Renunciation by petitioner of portion of testamentary income in 1956, many years after testator's death in 1931,
37 T.C. 147">*147 The respondent determined the following deficiencies in petitioner's income and gift taxes:
Year | Type of tax | Deficiency |
1955 | Income | $ 76,964.80 |
1956 | Gift | 105,726.92 |
Income | 25,171.35 | |
1957 | Income | 23,956.78 |
It is stipulated that the petitioner does not contest the income tax deficiencies for 1956 and 1957. The issue is whether the petitioner made a gift in 1956 to her three sons of a portion of her life income interest under a testamentary trust when she executed a renunciation and disclaimer of this portion in 1956.
FINDINGS OF FACT.
Some of the facts 1961 U.S. Tax Ct. LEXIS 46">*47 have been stipulated and they are herein included by this reference.
Kathryn S. Fuller, hereinafter called petitioner, is a resident of Dalton, Pennsylvania. She filed her income tax returns for the years here involved with the district director of internal revenue at Scranton, Pennsylvania.
37 T.C. 147">*148 Petitioner is the widow of Mortimer B. Fuller who died testate on September 7, 1931, leaving surviving him the petitioner and three sons, Edward, Mortimer B., Jr., and Henry S. Fuller. Decedent's will and codicils were admitted to probate and recorded by the Orphans' Court for Lackawanna County, Pennsylvania, on September 11, 1931, and letters testamentary were then issued to petitioner and her three sons as executors of the decedent's estate.
After certain cash legacies to nonrelatives, paragraph 4 of the will devised to petitioner "for and during the term of her natural life my * * * home * * * together with the grounds and other appurtances [
Paragraph 5 of the will 1961 U.S. Tax Ct. LEXIS 46">*48 provided as follows:
5. All the rest, residue and remainder of my estate of whatsoever nature, real, personal or mixed, and wheresoever situate, I give, devise and bequeath to my wife, Kathryn S. Fuller, and my son, Edward L. Fuller, their heirs and assigns forever, upon the following trusts:
(a) To separate and set aside from the rest of my estate one portion thereof sufficient to produce an income of Fifty Thousand ($ 50,000.00) dollars annually, and to use said income or so much thereof as may be needed for the maintenance and operation of my home known as "Overlook" situate partly in the Borough of Dalton and partly in the Township of North Abington, as aforesaid, including the grounds and other appurtenances and all things incident thereto, for and during the term of the life of my wife, Kathryn S. Fuller. It shall be so maintained and conducted after the death of my wife out of said fund also as long as any one of my sons may so desire; but if one of my three sons should not desire it so maintained and conducted only two-thirds (2/3) of said fund shall be used annually for said purpose and the remainder shall become part of the trust funds hereinafter mentioned; and if two of 1961 U.S. Tax Ct. LEXIS 46">*49 my three sons do not desire it so maintained and conducted only twenty-five thousand ($ 25,000.00) dollars of said income shall be used annually for said purpose and the remainder shall become part of the trusts funds hereinafter mentioned;
(b) If at any time during the life of my wife, Kathryn S. Fuller, she and all my sons shall desire that said home, together with the grounds and appurtenances and things incident thereto, be sold, she and my trustees shall sell the same and the proceeds of said sale shall become part of my trusts funds hereinafter mentioned, in the same proportions as hereinafter set forth;
(c) If after the death of my wife at any time my three sons, or they or he then surviving, shall decide to sell said home and grounds and appurtenances and things incident thereto, my trustees shall sell the same and divide and distribute the proceeds equally among my son or sons then living and the children of any surviving son or sons per stirpes;
(d) The remainder of my estate, real, personal and mixed, shall be divided and held by my trustees in eight (8) separate and equal parts. The income from five (5) of said parts shall be paid to my wife, Kathryn S. Fuller, during the 1961 U.S. Tax Ct. LEXIS 46">*50 term of her natural life. My three sons shall each receive during the life of my wife, the income of one of said other three (3) parts of my trust estate. Should any of my said three sons die before me or before their mother, the income which would be paid to him if living shall be paid, during the life of 37 T.C. 147">*149 my wife, to his children, share and share alike, if any, otherwise said income shall be paid to the other son or sons surviving, and the issue of any deceased son per stirpes. On the death of my wife, Kathryn S. Fuller, the principal and unpaid income of all of said eight (8) separate trusts shall be distributed, transferred and conveyed absolutely to any of my said three sons that may be then living, and to the children of any deceased son or sons, if any, equally and per stirpes.
