Harper v. Commissioner , 11 T.C. 717 ( 1948 )

Estate of Elizabeth V. Harper, Deceased, Genesee Valley Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent

Harper v. Commissioner

Docket No. 15948

United States Tax Court

11 T.C. 717; 1948 U.S. Tax Ct. LEXIS 43;

October 29, 1948, Promulgated

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Decision will be entered under Rule 50.

H died testate. Among the assets of her estate were notes executed by T and G and by G and his wife, some of which were secured by stock. The value of the stock plus the net worth of the makers was less than the face amount of the notes at time of H's death. Under will of H, T and G each became entitled to receive one-sixth of her residuary estate. Except for these inheritances, there existed no reasonable expectation that the makers of the notes could pay their obligations. If inheritances are reflected in net worth of the makers, they become financially able to pay them. Respondent determined that the notes should be included in decedent's gross estate at face value plus interest. Held, the value of notes includible in decedent's gross estate is the value of the interest of decedent which ceased at her death, viz., the value of the assets held as security for the notes plus the net worth of the makers.

Walter J. Holloran, Esq., for the petitioner.

Clay Holmes, Esq., for the respondent.

Harlan, Judge. Van Fossan and LeMire, JJ., concur only in the result. Disney, J., dissents.

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HARLAN

The Commissioner determined a deficiency in estate tax in the amount of $ 36,819.33. The deficiency involved a number of issues, all of which have been adjusted between the parties by stipulation except one pertaining to the value of certain notes in the hands of the executor. The question presented is as to whether promissory notes given to the decedent in her lifetime by a maker who was insolvent just prior to the decedent's death but was a residuary legatee of the decedent and by virtue thereof became possessed of funds more than sufficient to pay the notes, should be listed in the decedent's taxable estate at their face value.

FINDINGS OF FACT.

All of the facts herein were stipulated and the stipulation as submitted is adopted.

Elizabeth V. Harper died in Rochester, New York, on December 10, 1944, being then eighty-one years of age. Decedent was survived by seventeen distributees, among them being T. Chester Meisch and G. Arthur Meisch. She left a last will and testament, duly admitted to probate by the Surrogate's Court of the County of Monroe, New York, on March 13, 1945, and the petitioner qualified as executor thereunder.

By the terms of her will, decedent left her residuary estate equally to said T. Chester Meisch and G. Arthur Meisch and four nieces, each thus becoming entitled to a one-sixth part of the residuary estate. The will was admitted to probate only after the settlement of an incipient will contest, which was settled by the payment of the sum of $ 3,000 to one of the distributees.

Among the assets of the estate were: (1) Two unsecured demand notes of T. Chester Meisch, upon which there was due at the date of death the aggregate stipulated amount of $ 56,000; (2) five demand notes of G. Arthur Meisch, upon which there was due at the date of death the stipulated aggregate amount of $ 12,893.78, which notes were secured by the pledge of 40 shares of the common stock of Eastman Kodak Co., having a market value of $ 6,850; and (3) the unsecured demand note of G. Arthur Meisch and Rosetta Meisch, his wife, upon which there was due the stipulated aggregate amount of $ 3,278.

The executor returned the T. Chester Meisch notes as having a fair market value as of the date of death of $ 13,436.46, that being the stipulated net worth of the maker as of the date of death, exclusive of the obligations represented by the notes in question.

The executor returned the five obligations to G. Arthur Meisch as having a fair market value of $ 6,850, that being the value of the collateral pledged to the notes, and returned the G. Arthur Meisch and Rosetta Meisch note as having no market value.

At the date of decedent's death, the makers of the notes were insolvent. T. Chester Meisch had paid only interest upon his obligations, although the indebtedness had accrued as far back as 1931; G. Arthur Meisch had paid neither principal nor interest on his obligations from the inception of the indebtedness; and, except for four small payments in each of the years 1936 and 1937 and a payment in the year 1939, no payments of principal or interest were made upon the note of G. Arthur Meisch and Rosetta Meisch.

Except for the respective inheritances from this estate, there existed no reasonable expectation that T. Chester Meisch or G. Arthur Meisch could pay these obligations. On the other hand, if the inheritance from this estate be reflected in the worth of the makers, they become financially able to pay the several notes. Each maker is entitled to one-sixth of the residuary estate, which share is $ 60,634.85, assuming the residuary estate to include the notes at par and accrued interest.

OPINION.

The sole issue in this proceeding is whether the notes mentioned in our findings should be included in decedent's gross estate at face value plus interest, as determined by the respondent, or whether they should be included at a value equivalent to the value of assets held as security therefor plus the net worth of the makers, as contended by petitioner.

The cases cited by the respondent in support of his determination are Buck v. Helvering, 73 Fed. (2d) 760; Estate of Henry Monroe Springer, 45 B. T. A. 561; Estate of Charles H. Lay, 40 B. T. A. 522; and Estate of Edwin Hodge, 2 T. C. 643. Buck v. Helvering, supra, holds that the Commissioner's determination of the value of a note for estate tax purposes is presumptively correct, and that, in the absence of evidence showing a different value or that the note was worthless, his determination will be sustained. A similar holding was made in Estate of Henry Monroe Springer, supra.Estate of Charles H. Lay, supra, involved the valuation for estate tax purposes of securities loaned by a decedent to his son for use as additional collateral to secure the son's indebtedness to a bank on promissory notes which had not been paid at the time of decedent's death. The executor deducted as a claim against the estate the amount of the son's notes. It was held that, where an estate is liable only as surety or endorser, it can not take any deduction because of such liability where the principal has ample assets to pay the indebtedness. In Estate of Edwin Hodge, supra, the question involved was whether an estate realized income when it distributed to decedent's son certain notes evidencing an indebtedness owed to the decedent by the son, who was insolvent and unable to pay the notes on the date of decedent's death but became solvent by reason of the inheritance left him by decedent. It was held that at the time of acquisition of the notes by the estate they were worth their face value ($ 80,000) and that the estate realized no taxable income upon their distribution at face value to the son, one of the heirs of the estate. The findings disclose that for estate tax purposes the notes were included in the gross estate at $ 28,190, which the parties agreed was the value of the collateral on the date of the decedent's death.

The petitioner cites and relies upon Estate of William Walker, 4 T. C. 390. In that case notes executed to a decedent by two of his children, which were partly secured by collateral but subject to defenses of the statute of limitations and coverture, were held to have no value in excess of that of the collateral.

No useful purpose would be served by discussing at length the cases cited by the parties. Suffice it to say that an examination of them convinces us that they are not particularly helpful in arriving at a solution of the issue presented. Respondent seeks to include the notes in decedent's gross estate at face value plus interest for the reason that immediately upon the death of the decedent the makers of the notes became vested with more than sufficient assets to satisfy their obligations. In other words, he looks to the amount of the inheritances of the makers to create value in notes which otherwise had no value in excess of the security therefor plus the net worth of the makers. In doing this he overlooks the fact that the estate tax is a tax imposed "on the privilege of transferring the property of a decedent at death, measured by the value of the interest transferred or which ceases at death." Chase National Bank v. United States, 278 U.S. 327">278 U.S. 327. And section 811 of the Internal Revenue Code provides that 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 "to the extent of the interest therein of the decedent at the time of his death." (Italics supplied.) At the time of her death the decedent had an interest in notes the value of which did not exceed the value of the assets held as security therefor plus the net worth of the makers, and that is the interest which ceased at her death. We hold that the petitioner correctly returned the value of the interest of the decedent in the notes at the time of her death for estate tax purposes.

Decision will be entered under Rule 50.