Keller v. Commissioner , 41 B.T.A. 478 ( 1940 )

CHARLOTTE KELLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Keller v. Commissioner

Docket No. 93026.

United States Board of Tax Appeals

41 B.T.A. 478; 1940 BTA LEXIS 1179;

February 28, 1940, Promulgated

---

Petitioner was residuary legatee under a will and codicil. The testatrix later made another will. Probate thereof was contested by the petitioner and others on grounds of incompetency of the testatrix at time of execution, and fraud and undue influence over her. Petitioner also prayed for probate of the earlier will. Pending these proceedings the whole matter was settled and the second will was probated and distribution made thereunder. Petitioner received certain money and property by distribution in the probate court. Held, such receipts are to be excluded from gross income under section 22(b)(3), Revenue Act of 1934. Lyeth v. Hoey,305 U.S. 188">305 U.S. 188; Magruder v. Segebade, 94 Fed.(2d) 177, followed.

Walter H. Linforth, Esq., and William M. Cannon, Esq., for the petitioner.

Alva C. Baird, Esq., for the respondent.

---

DISNEY

This proceeding involves income tax. The respondent determined a deficiency of $40,843.38 and a delinquency penalty of $10,210.85 for the calendar year 1935, or in the alternative a deficiency of $39,518.70 and a delinquency penalty of $9,879.68 for the calendar year 1934. The principal question presented is whether amounts received by the petitioner constituted income, or are to be excluded from gross income as "acquired by * * * bequest, devise, or inheritance", under section 22(b)(3) of the Revenue Act of 1934. The greater part of the evidence was documentary, or was stipulated. Therefrom, and from a small amount of testimony, we make the following findings of fact.

FINDINGS OF FACT.

1. On May 27, 1929, Erna Herrscher executed at Berlin, Germany, a will with Charlotte Keller as sole residuary legatee, making, however, various bequests, including one of $200,000 to the husband of Erna Herrscher. Charlotte Keller was not related to Erna Herrscher by blood or marriage. On November 30, 1929, Erna Herrscher executed at San Francisco, California, a codicil to the above will, revoking the bequest of $200,000 made in the will to her husband, the parties having in the meantime been divorced. By the codicil the $200,000 was made a part of the residue and to go to Charlotte Keller. The codicil ratified, confirmed, and approved the will. The codicil named an executor different from the one named in the will. The above will and the codicil will hereinafter be referred to as the Keller will.

2. On January 24, 1933, at Berlin, Germany, Erna Herrscher executed another will by which Max Horn of Brussels, Belgium, was designated sole residuary legatee and Charlotte Keller was not mentioned. All other wills and codicils were expressly revoked. This will will hereinafter be referred to as the Horn will.

3. Erna Herrscher died a suicide in Paris, France, on March 15, 1933. On March 20, 1933, petition for probate of the Horn will was filed in the Superior Court in and for the City and County of San Francisco, California. The will was admitted to probate and letters testamentary were issued to Theo. J. Roche as executor on April 3, 1933.

4. On September 13, 1933, within the time allowed by law, Charlotte Keller, Frieda Eliasberg, and Alice Broh Filed in the Superior Court in and for the City and County of San Francisco, California, their contest of the Horn will, alleging, among other things, in substance and effect, that at the time of the execution of the Horn will Erna Herrscher was not of sound and disposing mind and memory, but was incompetent, that her mind was enfeebled, and that the Horn will was not the natural result of the uncontrolled will of the testatrix; that the testatrix had executed the will of May 27, 1929, and the codicil thereto upon November 30, 1929, when she was of sound mind, and thoroughly capable of making and understanding a will, and therefore the petitioners pray for revocation of the probate of the document dated January 24, 1933, and that the last will of Erna Herrscher made in 1929 be admitted to probate. On September 21, 1933, an amended contest was filed by Charlotte Keller, Frieda Eliasberg, and Alice Broh, in which it was also alleged, among other things, that Erna Herrscher was predisposed to insanity, had been at various times confined in asylums for the insane, was and had been for many years an addict to the use of narcotics and hypnotics, and that from December 31, 1932, until the day of her death she was completely deranged, had lost her memory and sense of locality and consciousness, and that on January 24, 1933, the time of the execution of the Horn will, she was absolutely out of her mind, incapable of doing any business, incapacitated, and incompetent to make any last will or testament. The prayer to propound the will dated May 27, 1929, and the codicil thereto dated November 30, 1929, and to have it probated as the last will and testament of Erna Herrscher was repeated.

