Estate of Hoelzel v. Commissioner , 28 T.C. 384 ( 1957 )

Estate of John P. Hoelzel, Deceased, The Union National Bank of Pittsburgh, Surviving Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent

Estate of Hoelzel v. Commissioner

Docket No. 58098

United States Tax Court

28 T.C. 384; 1957 U.S. Tax Ct. LEXIS 188;

May 17, 1957, Filed

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Decision will be entered under Rule 50.

Decedent bequeathed to trustees for the benefit of his wife (she having power of appointment over corpus) a "sum equal to one-half (1/2) of the excess of the property included in [his] gross estate for the purpose of the federal estate tax over the deductions allowable * * *" to be further reduced by the "portions of [his] gross estate which pass to [his] wife, but do not constitute a part of [his] estate at the date of [his] death." At the time of his death decedent owned certain annuity and insurance contracts with regard to the proceeds of which he gave his wife a life interest. The wife had an incurable cancer and died 1 year and 3 months after the decedent died. The question concerns the computation of the trust corpus for purposes of the marital deduction.

Held, (1) the one-half of the gross estate should be reduced by the value of the life interest of the wife under the annuity and insurance contracts; (2) the valuation of such interest is to be made on the basis of the wife's actual life expectancy; (3) the use of the wife's terminable interest under the annuity and insurance contracts in computing proper corpus of trust does not invalidate such trust as a marital deduction; and (4) there was no "implied disclaimer" by decedent's children as to the corpus of the trust properly computed under decedent's will.

Donald L. McCaskey, Esq., for the petitioner.

George J. Rabil, Esq., for the respondent.

Kern, Judge.

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KERN

Respondent determined a deficiency in Federal estate taxes against the Estate of John P. Hoelzel, deceased, in the amount of $ 88,626.68, arising by reason of his determination that a marital deduction claimed under the provisions of section 812 (e) of the Internal Revenue Code of 1939 in the amount of $ 554,243.90 was allowable only to the extent of $ 294,801.33. The sole issue for determination herein is whether respondent erred in this determination. With regard to other issues raised in the petition, the parties have stipulated that attorneys' fees and expenses, if any, in connection with the administration of the estate, including the conduct of this proceeding, which may constitute proper deductions from the gross income, will be allowed as deductions in the computations submitted in accordance with Rule 50, and further that in accordance with section 813 (b) of the Internal Revenue Code of 1939 petitioner may claim credit for State, estate, inheritance, legacy, and succession taxes, and may present to the respondent proof of such payments within the statutory period.

FINDINGS OF FACT.

The parties have filed herein a stipulation of facts. We find the facts to be as stipulated and incorporate herein by this reference the stipulation, together with the exhibits attached thereto.

The decedent, John P. Hoelzel, died testate on December 26, 1950, a resident of Pittsburgh, Pennsylvania. By his will decedent appointed his wife, Agnes M. Hoelzel, and the Union National Bank of Pittsburgh as executrix and executor, respectively. Agnes M. Hoelzel died on April 1, 1952. In addition to his wife, decedent, John P. Hoelzel, was survived by two daughters. An estate tax return was timely filed on behalf of the Estate of John P. Hoelzel with the then collector of internal revenue for the twenty-third district of Pennsylvania.

Decedent, by article One of his will, bequeathed to his wife certain items of personal apparel and any automobiles registered in his name. Article Four of decedent's will provided as follows:

ARTICLE FOUR. If my wife, Agnes M. Hoelzel, shall survive me, I devise and bequeath to the trustees hereinafter named in Article Seven hereof, upon the trusts and subject to the provisions hereinafter set forth, a sum equal to one-half (1/2) of the excess of the property included in my gross estate for the purpose of the federal estate tax over the deductions allowable for expenses, claims, mortgages and indebtedness in the determination of the net estate for the purpose of such tax. The property devised and bequeathed by this Article shall be reduced by the portions of such gross estate which pass to my wife, but do not constitute a part of my estate at the date of my death, and by the portions which pass to my wife by virtue of the bequests of Article One hereof. The trustees shall hold the property devised and bequeathed to them by this Article upon the following uses and trusts:

A. The trustees shall invest and reinvest the trust property and collect the income thereof, and shall pay all of the income of the trust property in quarter-yearly installments to my aforementioned wife during her life.

B. On the death of my said wife, the trustees shall distribute the principal of the trust property free of trust to such persons (including her estate) and in such proportions as my wife by her last will shall appoint. If she does not survive me or if she shall fail to exercise the said power of appointment, then the property devised and bequeathed by this Article shall be disposed of to the same persons and in the same manner as the other part of the residue of my estate devised and bequeathed by Article Five of this will.

