Estate of Zietz v. Comm'r of Internal Revenue

• Decision Date: 31 May 1960
• Docket Number: Docket No. 58654.
• Citation: 34 T.C. 351
• Parties: ESTATE OF HEDWIG ZIETZ, WILLY ZIETZ, ADMINISTRATOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

34 T.C. 351

ESTATE OF HEDWIG ZIETZ, WILLY ZIETZ, ADMINISTRATOR, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 58654.

Tax Court of the United States.

Filed May 31, 1960.

Benjamin Busch, Esq., for the petitioner.

Charles M. Greenspan, Esq., for the respondent.

The decedent, Hedwig Zietz, was the widow of Hugo Zietz and the mother of Hugo, Jr., and Willy Zietz. All were citizens of Germany. Hugo died testate, a resident of Germany, in 1927. German law applies to the construction of his will. Before his death he sold his business. He deposited a large part of the proceeds in various banks in the joint names of himself and his wife. The bank accounts were included in his gross estate. Under his will, Hedwig was appointed the provisional of first heir, and their two sons were named the reversionary or final heirs. It was proper procedure under German law for Hedwig to hold the estate property in her own name and she did. After Hugo's death, Hedwig and her sons established the family residence in Switzerland where Hedwig resided at the time of her death in 1945. She was a nonresident alien of the United States. Willy was her sole survivor. She died intestate. At the time of Hedwig's death, banks in New York City held securities in custody accounts in her name of a large value. The Commissioner determined that such property was owned by Hedwig and included it in her estate. The issue is whether all or part of the property held in New York was the property of Hedwig or was part of the remaining assets in Hugo's estate. Held:

1. The bank accounts created by Hugo during his life were his sole property. Hedwig did not own any interest in them during Hugo's life or upon his death; they were wholly owned by Hugo when he died; they constituted part of his gross estate; and they were subject to the provisions of his will.

2. All of the securities located in New York City were purchased with funds of Hugo's estate; they constituted part of the remaining assets in his estate; and they were subject to the provisions of his will.

3. Under German law, Hugo appointed his wife and sons as successive heirs. Hedwig's interest in Hugo's estate was defined in the will to be for such period of years as she lived and she was the first or provisional heir. The surviving son, Willy, was the reversionary or final heir and upon Hedwig's death, he succeeded her as the heir of Hugo. He derived his interest directly from his father and not from his mother. Although under the will and by operation of German law, Hedwig had the power to invade and consume the corpus of the estate only for the use of herself and sons, her power to invade was limited and restricted by law so as to protect the interest of the final heir. Hedwig did not have any power of final disposition of the property in Hugo's estate and she could not dispose of any of it by gift, bequest, devise, or appointment. The will of Hugo created legal relationships between his widow and his surviving son substantially similar to the relationship known under general law in the United States as that of a life estate, with power to invade corpus in the widow, and a remainder interest in the son. Upon Hedwig's death all of the remaining properties in Hugo's estate, including the securities held in Hedwig's name in New York, devolved immediately and directly upon Willy by operation of law from the testator, Hugo, and not from Hedwig. Therefore, the New York securities were not includible in the estate of Hedwig Zeitz.

The Commissioner determined a deficiency in estate tax in the amount of $214,126.50. The decedent, Hedwig Zietz, was a nonresident alien of the United States and a resident of Switzerland at the time of her death. There were located in New York City when she died, securities having a substantial value. The deficiency results from the Commissioner's inclusion in Hedwig's estate for Federal estate tax under sections 811, 860, and 862, 1939 Code, of the entire value of the securities. The main questions are as follows: (1) Whether under the will of Hedwig's deceased husband, Hugo, and provisions of the German Civil Code the securities located in New York were Hedwig's property at the time of her death, so as tobe includible in her estate, or were part of the remaining estate of Hugo and the property of the surviving son, Willy, as a reversionary heir of his father by operation of law. (2) Whether Hedwig owned any legal interest upon the death of Hugo in bank accounts created by him in the names of himself and Hedwig during his life, or whether such bank accounts were owned by Hugo and constituted part of his gross estate. (3) Whether any of the New York securities were purchased by Hedwig with her own funds or whether they emanated from Hugo's estate.

FINDINGS OF FACT.

