City Bank Farmers Trust Co. v. Bowers

• Citation: 2 F. Supp. 883
• Parties: CITY BANK FARMERS' TRUST CO. v. BOWERS.
• Decision Date: 01 December 1932
• Court: U.S. District Court — Southern District of New York

2 F. Supp. 883

CITY BANK FARMERS' TRUST CO. v. BOWERS.

District Court, S. D. New York.

December 1, 1932.

Winthrop, Stimson, Putnam & Roberts, of New York City (William C. Chanler, Henry L. Steitz, and John E. Parsons, all of New York City, of counsel), for plaintiff.

George Z. Medalie, U. S. Atty., of New York City (Frank Chambers, Asst. U. S. Atty., of New York City, of counsel), for defendant.

KNOX, District Judge.

This suit was tried before the court upon an agreed state of facts, and in the absence of the jury. The material facts are these:

Evelyn Bostwick Voronoff, a citizen and resident of France, died at Paris on March 3, 1921. Owning property located within the United States, she made disposition of the same through the medium of an American will, in which Edgerton L. Winthrop, Jr., was named as executor. The document was probated in New York county, and subsequently, upon April 15, 1921, Mr. Winthrop qualified as executor. He acted as such until his demise upon January 12, 1926. Plaintiff succeeded him in office and continues to act therein.

Mrs. Voronoff, at the time of her demise, owned or had an interest in property within this country to the value of $2,842,639.66, of which $57,284.06 consisted of United States bonds and certificates. In addition, she owned stock in certain American corporations which had a market value of $1,049,060.50. These securities, together with a number of bonds of the republic of France, and worth $65,207.65, were pledged with Farmers' Loan & Trust Company as collateral security for loans which that institution had made to testatrix, and which, in the aggregate, amounted to $557,052.61. Her equity in the pledged American securities, after an appropriate adjustment for the presence of the French bonds, was $527,712.03. Exclusive of the pledged property, the value of the decedent's estate, wherever situated, was $3,278,234.07.

The Commissioner of Internal Revenue, in his determination of the federal inheritance tax upon the estate, included therein the full market value of the pledged stock, viz. $1,049,060.50, and thus found the gross value of decedent's property within the United States to be $3,834,416.10. When account was taken of decedent's property, wherever situated, its gross value was fixed at $4,327,294.57.

Debts and administration expenses of the decedent, other than her indebtedness to Farmers' Loan & Trust Company, amounted to $491,208.57. With the inclusion of this indebtedness, the deductions which it is claimed should be credited against the gross estate, amounted to $1,048,261.18.

The Commissioner, however, in making his tax computation, limited allowable deductions for debts, funeral expenses, etc., to 10 per centum of the gross estate found within the United States, or $383,441.61, as provided by subdivision b (1) of section 403 of the Revenue Act of 1918, enacted February 24, 1919 (40 Stat. 1098). Upon this basis, a tax was paid to Frank C. Bowers, collector of internal revenue, now deceased. Payment was made under protest, and Mr. Winthrop claimed a refund of such portion thereof as, according to his contention, was improperly exacted from him. The claim was rejected, and hence this suit.

At the outset, one item of the claimed refund admits of summary disposition. It relates to a deduction of $11,807, which should be allowed against the gross estate of the testatrix on account of the value of certain household furniture and fixtures which came to her as a share of the estate of Helen C. Bostwick, who had died within five years prior to the decease of Mrs. Voronoff, and upon whose estate the federal estate tax had been duly paid. Defendant now concedes that plaintiff is entitled to this deduction, with the result that, upon this item, plaintiff should receive a refund of $1,889.21.

Turning now to the matters with respect to which the parties are in disagreement, two basic questions present themselves. These are:

(1) Was it proper to include the full value of the stocks pledged with Farmers' Loan & Trust Company in the "gross estate" of decedent?

(2) Was the provision in section 403 (b) (1) of the Revenue Act of 1918, limiting the total allowable amount of deductions to 10 per centum of a decedent's gross estate, constitutional?

The conclusions here to be reached depend upon the manner in which each, or both, of these queries are answered. If the Commissioner of Internal Revenue was correct in answering both questions in the affirmative, plaintiff may recover nothing except the aforesaid sum of $1,889.21. If the first question should be answered in the negative and the second in the affirmative, plaintiff will recover a total amount of $76,362.45. If the first is answered in the affirmative and the second in the negative, plaintiff will recover $87,031.70. If both questions are answered in the negative, plaintiff will recover $89,842.89.