Included in the gross estate of John P. Hoelzel were the proceeds of a refund annuity contract issued by Bankers Life Company in the amount of $ 108,399.57. The settlement elected under this contract by the decedent provided that installments of $ 500 a month be paid to Agnes M. Hoelzel, his widow, during her lifetime. Agnes M. Hoelzel had no power to dispose of the principal of the proceeds during her lifetime or at her death. No part of the proceeds of the foregoing refund annuity contract is allowable as part of the marital deduction.

Included in the gross estate of John P. Hoelzel were the proceeds of 3 life insurance policies issued by Equitable Life Assurance Society of the United States aggregating in value $ 151,043. The settlement election made by the decedent prior to his death provided that the interest from these policies was to be paid to his widow, Agnes M. Hoelzel, at a rate of 3 per cent per annum in monthly installments during her lifetime. Agnes M. Hoelzel had no power to dispose of the proceeds of the policies during her lifetime or at her death. No part of the proceeds is allowable as part of the marital deduction.

In computing the amount bequeathed to the trust established by article Four of decedent's will allowable as a marital deduction, and particularly in computing the portion of the estate of decedent which passed to Agnes M. Hoelzel but did not constitute a part of decedent's estate at the time of his death, within the meaning of article Four, the petitioner reduced one-half of the adjusted gross estate ($ 554,249.33) by the sum of $ 75,711.97, representing "property interest passing to surviving spouse," listed in schedule M of the estate tax return and consisting of joint property, insurance proceeds (proceeds of policies not here in issue), and jewelry passing to decedent's widow pursuant to article One of his will.

Respondent, in a similar computation, determined that the portion of the estate of decedent which passed to his widow but did not constitute a part of decedent's estate at the date of his death, within the meaning of article Four of decedent's will, included an amount of $ 259,442.57, representing a total of the entire proceeds of the refund annuity contract and life insurance policies referred to above, and, therefore, the one-half of the adjusted gross estate ($ 554,249.33) should be reduced by this amount in addition to the amount of $ 75,711.97 subtracted in petitioner's computation.

The executors of decedent's estate filed a first and final account with the Orphans' Court of Allegheny County, Pennsylvania, which made a decree thereon dated April 27, 1953. No objections were made to the account filed. The decree confirmed the account and directed distribution in the amount of $ 478,537.36 ($ 554,249.33 less $ 75,511.97) to the trustees of the trust created by article Four of decedent's will.

Agnes M. Hoelzel (hereinafter referred to as Agnes) was born on May 16, 1889, and died on April 1, 1952. At the time of her husband's death on December 26, 1950, she was 61 years old but, in accordance with the respondent's regulations for determining the value of any life interest owned by her, her age was 62. It is stipulated that if her interest in the refund annuity contract, "being the right to receive $ 500 a month during her lifetime," is to be determined by the respondent's actuarial tables, the value of that interest was $ 53,641.95. It is further stipulated that if her interest in the insurance contracts here involved, "being the right to receive interest in the amount of $ 377.61 a month during her lifetime," is to be determined by respondent's actuarial tables, the value of such interest was $ 40,511.20.

In January 1941 Agnes was operated on for cancer of the breast. This operation consisted of a radical dissection. In June 1949, after Agnes had complained of pain in the chest, difficulty in breathing, and other symptoms, an examination was made of her by her physician and surgeon, in cooperation with the hospital pathologist and radiologist, in connection with which examination about a gallon of bloody fluid was removed from her left chest. This was found to contain the same type of cancer as was found in her breast in 1941. X-ray pictures disclosed that Agnes had a tumor in the lining of her lung and the diagnosis of her physician and surgeon was that she at that time had an incurable and inoperable metastatic carcinoma of the left lung. Both her surgeon and physician were of the opinion that she could live a maximum of about a year and a half.

On December 26, 1950 (the date of decedent's death), the life expectancy of Agnes did not exceed 1 year.

From December 26, 1950, to the date of her death Agnes received an aggregate of $ 6,000 as monthly installments under the annuity contract, and the aggregate amount of $ 4,531.29 under the insurance contracts here involved. The value on December 26, 1950, of the life interest of Agnes in these annuity and life insurance contracts did not exceed $ 10,531.29.

OPINION.

The parties herein disagree in their computations of the amount of the corpus of the trust provided for by article Four of decedent's will, which is allowable as a marital deduction under section 812 (e) (1) (A) of the Internal Revenue Code of 1939. ^{*198 The precise question upon which the parties disagree is whether and to what extent the proceeds of the annuity and insurance contracts, referred to in our findings, constitute "portions of [decedent's] gross estate which pass to [his] wife, but do not constitute a part of [his] estate}

Respondent contends that the entire proceeds of the annuity and insurance contracts must be considered as having passed to decedent's wife, while petitioner argues that under a proper construction of the will, which gives effect to the testator's real intention, no part of or interest in the proceeds of these contracts can be considered as "portions of [his] gross estate which pass to [his] wife * * *."

