First National Exchange Bank of Roanoke v. United States

• Decision Date: 16 May 1963
• Docket Number: Civ. A. 1223.
• Citation: 217 F. Supp. 604
• Parties: The FIRST NATIONAL EXCHANGE BANK OF ROANOKE, Executor and Trustee under the Will of Josephus Daniels Pell, deceased, Plaintiff, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Virginia

217 F. Supp. 604

The FIRST NATIONAL EXCHANGE BANK OF ROANOKE, Executor and Trustee under the Will of Josephus Daniels Pell, deceased, Plaintiff, v. The UNITED STATES of America, Defendant.

Civ. A. 1223.

United States District Court W. D. Virginia, Roanoke Division.

May 16, 1963.

Joseph Wysor Smith, Roanoke, Va., Clyde H. Perdue, Rocky Mount, Va., for plaintiff.

Louis F. Oberdorfer, Asst. Atty. Gen., Edward S. Smith, Myron C. Baum, John D. Clark, Jr., Attys., Dept. of Justice, Washington, D. C., Thomas B. Mason, U. S. Atty., Roanoke, Va., for defendant.

MICHIE, District Judge.

Josephus Daniels Pell died a resident of Franklin County, Virginia, on September 2, 1958 leaving a will under which the First National Exchange Bank of Roanoke duly qualified as executor. The testator left a widow but no descendants, adopted children, descendants of adopted children or parents. By his will he, in effect, left his entire estate in trust, directing that the entire income therefrom be paid to his wife as long as she lived and, after her death, be distributed for a period of thirty years to various persons and the Pell Foundation, a charitable foundation, and that, after said thirty-year period, the entire principal be paid over to the Pell Foundation.

§ 64.13 of the Code of Virginia provides, insofar as here material, as follows:

"§ 64-13. When and how benefits of will may be renounced. — When any provision for a husband or wife is made in the consort's will, the survivor may, within one year from the time of the admission of the will to probate, renounce the provision. * * *"

On October 24, 1958, slightly more than two weeks after the will was probated, Mrs. Pell duly renounced the will and thereby, under § 64-16 of the Code of Virginia, became entitled to one-half of the surplus of the decedent's personal estate after payment of funeral expenses, charges of administration and debts. (Va. Code §§ 64-11 and 64-16.) And, in addition to such interest in personalty, the widow, as a result of the renunciation, also became entitled under §§ 64-16 and 64-27 of the Code of Virginia to dower in one-third of the real estate of her husband in Virginia. This real estate was finally valued for federal estate tax purposes at $155,309.45. Under § 64-38.1 of the Code of Virginia the widow had the right, in lieu of having her dower assigned in the land of which her husband died seized, to have her dower commuted if it appeared that her dower could not conveniently be laid off and assigned in kind.

The plaintiff executor filed a suit in the Circuit Court of Franklin County, Virginia, for the purpose of having certain provisions of the will construed and for the guidance of the court in the administration of the estate. In the bill the executor alleged that it had been advised that the widow would demand that her commuted dower interest be paid to her in cash under § 64-38.1 on the ground that her dower could not conveniently be laid off and assigned in kind. The widow filed an answer to the bill of complaint in which she did take that position and make that demand. The court found as a fact that dower could not conveniently be laid off and assigned to the widow in kind and calculated the widow's dower interest as 21.983% of the fair value of the land. And subsequently, after the sale of the land, this amount was paid to the widow, amounting to $33,167.70.

§ 2056 of the Internal Revenue Code of 1954 provides for the so-called marital estate tax deduction. In sub-paragraph (a) it provides for deducting from the value of the gross estate an amount equal to the value of any property interest which passes or has passed from the decedent to his surviving spouse. But under the provisions of sub-paragraph (b) of the section no deduction is allowed for a so-called terminable interest. A dower interest, if not commuted, is clearly a terminable interest since it terminates upon the widow's death and passes to someone else. The question that we have before us is whether the commutation of the dower right and its payment in cash takes it out of the terminable interest rule. (The deductibility of the sum paid the widow for the statutory interest in the decedent's personalty which accrued upon her renunciation of the will is apparently not in issue.)

