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Estate of Maurice Falk, Deceased, Leon Falk, Jr., and Eugene B. Strassburger, Surviving Executors, Petitioner, v. Commissioner of Internal Revenue, RespondentFalk v. CommissionerDocket No. 30311
United States Tax Court June 30, 1952, Promulgated *149
Decision will be entered under Rule 50 .1. Decedent, who died in 1946, transferred securities to his second wife in 1934 pursuant to an agreement entered into in 1930. In agreeing to the transfer, the decedent was motivated by a desire to give his wife a wedding present and not by a desire to bar her rights as widow in his estate.
Held , the transfer of the securities was not made in contemplation of death within the meaning ofsection 811 (c), Internal Revenue Code .2. On April 23, 1946, the petitioner, by authority of the trustees of a charitable organization, the residuary legatee under the decedent's will, agreed to purchase annuity contracts for the benefit of the decedent's widow in consideration of her election to take under the decedent's will. Pursuant to the agreement, the petitioner purchased refund annuity contracts in which the charitable organization was irrevocably named as beneficiary. The cost of the refund type annuity contracts was $ 83,425.29 in excess of the cost of no refund type annuity contracts which would have provided the widow with the same benefits but which would not have refunded the excess of the premiums received over the amounts paid to*150 the widow.
Held , the sum of $ 83,425.29 is includible in the residuary bequest to the charitable organization.Louis Caplan, Esq ., for the petitioner.Fortescue W. Hopkins, Esq ., for the respondent.*151 Arundell,Judge . Raum,J ., concurs only in the result on the second issue.ARUNDELL*699 The respondent has determined a deficiency of $ 121,404.15 in the petitioner's estate tax liability. The deficiency results from including *700 in the decedent's gross estate securities which the respondent contends were transferred in contemplation of death, and from reducing by $ 206,819.26 the sum claimed as a deductible charitable bequest.
All stipulated facts are found as stipulated.
FINDINGS OF FACT.
The decedent, Maurice Falk, died testate on March 18, 1946. His last will and testament, dated July 24, 1944, was duly probated.
The decedent named as the executors of his estate Leon Falk, Jr., I. A. Simon, and Eugene B. Strassburger, all of whom duly qualified as such on April 1, 1946. I. A. Simon, one of the executors, died on November 17, 1949. Leon Falk, Jr., and Eugene B. Strassburger are the surviving and acting executors.
The estate tax return for the decedent's estate was filed on June 18, 1947, with the collector of internal revenue for the twenty-third district of Pennsylvania at Pittsburgh, Pennsylvania, and showed an estate tax liability in the amount of $ *152 768,955.35, which was paid on June 18, 1947.
The decedent and his brother, Leon Falk, were engaged in business together in Pittsburgh for a number of years. They originally began in the nonferrous metals business. They also participated in founding other industries and amassed considerable fortunes.
The decedent and Leon Falk retired from active conduct of their nonferrous metals business in 1923 or 1924. At that time they became very active in philanthropic endeavors in the city of Pittsburgh where their fortune had been made. They were generous donors to community philanthropies. Their gifts included $ 500,000 for the creation of the Falk Clinic at the University of Pittsburgh, $ 100,000 to the Montefiore Hospital, $ 100,000 to the Young Men's and Young Women's Hebrew Associations and current contributions on a community basis. They also took an active part in the work of those charities and were trustees and officers in most of them.
After the disposal of their metal business, the decedent and Leon Falk (who died in 1928) continued as directors in most of the companies which they had helped to found. Those were large corporations having capital surpluses ranging from $ 17,000,000*153 to $ 100,000,000. The decedent was also director of a bank in Pittsburgh which had deposits in 1930 totaling approximately $ 75,000,000, and of an insurance company, which at that time had approximately $ 250,000,000 of life insurance outstanding.
The decedent continued to serve as a director of those corporations until his death in 1946. He was very active as a director and attended board meetings regularly. He attended meetings of the board of *701 directors of a bank in Pittsburgh almost daily and served on the loan committee.