By subsequent codicils, the cash legacies were eliminated and decedent's other two sons were added as executors and trustees.
An inventory of decedent's estate as of December 7, 1931, showed the following items:
Personalty consisting of cash, stocks and | ||
bonds, life insurance, | ||
jewelry, machinery, livestock, etc | $ 3,244,236.60 | |
Real estate | 60,570.00 | |
$ 3,304,806.60 | ||
Notes and accounts payable | $ 1,822,753.05 | |
Fees, commissions, and misc. expenses | 227,963.06 | |
Bequests to employees | 39,250.00 | |
$ 2,089,966.11 |
1961 U.S. Tax Ct. LEXIS 46">*51 Decedent owned a substantial block of stock in the International Salt Company at the time of his death. Petitioner also owned independently a substantial block of stock in the same corporation. Decedent had been the first president of the corporation and his three sons were officers and directors of the corporation at the time of this trial.
Since it would have been necessary for the estate to liquidate a substantial amount of the International Salt Company stock in order to pay the outstanding notes and accounts payable liability in the amount of $ 1,822,753.05, it was decided at a meeting of the Fuller family, at which petitioner was present, that it would be advisable to use the income from the estate for the reduction of these liabilities. Petitioner agreed to this plan.
As of June 13, 1956, the notes and accounts payable of $ 1,822,753.05 had been reduced to a total of $ 133,200.61.
Petitioner at no time filed any election to take against the will and codicils. Prior to December 31, 1955, no trusts were set up as provided in paragraph 5 of the will.
During the period of September 11, 1931 through 1956, the petitioner continued to reside in Overlook and substantial sums were used 1961 U.S. Tax Ct. LEXIS 46">*52 by the executors for the operation and maintenance of Overlook. In addition to the main house, there were three other houses on the grounds at the time of decedent's death, and these have been used by the three sons as their respective family residences. During the 37 T.C. 147">*150 years 1931 through 1955 no annual computation was made of the amounts spent by the decedent's estate on the maintenance and operation of Overlook. These expenditures were not segregated on the books and records of the estate but were commingled with the general expenditures made by the estate for all purposes during that period.
The estate income was the subject of prior litigation in the Tax Court.
About May 12, 1955, an attorney, Edward W. Warren, was notified that petitioner had made up her mind to renounce a three-eighths interest in the annual income under the decedent's will and to keep only two-eighths interest. After some research on the problem, Warren's law firm prepared a draft of the renunciation early in September 1955.
No account for the estate during the period from September 11, 1931, when the will 1961 U.S. Tax Ct. LEXIS 46">*53 was probated, through 1955, had ever been prepared or filed with the Orphans' Court of Lackawanna County.
On March 2, 1956, there was filed in the Orphans' Court for Lackawanna County a petition for approval of family settlement and discharge of the executors, and attached to said petition was a declaration of family settlement and a schedule of assets and liabilities. The declaration showed that the petitioner and her three sons ratified and confirmed the actions of the executors over the period of administration. Paragraph 7 of the declaration stated as follows:
Kathryn S. Fuller, Widow of Mortimer B. Fuller, Deceased, has renounced all her past, present and future interest as beneficiary of the trust created under Paragraph 5(d) of the Will of Mortimer B. Fuller, Deceased, in excess of the right to receive the income during her life from two parts or two-eighths of the said residuary fund. We hereby authorize and direct Kathryn S. Fuller, Edward L. Fuller, Mortimer B. Fuller, Jr., and Henry S. Fuller, as Executors of the Estate, to recognize the renunciation by Kathryn S. Fuller of a partial interest in said fund.
Paragraph 8 of the declaration authorized the transfer of the estate 1961 U.S. Tax Ct. LEXIS 46">*54 assets to the "Trustees of the Estate of Mortimer B. Fuller, Deceased" and also directs the trustees to assume all the liabilities of said estate. An attached schedule (dated December 31, 1955) showed total assets of the estate in the amount of $ 1,226,263.01 and total liabilities of $ 235,200.61, for a net value of $ 991,062.40.
On March 2, 1956, the Orphans' Court of Lackawanna County ordered (1) that the declaration of family settlement filed on that same day be approved, (2) that the distribution of assets from the executors to the trustees and the assumption of the liabilities of the estate by the trustees be approved, and (3) that petitioner and her three sons be discharged as executors.
