Vardell's Estate v. CIR

• Citation: 307 F.2d 688
• Decision Date: 11 July 1962
• Docket Number: No. 19040.,19040.
• Parties: ESTATE of Lela Barry VARDELL, Deceased, First National Bank in Dallas, Executor, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

307 F.2d 688 (1962) ESTATE of Lela Barry VARDELL, Deceased, First National Bank in Dallas, Executor, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 19040.

United States Court of Appeals Fifth Circuit.

July 11, 1962.

Henry C. Coke, Jr., James K. Rushing, Leland E. Fiske, Dallas, Tex., for petitioner.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, R. P. Hertzog, Acting Chief Counsel, I.R.S., Robert N. Anderson, John A. Bailey, Attys., Dept. of Justice, John B. Jones, Jr., Acting Asst. Atty. Gen., Washington, D. C., for respondent.

Before BROWN, WISDOM, and BELL, Circuit Judges.

GRIFFIN B. BELL, Circuit Judge.

This is an estate tax case.¹ It is an appeal by the taxpayer from an adverse decision of the Tax Court. 35 T.C. 50.

Lela Barry Vardell died on September 12, 1955. Her husband, T. W. Vardell, died testate on February 27, 1934. They were domiciled in Texas and all of his property was community property. He put his wife, the decedent here, to an election under his will, either to retain her community one-half interest and receive no part of his estate, or to allow her community one-half interest to be governed by the terms of his will and to receive specified benefits thereunder.²

In the latter event, the husband, by Item Two of his will, bequeathed to his wife all of the community property, which, of course, was only his one-half therein "for the term of her life, and so long as she shall remain a widow, she to have, during such time, full and absolute authority to handle, manage, sell, and in any manner dispose of said properties, or any part thereof, and to invest and re-invest any proceeds received from the sale of any part of said properties * * *".

The will then provided that in the event of the remarriage of Mrs. Vardell, all property owned by the husband at the time of his death then remaining undisposed of together with the proceeds then on hand received from the sale of any part thereof would pass immediately to the trustees named in Item Three of the will. Her interest on the community was expressly excluded from the operation of this clause. Thus, she would lose only the life estate and the power of disposition over the one-half interest in the community owned by her husband, retaining in the event of remarriage a life estate in and the power of disposition over her one-half interest in the community; losing in any event however, the remainder interest in her one-half. Stated differently, Mrs. Vardell exchanged the remainder interest in her one-half of the community for a life estate in the one-half interest of her husband in the community, with the life estate being defeasible in the event of her remarriage.

Legal title to the remainder interest in the whole of the community passed under the will to Trustees. The beneficiaries under the trust were the two daughters of Mr. and Mrs. Vardell and their lineal descendants.

Decedent elected to take under the will of her husband. A gift tax return was filed by her on the contribution made as a result of the election, and taxes in the amount of $6,617.50 were paid.³ At the conclusion of the administration of the estate of the husband in 1935 all of the community assets were turned over to decedent and she managed these assets during her lifetime, receiving all of the income therefrom. She never remarried. At her death the remaining community assets passed to the trust under the terms of the will of her husband. At the date decedent elected to take under the will the total value of the whole of the community was $2,304,564.68, attributable, because of taxes and other expenses allocable to the estate of the husband at his death, 53.8% to her interest in the community assets, and 46.16% to the interest of her husband.

The value of the whole of the community property remaining undisposed of at the time of the death of the widow, valued as of a date one year thereafter, was $3,972,582.99, of which $2,138,838.68 (53.84%) was attributable to the share of Mrs. Vardell. None of the value of this property was included in the Federal estate tax return filed as being in her gross estate. The Commissioner, in determining the deficiency in estate tax, included the community of Mrs. Vardell in her gross estate and the Tax Court affirmed this action, holding that it was included under § 2036 of the 1954 Revenue Code, 26 U.S.C.A., § 2036,⁴ stating that the transfer by her to the remaindermen was not completed until her death. It would also have been includible under § 2038 of the Code. 26 U.S.C.A., § 2038.⁵ We would reach the same point taxwise under either or both.⁶