In our opinion the arguments of both parties on this question are without merit. It seems obvious to us, under the facts stipulated, that all of the proceeds of these contracts did not pass to decedent's wife; and equally obvious that some part or portion of these proceeds did so pass, namely, a life interest therein.

Both parties, anticipating the possibility, if not the probability, that this would be our conclusion on this issue, present alternative contentions dealing with the valuation to be placed upon this life interest. The respondent's position is that "petitioner has failed to show that that value is less than $ 94,153.10 as evidenced by respondent's actuarial tables." Petitioner's contention in this regard is that the uncontradicted medical testimony herein shows that on the date of decedent's death the actual life expectancy of Agnes was not in excess of 1 year, that the application of standard mortality tables is improper in this case, and that the value of the life interest of Agnes as based upon her actual life expectancy, rather than the theoretical life expectancy shown by mortality tables, was not in excess of $ 10,531.29.

On this issue we agree with petitioner both on the facts and the law. See Estate of John Halliday Denbigh, 7 T. C. 387; Estate of Nellie H. Jennings, 10 T. C. 323; Estate of Nicholas Murray Butler, 18 T.C. 914">18 T. C. 914.

Therefore, we conclude that the amount bequeathed to the trust established by article Four of decedent's will, which is allowable as a marital deduction, is one-half of the adjusted gross estate ($ 554,249.33) reduced by $ 75,711.97, and further reduced by $ 10,531.29, the value of the life interests in the annuity and insurance contracts of decedent passing to Agnes at his death.

Respondent also argues that since the amount distributed to the trustees, under article Four of the will was not reduced by all or any part of the proceeds of the annuity and insurance contracts and since the children of decedent "failed to contest the action of the executor in giving the mother more than she was entitled to under Article Four of the will thereby reducing their shares, such action should be considered an implied disclaimer on their part" and, therefore, "the excess that the widow received would not qualify for the marital deduction under section 812 (e) (4) (B)*390 pass directly * * * from her husband * * * but is considered to have come from the children."

Since we have indicated above a computation of the amount bequeathed by the decedent to the trust established by article Four of his will, which is allowable as a marital deduction and which was not more than the widow was entitled to under this article, there is no longer a question of any "implied disclaimer" on the part of the children.

Respondent also argues that since one of the factors necessarily considered in computing the amount of the corpus of the trust created by article Four (the proceeds of the annuity and insurance contracts with regard to which the wife had a life interest) was a terminable interest, no part of the corpus of this trust is allowable as a marital deduction, even though as to the corpus itself, after the computation has been made and the amount thereof has been properly determined, there is no terminable interest which would preclude its allowance as a marital deduction under section 812 (e) (1) (B). *202 Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 812. NET ESTATE.

  For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate --

  * * * *

  (e) Bequests, Etc., to Surviving Spouse. --

  (1) Allowance of marital deduction. --

  (A) In General. -- An amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.↩

• 2. We construe this to mean "a part of his estate subject to administration."↩

• 3. SEC. 812. NET ESTATE.

  (e) Bequests, Etc., to Surviving Spouse. --

  * * * *

  (4) Disclaimers. --

  * * * *

  (B) Disclaimer by Any Other Person. -- If under this subsection an interest would, in the absence of a disclaimer by any person other than the surviving spouse, be considered as passing from the decedent to such person, and if a disclaimer of such interest is made by such person and as a result of such disclaimer the surviving spouse is entitled to receive such interest, then such interest shall, for the purposes of this subsection, be considered as passing, not to the surviving spouse, but to the person who made the disclaimer, in the same manner as if the disclaimer had not been made.↩

• 4. SEC. 812. NET ESTATE.

  (e) Bequests, Etc., to Surviving Spouse. --

  (1) Allowance of marital deduction. --

  * * * *

  (B) Life Estate or Other Terminable Interest. -- Where, upon the lapse of time, upon the occurrence of an event or contingency, or upon the failure of an event or contingency to occur, such interest passing to the surviving spouse will terminate or fail, no deduction shall be allowed with respect to such interest --

  (i) if an interest in such property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to any person other than such surviving spouse (or the estate of such spouse); and

  (ii) if by reason of such passing such person (or his heirs or assigns) may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving spouse;

  and no deduction shall be allowed with respect to such interest (even if such deduction is not disallowed under clauses (i) and (ii)) --

  (iii) if such interest is to be acquired for the surviving spouse, pursuant to directions of the decedent, by his executor or by the trustee of a trust.

  For the purposes of this subparagraph, an interest shall not be considered as an interest which will terminate or fail merely because it is the ownership of a bond, note, or similar contractual obligation, the discharge of which would not have the effect of an annuity for life or for a term.↩