37 T.C. 147">*151 On February 8, 1956, the petitioner and her three sons, as trustees, executed a receipt acknowledging receipt of estate assets under section 5(d) of the will. The receipt stated that the "securities are received as a distribution under Paragraph 5(d) of the Will of Mortimer B. Fuller, Deceased, and are to be held and administered in accordance with the provisions contained therein, and in accordance with the terms of the renunciation filed by Kathryn S. Fuller." The trustees also assumed liability 1961 U.S. Tax Ct. LEXIS 46">*55 for all the debts of the estate.
On June 13, 1956, the trustees filed with the Orphans' Court of Lackawanna County a petition for distribution and their first and partial account for the period from December 31, 1955, to March 31, 1956. Paragraph (k) of the petition for distribution stated that "The only questions requiring adjudication by the Auditing Judge are the approval of the Confirmation of Release and Disclaimer of the Widow, Kathryn S. Fuller, * * * and the approval of the distribution of income as set forth in the First and Partial Account." The account showed a distribution on March 2, 1956, of $ 20,000 each to petitioner and her three sons. The "Confirmation of Release and Disclaimer" attached to the petition provides as follows:
Know all Men by These Presents, That I, KATHRYN S. FULLER, now residing in the Borough of Dalton, County of Lackawanna, and Commonwealth of Pennsylvania, have on or about October 1, 1955, released, disclaimed and renounced, and by these presents do hereby release, disclaim and renounce all past, present and future rights, title or interests accruing to me as beneficiary of the trust established under Paragraph 5(d) of the Will of my deceased Husband, 1961 U.S. Tax Ct. LEXIS 46">*56 Mortimer B. Fuller, to the extent of my right to receive the income from three parts, or three-eighths, of the trust estate created therein.
I do further confirm my release, disclaimer and renunciation of my right, if any, to receive such income in excess of two parts, or two-eighths, under or by virtue of the Intestate Laws of the Commonwealth of Pennsylvania.
In Witness Whereof, I have hereunto set my hand and seal this
/s/ Kathryn S. Fuller (SEAL)
Kathryn S. Fuller
On June 21, 1956, the Orphans' Court confirmed the trustees' first and partial account by its adjudication, which further provided, as follows:
DISTRIBUTION IS THEREFORE AWARDED AS FOLLOWS:
Fund for distribution shown by first and partial account and as set forth in the 1st finding of fact herein, $ 1,097,788.17, which is awarded as follows:
To Kathryn S. Fuller, Edward L. Fuller, Mortimer B. Fuller, Jr. and Henry S. Fuller, Trustees, for further administration and accounting under the terms and provisions of and for the purposes set forth in the last will and testament and codicil of the decedent, as modified by the confirmation of release and disclaimer of Kathryn S. Fuller, widow of the decedent.
It is 1961 U.S. Tax Ct. LEXIS 46">*57 Ordered and Decreed that Kathryn S. Fuller, Edward L. Fuller, Mortimer B. Fuller, Jr. and Henry S. Fuller, Trustees as aforesaid, do make the distribution herein awarded to the persons entitled thereto.
37 T.C. 147">*152 It has been stipulated that the distributable net income of the trust for 1955 was $ 196,796.94.
Petitioner in her individual income tax return for 1955 reported an adjusted gross income of $ 153,714.49. This amount included (1) dividends from stock, $ 109,997.32 (minus a dividend exclusion of $ 50); (2) an item identified as "Estate of M. B. Fuller Trust," $ 33,000; and (3) a capital gain of $ 10,767.17. A fiduciary return had been filed for 1955 showing distributable income of $ 132,000; the amount of $ 33,000 reported by petitioner on her 1955 return represented two-eighths of $ 132,000.
Respondent included in petitioner's income for 1955 an additional amount of $ 89,998.09, with the explanation that the books and records of the "Trustees of the Estate of Mortimer B. Fuller Trust" showed that petitioner's share of the distributable net income for 1955 was $ 122,998.09 (five-eighths of $ 196,796.94, the stipulated distributable net income for 1955), of which the petitioner had only 1961 U.S. Tax Ct. LEXIS 46">*58 reported $ 33,000.
