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

• Decision Date: 28 July 1981
• Docket Number: Docket No. 2182-79.
• Citation: 77 T.C. 120
• Parties: ESTATE of HELEN M. JOHNSON, DECEASED, LOLITA MCNEILL MUHM, INDEPENDENT EXECUTOR, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

77 T.C. 120

ESTATE of HELEN M. JOHNSON, DECEASED, LOLITA MCNEILL MUHM, INDEPENDENT EXECUTOR, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 2182-79.

United States Tax Court

Filed July 28, 1981.

Held, the homestead rights created under Texas law are to be considered in determining the value of homestead property included in the gross estate, and the value of such property is less than the value of the same property unencumbered by homestead rights. Estate of Hinds v. Commissioner, 11 T.C. 314 (1948), affd. on another issue 180 F.2d 930 (5th Cir. 1950), overruled. P. Allan Port, for the petitioner.

Evelyn B. Brennan, for the respondent.

OPINION

EKMAN , Judge:

* Respondent determined a deficiency of $51,687 in petitioner's Federal estate tax. Concessions having been made by the parties, the sole issue remaining for decision is whether the date of death value of homestead property owned by decedent should be reduced or discounted on account of the homestead rights of decedent's surviving spouse.

All of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference. The pertinent facts are summarized below.

Lolita McNeill Muhm (hereinafter petitioner) is the independent executrix of the Estate of Helen M. Johnson, deceased. Petitioner is the successor to Perry Reese McNeill, Sr., who, as independent executor of the Estate of Helen M. Johnson, deceased, filed a Federal estate tax return with the District Director of Internal Revenue, Austin, Tex. Petitioner's legal residence at the time the petition was filed was Richardson, Tex.

Helen M. Johnson (hereinafter decedent), a resident of Brazoria, Brazoria County, Tex., died March 1, 1975, and was survived by her husband, Elmer V. Johnson, who was then 73 years of age.

At the time of her death, decedent owned interests in various tracts and parcels of real property in Brazoria County, Tex. Among them was the property in dispute, an undivided one-half interest in a tract of 297.563 acres (hereinafter tract 2) and the entire fee interest in 2.4378 acres (hereinafter tract 7). These properties, although separately owned by decedent, constituted the homestead of decedent and her husband.

Perry Reese McNeill (decedent's brother) was the owner of the other undivided one-half interest in the 297.563-acre tract referred to as tract 2. After decedent's death, Elmer V. Johnson asserted his right to continue to occupy both tracts as his homestead property against the wishes of decedent's brother.

Petitioner contends that once property is characterized as a homestead, certain rights created under Texas law serve to reduce its value for estate tax purposes. Respondent contends, on the other hand, there should be no reduction in value.

The parties have stipulated that if the homestead character of the property is to be reflected in valuing the property, the aggregate value of the interest in tract 2 and tract 7 is $92,233.73, while, if the homestead character is to be disregarded, the aggregate value is $173,945.50.

This Court faced the present issue in Estate of Hinds v. Commissioner, 11 T.C. 314 (1948), affd. on another issue 180 F.2d 930 (5th Cir. 1950). In response to the contention that in calculating the gross estate there should be deducted from decedent's community half interest the homestead interest of the surviving spouse, this Court, relying on the predecessor of section 2033 and the regulations thereunder, stated at page 325:

We think this contention is without merit. The Federal estate tax laws do not contemplate any such deduction. There is nothing particularly unusual about the laws of Texas with respect to the surviving spouse having the right of life occupancy to the homestead property. Many states have laws of a similar nature. The regulations specifically provide that property subject to homestead or other exemptions under local law is includible as part of the gross estate. See Regulations 105, sec. 81.13. Here the decedent had a vested community one-half interest in the homestead property, which interest was terminated by his death. This community one-half interest is, therefore, includible in the decedent's estate.

Petitioner contends that Estate of Hinds was wrongly decided, that we summarily disposed of the issue therein, and that we should at this time reexamine our holding. Because we find no cases since Hinds bearing on the specific question, we turn to general principles of estate tax law for guidance.¹

Although Federal estate tax laws are controlling, we must first look to State law to determine the property rights and interests created in the parties. Morgan v. Commissioner, 309 U.S. 78 (1940); Lang v. Commissioner, 304 U.S. 264 (1938); see Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).

