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

• Decision Date: 10 June 1968
• Docket Number: Docket No. 4305-66.
• Parties: ESTATE OF JOSEPH NACHIMSON, DECEASED, ISADORE NACHIMSON AND RUBIN WEINER, EXECUTORS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

50 T.C. 452

ESTATE OF JOSEPH NACHIMSON, DECEASED, ISADORE NACHIMSON AND RUBIN WEINER, EXECUTORS, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4305-66.

Tax Court of the United States.

Filed June 10, 1968.

Neil I. Kilstein, for the petitioner.

Julius M. Jacobs, for the respondent.

Decedent's will created a trust for the benefit of his widow, in lieu of dower and other rights in his estate. She was dissatisfied with this provision. Instead of pursuing her rights to an assignment of dower or an interest in lieu thereof in the New Jersey courts, the widow entered into an arm's-length agreement with the estate and received a lump-sum payment of $10,000. Held, based upon New Jersey law, the $10,000 did not ‘pass' to the widow from the decedent and hence did not qualify for the marital deduction under sec. 2056, I.R.C. 1954.

TANNENWALD, Judge:

Respondent determined a deficiency in the estate tax against petitioner in the amount of $1,090.

Because of concessions by petitioner, the only issue for decision is whether petitioner is entitled to a marital deduction with respect to certain property which decedent's widow received as a result of an agreement with the estate whereby the widow relinquished all rights of inheritance and dower.

FINDINGS OF FACT

Some of the facts are stipulated and are found accordingly.

Joseph Nachimson died testate, a resident of Paterson, N.J., on May 14, 1963. Surviving him were his widow, two children of a prior marriage, and three grandchildren, the children of a deceased son of the prior marriage.

The widow was born on December 25, 1895.

Decedent's last will and testament was admitted to probate in the Surrogate's Court, Passaic County, N.J. Isadore Nachimson, his son, and Rubin Weiner, his son-in-law, who were named as executors of decedent's estate in the will and qualified on May 27, 1963, were still acting as such executors and were residents of New Jersey at the time of filing the petition herein. Petitioner filed a timely estate tax return with the district director of internal revenue, Newark, N.J.

Decedent's gross estate for Federal estate tax purposes totaled approximately $85,000. The sole provision in the will for his widow was the creation of a $15,000 trust for her benefit, in lieu of her dower and other rights in his estate. Under the terms of the trust, the widow was to receive $30 a week for life, or until she should remarry.

The widow was dissatisfied with the will's provision and accordingly made demand upon the executors of decedent's estate to have her dower assigned. As of his death, decedent owned two parcels of real estate from which dower could be assigned under New Jersey law.

The first parcel of property consisted of land and three fuel oil tanks. Its fair market value at decedent's death was $3,750. The net annual income available from the property, after expenses, was approximately $1,200 as of the date of death.

The second parcel of property consisted of a lot and house containing three apartments and having a fair market value at decedent's death of $23,000. The apartments were rentable at $120, $110, and $60 per month, respectively. The net annual income available from the property, after expenses, was approximately $2,000 as of the date of death.

The two parcels of property were incapable of being partitioned.

As a result of arm's-length bargaining between the representatives of the widow and of the estate, the parties entered into an agreement dated September 30, 1963, under which the widow was to receive a lump-sum payment of $10,000 in consideration of her release of all claims she might have against the estate, whether under the will, by way of dower, or otherwise.

On October 2, 1963, the widow was paid the sum of $10,000 against her delivery of a general release and two executed deeds evidencing her release of dower in the two parcels of real estate. The settlement agreement and general release were filed in the office of the Surrogate of Passaic County, N.J., on October 2, 1963.

On the estate tax return, petitioner claimed a marital deduction under section 2056¹ for the $10,000, which the respondent disallowed.

Under the applicable New Jersey statutes and the rules governing the New Jersey courts, the actuarial lump-sum value of the widow's dower was:

(1) Approximately $4,800 based on the income from the net proceeds of an assumed sale of the two parcels of real estate.

(2) Approximately $15,000 based upon the yearly income from the two parcels as of the date of death.

OPINION

The basic facts herein are undisputed. Decedent, in his will, made only one provision for his wife, a $15,000 trust fund, from which she was to be paid $30 per week for life or until she should remarry. The widow, dissatisfied with the trust provision, demanded that the executors assign her dower in lieu thereof. As a result of arm's-length bargaining between the widow and the estate, the widow agreed to release all claims she might have and received in exchange therefore a lump-sum payment of $10,000. The sole issue is whether this payment qualifies for the marital deduction under section 2056.

