Estate of Matthews v. Comm'r of Internal Revenue

• Decision Date: 28 March 1944
• Docket Number: Docket No. 112390.
• Parties: ESTATE OF JAMES H. MATTHEWS, FIDELITY TRUST COMPANY, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

3 T.C. 525

ESTATE OF JAMES H. MATTHEWS, FIDELITY TRUST COMPANY, EXECUTOR, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 112390.

Tax Court of the United States.

Promulgated March 28, 1944.

1. Decedent and a business associate, who were both officers and stockholders of X corporation, entered into a reciprocal agreement under which the survivor was to have the option to purchase for a limited time after the death of the other and for a stipulated price of all the shares of X corporation which the other should own at the time of his death. Both parties were free to dispose of any or all of such shares during their lifetime. Held, that the shares of X stock which decedent owned at the time of his death should be included in his gross estate at their fair market value at the time of decedent's death and that such fair market value is not limited to the option price. Claire Giannini Hoffman, 2 T.C. 1160, followed.

2. During his lifetime decedent created two insurance trusts, naming the trustee beneficiary of a number of policies of insurance on his life but reserving the right to change the beneficiary or to assign the policies and to alter or revoke the trusts. Thereafter he assigned some of the policies to a creditor bank as collateral on his promissory note. Held, that the portion of the proceeds of the assigned policies which after decedent's death was payable to the assignee bank in satisfaction of decedent's debt is includible in the gross estate as amounts ‘receivable by the executor.‘ Sec. 302(g), Revenue Act of 1926.

3. Decedent, prior to March 3, 1931 (the date of the Joint Resolution amending section 302(c), Revenue Act of 1926), created a trust for the benefit of his wife, his daughter, and himself, reserving the income for life, following the death of his wife, and a contingent right to dispose of one-half of the corpus. This contingency, however, was cut off during his lifetime by the death of his wife. Held, that no part of the corpus of the trust is includible in decedent's gross estate. W. A. Seifert, Esq., Norman D. Keller, Esq., and A. G. Wallerstedt, C.P.A., for the petitioner.

J. Harrison Miller, Esq., for the respondent.

SMITH, Judge:

This proceeding involves an estate tax deficiency of $21,009.01, all of which is in controversy. The questions for our determination are:

(1) The valuation, for estate tax purposes, of certain corporate shares which decedent owned at the time of his death but which under the terms of an existing agreement a business associate had an option to purchase within a stated period at a stipulated price.

(2) Whether the proceeds of the policies of insurance on decedent's life which were paid to a creditor bank to whom decedent has assigned the policies as collateral security on his promissory note are includible in decedent's gross estate without the benefit of the statutory exemption of $40,000 as ‘amounts receivable by the executor‘ within the meaning of section 302(g) of the Revenue Act of 1926. In the alternative the respondent contends that, if the amount of insurance paid to the creditor bank is subject to the $40,000 exemption, then the total amount of such insurance should include the proceeds of two group insurance policies on decedent's life, one of which was contributory and one noncontributory.

(3) Whether there should be included in the gross estate the value of the corpus of a trust which decedent created in 1922, reserving the right to receive the income for life, after the death of his wife, and a contingent power of testamentary disposition over a portion of the corpus.

The evidentiary facts are all contained in a written stipulation of facts and exhibits which the parties filed at the hearing. We find the facts therein contained as stipulated. The facts pertinent to the several issues are set out separately below.

The written stipulation submitted by the parties also contains a settlement of other matters pertaining to the estate tax liability of the estate which will be given effect in the recomputation under Rule 50.

FINDINGS OF FACT.

The decedent, James H. Matthews, died testate a resident of Pittsburgh, Pennsylvania, on November 23, 1938. His executor, petitioner herein, duly filed an estate tax return on behalf of his estate with the collector of internal revenue at Pittsburgh. The executor elected in the return to value the property in the gross estate as of the date of decedent's death.

Issue 1.— Valuation of Stock Subject to Option Agreement.

