Commissioner of Internal Revenue v. Bristol, 3658.

• Decision Date: 27 June 1941
• Docket Number: No. 3658.,3658.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. BRISTOL.
• Court: U.S. Court of Appeals — First Circuit

121 F.2d 129 (1941)

COMMISSIONER OF INTERNAL REVENUE v. BRISTOL.

No. 3658.

Circuit Court of Appeals, First Circuit.

June 27, 1941.

COPYRIGHT MATERIAL OMITTED

L. W. Post, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for the Commissioner.

George D. Brabson, of Washington, D. C. (D. H. Blair, of Washington, D. C., and Frank H. Noyes, of Boston, Mass., on the brief), for Bristol.

Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.

MAHONEY, Circuit Judge.

This is a petition by the Commissioner of Internal Revenue to review a decision of the Board of Tax Appeals in which the Board decided that there was no deficiency owing but that there was an overpayment by the respondent of a gift tax for the year 1937 in the amount of $4,641.60.

Pursuant to an ante-nuptial agreement between the taxpayer and his intended wife, the taxpayer purchased two annuities for her and transferred two pieces of realty to himself and her as tenants by the entirety in consideration of her relinquishment of the statutory rights she might have in certain stocks then owned by him. The question is whether the wife's relinquishment of these prospective rights constituted adequate and full consideration in money or money's worth for the transfers made to her by the taxpayer.

The taxpayer and his brother owned and controlled the Foxboro Company, a manufacturing corporation in Foxboro, Massachusetts, which had been in his family for many years. He desired to keep control of the stock of the Company and to insure that upon his death it would go to some of his six children by his first marriage. He was about to remarry, and he consulted his attorney as to the effect of his remarriage upon the family plan to retain control of the Company. The attorney informed the taxpayer that in the event of his death, under the laws of Massachusetts, his widow would acquire a one-third interest in all his property.

The attorney also informed the taxpayer that it would be possible to transfer other property to his intended wife in lieu of her statutory interests. He advised him that the desired result could be accomplished by a will executed by the taxpayer and assented to by the intended wife, plus a transfer of certain other property to her. The taxpayer discussed the matter with the intended wife in the presence of his attorney, and she agreed to accept two annuities and an interest in two pieces of real estate as tenant by the entirety in lieu of any interest which she might have otherwise acquired in the Company's stock. At the time this agreement was made the taxpayer owned 130,230 shares of the Company's stock, valued at $6 per share, i. e., $781,380, the two pieces of real estate transferred to him and his wife as tenants by the entirety, valued at $34,000, and certain other real estate and securities of much less value than the stock in the Company.

By a will executed August 24, 1937, the taxpayer provided for the carrying out of the terms of the ante-nuptial agreement. By the terms of this will he bequeathed his Foxboro Company stock to one of his sons and to a bank on certain trusts, and left one-third of the residue of his estate, exclusive of this stock, to his intended wife. The latter attached to the will her acknowledgment of the will, and her consent thereto, and an agreement not to waive its provisions and attempt to take her intestate share. On August 26, 1937, the day they were married, he purchased two annuities which cost $51,983 each, payable to his wife for life. On August 27, 1937, he transferred to himself and his wife as tenants by the entirety, in accordance with the agreement, his Foxboro winter home and his Falmouth summer home. There is no suspicion that the transaction was not in good faith or that it was entered into to evade taxes. It was a purely business transaction.

The taxpayer filed a gift tax return for the year 1937 in which he reported as taxable gifts the two annuities purchased for his wife. He paid a gift tax in the sum of $4,641.60 which was assessed against him on the basis of this return. In the same return he reported the transfer of the two parcels of real estate to himself and his wife as tenants by the entirety but claimed that these conveyances did not constitute taxable gifts.

The Commissioner notified the taxpayer on September 6, 1938, that the transfer of real estate to himself and his wife as tenants by the entirety was a taxable gift and gave notice of a deficiency in the sum of $2,056.92.

The taxpayer contested this deficiency, and on November 29, 1938, he filed a claim for refund of the gift tax assessed and paid in 1937 in the sum of $4,641.60 on the ground that the transfers of the annuities and the real estate were in no sense gifts but were transfers of property for adequate and full consideration in money or money's worth pursuant to the marital agreement. The Commissioner refused to accede to the taxpayer's claims and assessed a deficiency.

