Estate of Horton v. Comm'r of Internal Revenue

• Decision Date: 27 March 1967
• Docket Number: Docket No. 1479-65.
• Citation: 47 T.C. 641
• Parties: ESTATE OF S. WENTWORTH HORTON, GERTRUDE I. WARNER, EXECUTRIX, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

47 T.C. 641

ESTATE OF S. WENTWORTH HORTON, GERTRUDE I. WARNER, EXECUTRIX, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1479-65.

Tax Court of the United States.

Filed March 27, 1967.

Richard H. Wels, for the petitioner.

Marie L. Garibaldi, for the respondent.

Held, under New York law, the language ‘should (my wife) die before said residuary estate shall have been distributed to her, then * * * I give, devise, and bequeath said residuary estate, * * * to our two sons,‘ as it affected realty, created a ‘terminable interest’ which was nondeductible under sec. 2056, I.R.C. 1954.

FORRESTER, Judge:

The respondent determined a deficiency in estate tax in the amount of $29,844.54 in respect of the Estate of S. Wentworth Horton. The sole question for our determination is whether the surviving spouse's interest in real property that passed under Horton's will qualifies for the marital deduction under section 2056.¹

FINDINGS OF FACT

All of the facts have been stipulated.

S. Wentworth Horton, hereinafter referred to as the decedent, died on October 2, 1960, 12 days before his 75th birthday, a resident of the State of New York.

On October 9, 1960, Gertrude I. Warner was appointed executrix of decedent's estate.

She filed an estate tax return on January 2, 1962, with the district director of internal revenue, Brooklyn, N.Y.

The decedent was survived by his wife, Martha M. Horton, and his two sons, David Barnabas Horton and Stewart Woodford Horton.

The decedent's will, dated February 16, 1950, was duly admitted to probate on October 9, 1960. It had been drawn by the decedent's brother-in-law, who was an insurance agent.

The third and fourth paragraphs of decedent's will are as follows:

THIRD: All the rest, residue and remainder of my estate, real, personal and mixed, of whatsoever kind and wheresoever situate, to which I may be entitled, or of which I may have power to dispose at my demise, I give, devise and bequeath absolutely to my beloved wife, MARTHA M. HORTON.

FOURTH: Should my said wife predecease me, or should she die before said residuary estate shall have been distributed to her, then and in such event I give, devise and bequeath said residuary estate, in equal shares, to our two sons, DAVID BARNABAS HORTON and STEWART WOODFORD YOUNG HORTON, absolutely.

The petitioner claimed a marital deduction of $150,890.50, an amount equal to 50 percent of the value of the adjusted gross estate.

The deduction consisted of $57,030.39 attributable to assets that passed outside the will and $93,860.11 attributable to the wife's interest in real estate that passed under the residuary clause quoted above.

The respondent determined that a marital deduction was allowable in the amount of $57,030.39.

OPINION

The respondent's position is that the wife's interest in real property that passed under the will was a nondeductible, terminable interest. The petitioner argues that under New York law the real property vested indefeasibly in the wife at the decedent's death and therefore the wife's interest in such property qualifies for the marital deduction.

Section 2056(b) provides:

(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; * * *

The nature of the interest that passed to the wife under the decedent's will is a question of State law. Kapser v. Kellar, 217 F.2d 744 (C.A. 8, 1954). Under New York law title to real property vests in the devisee immediately upon the death of the testator. Barber v. Terry, 224 N.Y. 334, 120 N.E. 732 (1918); 12 Carmody-Wait, Cyclopedia of New York Practice, sec. 1575. The question is therefore whether a New York court would hold that the wife's interest in real property vested indefeasibly at the decedent's death or that it vested subject to divestment. If it vested indefeasibly the interest would qualify for the marital deduction. If it did not it would be a nondeductible, terminable interest.²

