Wade v. Commissioner , 21 B.T.A. 339 ( 1930 )

JEPTHA H. WADE, JR., GEORGE G. WADE, AND EDWARD G. GREENE, EXECUTORS UNDER THE WILL OF JEPTHA H. WADE, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Wade v. Commissioner

Docket No. 43164.

United States Board of Tax Appeals

21 B.T.A. 339; 1930 BTA LEXIS 1871;

November 13, 1930, Promulgated

---

Certain indebtedness of the decedent to educational institutions paid by his executors, held to be legal deductions from the value of the gross estate.

Harold T. Clark, Esq., and John B. Dempsey, Esq., for the petitioners.

Hartford Allen, Esq., for the respondent.

---

SMITH

This proceeding is for the redetermination of a deficiency in Federal estate tax of the estate of Jeptha H. Wade, deceased, in the amount of $61,170.95. The sole issue presented is whether certain amounts paid by the executors out of decedent's estate to educational institutions are deductible from the gross estate. There is no dispute as to the essential facts which have been set forth in a stipulation entered into by the parties and filed as a part of the record in this proceeding.

FINDINGS OF FACT.

The decedent, Jeptha H. Wade, died March 6, 1926. During his lifetime and on the dates hereinafter specified decedent assumed certain obligations in favor of the Cleveland Museum of Art, the Cleveland Museum of Natural History, and the Cleveland Collage of Western Reserve University, under the circumstances hereinafter described.

On June 9, 1922, the decedent sent a written communication to the trustees of the Cleveland Museum of Art reading as follows:

As you are aware, the Museum of Art is in urgent need of funds for its running expenses, an additional income of $35,000 to $40,000 having become a necessity if the Museum is to continue its present educational work and take care of its natural increase.

The educational work of organizations of Art, Science and Music is rapidly becoming recognized as one of their important functions and a necessity in order to obtain the interest and support of the community. In Cleveland this is shown by the action of the new Natural History Museum in spending most of its fund, so far for the purpose of educating the public to appreciate the objects it expects to acquire later. The Musical Arts Association, by its fine educational work, so impressed the Community Fund as to have obtained a contribution for that feature of its work.

I suggest that the Trustees make an effort at once to raise $600,000 from the friends of the Museum, which be placed in trust with the Union Trust Company, the income only to be used for the running expenses of the Museum, with the proviso that any income from this fund not needed, in the judgment of the Trustees, for such expense, during any year may be used by them for the purchase of works of Art.

Towards this endowment I will contribute $200,000 with the understanding that no contribution be binding until the sum of $600,000 be pledged and that securities acceptable to the Trustees may be paid in lieu of cash.

Very sincerely,

(Signed) J. H. WADE.

As soon as the Trustees shall complete the endowment as outlined above, I will in addition, add $200,000 to my previous endowment for the purchase of works of art.

(Signed) J. H. WADE.

On October 1, 1922, the above recited conditions having been fulfilled by the trustees, the decedent executed the following instruments:

WHEREAS, the conditions of my offer of June 9, 1922, to the Trustees of The Cleveland Museum of Art have been fully complied with; -

NOW, THEREFORE, I agree, for valuable consideration, with The Cleveland Museum of Art and promise to pay to The Union Trust Company, as Trustee for The Cleveland Museum of Art, at any time on or before October 1, 1932, the sum of two hundred thousand ($200,000.00) dollars, the same to draw interest at six (6) per cent annum, payable October first and April first in each year, with the privilege of paying this obligation in full or in part, at any time before maturity, either in cash or securities.

The principal sum shall be held in perpetuity as a part of the general endowment for The Cleveland Museum of Art, the income therefrom to be used only for operating purposes for the Museum, with the proviso that any income not needed in the judgment of the Rustees of the Museum for such expenses during any year may be used by them for the purchase of works of art, or added to this endowment.

This obligation binds the undersigned, his heirs and personal representatives.

WHEREAS, the conditions of my offer of June 9, 1922, to the Trustees of The Cleveland Museum of Art have been fully complied with; -

Now, THEREFORE, I agree, for valuable consideration, with The Cleveland Museum of Art and promise to pay to The Union Trust Company, as Trustee for The Cleveland Museum of Art, at any time on or before October 1, 1932, the sum of two hundred thousand ($200,000.00) dollars, the same to draw interest at six (6) per cent per annum, payable October first and April first in each year, with the privilege of paying this obligation in full or in part, at any time before maturity, either in cash or securities.

