Gump v. Commissioner

CAMILLE R. GUMP, EXECUTRIX, AND EDWIN LETTS OLIVER, EXECUTOR OF THE ESTATE OF ALFRED S. GUMP, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Gump v. Commissioner Docket No. 90656. United States Board of Tax Appeals 42 B.T.A. 197; 1940 BTA LEXIS 1037; June 25, 1940, Promulgated *1037 1. Under laws of California, community property acquired prior to July 29, 1927, passes to the wife by succession upon the death of her husband and the whole of the community estate is properly includable in the gross estate of the husband for Federal estate tax purposes. 2. The value of installment notes received by husband upon sale in 1929 of stock acquired prior to July 29, 1927, is properly includable in its entirety in the gross estate of the husband. A mere change in the form of investment does not change the character of ownership. 3. The executors, to avoid inclusion in the final income tax return of decedent of the unreported profit of $285,072.22 represented by installment notes held by decedent at time of death, complied with requirements of section 44(d) under the title "Income Tax" of the 1934 Act so that taxes thereon would be payable by the person receiving payment of such obligations. The installment notes are includable in the gross estate of decedent at their value at time of death under section 302 under the title "Estate Tax" of the 1926 Act and not at their cost basis. Estate taxes and income taxes are wholly different in concept and theory and a*1038 change in one is without effect upon the other. 4. The amount of taxes which would have been payable on the unreported profit on the installment notes had the executors included the same in decedent's final return is not allowable as a deduction or credit, in the absence of any statutory provision therefor. 5. A pledge made to the Community Chest of San Francisco by decedent and paid by his executors is an allowable deduction within section 303(a)(1), Revenue Act of 1926. Chas. A. Christin, Esq., and Myrtile Cerf, C.P.A., for the petitioners. T. M. Mather, Esq., and Alva C. Baird, Esq., for the respondent. HARRON *197 The Commissioner determined a deficiency in Federal estate tax in the amount of $32,175.18. The questions to be determined are (1) whether the Commissioner erred in including in the value of the gross estate of decedent (a) the share of the wife by virtue of her community interest, or (b) the share of the wife by virtue of her alleged interest as tenant in common; (2) in including in the gross value of decedent's estate four installment notes at their face value, instead of one-half of $99,922.23, representing*1039 cost basis to the estate and beneficiaries for Federal income tax purposes; (3) whether, in the alternative to issue (2), petitioners are entitled to a credit in computing the tax liability of the estate of not less than $25,877.59; *198 and (4) in refusing to allow as a deduction the amount of $200 pledged by decedent to the Community Chest of San Francisco. The petitioners also allege overpayment of Federal estate taxes and request refund of the amount determined to have been overpaid plus interest. FINDINGS OF FACT. The petitioners are the duly appointed and acting executors of the estate of Alfred S. Gump, who died testate on January 23, 1934. Decedent was married to Camille R. Gump, one of the executors above named, on March 28, 1905. Until his death decedent and his wife were continuously domiciled in California. The will of decedent executed June 19, 1933, after bequeathing his automobile and all his furniture, paintings, pictures, statuary, and bric-a-brac to his wife, bequeathed and devised, in the seventh paragraph thereof, all the residue and remainder, "including all community property, my wife's share thereof, as well as my own", to Edwin Letts Oliver*1040 and the Wells Fargo Bank & Union Trust Co. of San Francisco in trust, the net income thereof to be paid monthly to his wife during her lifetime and upon her death to their only daughter, if then living, during her lifetime. The trust was to terminate upon the death of his wife and daughter and the trust estate distributed as provided. The petitioners filed a Federal estate tax return on January 23, 1935. In this return petitioners reported community property of a total value of $799,269.41, from which they deducted one-half as representing the community interest of the widow, leaving a gross estate of decedent of the value of $399,634.71. At the time of filing such return petitioners paid a Federal estate tax in the amount of $12,554.86. Among the assets of the community shown in the above mentioned estate tax return there was included the following item: "Payments due under contract between Alfred S. Gump, Abraham L. Gump and William E. Gump - $384,994.45." In about 1899 the S. & G. Gump Co. was organized. On March 28, 1905, the date of decedent's marriage, the decedent owned 25 shares of the capital stock of the Gump Co. The book value of these 25 shares on that date*1041 was $41,636. The Gump Co. suffered a severe loss as a result of the San Francisco earthquake and fire during April 1906 and operation of its business ceased for several months. Business was resumed about November 3, 1906. At that time the company