Security First Nat'l Bank v. Commissioner , 38 B.T.A. 425 ( 1938 )


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  • SECURITY FIRST NATIONAL BANK OF LOS ANGELES, AS EXECUTOR OF THE ESTATE OF MARY S. MASON, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
    Security First Nat'l Bank v. Commissioner
    Docket No. 84133.
    United States Board of Tax Appeals
    38 B.T.A. 425; 1938 BTA LEXIS 870;
    August 30, 1938, Promulgated

    *870 1. Order of a probate court of California fixing inheritance tax held not final and conclusive as to extent of property or interest passing to petitioner's decedent under the will of her mother.

    2. Several writings constituting the will of the mother of petitioner's decedent construed as giving to decedent a life estate in a portion of the income of her mother's estate.

    3. Where respondent claims as a basis for an increased deficiency that his determination of the value of realty was erroneous, the burden rests upon him to prove that he erred in his original determination.

    Joseph D. Brady, Esq., W. W. Phelps, Esq., and Frederick E. Hines, Esq., for the petitioner.
    L. H. Rushbrook, Esq., for the respondent.

    MELLOTT

    *425 This proceeding involves a deficiency in estate tax in the amount of $1,746.26. It is alleged by the petitioner that the respondent erred (1) in including in the gross estate of decedent an interest in the estate of her mother valued at $30,125.42; (2) in determining that item 1 of the real estate schedule had a value of $30,000 at the date of decedent's death; (3) in failing to allow a deduction for a reasonable*871 remuneration to the attorney employed by the executor on behalf of the estate in connection with this appeal; and (4) in failing to allow a credit of the amount of estate, inheritance, legacy, and succession taxes actually paid to the State of California. No evidence was submitted as to errors (3) and (4), it being agreed that adjustment of these items shall be made by counsel under Rule 50.

    FINDINGS OF FACT.

    The petitioner is a national banking association, with its principal office and place of business in the city of Los Angeles, California. It is the duly appointed and acting executor of the estate of Mary S. Mason, who died testate, a resident of the County of Los Angeles, California, October 3, 1933.

    Petitioner's decedent was the daughter of Harriet W. R. Strong, who, having survived her husband, died a resident of the County of Los Angeles, California, on September 16, 1926.

    The last will and testament of Harriet W. R. Strong, with the codicils thereto, was duly admitted to probate in the Superior Court *426 of California in and for the County of Los Angeles. These documents are as follows:

    Los Angeles, California

    May 6th, 1925

    Owing to changes in*872 the locality of my home and properties it becomes necessary for me to make changes in the will made by Ward Chapman atty. and in his possession and do herein and hereby cancel it in whole and entirely, as not possible to carry out. All of my property is for the benefit of my children, to be disposed of in detail as I may herein direct. First the care and support of my two unmarried daughters. All net income shall be theirs to use and employ for their comfort and happiness first of all other uses. The expenses of the home place including living expenses taxes, insurance, etc. shall be paid first. When the net income is 12,000.00 Twelve Thousand dollars. Ten per cent shall be used for each year charitable purposes, the balance shall be divided in three equal parts one third to Harriet and third to Nelle and the other third to be divided equally between my daughter Mary S. Mason and my grand daughter Georgina S. Hicks. Also there shall be a monthly payment made to my grand niece Helen Whipple of Oakland Cal. Sufficient to make her comfortable the amount to be determined by my daughters this to be counted with regular expenses. before net is determined. (2) A trust deed of all*873 the Ranch property lots A. & B. in Ranchito del Fuerte tract shall be made to the Citizens Trust Company of Los Angeles to hold the title in perpetuity except such portions as I may sell on under contract to sell - and except also the houses - home - and about eleven acres of ground. This shall neither be sold - mortgaged or otherwise disposed of - Its use for my daughters and grand daughter The occupancy of the home is for Harriet and Nelle: and the first home for Mary and Georgina - The latter built in 1869 - during their respective lives There shall be a Trust Deed made to the Pacific Southwest Trust and Savings Bank of this property 115 acres to hold until the property is sold - The money therefrom shall be invested in Los Angeles city property or Long Beach said property so purchased shall be income business property of first grade:

