DocketNumber: Docket No. 2182-79
Citation Numbers: 1981 U.S. Tax Ct. LEXIS 94, 77 T.C. 120
Judges: Ekman,Sterrett,Fay,Tannenwald,Simpson,Nims,Tannenwald,Wilbur,Chabot
Filed Date: 7/28/1981
Status: Precedential
Modified Date: 1/13/2023
*94
*120 OPINION
Respondent determined a deficiency of $ 51,687 in petitioner's Federal estate tax. Concessions having been made by the parties, the sole issue remaining for decision is whether the date of death value of homestead property owned by decedent should be reduced or discounted on account*98 of the homestead rights of decedent's surviving spouse.
All of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated *121 herein by this reference. The pertinent facts are summarized below.
Lolita McNeill Muhm (hereinafter petitioner) is the independent executrix of the Estate of Helen M. Johnson, deceased. Petitioner is the successor to Perry Reese McNeill, Sr., who, as independent executor of the Estate of Helen M. Johnson, deceased, filed a Federal estate tax return with the District Director of Internal Revenue, Austin, Tex. Petitioner's legal residence at the time the petition was filed was Richardson, Tex.
Helen M. Johnson (hereinafter decedent), a resident of Brazoria, Brazoria County, Tex., died March 1, 1975, and was survived by her husband, Elmer V. Johnson, who was then 73 years of age.
At the time of her death, decedent owned interest in various tracts and parcels of real property in Brazoria County, Tex. Among them was the property in dispute, an undivided one-half interest in a tract of 297.563 acres (hereinafter tract 2) and the entire fee interest in 2.4378 acres (hereinafter tract 7). These*99 properties, although separately owned by decedent, constituted the homestead of decedent and her husband.
Perry Reese McNeill (decedent's brother) was the owner of the other undivided one-half interest in the 297.563-acre tract referred to as tract 2. After decedent's death, Elmer V. Johnson asserted his right to continue to occupy both tracts as his homestead property against the wishes of decedent's brother.
Petitioner contends that once property is characterized as a homestead, certain rights created under Texas law serve to reduce its value for estate tax purposes. Respondent contends, on the other hand, there should be no reduction in value.
The parties have stipulated that if the homestead character of the property is to be reflected in valuing the property, the aggregate value of the interest in tract 2 and tract 7 is $ 92,233.73, while, if the homestead character is to be disregarded, the aggregate value is $ 173,945.50.
This Court faced the present issue in
We think this contention is without merit. The Federal estate tax laws do not contemplate any such deduction. There is nothing particularly unusual about the laws of Texas with respect to the surviving spouse having the right of life occupancy to the homestead property. Many states have laws of a similar nature. The regulations specifically provide that property subject to homestead or other exemptions under local law is includible as part of the gross estate. See Regulations 105, sec. 81.13. Here the decedent had a vested community one-half interest in the homestead property, which interest was terminated by his death. This community one-half interest is, therefore, includible in the decedent's estate.
Petitioner contends that
Although Federal estate tax laws are controlling, we must first look to State law to determine the property rights and interests created in the parties.
In Texas, marital property may consist of either separate or community property. Tex. Fam. Code Ann. tit. 1, sec. 5.01 (Vernon); see
Once designated as homestead, the property is protected from all but a limited number of creditors.
Upon the death of one spouse, the homestead property retains its exemption from creditors. Tex. Prob. Code Ann. tit. 17c, sec. 270 (Vernon). The property is not part of the estate for administrative purposes and it is delivered directly to the surviving spouse if there is one and if not, to the guardian*103 of the minor children and unmarried surviving children, if any, living with the family. Tex. Prob. Code Ann. tit. 17c, sec. 271, sec. 272 (Vernon). The homestead vests and descends like any other real property; however the surviving spouse (or children) may continue to use and occupy the property so long as he or she elects to use and occupy it as the homestead.
Petitioner concedes that the homestead property is includable in decedent's estate but contends that the value of the interest that decedent possessed at death must be reduced due to these homestead rights. Petitioner has submitted the report of an expert to support her contention that*104 the homestead rights created under Texas law are restrictions which, like encumbrances on the property, reduce its value. Respondent on the other hand would have us ignore any effect which the homestead rights might have on fair market value. We agree with petitioner. The value of the interest decedent possessed at death is less than that of the same property unencumbered by homestead rights, and we cannot totally disregard those rights in determining values. 2
Brief as is the instant of death, the court must pinpoint its valuation*105 at this instant -- the moment of truth, when the ownership of the decedent ends and the ownership of the successors begins. It is a fallacy, therefore, to argue value before-or-after death on the notion that valuation must be determined by the value either of the interest that ceases or of the interest that begins. Instead, the valuation is determined by
"Fair market value" is not an incantation whose ritualistic use will immediately reveal the worth of unusual types of property. The basis of the definition*106 of fair market value is the assumption that hypothetical willing buyer and hypothetical willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of the relevant facts, will arrive at some sale price for the property in question.
