Borland v. Commissioner

ESTATE OF HARRIET BLAIR BORLAND, CHAUNCEY BORLAND, BRUCE BORLAND, AND CYRUS H. ADAMS, JR., EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Borland v. Commissioner Docket No. 82722. United States Board of Tax Appeals 38 B.T.A. 598; 1938 BTA LEXIS 848; September 23, 1938, Promulgated *848 Decedent loaned securities to a cousin for use as additional collateral to that pledged to secure the latter's indebtedness to a firm of brokers. Held, the full value of decedent's securities so loaned should be included in her gross estate; held, further, the value of decedent's securities used in satisfying the indebtedness to the brokers, less the fair market value of the cousin's collateral remaining at the time the brokers' indebtedness was satisfied, is a proper deduction under section 303(a)(1), Revenue Act of 1926, as amended. J. F. Dammann, Esq., and Stuart J. Templeton, Esq., for the petitioners. W. Frank Gibbs, Esq., for the respondent. ARNOLD *598 This proceeding involves a deficiency in estate tax of $19,536.30. The question presented is whether, as a matter of law, the entire value of securities loaned by the decedent to secure the indebtedness of another should be included in her gross estate, or merely the *599 value of her interest in the securities, which would be determined by reducing their fair market value at the date of decedent's death by the amount of the indebtedness which they secured. There*849 is no dispute between the parties as to the facts. FINDINGS OF FACT. The petitioners are the duly qualified and acting executors under the will of Harriet Blair Borland, who died, a resident of Chicago, Illinois, on September 16, 1933, at the age of eighty. On May 14, 1930, the decedent, and her cousin, Mary Blair Keep, entered into an agreement with Carrie D. Holland, who was a cousin of each, and with named trustees, for the purpose of protecting a margin account of Carrie D. Holland with Mitchell, Hutchins & Co. of Chicago. The decedent and Mary Blair Keep loaned securities in equal amounts to Carrie D. Holland to be used as collateral for her indebtedness with Mitchell, Hutchins & Co. which amounted to $233,509.05 at April 30, 1930. Among other things the agreement prohibited Carrie D. Holland or her son from trading in the account, reserved to decedent and Mary Blair Keep, the income from collateral loaned by them, gave the trustees full authority as to the account and securities therein, and provided for the termination of the account in any event at the end of three years and return of unsold securities to the respective owners thereof. Under this agreement Mary*850 Blair Keep's collateral in Carrie D. Holland's account was 1,000 shares of Texas Corporation stock, and decedent's collateral was 1,000 shares of Chicago Corporation convertible preferred stock and 1,000 shares of Chicago Corporation common stock. Under date of June 30, 1932, a second agreement was entered into regarding the account of Carrie D. Holland with Mitchell, Hutchins & Co., the parties thereto being the decedent, Mary Blair Keep, the trustees, and Carrie D. Holland. The principal reason for the second agreement was to divide the Carrie D. Holland account and her securities equally, into account "#1" and "#2," the decedent's collateral and one-half of Carrie D. Holland's collateral and indebtedness being placed in the Carrie D. Hollard account #1, and the other half and Mary Blair Keep's collateral being placed in account #2, Chauncey B. Borland and Bruce Borland managing account #1, for the decedent, and James C. Hutchins and Robert A. Gardner managing account #2, for Mary Blair Keep. At May 31, 1932, the indebtedness of Carrie D. Holland was $212,173.57, which indebtedness was divided by the agreement of June 30, 1932, as follows: $106,086.78 to the Carrie D. Holland*851 account #1, and $106,086.79 to the Carrie D. Holland account #2. The fair market value of the decedent's securities used as collateral for account #1 on June 30, 1932, was $95,900.00. The fair market *600 value of Carrie D. Holland's securities in account #1 on June 30, 1932, was $15,945.12. At the date of decedent's death, September 16, 1933, the fair market value of her securities held as collateral for account #1 was $121,868.72. The fair market value of Carrie D. Holland's securities in account #1 on the same date was $32,813.27. The total indebtedness of the Carrie D. Holland account #1 to Mitchell, Hutchins & Co. on the date of decedent's death was $127,855.33. The debit balance of the Carrie D. Holland account #1 was liquidated April 30, 1936, by payment of $32,173.17 by the estate of Harriet Blair Borland. A consolidated statement of account #1 from September 16, 1933, to April 30, 1936, inclusive, reveals the following totals of debits and credits: Debit Credit 9/16/33 balance (including interest to date) $127,855.33 Net interest debited 9,149.63 Net interest and dividends from securities belonging to Carrie D. Holland $1,851.25 Proceeds from sale of securities of Carrie D. Holland 3,158.66 Paid into the account by the estate of Harriet Blair Borland 131,995.05 Total 137,004.96 137,004.96 *852 At April 30, 1936, the securities of