Neller Estate , 356 Pa. 628 ( 1946 )

The majority opinion seems unmistakably to chart as sure a course to effective tax avoidance as one could possibly imagine. Under the rationale of the decision, a wife's postnuptially agreed upon share of her husband's estate, payable after his death, can be relieved from liability for Pennsylvania's transfer inheritance tax if the wife's waiver of a marital right be made the consideration for her contractually specified property interest in her husband's post-mortem estate.

As I see it, all that will be necessary for any married man, resident in Pennsylvania, to do henceforth in order to obtain the tax-free situation, as above indicated, with respect to his estate will be for him and his spouse to enter into a postnuptial contract whereby she agrees "that she will not press any nonsupport charges against [him] . . . but in lieu of a support order will accept" a specified sum monthly for the husband's life upon the further condition "that at the time of his death there shall be paid [to her] from his estate . . . a sum equal to [any agreed upon portion] of the net amount of his said estate"; and the husband, on his own part, binds himself, "his heirs, executors, administrators and assigns" for the payment of the sums set forth in the contract. Such is precisely the situation which the instant decision covers; and the majority hold that the amount so payable to the wife out of her husband's estate after his death is in discharge of a debt and, therefore, deductible in ascertaining the clear value of his net estate subject to tax. With that, I cannot agree.

Nor is the decision in any wise buttressed by the fact that, at the time of the execution of the agreement here involved, the parties thereto had separated and were then "living separate and apart" because of "divers disputes and unhappy differences [which had] arisen" between them or that, several months after the execution of the agreement, the wife obtained an absolute divorce which did not terminate the agreement because of a cognate saving clause therein. It matters not whether the parties, when thus contracting, are living separate and apart or are living together in amity and continue so to do until separated by death. The postnuptial relinquishment by the one of a marital right against the other is no more a"consideration in money or money's worth" in the one instance than in the other. A conclusion otherwise seems inadmissible from the very character of the subject-matter dealt with. Marital rights are created and exist by law in furtherance of its regard for the social importance and dignity of the status to which they attach. Once such rights become fixed, and thenceforth while the marriage endures, they are unsusceptible, as a matter of law, of being appraised, aliened or terminated on a parity with articles of commerce on the market. Tax laws, in particular, have generally so recognized: see Commissioner v. Wemyss,324 U.S. 303, 305.

Primarily, the question presented for decision in the instant case is whether Mrs. Neller's postnuptial relinquishment of her right to obtain a support order against her husband constituted an adequate and full consideration in money or money's worth for the husband's contemporaneously specified obligation that she receive a certain portion of his net estate upon his death. In short, did Mrs. Neller become a creditor of her husband by virtue of their postnuptial agreement? Unless that question can justifiably be answered in the affirmative, there is no basis whatsoever for deducting from the husband's estate, in ascertaining its clear value subject to tax, the amount so payable to Mrs. Neller out of the estate. Section 2 of the Transfer Inheritance Tax Act of June 20, 1919, P. L. 521, as amended by the Act of May 27, 1943, P. L. 757 (72 PS 2302), provides, in presently material part, that ". . . In ascertaining the clear value of such estates, the only deductions to be allowed from the gross values of such estates . . . shall be the debts of the decedent, [etc.] . . .: Provided, That the deductions herein allowed in the case of anyindebtedness of the decedent shall, when founded upon a promiseor agreement, be limited to the extent that they werecontracted bona fide and for an adequate and full considerationin money or money's worth. . . ." (Emphasis supplied).

As already stated, the rule in general is that one's postnuptial relinquishment of a marital right against a spouse does not, as a matter of law, constitute "an adequate and full consideration in money or money's worth". The majority opinion cites no authoritative decision to the contrary, and none has yet come to my attention otherwise. The cases ofIn Re Vanderbilt's Estate, 172 N.Y. Supp. 511, and Hill et al.v. Treasurer, etc., 116 N.E. (Mass.) 509, cited by the majority, like the cases cited by the learned court below, are readily distinguishable and are not in point here. Each of them is concerned with property rights acquired under an antenuptial agreement, made when the contracting parties had not yet entered the marital status with its attendant reciprocal legal rights and liabilities, and the contemplated marriage, itself, upon performance becomes valuable consideration sufficient to support the antecedent covenants and obligations of the parties. The instant case grows out of a postnuptial agreement and the opinion of the majority as well as that of the court below so tabulates it. So far as a setting for deliberate tax avoidance is concerned, the distinction seems obvious.