Petitioner urges us to consider Elmer V. Johnson's rights as surviving spouse as a life estate. Numerous Texas cases do indeed discuss the homestead rights of a surviving spouse in terms of life estate or "in the nature of a life estate." See
*107 *125 Respondent analogizes the homestead rights under Texas law to common law rights of dower and curtesy and maintains that although technically not within the reach of
Section 20.2034-1, Estate Tax Regs., provides:
Dower or curtesy interests. A decedent's gross estate includes under
However, as respondent concedes, homestead rights are not dower, curtesy, or an interest created in lieu thereof. See Interpretive Commentary following
Respondent contends that the direct reference to homestead property in
*126 The language of respondent's own regulations concerning dower and curtesy differs from that dealing with*109 homestead property. Section 20.2034-1, Estate Tax Regs., reads as follows:
Thus, the
In this case, the decedent did not possess a full total interest subject to her unrestricted control. Once the property was characterized as the homestead, decedent could not sell it without joinder of her spouse (Tex. Fam. Code Ann. tit. 1, sec. 5.01 (Vernon); see, e.g.,
The fair market value of property subject to restrictions is generally recognized to be less than that of the same property unrestricted. Thus, restrictions on shares in a corporation (see
Because of the restrictive nature of common ownership of property, the fair market value of an undivided fractional interest is often less than the full aliquot share of the value of the entire property. See
Thus, restrictions have consistently played a role in determining fair market value. As provided in
Accordingly, we hold that the fair market value of the property in controversy, and the amount thus includable in the gross estate of decedent, was $ 92,233.73.
Fay,
*129 I believe
The majority opinion holds that Texas homestead rights are not an interest created "in lieu of" dower or curtesy, and cites the Interpretative Commentary following
The idea of
The foregoing analysis leads me to conclude that
*120 As indicated above, I agree with much of the majority's analysis under
That much said, I think the remainder of the*122 majority's analysis under
*123 This is admittedly a gap or "loophole" in
Finally, it is unclear from the majority opinion,
*124 However, by "expressly" overruling
Nims,
Furthermore, it seems to me highly inappropriate to reach a result, unless we are absolutely compelled to do so, which will now affect the reach of the estate tax on a State-by-State basis. Nevertheless, I do not base my objections simply upon a "'tain't right" approach. There is substantial rationale for the result in
Clearly, Texas homestead rights are not includable under
In another context, we have held that "the fact that transfers may be inchoate when originally made does not preclude them from being perfected at some later date"; i.e., at the date of death.
The fact that homestead rights are not a statutory substitute for dower or curtesy, as required for inclusion under
It seems to me that the creation of the homestead pursuant to the Texas Constitution, as described by the majority,
For the above reasons, I would hold for the respondent.
*. By order of the Chief Judge dated Sept. 12, 1980, this case was reassigned from Judge Herbert L. Chabot to Judge Sheldon V. Ekman.↩
1. Petitioner alternatively contends that even if
2. Fortunately, the parties, by stipulation, have spared us the task of ascertaining the value of those rights.↩
3. The Court of Appeals for the Fifth Circuit in a comprehensive opinion has recently held that a Texas homestead interest is a "property right in the nature of an estate in land."
The interest differs from a life estate in that if the surviving spouse ceases to use the property as a homestead, his homestead rights are terminated. In addition, the right to live on the property for life cannot be sold or conveyed but rather is personal to the surviving spouse.
4. Compare
5. Art. 2, Regs. 70 (1926), for the first time provided that "homestead and other exemptions" are subject to tax, following enactment of sec. 302(b), Revenue Act of 1926, 44 Stat. 70. That statute eliminated the limitation of an earlier predecessor of
Respondent, in his 1937 regulations, removed the reference to homestead from art. 2, Regs. 80 (1937) (the predecessor of Estate Tax Regs.
6. The words "full value" have consistently been included in respondent's regulations for property subject to dower and curtesy rights since 1919 (see art. 21, Regs. 37 (1919); art. 21, Regs. 37 (1921); art. 16, Regs. 63 (1922); art. 14, Regs. 68 (1924); art. 14, Regs. 70 (1926); art. 14, Regs. 70 (1929); art. 14, Regs. 80 (1934); art. 14, Regs. 80 (1937); sec. 81.14, Regs. 105 (1942); sec. 20.2034-1, Estate Tax Regs. (1959)) but have never appeared in his regulations for property subject to homestead rights (see art. 2, Regs. 70 (1926); art. 2, Regs. 70 (1929); art. 2, Regs. 80 (1934); art. 13, Regs. 80 (1937); sec. 81.13, Regs. 105 (1942);
7. In
1. As pointed out by the majority,
2. I am somewhat confused by the majority's statement at pp. 123-124, "Petitioner concedes that the homestead property is includable in decedent's estate but contends that the value of the interest that decedent possessed at death must be reduced due to these homestead rights." I can find no such concession in the briefs. Read literally, that concession, had it in fact been made, would have ended the case.↩
3. It is important to recognize that similar restrictions and rights attach prior to death to property subject to common law dower or curtesy. In
4. In his reply brief, respondent stated, "Respondent does not assert that
1. As a matter of fact, R. Stephens, G. Maxfield & S. Lind, Federal Estate and Gift Taxations par. 4.06 (1978 ed.), opine that the