Prior to 1929, the decedent had been married to Laura Falk, who died in December 1928. Shortly after the death of Laura Falk, the decedent announced that he was going to create a charitable foundation in her memory. At the time that that announcement was made, the value of the securities that the decedent announced he would transfer to the Foundation to create it was approximately $ 10,000,000.
The Foundation, which is known as "The Maurice and Laura Falk Foundation" (hereinafter referred to as the Foundation) was created by deed of trust dated December 14, 1929, and the designated securities were transferred to it.
Prior to the creation of the *154 Foundation and up to the time of its establishment, the decedent discussed his aims and ideas with respect to the Foundation with his nephew, Leon Falk, Jr., who became the chairman of the board of the Foundation, and with Eugene B. Strassburger who was one of the first trustees and is now the secretary of the Foundation. After the creation of the Foundation and continuing to the time of his death, the decedent took an active interest in the work of the Foundation. He attended all of its meetings when he was in Pittsburgh.
The decedent was a very cheerful, energetic, and mentally alert man, who was keenly interested in business, philanthropy, and politics at all times until his death. He was very active, in excellent health, and played golf regularly up to the time of his death.
Shortly after September 20, 1930, the decedent, then a widower, was married to Selma K. Wertheimer (hereinafter referred to as Selma), then a widow. At the time of his marriage, Maurice Falk was 64 years of age and had no children or other descendants. Selma was then 62 years of age and had one child, a married daughter, and no other descendants. At the time of the marriage, Maurice Falk and Selma were*155 in good health.
Selma's family and the family of her first husband, Morris Wertheimer, who died early in 1929, and the Falk family had been very close friends for many years. The decedent and Selma were friends since childhood and were classmates at school. The decedent looked forward to his second marriage.
Selma was a very independent person and stated, immediately prior to her contemplated marriage with the decedent, that she was anxious that her financial affairs be kept separate from those of the decedent. She said that she did not want any of the decedent's property and that she wanted to make it clear that she was not going to benefit financially by her marriage. Her insistence in this matter was the only difficulty in the way of the proposed marriage. She knew, and *702 was motivated by the fact, that the Foundation had been created in memory of the decedent's first wife and that the decedent intended that most of his fortune should go to this Foundation.
As the result of the insistence of Selma that the financial affairs of the decedent and herself be kept separate and apart and that she should not benefit financially by the marriage, the decedent and Selma on September*156 20, 1930, shortly prior to their marriage, entered into a written antenuptial agreement. It was recited in the antenuptial agreement that each of the parties was independent financially and that it was the intention of both that, notwithstanding the contemplated marriage, neither should have any share or interest in the property, estate, or income of the other.
In the antenuptial agreement, the decedent agreed that if the proposed marriage were entered into he would, on or before December 31, 1931, transfer and deliver to Selma 1,000 shares of the capital stock of National Steel Corporation or other stock or securities of equal value acceptable to Selma. Further, in the agreement the decedent released Selma and any property or estate she then had or might thereafter have from any right of curtesy or other right or claim to which the decedent might be entitled as husband of Selma, and Selma released the decedent and any property or estate he then had or might thereafter have from any and all dower or other right or claim to which Selma might be entitled as the wife of the decedent.
At the time of the execution of the antenuptial agreement and of the marriage, the decedent had a net*157 worth in excess of $ 1,750,000. His net income from dividends, interest, and salary for the year 1930 was in excess of $ 125,000 before deduction for income taxes. At the time of the execution of the antenuptial agreement and of the marriage, Selma had a life interest in a trust created under the will of her deceased husband, Morris S. Wertheimer, of which Selma and the Fidelity Trust Company of Pittsburgh were trustees. Selma was entitled to all of the income of the trust estate during her life and, in addition to such net income, the trustees were directed to pay Selma so much of the principal of the trust fund as she might request from time to time, even to the exhaustion of the trust fund. At the time of the execution of the antenuptial agreement and of the marriage, the market value of the corpus of the trust fund was $ 209,485.26. The income from the trust fund for the year 1930 was $ 15,230.94 before deduction for income taxes.
