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

• Decision Date: 31 January 1990
• Docket Number: Docket No. 37289-87.
• Citation: Starr v. Comm'r of Internal Revenue (In re Estate of Fletcher), 94 T.C. 49, 94 T.C. No. 5 (T.C. 1990)
• Parties: ESTATE OF MARGARET A. FLETCHER, DECEASED, MARY M. STARR, ADMINISTRATRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

94 T.C. 49

94 T.C. No. 5

ESTATE OF MARGARET A. FLETCHER, DECEASED, MARY M. STARR, ADMINISTRATRIX, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 37289-87.

United States Tax Court

Filed January 31, 1990.

D died 3 hours after H due to a common accident. At the time of H's death, he owned a certificate of deposit in his name followed by the designation ‘payable on death‘ to D. D and H also owned U.S. savings bonds on which both names appeared connected by ‘or.‘ H's gross estate included the certificate and bonds. The probate court approved a final accounting reflecting that D was entitled to one-third of the certificate and bonds and that the two surviving children were entitled to one-third each. R determined that the full value of the certificate and bonds were includable in D's gross estate. With respect to the bonds, R contends that Federal statutes and regulations apply. With respect to the certificate, R argues that an Oklahoma statute would apply in spite of the probate court's approval of the accounting in H's estate. D argues payable on death clauses are violative of the Statute of Wills and not effective because they are not inter vivos transfers.

HELD: Payable on death designations are valid under an Oklahoma statute in effect at the time of death. Oklahoma law interpreted. Held further: Federal statutes and regulations are determinative of the ownership of U.S. savings bonds. Rex Earl Starr, for the petitioner.

Donald Edwards, for the respondent.

GERBER, JUDGE:

Respondent, by means of a statutory notice of deficiency, determined a $45,190.30 Federal estate tax deficiency with respect to the Estate of Margaret A. Fletcher (estate). The two issues presented for our consideration concern whether the value of certain assets should be includable in Margaret A. Fletcher's gross estate. The assets in question are jointly held United States savings bonds, series E, and a certificate of deposit made ‘payable on death.‘ We consider here the inclusion of assets in the estate of the last person to die from a common accident where both decedents' names appear on the bonds and certificate.

FINDINGS OF FACT

The parties' stipulation of facts and exhibits are incorporated by this reference. Mary M. Starr, Administratrix (petitioner), was a resident of Stilwell, Oklahoma, at the time the petition was filed in this case.

Margaret A. Fletcher, deceased (decedent), and her husband, Jack B. Fletcher, Sr. (husband), were both involved in an automobile accident. Husband died during the last hours of September 18, 1984, and decedent died about three hours later, during the first hours of September 19, 1984. Both individuals died intestate. Decedent had been a housewife and husband owned and operated a hardware store during most of their married lives in Stilwell, Oklahoma.

At the time of his death, husband was the owner of a $100,000 certificate of deposit (CD) issued in Oklahoma on August 19, 1983, and maturing on February 19, 1985, with ownership reflected as ‘Jack B. Fletcher, P.O.D. Margaret Fletcher.‘ At the time of her death, decedent was the owner of a $100,000 CD issued in Oklahoma on August 19, 1983, and maturing on February 19, 1985, ¹ with ownership reflected as ‘Margaret Fletcher, P.O.D. Jack B. Fletcher.‘ Husband's estate reported his $100,000 CD as an asset. Decedent's estate included $100,000 for her CD and $33,333.33 as representing one-third of husband's CD. Respondent determined that decedent's estate should include the entire value of husband's CD and determined that the gross estate should be increased by $66,666.67.

At the time of husband's death, husband and decedent held 45 series E bonds in a co-ownership, with the word ‘or‘ joining their names. The value of the bonds was reported on husband's Federal estate tax return at $106,193. Husband's Federal estate tax return treated decedent as having survived husband and a $151,330 marital deduction was claimed (some part of which was attributable to the bonds). Most of the bonds reflected husband's name first, but three of them had decedent's name listed first. Other than the names and the word ‘or‘ between them, no additional designations or indications of ownership appeared on the bonds. The estate reported a $70,795 value for series E bonds on its Federal and State of Oklahoma estate tax returns. The State of Oklahoma Tax Commissioner determined or asserted that the estate should have reported $106,193 or a $35,398 increase to estate assets. Respondent, in the notice of deficiency, mirrored the State of Oklahoma and also determined a $35,398 increase.