5. On September 30, 1933, Eda Rothmeyer filed in the Superior Court in and for the City and County of San Francisco, California, a contest and petition for revocation of probate of the Horn will, alleging among other things that Max Horn (and others mentioned in the Horn will) were only remotely related to Erna Herrscher and that the petitioner and one Sophie Lange were more nearly related to Erna Herrscher than Max Horn and his associates; that at the date of the death of Erna Herrscher, she was survived by Sophie Lange, her aunt; that Sophie Lange died at Hamburg, Germany, on or about August 28, 1933, intestate, and that the petitioner, Eda Rothmeyer is the daughter of Sophie Lange; that Erna Herrscher was at the date of the execution of the Horn will on January 24, 1933, not of sound or disposing mind or memory, or in any respect capable of making a will, but was for a long time and had been wholly incompetent to make a will, and for many years had suffered from mental derangements and disorders, and executed the will because of the false and fraudulent acts, conduct, and representations of the legatees named therein.

On the same day, September 30, 1933, Eda Rothmeyer, as special administratrix of the estate of Sophie Lange, deceased, filed a contest and petition for revocation of probate of the Horn will, alleging in substance the same matters set forth in the contest filed by Eda Rothmeyer individually.

6. On December 6, 1933, Charlotte Keller filed in the Superior Court in and for the City and County of San Francisco, California, her petition for the probate of the will of May 27, 1929.

7. On April 25, 1934, Charlotte Keller, Frieda Eliasberg, and Alice Broh filed their second amended petition for revocation of the probate of the Horn will. The allegations as to the mental condition of Erna Herrscher at the time of the execution of the Horn will previously alleged in the earlier contest were in effect repeated, and the contestants prayed for revocation of the probate of the Horn will.

8. On June 26, 1934, Max Horn (together with Maggie Horn, Josefa Alberti, Felix Alberti, Elizabeth Alberti, and Carla Alberti), as parties of the first part, and Charlotte Keller, as party of the second part, entered into an agreement of compromise of the matters pending in the Superior Court at San Francisco. After a recitation of the facts in litigation, the agreement provides in effect that Charlotte Keller shall receive one-third of the estate of Erna Herrscher and that Max Horn and his associates shall receive two-thirds thereof, it being agreed that the parties of the first part shall assign to Charlotte Keller one-third of the estate to which they will or may become entitled under the will of January 24, 1933, and that on her part Charlotte Keller assigns to Max Horn two-thirds of any and all property to which she is or may be entitled under the will of May 27, 1929, and the codicil of November 30, 1929; that in the event the probate of the will of January 24, 1933, is revoked, the parties of the first part agreed at their own expense to employ counsel to assist attorneys for Charlotte Keller to prosecute her petition for probation of the Keller will and codicil. Charlotte Keller agreed that upon demand she would deliver to the attorneys for the parties of the first part a dismissal with prejudice of her petition for revocation of the probate of the will of January 24, 1933. Provision was made for payment of taxes and expenses out of the estate, and for taking care of settling and compromising with other parties.

9. On November 30, 1934, Max Horn filed petition for partial distribution of the estate, reciting that the executor had filed an appraisement showing the appraised value of the estate to be $512,475.90; and in effect that he had assigned to Charlotte Keller an undivided one-third of his interest in the estate. On December 18, 1934, the court entered its decree, citing that Max Horn had assigned one-third of his interest to Charlotte Keller; that he had assigned to Eda Rothmeyer $50,000; that on October 15, 1934, by decree of partial distribution there had been distributed to Eda Rothmeyer $10,000, on account of said $50,000; that, therefore, it was ordered that $40,000 be paid to Eda Rothmeyer, that $70 and certain personal property, described and enumerated, be distributed to Charlotte Keller as assignee of Max Horn, and that personal property described be distributed to Max Horn. The court found that the market value of the property distributed to Charlotte Keller was $39,930; that accrued interest thereon was $588.52; that the market value of the property distributed to Max Horn was $30,110 and the accrued interest thereon was $323.52.