Hedwig Zietz, the decedent, was born in Germany, she died in Switzerland on November 22, 1945. With respect to the United States, the decedent was a nonresident alien.

The decedent's son, Willy Zietz, is the administrator of the goods, chattels, and credits of the decedent. He filed a nonresident alien estate tax return on April 27, 1954, showing no net estate and no estate tax due to the United States.

The Commissioner determined that the decedent owned property located in the United States at the date of her death consisting of corporate stocks and bonds which were held by banks in New York City. The total value of all of the securities was $697,504.29, at the date of death.

Hedwig was married to Hugo Zietz, a German citizen, in 1898. They resided in Dresden, Germany, until the death of Hugo. They had two sons, Hugo, Jr., and Willy.

At the time of her marriage, Hedwig did not own any property except some heavily encumbered real estate in Berlin. It was destroyed during World War II.

Hugo Zietz was engaged in the manufacture of cigarettes. He owned the business known as the Oriental Tobacco and Cigarette Factory Yenidze.

Hugo died testate in Germany on September 3, 1927. He was survived by Hedwig and their two sons. The last will and testament of Hugo was executed on May 8, 1925, in Dresden. Upon his death it was probated without contest in the Dresden court having jurisdiction. The will is incorporated herein by this reference.

Under the will of Hugo, his wife and sons were appointed successive heirs. Hedwig was named the ‘first heir,‘ or the ‘provisional heir’ (Vorerbin), and the sons were named the ‘reversionary’ or ‘final’ heirs (Nacherben); and upon the death of Hedwig, all of the remaining assets in the estate were to go to the Sons, willy and Hugo, share and share alike, and eventually to their issue, if any. The provisional heir, Hedwig, was released from all restrictions (befreiter vorerbin), as far as permissible under German law. Certain specific bequests were made to Hedwig consisting of family residences, furniture, personal property, and an amount of cash. The will made reference to the possibility that prior to the testator's death, his business, the cigarette factory, might have become incorporated. The will provided that in such event his sons would receive all of the interest in the corporation represented by the stock certificates, share and share alike, as ‘final heirs.’ The will provided that payments out of principal could be made to the sons before they were 27 years old and during their mother's life. The will provided, further, as follows:

(11) The executors shall take care of the carrying out of the legacies to my wife and of the rights and obligations of the final heirs, to the extent as it may become necessary; further, they shall take care of the distribution of my estate, in case my sons should become heirs (Par. 1, last subdivision) or the final heirship occurs, and they shall manage the shares of my sons or that property going to them as final heirship and final legacy until each of them reaches his twenty-seventh year of age. * * *

(12) Out of their inheritances, I authorize the executors to pay to my sons parts of the principal even before they are twenty-seven years old, in so far as it is needed for the living expenses of my sons and their families, or if, in the discretion of the executors, such payment is useful for their education, or for the establishment of a business, or for the achievement of an economic advantage on behalf of the son concerned.

On October 29, 1925, Hugo sold his cigarette business, which was unincorporated, for approximately $4 million. All of the funds received were deposited by Hugo in bank accounts in 23 banks which were located in various cities in Germany, The Netherlands, and Switzerland, except 2 which were located in Buenos Aires. There were deposits in 21 banks in Europe and in 2 banks in South America. The deposits were made in various banks for security and to diversify risks.

At the time Hugo sold his cigarette business, of which he was the sole owner, and arranged for the deposits of the proceeds in various banks, Hans Siler (who had been an employee in the accounting department of the cigarette business) was Hugo's private secretary and accountant. He was living at the time of the trial of this case and his deposition was taken in Amsterdam. He kept Hugo's books and records, and later, Hedwig's books and records.

Before the deposits referred to above were made in the various banks, Hugo considered whether he should open individual bank accounts in his own name and give powers of attorney to Hedwig, or joint bank accounts in the name of himself and Hedwig. Hugo had a physical disability, palsy, which had become progressively worse and at the time he sold his business in 1925 he hardly could write or sign his name. Upon the advice of a Berlin bank, Hugo decided to open bank accounts in the joint names of himself and Hedwig, so that Hedwig could sign checks. Hugo and Hedwig executed forms which were furnished by the banks. In opening the accounts, Hugo did not intend to enter into an agreement by...