    ,also when this water property consisting of 115 acres in the Paso de Bartolo - (Ranchito) Viejo is sold it is my wish $250.00 of the same (when convenient to my Trustees) to be paid to the children of (each one) my Sister Sarah J. Russell Thompson - my brother Samuel Andrew Russell, my Sister Mary Russell Mather and Kate Russell Hundley - *874 also a piano to Mary Chapman Gilliam. all things further will be contained in a paper providing for the uses of the land and money by and for the benefit of the girls of California - to prepare them for useful happy lives -

    HARRIET W. R. STRONG

    I do hereby appoint and name as my Executors of this Will.

    My daughters - Harriet, Mary, and Nelle, Miss Katherine E. Titus Mr. (Max) L. M. Chapman - all of Los Angeles - without bonds.

    May 6 - 1925

    Ranchito del Fuerte

    September 19th 1925

    In my endeavor to keep up with the changes in handling my business, through changed conditions in the section where we live (land and oil booms) I have from time to time put in writing such changes as I saw the exigencies of the case demanded, likewise I will express in this, what I see is required to make practical my intentions as a guide to the consummation of the plans made through many years. 1st I have devoted time and energy to provide for my *427 daughters beyond peradventure. 2nd to use and employ my land and all other resources to this end. 3rd To so direct the handling of this business that the detail may be worked out by others so that the income and properties shall be*875 secured to my daughters, the same income &c may never be used to pay the debts of anyone, also that the properties be never mortgaged to secure the payment of debts in the future making. 4th That the income shall be used by my two unmarried daughters Harriet Russell and Nelle deLuce Strong, for their comfort and happiness, the entire net income from whatsoever source, and when it is more than enough to meet their requirements, a share shall go to my married daughter Mary Strong Mason, and still further as there is more income the three daughters shall determine a portion to be given to my grand daughter Georgina Strong Hicks. Also my daughters shall assist my grand niece in the care of her children to be an amount each month for her use.

    5th The seventy (76) acre lot (A) of Ranchito del Fuerte, shall be held in perpetuity as first our home so long as my daughters require it, then for the benefit of the girls of California to enable them to become independent of adverse fortune - The plans for a Horticultural College and Technical School are fully set forth in another document. Yet the increased value of my property will make it possible for my daughters to carry out my original*876 plans as comprehended in the Business League organized by me in Chicago 1893 - This is my dearest wish for the benefit of the girls of California, my own first. The lower orchard of 110 acres should net 3000.00 per acre. The water property net 200,000.00. This is also oil property. My present plan is to incorporate the water property and furnish the 110 acres in subdivision and other lands - To hold unsold the East 20 acres of lower orchard until it is worth 10,000 per acre. This to be used for buildings - with a prayer for blessings on my children and friends and all mankind.

    HARRIET W. R. STRONG.

    continued-

    (4)

    The money from the sale of the 110 acres (Lot B) shall be invested in a business block in Los Angeles or Long Beach - income - property free of encumbrance. The money from water sales to be invested in revenue producing property, not at interest, or in mortgages on other property. These wishes are to be carried out as may be possible with the general plan of the document in Ward Chapman's hands - with the substitution of L. M. Chapman in place of Ward as I realize the latter will be unable to give time to the details involved in this business.

    HARRIET W. *877 R. STRONG.