The petitioner relies on In re Herrmann's Estate, 82 N.Y.S.2d 888 (Surr. Ct. 1948). In that case the decedent's will created a trust for the benefit of his brother and directed that upon the brother's death the principal be distributed equally between two nieces of the decedent. They will also contained a residuary bequest to the two nieces. It provided for alternative gifts in the event that either of the nieces ‘shall die before she shall become entitled to the possession of or title to any funds or property hereunder.’ One of the nieces, Leona, died 5 months after the testator. In a proceeding for construction of the will, the special guardian of the alternative takers, the infant children of Leona, argued that since Leona died before the distribution of the testator's property her interest in the estate was divested. The: executors of the testator's estate and of the estate of Leona conceded that Leona, having predeceased the testator's brother, had no further interest in the remainder of the trust. They maintained, however, that the gift of one-half the residue vested indefeasibly in Leona when she survived the testator. The court held that Leona's interest in personal property passing under the residuary clause was divested by her death prior to distribution but that her interest in real property vested indefeasibly at the testator's death. The court said (82 N.Y.S.2d at 890-891):

Upon the death of a testator title to his real property vests in the devisees named in his will. Waxson Realty Corp. v. Rothschild, 255 N.Y. 332, 174 N.E. 700; Barber v. Terry, 224 N.Y. 334, 339, 120 N.E. 732, 733; Corley v. McElmeel, 149, N.Y. 228, 235, 43 N.E. 628, 630; Schick v. Wolf, 207 App.Div. 652, 202 N.Y.S. 601. In respect of his personal estate a different rule applies. An executor takes the unqualified legal title of all personal property of a testator not specifically bequeathed. The fiduciary holds it not in his own right but as trustee for creditors, legatees and other persons interested in the estate. Matter of Starbuck's Ex'x, 251 N.Y. 439, 443, 167 N.E. 580, 581, 65 A.L.R. 216; Blood v. Kane, 130 N.Y. 514, 29 N.E. 994, 15 L.R.A. 490; Milliner v. Morris, 219 App.Div. 425, 427, 219 N.Y.S. 166, 168; Sauvage v. Sauvage, 235 App.Div. 460, 461, 257 N.Y.S. 325, 326, 327. The legatees take no legal title to the subject of their legacies until the executor assents to the delivery of the property. Blood v. Kane, supra.

In the use of the terms ‘possession of’ and ‘title to’ with reference to any funds or property under his will, the testator evidently had in mind the distinction between property which descends immediately and property which is transferred only after the estate is administered. In respect of his personal property the legal title would be in his executors and the legatees would not be entitled to possession until the administration of the estate had proceeded to such a point that the executors could make distribution. The title to the real estate would devolve upon the devisees immediately without any act on the part of the executors. In one case there would be distribution only when the executors had acted to distribute the property and in the other case there would be distribution immediately.

The petitioner argues that in the instant case the decedent, by conditioning the wife's bequest upon her survival to the date of ‘distribution,‘ had in mind the same distinction between the devolution of real and personal property and therefore the effect of the fourth paragraph of the will, as to decedent's real property, was merely to require that the wife be living at his death.

We do not think that a New York court would place such a construction upon the will. The language of the will in the Herr mann case, ‘entitled to the possession of or title to any funds or property hereunder,‘ was more explicit in distinguishing between real and personal property. The court there was able to read the will as conditioning the gift upon survival to the time of becoming ‘entitled to * * * the title to * * * property,‘ which does seem to evidence a reasonably clear intent to make a gift of real property conditional merely upon surviving the death of the testator since title to such property vests automatically in the devisee at that time. In the instant cast the construction argued for would render unnecessary that part of the fourth paragraph that expressly requires the wife to survive the testator's death. The relevant language is:

FOURTH: Should my said wife predecease me, or should she die before said residuary estate shall have been distributed to her * * * .

Also, the petitioner, in arguing for a liberal construction of the will with respect to tax consequences, points out that the will was drafted by a nonlawyer. In our view that fact under cuts the contention that the testator intended, by using the word ‘distribution,‘ to embody the rather subtle double meaning give to that term by the Herrmann case.

The decedent might have intended in some general way to insure that the wife's interest would not vest indefeasibly until she was able personally to possess and enjoy the assets passing under the residuary clause. If that had been his intention it would not follow that, as to realty, he intended his wife's interest to vest indefeasibly...