Kieferdorf v. Commissioner

OPINION.

Disney, Judge:

The Commissioner, after having made a jeopardy assessment against petitioner, sent her a notice of a deficiency as a transferee of assets of the estate of her deceased husband, for his income tax in the amount of $557.31 for the calendar year 1939. The facts are found to be as stipulated.

Petitioner’s husband, W. J. Kieferdorf (hereinafter referred to as decedent), a resident of San Francisco, died testate, December 3,1939. He was survived by his widow and two minor children. The Bank of America National Trust & Savings Association was duly appointed and qualified as executor of his estate on January 3,1940. On March 15,1940, the executor filed an income tax return, reporting the income received by decedent during 1939. The tax shown to be due was $557.31 and the correctness of this amount is not in issue. No part of the tax was paid by the executor, though due notice and demand was served on it on or about June 1, 1940, and a second notice was served on it on or about July 31,1940.

On January 25, 1940, petitioner filed a petition in the Superior Court, in accordance with the Probate Code of California, requesting that family allowance in the sum of $300 per month be granted for her minor children, who were wholly dependent on the estate, and for herself, she being “partially dependent thereon for support and maintenance.” On February 8, 1940, the court entered an order directing that $250 per month be paid as a family allowance “during the progress of the settlement of the estate or until further order of the Court.” The executor complied with the order thereunder, and on June 5, 1940, paid petitioner $1,500, being $250 per month from December 3, 1939, to June 3, 1940; and further paid $250 per month to August 3, 1940. Because of the exhaustion of the funds of the estate a final payment of the balance of the funds on hand in the amount of $90.73 was made on August 9, 1940. The aggregate of the payments made under the order was $2,090.73.

On April 5,1940, petitioner filed another petition in the same court requesting that the property of the estate exempt from execution be set apart for the use and benefit of the family of the decedent. The court set apart for them and the executor paid to petitioner on June 6, 1940, $11,914.52 representing the proceeds of six policies of life insurance, the annual premiums on which had been less than $500 ($470.54) during decedent’s life. After this amount was paid over to her there yet remained in the estate approximately $590, and liabilities of several thousand dollars.

The assets and receipts of the estate and the disbursements made by the executor were as follows:

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The executor filed a first and final report covering the period from appointment to September 3, 1940. The report showed income tax due because of income received by the decedent during his lifetime and that such sums had not been paid because of the exhaustion of the funds and assets of the estate by payment of costs of administration, a preferred claim, the setting aside of exempt property, and the payment of a family allowance. The exempt property referred to was the proceeds of the insurance. The report asked that any after-discovered property be distributed subject to charges for unpaid administration costs, income taxes, and other claims.

The executor was discharged and the administration of the estate was closed on or about October 9, 1940. All of the assets of the estate had been disposed of by September 3, 1940, leaving unpaid Federal and state income taxes, and other claims in the amount of $5,452.01; also executor’s commissions and attorney’s fees.

Is petitioner liable, as a transferee, for the income tax of her husband under the abovle facts ? Respondent insists that she is, relying upon the rationale of Loe M. Randolph Peyton, 44 B. T. A. 1246, and the cases cited therein. The cited cases applied the well established principal that a distributee of the estate of a deceased taxpayer is a transferee within the purview of — indeed within the precise provisions of — the transferee section. (Sec. 311, Internal Revenue Code.) Petitioner insists that respondent has failed to sustain his burden of proving that she received property or assets of her deceased husband’s estate under such circumstances as to make her liable, “at law or in equity,” for the tax.

The first court order in the administration proceeding, referred to above, was made under section 680 of the Probate Code of California, reading as follows:

The widow and minor children are entitled to such reasonable allowance out of the estate as shall be necessary for their maintenance according to their circumstances, during the progress of the settlement of the estate, which, in case of an insolvent estate, must not continue longer than one year after granting letters. Such allowance must be paid in preference to all other charges, except funeral charges, expenses of the last illness and expenses of administration, and may, in the discretion of the court or judge granting it, take effect from the death of the decedent.

