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

• Decision Date: 28 February 1985
• Docket Number: Docket No. 14654-81.
• Citation: 84 T.C. No. 23,84 T.C. 329
• Parties: ESTATE OF GERALDINE W. HARMON, Deceased WALTER I. BREGMAN, Executor, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

84 T.C. 329

84 T.C. No. 23

ESTATE OF GERALDINE W. HARMON, Deceased WALTER I. BREGMAN, Executor, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14654-81.

United States Tax Court

Filed February 28, 1985

D died testate in California. By her will, D gave her condominium and its contents to her husband, but she also made an alternate gift of such property in the event that her husband did not ‘survive distribution of * * * (her) estate.‘ D's husband survived her death and survived the probate court's entry of the decree of final distribution of her estate.

HELD, the disposition to D's husband created a terminable interest under sec. 2056(b), I.R.C. 1954, for which no marital deduction is available, because such disposition would have terminated or failed if he had not survived the entry of the final decree of distribution of her estate. CHARLOTTE MITCHELL, for the respondent.

MICHAEL L. GIANELLI, for the petitioner.

SIMPSON, JUDGE:

The Commissioner determined a deficiency of $41,174 in the estate tax due from the Estate of Geraldine W. Harmon. The sole issue for decision is whether a gift to the husband of the decedent subject to his surviving distribution of her estate created a terminable interest under section 2056(b) of the Internal Revenue Code of 1954 ¹ for which no marital deduction is available.

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found.

Walter I. Bregman, the son of Geraldine W. Harmon and the executor of her estate, had his legal residence in Stamford, Conn., at the time he filed the petition in this case. He timely filed an estate tax return with the Internal Revenue Service Center, Fresno, Calif.

Geraldine W. Harmon (the decedent or Mrs. Harmon) died on December 5, 1977. Prior to her death, she resided with her husband, Sidney Harmon, in a condominium located in Rancho Mirage, Calif. The condominium was Mrs. Harmon's separate property.

Mr. and Mrs. Harmon were married in 1971 when Mrs. Harmon was about 61 years old and Mr. Harmon was about 64 years old. They had no children of their marriage. Mr. Harmon had been married twice previously. He had four children from his second marriage, all of whom were alive and adult at the time of Mrs. Harmon's death. Mrs. Harmon had been married once previously and had one child, Walter I. Bregman, from that marriage. Relations between Mr. and Mrs. Harmon and their separate families were amicable.

At the time of their marriage, Mrs. Harmon owned real and personal property with an estimated net value of $1,000,000, while Mr. Harmon owned personal property with an estimated net value of $200,000 and no real property. Before their marriage, they executed an antenuptial agreement by which they agreed that all property owned by each party prior to their marriage, and all property coming to each party from whatever source during the marriage, was to remain separate property. They both also waived all community property rights, all rights as an heir or surviving spouse, all rights to a family allowance or probate homestead, all rights in the event of death, and all right to act as administrator of the estate of the other. However, during their marriage, the decedent and Mr. Harmon did share a joint bank account and expenses.

Mrs. Harmon executed her will on June 12, 1974. The pertinent provisions of the will are as follows:

THIRD: I hereby give, devise, and bequeath all tangible personalty and the condominium located at Tamarisk West, Rancho Mirage, California to SIDNEY HARMON. If SIDNEY HARMON FAILS TO SURVIVE DISTRIBUTION OF MY ESTATE, then in that event I hereby devise and bequeath the tangible personalty (sic) property and condominium to my son WALTER I. BREGMAN.

FOURTH: (A) I give and bequeath all of my jewelry to my beloved son, WALTER I. BREGMAN, but should he predecease me, then I give this bequest to my sister, SHIRLEY W. BERNSTEIN.

* * *

(C) I give and bequeath the sum of Two Hundred Thousand Dollars ($200,000.00) to the BANK OF AMERICA, in trust.

(1) The Trustee shall pay for the support of SHIRLEY BERNSTEIN the income from the Trust.

(2) Upon the death of SHIRLEY BERNSTEIN the trust shall terminate and be distributed to my son WALTER BREGMAN.

* * *

FIFTH: I give, bequeath and devise to my son, WALTER I. BREGMAN, if living at the time of my death, all the rest, residue and remainder of my estate, * * *.

