United States v. Stapf

309 F.2d 592, 10 A.F.T.R.2d (RIA) 6266, 1962 U.S. App. LEXIS 4041

• Court: Court of Appeals for the Fifth Circuit
• Decided: September 26, 1962
• Docket: No. 18974
• Status: Published

Opinions

GRIFFIN B. BELL, Circuit Judge.

This is an estate tax case. The opinion of the District Court is reported at 189 F.Supp. 830. Suit was filed by the executors of the estate of Lowell H. Stapf for a refund of estate taxes and interest paid pursuant to a deficiency asserted against the estate.

All facts have been stipulated. Mr. Stapf died testate on July 29, 1953, a Texas resident and domiciliary. His will was probated in Texas where his principal estate consisting of separate and community property, was situated. His will put his wife to an election¹ either to elect not to take under the will and thereby retain her one-half interest in the community estate, or to allow her one-half interest to be disposed of under his will in order that she might receive specified benefits thereunder.

The benefits included one-third of the residue, consisting of the whole of the community property, and separate property of a value of $65,100 owned by the decedent, less specific bequests. The benefits also included an automobile, itself community property in which the widow owned a one-half interest. The will provided that if she should elect to take under its provisions, all funeral expenses, costs of administration and claims against the estate, whether community or separate, should be paid out of the one-half interest of decedent in the community property. Community debts to-talled $32,367.74, while expenses of administration, including attorneys’ fees, were $4,073.47 and the community of the husband was sufficient to pay these.

Electing not to take under the will, the widow would have retained her one-half of the community property, subject to its pro-rata share of expenses of administration and one-half of the community debts, having a net value of $111,-442.68. Taking, she became entitled to one-third of the gross value of decedent’s separate estate ($21,666.66), the one-half interest of the husband, valued at $700 in the community automobile, and one-third of the combined community estate. This had a value of $106,268.18, or $5,-174.50 less than the value of the interest Mrs. Stapf would have retained had she not elected to take under the will. Computed differently but with the same result, the widow retained a one-third interest out of the one-half of the community owned by her, thereby transferring only a one-sixth interest under the election to take. Under this method of computation she transferred property having a valuation of $27,541.16 and received property being the one-third interest in the separate property of the husband and the one-half interest in the automobile of the aggregate value of the $22,366.66, making a net loss to her of $5,174.50. The government uses one method while the taxpayer uses the other. Either is sufficient for our purposes.

The taxpayer, having been notified of a deficiency after filing the estate tax return, paid the deficiency and claimed a refund. It being denied, suit was filed and this appeal is from the judgment of the District Court. The taxpayer appeals from the disallowance of the community debts and administration expenses as deductions from the gross estate of decedent under § 812(b) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 812(b). The government appeals from the allowance of an exclusion from the gross estate as a part of the marital deduction of the one-third of the separate property of decedent and the one-half interest in the community automobile passing to the widow under her election to take under the will, contending that this devise was incumbered or obligated within the meaning of § 812(e) (1) (E) (ii) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 812(e) (1) (E) (ii), in an amount exceeding the value of the devise received by the widow in that the property transferred by her was of a greater value than that received by her.

As to the deductibility of the total of the debts and expenses from the community of decedent alone,² § 812 of the Internal Revenue Code of 1939, as amended, being the applicable statute, provides in part:

Ҥ 812. Net estate

“For the purpose of the tax the value of the net estate shall be determined, * * * by deducting from the value of the gross estate— * * «•

“(b) * •» « such amounts—

“(1) for funeral expenses,³

“(2) for administration expenses,

“(3) for claims against the estate, # * #

as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, * * *. The deduction herein allowed in the case of claims against the estate * * * .shall, when founded upon a promise or agreement, be limited to the extent that they [are] contracted bona fide and for an adequate and full consideration in money or money’s worth * *

This section is the same as § 303 of the Revenue Act of 1926 with respect to which it was said in First-Mechanics Nat. Bank of Trenton v. Commissioner of Internal Revenue, 3 Cir., 1940, 117 F.2d 127, 132 A.L.R. 1459:

“Unquestionably, a claim against a decedent’s estate which is allowed by the laws of the jurisdiction under which the estate is administered is deductible in determining the net estate subject to federal tax. The Revenue Act applicable to the instant case specifically so provides.”