At the outset it should be recognized that the mere fact that the lump-sum payment herein was made pursuant to an arm's-length agreement is not determinative. Admittedly, such agreements, settling disputes of the type involved herein, have been favored by the courts, as indeed they should. ² Dougherty v. United States, 292 F.2d 331 (C.A. 6, 1961); Stephens v. United States, 270 F.Supp. 968 (D. Mont. 1967); Moore v. United States, 214 F.Supp. 603 (W.D. Ky. 1963); cf. Lyeth v. Hoey, 305 U.S. 188 (1938); Estate of Gertrude P. Barrett, 22 T.C. 606 (1954). But the foundation of these decisions is that the arm's-length agreement simply reflects a monetary disposition by the parties of the underlying legal right of the taxpayer. They in no way suggest that the agreement determines the source or nature of those rights.

In this case, the critical elements are the source and nature of the widow's right to receive a lump sum. In order to prevail, petitioner must show that the widow's right to receive a lump sum was ‘dower * * * or statutory interest in lieu (of dower)‘ so that the $10,000 ‘passed’ from the decedent under section 2056(e)³ and that such right was not a ‘terminable interest’ within the meaning of section 2056(b).⁴ The considerations involved in determining whether these two conditions have been met are not unrelated. See 4 Mertens, Law of Federal Gift and Estate Taxation, sec. 2913, p. 345, and sec. 29.27, p. 300 (1967 cum. supp.). Petitioner contends that the $10,000 from a sale of her dower interest under the agreement with the estate and not in settlement of any statutory interest in lieu thereof.

Under New Jersey Revised Statutes (1951) sections 3A:35-1 and 3A:36-2, the widow was entitled to claim dower by way of a life estate in one-half of the real estate held by her husband and to institute legal action for the admeasurement (i.e., assignment) thereof. New Jersey Revised Statutes section 3A:36-3 provides the conditions under which an assignment from rents and profits or a lump sum in lieu of admeasurement of dower may be awarded to a widow:

3A:36-3. Where admeasurement cannot be had without prejudice; sale as in partition.

When the superior court or county court determines that the real estate, or part thereof, is so circumstanced that dower or curtesy cannot be assigned, admeasured and set off without prejudice to the owners, it may direct a sale thereof as in an action for partition where actual partition cannot be had without prejudice to owners, or in its discretion it may direct an assignment of the dower or curtesy from the rents and profits of the real estate. The court may order the real estate sold free from dower or curtesy, making compensation for the value thereof.

In applying these provisions, it is settled New Jersey law that the courts have the power to award a lump sum in lieu of dower under the statute only if the lands of the decedent are directed to be sold. If the lands are not sold under judicial procedure, the New Jersey courts can only make such an award pursuant to the agreement of the parties. Potter v. Watkins, 104 N.J.Eq. 13, 17, 144 A. 27, 99 (Ch. 1928); cf. Katz v. Farber, 44 N.J.L. 333, 337, 72 A.2d 862, 864 (1950); In Re Flasch, 51 N.J.Super. 1, 19-21, 143 A.2d 208, 218-219 (App. Div. 1958); see 7 Clapp, New Jersey Practice, Wills and Administration sec. 1677 (3d ed. 1962). Compare also Haulenbeck v. Cronkright, 23 N.J.Eq. 407 (Ch. 1873), affd. 25 N.J.Eq. 513 (Err. & App. 1874). This categoric renunciation makes inapplicable decisions where an inherent power in the courts of other States to make a lump-sum award in lieu of dower was found to exist and the award was therefore equated with a ‘statutory interest in lieu (of dower).’ United States v. Hiles, 318 F.2d 56 (C.A. 5, 1963) (Alabama); American National Bank & Trust Co. v. United States, 266 F.Supp. 1008 (E.D. Tenn. 1967). Here, there is no evidence that any proceeding for the sale of the two parcels of real estate was instituted in the New Jersey courts or that there was any direction by a court that the parcels by sold (or, for that matter, that they were in fact sold). Cf. Dougherty v. United States, supra. Indeed the contrary seems to have been the case. Under these circumstances, we can only conclude that the source of the right of the widow to receive the $10,000 was the agreement with the estate and not the provisions of the New Jersey statutes. Accordingly, such right did not reflect a ‘statutory interest in lieu (of dower).’ Since the $10,000 was obviously neither dower itself nor otherwise derived from the decedent, it did not represent an interest which ‘passed’ within the meaning of section 2056(a) or (3).⁵

In view of our conclusion that under New Jersey law the $10,000 did not ‘pass' from the decedent, we need not decide whether,...