    October 14th - 1925

    340 Lafayette Park Place

    Los Angeles

    July 26th 1926

    The real estate that I am trying to sell - I wish sold and the money to be used to pay my debts. and all the balance to be placed at interest until it goes into income business property - my daughters know my plans for future benefit of girls of California - and whatever comes I am sure they will respect my wishes - my efforts have been and are for my dear children when they are through with the income they will arrange for the college & technical school - *428 The homeplace 76 acres never to be sold - The 20 acres in East held for 10,000.00 per acre - God bless every body -

    HARRIET W. R. STRONG

    340 Lafayette Park Place

    Los Angeles -

    On or about November 7, 1927, the state inheritance tax appraiser filed a report in the mother's estate, wherein it was stated that the residue of all real and personal property, totaling $606,092.76, "passed" to the three daughters and one granddaughter equally. On November 8, 1927, objections to such report were filed by the executors and one of the daughters, Harriet R. Strong, as beneficiary, wherein, inter alia, it was stated:

    The determination*878 of the inheritance tax appraiser that the property should be distributed equally to the three daughters and one granddaughter of the deceased is incorrect, and the tax based upon such an interpretation of the will is incorrect; and, in place thereof, the tax should be based upon a life estate in Harriet R. Strong and Nelle de Luce Strong in the income, and a contingent future interest in the income from the said property in Mary S. Mason and Georgina Strong Hicks Kelly, and with a remainder over of the seventy-six (76) acre tract, known as Lot A of the Ranchito del Fuerte, to a girls horticultural college and technical school, and the remaining property to the three daughters and one granddaughter of the deceased after the termination of the life estates above set forth; the transfer of the fee interest in the seventy-six (76) acre tract, known as Lot A, is exempt from taxation, under the provisions of Section 6 of Act 8443, General Laws of the State of California, being a transfer in trust for charitable and educational uses.

    Under date of November 8, 1927, an order was made fixing the time of hearing of such objections, which hearing was postponed from time to time, until April 20, 1928, when*879 the objections were dismissed by the objectors. Under date of May 7, 1928, an amended report of the state inheritance tax appraiser dated April 12, 1928, was filed, wherein, inter alia, it was stated:

    The CLEAR MARKET VALUE of said property is therefore $607,065.13

    That said property passed to the following named persons, whose relationship to decedent, the character and clear market value of whose respective interests at the time of the death of decedent and the inheritance or transfer tax due thereon are as hereinafter shown:

    Name Relationship to deceasedExemption and ratesTax
    Character and value of interest.
    Harriet Russell Strong, (daughter)
    1/2 Jt. acct$7,528.35
    Life Interest70,333.56
    $77,861.91$10,000.00 Ex.
    15,000.00 1%$150.00
    25,000.00 2%500.00
    27,861.91 4%1,114.48
    $1,764.48
    Nelle de Luce Strong (daughter)
    1/2 Jt. Acct$7,528.36
    Life interest108,254.66$115,783.02$10,000.00 Ex.
    15,000.00 1%$150.00
    25,000.00 2%500.00
    50,000.00 4%2,000.00
    15,783.02 7%1,104.81
    $3,754.81
    Mary Strong Mason, Daughter.
    Life interest$81,140.6710,000.00 Ex.
    15,000.00 1%150.00
    25,000.00 2%500.00
    31,140.67 4%1,245.63
    1,895.63
    Georgina S. H. Kelly, Granddaughter
    Life interest$235,447.6710,000.00 Ex.
    15,000.00 1%150.00
    25,000.00 2%500.00
    50,000.00 4%2,000.00
    100,000.00 7%7,000.00
    35,447.67 10%3,544.77
    13,194.77
    Girls of California, Educational$96,831.86Exempt
    $607,065.13$20,609.69

    *880 *429 By "Amended Order Fixing Inheritance Tax" dated May 7, 1928, the Superior Court approved and confirmed the amended report and appraisement of the inheritance tax appraiser. This order has never been reversed, modified, or set aside.

    The executors of the mother's estate on March 16, 1929, filed a Federal estate tax return in which they reported a total gross estate of $742,580.57. The deductions claimed therein included a charitable bequest to a "school for the girls of California" in the amount of $96,660.84. Upon audit of such return the respondent determined a deficiency of $2,041.06 as a result of several adjustments, including the disallowance of the deduction for the charitable bequest "for the reason that the bequest was to an organization that does not exist and therefore does not come within the purview of section 303(a)(3) of the Revenue Act of 1926." Under date of June 22, 1929, Harriet R. Strong, as executrix, signed a waiver of the right to file a petition with the United States Board of Tax Appeals and consented to the assessment and collection of such deficiency.

