Sage v. Commissioner

ESTATE OF JOHN SAGE, DECEASED, ALFRED D. SAGE, ROBERT J. RENDALL, AND THE FIFTH AVENUE BANK OF NEW YORK, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Sage v. Commissioner Docket No. 97720. United States Board of Tax Appeals 42 B.T.A. 1304; 1940 BTA LEXIS 876; November 26, 1940, Promulgated *876 Decedent left a will providing that a specific legacy be paid his widow and that the residue of his estate be paid to the Lord Provost of Glasgow, Scotland, for charitable purposes. The widow became incompetent and guardians and a committee were appointed to act in her behalf. Her guardians opposed probate of decedent's will. The residuary charitable legatee agreed to pay the widow or her representatives 25 percent of the residuary bequest if the widow or her representatives would withdraw all objections to the probate of the will. The will was probated. Decedent's executors deducted, on the estate tax return for decedent's estate, the entire amount of the residuary estate as a charitable or public bequest. Held, that the deduction may not include the amount payable by the residuary legatee to widow of decedent under the compromise settlement. Lyeth v. Hoey,305 U.S. 188, followed. T. Girard Wharton, Esq., and Thomas A. S. Beattie, Esq., for the petitioners. Harold F. Noneman, Esq., for the respondent. VAN FOSSAN *1304 Petitioners contest respondent's determination of a deficiency in estate tax in the sum*877 of $9,687.66. The sole issue before the Board is whether petitioners may deduct from decedent's gross estate the full amount of a residuary bequest to charity or whether that deduction must be limited to the amount remaining in the residue after the charity has made a payment in compromise of a contest of decedent's will. *1305 FINDINGS OF FACT. The facts were stipulated substantially as follows: Decedent, John Sage, a resident of Glen Rock, Bergen County, New Jersey, died testate on October 11, 1936. Decedent left a widow, Dorothy T. Sage, who on December 21, 1936, was adjudged an incompetent by the Court of Chancery of the State of New Jersey. On December 22, 1936, her brother, John Tonnessen, and her sister, Sadie Weiss, were appointed guardians of her person and property by the Bergen County Orphans' Court. Her brother and sister have continued to act as her guardians since the date of their appointment. On January 7, 1937, John Tonnessen and Sadie Weiss were appointed a committee of the widow's person and property by an order of the Supreme Court of the State of New York. This committee was discharged on March 18, 1938, by an order of that court. Decedent*878 left an estate of approximately $450,000. Under his last will and testament his widow was bequeathed his household effects and legacies totaling $42,000. The residuary estate was bequeathed to the Lord Provost of Glasgow, Scotland, by the following provision of decedent's will: ELEVENTH: I direct my said executors to convert into cash all the rest, residue and remainder of my property of whatsoever kind, nature or description, and I give and bequeath the proceeds of such conversion to the LORD PROVOST of Glasgow, Scotland. I request said LORD PROVOST to distribute same among such institutions in Scotland, as are devoted to the care and maintenance of blind, maimed and disabled soldiers and sailors of the British Army and Navy, according to his best judgment and discretion. Decedent's last will and testament was first offered for probate in the Surrogate's Court for the County of New York, in the State of New York. The widow's committee objected to its admission to probate. Thereafter, the Surrogate's Court dismissed the probate proceedings in New York and ordered the will to be transmitted to the Surrogate of Bergen County, New Jersey, for further probate proceedings. *879 The will was offered for probate before the Surrogate of Bergen County on or about April 9, 1937. On May 8, 1937, John Tonnessen and Sadie Weiss, as the guardians of and committee for decedent's widow, entered into an agreement with the Lord Provost of Glasgow, Scotland, through his attorney in fact, Thomas A. S. Beattie, a member of the New York Bar. This agreement provided that the widow's guardians and committee would withdraw all objections to the probate of decedent's will and would consent to its probate as a competent instrument to pass his real and personal property. The agreement further provided that the Lord Provost would pay to decedent's widow, or to her guardians and committee, a sum equivalent to 25 percent of the amount received by the residuary legatee under the *1306 provisions of decedent's will. Petitioners, as executors, were not parties to this agreement. Upon the petition of the guardians of the widow the agreement between the guardians and the Lord Provost was approved by the order of the Bergen County Orphans' Court. The agreement was not incorporated in and did not become a part of the probate proceedings. All further objections in behalf*880 of the decedent's widow to the probate of his last will and testament were discontinued and it was duly admitted to probate on May 19, 1937. On the same day letters testamentary were issued to petitioners, who immediately thereafter undertook administration of the estate. On or about December 1, 1937, petitioners filed their final account as executors with the Bergen County Orphans' Court. On January 11, 1938, the court made a decree allowing petitioners' account. The decree showed a balance in petitioners' hands of $175,750.48, after payment of specific and general legacies and allowances, and payment of all commissions, counsel fees, and other disbursements. Thereafter, petitioners filed a petition with the Orphans' Court praying for a decree of distribution. On February 9, 1938, the Orphans' Court entered a decree, ordering and directing that the entire balance on hand be paid by petitioners to the Lord Provost of Glasgow, Scotland, as residuary legatee. Neither this decree nor that allowing petitioners' account provided for any payment or payments to decedent's widow or her committee or guardians. On or about March 30, 1938, Beattie, as attorney in fact for the Lord*881 Provost, paid the sum of $33,687.62 to the widow's guardians, pursuant to the terms and conditions of the agreement entered into between the guardians and committee of the widow and the Lord Provost. Beattie now had in his possession the further sum of $5,000 to be paid to the widow's guardians under the terms and conditions of the agreement. On or about December 20, 1937, petitioners filed a Federal estate tax return with respondent, in which a deduction was claimed for the full amount