All of the CD's and bonds were purchased with money earned by husband in his business endeavors during his marriage to decedent.

The Oklahoma District Court allowed a final account in husband's intestate estate which reflected the savings bonds and one of the CD's as husband's assets to be distributed one-third to decedent and one-third to each of the two children of the marriage between husband and decedent.

OPINION

This case concerns an unfortunate situation involving the accidental death of married individuals with an interest in common property within a short time of each other. We are focused upon the estate of the last to die and seek to decide the portion of co-owned property which should be included in the second gross estate and which had been fully included in the first gross estate. Due to variations in the form of ownership and treatment of the two types of property involved, we will consider them separately.

UNITED STATES SAVINGS BONDS, SERIES E (BONDS) -- At the time of their deaths, decedent and husband owned 45 bonds as co-owners (registered in both names connected by the disjunctive ‘or‘). The bonds were purchased by means of the business activity of husband during the marital estate of decedent and husband. The full $106,193 value ² was reported on husband's estate tax return. The probate estate of husband reflected the inclusion of United States savings bonds, but the value or number of bonds was not indicated and, accordingly, the record here does not reflect whether all 45 bonds were included in husband's probate estate. We note, however, that respondent's determination (and that of the State of Oklahoma) appears to indicate that all 45 bonds were included in husband's estate. Decedent's Federal estate tax return included $70,795 for bonds. Although the parties have not delineated the source of the $70,795 amount, it appears to represent the rounded-off sum of decedent's one-half bond ownership ($106,193.00 divided by 2 = $53,096.50), plus her one-third intestate share of husband's one-half interest ($53,096.50 divided by 3 = $17,698.83). Petitioner asserts that decedent, at the time of her death (three hours after her husband), owned a one-half interest in the bonds and was entitled to an additional one-third by operation of the laws of intestacy of the State of Oklahoma. Respondent, on the other hand, argues that after the death of husband, decedent, as surviving co-owner, owned 100 percent of the co-owned bonds, all of which is includable in her estate.

Generally, the value of all property owned by the decedent at the time of death is includable in the gross estate. Secs. 2031 and 2033. ³ When one co-owner of jointly held property dies, section 2040 provides rules to determine how much, if any, of the jointly held property is includable in the gross estate of the deceased co- owner. Section 2040 is not applicable here because we are dealing with the second estate of a co-owner of jointly held property. At the time of decedent's death, husband had predeceased her and, accordingly, we must determined the interest she held after husband's death.

We will look to state law to determine whether the decedent possessed an interest in property at the date of death. Helvering v. Stuart, 317 U.S. 154, 161 (1942); Tracy v. Commissioner, 70 T.C. 397, 402 (1978). We will follow the decision of the highest state court, but in the absence of a decision by that court, we may look to other courts' rulings and holdings. Commissioner v. Estate of Bosch, 387 U.S. 456, 465 (1967). Where, however, there is a controlling Federal statute or regulation, it overrides or preempts any inconsistent state property law, including the decision of the highest state court. Free v. Bland, 369 U.S. 663, 669 (1962); United States v. Chandler, 410 U.S. 257, 262 (1973).

United States savings bonds, series E, are issued by the Secretary of the Treasury under authority granted in title 31 U.S.C. section 3105 (1982). Within that authority, the Secretary may, among other authorizations, prescribe the form and amount, the way in which they will be issued, the conditions (including restriction on transfer) to which they will be subject, and conditions governing their redemption. 31 U.S.C. sec. 3105(c)(1), (2), (3), and (4) (1982).

The Secretary has issued regulations concerning the ownership of bonds issued under authority of 31 U.S.C. section 3105. Co-ownership in the ‘or‘ form is a permissible form of ownership under regulation section 315.7, 31 C.F.R. (1988). The use of the ‘or‘ form was also permissible at the time of decedent's death. Regulation section 315.70, 31 C.F.R. (1988), and section 315.61, 31 C.F.R. (1959), state: ‘If one of the coowners named on a bond has died, the surviving coowner will be recognized as its sole and absolute owner, and payment or reissue will be made as though the bond were registered in the name of the survivor alone.‘ Accordingly, under Federal law, decedent became the sole owner of the bonds upon husband's death. These regulations have been upheld in similar circumstances by the Supreme Court. United States v. Chandler, 410 U.S. 257, 262 (1973).

The State of Oklahoma District Court, in an order allowing the final account, recited that husband owned United States savings bonds and that under the rules of intestacy decedent and each of the two adult...