Cf. Blair v. Stewart, Footnote (3), supra; and Lang’s Estate v. Commissioner of Internal Revenue, 9 Cir., 1938, 97 F.2d 867, on appeal from the Board of Tax Appeals, 34 B.T.A. 337. Thus, uniformity in the application of the statute was not expected by the Congress, and we look to the law of Texas to determine this issue.

The principle that community debts are deductible in their entirety from the community interest of the decedent in determining estate tax liability where directed by the provisions of the will was recognized, although not applied, in Lang’s Estate v. Commissioner, supra:

“On this issue we think the Board was correct in permitting a deduction of only one-half of these community obligations. Regardless of the incidents of the husband’s personal liability for community debts during his lifetime, section 1342, Remington’s Revised Statutes, supra, as construed by the Supreme Court of Washington, requires that community debts be satisfied pro rata from that portion of the community property distributable to the wife and that portion subject to the husband’s testamentary disposition. It is only by provision of a deceased husband’s will that a community debt may be charged solely against his share of the community. Redels-heimer v. Zepin, 105 Wash. 199, 202, 177 P. 736; In re Hart’s Estate, 150 Wash. 482, 492, 273 P. 735.”

There was no provision in the will in that case to charge the whole of the claims against the community of the decedent, but the holding was that the claims in any event were not personal obligations of the decedent within the meaning of the Washington law as required by the regulation.

The Applicable Treasury Regulation, 105 (1939 Code), provides in pertinent part;

“Sec. 81.29 Deduction of administration expenses, claims, etc. — In order to be deductible * * * the item must fall within one of the several classes of deduction * * * enumerated * * * and must also * * * be one of payment of which out of the estate is authorized by the laws of the jurisdiction under which the estate is being administered. Unless both of these conditions exist the item is not deductible. * * * If a claim against the estate, an unpaid mortgage, or an indebtedness is founded upon a promise or agreement, the deduction therefor is limited to the extent that the liability was contracted bona fide and for an adequate and full consideration in money or money’s worth, * *

“Sec. 81.32 Administration Expenses— * * * Administration expenses include (1) executor’s commissions; (2) attorney’s fees; (3) miscellaneous expenses. * * * ”

“See. 81.36 Claims against the estate. — The amounts that may be deducted under this heading are such only as represent personal obligations of the decedent existing at the time of his death, * * *. Only claims enforceable against the decedent’s estate may be deducted. If the claim is founded upon a promise or agreement, the deduction therefor is limited to the extent that the liability was contracted bona fide and for an adequate and full consideration in money or money’s worth. * * *»

Measured by the criteria of the statute and the regulation, which adds the additional requirement that the claims be personal obligations, we hold that the debts and expenses here were deductible in full from the community interest of decedent, and reverse to that extent.

First, the Texas case law makes it abundantly clear that decedent by the terms of his will could so obligate his estate and his community property. Medlin v. Medlin, Tex.Civ.App., 1947, 203 S.W.2d 635; and Matthews v. Jones, Tex.Civ.App., 1952, 245 S.W.2d 974. It is true that neither of these cases involved taxes, but the regulation here requires only that the payment be authorized under the Texas law. Cf. In re Marinos’ Estate, 1940, 39 Cal.App.2d 1, 102 P.2d 443.

Second, the government contends that only one-half of the debts represented personal obligations of the decedent and for that reason only one-half may be claimed as deductible. Cf. Lang’s Estate, supra. This, too, is a question of state law. The general rule is that on dissolution of the community the husband, but not the wife is personally liable for community debts. 42 C.J.S. Husband and Wife § 566b(1), p. 100. This is the law of Texas. A judgment could have been obtained against the estate of decedent for the full amount of the community debts. Of course, the community of the wife under Texas law is liable for payment of the community debts, and her husband could recover from it for advances made to pay community debts, but no personal judgment could be obtained against, her for community debts. The surviving wife does not personally owe the community debts. Leatherwood v. Arnold, 1886, 66 Tex. 414, 1 S.W. 173; Security Nat. Bank of Wichita Falls v. Allen, Tex.Civ.App., 1924, 261 S.W. 1057; Sargeant v. Sargeant, 1929, 118 Tex. 343, 15 S.W.2d 589; and Anderson v. Bundick, Tex.Civ.App., 1952, 245 S.W.2d 318. The debts were personal to decedent and to him only under the Texas law. The fact that the community property or even his property was sufficient to pay the debts does not take them out of the personal category.