The principal shall be added to the fund known as the "Wade Purchase Fund" and shall be subject to all the terms and conditions of that Fund.

This obligation binds the undersigned, his heirs and personal representatives.

In reliance upon the contributions of the decedent and others, the trustees of the Museum assumed responsibility for operating expenses in each year, beginning in the year 1923, amounting to the entire income of the said general endowment fund.

In the early fall of 1925, a committee was organized by the Garden Club of Cleveland for the purpose of studying the improvement of the park surrounding Wade Park pond and lying between the Museum and Euclid Avenue. At a meeting held at the Union Club on October 15, 1925, at which tentative plans were suggested, the ladies of the Garden Club explained that they had already secured preliminary sketches by Olmsted Brothers, which were shown. These called for various architectural features, including a terrace of marble at the Euclid Avenue end. At that meeting Jeptha H. Wade stated that he would be willing to pay for the cost of certain architectural features, which at that time were estimated at $11,500, provided the ladies of the Garden Club would contribute the plans and that other friends would contribute the additional money to carry out the plans with the cooperation of the city.

As a result of this offer by the decedent, other offers of smaller and larger sums were made by various citizens, and the city assumed large responsibilities, resulting in a total expenditure of about $500,000 for the beautification of this bit of park land, which had theretofore been very unsightly and a constant source of annoyance to the decedent and others. The whole project had its turning point in Wade's conditional offer, which became binding upon him by the contributions made by other citizens in reliance upon the offer, and the pledge was made to the Cleveland Museum of Art and the amount was paid by the executors of the decedent.

On May 7, 1925, the decedent executed the following instrument in favor of the Cleveland Museum of Natural History:

ENDOWED MEMBERSHIP NOTE

THE CLEVELAND MUSEUM OF NATURAL HISTORY

CLEVELAND, OHIO, May 7, 1925.

IN CONSIDERATION of the cancellation of my pledge as an annual patron of The Cleveland Museum of Natural History and of the agreement of said Museum to enroll my name as a Patron in Perpetuity, and in further consideration of the participation by others in the endowment of said Museum and of expenditures made or to be made in reliance upon the endowment created by this and other notes, I promise to pay to The Cleveland Museum of Natural History, an Ohio corporation not for profit, the sum of TWENTY THOUSAND DOLLARS ($20,000.00), with interest from July 1, 1925 at five per centum (5,,) per annum, payable quarterly in advance on the first day of January, April, July and October. The face of this note may be paid in full or in installments at my convenience but unless previously paid in full, shall become due and payable upon my decease. The face of this note, when paid, shall be kept intact as a part of the General Endowment of the Museum, and the income applied without restriction to any of the corporate purposes of the Museum.

(Signed) J. H. WADE

ACCEPTED:

THE CLEVELAND MUSEUM OF NATURAL HISTORY,

By (signed) P. M. REA, Director.

In reliance upon this contribution the Museum set up in its books as a part of its permanent endowment fund the amount of $20,000 and included in its budgets for one-half the year 1925, and for the entire year 1926, all of the interest due on said obligation.

On July 1, 1925, the decedent addressed a letter to Newton D. Baker, reading as follows:

Replying to your favor of the 27th regarding a down own college, I will willingly join others, in a guaranty against deficits, up to $500. - for a period of three years.

This pledge was for the purpose of meeting the annual deficit of the Cleveland College of Western Reserve University.

During his lifetime the decedent regularly paid the interest due on his pledges to the Cleveland Museum of Art and the Cleveland Museum of Natural History.