FINDINGS OF FACT.— At the time of his death, and for a number of prior years, decedent was president and a large stockholder of Jas. H. Matthews & Co., a Pennsylvania corporation. On October 12, 1934, decedent entered into a written contract under seal with another officer and stockholder of the corporation, William Jenkins, whereby reciprocal options were given for the survivor of them, within a limited time after the death of the other, to purchase from the estate of the deceased all the shares of stock of Jas. H. Matthews & Co. which might be owned by the deceased at the time of his death, with certain exceptions not here material. The agreement provides in part as follows:

FIRST, The said JAMES H. MATTHEWS agrees for himself, his heirs, executors of administrators, that in the event of his death before that of the said WILLIAM JENKINS then the said WILLIAM JENKINS shall have the exclusive option or privilege of purchasing from the heirs, executors or administrators of the Estate of the said JAMES H. MATTHEWS, at the price hereinafter set forth, all or any part of the capital stock of said Corporation owned by the said JAMES H. MATTHEWS at the time of his death with the exception of five hundred (500) shares thereof disposed of by Will.

SECOND. The said WILLIAM JENKINS agrees for himself, his heirs, executors or administrators, that in the event of his death before that of the said JAMES H. MATTHEWS then the said JAMES H. MATTHEWS shall have the option or privilege of purchasing from the heirs, executors or administrators of the Estate of the said WILLIAM JENKINS, at the price hereinafter set forth, all or any part of the capital stock of said Corporation owned by the said WILLIAM JENKINS at the time of his death with the exception of two hundred (200) shares thereof disposed of by Will.

THIRD. The price to be paid by the survivor of the parties hereto for, the said capital stock owned by the one who first dies shall be the sum of SEVENTY-FIVE ($75.00) DOLLARS per share if purchased within three (3) months of the other party's death, provided a dividend shall have been paid prior thereto by the Corporation from the proceeds of life insurance carried by the Corporation on the life of said decedent; otherwise the survivor may purchase said capital stock owned by the other, within six (6) months of death, by paying the price of NINETY ($90.00) DOLLARS per share therefor.

By an amendment to the agreement made December 20, 1935, the exemption of the 500 shares referred to as disposed of by the decedent in his will was removed.

Decedent was the owner at the time of his death of 785 shares of Jas. H. Matthews & Co. stock. In his will he referred to his agreements with Jenkins relating to such stock and provided that ‘In making disposition of this stock, I direct that my executor, hereinafter named, be guided by the terms of these agreements.‘ No dividend from the proceeds of the life insurance carried by Jas. H. Matthews & Co. on the life of the decedent was paid within three months after the decedent's death. Pursuant to the terms of the option agreement the 785 shares were sold by decedent's executor to Jenkins at the price of $90 per share. In decedent's estate tax return the 785 shares of Jas. H. Matthews & Co. stock which he owned at the time of his death were valued at $90 per share, or at a total value of $70,650. The respondent has determined in his deficiency notice that the fair market value of the stock at the date of decedent's death was $120 per share, or a total of $94,200.

The fair market value of the 785 shares of Jas. H. Matthews & Co. stock which decedent owned at the date of his death was $120 per share.

OPINION.— The respondent contends that the shares in question which decedent owned at the time of his death must be included in his gross estate under section 302 of the Revenue Act of 1926 at their fair market value at the date of decedent's death, which he has determined was $120 per share. Petitioner contends that the option price of $90 per share at which William Jenkins had the right to purchase the stock from the decedent's estate must be taken as the measure of the fair market value.

This question was recently considered by this Court in Claire Giannini Hoffman, 2 T.C. 1160. There, a decedent during his lifetime had given his brother an option to acquire, upon his death, whatever interest he might then have in a securities business operated as a partnership and in certain notes of the nominal partners, upon the payment of the balance then due on a promissory note of the decedent and the payment to his estate of a sum equal to 20 percent of the value of the assets of the partnership. We held that the fair market value of the property at the date of decedent's death and not the option price was the measure of the value at which it should be included in the gross estate. The restrictions there imposed upon the property by the option agreement did not become effective until the decedent's death and did not affect its value until after his death. That was the situation in the present case. The option agreement was to apply only to the stock which might be owned by the decedent at the time of his death and decedent was under no obligation to retain ownership of any of the shares until his death. He was free up to the very moment of his death to sell or otherwise dispose of the shares for the best price obtainable. That right terminated with and...