Petitioner took the position before the Tax Court that none of the interest of Mrs. Vardell in the community property was includible because its transfer under the election to which decedent was put constituted a bona fide sale for an adequate and full consideration in money or money's worth within the meaning of § 2036. Alternatively, if there was less than a full consideration, it was urged that decedent was entitled to a credit under § 2043(a) of the 1954 Revenue Code, 26 U.S.C.A., § 2043(a),⁷ which in effect allows a credit for the amount of the consideration for a transfer, where it is less than full consideration. The gross estate under this section includes only the excess of the fair market value of the property over the value of the consideration received therefor by a decedent where a transfer has been made under §§ 2035 to 2038, inclusive, and § 2041, of Title 26.⁸

The Tax Court disposed of the case by holding the transfer by Mrs. Vardell of her one-half interest in the community to have been incomplete until her death, and that her community was includible in her gross estate under § 2036. This holding was based on the power of disposition vested in Mrs. Vardell by the terms of the will which rendered the remainder contingent as to property. The law of Texas dictates the type of property interest involved, here a life estate, see Footnote (6), supra, and this transaction falls squarely within the terms of § 2036. The Tax Court missed the mark however in failing to apply § 2043(a).

The government concedes that this property, if not includible under § 2033, and we have held that it is not, is includible under § 2036. And we hold, contrary to the contention of the taxpayer, that the transfer was not for a full consideration under § 2036. We put aside any question as to gift tax since it is admitted by the government that the gift tax collected was not due. Nor are we concerned with a valuation of the property transferred by Mrs. Vardell since the very purpose of § 2036 and the related sections is to include all of such property in her gross estate subject to such credits, if any, as may be due.

This brings us to the remaining questions presented. They are: first, whether the transfer was for a consideration within the meaning of § 2043(a); and if so, then second, how the credit is to be computed.

The question regarding consideration under § 2043(a) is of first impression. However, such an exchange has been held to be for a consideration under the gift tax statute. § 1002 of the 1939 Revenue Code, 26 U.S.C.A., § 1002: Commissioner v. Siegel, 9 Cir., 1957, 250 F.2d 339; Chase National Bank, Trustee for Marie Moran v. Commissioner, 25 T.C. 617, reversed on grounds not here applicable sub. nom. Commissioner of Internal Revenue v. Chase Manhattan Bank, 5 Cir., 1958, 259 F.2d 231; and Turman v. Commissioner of Internal Revenue, 1961, 35 T.C. 1123. Section 1002 uses consideration in the same sense as it is used in § 2043(a). Commissioner v. Bristol, 1 Cir., 1941, 121 F.2d 129. We hold that the life estate received by the widow constituted consideration within the purview of § 2043(a). Accord: Restat. Contracts, § 75(1) (c) (d), § 90; Williston on Contracts, Rev. Ed., 1936, § 113; Corbin on Contracts, 1950, § 194.

Having determined that there is consideration as contemplated by § 2043(a), we come to the method and possibility of computation. The Regulation, § 20.2043-1, provides that the consideration must be reducible to a money value. And the consideration received is to be valued at the time of the transfer, i. e., the date of election. Ithaca Trust Company v. United States, 1929, 279 U.S. 151, 49 S.Ct. 291, 73 L.Ed. 647. Once valued, it is to be credited against the value of the property of the widow at the time of her death. The net is what is to be included in the gross estate.

The computation of the value of the consideration received here by the widow is complicated but not made impossible by the remarriage provision in the will of the husband which renders defeasible the life estate transferred to decedent in the event of her remarriage. The Treasury Regulations provide a method of valuation of the life estate. 26 C.F.R., Table A, § 81.10(j), Treasury Regulations 105. Value is a question of fact to be determined by ascertaining in terms of money what the property would bring in the market, subject to such uncertainty as ordinarily attaches to such an inquiry. United States v. Provident Trust Co., 1934, 291 U.S. 272, 54 S.Ct. 389, 78 L.Ed. 793. The hindsight method can be used in arriving at a value. Nourse v. Riddell, D.C.Cal., 1956, 143 F.Supp. 759. This is possible because the credit may not be claimed until after the death of the person receiving the consideration. Then it is known if, and when, she remarried and what sums were paid to her prior to her remarriage.⁹ However, the credit is in no event to exceed the lesser of the amount of the life estate valued as of the date of election and the sums actually received prior to remarriage.¹⁰ This rule will give effect to the intent of Congress that there be a credit for the consideration, and will at the same time limit the credit to the maximum valuation possible as of the date of transfer.

In summary, the gift tax on inter vivos transfers supplements the estate tax on...