Schoenfeld v. Commissioner , 37 B.T.A. 36 ( 1938 )

ESTATE OF HERBERT A. SCHOENFELD, DECEASED, L. KENNETH SCHOENFELD, HERBERT A. SCHOENFELD AND RALPH A. SCHOENFELD, ADMINISTRATORS, DE BONIS NON, CUM TESTAMENTO ANNEXO, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Schoenfeld v. Commissioner

Docket No. 83654.

United States Board of Tax Appeals

37 B.T.A. 36; 1938 BTA LEXIS 1099;

January 7, 1938, Promulgated

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1. ESTATE TAX - CLAIM AGAINST THE ESTATE. - The allowable claim against decedent's estate under a stock purchase contract, the purchasers being jointly and severally liable, may not exceed his share of the entire liability measured by the proportion of stock acquired by him under the contract, in this case one-fourth. The fact of allowance of a larger amount by the probate court is not determinative of the amount deductible under the Federal statute.

2. Id. - BURDEN OF PROOF. - The amount of an allowable deduction having been determined by the Commissioner by the use of a certain interest rate and mortality tables, the petitioners have the burden of proving error in the figures so used.

Van C. Griffin, Esq., for the petitioners.

James C. Maddox, Esq., for the respondent.

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ARUNDELL

This proceeding involves a deficiency in estate tax in the amount of $11,256.84, only a part of which is in controversy. The petition filed alleged several errors, but only one is now urged by the petitioners, namely, the Commissioner's reduction of a claim against decedent's estate from $65,190 to $24,226.79.

FINDINGS OF FACT.

The petitioners are administrators of the estate of Herbert A. Schoenfeld, who died on April 21, 1933. Decedent was a resident of the State of Washington and his estate is subject to administration under the laws of that state.

On December 10, 1923, Berman Schoenfeld, Herbert A. Schoenfeld (the decedent), and Bessie B. Schoenfeld, wife of the decedent, entered into a contract whereby they acquired from Maude Falk Schoenfeld 25.15 shares of stock of the Schoenfeld Holding Corporation. It was understood and agreed by all the parties that one-half of those shares became the property of Berman Schoenfeld and that one-fourth became the property of each of the other two purchasers. The consideration for the purchase was the agreement by the purchasers to pay to the seller for life such sums as the seller might require for her living expenses. The monthly sum agreed upon at that time was $1,000, and it was agreed that the maximum should not exceed $1,500 per month. The purchasers further agreed, as part of the consideration, that upon the death of the seller they would pay monthly incomes for life to the brothers or sisters of the seller as the seller should direct by will, but not to exceed $500 per month. The provisions last described were amended in 1926 to provide that one of the seller's sisters, Beatrice R. Falk, should be assured a life income of $1,000 per month if that amount was needed for her care and support. No payments have been made under this amendment. As security for the payments to be made by the purchasers they agreed to and did deposit the 25.15 shares of stock with a national bank.

The seller of the stock, Maude Falk Schoenfeld, died prior to June 26, 1931. Bessie B. Schoenfeld died on June 26, 1931. By her will Bessie B. Schoenfeld devised her community interest in the Schoenfeld Holding Corporation stock to her husband for life with remainder over to her sons. She directed by her will that her community liability on account of the purchase of the stock be paid by her husband out of the earnings on her community half of the stock.

At the death of Herbert A. Schoenfeld there were four persons living who were entitled to benefits under the stock purchase contract. Their ages were 48, 58, 59, and 70. In June 1933 one of the four beneficiaries, on behalf of all four, filed a claim against the estate in the amount of $65,190 as representing the estate's one-half of the liability under the stock purchase contract of December 10, 1923. The claim was approved by the administrators and by the judge of the probate court having jurisdiction of the estate.

In each of the estate tax returns of decedent and of decedent's wife there was returned as gross estate the value of one-fourth of the 25.15 shares of stock. In auditing these returns the respondent in each case allowed as a deduction the amount he determined as representing one-fourth of the entire contract liability. In the present case the administrators claimed a deduction for decedent's contract liability in the amount of $65,190. The respondent allowed $24,226.79 of the deduction claimed and disallowed the remainder.

OPINION.

ARUNDELL: The single issue submitted for decision was tried largely upon the question of the use of a formula to determine the amount allowable for the claim of the contract beneficiaries against the estate. The respondent in his determination of a deficiency has conceded the allowability of a claim and has worked out the amount allowable by a formula based on interest, mortality, and present worth tables.

Before reaching the matter of a formula, there is to be determined the question of whether decedent's estate is liable for one-fourth or one-half of the total liability under the stock purchase contract. The petitioners claim one-half, the amount thereof being the amount for which a claim was filed by the contract beneficiaries and approved by the probate court. The Commissioner has allowed one-fourth of the contract liability, determining the amount allowable by a formula discussed more fully below.

