficiaries in proportion to the amounts of their bequests, and the contestants released their claims against the estate. A consent decree was entered in the will contest suit finding against the contestants and confirming the probate of will. Held, the deduction for the bequests to the charitable organizations should not be diminished by the $75,000 thus paid. Harry Thom, Esq., for the petitioner. R. F. Staubly, Esq., for the respondent. KERN *220 This proceeding involves a deficiency in Federal estate tax in the amount of $113,260.83 determined by respondent by reason of his disallowance of a deduction claimed for executor's and attorney's fees and a part of the deduction claimed*897 for charitable legacies and bequests. The only question, however, presented in the facts, which *221 were stipulated, and the briefs submitted, is with regard to the disallowance of part of the deduction claimed for charitable legacies and bequests. It is stated in petitioner's brief that respondent has stipulated to the allowance of the deduction for fees paid as claimed. FINDINGS OF FACT. The facts herein are stipulated by the parties and are found by us to be as stipulated. Those facts which are material may be summarized as follows: Fred B. Jones, a resident of the city of Chicago, Illinois, died testate on April 9, 1933. His last will and testament, duly probated on August 2, 1933, provided for a number of specific bequests to named individuals and specific and residual bequests to corporations which qualified as corporations organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes under section 303(a)(3) of the Revenue Act of 1926, as amended. On July 20, 1934, certain heirs of the testator, who were not beneficiaries under his last will and testament, filed a complaint in the Circuit Court of Cook County, *898 Illinois, contesting the validity of the decedent's will. On December 15, 1936, certain of the charitable legatees entered into an agreement with the contestants, whereby the charities agreed to pay $75,000 to the contestants in settlement of the will contest action. The $75,000 was contributed by the charities ratably in proportion to their respective legacies. The settlement payment was made by the following charities in the amounts set opposite their respective names: Home for Destitute Crippled Children $3,000 Old Peoples Home 3,000 Chicago Home for the Friendless 3,000 Young Men's Christian Association of Chicago 1,500 Chicago Community Trust 40,500 Salvation Army of Illinois 3,000 Allendale Association 1,500 Boy Scouts of America 1,500 Chicago Chapter of American Red Cross 1,500 Children's Memorial Hospital 3,000 Chicago Home for Incurables 3,000 Glenwood Manual Training School 1,500 Supreme Lodge of the World (Loyal Order of Moose) 1,500 Little Sisters of the Poor 1,500 Improvement Assn. for Blind People (also known as "Chicago Lighthouse") 1,500 Young Women's Christian Association 1,500 Chicago Polyclinic of Chicago, Illinois 1,500 Trustees of Pittsfield, Pike County, Illinois, Public Library, and Pittsfield Public Library and city of Pittsfield, a municipal corporation 1,500 *899 *222 The Circuit Court of Cook County, Illinois, on December 15, 1936, entered a consent decree which, after setting forth the terms of the settlement agreement, provided: It is further found, ordered, adjudged, and decreed by consent as aforesaid, that the allegations of said petition are true, that there is no equity in said complaint as to plaintiffs, that the equities are against the contestants and that said instrument dated May 25, 1932, heretofore on August 2, 1933, admitted to probate in the Matter of the Estate of Fred B. Jones, deceased, in the Probate Court of Cook County, is the Last Will and Testament of said Fred B. Jones, deceased, and the probate thereof is in all respects confirmed." (Exhibit "B", page 8, attached to Stipulation.) The time in which to appeal from said decree has expired. The decedent's net estate, after all allowable deductions have been taken, except the deduction for charitable bequests and the specific exemptions allowed in the Revenue Acts of 1926 and 1932, is $1,006,702.75, of which amount $886,077.34 represents that portion of the estate passing to charitable institutions under the terms of the will as probated and affirmed. *900 OPINION. KERN: Petitioner's testator, by his will, made numerous bequests to corporations operated exclusively for religious, charitable, scientific, literary, or educational purposes within the meaning of section 303(a)(3) of the Revenue Act of 1926, set out in the margin. 