Goldsmith v. Commissioner , 36 B.T.A. 1201 ( 1937 )

ESTATE OF HUGO GOLDSMITH, DECEASED, MAX GOLDSMITH, ERICH KEIBEL AND THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, AS EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Goldsmith v. Commissioner

Docket No. 82612.

United States Board of Tax Appeals

36 B.T.A. 1201; 1937 BTA LEXIS 611;

December 28, 1937, Promulgated

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The decedent during his lifetime conveyed residential property to his sister. It was understood that their mother, who was then 82 years of age, should have the right to occupy the premises so long as she lived and that the decedent would maintain the property and pay the taxes thereon during her lifetime. He paid all such expenses up to the time of his death. Thereafter a claim was presented against his estate covering amounts expended for taxes and upkeep of the property after decedent's death, and for an additional amount to cover further expenditures of that character during the remaining life expectancy of the mother. A compromise amount was agreed upon by the claimants and the executors of the decedent's estate and the payment thereof was approved by the Surrogate's Court. Held, that the claim so made against the decedent's estate was not a claim incurred for full and adequate consideration in money or money's worth within the meaning of section 303(a)(1) of the Revenue Act of 1926.

Harter F. Wright, Esq., for the petitioners.

Lewis S. Pendleton, Esq., for the respondent.

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TURNER

This proceeding involves a deficiency in estate tax in the amount of $3,922.76. The only issue presented for our determination is whether or not a certain claim paid by the executors out of the decedent's estate is deductible from his gross estate.

FINDINGS OF FACT.

Hugo Goldsmith, the decedent herein, died in Wohlen-Aargau, Switzerland, on September 22, 1933. He was a citizen of the United States and a resident of New York, New York. His will was admitted to probate by the Surrogate's Court of New York County, New York, and the petitioners are the duly appointed executors.

The decedent's mother, Fannie Goldschmidt, had five children, all of whom were born in Switzerland. The decedent and two of his brothers, Max Goldsmith and Emile Goldsmith, came to New York in about 1901 and Americanized the spelling of their name as shown herein.

The decedent prospered and became a man of considerable wealth. It was his custom to return to Switzerland every year. He owned certain real property in Wohlen-Aargau, Switzerland, upon which he built an imposing residence. While visiting there in 1929 he executed an unconditional deed of gift of that property to his sister, Nettie G. Dreifuss. The deed was recorded at Wohlen-Aargau, Switzerland, on September 7, 1929, and October 1, 1929.

The decedent entered into an agreement with his sister, Nettie G. Dreifuss, under the provisions of which she agreed to permit their mother, Fannie Goldschmidt, to occupy the residence during the remainder of her lifetime, and in consideration therefor the decedent agreed to pay all the taxes and upkeep on the property so long as she resided there. This agreement was not reduced to a formal written contract but was evidence by a memorandum in the handwriting of the decedent, as follows:

Conveyed free to Nettie Dreifuss on September 9, 1929, before Notary Adolph Wirth of Wohlen (I to pay upkeep and taxes while Mother occupies the property and subj. to Mother's right to occupancy during her lifetime - priv. understanding.)

At the time this agreement was made, their mother was 81 or 82 years of age and without property of any kind or income from any source. The decedent was very devoted to her and had provided for her for a number of years. He was the only member of the family who was financially able to do so.

Thereafter and up to the time of this proceeding, Fannie Goldschmidt occupied the residence, and the decedent paid all the taxes and upkeep thereon up to the time of his death in 1933. It was his custom to transfer sufficient funds to defray these expenses to his brother-in-law, Theodor Dreifuss, who would, from time to time, account to him therefor. After the decedent's death the remission of such funds ceased, but Dreifuss continued to pay such charges out of his own funds for the account of the decedent's estate.

On July 2, 1932, Nettie G. Dreifuss died, leaving Ruth Dreifuss and Bernhard Dreifuss as her minor heirs.

