Ray v. Comm'r of Internal Revenue (In re Estate of Ray) , Docket No. 4836-68.

• Decision Date: 27 May 1970
• Docket Number: Docket No. 4836-68.
• Parties: ESTATE OF VIRGINIA LOREN RAY, ANDREW M. RAY, EXECUTOR, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

54 T.C. 1170

ESTATE OF VIRGINIA LOREN RAY, ANDREW M. RAY, EXECUTOR, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4836-68.

United States Tax Court

Filed May 27, 1970.

Albert J. Horn, for the petitioner.

Jeffrey E. Boly, for the respondent.

Under the terms of her will, the decedent made a bequest to her surviving husband on the condition that the execute and file with the Probate Court an agreement, within 4 months of her death, to devise to their daughter an amount equivalent in value to that of the bequest and also promise not to defeat this agreement by inter vivos gifts. In the event he did not execute this agreement the bequest was to pass to a trust for the benefit of the daughter. Held, the marital deduction is not allowable under sec. 2056(b), I.R.C. 1954, since the interest received by the surviving spouse was a terminable interest.

OPINION

RAUM, Judge:

The Commissioner determined a deficiency in petitioner's estate tax in the amount of $23,555.90. Under the terms of her will, the decedent, Virginia Loren Ray, gave her residuary estate to her surviving husband on the condition that within 4 months after her death he execute and file in Probate Court a binding agreement in which he promised to bequeath property of equivalent value to their daughter and also undertook to make no gifts or other transfers without adequate consideration seeking to defeat the provisions of the agreement for their daughter's benefit. In the event he did not execute such agreement the bequest was to pass to a trust for the benefit of the daughter. At issue is whether this bequest is a terminable interest which does not qualify for the marital deduction allowed by section 2056, I.R.C. 1954. The facts have been stipulated.

Virginia Loren Ray died testate on August 12, 1964, a resident of San Mateo County, Calif., and her spouse, Andrew M. Ray (Andrew), was named executor.

Petitioner filed an estate tax return with the district director of internal revenue, San Francisco, Calif., on November 12, 1965, in which a marital deduction of $83,876.87 was claimed. In his notice of deficiency the Commissioner disallowed the deduction to the extent of $81,831.87¹ in respect of the decedent's residuary estate, which was disposed of as follows under paragraph Fourth of her will:

FOURTH: On the condition that my said husband, ANDREW MALCOLM RAY, shall within four months after my death file with the probate court having jurisdiction over the administration of my estate a written agreement wherein he shall agree to bequeath and devise to our daughter, DEBORAH LYNN RAY, upon his death by his will property of equivalent value to the property bequeathed and devised to him under the provisions of this paragraph FOURTH, and wherein he will further agree to make no gifts or other transfers without adequate consideration seeking to defeat the provisions of such agreement for our said daughter, I hereby give, bequeath and devise to my said husband, ANDREW MALCOLM RAY, all of the rest, residue and remainder of my estate, including all property not hereinabove effectually disposed of.

Paragraph Fifth provided, in part:

FIFTH: If my said husband shall predecease me or shall have failed to execute and file the agreement required of him by paragraph FOURTH hereof, I hereby give, bequeath and devise all of the rest, residue and remainder of my estate, including all property of every kind and wheresoever situated over which I may have the power of appointment or of testamentary disposition and which is not herein otherwise effectually disposed of, to my father, D. H. LOREN, and WELLS FARGO BANK, a corporation, as trustees, in trust, for the uses and purposes and with the powers and subject to the conditions following, to wit * * *

Under paragraph Fifth the trustees were to expend the income or principal of the trust for the benefit of the daughter Deborah Lynn Ray. Provision was also made for distributions of capital to her at specified ages and for payments in the event of her death before or after the creation of the trust.