of the residuary estate, as a charitable and public bequest to the Lord Provost of Glasgow, Scotland. On or about January 5, 1939, in determining the deficiency, respondent disallowed one-fourth of the claimed deduction on the theory that under the terms of the agreement the amount payable by the Lord Provost to the widow passed from decedent to the widow and not from the Lord Provost to the widow. Respondent determined a deficiency thereon in the sum of $9,687.66. The State of New Jersey had previously assessed transfer inheritance taxes upon the entire residuary estate as a charitable and public bequest, pursuant to the statutes and decisions of that state, and no part or portion thereof*882 was taxed to decedent's widow. *1307 OPINION. VAN FOSSAN: The single question before us is whether, in determining decedent's taxable estate, petitioners must deduct from a charitable residuary bequest the amount paid by the charitable legatee to decedent's widow in compromise of a contest of decedent's will. Petitioners contend that the estate tax is imposed upon the transfer of property at death and that the amount of the deduction should be determined as of that date. They assert that Mrs. Sage received nothing by inheritance except that given her specifically by her husband's will. They urge that any additional amount receivable by her was by virtue of the compromise. Respondent's contention is that the widow received the compromise payment as a bequest, devise, or inheritance and that the residuum must be reduced to the extent of the sum paid her. He relies on the decision of the Supreme Court in . The deduction under consideration is claimed under section 303(a)(3) of the Revenue Act of 1926, as amended by section 406 of the Revenue Act of 1934. *883 In , an heir of a decedent opposed probate of the decedent's will. The will contest was settled by compromise and the heir received a payment which the collector of internal revenue contended was income taxable to the heir. In holding that the compromise payment was exempt from income tax as a "bequest, devise, or inheritance", the Supreme Court said: There is no question that petitioner obtained that portion, upon the value of which he is sought to be taxed, because of his standing as an heir and of his claim in that capacity. It does not seem to be questioned that if the contest had been fought to a finish and petitioner had succeeded, the property which he would have received would have been exempt under the federal act. Nor is it questioned that if in any appropriate proceeding, instituted by him as heir, he had recovered judgment for a part of the estate, that part would have been acquired by inheritance within the meaning of the act. We think that the distinction sought to be made between acquisition through such a judgment and acquisition by a compromise agreement in lieu of such a judgment is too formal to be sound, as it disregards*884 the substance of the statutory exemption. It does so, because it disregards the heirship which underlay the compromise, the status which commanded that agreement and was recognized by it. While the will was admitted to probate, the decree also required the distribution of the estate in accordance with the compromise and, so far as the latter provided for distribution to the heirs, it overrode the will. So far as the will became effective under the agreement it was because of the heirs' consent and release and in consideration of the distribution they received by reason of their being heirs. The position of Mrs. Sage in the present proceeding closely parallels that of the heir in The amount payable to her by virtue of the compromise was hers by inheritance and not *1308 by Purchase. ; see . Petitioners' contention, that the compromise here differed from that in the Lyeth case in that it was not incorporated in the decree of the probate court, is not persuasive. The fact of receipt by*885 Mrs. Sage because of her standing as widow and legatee and not the absence of official court sanction is the material factor bringing this proceeding within the doctrine of Petitioners' principal argument with respect to the inapplicability of the Lyeth decision is that there the Court was considering an income tax question, while we are confronted with an estate tax problem. They argue that, although Mrs. Sage may have received the payment because she was widow and legatee of decedent, she did not receive it from the estate pursuant to decedent's will or as an heir. They bottom this contention on . In that case the Circuit Court of Appeals for the First Circuit held that an indefinite bequest to a charitable institution was not deductible from decedent's gross estate although, as the result of a contest of the will, the charity received a sum equal to the largest amount payable under the indefinite bequest. The court distinguished *886 , on the ground that the Supreme Court was there considering an income tax question. We do not believe, however, that the application of the principles laid down in , must necessarily be limited solely to income tax questions. In , we held that a widow received a payment in compromise of a will contest as an inheritance. The amount payable to Mrs. Sage by the Lord Provost was receivable by her because of her standing as legatee and widow of decedent and was payable to her as such. Petitioners further assert that the gross estate should be determined as of the date of the testator's death without regard to events occurring after that time. That is the general rule. ; ; affd., . Here, however, the Lord Provost was not an heir, but the residuary legatee. His status was not secure until probate of the will. Had the litigation been carried to*887 a judgment and 25 percent allowed by the court and paid in due course, it is clear that the deductible residuary bequest would have been reduced in that amount. We are of the opinion that the agreement entered into in advance to pay Mrs. Sage 25 percent of the amount received likewise effectually limited the size of the residuum. We would ignore the substance of the matter should we decide that the residuary estate was undiminished by the amount payable to the widow. Parenthetically, it will be readily *1309 observed that a contrary conclusion would be fraught with incalculable possibilities for the evasion of estate tax. We hold that respondent committed no error in excluding from the amount deductible as a charitable bequest the sum payable to decedent's widow under the compromise of the will contest. See Heim v. Nee,United States District Court, Western District of Missouri, May 28, 1937. Decision will be entered for the respondent.