10. Likewise on November 30, 1934, Maggie Horn, Felix Alberti, Elizabeth Alberti, Carla Alberti, and Josefa Alberti filed their petition for partial distribution, and pursuant thereto upon December 18, 1934, the Superior Court distributed by decree certain amounts of personal property to the petitioner.

11. On January 28, 1935, Max Horn again filed petition for partial distribution, and upon February 11, 1935, pursuant thereto certain property of the estate was distributed to him as residuary legatee and devisee under the will of Erna Herrscher. Likewise on February 21, 1935, Max Horn filed his petition for partial distribution, reciting his assignment of one-third of his interest to Charlotte Keller, and on March 7, 1935, by decree, the court distributed certain property and money of a value of $10,695.40 to Max Horn, and certain property and money of a value of $9,741.20 to Charlotte Keller.

12. On November 27, 1933, Charlotte Keller and her attorneys executed an agreement, reciting in effect her representation by said attorneys in the matter of the will of Erna Herrscher made to Charlotte Keller and the contest of the will made to Max Horn, and employing said attorneys for such representation upon a contingent fee of one-third of any amount recovered or received by Charlotte Keller, which one-third interest was by the agreement assigned, transferred, and set over to the attorneys. On June 26, 1934, pursuant to the contract of November 27, 1933, Charlotte Keller assigned to her attorneys, Walter H. Linforth and William M. Cannon, an undivided one-third interest in any and all moneys and/or other property, real or personal, coming to her, or to which she may be entitled under the compromise agreement with Max Horn and others, and in addition thereto, such sum or amount as will repay them for all costs advanced and to be advanced, such sum, however, to be deducted from the total amount to be received by her before the one-third coming to her is arrived at.

13. The time of Theo. J. Roche, as executor of the Horn will, to answer the second amended contest filed by petitioner, Charlotte Keller, and Frieda Eliasberg and Alice Broh had been extended by stipulation to July 30, 1934.

14. During the calendar year 1935 the executor of the estate of Erna Herrscher, deceased, distributed substantially all of the property contained in that estate to the parties entitled thereto. Charlotte Keller was entitled to receive and did receive securities having a fair market value of $97,364.82 during the year 1935, and during the same year her attorneys, Walter H. Linforth and William M. Cannon, as assignees from the petitioner received distribution of properties of the fair market value of $44,418; that is, property of the fair market value of $141,782.82 was distributed to petitioner, Charlotte Keller, from which Walter H. Linforth and Willaim M. Cannon, under assignments executed by petitioner, were entitled to receive and did receive property of the fair market value of $44,418.

15. The executor of the estate of Erna Herrscher appointed upon probate of the Horn will felt that the controversy between Horn and his associates and Charlotte Keller and others ought to be adjusted, and did adjust it for the least possible amount that Charlotte Keller and her attorneys were willing to accept. At that time he was of the opinion that the value of Charlotte Keller's claim was reasonably worth the amount she received. The executor insisted that the probate of the Horn will should stand. He made the best settlement he could for his client, taking into consideration the various factual matters involved in the contest, and the danger or dangers thereof.

OPINION.