    The mother's estate has never been closed in probate and was still open at the time*881 of the hearing of the instant proceeding.

    The petitioner filed a Federal estate tax return on October 3, 1934, with the then collector of internal revenue at Los Angeles, California, in which it reported a gross estate at a value of $208,635.58, including six items of real estate valued at $124,338, item 1 being property occupied by the decedent as a residence, designated as 340 So. LaFayette Park Place, valued at $30,000; stocks and bonds valued at $44,646; cash in the amount of $525.66; and other miscellaneous property valued at $39,125.92.

    *430 The respondent increased the value of the gross estate from $208,635.58 to $239,371.70. Of such increase only the amount of $30,125.42 is in issue. This amount represents the value fixed by the respondent of an interest which he claims petitioner's decedent had in her mother's estate at the time of her death, he having determined that the corpus of such estate "passed as though she [the mother] died intestate."

    Probate proceedings in the estate of decedent were commenced shortly after her death. Under date of August 1, 1935, the state inheritance tax appraiser filed a second amended report in said estate, wherein he stated*882 that at the date of decedent's death the fair market value of the property of the estate was $189,300.48 and that the clear market value of the property, less allowable deductions, was $122,483.02. In the report there was not included in the property of decedent at the time of her death any value attributable to her alleged interest in the estate of her mother. The petitioner, as executor of the estate, has never claimed that decedent had any interest in her mother's estate at the time of death greater than a life interest. In its "Second Amended Order Fixing Inheritance Tax," dated October 1, 1935, the Superior Court approved and confirmed the above report of the inheritance tax appraiser. This order has never been modified, reversed, or set aside.

    The amended inheritance tax appraiser's report included, in the schedule of real estate owned by the decedent, her residence at a value of $30,000. Upon audit of the estate tax return the respondent tentatively determined that the value of the residence at the time of decedent's death was $35,000, but in determining the deficiency herein he reduced the value to $30,000. The value of the residence at the time of decedent's death*883 was $25,000.

    OPINION.

    MELLOTT: The first question to be determined is whether the decedent had more than a life interest in the estate of her mother.

    Petitioner contends that the "Amended Order Fixing Inheritance Tax," dated May 7, 1928, in the mother's estate is a decree of a state court of competent jurisdiction, determining property rights, and, as such, is final and conclusive when the existence and nature of those property rights are in issue before any other tribunal. It is well settled that statutes and decisions of state courts as to property rights or interests are controlling and conclusive upon Federal courts and the Board. ; ; ; ; . The respondent concedes that this is a general rule; *431 but he contends that the order involved is not a final and conclusive decree as to the nature and extent of the property rights or interests of petitioner's decedent in the estate of her mother*884 and hence that the rule is not applicable.

    In ; , involving the construction of that part of a will which disposed of any residue remaining after the payment of all debts, expenses of administration, and legacies, the question was raised whether the distribution under it should have been made to the named legatees equally, or in proportion to the amounts of the specific legacies given to each of them under the will. The trial court determined the latter method was the one intended by the testator. On appeal the appellants contended that the court could not adopt such a construction because it had previously made an order determining the inheritance tax on the basis of an equal distribution of the residuum to the residuary legatees. The court, in its opinion, said:

    A reference to the "Inheritance Tax Act" (Deering's Gen. Laws 1923, p. 3501, Act 8443) demonstrates that it is purely a taxation statute, and, while the inheritance tax appraiser, for the purpose of making his report as therein provided for, must of necessity determine the several interests in the estate of the decedent for the purpose*885 of computing the tax upon "any property passing" therein, it can hardly be said that the proceeding should be conclusive upon any question other than that of taxation. Certainly the Legislature never had such a thought in mind, and it is to be doubted if any of our courts ever entertained such an opinion. While the question has not, to our knowledge, been raised heretofore in California, it has been discussed by the New York courts, where there exists a statute very similar to our own. [Citing and discussing New York decisions.]