The government's position in this litigation is that when Mrs. Pell renounced her husband's will she became entitled to a terminable dower interest in her husband's lands which she subsequently traded or "sold" in the commutation proceedings for a cash interest; and that the deductibility of the interest left Mrs. Pell by the will is to be determined by the form of the interest to which she theoretically became entitled upon the renunciation of the will rather than by what she ultimately received as a result of the commutation proceedings.

Apparently the government does not seek to hold Mrs. Pell to the original terms of the will since, if it did, it would also have disallowed as a deduction the cash received as her share of the personal property. But it disallowed only the cash received for the real estate and therefore must be attacking only the effect of the dower commutation proceeding rather than the effect of the renunciation.

The taxpayer's position on the other hand is that her rights were not definitely fixed by the renunciation but that, since her dower could not conveniently be laid off in kind, she thereby acquired the option of either proceeding to have her dower right commuted under § 64-38.1, as she did, or of proceeding under § 64-38 to procure a decree establishing the fair net annual value of the proportional part of the real estate she would have been entitled to have as a tenant in dower which would thereafter constitute a lien on all of the decedent's real estate.

Of course a number of other solutions could have been worked out by agreement of all interested parties but the above are the only enforceable rights that Mrs. Pell acquired upon the renunciation of the will. In the absence of agreement she had to elect one of those two courses. And neither of them is primarily imposed on her with an election to choose the other. She must elect one or the other or make some other agreement with the other interested parties. In this case she elected to proceed under § 64-38.1 rather than to proceed under § 64-38 or to work out some other agreement. And of course what she elected to receive was clearly not a terminable interest and was, therefore, deductible in arriving at the taxable estate.

Before turning to the cases it may be well to advert to the history of the marital deduction in estate tax law.

Prior to the enactment of the provisions in question in 1948 the citizens of community property states had a very great advantage over the citizens of other states in the application of the estate tax laws. In the community property states a wife at all times owns one half of the community property, i. e., if a husband has done well and accumulated a large estate he does not own it all as he would in a common law state but he owns only one-half of it. The other half belongs at all times to the wife and is not an asset of the husband's estate at his death. Consequently when a wealthy man died in a community property state he would be taxed on only half of the wealth that he had accumulated. The wife would of course be taxed on the other half when she died but the net effect of splitting the estate into two parts was to subject it to lower average rates since no part of it gets into the higher brackets which would have been applicable if it had all been one estate instead of two.

To put the citizens of common law states on the same basis as those of community property states Congress enacted the amendments which put into effect the so-called marital deduction. Under these provisions, if a husband left part of his property to his wife, his estate would get a deduction of the value of the property so left up to (but not more than) one-half of his taxable estate so that if a full half was left to the wife his estate would be taxed no more than it would have been if he had lived in a community property state. And, as in any community property state, the half left to the wife would, upon her death, be taxed in the same manner and at the same rates as the half of the combined estate that was owned by the wife in a community property state. For in the community property state the wife owns half of the combined accumulation outright and it is thus clearly taxable in her estate.

While equalizing the situation in the common law and community property states, Congress was careful not to give an advantage to the common law states. Hence it was provided that, in order to take advantage of the marital deduction, the property of the husband which might be left to the wife in a common law state could not be tied up in a trust or otherwise left so that it would not be taxable in the wife's estate when she died, but must be left in such a way that it would be taxable in the wife's estate upon her death—assuming of course that she did not eat it up or give it away in the meantime which would of course also be the situation in a community property state.

Therefore the qualification of the marital deduction which had to do with terminable interests was put in the law to see that the combined estate of the husband and wife in the common law state did not, under the equalizing provisions, get any advantage which did not already accrue to the combined estates of the husband and wife in a community property state. In other words, if the husband in a common law state left the wife only an interest for life in certain property, that interest would not be taxable in her estate and that interest would therefore not qualify for the marital deduction in the husband's estate.

Now it may be well to start the discussion of our particular case by noting that if the intent of Congress has been carried out in...