On September 20, 1930, when the antenuptial agreement was executed the market value of shares of the capital stock of National Steel Corporation was $ 53 per share. On December 31, 1931, the date specified in the antenuptial agreement for the delivery*158 of the 1,000 shares of stock of National Steel Corporation to Selma, the market *703 value of the stock was $ 22 per share. On or about November 26, 1934, in fulfillment of the terms of the antenuptial agreement, the decedent transferred to Selma 1,000 shares of the capital stock of National Steel Corporation, which at that time had a market value of $ 45,500.
During the period 1929-1930, the decedent did not have sufficient cash to fulfill some of his commitments to charity. He did not wish to sell securities to meet those commitments and from time to time he borrowed money.
Following their wedding, the decedent and Selma went on a wedding trip. They made frequent trips after their marriage. They travelled to Florida every year and spent much of their time in Hollywood, in that state. Their marriage proved to be a very happy one and they were very devoted to each other.
Originally the decedent and Selma stayed in resort hotels in Florida. In 1937 the decedent built his own home in Hollywood and he and Selma spent their winters there from 1937 until the time of his death in 1946. The decedent led a very active life in Florida. He took part in swimming and fishing, including*159 strenuous deep-sea fishing.
The decedent died in Florida from uremic poisoning. His last illness lasted a few days.
The income of the decedent from dividends and interest for the year 1945 (the year before his death) was $ 114,708.99 before deduction for income taxes. The income of Selma for the year 1945 was $ 13,639.05 before deduction for income taxes.
At the time of his death, the decedent had a net worth of approximately $ 3,300,000.
At the time of the decedent's death, the market value of 1,000 shares of stock of National Steel Corporation was $ 82,250.
The transfer by the decedent on or about November 26, 1934, to Selma of 1,000 shares of the capital stock of National Steel Corporation in fulfillment of the terms of the antenuptial agreement was not a transfer made by the decedent in contemplation of death.
The decedent devised and bequeathed his entire residuary estate (subject to the payment of two small annuities which are not here involved) to the trustees of the Foundation for the uses and purposes set forth in the written agreement between the decedent and the trustees dated December 14, 1929, by which the Foundation was created. The decedent made no provision in his*160 will for Selma.
On April 23, 1946, the petitioner, by authority of the trustees of the Foundation, as residuary legatee under the decedent's will, entered into a written agreement with Selma, under which the petitioner agreed that if Selma would execute and deliver to the petitioner at that time her written irrevocable election as widow to take under the decedent's will, in order that the administration and distribution *704 of the estate might be expedited, the petitioner, in consideration thereof, would pay to her, or upon her order, the sum of $ 5,000, plus an amount sufficient to purchase refund annuity contracts, which would provide for payment to her of $ 1,250 per month for life and for payment to the Foundation of the refundable portions of the original premiums remaining unused at the time of her death, and would also transfer and deliver to her the decedent's 1941 Cadillac automobile and all of the decedent's household goods and jewelry.
Pursuant to the terms of the agreement, Selma delivered to the petitioner on April 23, 1946, her written election to take under the decedent's will and relinquished all her right as widow to take against the will.
Pursuant to the terms*161 of the agreement, the petitioner, on or about April 24, 1946, purchased for $ 223,455.88 refund annuity contracts which provided for the payment of quarterly annuities in the amount of $ 3,750 to Selma for the remainder of her lifetime. In the refund annuity contracts, the Foundation was irrevocably named as beneficiary to receive upon the death of Selma the full balance of the purchase price of the contracts in excess of the total amounts paid to her during her lifetime. The amount payable to the Foundation if Selma had died on April 24, 1946, was $ 223,455.88 and decreased quarterly by $ 3,750. If Selma had lived until 15 years after April 24, 1946, the payments to her would have exceeded the purchase price of the contracts and no refund payments would have been available to the Foundation. The same insurance companies would have charged $ 140,030.59 for the contracts on a no-refund basis, under which none of the unused portion of the purchase price would be refunded by the insurance companies upon the death of Selma.
In pursuance of the agreement, the petitioner paid to Selma the sum of $ 5,000 in cash and delivered to her the decedent's 1941 Cadillac automobile and the decedent's*162 household goods and jewelry which had a total value of $ 4,450 at the time of the decedent's death.
