Estate of Johnson v. C.I.R.

• Citation: 718 F.2d 1303
• Decision Date: 24 October 1983
• Docket Number: No. 82-4074,82-4074
• Parties: 83-2 USTC P 13,544 ESTATE OF Helen M. JOHNSON, Deceased, Lolita McNeill Muhm, Independent Executor, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 1303

718 F.2d 1303

83-2 USTC P 13,544

ESTATE OF Helen M. JOHNSON, Deceased, Lolita McNeill Muhm,

Independent Executor, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 82-4074.

United States Court of Appeals, Fifth Circuit.

Oct. 24, 1983.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief Appellate Sec., James F. Miller, Robert A. Bernstein, Justice Dept., Tax Div., Washington, D.C., for respondent-appellant.

P. Allan Port, Houston, Tex., for plaintiff-appellee.

Appeal from the Decision of the United States Tax Court.

Before CLARK, THORNBERRY and RANDALL, Circuit Judges.

RANDALL, Circuit Judge:

The Commissioner of Internal Revenue appeals a decision of the United States Tax Court allowing the deduction of the value of the homestead interest of the surviving spouse from the value of property included in the decedent's gross estate. Finding that the interest of the surviving spouse created by the Texas homestead law is "by virtue of a statute creating an estate in lieu of dower or curtesy" within the meaning of section 2034 of the Internal Revenue Code ("Code"), I.R.C. Sec. 2034 (1976), we reverse the decision of the Tax Court, 77 T.C. 120, and remand with instructions to enter judgment for the Commissioner.

I.

At issue in the present case is whether the value of a decedent's homestead property should be reduced for Federal estate tax purposes by the value of the surviving spouse's interest in the homestead. Because this case raises difficult questions of law involving the interrelationship between the Federal estate tax and Texas homestead laws, it will first be useful, in order to facilitate a more complete understanding of the issues, to briefly outline the statutory schemes involved in this case.

A.

Congress has, since 1916, ¹ levied a graduated tax upon the transfer of a decedent's taxable estate. Section 2001 of the current Code imposes a tax "on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States." I.R.C. Sec. 2001 (1976). The taxable estate is determined by subtracting from the "gross estate" certain deductions authorized by the statute. I.R.C. Sec. 2051 (1976). ² Therefore, the first step in determining a decedent's Federal estate tax liability is a determination of the gross estate. ³

Section 2031(a) provides that the gross estate is the date-of-death value ⁴ of all property owned by the decedent. I.R.C. Sec. 2031(a) (1976). ⁵ The regulations to that section further provide that this value may be calculated by totaling the value of the interests described in sections 2033 through 2044. Treas.Reg. Sec. 20.2031-1(a) (1958). ⁶ Of such interests, only those set forth in sections 2033 and 2034 have direct relevance to the instant case. Section 2033, termed the generic section, ⁷ includes within the gross estate, "the value of all property to the extent of the interest therein of the decedent at the time of his death." I.R.C. Sec. 2033 (1976). ⁸ Section 2034 states that "the value of the gross estate shall include the value of all property to the extent of any interest therein of the surviving spouse, existing at the time of the decedent's death as dower or curtesy, ⁹ or by virtue of a statute creating an estate in lieu of dower or curtesy." I.R.C. Sec. 2034 (1976). ¹⁰ Thus the gross estate includes the date of death value of the interest in property owned by the decedent, as well as the interest of the surviving spouse represented by dower or curtesy or an interest created in lieu of dower or curtesy.

B.

Homestead laws are a uniquely American institution, having their origins in the great debtor revolution of the era of "Jacksonian Democracy;" ¹¹ as human life became more important than money, the homestead ¹² began to find a peculiar favor in the eyes of the law of most states, which sought to afford protection to the home and family against the rapacity of creditors. The broad purpose of these laws was to protect the family from dependence and pauperism. See Lehman v. Cottrell, 298 Ill.App. 434, 19 N.E.2d 111 (1939); Ramsey v. Lake County, 70 S.D. 61, 14 N.W.2d 125 (1944). Because public policy is opposed to pauperized widows and children, Clark v. Davis, 37 Wash.2d 850, 226 P.2d 904 (1951), the homestead laws are based not only upon a tender regard for the family, but also contribute to the stability and welfare of the state. Andrews v. Security National Bank of Wichita Falls, 121 Tex. 409, 50 S.W.2d 253, 256 (1932).

