In re Sage's Estate

• Decision Date: 27 June 1941
• Docket Number: No. 7708.,7708.
• Parties: In re SAGE'S ESTATE. SAGE et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

122 F.2d 480 (1941)

In re SAGE'S ESTATE SAGE et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 7708.

Circuit Court of Appeals, Third Circuit.

June 27, 1941.

T. Girard Wharton, of Somerville, N. J. (Thomas A. S. Beattie, of New York City, Frederick W. Hall, of Newark N. J., and Joseph Halpern, of Somerville, N. J., on the brief), for petitioners.

Louise Foster, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before CLARK, JONES, and GOODRICH, Circuit Judges.

JONES, Circuit Judge.

In determining the net amount of a testator's estate subject to tax, is a charitable bequest of the residuary estate deductible in the amount available for distribution to the legatee or in that amount less a sum paid by the legatee to the decedent's widow, under a compromise agreement, to procure her abandonment of a contest of the testator's will?

The facts in the case were stipulated before the Board of Tax Appeals. John Sage, a resident of Bergen County, New Jersey, died testate on October 11, 1936, leaving to survive him his widow, who was adjudged incompetent two months later and for whom guardians were appointed by the Orphans' Court of Bergen County on December 22, 1936. The guardianship endured throughout the time involved in the present matter. The testator left a gross estate of approximately $450,000. By his will he bequeathed to his widow his household effects and legacies aggregating $42,000. After other specific and pecuniary legacies, he bequeathed his converted residuary estate to the Lord Provost of Glasgow, Scotland, outright, and added a request that the Lord Provost "distribute same among such institutions in Scotland, as are devoted to the care and maintenance of the blind, maimed and disabled soldiers and sailors of the British Army and Navy according to his best judgment and discretion."

The will was first offered for probate before the Surrogate for the County of New York, State of New York, on December 7, 1936. On January 12, 1937, the guardians of the widow, who had been appointed in the meantime, filed answer in the nature of a caveat and prayed that probate be denied the will and that it be declared null and void. Consequent upon the contest proceeding, the Surrogate in New York directed that the will be transmitted to the Surrogate of Bergen County, New Jersey, and thereupon dismissed all proceedings in the New York Surrogate's Court looking to the probate of the will. The will was then (April 9, 1937) filed for probate in the office of the Surrogate for Bergen County, New Jersey, and a petition for its probate was duly filed in the surrogate's court. Citations, returnable May 19, 1937, issued on the petition for probate. It was in that situation that the guardians of the widow and the Lord Provost, acting by local attorney-in-fact, entered into a written agreement of compromise on May 8, 1937, whereby the guardians agreed "to withdraw all objection to the probate of the instrument * * as the Last Will and Testament of said John Sage, deceased" and consented "to the probate thereof * * *", the Lord Provost agreeing to pay to the guardians of the widow "a sum equivalent to twenty-five (25%) percent of the gross amount payable to the Lord Provost * * * as residuary legatee of the Estate of John Sage, deceased, pursuant to * * * said Will." On May 17, 1937, the guardians of the widow petitioned the Orphans' Court of Bergen County, setting forth the material facts as to Sage's death, his will and the attempts to probate it, the objections thereto and the agreement of compromise between the guardians and the Lord Provost. The petition prayed the court's approval of the compromise agreement, which the court, by formal order of May 19, 1937, did approve. On the same day, the will was admitted to probate by the Surrogate for Bergen County. The executors named in the will thereupon qualified and entered upon the administration of the estate. On December 1, 1937, the executors filed their final account in the Orphans' Court of Bergen County and on January 11, 1938, the court entered a decree allowing and settling the account. The account showed a balance for distribution of $175,750.48 after the payment of debts, specific and general legacies and allowances, and the payment of all commissions, counsel fees and other administration expenses and disbursements. Thereafter the executors petitioned the Orphans' Court for a decree of distribution, which was entered by the court on February 9, 1938. The decree awarded and distributed the entire balance on hand to the Lord Provost as residuary legatee.

The executors were not parties to the compromise agreement nor was it incorporated in or made a part of the probate proceedings. Neither the decree settling the executors' account nor the decree of distribution provided for any payments to the widow or her guardians. (Her specific and pecuniary legacies had been paid by the executors prior to the filing of their account.) If these matters be material, it should also be noted, in passing, that the decree of distribution, as well as the decree settling the executors' account, was entered by the same court acting by the same judge as had approved the compromise agreement prior to and as a part of the withdrawal of the objections to the will and the probate thereof.

On March 30, 1938, the attorney-in-fact for the Lord Provost, pursuant to the terms and conditions of the compromise agreement, paid the sum of $38,682.62 to the widow's guardians and at the time of the stipulation before the Board of Tax Appeals, the attorney-in-fact had in his possession the further sum of $5,000 to be paid to the widow's guardians.

On December 20, 1937, the executors filed an estate tax return in which a deduction from the testator's gross estate was claimed for the full amount of the residuary estate as a charitable and public trust. On January 5, 1939, the Commissioner of Internal Revenue determined a deficiency in tax, having disallowed one-fourth of the deduction claimed for the residuary bequest on the ground that, under the terms of the compromise agreement, the amount paid the widow by the Lord Provost passed to her as the widow of the testator in settlement of her contest of the testator's will and that, in no event, could the payment to the widow be considered part of a charitable bequest entitled to freedom from the estate tax. The State of New Jersey had previously assessed the decedent's estate for transfer inheritance tax purposes on the basis that the entire residuary estate was a charitable and public bequest.

The applicable statutory provision in Section 303(a) (3) of the Revenue Act of 1926, c. 27, 44 Stat. 9, as amended, 26 U.S.C.A. Int.Rev.Acts, pages 232 and 235 et seq. The Commissioner concedes the testator's bequest was to a charitable use. It is only the amount which may be deducted in determining the testator's net estate subject to tax that is in dispute here.

We think that the Board was right in approving the Commissioner's assessment. What the widow received as a result of the compromise agreement she took because of her standing, as the testator's widow, to contest the will and, if successful, so deprive the residuary legatee of the bequest. The principle involved was ruled by the Supreme Court in Lyeth v. Hoey, 305 U.S. 188, 59 S.Ct. 155, 156, 83 L.Ed. 119, 119 A.L.R. 410. There, an heir contested the will of his deceased grandmother. The contest resulted in a settlement whereby the heir received a considerable portion of the estate otherwise bequeathed by the will which, consequent upon the settlement and in effectuation thereof, was admitted to probate. The question involved, as stated by the Supreme Court, was "whether property received by petitioner grandson from the estate of a decedent in compromise of his claim as an heir is taxable as income under the Revenue Act of 1932." The Commissioner had assessed against the heir, as income, the amount received by him under the settlement. It was the heir's contention that what he had received in the settlement represented property acquired by "inheritance" within the meaning of Section 22(b) (3) of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, pages 487, 488, which exempts the value of such property from income tax. The Supreme Court sustained the heir's contention, and in so doing, said, 305 U.S. at page 196, 59 S.Ct. at page 159, — "There is no question that petitioner obtained that portion, upon the value of which he is sought to be taxed, because of his standing as an heir and of his claim in that capacity. It does not seem to be questioned that if the contest had been fought to a finish and petitioner had succeeded, the property which he would have received would have been exempt under the federal act. Nor is it questioned that if in any appropriate proceeding, instituted by him as heir, he had recovered judgment for a part of the estate, that part would have been acquired by inheritance within the meaning...