About March 1934 the petitioners were notified by Fannie Goldschmidt, the mother of the decedent, Theodor Dreifuss, widower of Nettie G. Dreifuss, and Bernhard Dreifuss and Ruth Dreifuss, children of Theodor and Nettie G. Dreifuss, that a claim or claims based upon the decedent's agreement to pay the taxes and for the upkeep of the property would be presented against the decedent's estate. It was alleged that performance under the agreement had become an obligation of the estate. On May 7, 1935, the parties named executed an assignment of their claims to Benedict Weisz.

On or about June 20, 1935, Benedict Weisz, as assignee of the combined claim, filed with the petitioners a proof of claim in the amount of $28,525.76. That amount included an item in the amount of $6,025.76 representing expenses already paid or incurred by Theodor Dreifuss on account of the taxes and upkeep on the property for the period beginning with decedent's death and up to May 1, 1935, and an item in the amount of $22,500 representing the "total amount estimated to be necessary to defray such upkeep and taxes from May 1, 1935 and so long as said Fannie Goldschmidt shall live." When this claim was filed Fannie Goldschmidt was 87 years of age, but in excellent health and without any signs of physical or mental defects. The above estimate was made on the basis of her normal life expectancy of 2.19 years, as shown by the American Experience Table of Mortality.

After the claim was filed the petitioners consulted their attorneys, who advised them that in their opinion the claim was a legal, valid, and binding agreement against the estate, both under the laws of the State of New York and the laws of Switzerland. Thereupon the petitioners arranged a conference with Benedict Weisz and their respective attorneys, at which conference the claim was compromised in the amount of $14,000, subject to the approval of the Surrogate's Court of New York County, New York. That compromise was computed and arrived at as follows:

Total amount in dollars at the then rate of exchange paid or incurred by Theodor Dreifuss on account of the said upkeep and taxes from the death of Hugo Goldsmith to May 1, 1935		$6,025.76
Estimated normal future expense for upkeep and taxes during the life expectancy of 2.19 years of Fannie Goldschmidt	$4,035.62
Estimated cost of future major repairs to the said dwelling during the life expectancy of Fannie Goldschmidt, according to the prior experience of Theodor Dreifuss in managing the property	4,526.73
Total estimated future expenses during life expectancy of Fannie Goldschmidt	$8,562.35
Present value of $8,562.35 at 4% payable quarterly over 2.19 years		$8,177.15
Total of foregoing		$14,202.91
Amount of compromise		14,000.00
Amount saved to the estate, assuming that Fannie Goldschmidt lives to her exact expectancy		$202.91

Petitioners thereupon applied to the Surrogate's Court for leave to compromise and settle the claim in the amount of $14,000. The court appointed Irving Lachenbruch, Esq., as special guardian to protect the interests of the minor heirs, and he filed a report recommending the approval and confirmation of the compromised settlement.

The court granted the application and entered a decree under date of July 30, 1935, authorizing and directing the petitioners, as executors, to pay the compromised claim in the amount of $14,000, and also authorized and directed them to pay the sum of $150 to Irving Lachenbruch, as his compensation for services as special guardian of the minor heirs. The petitioners thereupon paid to Benedict Weisz the sum of $14,000 and to Irving Lachenbruch, Esq., the sum of $150.

When the petitioners filed the original estate tax return in June 1934, the claim of Benedict Weisz had not then been filed and no deduction was taken in respect of such a claim. In August 1935 the petitioners filed an amended return, claiming as a deduction the amount paid on account of that claim and also the fee paid to Irving Lachenbruch, as special guardian. The respondent disallowed the deduction on the ground that the "claim was not incurred or contracted for an adequate or full consideration in money or money's worth."

OPINION.

TURNER: The only issue presented is whether the guardian fee and claim paid by the petitioners are deductible from the gross estate of the decedent under section 303(a)(1) of the Revenue Act of 1926. ¹ The respondent rests the disallowance of the deduction on the ground that the claim was not "incurred or contracted * * * for an adequate and full consideration in money or money's worth."