In his statutory notice of deficiency the respondent explained his determination of petitioner's gift tax liability for 1956 in the amount of $ 105,726.92 as follows:
The release of three-eighths representing 37 1/2% of the entire income of the trust established under paragraph 5(d) of the will of Mortimer B. Fuller who died September 7, 1931, constitutes a gift as of February 8, 1956, under the provisions of sections 2501 and 2511 of the 1954 Code.
The net value of the trust corpus referred to above | $ 4,790,163.53 |
37 1/2% of $ 4,790,163.53 | 1,796,311.32 |
Value of life estate released | 450,137.66 |
The gift tax and income tax deficiencies were determined in two separate notices though mailed on the same day. The petition herein was filed April 15, 1959. On May 29, 1959, respondent filed a motion to require petitioner to file a separate petition for the gift tax deficiency and the income tax deficiency. This motion was denied.
OPINION.
Respondent's determination of a gift tax deficiency for the year 1956 is bottomed on
37 T.C. 147">*153
(c) The gift tax also applies to gifts indirectly made. Thus, all transactions whereby property or property rights or interests are gratuitously passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax. * * * Where the law governing the administration of the decedent's estate gives a beneficiary, heir, or next-of-kin a right to completely and unqualifiedly refuse to accept ownership of property transferred from a decendent [
The foregoing regulation was promulgated in 1958 but provides that: "The regulations are applicable to gifts made during the calendar year 1955 and subsequent calendar years."
Under the decedent's will the petitioner was entitled to a five-eighths share of the trust income for life and each of her three sons was entitled to a one-eighth share. She was also given a life estate in the family home, to the upkeep of which a portion of the total income was to be devoted. After her renunciation of three-eighths out of her five-eighths share, each of her sons received an additional one-eighth share of the trust income.
The parties are apparently in agreement that in cases where no renunciation is possible, 1961 U.S. Tax Ct. LEXIS 46">*62 as, for example, where the State law permits none, a gift to the second taker is made by the beneficiary who purports to renounce.
Without considering such questions as whether the Orphans' Court adjudication was nonadversary, a consent decree, or even collusive,
On whatever prior date, if any, petitioner may have orally disclaimed, it seems clear that the first written document was a "Confirmation of Release and Disclaimer," 1961 U.S. Tax Ct. LEXIS 46">*64 dated February 8, 1956. It is upon this "confirmation" that the Orphans' Court approved the accounting of the trustees for the period beginning January 1, 1956, using, in part, the following language:
DISTRIBUTION IS THEREFORE AWARDED AS FOLLOWS:
* * * *
To Kathryn S. Fuller, Edward L. Fuller, Mortimer B. Fuller, Jr. and Henry S. Fuller, Trustees, for further administration * * * under the terms and provisions of and for the purposes set forth in the last will and testament * * * of the decedent,
It seems evident that there was no adjudication by the State court as to the date when petitioner disclaimed, but, if anything, the implication 37 T.C. 147">*155 is that this occurred only by reason of the confirmation of disclaimer of February 8, 1956.
By the time of the "renunciation," the administration of the estate had continued for almost a quarter century, during all of which petitioner had accepted, directly or indirectly, the benefits conferred upon her by the will. 31961 U.S. Tax Ct. LEXIS 46">*66 Certainly such a "renunciation," however convenient for eliminating family controversy, could not by any stretch of language be said 1961 U.S. Tax Ct. LEXIS 46">*65 to have been made within a "reasonable time." To be effective for gift tax purposes under respondent's regulations, this requirement must be met. And it would be difficult to conclude that petitioner's prior conduct had not constituted an "acceptance" within the meaning of the same regulation. We cannot say that his regulation is contrary to the statute or unreasonable in either respect. See
It follows that this becomes a situation in which, as the opinion in
The controversy as to income tax relates to 1955. Any disputes as to 1956 and 1957 have been expressly eliminated. All during 1955 petitioner had "unfettered command" over her distributable share 37 T.C. 147">*156 of the estate. 51961 U.S. Tax Ct. LEXIS 46">*69 The estate tax returns for all years prior to 1955 undoubtedly reported her distributable interest as the five-eighths of the residue which the will gave her. See
It follows that solely by her action after the end of 1955 in participating in the "family settlement" and executing the "confirmation" did the 1955 income, which was already hers, become the property of her sons. This of course would be binding on her, and presumably be enforcible in the State courts. But for tax purposes it would not exclude it from her income nor change it into the income of someone else.