Carrie D. Holland held by Mitchell, Hutchins & Co., in account #1 had a fair market value of $43,113.81. Between April 30, 1936, and November 30, 1937, the decedent's estate received $23,347.83 from dividends and the sale of securities of Carrie D. Holland in account #1. At December 3, 1937, the securities of Carrie D. Holland held by Mitchell, Hutchins & Co. in account #1 had a total value of $19,770.25. At September 16, 1933, Carrie D. Holland was approximately seventy-five years of age and was a widow. She was suffering from angina pectoris and was physically incapacitated for work and financially dependent upon the decedent and Mary Blair Keep. Her property consisted solely of the securities in the two accounts with Mitchell, Hutchins & Co. In the estate tax return the petitioners reported the value of decedent's securities in account #1 as reduced by the net indebtedness of the account in excess of the value of Carrie D. Holland's collateral. OPINION ARNOLD: Section 302 of the Revenue Act of 1926 provides that the value of the gross estate of a decedent shall be determined by including the value at the time of death of all*853 property, real or personal, tangible or intangible, wherever situated, "to the extent of the interest therein of the decedent at the time of his death." Section *601 303 of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932, provides that in the case of a resident the value of the net estate shall be determined by deducting from the value of the gross estate the items therein set forth, including amounts "for unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate." The section further provides that "The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or moneys' worth." The petitioners contend that the statute requires them to include only the interest of the decedent in the securities held in account #1. The decedent's interest, they contend, is not the total value of the securities, *854 but only so much thereof as remained after deducting therefrom the superior interest of Mitchell, Hutchins & Co. Petitioners further contend that, even if the pledged securities are treated as the property of the decedent and their entire value included in decedent's gross estate, the indebtedness to Mitchell, Hutchins & Co. constitutes a prior charge against the securities and is a proper deduction in determining the value of the decedent's net estate, proper credit being given for the value of Carrie D. Holland's securities in account #1. The respondent contends that the courts and this Board have already held, in , and , affirming , that securities pledged to secure the indebtedness of another shall be included in a decedent's gross estate to the extent of their full value. Respondent argues that the securities pledged by Harriet Blair Borland were at all times considered by the parties to the two agreements to be the absolute property of the decedent, and that the extent of her interest therein was*855 the fair market value of the securities at September 16, 1933. In answer to the second phase of petitioner's argument, respondent points out that Mitchell, Hutchins & Co. had no claim against decedent or her estate because of the indebtedness of Carrie D. Holland, and, therefore, the pledging of decedent's securities to secure the brokers was not a liability incurred or contracted for an adequate consideration in money or money's worth. We are in accord with respondent's position regarding the inclusion of the fair market value of the decedent's pledged securities in her gross estate. There can be no doubt that these securities *602 were owned outright by the decedent and that only the possession thereof was relinquished by her. She retained her other rights of ownership, such as the right to the income therefrom, the right to substitute other securities therefor, and the right to sell them. The reservation of the right to substitute other securities for those pledged would have enabled decedent, before her demise, to have reduced the particular securities to possession, thus clearly indicating the ownership thereof. Since this is true, the value of the pledged securities*856 should be included in decedent's gross estate under section 302(a) of the Revenue Act of 1926 and article 10 of Regulations 80. Cf. , and , cases involving the gross estates of nonresident decedents. This brings us to the question of whether petitioners are entitled to a deduction from the gross estate in determining the net estate subject to tax. Section 303(a)(1) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932, provides for the deduction of "any indebtedness in respect to, property where the value of decedent's interest therein, undiminshed by such * * * indebtedness, is included in the value of the gross estate." Having determined that decedent's pledged securities should be included in her gross estate without diminution, are petitioners entitled to deduct the indebtedness, if any, existing on September 16, 1933? Respondent denies the right to any deduction because the indebtedness was not that of decedent, but an indebtedness of Carrie D. Holland. He says that decedent's act was prompted by generosity and