While the reasoning in the cases construing the provisions of the statute referred to above may not be in complete harmony, certain conclusions may be drawn from the decided cases and now regarded as settled. First, a claim against an estate is not deductible merely because it is enforceable. ; ; ; . Second, it is not necessary that the consideration should pass to the decedent. ; ; ; ; Third, it is not essential that the transaction on which the claim is based should have been of a business or commercial nature. ;;;. In each of the cases last cited the claim was based on subscriptions made by the decedent during his lifetime to certain recognized public, educational, charitable, or religious institutions. The subscriptions were made in consideration of similar subscriptions by other individuals and he Board and the courts have uniformly held that the promise of others to make similar contributions supplied the necessary consideration in money or money's worth to bring those claims within the meaning of the statute and to make them deductible from the gross estate. In some of the earlier cases there was some intimation that the statute contemplated the allowance of deductions only in the case of claims based on commercial or business transactions. Arguments to that effect might be based on language appearing in ;;;; and In the first three cases cited, however, the deductions were disallowed for other reasons, namely, that the promises upon which claims were based were in fact promises to make a gift or a bequest, while in the other two cases the transactions involved were definitely of a business or commercial nature, making it unnecessary to determine the effect of the statute on claims of a different character.

In none of the cases, however, have we been able to discover a holding that a claim based on a promise of gift or contemplated bounty was a claim incurred for money or money's worth within the meaning of the statute, even though under local law the claim might be enforceable. The courts in , and , were definitely of the opinion that Congress had in mind, when it enacted the provisions in question, the exclusion of family contracts and similar understandings made as a cloak to cover gifts.

It is argued in the instant case that the claim here involved has been considered as to its legal aspects and allowed by the Surrogate's Court; that it was in fact a business transaction even though made between a brother and sister; that the promise made by the decedent to his sister was in the discharge of a legal obligation which rested upon the decedent to support his mother; that it is supported by the mutual promise of the sister to permit the mother to occupy property belonging to sister; and that a claim based upon such a promise is brought within the provisions of the statute relied on and the interpretation of the statute by the Board and the courts. Considering the facts disclosed by the record, however, we are of the opinion that the promise of the decedent was the promise of a bounty. The real nature and character of the transaction is best shown by the statement of the decedent himself, written in his own hand and left among his papers. This statement convinces us that the gift of the property by the decedent to Nettie G. Dreifuss was subject to the right of the mother to occupy the dwelling during her lifetime. Nettie G. Dreifuss herself was the object of decedent's bounty and no consideration passed from her to anyone in respect of the understanding on which the claim herein was based. The decedent not only gave her the property, but also agreed to relieve her during the lifetime of the mother of the burden of maintaining the property and of paying the taxes thereon. From these facts the only conclusion we can draw is that the claim subsequently made against the estate of the decedent was not incurred for adequate and full consideration in money or money's worth, as required by the statute, but that the consideration was in the nature of the love and affection which he held for his sister and his mother. Nothing of money or money's worth passed from any one except from the decedent himself.

In reaching the above conclusion we do not overlook the fact that the stipulation of facts contains a statement to the effect that at some time subsequent to October 1, 1929, a date after that of the formal conveyance of the property to Nettie, G. Dreifuss, the decedent entered into an agreement with her for the benefit of his mother in respect of the occupancy and use of the property. While this statement standing alone might indicate that there were no conditions attached to the conveyance of the property to Nettie G. Dreifuss and that at the time of the agreement with the decedent for the care of their mother, Nettie G. Dreifuss did supply consideration in money or money's worth in the form of the use of property then unconditionally belonging to her, the stipulation does not stand alone and such a conclusion is clearly not in harmony with statements contained in the decedent's memorandum. It may be that the details of the agreement were not worked out until after October 1, 1929, but the decedent's memorandum in our opinion definitely shows that the conveyance was made in the light of the private understanding mentioned.

On the facts in this case, we hold that the claim here involved was not incurred by the decedent for full and adequate consideration in money or money's worth.

Decision will be entered for the respondent.

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Footnotes

• 1. SEC. 303. For the purpose of the tax the value of the net estate shall be determined -

  (a) In the case of a resident, by deducting from the value of the gross estate -

  (1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property (except in the case of a resident decedent, where such property is not situated in the United States), to the extent that such claims, mortgages, or indetbedness were incurred or contracted bona fide and for an adequate and full consideration in money or money's worth * * *. ↩