Third, it is contended that there was no full and adequate consideration for more than one-half of the debts. The statute itself was amended in 1932 to make it clear that this requirement applies only where the debt is founded upon a promise or agreement,⁴ and thus we do not reach the question of consideration for the debts here were in the main for income taxes and ad valorem taxes, debts imposed by law. The contention of the government would be well taken if the debts were founded on contract; otherwise a deduction could be claimed against the estate of decedent for a debt where one-half of the consideration received under the debt, such as the proceeds of a loan, went into the estate of the surviving wife. Here, however, no effort has been made to segregate the debts as between being founded on contract or imposed by law and none are pointed out as arising under contract.

The direction in the will of decedent, and the Texas law, coupled with the provisions of the Revenue Statute and Regulation, make it clear that the total of the debts and expenses of administration as specified in the findings of fact by the District Court were deductible from the gross estate of decedent. The District Court erred in not so holding. Cf. Estate of McGugan v. Commissioner of Internal Revenue, 1942, 47 B.T.A. 658 where the expenses of last illness and funeral expenses were allowed as a deduction from the gross estate of the wife, although these expenses were the primary liability of the husband under Florida law, where the wife provided by her will for payment out of her estate. See also Estate of Sarah H. Bradley v. Commissioner, Memorandum opinion, Docket No. 106452, 1943, CCH, 2 TCM 609 involving a Georgia estate to the same effect.

We affirm that part of the judgment holding that the devise to the widow of one-third of the separate property of decedent and the one-half interest in the community automobile qualified as a part of the marital deduction or exclusion from the estate of decedent.⁵

Certain basic facts must be borne in mind in considering this question. There was no exchange of property between the testator and Mrs. Stapf, and she did give to the testamentary trust set up by decedent more than she received under the will. Only decedent’s one-half interest in the community property is includible in his gross estate for federal tax purposes, Commissioner of Internal Revenue v. Chase Manhattan Bank, 5 Cir., 1938, 259 F.2d 231, and there is no contention that the property of the widow passing by the election under the will of decedent became a part of his gross estate for estate tax purposes. And, lastly, under the Texas law the devise of one-third of the whole community to the widow did not pass to her under the will but was satisfied out' of her own one-half. Jones v. State, Tex.Comm. App., 1928, 5 S.W.2d 973; and Calvert, Comptroller v. Fort Worth National Bank, Tex., 1962, 356 S.W.2d 918, 919.

The statute here in question, par. (E) (ii) of § 812(e) (1), supra, having to do with the valuation of marital deduction property passing from a decedent to his surviving spouse is as follows:

“(E) Valuation of interest passing to surviving spouse. In determining for the purposes of subpara-graph (A) the value of any interest in property passing to the surviving spouse for which a deduction is allowed by this subsection— * * *

“(ii) where such interest or property is incumbered in any manner, or where the surviving spouse incurs any obligation imposed by the decedent with respect to the passing of such interest, such incumbrance or obligation shall be taken into account in the same manner as if the amount of a gift to such spouse of such interest were being determined.”

The government relies on Treasury Regulation 105, (1939 Code), § 81.-47c(b), which extends the language of this statute to include an election as here, specifying by example that in computing the marital deduction the value of the bequest to a widow is to be reduced by the value of the community property interest relinquished by her. Neither this section of the Act or its legislative history envision such an example or result.⁶ The regulation in this regard changes the plain terms of the statute by sweeping away the last clause thereof and must give way to the statute. Kosh-land v. Helvering, 1936, 298 U.S. 441, 56 S.Ct. 767, 80 L.Ed. 1268; Miller v. Commissioner of Internal Revenue, 5 Cir., 1956, 237 F.2d 830.

We also put aside the contention of the taxpayer that an encumbrance or obligation to be taken into account in valuing the property to be excluded means an encumbrance or obligation on the property, such as a lien against the property for a debt, as distinguished from an obligation or encumbrance in the nature of a condition as here under the. election. Wachovia Bank & Trust Co. v. United States, 1958, 163 F.Supp. 832, 143 Ct.Cl. 376.

We look to the terms of the statute itself for its meaning. The last clause of it teaches how the valuation is to be computed and this is the key to the determination of this issue. It shall be taken into account in the same manner as if the amount of a gift of such interest by the husband to his wife was being determined.