The Federal Estate Tax Act, like our State's Transfer Inheritance Tax Act, provides, and for years has provided, that deductions for indebtedness in determining the value of an estate subject to tax ". . . shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. . . .": see Int. Rev. Code,26 U.S.C.A. 812 (b) (5). In fact, the particular language is exactly the same in both the State and Federal Acts. The Federal statute, however, in the subdivision and subsection above cited, also goes on to declare that "For the purposes of this subchapter, a relinquishment or promised relinquishment of dower, curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the decedent's property or estate, shall not be considered to any extent a consideration 'in money or money's worth' ". The provision just quoted is not now cited as directly controlling here. But, at most, it is no more than a super-cautionary iteration of the rule appropriate in the circumstances to tax law administration even without theexpress statutory declaration. That that is so is plainly evident from the action taken by the Supreme Court of the United States in Merrill v. Fahs, 324 U.S. 308, 312-313, which involved a tax on an inter vivos transfer as a gift.

Thus, the Federal Gift Tax Act, consonantly with the allowances of the Federal Estate Tax Act for debt deductions, taxes as a gift property transferred in excess of "an adequate and full consideration in money or money's worth". But, the Gift Tax Act, unlike the Estate Tax Act, does not contain the legislative declaration as to the relinquishment of a marital right not being considered "to any extent a consideration 'in money or money's worth' ". Nonetheless, in the Merrill case, the Supreme Court applied the exclusory rule to that gift tax case on the ground that the principle was a naturally inherent part of the legislative limitation intended by the phrase "adequate and full consideration". In that connection, Mr. Justice FRANKFURTER said at pp. 312-313, "Plainly, the explicitness [i. e., exclusion of relinquishment of marital rights from being considered "money or money's worth"] was one of cautious redundancy to prevent 'subversion of the legislative intent'. Without this specific provision, Congress undoubtedly intended the requirement of 'adequate and full consideration' to exclude relinquishment of dower and other marital rights with respect to the estate tax." There is no sound reason, so far as I can see, for concluding that the Pennsylvania legislature meant anything different by its use of the same terms.

The only case of this court construing and applying the "adequate and full consideration in money or money's worth" clause as contained in the proviso of the Transfer Inheritance Tax Act of 1919, as amended, is Hermann Estate, 349 Pa. 230, 36 A.2d 804. While the facts of that case and the present are by no means "on all fours", the unsubstantiability of the consideration in relation to "money or money's worth" is equally apparent in both instances so that what Mr. Justice HORACE STERN said in the Hermann case (pp. 234-235) in pertinent regard merits repetition here, ". . . Moreover, by the Act of June 24, 1939, P. L. 721, amending the Act of June 20, 1919, P. L. 521, it is provided that 'the deductions herein allowed in the case of any indebtedness of the decedent shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth'. The consent of the trustees to serve in the management of the museum was not a consideration 'in money or money's worth' contemplated by the statute as necessary to convert what would otherwise be a gift or legacy into a deductible debt. See Taft, Executor v. Commissioner of Internal Revenue,304 U.S. 351; In re Wheeler's Estate, 119 Nebr. 344, 228 N.W. 861; Butler's Estate, 19 Pa. D. C. 172. If the consideration for whichthis gift was made were to be held sufficient to make thetransaction contractual rather than donative the door wouldobviously be opened for an easy method of evading inheritancetaxes". (Emphasis supplied).

With the statutorily required consideration for the creation of a deductible debt nonexistent in the present case, the transfer at once became one intended to take effect in possession and enjoyment at or after the settlor's death and, therefore, taxable under the express terms of the Transfer Inheritance Tax Act: Section 1 (c) of the Act of June 20, 1919, P. L. 521, as amended by the Act of June 22, 1931, P. L. 690,72 PS 2301 (c). See also DuBois' Appeal, 121 Pa. 368, 385,15 A. 635. As was said by Mr. Justice PATTERSON, speaking for this Court in Jones Estate, 350 Pa. 120, 124, 38 A.2d 30, ". . . To defeat the Commonwealth's right to the [transfer inheritance] tax, the grantor or settlor must part with possession, title and enjoyment: [citing cases]". Here, the settlor parted with no portion of his estate in his lifetime. Indeed, he could have exhausted the whole of it and left nothing at death for his wife to participate in under the postnuptial agreement.

For the reasons given, I think the Commonwealth's claim for tax was well taken and should have been allowed. I therefore dissent from the action of the Court.

Mr. Justice LINN and Mr. Justice HORACE STERN join in this dissent.