possibly love and affection for a*857 kinsfolk, and, therefore, that there could be no full and adequate consideration in money or money's worth to support the claimed deduction. We do not understand that respondent denies the existence of the indebtedness, or the amount thereof at September 16, 1933; his denial is that the indebtedness was the decedent's, or that any liability existed as to her estate to pay the indebtedness of Carrie D. Holland. Legally, Mitchell, Hutchins & Co. had no claim against decedent's estate because of any personal liability of the decedent. However, the brokers held certain securities which were assets of the estate but which the petitioners could not reduce to possession without satisfying the brokers' lien. The brokers had acquired their special interest or property in decedent's securities when, pursuant to decedent's loan of the securities, they were pledged to secure the indebtedness of Carrie D. Holland. . The pledge of decedent's securities as collateral subjected the securities to the liability of the brokers' lien, to the extent they might be necessary to discharge the lien. *858 ; ; . This liability became fixed and determined during the administration of the decedent's estate and thereupon constituted an indebtedness in respect to property within the meaning of section 303(a)(1) of the 1926 Act, as amended. There remains for consideration the limitation contained in section 303(a)(1), as amended, to the effect that the deduction of any indebtedness in respect to property shall, when founded upon a promise or agreement, be limited to the extent that the indebtedness was contracted bona fide and for an adequate consideration in money or money's worth. Respondent, as above stated, has pointed out that there was no consideration flowing to the decedent which will support the claim, nor was there any contractual obligation between the decedent and the brokers which would support the deduction. This argument, that the consideration must flow to the decedent to support a deduction claimed by the estate, has been considered and rejected in a number of*859 court and Board decisions. In , the Board stated: From a careful consideration of the provisions of section 303(a)(1) of the Revenue Act of 1926, and of the legislative history of the section, we are of the opinion that it is not necessary that the consideration for the claim against the estate or mortgage upon or indebtedness in respect of property referred to in the section should have been received by the decedent. The law does not require that the consideration should be received by the decedent. The statute requires (1) that the indebtedness should be incurred or contracted bona fide; (2) that there shall be an adequate and full consideration; and (3) that the consideration shall be in money or money's worth. To the same effect are the following decisions: ; ; , affirming *860 ; ; petition to review dismissed, . In this proceeding the decedent, by subjecting her securities to the brokers' lien, protected the brokers as to the indebtedness of Carrie D. Holland, and secured a forbearance from the brokers in closing out the Holland account. There can be no question about the bona fides of the transaction, either with respect to Carrie D. Holland or the decedent, and we are satisfied that there was adequate and full consideration in money or money's worth, even though the principal monetary consideration was not received by decedent. Her estate acquired substantial rights by subrogation, and these rights were later exercised by her executors in recovering a portion of the indebtedness from the collateral deposited by Carrie D. Holland. Cf. . *604 In determining the amount of their claimed deduction petitioners would reduce the total indebtedness of account #1 by the value of Carrie D. Holland's collateral at September 16, 1933, arriving at a balance of $95,042.06, which they claim is*861 deductible as the indebtedness in respect of the property included in the gross estate without diminution. This liability, however, was contingent upon the fluctuations of the market; it was not fixed or determinable until the brokers exercised their lien, or the petitioners paid off the indebtedness and released the collateral. The latter occurred on April 30, 1936, when petitioners paid off the balance of $32,173.17. Including this payment, the decedent's estate had paid $131,995.05 into account #1 over and above credits to the account by was of interest and dividends from Carrie D. Holland's securities and proceeds from the sale of securities of Carrie D. Holland. On April 30, 1936, the value of Carrie D. Holland's Collateral in account #1 was $43,113.81, which amount should be credited against the payments made by the executors to determine the amount of the indebtedness satisfied by the decedent's estate. The difference, amounting to $88,881.24, represented the indebtedness in respect to property, which was paid during the administration of the estate, and this amount should be deducted from decedent's gross estate in accordance with the provisions of section 303(a)(1) of*862 the Revenue Act of 1926, as amended. Decision will be entered under Rule 50.