In Texas, marital property may consist of either separate or community property. Tex. Fam. Code Ann. tit. 1, sec. 5.01 (Vernon); see Estate of Wyly v. Commissioner, 610 F.2d 1282, 1288 (5th Cir. 1980). Article 16, section 51 of the Texas Constitution provides that “the homestead, not in a town or city, shall consist of not more than two hundred acres of land, which may be in one or more parcels, with improvements thereon.” It is well established that a homestead may consist of community property or separate property of either spouse. Sparks v. Robertson, 203 S.W.2d 622 (Tex. Civ. App. 1947); Wicker v. Rowntree, 185 S.W.2d 150 (Tex. Civ. App. 1945); Gillespie v. Gillespie, 110 S.W.2d 89 (Tex. Civ. App. 1937).

Once designated as homestead, the property is protected from all but a limited number of creditors. Tex. Const. art. 16, sec. 50. Generally, neither spouse may convey, encumber, or sell the homestead without joinder of the other. Tex. Fam. Code Ann. tit. 1, sec. 5.81 (Vernon).

Upon the death of one spouse, the homestead property retains its exemption from creditors. Tex. Prob. Code Ann. tit. 17c, sec. 270 (Vernon). The property is not part of the estate for administrative purposes and it is delivered directly to the surviving spouse if there is one and if not, to the guardian of the minor children and unmarried surviving children, if any, living with the family. Tex. Prob. Code Ann. tit. 17c, sec. 271, sec. 272 (Vernon). The homestead vests and descends like any other real property; however the surviving spouse (or children) may continue to use and occupy the property so long as he or she elects to use and occupy it as the homestead. Tex. Const. art. 16, sec. 52.

Section 2033 states simply “The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.” A decedent's gross estate for Federal estate tax purposes may be very different from the same decedent's estate for local probate purposes. Sec. 20.0-2(b)(2), Estate Tax Regs. Thus, section 20.2033-1(b), Estate Tax Regs., provides that property subject to homestead or other exemptions under local law is included in the gross estate.

Petitioner concedes that the homestead property is includable in decedent's estate but contends that the value of the interest that decedent possessed at death must be reduced due to these homestead rights. Petitioner has submitted the report of an expert to support her contention that the homestead rights created under Texas law are restrictions which, like encumbrances on the property, reduce its value. Respondent on the other hand would have us ignore any effect which the homestead rights might have on fair market value. We agree with petitioner. The value of the interest decedent possessed at death is less than that of the same property unencumbered by homestead rights, and we cannot totally disregard those rights in determining values.²

Section 20.2031-1(b), Estate Tax Regs., provides generally that the value of every item includable in a decedent's gross estate under sections 2031 through 2044 is its fair market value at the time of death or alternate valuation date under section 2032. As Judge Wisdom stated in United States v. Land, 303 F.2d 170, 172 (5th Cir. 1962):

Brief as is the instant of death, the court must pinpoint its valuation at this instant—-the moment of truth, when the ownership of the decedent ends and the ownership of the successors begins. It is a fallacy, therefore, to argue value before-or-after death on the notion that valuation must be determined by the value either of the interest that ceases or of the interest that begins. Instead, the valuation is determined by the interest that passes, and the value of the interest before or after death is pertinent only as it serves to indicate the value at death.

Section 20.2031-1(b), Estate Tax Regs., defines fair market value as the “price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” That regulation further provides that all the relevant facts and elements of value as of the applicable valuation date are to be considered in every case. As we said in Estate of Reynolds v. Commissioner, 55 T.C. 172, 195 (1970):

“Fair market value” is not an incantation whose ritualistic use will immediately reveal the worth of unusual types of property. The basis of the definition of fair market value is the assumption that hypothetical willing buyer and hypothetical willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of the relevant facts, will arrive at some sale price for the property in question. Sec. 20.2031-1(b), Estate Tax Regs.; sec. 25.2512-1, Gift Tax Regs. In reality, no willing buyers or willing sellers may exist. * * *

Petitioner urges us to consider Elmer V. Johnson's rights as surviving spouse as a life estate. Numerous Texas cases do indeed discuss the homestead rights of a surviving spouse in terms of...