had no surplus and the book value and par value of its outstanding stock was the same, or $200,000. During the period from the date of his marriage in 1905 to February 9, 1929, the decedent and his brothers, Abraham L. and William E., devoted their entire *199 time and efforts to the developing and building up of the business of the Gump Co., and the success of that company was largely due, and in equal measure, to the ability, hard work, and efforts of decedent and his brothers. From March 17, 1921, to February 9, 1929, the decedent held 2,664 shares of common stock of the Gump Co. On or about March 2, 1911, the decedent and his two brothers caused to be incorporated under the laws of California the S. & G. Gump Realty Co., with an authorized capital of $20,000, consisting of 40 shares of common stock of the par value of $500 each. The 40 shares were issued to the three brothers as follows: The decedent and Abraham L., 15*1042 shares each, and William E., 10 shares. No change was thereafter made in the capital structure of this corporation. The decedent and his wife, as first parties, and Abraham L. Gump, as second party, entered into two agreements in writing under date of February 9 and December 23, 1929, respectively. Under the terms of these agreements the decedent and his wife sold to Abraham L. Gump 2,710 shares of the common stock of the Gump Co. for the book value thereof, or $1,100,976.25, and 15 shares of the capital stock of the Realty Co. for $84,018.20, or a total of $1,184,994.45, payable to decedent as follows: $500,000 in cash on February 9, 1929, $84,018.20 of which was in payment of the 15 shares of the Realty Co., the remainder, or $684,994.45, was payable in seven annual installments with interest at 5 percent per annum and evidenced by six promissory notes of $100,000 each and one note of $84,994.45. The first note was payable on February 1, 1930, and the last note, of $84,994.45, on February 1, 1936. The notes were all made payable to the decedent and were endorsed by William E. Gump. It is stated in the agreements that the decedent was the owner of 2,664 shares of the Gump*1043 Co. and the 15 shares of the Realty Co. and that his wife was the owner of 46 shares of the Gump Co. At the date of the death of decedent there had been paid under the above contracts the total amount of $800,000. At that time four notes remained unpaid in the principal amount of $384,994.45. On March 20, 1935, a decree of settlement of the accounts of the executors and final distribution was entered in the estate of decedent. In this decree the court found, among other things, that the whole estate of the decedent of the value of $799,269.91 was the community estate of the decedent and his wife; that the wife waived her one-half interest in and to the community property and consented to the distribution of all of her one-half interest in the community property pursuant to and under the conditions of the seventh paragraph of decedent's will; and that there was due to the wife from the estate of the decedent the sum of $18,688.16 for 46 shares of stock of the S. & G. Gump Co. belonging to her, which stock had been held in *200 trust by decedent and sold by him for $18,688.16, which sum had never been paid to her but was held in trust for her use and benefit by decedent. *1044 In this decree the court ordered, among other things, the distribution of the rest, residue, and remainder of the estate of decedent in the hands of the executors, after payment of executors' and attorneys' fees and the amount of $18,688.16 to decedent's wife in payment of the 46 shares of stock of the Gump Co., to Edwin Letts Oliver and the Wells Fargo Bank & Union Trust Co., as trustees, pursuant to the trust provisions contained in the seventh paragraph of the last will of decedent. In auditing the estate tax return filed by petitioners the respondent determined that the gross estate of decedent consisted of the entire community estate of decedent and his wife, having a value of $802,737.41. The respondent included in the gross estate the four notes unpaid at the death of decedent under the contracts hereinbefore mentioned at their face value of $384,994.45. The petitioners, as executors of decedent's estate, filed a Federal income tax return for decedent for the calendar year 1933. In Docket No. 87350 this Board determined, pursuant to stipulation, that there was a deficiency in income tax of decedent for the year 1933 in the amount of $1,635.06. It is conceded by respondent*1045 that this item is an allowable deduction in determining the estate tax here in question. The petitioners also filed an income tax return for decedent covering the period from January 1 to January 23, 1934. The petitioners, not desiring to include in such return the gain realized by the transmission of the unpaid installment obligations of Abraham L. Gump by reason of the death of decedent, as provided for in section 44(d) of the Revenue Act of 1934, filed a bond at the time of filing the income tax return, conditioned upon the return as income by all persons receiving any payments in satisfaction of the installment obligations in the same proportion of such payments as would be returnable as income by the decedent if he had lived and