SIXTH: In the event that my said son, WALTER I. BREGMAN, shall predecease me, all the rest, residue and remainder of my estate, * * * I give, devise and bequeath to the BANK OF AMERICA, National Trust and Savings Association, as Trustee. Such Trust shall be known as the ‘Grandchildren's Trust‘ * * *. (Emphasis added.)

The June 1974 will revoked a will that the decedent had executed in June 1972, shortly after she married Mr. Harmon. In the earlier will, the decedent had left all of her estate to her son, or if he predeceased her, to her grandchildren, in trust. She executed the June 1974 will when she became concerned about the future financial needs of her husband and of her sister, Shirley Bernstein. In addition to providing a trust fund for her sister's support, Mrs. Harmon wanted to insure that Mr. Harmon would be able to continue residing in the Rancho Mirage condominium after her death as Mr. Harmon had no residence of his own and his separate personal property had become substantially depleted since their marriage. By codicil executed in September 1975, Mrs. Harmon also bequeathed $75,000 to a trust, with the income payable to Mr. Harmon during his life and the corpus to be distributed to her son on Mr. Harmon's death. However, upon Mrs. Harmon's death, the bulk of her estate would still pass to her son. The revoked will, the 1974 will, and the codicil were all prepared by the decedent's attorney, H. Morgan Dougherty.

A petition for the probate of the decedent's will and for letters testamentary was filed on December 15, 1977, in Riverside County, Calif. A Judgment for Final Distribution of the estate was entered on January 8, 1979, in that county. Mr. Harmon survived the decedent's death and the entry of the Judgment of Final Distribution.

The petitioner claimed a marital deduction of $117,175 on its estate tax return. In his notice of deficiency, the Commissioner disallowed $116,220 of the claimed marital deduction because he determined that paragraph ‘THIRD‘ of the decedent's will passed a nondeductible, terminable interest in the personal property and the condominium to her husband.

OPINION

The issue for decision is whether the gift of the personalty and condominium to Mr. Harmon subject to his surviving distribution of the estate of the decedent was a terminable interest within the meaning of section 2056(b) for which no marital deduction is allowable.

Section 2056(a) permits a deduction equal to the value of any interest in property which passes from the decedent to her surviving spouse to the extent that such interest is included in determining the value of the decedent's gross estate. However, section 2056(b) sets forth an exception for life estates and other terminable interests where the deduction will not be allowed:

SEC. 2056(b) Limitation in the Case of Life Estate or Other Terminable Interest.

(1) General rule.—Where, on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail, no deduction shall be allowed under this section with respect to such interest.

(A) if an interest in such property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to any person other than such surviving spouse (or the estate of such spouse); and

(B) if by reason of such passing such person (or his heirs or assigns) may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving spouse;

Section 2056(b)(3) sets forth guidelines whereby certain conditions of survivorship will not be deemed to create a terminable interest:

(3) Interest of spouse conditional on survival for limited period.—For purposes of this subsection, an interest passing to the surviving spouse shall not be considered as an interest which will terminate or fail on the death of such spouse if—

(A) such death will cause a termination or failure of such interest only if it occurs within a period not exceeding 6 months after the decedent's death, or only if it occurs as a result of a common disaster resulting in the death of the decedent and the surviving spouse, or only if it occurs in the case of either such event; and

(B) such termination or failure does not in fact occur.

The nature of a legal interest in property is a matter of State law, and therefore in the present case, we must look to California law to determine whether the disposition to Mr. Harmon under paragraph ‘THIRD‘ of the will might terminate or fail more than 6 months after the decedent's death. Broday v. United States, 455 F.2d 1097, 1099 (5th Cir. 1972); Estate of Fulmer v. Commissioner, 83 T.C. 302, 304 (1984); Estate of Rubinow v. Commissioner, 75 T.C. 486, 489 (1980). In making this determination, we are, ‘in effect, sitting as a state court,‘ being bound by decisions of the Supreme Court of California and ‘giving 'proper regard’ to relevant rulings of other courts of the State. ‘ Commissioner v. Estate of Bosch, 387 U.S. 456, 465 (1967); Estate of Fulmer v. Commissioner, supra at 306. The petitioner's ultimate position is that the phrase ‘fails to survive distribution of my estate‘ contained in paragraph ‘THIRD‘ must be interpreted as synonymous with the phrase ‘fails to survive my death‘ in order to effectuate the intent of the decedent. The petitioner contends that the phrase ‘fails to survive distribution of my estate ‘ is ambiguous and that the ambiguity is not removed by reference to...