All of the bequests contained in the decedent's will except the residuary bequest to the Foundation have been paid in full.
Selma died on November 4, 1947. There had been paid to her during her lifetime under the refund annuity contracts the total sum of $ 22,426.50. At the time of her death there remained unused and refundable to the Foundation from the purchase price of the contracts a balance of $ 201,029.38 which was paid to the trustees of the Foundation.
Selma was born on February 12, 1868, and was 78 years of age at the time of the purchase of the above recited annuity contracts. On March 18, 1946, as well as on April 24, 1946, the life expectancy of Selma under the Actuaries' or Combined Experience Table of Mortality, as extended, was 5.42 years.
*705 The annuity contracts provided that the quarterly payments of $ 3,750 to Selma should begin on or about August 1, 1946, and should terminate with the last quarterly payment immediately preceding her death.
The value as of April 24, 1946, of the interest of the Foundation, as irrevocable beneficiary, in the refund annuity*163 contracts, on the basis of the Actuaries' Combined Experience Table of Mortality, as extended, and on the basis of 4 per cent compound interest, was $ 122,797.
On April 24, 1946, the difference between the aggregate amount of premiums which the insurance companies charged for the refund annuity contracts, namely, $ 223,455.88, and the amount which the same insurance companies would have charged for the contracts on a no-refund basis, namely, $ 140,030.59, was $ 83,425.29.
The Foundation is now and at all times since its creation on December 14, 1929, has been a trust created and operated exclusively for charitable, scientific and educational purposes and all gifts and bequests to it are used exclusively for such purposes. No substantial part of the activities of the Foundation is carrying on propaganda, or otherwise attempting to influence legislation.
OPINION.
The first question before us is whether the decedent's transfer of securities in 1934, approximately 12 years before his death in 1946, was a transfer made in contemplation of death within the meaning of
section 811 (c), Allen v.Trust Co. of Georgia , 326 U.S. 630*165 The transfer in 1934 of 1,000 shares of stock in the National Steel Corporation was in fulfillment of a promise incorporated in an antenuptial agreement executed in 1930 by petitioner and his prospective bride. At the time of the agreement, the decedent was a widower, 64 years of age, and was looking forward to his second marriage to a widow who had been a classmate and a life-long friend.
*706 At all times until shortly before his death in 1946, the decedent was a cheerful, energetic, and mentally alert individual, who enjoyed excellent health, played golf regularly, made frequent trips, especially to Florida where he built a home in 1937, and participated in such sports as swimming and deep-sea fishing. In addition, he served as a director of several companies, attended board meetings regularly, participated in philanthropic activities and took an active interest in the Maurice and Laura Falk Foundation, referred to herein as the Foundation, a charitable organization he created in 1929.
Finally, it is significant that in 1930 the transferred property had a value of only $ 53,000, a relatively small sum when contrasted to the sum of $ 1,750,000 which represented the decedent's*166 financial worth at that time, after having transferred to the Foundation securities worth approximately $ 10,000,000 in 1928.
In view of these and other facts set forth in our findings, we think it is clear that neither the thought of death nor the desire to avoid death taxes was the impelling cause for the 1930 agreement to transfer the securities.