had received such payments. This bond was accepted and approved by respondent. The respondent determined that 74.0458 percent of each dollar collected on such installment obligations represented taxable income to be accounted for when collected. He further determined that the estate of decedent and the beneficiaries thereof should return as income and pay income tax on the amount of gain, i.e., 74.0458 percent of the amounts paid by Abraham L. *1046 Gump since January 23, 1934, and he has refused to treat the payments so made as payments of principal applicable to the principal obligation of $384,994.45. The amount of Federal income tax that would have been payable on the income of decedent for the period of January 1 to January 23, 1934, would have been $25,877.59 had there been reported as taxable *201 income for that period the amount of gain, or $285,072.22, included in the principal of the unpaid installment obligations in question. Decedent, in consideration of contributions made by others to the Community Chest of San Francisco, pledged a contribution. The unpaid amount of this pledge at the time of decedent's death, or $200, was paid by the executors and deducted from the value of the gross estate. This deduction was disallowed by respondent. OPINION. HARRON: The first question to be determined is whether the respondent erred in including in the gross estate of decedent the value of all the community property. The petitioners contend that at the time of his death in 1934 the decedent had no interest in the wife's share of the community property. They rely upon the provisions of section 1401 of the*1047 Civil Code of California, 1 later section 201 of the Probate Code of California. It is argued that under that statute one-half of the community estate "belongs to" the wife. It is further argued that, since the husband's power of testamentary disposition of community property is limited to one-half thereof, he has no interest in the other half. This question has been considered many times by the Board and courts. It has been repeatedly held that the interest of a surviving wife in community property acquired prior to July 29, 1927, is under the laws of California no more than a mere expectancy, although her interest may be more definite than that of an ordinary heir, and that her share in the community property passes to her by succession and, therefore, is includable in the gross estate of the*1048 deceased husband and subject to the Federal estate tax. ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; ; Griffith*202 *1049 ; affd., ; certiorari denied, ; ; ; certiorari denied, ; ; certiorari denied, ; ; ; . The petitioner's contention that a part of the gross estate as determined by the respondent constitutes property in which the surviving wife had an interest of a tenant in common is wholly without merit. Exhibit 5 introduced in evidence by the petitioners is a schedule listing assets of a value of $714,884.05 included in the gross estate of the decedent which it is claimed were acquired as the proceeds of, or with the moneys received from Abraham L. Gump under the contracts of February 9 and December 23, 1929. This amount of $714,884.05 includes the unpaid installments under the contracts of $384,994.45. *1050 It is the contention of the petitioners that the difference between $714,884.05 and $384,994.45, or $329,889.60 constitutes property held as tenants in common and that therefore one-half thereof, or $164,944.80, in addition to the one-half of the value of the unpaid installment obligations, should be excluded from the gross estate of decedent. It is stated on brief that by the terms of the contracts of February 9 and December 23, 1929, the entire consideration of $1,184,994.45 was payable to the decedent and his wife, that there was a complete merger of their interests for a single consideration, and that they took the consideration in undivided and unallocated equal interests. It is argued that therefore the property to the value of $714,884.05 was held as tenants in common under section 164 of the Civil Code of California 1929. 2 In other words, petitioners claim in effect that the contracts of sale made in 1929 converted community property into property held as tenants in common. *1051 The above statement of petitioners pertaining to the terms of the contracts is erroneous in fact. The total consideration under the contracts, although the stock sold included 46 shares of stock of the Gump Co. therein stated to be owned by Camille R. Gump, was expressly made payable to the decedent. The seven notes were made *203 payable to the order of the decedent. It is reasonable to infer from the entire record that decedent's wife merely joined in the agreements to evince her consent to the sale of her 46 shares by the decedent as well as the sale of the other stock involved in which she had a community interest, although the contracts expressly state that the decedent was the owner thereof. See (Cal., 1934), wherein it is held that previous to 1927 title to community property was vested in the husband subject to the statutory restraints upon his power to alienate or encumber the same without the wife's consent and the power given her to devise a portion thereof, and that