Texas' was the earliest homestead law, originally enacted in 1839. 1839 Laws of the Republic of Texas, First Session of the Third Congress, 125. ¹³ In its present form, the Texas homestead law consists of three distinct features: ¹⁴ first, the homestead ¹⁵ is exempted from the reach of creditors, Tex. Const. art. 16, Sec. 50; ¹⁶ second, limitations are placed upon the conveyance of the homestead, in that the homestead cannot be sold by one spouse without the consent of the other, regardless of whether the homestead property is community property or the separate property ¹⁷ of either spouse, id.; ¹⁸ third, upon the death of either spouse, the homestead is subject to occupancy by the surviving spouse so long as the surviving spouse elects to use it as a homestead, Tex. Const. art. 16, Sec. 52. ¹⁹ It is the latter of these--waivable forced heirship rights--which has particular relevance here. ²⁰

Unlike the majority of states, in which the homestead interest has been held to be merely an inchoate personal privilege, see, e.g., In re Noble's Estate, 73 So.2d 873 (Fla.1954); Mercer v. McKeel, 188 Okl. 208, 108 P.2d 138 (1940); Radtke v. Radtke, 247 Wis. 330, 19 N.W.2d 169 (1945); Snortum v. Snortum, 155 Minn. 230, 193 N.W. 304 (1923); Lear v. Lear, 234 Ky. 369, 28 S.W.2d 32 (1930); Neset v. Rudman, 74 N.W.2d 826 (N.D.1956), the homestead interest in Texas is an estate in the property itself which vests at marriage. Woods v. Alvarado State Bank, 118 Tex. 586, 594, 19 S.W.2d 35, 37 (1929); Crews v. General Crude Oil Co., 287 S.W.2d 243, 250 (Tex.Civ.App.1955). As the U.S. Supreme Court recently noted in United States v. Rodgers, --- U.S. ----, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983), "the Texas homestead right is not a mere statutory entitlement, but a vested property right." 103 S.Ct. at 2139. Thus, the nature and extent of the homestead interest in Texas has been interpreted to grant a greater interest than the homestead laws of most states.

II.

The facts of the present case are uncontested. Helen M. Johnson ("decedent"), a resident of Texas, died March 1, 1975, survived by her husband Elmer. At her death, decedent owned, as her separate property, a lot on which a dwelling was situated ²¹ and a one-half interest in a parcel of agricultural land, ²² which were claimed by decedent and her spouse as their homestead. ²³ Under the terms of her will and holographic codicil, decedent devised this homestead property to her niece and nephew. After decedent's death, the husband asserted his right under Texas law to continue to use and occupy both tracts as his homestead. ²⁴

When decedent's Federal estate tax return was filed on November 25, 1975, the date-of-death values of the homestead property were reported in accordance with an appraisal performed by G. Wayne Ford, an expert real estate appraiser, who treated the homestead property as encumbered by the surviving spouse's homestead interest. The appraiser opined that the value of the homestead property at decedent's death was substantially less than would be the value of the property had it not been so encumbered. The Commissioner redetermined the date-of-death value of the homestead property without any deduction for the homestead interest of the surviving spouse and determined a deficiency of $51,687 in decedent's Federal estate tax.

III.

On February 23, 1979, the decedent's estate, ²⁵ the taxpayer herein, filed a petition for redetermination with the Tax Court. The parties entered into comprehensive stipulations and submitted the case for decision based upon the stipulated record. At the time of submission, the sole issue remaining before the Tax Court was whether the date-of-death value of homestead property owned by the decedent should be reduced by the value of the surviving spouse's elective right to use and occupy the homestead during his lifetime. ²⁶

Prior cases had generally accepted that homestead rights are includible in the gross estate. See United States v. Hiles, 318 F.2d 56, 60 (5th Cir.1963); Estate of Hinds v. Commissioner, 11 T.C. 314, 325 (1948), aff'd on other grounds, 180 F.2d 930 (5th Cir.1950), overruled, Estate of Johnson v. Commissioner, 77 T.C. 120, 128 (1981); cf. Mayer v. Reinecke, 130 F.2d 350, 353 (7th Cir.), cert. denied, 317 U.S. 684, 63 S.Ct. 257, 87 L.Ed. 548 (1942). Indeed, just months before its decision in the present case, the Tax Court held that Oklahoma homestead property is includible in the gross estate at full value. Estate of Glass v. Commissioner, 76 T.C. 949, 41 T.C.M. (CCH) 1303, 1306 (1981). Commentators had considered the question a settled issue. See, e.g., R. Stephens, G. Maxfield & S. Lind, Federal Estate and Gift Taxation p 4.05(3), at 4-91 (5th ed. 1983); 2 J. Mertens, Law of Federal Gift and Estate Taxation Sec. 14.06, at 113 (1955); Comment, Federal Estate and State Inheritance Tax Aspects of the Family Allowance, the Homestead, and the In Lieu of Homestead Awards, 37 Wash.L.Rev. 435, 438 (1962). However, Judge Ekman, writing for the majority in the present case, held that homestead rights are encumbrances that reduce the fair market value of the homestead property. In holding that the husband's homestead interest was not includible in the decedent's gross estate, the majority expressly overruled the long-standing rule announced in Estate of Hinds v. Commissioner, 11 T.C. 314 (1948), requiring the inclusion of Texas homestead property in a decedent's gross estate...