The respondent nevertheless refers to the fact that the decedent's promise to transfer the securities was incorporated in the antenuptial agreement in which the decedent and Selma relinquished their interests as spouse in each other's property and concludes that the promise to transfer the securities was part consideration for Selma's release of her statutory interests as widow. From this premise, the respondent argues that the motive for the transfer was therefore a motive associated with death, which brings the transfer within the purview of
section 811 (c) of the Code, citingIn re Kroger's Estate , 145 F. 2d 901324 U.S. 866">324 U.S. 866 .In
In re Kroger's Estate , the Court of Appeals for the Sixth Circuit held that there was substantial evidence to support our finding*167 that the transfers in question were for the purpose of barring the decedent's prospective wife from her statutory rights should she survive him, and were made in contemplation of death. In 1928 shortly prior to his marriage, the decedent had transferred in trust a material part of his property, consisting of Treasury notes with a face value of $ 12,000,000, and directed that the income be paid to the decedent for life, remainder to his children and grandchildren. The decedent's decision to transfer the property in trust was reached after several discussions with his children concerning his contemplated marriage to a woman many years his junior. The record left no doubt that the transfer was motivated by the decedent's desire to have the property pass at his death to his children rather than to the woman he planned to marry.The decision reached in
In re Kroger's Estate, supra In entering into the antenuptial agreement, the decedent was motivated by a desire to satisfy the wishes of Selma and not by a motive associated with death such as an intent to bar her rights as his widow. The decedent's nephew, who was a close friend as well as business associate, testified that the decedent intended the transfer to be a wedding gift and we think the evidence establishes this intent. At the time of the agreement, the securities had a value of $ 53,000, which represented only about three per cent of the decedent's financial worth. It was not an improbable sum to be given to a wife as a wedding gift by a husband then worth approximately $ 1,750,000, after having transferred to a Foundation*169 created in memory of his first wife securities worth in 1928 approximately $ 10,000,000 and, moreover, who gave to public charities sums far in excess of $ 53,000.
After considering the entire record, it is our view that the decedent's transfer of the securities was not impelled by the thought of death, the desire to avoid death taxes, or the desire to bar Selma's statutory rights as widow, and was not a transfer in contemplation of death within the meaning of
section 811 (c) of the Code.The second question, the amount to be deducted from the decedent's gross estate as a charitable bequest under
section 812 (d), Internal Revenue Code , arises from the following facts: The decedent bequeathed his entire residuary estate to the Maurice and Laura Falk Foundation, an admittedly charitable organization within the meaning ofsection 812 (d) , and left no legacy or bequest to his widow Selma.On April 23, 1946, about five weeks after the decedent's death, his executors, by authority of the trustees of the Foundation, as residuary legatee under the decedent's will, agreed to pay Selma a sum sufficient to purchase annuity contracts which would provide for payment to her of $ 1,250 per month*170 for life. The agreement to pay this sum, plus other property with a value of $ 9,450, which is not in dispute, was in consideration of her election *708 The agreement provided for the purchase of "refund" annuity contracts which would refund to the Foundation the premiums unused, if any, at the time of Selma's death. The "refund" annuity contracts cost $ 223,455.88 which was $ 83,425.29 in excess of the cost of "no refund" annuity contracts that would have provided Selma with the same benefits but which would not have refunded the unused premiums.
The purchase of the "refund" annuity contracts at the additional cost of $ 83,425.29 was solely for the benefit of the Foundation. The agreement provided that the Foundation would be irrevocably designated as beneficiary.
*171 The refund payable to the Foundation on April 24, 1946, was $ 223,455.88 (the total cost) and decreased quarterly by $ 3,750, the amount of the quarterly payments to the annuitant, Selma. If Selma lived for 15 years after April 24, 1946, no refund would have been available to the Foundation.
With these facts before us, the problem is to determine the value of the deductible residuary bequest to the Foundation. The petitioner argues that there should be included in the residuary estate the sum of $ 122,797 which allegedly represents the value of the Foundation's "remainder" interest in the refund annuity contracts or, alternatively, the sum of $ 83,425.29 which represents the cost of that interest. The respondent contends the interest is not deductible as a charitable bequest and gives as his reasons principles applicable to bequests of contingent remainders to charity. He argues,
inter alia , that the value of the interests in the annuity contracts is not ascertainable and also that the possibility that Selma would live for 15 years after April 24, 1946, with the result that the Foundation would not receive any refund, was not too remote to be negligible. SeeMerchants National Bank of Boston v.Commissioner , 320 U.S. 256">320 U.S. 256Humes v.United States , 276 U.S. 487">276 U.S. 487Newton Trust Co. v.Commissioner , 160 F.2d 175">160 F. 2d 175Boston Safe Deposit & Trust Co., et al., Executors , 30 B. T. A. 679However, as we understand the plan of the Federal estate tax, the problem does not require a valuation of the interest in the refund annuity contracts, as urged by the parties. The interest was not bequeathed by the decedent and was not part of his residuary estate but was instead an asset purchased by the Foundation *173 *709 The problem is to value the residuary estate, and that can best be done here by looking to what remained in the residuary estate after deducting from the gross estate all debts, expenses, legacies and bequests (other than the residuary bequest), including the property transferred to Selma in consideration of her election to take under the will. The issue, therefore, centers on what remained in the residuary estate after taking into account the sum expended for the benefit of Selma by reason of the agreement executed on April 23, 1946.