1 The testator died in 1933 and his will was admitted to probate in the Probate Court of Cook County, Illinois. Thereafter, certain heirs at law of the testator, who were not beneficiaries under his will, filed a complaint in the Circuit Court of Cook County, Illinois, contesting the validity of his will. In 1936 the beneficiaries under the will effected a compromise with the contestants of the will, whereby they agreed to pay the contestants the sum of $75,000, to which sum the beneficiaries contributed ratably in proportion to their legacies, including the trustee to whom testator had bequeathed the *223 residue of his estate under a charitable trust, and whereby the contestants released all claims against the estate or the assets thereof. This compromise agreement was approved by the Circuit Court of Cook County in a consent decree which found that there was no equity in contestants' complaint*901 and that the will contested was the last will and testament of the testator and confirmed its probate. It is conceded that the estate of testator is entitled to deduction pursuant to section 303(a)(3) of the Revenue Act of 1926, supra, in the amount of the bequests to the charitable and educational legatees, but it is contended by respondent that the amount of such deductions should be reduced by the sum of $75,000 which was contributed by the charitable and educational beneficiaries and was ultimately paid to and enjoyed by certain of testator's heirs at law as to whom no such deduction would be allowable. *902 In our opinion, this contention is without merit. The rights of a beneficiary under a will are property rights and a determination of them by a state court of competent jurisdiction is decisive as to their extent and character. Freuler v. Helvering,291 U.S. 35; Blair v. Commissioner,300 U.S. 5. Whether property is received by way of inheritance or otherwise depends upon the law of the jurisdiction under which the taxpayer receives it. Uterhart v. United States,240 U.S. 598; Lyeth v. Hoey, 96 Fed.(2d) 14 (C.C.A., 2d Cir., Apr. 11, 1938). Under the law of Illinois, an agreement of compromise such as was involved in the instant case does not constitute a modification of the will, the payments incident to the compromise being considered as made and received pursuant to the agreement and not under the will or the intestate laws of the state. People v. Union Trust Co.,255 Ill. 168; 99 N.E. 377; People v. Upson,338 Ill. 145; *903 170 N.E. 276. The contestants in the instant case, the heirs at law of petitioner's testator, did not receive the payments to them in compromise of their claims against the estate as a bequest or inheritance, but by purchase from those who acquired title under the allowed will. Their rights were contractual and not testamentary. Lyeth v. Hoey, supra; Bernard O. Kearney,31 B.T.A. 935. The case of Magruder v. Segebade, 94 Fed.(2d) 177 (C.C.A., 4th Cir., Jan. 4, 1938), cited by respondent, does not persuade us to the contrary. The court in that case considered this question but cited as the sole authority for its conclusion the case of Lyeth v. Hoey,20 Fed.Supp. 619, the decision in which was later reversed by the Circuit Court of Appeals for the Second Circuit in Lyeth v. Hoey, supra. To hold, as we have done, that the contestants did not receive the payments involved herein under the will of petitioner's testator or the intestate laws of Illinois, would seem to dispose of the question presented in this proceeding, since the respondent does not contend *224 that the deduction allowed*904 under section 303(a)(3) of the Revenue Act of 1926 is limited to that portion of the legacy which is ultimately received and enjoyed by such beneficiary after the payment of expenditures incident to its acquisition. Such a contention would be futile in view of the authorities holding contra. Edwards v. Slocum,264 U.S. 61; Howard K. Walter et al., Executors,2 B.T.A. 453; John Aspinwall Hadden, Jr.,10 B.T.A. 741. It is respondent's contention that, in fact even if not in form, the contestants here received $75,000 which belonged to the testator's estate prior to the distribution to the beneficiaries and received this sum because they were heirs, and, therefore, this sum was not a proper deduction. Although the contestants here may have received the payment because they were heirs at law of the testator, they did not receive it as heirs or from the estate pursuant to the will. As we have pointed out, the payment was made by the beneficiaries out of legacies which were proper deductions under the revenue act, pursuant to a compromise agreement which, under the law of the State of Illinois, did not constitute a modification*905 of the will of petitioner's testator, and, therefore, will not diminish the amount of the deductions properly taken pursuant to section 303(a)(3) of the revenue act. It is stipulated by the parties that if we hold, as we have held, that the deduction otherwise allowable for bequests to charities should not be diminished by the amount of $75,000, then the deficiency in the estate tax is the sum of $147.99. Decision will be entered that there is a deficiency in the sum of $147.99. Footnotes 1. SEC. 303. For the purpose of the tax the value of the net estate shall be determined - (a) In the case of a resident, by deducting from the value of the gross estate - * * * (3) The amount of all bequests, legacies, devises, or transfers, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate; * * * ↩