    In , the California Supreme Court stated:

    * * * The order fixing inheritance taxes, which may incidentally determine questions in regard to succession and beneficial ownership, is not binding except for tax purposes as between those who claim the estate, whether as heirs, legatees, or beneficiaries of a trust extrinsic to the will. .

    See also sections 1020 and 1021, Deering's Probate Code of California, 1933.

    We are of the opinion that the order fixing the inheritance tax, based upon the appraiser's determination and*886 report that the petitioner's decedent had a "life interest" in the estate of her mother, is not final and conclusive upon any question other than the amount of tax due to the state, and is not binding, except for such purpose, upon the heirs or legatees.

    Section 1020 of the Probate Code of California provides in part that immediately upon the final settlement of the accounts of the executor or administrator, or at any subsequent time, upon the application *432 of the executor or administrator, or of any heir, devisee, or legatee, or his assignee, grantee, or successor in interest, the court must proceed to distribute the residue of the estate among the persons entitled thereto. Section 1021 of the Probate Code of California provides, in so far as applicable herein, that in its decree of distribution the court must name the persons and the proportions or parts to which each is entitled and that such order or decree, when it becomes final, is conclusive as to the rights of the heirs, devisees, and legatees. ; *887 . No such final accounting or decree of distribution has been made in the mother's estate.

    Since the order fixing the inheritance tax is not a final and conclusive determination of the interest of decedent in the estate of her mother, and since no decree of distribution has been made, it is necessary to look to the mother's will to ascertain the extent of the interest of petitioner's decedent in the estate.

    On brief the respondent states that he does not contend that the so-called charitable trust set up in the mother's will is invalid because of indefiniteness, but he now contends, first, that the will itself is so ambiguous, vague, indefinite, uncertain, and contradictory that it is void and that decedent therefore shares in her mother's estate as though her mother had died intestate; and, second, that if the will is not so ambiguous and indefinite as to be void, the only charitable devise made in it is the devise of the 76 acres (lot A of Ranchito del Fuerte) for the establishment of a horticultural college and technical school for girls of California.

    Sections 380 and 384 of the Probate Code of California, 1933 (formerly sections 1327 and 1333 Code*888 Civil Procedure), provide that if no person contests the validity of a will, or the probate thereof, within six months after it is probated, "the probate of the will is conclusive" except as to infants and persons of unsound mind who were not made parties to the proceeding.

    The will of the mother consists of four separate writings. Section 101 of the Probate Code of California, 1933 (formerly sections 1317 and 1320 of the Civil Code of California), provides as follows:

    Several testamentary instruments executed by the same testator are to be taken and construed together as one instrument. A will is to be construed according to the intention of the testator. Where his intention cannot have effect to its full extent, it must have effect as far as possible.

    Section 103 of the Probate Code of California, 1933 (formerly sections 1321 and 1923 of the Civil Code), provides as follows:

    Where the meaning of any part of a will is ambiguous or doubtful, it may be explained by any reference thereto, or recital thereof, in another part of the will. All the parts of a will are to be construed in relation to each other, and so as, if possible, to form one consistent whole; but where*889 several parts are absolutely irreconcilable, the latter must prevail.

    *433 Section 102 of the Probate Code of California, 1933 (formerly section 1326 of the Civil Code), provides in part that "of two modes of interpreting a will, that is to be preferred which will prevent a total intestacy." Furthermore, courts are reluctant to hold wills void for uncertainty and will not do so if a construction effectuating the testator's intent is possible. 68 C.J. 937.