Pursuant to paragraph Fourth of the will, Andrew filed an agreement with the Superior Court of the State of California, in and for the County of San Mateo, on September 10, 1964. Under the terms of this agreement the petitioner promised:

(1) That he will at all times keep and maintain in force a good and valid will wherein or whereby he will bequeath and devise to DEBORAH LYNN RAY, daughter of the said ANDREW MALCOLM RAY and the said VIRGINIA LOREN RAY, property of equivalent value to the property bequeathed and devised to him under the provisions of the said paragraph FOURTH of the said will of the said VIRGINIA LOREN RAY.

(2) That he will not at any time make any gifts or other transfers without adequate consideration which will defeat the foregoing agreement for the benefit of the said DEBORAH LYNN RAY.

The petitioner has maintained a will which complies with the foregoing agreement.

On September 24, 1968, the Superior Court of the State of California, in and for the County of San Mateo, sitting in probate, entered its decree of final distribution in the matter of the Estate of Virginia Loren Ray. The decree provided in part:

11. In the said decedent's will the entire estate of the said decedent was bequeathed to her husband, ANDREW M. RAY, executor herein, on the condition that he execute and file with the court ‘. . . a written agreement wherein he shall agree to bequeath and devise to our daughter, DEBORAH LYNN RAY, upon his death by his will property of equivalent value to the property bequeathed and advised to him under the provisions of this paragraph FOURTH, and wherein he will further agree to make no gifts or other transfers without adequate consideration seeking to defeat the provisions of such agreement for our daughter . . .’ Pursuant to provisions of the said will the said ANDREW M. RAY did file such an agreement with the clerk of this court on September 10, 1964. It is the obligation of the said ANDREW M. RAY, under the said agreement, to bequeath to his daughter, DEBORAH LYNN RAY, by his will, the sum of $171,453.73 representing the value of the property bequeathed and devised to him under the will of the said decedent, minus the debts of the said decedent, costs of administration, inheritance taxes and estate taxes, which sum of $171,453.73 is, however, subject to adjustment in the event that the estate taxes shown as $8,531.68 on the estate tax return filed by the executor and later modified shall subsequently be increased by the Internal Revenue Service as a result of tax litigation. The said ANDREW M. RAY has full power to use and consume the said sum of $171,453.73 and all of his other assets in such manner as he deems appropriate and he has a present vested interest therein and is unaccountable to anyone therefor and has the use, possession and full ownership thereof without restrictions of any kind, except that he may not give any portion of the said sum of $171,453.73 away to any person other than to his daughter, DEBORAH LYNN RAY.

This decree was entered pursuant to the petition of the executor and after a hearing at which the provisions of the proposed decree were uncontested.

At issue is whether the decedent's bequest to her husband qualified for the marital deduction allowed by section 2056, I.R.C. 1954.² That section provides that no marital deduction shall be allowed for a ‘terminable interest’ passing from the decedent to the surviving spouse. In general, an interest is regarded as ‘terminable’ and is to be disqualified for deduction where at the time of decedent's death (1) it will terminate or fail on the lapse of time or on the occurrence or nonoccurrence of an event or contingency; (2) an interest in the same property passes or has passed from the decedent to someone other than the surviving spouse for less than an adequate and full consideration in money or money's worth; and (3) such other person will be able to possess or enjoy any part of such property upon the termination or failure of the surviving spouse's interest. We think that the bequest here in issue is a ‘terminable interest’ within the meaning of these provisions.

Under the terms of the decedent's will the bequest to her spouse was expressly conditional: the bequest would fail if Andrew failed to execute and file a written agreement promising that he would devise to his daughter an amount equivalent to the value of the residuary estate devised to him under the decedent's will and that he would not defeat this undertaking by making inter vivos transfers without adequate consideration. In the event Andrew did not execute the foregoing agreement within 4 months of the decedent's death the bequest was to pass to a trust for their daughter. Thus, under the terms of the bequest the gift would fail upon the passage of 4 months without performance of the conditions of paragraph Fourth. Also, if the conditions were not fulfilled the entire bequest would pass to a trust for the decedent's daughter for...