The starting point is the rule applied in
In re Sage's Estate , 122 F. 2d 480314 U.S. 699">314 U.S. 699 . See alsoThompson's Estate v.Commissioner , 123 F. 2d 816In re Sage's Estate, supra The rule of the
Sage andThompson cases is that there is subtracted from the decedent's gross estate as a testamentary bequest the value of what the widow received in settlement of her will contest. She is deemed to have taken the property by "inheritance" within the meaning of the Internal Revenue Code. Applying that rule here, Selma received by "inheritance" certain property valued at $ 9,450 and an annuity valued at $ 140,030.59. Those sums are part of the total sum subtracted from the decedent's gross estate in determining the value of the residuary estate.The additional sum of $ 83,425.29, representing the cost of the refund provision contained in the annuity contracts, was not expended for the benefit of Selma and did not represent anything of value to her. Selma's estate was not the beneficiary of the provision and Selma had no voice in designating the*175 beneficiary. Her agreement with the executors specifically provided that the Foundation was to be irrevocably designated as beneficiary. Perhaps the trustees of the Foundation decided to purchase the refund provisions for the benefit of the Foundation after concluding that it offered a good opportunity for financial gain.
Therefore, the sum of $ 83,425.29, although expended in connection with the purchase of annuity contracts for the benefit of Selma, was not part of the consideration received by her and is not included in *710 the total subtracted from the decedent's gross estate. Instead, that sum remained a part of the gross estate and passed into the residuary estate. The sum would have passed either in the form of cash or securities to the Foundation as residuary legatee if it had not purchased the refund provisions and had instead purchased the no-refund type of annuity contracts.
It should be noted at this point that the Foundation received the interest in the refund provisions by purchase, not by inheritance. What it received by inheritance was cash or other property with a value of $ 83,425.29 which in turn was used by it to purchase the refund provisions. Since*176 the interest in the refund provisions was received by purchase and not by inheritance, the value of the interest or the fact that it was subject to divestment by a nonremote contingency is not relevant in determining the value of the charitable bequest that is deducted from the decedent's gross estate.
We, therefore, hold that the deductible charitable bequest includes the sum of $ 83,425.29 which, pursuant to the authorization of the trustees of the Foundation, was used to purchase the refund provisions in the annuity contracts.
Decision will be entered under Rule 50 .Footnotes
1.
Section 811 (c) , as effective for the taxable years and prior to amendment in succeeding years, reads as follows:SEC. 811 . GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States --
* * * *
(c) Transfers in Contemplation of, or Taking Effect at, Death. --
(1) General Rule. -- To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise --
* * * *
(A) in contemplation of his death. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this subchapter; * * *↩
2. See Pennsylvania Wills Act of 1917, Act of 1917, June 7, P. L. 403, sec. 23 (a) and (b), as amended. (20 Purd. Stat. Ann., Appendix, secs. 261, 262, pp. 451, 452.)↩
3. The executors of the estate executed the agreement with the widow Selma and purchased the annuity contracts but they acted pursuant to authorization by the trustees of the Foundation as residuary legatee.↩
4. One of the contentions of the petitioner was that the refund interest in the annuity contracts represented an investment of assets of the decedent's estate for the account of the Foundation.↩
Document Info
Docket Number： Docket No. 30311
Citation Numbers： 18 T.C. 699, 1952 U.S. Tax Ct. LEXIS 149
Judges： Arundell,Raum
Filed Date： 6/30/1952
Precedential Status： Precedential
Modified Date： 11/14/2024