In the settlement of decedent's estate the executors of his will paid the full amount of decedent's obligations to the Cleveland Museum of Art and the Cleveland Museum of Natural History, including interest due at the date of payment on those bearing interest. Payments were made to the Union Trust Co. of Cleveland, Ohio, as trustees for the Cleveland Museum of Art as follows:

April 8, 1926 (for interest)	$10,333.34
October 2, 1926	90,000.00
March 31, 1927	10,000.00
May 31, 1927	300,000.00

The note of $20,000 held by the Cleveland Museum of Natural History was paid by the decedent's executors on June 30, 1926, and the pledged $11,500 for the improvement of the grounds in front of the Cleveland Museum of Art was paid by the executors of the decedent as follows:

August 30, 1926	$8,600
October 1, 1926	2,900

In fulfillment of the decedent's pledge made to the Cleveland College of Western Reserve University the executors made the following payments:

July 9, 1926	$210
Dec. 15, 1927	435
Sept. 29, 1928	175

The obligations of the decedent to the Cleveland Museum of Art, to the Cleveland Museum of Natural History, and to the Cleveland College of Western Reserve University were all recognized by the executors as valid and enforceable claims against decedent's estate. The payments thereof were duly reported by the executors in their annual reports filed with the probate court, Cuyahoga County, Ohio, and were approved by the probate court.

All of the above named institutions come within the class of institutions specified in section 303(a)(3) of the Revenue Act of 1926.

Notwithstanding recitals contained in the notes, pledges, etc., the decedent, Jeptha H. Wade, in making the pledges hereinbefore referred to and executing the notes hereinbefore referred to, received no consideration in money or its equivalent, nor did the executors of his will or his estate receive any money or its equivalent at the time or times of the payments of the various sums herein previously referred to, nor do the executors of the estate of Jeptha H. Wade have any right of action or claim for money against institutions to which pledges were made by virtue of payments to such institutions.

The executors of decedent's estate have expended for attorney fees and expenses, in addition to the amounts already allowed by the respondent, the aggregate amount of $13,948.12. The executors of decedent's estate have obligated themselves to pay an additional amount of $5,000 for attorney fees in connection with this proceeding and the closing of the estate, and a further amount not to exceed $1,000 for incidental expenses.

OPINION.

SMITH: The only question for our determination in this proceeding is whether certain payments made by the executors of the decedent's will on account of pledges made by the decedent during his lifetime, including interest thereon, are deductible from the value of the gross estate. The payments in controversy are as follows:

The Cleveland Museum of Art	$400,000.00
The Cleveland Museum of Art (interest)	10,334.34
The Cleveland Museum of Art (improvement of Wade Park)	11,500.00
The Cleveland Museum of Natural History	20,000.00
The Cleveland College of Western Reserve University	820.00

The respondent admits that all of the obligations of the decedent to the above named institutions constituted "valid and enforceable claims against the estate," but contends, nevertheless, that they are not deductible from the value of the gross estate in the determination of the net estate. The petitioners contend that the payments are legal deductions from the value of the gross estate for two separate and distinct but equally valid reasons:

(a) Because under section 303(a)(1) of the Revenue Act of 1926 hey constituted claims incurred or contracted bona fide in money or money's worth.

(b) Because under section 303(a)(3) they constituted transfers to or for the use of corporations organized and operated exclusively for charitable, scientific or educational purposes, including the encouragement of art.

Section 303 of the Revenue Act of 1926 provides in part:

For the purpose of the tax the value of the net estate shall be determined -

(a) In the case of a resident, by deducting from the value of the gross estate -

(1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to property (except, in the case of a resident decedent, where such property is not situated in the United States), to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money's worth * * *

* * *

(3) The amount of all bequests, legacies, devises, or transfers, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, * * * The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate.

The respondent claims that the payments are not deductible from the gross estate under section 303(a)(1) for the reason that the decedent, as shown by the stipulation of fact -

* * * received no consideration in money or its equivalent, nor did the executors of his will, or his estate, receive any money or its equivalent referred to, nor do the said executors of the estate of the said Jeptha H. Wade have any right of action or claim for money against the said institutions by virtue of the payments to such institutions * * *.

Article 36 of the Commissioner's Regulations 70 (1929 edition), reads as follows:

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, whether then matured or not, but only to the extent that the liability therefor was incurred or contracted bona fide and for a fair consideration in money or money's worth. Only claims enforceable against the estate may be deducted. A pledge or a subscription evidenced by a promissory note or otherwise, even though enforceable against the estate, is deductible only to the extent such pledge or subscription was made for an adequate and full consideration in cash or its equivalent received therefor by the decedent.

