Frothingham v. Comm'r of Internal Revenue (In re Estate of Frothingham)

• Decision Date: 16 May 1973
• Docket Number: Docket No. 5605-71.
• Citation: 60 T.C. 211
• Parties: ESTATE OF C(HARLES) MIFFLIN FROTHINGHAM, DECEASED, GELSEY TAYLOR FROTHINGHAM, EXECUTRIX, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

60 T.C. 211

ESTATE OF C(HARLES) MIFFLIN FROTHINGHAM, DECEASED, GELSEY TAYLOR FROTHINGHAM, EXECUTRIX, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 5605-71.

United States Tax Court

Filed May 16, 1973.

Donald William Suchma, for the petitioner.

Justin S. Holden, for the respondent.

Held, the ‘adequate and full consideration’ clause in sec. 2043(a) of the 1954 Code comprehends only consideration received by a decedent in connection with property otherwise includable in his gross estate under secs. 2035-2038 or 2041. In a case where a decedent has given consideration to acquire a general power of appointment, but has received no consideration for the exercise or relinquishment thereof, sec. 2041(a) thus remains operative to require the inclusion of the property subject to the power in the decedent's gross estate.

The Commissioner determined a $103,046.62 deficiency in the estate tax of the Estate of C(harles) Mifflin Frothingham. As part of a compromise of a will contest the decedent acquired a general power of appointment in respect of a property interest valued at $856,330.01 as of the date of his own death. He exercised that power by will without receiving any consideration, and the property subject to it was includable in his gross estate under section 2041 of the 1954 Code, unless rendered nontaxable by section 2043(a). The principal issue is whether section 2043(a) is applicable by reason of consideration given by the decedent in connection with the creation of the power, or whether the consideration referred to in section 2043(a) relates only to consideration received by the decedent.

FINDINGS OF FACT

The parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference.

The decedent, C(harles) Mifflin Frothingham, died testate on August 18, 1967. His estate tax return was filed with the district director of internal revenue at Boston, Mass., and on the return the gross estate was valued as of the date of death. Gelsey Taylor Frothingham, decedent's widow and the executrix of his ‘estate,‘ resided in Weston, Mass., at the time of the filing of the petition herein.

The power of appointment representing the subject of the present controversy was acquired by the decedent pursuant to the settlement of a dispute involving the respective wills of decedent's cousin, George Harrison Mifflin, and George's mother, Jane Mifflin. Jane died on October 22, 1935, and George died on November 13, 1959.

Article Seventh of Jane's will, as amended by codicil, provided that the residue of her estate (after the distribution of certain bequests and payment of certain taxes provided for elsewhere in her will) be placed in a trust from which her son George was to receive the net income for his life. In the event that George survived Jane, as he did, article Seventh further directed the trustees to dispose of the trust corpus at his death in the following manner:

to pay over the principal sum to such persons uses or purposes as (George) shall by his will appoint and in default of such appointment to any issue of his then living and in case no issue of his is then surviving to pay the same to those persons who would be entitled to inherit my real estate by the statutes of descent then in effect if I had died intestate

George died leaving written instruments purporting to be his will and a codicil thereto. If the purported will were allowed, the power of appointment created by Jane's will would have been effectively exercised, and the principal of the trust created by Jane's will would have been included in George's residuary estate. Under article Second of George's purported will, if it were allowed, the decedent would have received, for his life, one-fourth of the net income from a trust consisting of one-half of the residuary estate. The net value of that interest is stipulated to have been approximately.$19,000 as of the date of George's death.

If George's purported will and codicil had been disallowed, it was likely that the principal of the trust created by Jane's will would have passed in default under the terms of article Seventh of her will and that the remainder of George's estate would have passed under the Massachusetts laws of intestate succession to George's only heirs and next of kin, the decedent and his sister, Eugenia B. Frothingham, in equal shares. The parties have stipulated that the ‘net value of a one-half interest in George's residuary estate would have been approximately $153,500.00 as of the date of George's death,'¹ an amount substantially in excess of the values of the respective interests that would have devolved to the decedent and Eugenia under the purported will and codicil. The decedent and Eugenia contested the admission to probate of the instruments purporting to be George's will and codicil, alleging testamentary incapacity on George's part.