DISNEY: We are first and primarily faced with the question, Does income received out of the estate of a decedent, by one who was not an heir but a legatee under a will of the decedent, through compromise of a claim as such devisee against those claiming under a later will, constitute taxable income, or is it to be excluded under section 22(b)(3) of the Revenue Act of 1934? Though voluminous documentary evidence was introduced, the facts necessary to decision of the question may be very briefly stated: The petitioner, though not a relative or heir of Erna Herrscher, was her residuary legatee under a will and codicil. Thereafter, and shortly before her death by suicide, Erna Herrscher made another will, not mentioning the petitioner and leaving the entire estate to others. The latter will was admitted to probate, whereupon within the statutory period the petitioner, with others, filed a contest and amendments thereto, which attacked the latter will, showing allegations of incompetency of the testatrix at the time of the last will and, in effect, fraud and undue influence exerted by the beneficiaries of the last will, and alleged the testatrix's competency and freedom from duress or undue influence at the execution of the first will and prayed probate of the first will. Petitioner also filed a petition for probate of the earlier will in which she was residuary legatee. Another party also filed a contest, claiming to be the only heir. While these conflicting claims were pending, and during an extension of time for answer by those interested in the later will to answer the contests by petitioner and others, petitioner and the others interested in the wills settled their differences. Pursuant to such settlement, petitioner received approximately one-third of the estate and those named in the later will two-thirds, and other contestants were paid off. The executor of the later will settled the matter for as little as possible, and considered petitioner's claim worth what was paid in settlement thereof. Petitioner received during the year 1935 her share of the estate under the compromise and, pursuant to contract with and assignment to her attorneys for their fees on a contingent basis, paid one-third of her share to her attorneys.

The petitioner relies primarily and strongly upon Lyeth v. Hoey,305 U.S. 188">305 U.S. 188. The respondent with equal vigor contends that such decision is inapplicable, because petitioner was not, like the claimant in the cited case, an heir of the decedent. Though other cases are cited by both parties, it is apparent that the conclusion to be reached here rests largely upon construction and application of Lyeth v. Hoey, supra.In that case the Supreme Court had before it a grandson who objected to probate of the will of his grandmother, whose heir he was, and compromised with the other claimants under the will to the effect that the will should be probated and that he receive certain amounts, more than provided for him by the will. The Court held that the amounts received by him were not taxable as being received by inheritance, under section 22(b)(3) of the Revenue Act of 1932. The petitioner herein argues that there is no essential difference between the situation here and that in the Lyeth case, while the respondent contends that the Supreme Court stressed the fact that the contestant there was an heir, while here the petitioner was neither heir nor relative, but only a friend of the testatrix, that the will making her a legatee was never probated, and that therefore Lyeth v. Hoey is wholly inapplicable.

We think the distinction made by the respondent is not consonant with the principles in the mind of the Supreme Court in deciding the Lyeth case. The Court said:

In exempting from the income tax the value of property acquired by "bequest, devise, or inheritance", Congress used comprehensive terms embracing all acquisitions in the devolution of a decedent's estate. * * *

We think that what petitioner received was an "acquisition in the devolution of a decedent's estate." It was distributed to her directly by the probate court, as was the remainder of the estate to the legatees or devisees. It is true that each distribution designated her as assignee, but the assignment was because of compromise of her own claim as legatee.

Respondent stresses the language in Lyeth v. Hoey as to the claimant there: "Save as heir he had no standing", and deduces therefrom that because the claimant was held not to receive by compromise, the petitioner, not an heir herein, must be held to take by compromise. The statute recites four ways of conveyance or devolution of property which exempt from income tax: gift, bequest, devise, or inheritance. Lyeth v. Hoey certainly therefore can not mean that one must be an heir and take only in the one category of "inheritance" in order to be free from taxation upon receipts from a compromise. Patently, if an heir could so compromise, one who is in fact a devisee, legatee, or donee could do the same. Petitioner was in fact a legatee as completely as was the claimant an heir in the Lyeth case. The fact of such designation by a will and codicil is not denied, nor is the competency of the testatrix or other impediment to the legality of the first wll suggested, save only the fact of a later will, not naming the petitioner. That will was strenuously attacked by petitioner, and others, upon grounds of insanity, incompetency, fraud, and undue influence, which, if substantiated, would have necessarily invalidated the later will. In such a situation the petitioner, and others, compromised their claims, that is, compromised the question as to the legal effect of petitioner's status as a legatee under a former will, and pursuant to such compromise the probate court distributed to the petitioner.