The respondent further contends that the amounts are not deductible under subdivision (3) of section 303(a) because they do not represent transfers made by the decedent during his lifetime. This latter contention is in accordance with the interpretation of the statute contained in article 44 of Regulations 70.

The petitioners, in support of their contention that the payments in question are deductible from the gross estate under section 303(a)(1), challenge the validity of the requirement of the last sentence of article 36 of Regulations 70 to the effect that the consideration must be received by the decedent. They contend that the Act does not so provide; that there is not a word in the Act to require a departure from the well established legal principle -

* * * that a claim may equally well arise under a contract where the consideration was detriment to the promisee as in the somewhat more usual case where the consideration was benefit to the promisor.

An inspection of the provisions of the Revenue Acts of 1916, 1918 and 1921 imposing an estate tax shows that they all allow the deduction from gross estate of claims against the estate, unpaid mortgages upon, or any indebtedness in respect of property, with certain exceptions not here material. The Revenue Act of 1924 is a departure from the earlier acts in that it placed a limitation upon the deductions which might be made with respect to claims against the estate, unpaid mortgages upon, or any indebtedness in respect of property owned by the decedent and provided that "such claims, mortgages or indebtedness" were deductible from the gross estate only where "incurred or contracted bona fide for a fair consideration in money or money's worth." The phrase "fair consideration in money or money's worth," used in section 303(a)(1) of the Revenue Act of 1924, was prompted by the same phrase used in section 402(c) of the Revenue Act of 1921. This is made clear by the report of the Ways and Means Committee, which drafted the provision contained in section 303(a)(1). That report stated:

* * * Section 402(c) of the existing law [Revenue Act of 1921] contains a limitation similar [to the clause "incurred or contracted for a fair consideration"] in character in the case of transfers and trusts, whereby property interests transferred by the decedent in contemplation of or intended to take effect at or after his death are included in his gross estate unless such interests were transferred by a bona fide sale for a fair consideration. On principle the same limitation should be applied here, and the proposed amendment is designed to effect this result.

An inspection of subdivisions (c), (d), and (e) of section 302 of the Revenue Act of 1924 shows that they all contain the identical phrase "bona fide sale for a fair consideration in money or money's worth."

Section 303(a)(1) of the Revenue Act of 1926 is identical with the same section of the Revenue Act of 1924, except that the phrase "a fair" consideration has been changed to read "an adequate and full" consideration. The phrase "a bona fide sale for an adequate and full consideration in money or money's worth" is found in subdivisions (c), (d), and (e) of the Revenue Act of 1926, and subdivision (i) of section 302 provides:

If any one of the transfers, trusts, interests, rights, or powers, enumerated and described in subdivisions (c), (d), and (f) of this section * * * for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value at the time of death of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent. (Italics ours.)

In General Counsel Memorandum 4784 (C.B. VIII-2, p. 385), the validity of the last clause in article 36 of Regulations 70, above quoted, that the consideration must be received by the decedent, is defended upon the basis of the specific language of subdivision (i) of section 302. It is stated:

In view of this situation, it is held that deduction is authorized by section 303(a) 1 of the Revenue Act of 1926 on account of claims against the estate and unpaid mortgages upon, or any indebtedness in respect to, property only to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money's worth received herefor by the decedent.

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 he 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.

In the proceeding at bar no question is raised as to the bona fide character of the transactions by which the pledges were made and indebtedness incurred by the decedent and the payments were made by the executors. The consideration for the pledges was the payment by others of large amounts of money to the same institutions. The consideration for each pledge was, in our judgment, adequate and full and in money or money's worth. Cf. Ferguson v. Dickson,300 Fed. 961 (1924).

Inasmuch as we are of the opinion that the amounts in issue in this case are deductible from the gross estate under the provisions of subdivision (1) of section 303(a) of the Revenue Act of 1926, it is unnecessary to discuss the contentions of the petitioner with respect to their right to deduct the amounts under section 303(a)(3) of the taxing act.

Pursuant to the stipulation filed, deductions for attorney fees and expenses will be allowed in accordance with the amounts set forth in the last paragraph of our findings.

Reviewed by the Board.

Judgment will be entered under Rule 50.

MARQUETTE dissents.