The insurance proceeds were set apart to petitioner under section 660 of the Probate Code of California, which is set forth in the margin,¹ which, as applicable here, authorizes tjie court in its discretion to set aside to a surviving spouse all or any part of the “property of the decedent exempt from execution.” One type of property within this category (Sec. 690.19 Code of Civil Procedure) is “moneys [and] benefits accruing or * * * growing out of any life insurance, if the annual premiums paid do not exceed five hundred dollars * * In this case they did not exceed $500. The petitioner contends, in effect, that the transfer of the insurance proceeds did not render the estate insolvent, but that it became so only upon the completion thereafter of the payments to her as widow’s allowance; and that both classes of payments were superior to the claim of the United States for the tax.

In Jessie Smith, Executrix, 24 B. T. A. 807, we held that the priority given Federal taxes by section 3466, Revised Statutes of the United States, does not confer priority over a widow’s allowance allowed by a state probate court. We will therefore assume, without further discussion, that the transfer of funds as widow’s allowance may not cause imposition of liability upon the petitioner in this matter. A transfer of the insurance proceeds is not, however, in our opinion, in the same category. In the case of the insurance proceeds, we find that the California statute fails to create any vested interest in the wife, as against the estate of the husband. Whether the Probate Court shall set apart the insurance proceeds to the wife is discretionary with that court. That this is true is emphasized by the fact that the same paragraph provides that the court must set aside the homestead (under certain circumstances). It thus appears that the insurance proceeds are not, as such, excluded from the estate of the decedent. Further, the power of the Probate Court to make the order is limited to property “exempt from execution,” and it was because of the fact that such insurance proceeds, as those here involved, are under section 690.19 of the Civil Code of California declared “exempt from execution or attachment,” that the order was made. It is plain, however, that the California law can not create exemptions from execution or attachment for the collection of Federal taxes. Section 3691 of the Internal Eevenue Code provides the only exemptions in that respect, and that section does not cover insurance proceeds. It thus appears that the California statute necessarily goes only to exemptions under California law, and therefore that, though the property might be set aside to- the widow as exempt under California law, the property so set aside was left subject to execution under the Federal law. To hold otherwise would be.to disregard numerous cases, including United States v. Howell, 9 Fed. 674; Staley v. Vaughn, 50 S. W. (2d) 907; and Shambaugh v. Scofield, 132 Fed. (2d) 345, to the effect that state law can not prevail against Federal statutes on the question here at hand. In our opinion, therefore, the transfer of the insurance proceeds as being exempt from execution did not affect the power of the respondent to proceed against them to make the tax here involved.

Proutt v. Commissioner, 125 Fed. (2d) 591, points to no contrary conclusion. That case involved the question of inclusion of insurance in gross estate within the meaning of section 302 (g) of the Revenue Act of 1926, as amended; this involves the efficacy of Federal statutes providing for collection of income taxes, as against a state statute. The Tennessee statute there construed specifically provided that insurance effected by a husband on his life “shall inure to the benefit of his widow and children.” Thus it appears that the insurance was, under the Tennessee law, not a part of the decedent’s estate; whereas the California statute provides merely a possibility that the insurance may, within the discretion of the Probate Court, be transferred to the wife as property exempt from execution — and as above suggested, such transfer leaves the property subject to execution under Federal law. Though the petitioner argues that we have here no distraint, but only a question of transferee liability, it is apparent, we think, that the view is too limited, for if the property is subject to distraint, the inquiry opens as to whether the petitioner, by taking the property having interfered with distraint, is liable at law or in equity.

Is the petitioner, in receipt of the insurance converted into money, liable at law or in equity as transferee? The petitioner argues that there is no such liability because the transfer of insurance proceeds left sufficient assets in the estate to pay the tax, although she received such remaining assets as widow’s allowance.