The value of a gift by a husband to a wife of property, on the condition that she surrender to, or give for the benefit of a third party a portion of her property, would not be reduced or “netted” by the amount of property given up by the wife. There must be a monetary consideration or- like benefit to the original donor before the value of the property surrender is to be deducted from the value of the gift. Commissioner of Internal Revenue v. Wemyss, 1945, 324 U.S. 303, 65 S.Ct. 652, 89 L.Ed. 958; Commissioner v. Bristol, 1 Cir., 1941, 121 F.2d 129; and Estate of Bartman, 1948, 10 T.C. 1073. All that Mrs. Stapf did by her election was to take the property devised to her and in turn surrender part of her property to the trust for the benefit of her children. Within gift tax confines the community property of the widow passing under the will of the husband to others may not be “netted” against the devise to the widow, and thus testator, were the transfer inter vivos, would be liable for gift taxes on the full value of the devise.⁷ Viewed in this light the devise of the one-half interest in the automobile and the one-third interest in the separate property of the testator qualify as a part of the marital deduction and the District Court did not err in so holding.

The gift and estate tax statutes complement each other. Here estate taxes are due now on the property of the husband with the devise to the widow excluded. It is a part of the marital deduction or exclusion on which taxes are deferred to the estate of the widow to-be assessed on so much of it as survives-on another day. The net of the transfer by the widow became subject to gift taxes at the time of the transfer. The property transferred by the widow will, to the extent of an amount equal to the devise to her, escape both gift and estate taxes. Nevertheless, and this applies alike to our holding on the deductibility of the debts and expenses of administration here, it is something permitted by the statute and proscription, if indicated, is for the Congress.⁸

Having reversed in part and affirmed in-part we remand for such other and further proceedings as may be necessary and which are not inconsistent herewith.

1 . The doctrine of election under the Texas law is well established. See Dakan v. Dakan, 1935, 125 Tex. 305, 83 S.W.2d 620; Smith v. Butler, 1892, 85 Tex. 126, 19 S.W. 1083; and 44 Tex.Jur., Wills, § 285 et seq.

2 . The debts of decedent totalled $32,367.74, all of which were community debts, including $23,701.34 due for 1951 income taxes, and interest thereon in the amount of $1,955.33. The expenses of administration totalled $4,073.47. The Commissioner determined that 65 percent of the expenses of administration should be allocated to and deducted from the gross estate of decedent, and the remaining 35 percent allocated to the widow’s one-half of the community estate. This allocation was affirmed by the District Court and the allocation is conceded to be correct if the expenses are not deductible. Ad valorem taxes due amounted to $1,954.96.

3 . Allowed in toto here. Blair v. Stewart, 5 Cir., 1931, 49 F.2d 257.

4 . Senate Report No. 665, 72nd Congress, 1st Sess., p. 51 explains the amendment (§ 805 of the 1932 Act) as limiting the requirement for consideration to liabilities founded on contract, as distinguished from liabilities imposed by law or arising out of torts.

5 . The Commissioner allowed the one-half community interest of the husband in the automobile as a part of the marital deduction. No issue was raised to such allowance by the government in the- trial court where the allowance was affirmed. Now it is asserted that the Commissioner was in error in the allowance which was based on his belief that Mrs. Stapf would have received the automobile whether she elected to take under the will or not. While this belief of the Commissioner was incorrect because the devise of the automobile was also based on the election, under our decision we do not reach this question.

6 . Senate Supp.Report No. 1013, Part 2, 80th Cong., 2nd Sess.; House Report No. 1274, 80th Cong., 2nd Sess.

7 . Aliter on the transfer hy the widow. The devise would be “netted” against what she surrendered as she did receive consideration of the necessary type. Commissioner v. Seigel, 9 Cir, 1957, 250 F.2d 339; Commissioner v. Chase Manhattan Bank, supra; and Turman v. Commissioner of Internal Revenue, 35 T.C. 1123.

8 . On the subject of a windfall under another tax statute, it has been aptly said:

“Granting the government’s proposition that these taxpayers have found a hole in the dike, we believe it one that calls for the application of the Congressional - thumb, not the court’s.” Fabreeka Products Co. v. Commissioner, 1 Cir, 294 F.2d 876, 879, cited in The Hanover Bank, Ex’r v. Commissioner, 369 U.S. 672, 80 S.Ct. 1080, 8 L.Ed.2d 187.