Fried v. Comm'r of Internal Revenue (In re Estate of Fried)

• Decision Date: 22 April 1970
• Docket Number: Docket No. 4505-67.
• Citation: 54 T.C. 805
• Parties: ESTATE OF HARRY FRIED, DECEASED, ETHEL FRIED, EXECUTRIX, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

54 T.C. 805

ESTATE OF HARRY FRIED, DECEASED, ETHEL FRIED, EXECUTRIX, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4505-67.

United States Tax Court

Filed April 22, 1970.

Sidney S. Allen, for the petitioner.

Robert M. Pearl, for the respondent.

Held: 1. Decedent's estate is not entitled to the marital deduction for personal property passing under a provision of a will, which is construed under the law of the State of New York, that in the event his wife survives him but dies before the probate of his will, the property is bequeathed to his daughter.

2. An amount of $5,000 which a corporation formed by decedent and his brother paid to decedent's widow is includable in decedent's estate under sec. 2037, I.R.C. 1954, since the facts show consideration passing from the decedent to the corporation to procure the agreement for the payment and a reversionary interest in the $5,000 in decedent's estate of over 5 percent.

3. On the facts of record respondent's inclusion of the value of an automobile in decedent's estate is sustained.

4. U.S. Government bonds which may be used to pay estate tax are properly includable in decedent's estate at face value.

5. Upon the facts of record respondent's disallowance of part of deductions claimed by decedent's estate for indebtedness for taxes and rent on an apartment is sustained.

SCOTT, Judge:

Respondent determined a deficiency in the estate tax of the Estate of Harry Fried in the amount of $8,185.23. One of the issues raised by the pleadings has been partially disposed of by agreement of counsel, leaving for our decision the following:

(1) Whether in computing the estate tax, the bequest to decedent's surviving spouse qualifies for the marital deduction under section 2056, I.R.C. 1954.

(2) Whether the value of benefits payable to decedent's widow by the corporation of which decedent was a 50-percent owner-officer and a director is includable in the estate under section 2037, I.R.C. 1954,

(3) Whether the value of an automobile which was paid for by decedent, registered in the name of the corporation of which he was part owner and after his death transferred to his widow, is includable in decedent's gross estate.

(4) Whether the portion of the deduction for taxes payable claimed by the estate as a deductible indebtedness of the estate, which respondent has not conceded to be deductible, is properly deductible by the estate.

(5) Whether certain U.S. Treasury bonds owned by decedent at the time of his death which were of the type acceptable at par value in payment of estate taxes should be included in the gross estate at their par value or at their fair market value on the date of decedent's death, such fair market value being less than the par value.

(6) Whether decedent had an indebtedness at the date of his death for 3 months' rent on his apartment which is properly deductible as an estate indebtedness in computing the taxable estate.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Ethel Fried, executrix of the Estate of Harry Fried, the petitioner in this case, was a legal resident of New York, N.Y., on the date of the filing of the petition herein.

The decedent died testate on July 20, 1963. Decedent's last will and testament, which was executed on February 17, 1957, was admitted to probate and letters testamentary were issued to Ethel Fried on August 7, 1963. An estate tax return was filed by the executrix on October 1, 1964, with the Internal Revenue Service in Brooklyn, N.Y.

Decedent's will, after directing that all just debts, funeral expenses, and expenses of administration of his estate to be paid, provided:

SECOND: All of the rest, residue and remainder of my property and estate, real, personal and mixed of whatsoever kind and nature the same may be and wheresoever situate of which I shall die seized or possessed or to which I may in any wise be entitled at the time of my decease or which may be subject to my disposal by will, I give, devise and bequeath as follows:

A. The whole thereof unto my beloved wife, ETHEL FRIED, if she survives me, for her use absolutely and forever.

B. In the event that my said beloved wife ETHEL FRIED, shall predecease me or shall die in the course of or as a direct result of the same accident, casualty or disaster as I or under such circumstances as make it impossible to determine which of us died first, or in the event that my said beloved wife survives me but dies before the probate of this my Last Will and Testament, then and in either of said events, I give, devise and bequeath the whole of said rest, residue and remainder of my estate to my daughter ELAINE FRIED ALLEN, if she survives me, or if she shall have predeceased me, then the whole thereof to her issue per stirpes.

