DocketNumber: Docket No. 6998-73
Citation Numbers: 34 T.C.M. 1071, 1975 Tax Ct. Memo LEXIS 125, 1975 T.C. Memo. 249
Filed Date: 7/28/1975
Status: Non-Precedential
Modified Date: 11/20/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
WILBUR,
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation of facts and the attached exhibits are incorporated by reference.
The petitioner is the estate of Claire M. Conard (decedent) who died on April 1, 1970. The executor for the estate is Richard Lee Conard (Richard or executor) who resided in Hutchinson, Kansas, at the time the petition was filed.
The estate has been administered in the probate court in Reno County, Kansas. The first notice of an appointment of an executor for the estate and notice to creditors was published on April 15, 1970.
Prior to her death, the decedent and her brother, Richard, operated and were the shareholders of the Salt City Business College, Inc., (College) in Hutchinson, Kansas. Richard became the sole shareholder after decedent's death.
Several years prior to decedent's death the College began to borrow money regularly from the Hutchinson National Bank and Trust Company (Bank) in Hutchinson, *127 Kansas. The loans were evidenced by notes which were periodically renewed by cancellation and issuance of new notes. The College signed as payor all notes for the loans made to it by the Bank. The College was and has always remained primarily liable for the repayment of all loans to it by the Bank.
Richard alone signed notes as a guarantor for the first several loans made to the College. Subsequently, the decedent endorsed notes as a co-guarantor with Richard. At the time of her death, there were three loans outstanding represented by notes which the decedent had endorsed as a co-guarantor. The total face value of these out-standing notes was $35,800. All of the notes which the decedent endorsed as a co-guarantor were unsecured. Shortly after the decedent's death, the notes on which the decedent was a co-guarantor were cancelled by issuance of new notes which the College signed as payor and Richard endorsed as guarantor.
The time for filing or exhibiting claims against the estate expired on January 15, 1971. The Bank did not file or exhibit a claim against the decedent's estate for her guarantee of the notes. The face value of the notes was deducted as a debt of the decedent on*128 the estate tax return.
After decedent's death the College continued to sign as payor and Richard endorsed as guarantor notes for loans made to the College. On April 3, 1972 Richard pledged certain property which he owned or had an interest in as collateral to secure the loans the Bank made to the College.
Both the petitioner and the decedent were cash basis taxpayers.
OPINION
The issue for decision is whether the petitioner may deduct from the gross estate the face value of unsecured notes endorsed by the decedent as a co-guarantor. Respondent contends that since no claim for these notes was presented pursuant to Kansas law, the claim is forever barred. Thus, according to respondent, since petitioner has not and will not be required to honor the notes as co-guarantor, the deduction for the face value of the notes must be denied. Petitioner, on the other hand, asserts that the Bank filed no claim because the Bank orally agreed to accept the estate assets as security for the notes in lieu of filing a claim. The pledge of the estate assets, in petitioner's view, constitutes a valid debt of the decedent which entitles the estate to a deduction. Alternatively, petitioner contends*129 that the cancellation of the notes and issuance of new ones constituted sufficient payment to permit deduction of the face value of the notes as a claim against the estate.
The deduction for claims against the estate provided by section 2053(a) (3) 1 is limited to those claims which are allowable under the laws of the jurisdiction in which the estate is administered and which represent personal obligations of the decedent at the time of his death. Whether or not the claim has matured does not affect deductibility. 2
*130 It is settled, however, that Congress was concerned with actual claims, not theoretical ones that the estate will never be required to pay.
*131 The conclusion we reach is dictated by our decision in
Similarly, the deduction must be denied in the instant case. Kansas law 5 requires that any demand against a decedent's estate, including those arising from liability a surety, guarantor or indemnitor, be exhibited within 9 months of publication of the first notice to creditors. Moreover, Kansas law requires that liens upon the property of a decedent not existing at death must be exhibited in the same manner as other claims against the estate. 6 Failure to exhibit the claim precludes its later enforcement.