a wife's joinder in a deed covering community property acquired prior to 1927 was in legal effect but an expression of her assent to the transfer*1052 by her husband. Furthermore, the court in the probate of the estate found that the entire estate of decedent, as inventoried by the executors, in which the property now claimed to be held as tenant in common was included, was community property, excepting $18,688.16, which amount was ordered to be paid to decedent's wife for the 46 shares of Gump Co. stock held in trust and sold by decedent under the contracts made in 1929. State law creates legal interests and is controlling as to the rights of legatees and beneficiaries and in the administration of estates and testamentary trusts. ; ; ; . The decedent acquired the stock sold under the contracts executed in 1929 prior to July 29, 1927. Assets of the value of $714,884.05 out of the total gross estate of $802,737.41 were admittedly acquired as the proceeds of or with moneys received under such contracts. The character of the stock sold determines the character of the property acquired with the consideration received for*1053 the stock sold in 1929. McKay's Community Property § 518; . We conclude that the gross estate of decedent constituted the community property of decedent and his wife, which, so far as the record shows, had all been acquired prior to July 29, 1927. Upon the authority above cited, such property is includable in its entirety in the gross estate of decedent for the purpose of Federal estate taxation. We will now consider the question as to the value to be included in decedent's gross estate of the notes of Abraham L. Gump, in the aggregate face value of $384,994.45, which represent the unpaid installments under the contracts made in 1929. It is petitioners' contention that the value of the installment obligations to be included in the gross estate of decedent should not be in excess of $49,961.12, or one-half of the cost basis of $99,992.23 determined by the respondent for computing the gain or taxable *204 income to the estate and beneficiaries upon payments made on such obligations. We have determined that the notes constituted community property of decedent and his wife acquired prior to July 29, 1927. Whatever*1054 value is determined is, therefore, includable in the gross estate of decedent in its entirety. The basis of petitioners' contention is that any amount in excess of $99,992.23, the cost basis for the determination of gain, represents unrealized gain and hence can not be regarded as an asset or capital of decedent's estate for Federal estate tax purpose. The petitioners overlook the fact that the sale of the stock was made in 1929 and that the sale gave rise to taxable income in 1929. The entire gain was then realized and taxable to decedent. However, under section 44 of the Revenue Act of 1928, the decedent was given an option to pay income tax on only a part of the realized gain. The exercise of the option merely deferred taxation. ; .alexander ; affd., . As stated in the Report of the Committee on Ways and Means, No. 2, p. 16, and the Report of the Committee on Finance, No. 960, p. 24, "The installment basis accords the taxpayer the privilege of deferring the reporting at the time of sale of the gain realized until such*1055 time as the deferred cash payments are made." Subsection (d) of section 44, 1928 Act, was enacted to prevent evasion of income taxes in connection with the transmission by death or other disposition of installment obligations. Section 302 of the Revenue Act of 1926 provides that the "value of the gross estate of decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated." Upon transmission of installment obligations by death, this permitted the estate, legatee, or beneficiary of decedent to obtain a greatly increased basis in reporting gain on payments received subsequent to the time of death. All gain, except as to the gain reported on installments paid before decedent's death, would thereby escape income tax. . Considerable hardship was experienced in cases of decedents who died possessed of substantial amounts of installment obligations on account of the provisions of subsection (d), supra, which required the reporting as income in the final income tax return of decedent of all profits theretofore not reported. Therefore*1056 a provision 3 was added *205 to that subsection in the Revenue Act of 1932. 4 This provision permitted the return as income by the person receiving any payment on such obligations of the amount which would have been returnable by the decedent had he lived and received the payment instead of reporting all the profits in the final income tax return of decedent. No change, however, was made in section 302, supra, pertaining to estate taxes, and the value of decedent's estate to be included in gross estate for estate tax purposes remained the "value at the time of death." Installment obligations were not excepted from that rule. *1057 The individual and his estate after his death are two separate entities. ; certiorari denied, . The estate tax and the income tax are wholly different in concept and theory and "may impinge upon each other in ultimate incidence by striking at the beneficiary so as to diminish