The statute applicable here is section 805 of the Revenue Act of 1932, amending section 303(a)(1) of the Revenue Act of 1926. This statute allows deductions, among others, for claims against the estate (subsection (B)), and for mortgages and indebtedness in respect to property which is included in gross estate without deduction for the mortgage or indebtedness (subsection (D)). These provisions are qualified by subsection (E) in several respects. One of the qualifications is that limiting the amounts deductible to such as are allowable by the laws of the jurisdiction under which the estate is being administered. Another is that the amounts allowable shall "be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth."

Under these provisions of the statute the claim here made for allowance of what is said to be one-half of the contract liability fails in several respects. First, it appears that the administrators included in decedent's gross estate only the value of one-fourth of the 25.15 shares of Schoenfeld Holding Corporation stock. As stated in the petition, the decedent had a community half of 12.575 shares, which interest was valued at $91,168.75. Against this community half of 12.575 shares, which is one-fourth of the total shares, the petitioners claim a deduction of one-half of the liability under the purchase contract. This may not be done under the part of the statute (subsection (D)) which requires an equality of treatment of the value of property returned and the amount of indebtedness against it. In other words, under subsection (D) the petitioners must need to have returned one-half of the value of the full 25.15 shares in order to support a claim for deduction of one-half of the indebtedness for the purchase price. Further, inasmuch as the decedent was entitled under the contract to only a one-fourth interest, he can not be said to have "contracted bona-fide and for an adequate and full consideration in money or money's worth" for any greater sum than one-fourth of the liability.

If, as argued by the petitioners, one-half of the contract obligation was a community obligation, then upon the death of the wife her estate became liable for one-half thereof (one-fourth of the whole obligation) and thus the decedent's estate would have a liability for only one-fourth of the whole. We have held, following the Washington statute and cases, that upon dissolution of the community by death the estate of the first decedent is entitled to deduct only one-half of the community debts. . The case of ; , cited by petitioners is not in point. That case holds that community property is not subject to execution under a judgment against the husband for a tort committed by him alone.

The liability of the purchasers of the stock was, under the contract, a joint and several liability. However, if the decedent's estate were required to pay any more than the decedent's proportionate share there would arise a right of contribution against the other purchasers. The same situation was present in ; affd. (C.C.A., 9th Cir.), . In that case two persons were jointly and severally liable on a mortgage and it was held that upon the death of one only one-half of the indebtedness could be deducted from the gross estate. The court's opinion reads in part:

* * * if either were required to pay more than one-half, the excess so paid was recoverable from the other. * * * Clearly, for taxation purposes under the Revenue Act, but one-half of the total mortgage debt was deductible in arriving at the amount of the tax upon the state of the testatrix.

Following that case it must be held here that the decedent's estate may not deduct more than one-fourth of the contract liability.

The approval by the probate court of the claim presented by one of the contract beneficiaries on behalf of all of the beneficiaries does not establish the deductibility of the amount thereof under the Federal estate tax law. In , loc. cit. p. 345, we rejected a similar contention and determined the amount deductible under "the law of the jurisdiction * * * under which the estate is being administered" as the Federal statute requires. In , the court held that the fact of allowance of a claim by the probate court and the payment thereof by the executors "has no bearing on the deductibility of the claim" under the Federal statute. In , we determined the amount reasonably required for the support of decedent's widow and held that amount allowable, notwithstanding the probate court's approval of a larger amount and the payment of the larger sum. The Circuit Court of Appeals for the Ninth Circuit, affirming our holding on this point, , said: "The fact that the probate court made an allowance of a larger sum was not binding on the Board of Tax Appeals." Following the above cases, we hold that the fact that the probate court has allowed the claim of the contract beneficiaries in an amount purporting to be one-half of the total contract liability is not determinative of the amount allowable in this proceeding.

We have held above that the proportion of the contract liability representing an allowable deduction from this estate is one-fourth of the total liability. The Commissioner determined the same proportion to be allowable. In calculating the amount allowable the Commissioner determined the size of the fund necessary to pay the contract liability on a 4 percent basis and applied to it a reversion factor based on the life expectancy of the four beneficiaries at their then ages of 48, 58, 59, and 70 years. Petitioners attack the use of the 4 percent rate and also the factor based on the life expectancy of the four beneficiaries. On these matters, however, the petitioners have failed to establish that any other figures are more nearly correct. Where deductions must be estimated according to the expected life of individuals, resort to mortality tables is proper. . This is what the Commissioner has done and if he erred in selecting a figure of life expectancy the burden is on the petitioners to show it. . The same applies to use of the interest rate.

The Commissioner is sustained.

Decision will be entered for the respondent.