I. Whether the full value of the pledged securities, or only the value of decedent's equity therein, should have been included in her gross estate within the United States, turns upon the correct interpretation of section 402 (a) of the Revenue Act of 1918 (40 Stat. 1097), which provides: "The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated — (a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges, against his estate and the expenses of its administration and is subject to distribution as part of his estate."

In considering the meaning of the words, "to the extent of the interest therein of the decedent," one should bear in mind the provision in section 403 (a) (1), 40 Stat. 1098, which states that "unpaid mortgages" shall be deducted from the "value of the gross estate" in determining the "value of the net estate." Reading these two sections together, it is apparent that, with respect to mortgaged property, the Congress intended the full value of such property to be included in the gross estate, and that, in arriving at the net value thereof, a deduction commensurate with the "unpaid mortgages" should be allowed. Such was the interpretation which the Treasury Department placed upon similar statutory provisions contained in earlier Revenue Acts. For example, T. D. 2513, July 16, 1917, declared that "mortgages resting on decedent's property should be shown under `Deductions' and the full value of the mortgaged realty should be shown under item 1 of `Gross Estate.' A similar rule must be applied with regard to hypothecated personalty."

Again, Mr. Black, in the fourth edition of his work entitled Income and Other Federal Taxes (section 283), states that a like interpretation was applicable to the provisions of the Revenue Act of 1918. His statement is corroborated by the language of article 15 (2) of Treasury Regulation 37, promulgated August 8, 1919, which reads: "The full value of securities pledged to secure a loan should be included in the gross estate. If the decedent had a trading account with a broker, all securities belonging to the decedent held by the broker at the date of death must be included at their market value on that date. Securities purchased on margin for the decedent's account and held by the broker should also be returned at their market value on the day of death. The amount of the decedent's indebtedness to the broker will be allowed as a deduction from the gross estate."

Constructions which thus define the meaning of the phrase, "to the extent of the interest therein of the decedent," are consistent with the nature of a pledge, as defined generally and by the law of the state of New York. As is well understood, a pledge, broadly speaking, is a transfer of the possession of personal property as a security for the payment of a debt or other obligation. The pledgor retains title to the property subject, however, to the right of the pledgee to retain the pledge until the debt for which it stands as security is paid, and, in the event of default in such payment, to sell the property and apply its proceeds to the debt. See Talty v. Freedman's Savings & T. Co., 93 U. S. 321, 23 L. Ed. 886; Warner v. Fourth National Bank, 115 N. Y. 251, 22 N. E. 172. See, also, 49 C. J. 896, 923. The pledgee acquires no interest in the property except as security for his debt, and his actual interest is purely contingent, in that it depends for effect on something that may or may not occur. Smith v. Savin, 141 N. Y. 315, 36 N. E. 338; Wood v. Fisk, 215 N. Y. 233, 109 N. E. 177. See 49 C. J. 924. The nature of a pledge is no wise disturbed by the death of its pledgor. The pledge then constitutes a part of the pledgor's estate, but it is incumbered by the charge which the decedent imposed upon it. Bell v. Mills (C. C. A.) 123 F. 24; Gillet v. Bank of America, 160 N. Y. 549, 560, 55 N. E. 292. See, also, In re Hallenbeck's Estate, 231 N. Y. 409, at page 412, 132 N. E. 131, 132, in which the court said: "But the title to the stock and testator's right of property therein remained in the pledgor. The pledgee had a lien thereon for the amount of its loan."

In that case, a resident of New Jersey died, leaving a gross estate of over $600,000 in New York. His will was admitted to probate in New Jersey, and ancillary letters testamentary were issued in New York. Twenty-five hundred shares of stock of the appraised value of $142,750 had been pledged by the decedent with a New York corporation, as collateral security for a loan of $150,000. In determining the amount of the taxable estate in New York, the appraisers added the value of the pledged stock to the assets of the estate, and included the debt in its liabilities. It was contended by the executor that decedent's only taxable interest in the stock was his right of redemption, which right was worthless, since the value of the...