Upon review, the Board of Tax Appeals upheld the contentions of the taxpayer. It held that the transfers here involved were made for adequate and full consideration in money or money's worth and, therefore, they were not subject to the gift tax. The Commissioner has appealed.

Each of the two annuities transferred pursuant to the agreement cost $51,983, a total of $103,966. The agreed value of the wife's interest in the real estate transferred to her and her husband as tenants by the entirety was $19,550, the method of computation of which is set out in the margin.¹ Thus the wife received, pursuant to the agreement, property to the value of $123,516. The taxpayer contends that, pursuant to the agreement, the wife relinquished her rights in the stock, and that the alleged value of the rights relinquished was $149,764.50, computed by the same manner as that used by the Commissioner in valuing the wife's interest in the real estate transferred.² The Commissioner conceded on oral argument that if the method of computing this alleged interest of the wife in the stock were proper, the figure was correct. He denied that there was any present interest capable of evaluation, and contended that even if there were, there was no possible method of evaluation of this interest in money or money's worth.

We agree with the Commissioner that the relinquishment by the wife of her statutory interest in the taxpayer's estate was not adequate and full consideration in money or money's worth for the transfer to her of the annuities and the interest in the pieces of real property. The transfers were, therefore, taxable under the provisions of Sections 501(a)³ and 503⁴ of the Revenue Act of 1932 (47 Stat. 245, 247, 26 U.S.C.A. Internal Revenue Acts, pages 580, 585).

The laws of Massachusetts provide that if a husband in the taxpayer's circumstances, i. e., with issue living, were to die intestate, either totally or partially, his surviving widow is entitled to one-third of the estate.⁵ There was some discussion at the oral argument as to whether the words "real and personal property not disposed of by will", as used in this section, did not indicate that a husband, by will, could defeat his wife's interest in the property remaining in his estate at death. Examination of this and the succeeding chapter shows that Chapter 190 refers only to intestate property, whether because there was no will or because not covered by the will, and that Chapter 191 contains all the rights of the surviving spouse as to property disposed of by will. If the taxpayer should die testate, his surviving widow could waive the provisions of his will and take the share set aside for her by statute.⁶ There is also provision for dower in real property which is waived if not demanded.⁷ It is the contention of the taxpayer that the binding ante-nuptial relinquishment of these various rights by the intended wife constituted adequate and full consideration in money or money's worth for the transfers by the husband. We cannot agree.

It is well settled law in Massachusetts that the relinquishment by an intended wife of her statutory rights to share in her husband's estate in the event of his death is sufficient consideration to support a contract by the husband to transfer to her certain property. Wellington v. Rugg, 1922, 243 Mass. 30, 136 N.E. 831; Collins v. Collins, 1912, 212 Mass. 131, 98 N.E. 588; Tarbell v. Tarbell, 1865, 10 Allen, Mass., 278; cf. Eaton v. Eaton, 1919, 233 Mass. 351, 124 N.E. 37, 5 A.L.R. 1426. Thus the agreement between the taxpayer and his wife is binding and enforcible.

However, it is equally well established that though mutual promises may be common law consideration sufficient to support an agreement, they may not be such consideration as will satisfy the statutory requirement of "an adequate and full consideration in money or money's worth". Taft v. Commissioner, 1938, 304 U.S. 351, 58 S.Ct. 891, 894, 82 L.Ed. 1393, 116 A.L.R. 346; Empire Trust Co. v. Commissioner, 4 Cir., 1938, 94 F.2d 307, 310; Stella S. Housman, 1938, 38 B.T.A. 1007, 1011. It is our opinion that the relinquishment of the wife's statutory rights was not consideration within the meaning of the word as used by Congress in Section 503 of the Revenue Act of 1932, supra.

Section 503, providing that a transfer shall be deemed a gift unless the transferor receives full and adequate consideration in money or money's worth, appears to mean that any transfer of property is to be treated as a gift to the extent that the transferor does not receive in return an adequate and full equivalent in money or something which can be valued in money. "Consideration", as used in Section 503, is not the same as common law consideration; it means that when the transferor gives something away and does not at the same time replace it with money of equal value or some goods or services capable of being evaluated in money, he is deemed to have made a...