    Examining the several writings in the light of these statutory rules of construction, we find that none contains any express or specific devise of real estate or other property to the daughters. In providing for the daughters and granddaughter, the testatrix refers to the "income" of the estate. In the writing of September 19, 1925, in discussing her plans regarding the disposition of her estate, she states, in substance, that she had devoted time and energy to using and employing her land and other resources so as to provide for her daughters "beyond peradventure." She expresses the desire that the property be used to that end, and directs that the details "be worked out by others so that the income and properties*890 shall be secured" to her daughters. The will provides that all the ranch property, lot A, the 76-acre tract, and lot B, a 132-acre tract, both in the Ranchito del Fuerte tract, be held in trust, and also a 115-acre tract in Rancho Paso de Bartolo. It further provides for the sale of the above realty, except the 76-acre tract, which is to be held in perpetuity, and directs that the "houses - home - and about eleven acres of ground" be used as a home for her daughters and granddaughter "during their respective lives", and that the funds received from the sale of the property be invested in "income business property of first grade." In the writing of September 19, 1925, it is restated that the 76-acre tract, lot A, of Ranchito del Fuerte, shall be held as a home so long as her daughters require it, after which it is to be held for the benefit of the girls of California for a horticultural college and technical school. In the last writing of July 26, 1926, she sums up her plans as follows: "My efforts have been and are for my dear children when they are through with the income they will arrange for the college and technical school."

    While there is some ambiguity in the several writings, *891 a careful reading of all of them discloses that the testatrix had two purposes in mind: (1) To provide for her daughters (in particular her two unmarried daughters) and granddaughter during their respective lives, and (2) upon the death of the survivor, the establishment and maintenance of a horticultural college and technical school for girls. If she had set aside the 76-acre tract only for the use of the school, as contended by the respondent, it is apparent that her second purpose would fail. Since the testatrix provided specifically that the 76-acre tract should be held in perpetuity, it is obvious that without provision for other and additional property or funds no college could *434 have been established or maintained. However, if the provisions of the will are construed so as to give the daughters and granddaughter a life interest in the income only, the residue to be held and used for the establishment and maintenance of the college, both purposes of the testatrix are made possible. It is our opinion that the testatrix intended to give to her daughter, petitioner's decedent, only a share in the income of the estate above that required for the comfort and happiness*892 of the unmarried daughters. Since the interest of decedent in her mother's estate ceased at her death, the respondent erred in including the amount of $30,125.42 in her gross estate as the value of her interest, at the date of her death, in her mother's estate.

    As to the second issue the evidence shows, and we have found, that item 1 of the real estate schedule had a value of $25,000 at the date of the death of the petitioner's decedent.

    At the close of the hearing counsel for the respondent moved, upon the proof, for an increased deficiency, in the event that the Board should hold the order of the Suprerior Court of California to be controlling as to the property interest of the decedent. His theory seems to be that, since the inheritance tax appraisers determined the value of the real estate belonging to the estate to be $157,000, which value was approved by the court, this amount should be used in determining the value of the gross estate for the purpose of the Federal estate tax rather than the value determined by him of $124,338. He accordingly seeks to include in decedent's gross estate an additional $32,662.

    We have not held the order of the court to be controlling, *893 though we have held that the respondent erred in including in the estate the $30,125.42 discussed in the earlier portion of this opinion. No amended answer was filed asking for an increased deficiency, and the claim for such is not referred to, nor discussed, upon brief. Apparently it has been abandoned; but if not, it must be denied.

    No evidence was adduced, nor was any issue raised, as to the value of the real estate. The executor included it in the return at a value of $124,338. The respondent apparently accepted this value as correct when he determined the deficiency on February 10, 1936, notwithstanding the fact that the second amended report of the inheritance tax appraisers finding the value to be $157,000 had been filed in the court months previously, i.e., on August 1, 1935. A presumption of correctness attached to respondent's determination of value and he can not lightly set it aside or ignore it. The burden rested upon him to prove that he erred in his original determination. ; *894 ; affd., ; ; affd., ; certiorari denied, ; *435 . He has failed to make such proof.

    Decision will be entered under Rule 50.

Document Info

Docket Number: Docket No. 84133.

Citation Numbers: 38 B.T.A. 425, 1938 BTA LEXIS 870

Judges: Mellott

Filed Date: 8/30/1938

Precedential Status: Precedential

Modified Date: 1/12/2023