first his inheritance and then his income therefrom." ; affd., . It may be pointed out that section 44 is included in the revenue acts under the title "Income Tax", whereas section 302 is included under the title "Estate Tax." It is our conclusion that the notes of Abraham L. Gump represented capital or corpus of the estate of decedent. Since there is no evidence that the value of the notes at the time of death of decedent was less than their face value, the inclusion of the notes in gross estate at their face value must be approved. The petitioners next contend that, if the installment obligations are held to be a part of the decedent's gross estate, then they are entitled to a credit of the amount of the income tax which would have been payable*1058 on the unreported profit of $285,072.22 as represented by the unpaid notes at the time of his death if the executors had not availed themselves of the privilege granted in section 44(d). This contention is wholly without merit. The executors availed themselves of the privilege granted in section 44(d) and filed the bond required therein, so that they were not required to report in the final return of the decedent the gain on the transaction in 1929 not theretofore reported by the decedent. They did not include such gain as income in the final return for the period from January 1 to January 23, 1934, and no tax was paid by them in behalf of decedent on such gain. They are claiming credit for taxes which they never paid or intended to pay by availing themselves of the privilege granted in section 44(d), supra. No statutory provision for the allowance of such a credit has been brought to our attention. The case of , relied upon by petitioners, is not controlling here. It is distinguishable on the facts. In that case the Commissioner treated profits received by the estate of a decedent as taxable income *206 for*1059 income tax purposes and also as capital of the estate for estate tax purposes. The profits involved were profits realized by the estate after the death of decedent and not profits realized by decedent prior to his death, as here involved. Furthermore, in the Bull case, the estate taxes allowed as a credit or recoupment against income taxes of the estate had been assessed and paid. See . The action of respondent in refusing to allow the amount of $25,877.59, representing taxes not assessed or paid, either as a credit or deduction, is approved. The respondent disallowed as a deduction a pledge of $200 made by decedent to the Community Chest of San Francisco which was paid by his executors. The facts are not in dispute. The Board has consistently held that monetary pledges of others constituted an "adequate and full consideration in money or money's worth" within the meaning of section 303(a)(1) of the Revenue Act of 1926. ; *1060 ; ; affd., ; ; affd., ; ; ; . It is held that the petitioners are entitled to the claimed deduction in the amount of $200. It was stipulated that petitioners are entitled to a deduction of the amount of $1,635.06 for additional income taxes of decedent for 1933. Effect will be given to this stipulation on recomputation of the estate tax under Rule 50. Decision will be entered under Rule 50. Footnotes 1. SEC. 1401. Community property on death of spouse.↩ Upon the death of either husband or wife, one-half of the community property belongs to the surviving spouse; the other half is subject to the testamentary disposition of the decedent, and in the absence thereof goes to the surviving spouse, subject to the provisions of section one thousand four hundred two of this code. 2. SEC. 164. Property acquired after marriage. All other property acquired after marriage by either husband or wife, or both, including real property situated in this state, and personal property wherever situated, heretofore or hereafter acquired while domiciled elsewhere, which would not have been separate property of either if acquired while domiciled in this state is community property; but whenever any real or personal property, or any interest therein or encumbrance thereon, is acquired by a married woman by an instrument in writing the presumption is that the same is her separate property, and if acquired by such married woman and her husband, or by her and any other person, the presumption is that she takes the part acquired by her, as tenant in common, unless a different intention is expressed in the instrument;↩ and the presumptions in this section mentioned are conclusive in favor of a purchaser, encumbrancer, payor, or any other person dealing with such married woman, in good faith and for a valuable consideration. [Emphasis supplied.] 3. SEC. 44. INSTALLMENT BASIS. * * * (d) * * * This subsection shall not apply to the transmission at death of installment obligations if there is filed with the Commissioner, at such time as he may by regulation prescribe, a bond in such amount and with such sureties as he may deem necessary, conditioned upon the return as income, by the person receiving any payment on such obligations, of the same proportion of such payment as would be returnable as income by the decedent if he had lived and had received such payment. ↩ 4. Report of Committee on Finance, No. 665, 72d Cong., 1st sess., p. 21. ↩