We think the petitioner’s contention should not be sustained for two reasons: First, that the estate was rendered insolvent by the transfer of insurance proceeds, and, second, that equity would, in our opinion, be deaf to the petitioner’s plea that insolvency was caused only by the subtraction of the widow’s allowance from the estate. An ordinary definition of insolvency is, in effect, a preponderance of liabilities over assets. In that sense the estate of petitioner’s husband was rendered insolvent on June 6,1940, when the insurance proceeds were transferred to her. We consider untenable the vi^w that there was solvency on June 6, merely because some money remained in the estate after the transfer of the insurance proceeds. That money was subject to the debts of the estate and particularly subject to an order of the Probate Court entered on February 8,1940, that $250 per month should be paid to the widow. The estate was exhausted on August 9, 1940. Under such circumstances we can no more view the estate as solvent on June 6,1940, than we could view as solvent some individual whose liabilities exceeded his assets, merely because upon a certain date he had funds sufficient to pay a certain debt, but subject to- his other liabilities.

The solvency of an estate must logically be viewed by comparison of all of its assets and liabilities as reflected in the final report and account. Additional claims might have existed against the estate here at hand, after the insurance proceeds were paid out. Indeed, the record shows that at the time of the filing of the executor’s final account there were unpaid claims of $5,452.01, and income taxes due the State of California. We hold that the estate was rendered insolvent when it made the distribution of insurance proceeds to the petitioner on June 6..

In the second place, and without considering the other liabilities just mentioned, we have no doubt that in a court of equity petitioner would not be heard to say that the transfer to her of the insurance proceeds did not render the estate insolvent, when she herself was taking under a widow’s allowance the remainder of the assets (except administration expenses and funeral expenses). It seems clear that equity would intervene, for if we assume the petitioner’s right to the widow’s allowance free from claims for income tax, it is obvious that the estate was, in effect, cut down to that extent, and that therefore the payment of the insurance money leaves the estate without assets with which to pay the income tax. Equity responds to the plea of inadequacy of legal remedy. 37 C. J. 340; Redhead v. Payne, 30 Cal. App. 685; 177 Pac. 298; Gilchrist v. Helena Hot Springs & Smelter R. Co., 58 Fed. 708. On the petitioner’s own theory, there was no legal remedy available to the tax collector as against the widow’s allowance, and the transfer of the insurance proceeds left the estate impotent to pay the tax. Moreover, even if the estate had been solvent, the petitioner would still be liable as transferee under Loe M. Randolph Peyton, supra. We there held, in. case of a solvent estate, that each distributee was liable as transferee, the Commissioner being able to proceed against one or all where altogether the transferees took the entire estate, leaving nothing for payment of the tax. Here the petitioner received the entire estate (except enough to pay funeral expenses and administration costs, which are prior claims). After distribution to her, nothing was left for discharge of the tax. It is immaterial that we assume one element of the distribution, the widow’s allowance, to be prior in right to Federal income tax. The other, as to insurance proceeds, we have above held to be otherwise. As in the Peyton case, it could not, being, all of the residuum of the estate, be distributed, without the incidence of transferee liability upon the distributee.

It should be borne in mind that the petitioner here is no mortgagee, purchaser, or judgment creditor, for protection against whom the United States must file its lien with state or Federal recorders, but merely the recipient, without payment of consideration, of a portion of the estate of the decedent taxpayer, whose assets are subject to the payment of the tax. She received a part of those assets without authority other than the state statute above discussed, leaving the estate unable to pay the tax, she having also received the other assets under a claim here assumed prior to that of the United States. Primary principles of equity forbid that one convey his assets for no consideration, leaving a creditor powerless to collect his due. We hold that the petitioner, having received the results of conversion of the insurance, is liable in equity.

Reviewed by the Court.

Decision will be entered for the respondent.

1 § 660. Possession before inventory : Setting aside homestead. The decedent’s surviving spouse and minor children are entitled to remain in possession of the homestead, the wearing apparel of the family, the household furniture and other property of the decedent exempt from execution, until the inventory is filed. Thereupon, or at any subsequent time during the administration, the court, on petition therefor, may in its discretion set apart to the surviving spouse, or, in case of his or her death, to the minor child or children of the decedent, all or any part of the property of the decedent exempt from execution, and must set apart to such spouse or to such minor child or children the homestead selected, designated and recorded, if such homestead was selected from the community property, or from the separate property of the person selecting or joining in the selection of the same. [Enacted 1931.]