The grounds upon which George's alleged will was attacked were regarded by counsel for the proponent of the will as having considerable merit, and a settlement of the dispute was effected by two ‘Compromise Agreements' executed late in 1960, one relating to Jane's estate and the other to George's. All parties to those agreements were represented by counsel, and the instruments together reflect a carefully negotiated and comprehensive reallocation of the property interests included in the two estates. The interest passing to the decedent under the terms of the ‘Compromise Agreements' was provided for by article Second of George's will, which was amended by the agreement relating to his estate to read, in relevant part, as follows:

SECOND: Under the will of my mother, Jane A. Mifflin, I may have the power to appoint by my will certain property. If I possess such power at my death, I intend to and hereby do exercise such power to the extent of one fourth of said property and no more, hereby declining to exercise said power as to the remaining three fourths thereof.

All the rest, residue, and remainder of my property, of whatever name and nature and wherever situate, and including said one fourth of the property held in trust under the will of my said mother, Jane A. Mifflin, I give, devise, and bequeath to my Trustees to hold, manage, invest, and reinvest the same and to dispose of as hereinafter provided. The Trustees shall divide the trust property into two equal shares and shall hold and dispose of said shares as follows:

A. The Trustees shall, until the death of the survivor of my cousin, C. Mifflin Frothingham, and his wife, Gelsey T. Frothingham, pay the net income from one such share to said C. Mifflin Frothingham and his estate or to such persons as he may appoint by a written instrument delivered to the Trustees in his lifetime or by his last will and testament. Upon the death of the survivor of said C. Mifflin Frothingham and Gelsey T. Frothingham, the Trustees shall dispose of said share as hereinafter provided * * *

On or about December 16, 1960, George's purported will and codicil were admitted to probate by the Probate Court for Suffolk County, Mass., subject to the ‘Compromise Agreement’ relating to his estate. The court's action was approved by the attorney general of Massachusetts. On or about the same date, the Probate Court approved the ‘Compromise Agreement’ relating to Jane's estate. The net value of the interest received by the decedent under article Second of George's will, as amended by the ‘Compromise Agreement,‘ is stipulated to have been $116,931.96 as of the date of George's death, and the income interest subject to the power of appointment which the decedent thus received is stipulated to have had a value of $856,330.01 as of the date of his death. By article First of the decedent's will, which was admitted to probate by the Probate Court for Middlesex County, Mass., on September 22, 1967, the decedent bequeathed to his surviving spouse all property over which he had a power of appointment.

A schedule and documents accompanying the decedent's estate tax return disclosed the existence of the power of appointment acquired by the decedent through the aforementioned settlement proceedings, the circumstances surrounding its acquisition, and the value of the income interest to which it related. No value was included in the gross estate, however, in respect of that power on the asserted theory that it ‘was created in a transaction (will compromise) which constituted a bona fide sale (of expectancy under will contest) for an adequate and full consideration in money or money's worth (power of appointment over one-half income for life of survivor of decedent and spouse).’ The Commissioner determined that the value of the property subject to the power of appointment ($856,330.01) was includable in the decedent's gross estate.

OPINION

RAUM, Judge:

There is no dispute between the parties that the decedent at his death had a ‘general power of appointment’ over an asset having a value of $856,330.01, that he exercised that power of appointment, and that section 2041² of the 1954 Code calls for the inclusion of that amount in his gross estate unless some other provision of the statute requires a different result. Petitioner contends, however, that the property passing under the decedent's power is excludable from his gross estate by reason of section 2043(a), which provides:

SEC. 2043. TRANSFERS FOR INSUFFICIENT CONSIDERATION.

(a) IN GENERAL.— If any one of the transfers, trusts, interests, rights, or powers enumerated and described in sections 2035 to 2038, inclusive, and section 2041 is made, created, exercised, or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value at the time of death of the property otherwise to be included on account of such transaction,...