*132 In this case, notice of the appointment of an executor and notice to the creditors to present their claims was first given on April 15, 1970. The bar date for filing claims was January 15, 1971, and the Bank failed to present any claim by this date. The petitioner was thus relieved of liability on the notes endorsed by the decedent as co-guarantor. The petitioner has not and will not be required to honor the notes as co-guarantor. Consequently, the deduction must be denied.
Petitioner's reliance on an oral agreement pursuant to which the estate assets were encumbered is misplaced. The record demonstrates that assets were encumbered by Richard after the bar date in his individual capacity as co-guarantor rather than in his fiduciary capacity as executor. We believe this accords with the Bank's decision to look to Richard alone as guarantor of the obligations in default of the primary obligor. Since there were some assets in the estate that did not pass to Richard, the Bank would otherwise have been motivated to file a claim. Additionally, if the Bank was relying on an oral agreement with Richard in his capacity as executor, it is difficult to believe it would have let the bar date*133 pass without reducing the agreement to writing or requiring that the assets of the estate be pledged. 7
Petitioner's contention that the renewal of the notes by cancellation of the old notes and issuance of new ones constitutes sufficient payment to permit deduction for the face value of the notes is similarly without merit. Rather than seek payment from either the primary obligor or the guarantors, the Bank consented to renew the notes with only Richard as guarantor. Thus, while the underlying obligation was not extinguished, the estate was released from secondary liability on the notes. Clearly, issuance of the new notes did not constitute payment (and certainly not by the estate), but rather extended the term for payment and eliminated the decedent and her estate as a coguarantor.
The estate has not paid the indebtedness represented by the notes on which the decedent was a co-guarantor and the failure to present the*134 claim for payment pursuant to Kansas law extinguished the estate's liability. "[The] gross estate was not decreased one single cent * * *. All the logic in the world cannot change these facts."
1. Unless otherwise indicated all section references are to the Internal Revenue Code of 1954. Sec. 2053 reads in pertinent part:
(a) GENERAL RULE.--For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts--
(1) for funeral expenses,
(2) for administration expenses,
(3) for claims against the estate, and
(4) for unpaid mortgages on, or any indebtedness in respect of, property where the value of the decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered. ↩
2. Estate Tax Regs. 20.2053-4.↩
3. A claim against the decedent as a secondary obligor is deductible if rights against the primary obligor are worthless.
4. For a different view, see
5. Since the estate was administered in Kansas, Kansas law governs. Relevant Kansas statutes, in effect in 1970, read in pertinent part:
Kan. Stat. Ann. sec 59-2237 (1939):
Any demand not exceeding fifty dollars, duly itemized and verified, may be allowed, if approved in writing by the executor or administrator, without compliance with any of the provisions of this act relating to petition, notice of hearing, or otherwise. The verification of any demand may be deemed prima facie evidence of its validity unless a written defense thereto is filed. Upon the adjudication of any demand, the court shall enter its judgment allowing or disallowing it. Such judgment shall show the date of adjudication, the amount allowed, the amount disallowed, and classification if allowed. Judgments relating to contingent demands shall state the nature of the contingency.
7. It was not until April 3, 1972, more than 1 year after the bar date had passed, that Richard, in his individual capacity, pledged the assets in question. This was more than a year and a half after the notes had been renewed with only Richard as guarantor.↩
Commissioner of Internal Revenue v. Wragg , 141 F.2d 638 ( 1944 )
Jacobs v. Commissioner of Internal Revenue , 34 F.2d 233 ( 1929 )
Du Val's Estate v. Commissioner of Internal Revenue , 152 F.2d 103 ( 1945 )
Parrott v. Commissioner of Internal Revenue , 30 F.2d 792 ( 1929 )
Russell v. United States , 260 F. Supp. 493 ( 1966 )