The extent to which petitioner's reliance on the accounting decree in the Orphans' Court is misplaced is illustrated by the following from petitioner's brief:
There was no family settlement of the proceedings involving the Trustees' First and Partial Account wherein the state court 1961 U.S. Tax Ct. LEXIS 46">*70 made its judicial determination that Mrs. Fuller's renunciation was valid. The procedure required by Pennsylvania law on Trustees' Accounts was followed.
The Orphans' Court, as these statements show, did not have before it and did not purport to pass upon the distribution of estate income prior to January 1, 1956. Whatever the sons received and petitioner relinquished with respect to 1955 income came only by way of family 37 T.C. 147">*157 settlement and was no different than any other instance of the assignment of income by one person to another.
The situation in
In
For the foregoing reasons, giving full effect to the proceedings in the Orphans' Court, we think petitioner was taxable on five-eighths of the distributable net income in 1955 instead of the two-eighths of the lesser sum of distributable net income which she reported. The parties are now in agreement as to the correct distributable net income for 1955 and we do not understand that petitioner is contesting respondent's determination of value if, as we hold, petitioner made a gift in 1956.
To take 1961 U.S. Tax Ct. LEXIS 46">*72 account of adjustments not in controversy,
Mulroney,
The disclaimer or renunciation is not made a gift within the gift tax statute by reason of the fact that the heir or beneficiary waits a long time (even if it is almost a quarter of a century) before executing it. Timing has nothing to do with it. The timing might be something to consider when the effectiveness of the instrument to divest the maker of his property interest is the issue -- such as 1961 U.S. Tax Ct. LEXIS 46">*74 its effectiveness as against the claims of creditors of the heirs or beneficiaries. Obviously, it is not a factor when the issue is the tax upon the admitted passage of the interest of the heir or beneficiary to others, resulting from the disclaimer. I would hold the gift tax applies merely because the disclaimer evidences an accomplished gratuitous transfer under the statute.
I agree that under the Commissioner's regulation (sec. 25.2511-1(c)), especially the part added in 1958, the timing of the execution of the instrument as well as its validity under State law are to be considered. The majority specifically approves this regulation, in this, its first Court test. I do not share that approval.
1. This language of
2. "The fact that the regulation was not promulgated until after the transactions in question had been consummated is immaterial. * * * The magnitude of the task of preparing regulations under a new act may well occasion some delay. To hold that respondent [the taxpayer] had a vested interest in a hypothetical decision in his favor prior to the advent of the regulations would introduce into the scheme of the Revenue Acts refined notions of statutory construction which would, to say the least, impair an important administrative responsibility in the tax collecting process.
"Hence, the regulation governs this case * * *." (
3. The will directed that a sum not in excess of $ 50,000 a year be devoted to the upkeep of "Overlook," the residence in which decedent left petitioner a life estate. "The decedent gave his widow a life estate in Overlook. That did not depend upon any act of the executors. They had no right to interfere with her use of the property where, as here, the personal property was ample for the payment of all debts of the decedent. * * * If they managed Overlook they did so as agents for the widow and not in their official capacity as executors of the decedent."
4. "One group of federal tax cases refuses to give state decisions conclusive effect in situations where Congress has imposed a federal criterion with respect to the taxability of income or property * * *. For example, in ascertaining whether claims asserted against an estate 'were contracted bona fide and for an adequate and full consideration in money or money's worth' n.2 * * * the Tax Court is not bound by a state court decision with respect to whether the federal test of deductibility has been met." (Footnote omitted.)
5. As the history of this litigation shows, respondent applied for an order requiring petitioner to file separate petitions as to the gift tax and income tax deficiencies. In persuading the Court to deny this motion, petitioner's counsel represented that: * * * these two cases are inter-related, almost inseparable. * * * If it was a '56 disclaimer, then the government's income tax case for '55 would probably be sustained
1. In
2. In * * * The language of the gift tax statute, "property * * * real or personal, tangible or intangible", is broad enough to include property, however conceptual or contingent. And lest there be any doubt as to the amplitude of their purpose, the Senate and House Committees, reporting the bill, spelled out their meaning as follows: "The terms 'property,' 'transfer,' 'gift,' and 'indirectly' [in sec. 501] are used in the broadest sense; the term 'property' reaching every species of right or interest protected by the laws and having an exchangeable value." n.4 n4 Senate Report No. 665. 72d Cong., 1st Sess., p. 39 House Report No. 708,