We think the petitioner had a standing as a legatee just as the claimant had a standing as heir in Lyeth v. Hoey. The mere fact of being an heir, that is, a grandson through a deceased mother, gave no rights to the claimant in the Lyeth case unless he could set aside the effect of the grandmother's will. So here, the petitioner was a legatee, able to reap results from such status, if she could set aside the effect of the later will. In both cases the objectionable will was affected by compromise, so that property was received. In both cases the objectionable will was probated and distribution was made in the course of such probate procedure, but according to the compromise effected and contrary to the terms of the will. In both instances the claimant took contrary to the will, except as affected by compromise. We therefore think that respondent's contention that petitioner did not take under the first will, where she was named legatee, but under a later contrary will, is no answer to the question propounded here. In the Lyeth case the claimant received property to an extent not provided by the will probated. His status was that of heir, regardless of the will; petitioner's status was that of legatee, regardless of the will actually probated. Had she been a legatee under the later will, in some smaller amount, and by compromise had received the amount she did actually receive, the objection suggested by respondent would be obviated. Or had the earlier will under which she was legatee been probated instead of the later will, her status as legatee would preclude any idea that she had not a standing as legatee under the expression "devise or bequest" parallel with and of equal force with the standing of the claimant in the Lyeth case, and respondent could not be heard to deny a parity of standing with that in the cited case.

We believe that the mere accident of probate of one will rather than the other can not be logically controlling. The compromise, in effect dividing the estate one-third to petitioner, two-thirds to her opponents, could have been carried out by probate of either will with substantially the same facility so far as any question herein is concerned. Had petitioner assigned to her opponents two-thirds of her interests under the earlier will and the later will been withdrawn, the effect would not have been materially different. We thus see that petitioner did have a standing as a legatee. We think the emphasis in Lyeth v. Hoey does not indicate any requirement that a claimant be an heir in order to receive the fruits of a compromise tax-free, but only that he occupy one of the four positions enumerated by the statute. Petitioner fulfilled the position referred to by devise and bequest.

This is shown, we think, by Magruder v. Segebade, 94 Fed.(2d) 117, conflict with which led to certiorari in Lyeth v. Hoey. Though actually heirs, the claimants there did not claim as such, but only as legatees. They were legatees under both the old will and the later will, in a lesser amount under the latter. Yet the plaintiffs allowed the later will to be probated, and received, by compromise, certain amounts in addition to the legacies received under the later will. This seems logically to control the situation here, for certainly the additional amounts, those involved in the tax question there presented, were received by compromise based upon the position of legatee under the former will - just as is involved here. Yet the court said the amount received through compromise was to be excluded from gross income under the statute. The court said, speaking of the taxpayers:

The plaintiffs would have received a greater amount under the first will than under the later will. Had they been successful in contesting the second will and establishing the first will as valid the amount that would have been received by them would undoubtedly have been a bequest or inheritance and no reasonable contention could be made that the whole amount was taxable income. * * *

The same language could be used as to petitioner here. Yet the court therein proceeds to follow the opinion of the District Court in Lyeth v. Hoey,20 Fed.Supp. 619, which was affirmed by the Supreme Court, saying that "certainly there was no gain derived from either capital or labor or from a sale or conversion of capital assets" and following the definition of income laid down in Eisner v. Macomber,252 U.S. 189">252 U.S. 189, and holds the plaintiff's receipts were excludible from gross income under section 22(b)(3) of the Revenue Act of 1934, here involved.

We are unable to distinguish the controlling principle here from that in the Magruder case, applying, so to speak, Lyeth v. Hoey. We think the grant of certiorari in the latter because of conflict with the former indicates approval by the Supreme Court of the Magruder case, and therefore of the application of both cases here. No other case cited is found sufficiently similar to the situation here to be of material assistance. We conclude and hold that the money and property received by petitioner from the estate of Erna Herrscher was received as legatee and is to be deducted, under the statute last above cited, from gross income

This conclusion renders it unnecessary to decide the further question as to deductibility from income of the amounts received as contingent fees by petitioner's attorneys in the will contest.

Decision of no deficiency will be entered.