The will then proceeded in paragraph Third to provide for the management of property by the executrix or executors if such property should vest in absolute ownership in a minor. Paragraph Fourth provided as follows:

FOURTH: In the event that any beneficiary under this Will and I or any other person on whose death such beneficiary shall become entitled to receive either income or principal under this Will, shall die in a common accident or disaster or under such circumstances that it is di cult or impractical to determine who survived the other, then I direct that, for the purpose of this Will, such beneficiary shall be deemed to have predeceased me or such other person as the case may be.

Paragraph Fifth directed the decedent's executors to comply with any stockholder agreements which he might have executed during his lifetime. Paragraph Sixth appointed Ethel Fried as sole executrix, and in the event she predeceased the decedent or was unable or unwilling to act, appointed Elaine F. Allen as sole executrix. Paragraph Seventh granted broad powers to the executrix or executors in the management and handling of the estate, and paragraph Eighth provided as follows:

EIGHTH: It is my wish that all legacies under this Will shall be satisfied by my Executor as soon as may be practicable after my death, but I direct that no legacy shall bear interest if not paid within the time specified by any law.

The will contained only eight paragraphs.

Decedent's will was drafted by Sidney S. Allen, the decedent's son-in-law who was admitted to practice law in the State of New York in 1937.

Decedent's widow, Ethel Fried, survived the probate of decedent's will and the entire net estate was distributed to her.

Harry Fried and his brother Elliot Fried, had for some time prior to 1957 operated a partnership. In 1957 they transferred the assets of the partnership to a corporation.

The decedent, his brother Elliot Fried, and Brake Laboratories, Inc., entered into an agreement which recited in part:

AGREEMENT, made the 9 of May 1963, effective as of the first day of October 1956, by and between HARRY FRIED, * * * hereinafter referred to as ‘HARRY’, ELLIOT FRIED, * * * hereinafter referred to as ELLIOT', and BRAKE LABORATORIES, INC., a New York Corporation, having its principal place of business at 552-554 West 23rd Street, Borough of Manhattan, City of New York, hereinafter referred to as the ‘CORPORATION’;

WITNESSETH

WHEREAS, HARRY and ELLIOT, for a number of years prior to the 1st day of April, 1957, had been co-partners doing business under the firm name and style of SCIENTIFIC BRAKE LABORATORIES, engaged in the business of repairing and servicing motor vehicles, specializing in the repair and replacement of brakes, said business then being located at 537 First Avenue, in the Borough of Manhattan, City of New York; and

WHEREAS, HARRY and ELLIOT caused the incorporation of the CORPORATION on the 12th day of July, 1950, with the intention of transferring the business of said partnership and all of its assets, tangible and intangible, to said CORPORATION at an appropriate time; and

WHEREAS, due to certain condemnation proceedings effecting the said premises 537 First Avenue, Borough of Manhattan, City of New York, the business of said partnership was directed to be removed from said premises and the parties found another location, whereat said business might be continued, commencing as of the 1st day of April, 1957, namely, at premises located at 552-554 West 23rd Street, Borough of Manhattan, City of New York; and

WHEREAS, HARRY and ELLIOT as co-partners doing business as SCIENTIFIC BRAKE LABORATORIES, did transfer all of their said business and assets, tangible and intangible, as aforementioned, to the CORPORATION as of the 1st day of April, 1957, and the CORPORATION did enter into a lease, dated the 5th day of October, 1956, for a term of fifteen (15) years for the purpose of conducting the said business of repairing and servicing motor vehicles, specializing in the repair and replacement of brakes, at premises 552-554 West 23rd Street, Borough of Manhattan, City of New York; and

WHEREAS, HARRY and ELLIOT did agree to terminate their said partnership under the firm name and style of SCIENTIFIC BRAKE LABORATORIES as of the 1st day of April 1957; and

WHEREAS, the CORPORATION has conducted the said business at the said last mentioned location as of, and since, the 1st day of April, 1957; and

WHEREAS, the parties desire to agree upon all matters respecting their respective interests in the said business and of the assets thereof, tangible and intangible, as well as their respective interests in the CORPORATION;

NOW, THEREFORE, in consideration of One and 00/100 ($1.00) DOLLAR, and other good and valuable consideration, receipt and sufficiency whereas is hereby acknowledged, and in consideration of the mutual promises and covenants herein contained, it is mutually agreed as follows:

1. HARRY and ELLIOT, individually and as co-partners, doing business as SCIENTIFIC BRAKE LABORATORIES, have sold, assigned and transferred, and do hereby, by these presents, sell, assign and transfer, as of the 1st day of April, 1957, to...