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

• Decision Date: 22 December 1982
• Docket Number: 11986-81.,Docket Nos. 11849-81
• Citation: 79 T.C. 1046
• Parties: ESTATE of ROBERT H. STEWART, DECEASED, ROBERT E. STEWART and MARY JUNE STEWART ROBERTS, COEXECUTORS, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

79 T.C. 1046

ESTATE of ROBERT H. STEWART, DECEASED, ROBERT E. STEWART and MARY JUNE STEWART ROBERTS, COEXECUTORS, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket Nos. 11849-81

11986-81.

United States Tax Court

Filed December 22, 1982.

Decedent and his wife owned certain real property as tenants by the entirety. They executed a mutual will which provided that a one-half interest in such real property would go immediately to their children upon the death of the first of them. Held: Under State law the tenancies by the entirety were converted into tenancies in common upon the execution of the mutual will because it provided for a disposition of the real property in a manner which was inconsistent with the tenants' rights of survivorship. Thus, upon the death of the wife, a one-half interest in the real property passed under her will to the children rather than to decedent by right of survivorship, and decedent made no gift of such interest to the children. Accordingly, no gift tax liability arose and the value of the one-half interest in such real property is not included in decedent's gross estate either as property held by decedent at his death or as a gift made in contemplation of death. Lester M. Ponder, Robert S. Ashby, Michael R. Fruehwald, and Don Hubert Wickens, for the petitioners.

Elsie Hall and Russell D. Pinkerton, for the respondent.

OPINION

FAY , Judge:

In these consolidated cases, respondent determined a deficiency of $97,871.17 in the Federal estate tax for the Estate of Robert H. Stewart (Mr. Stewart), a deficiency of $27,000.23 in Mr. Stewart's gift tax for the calendar quarter ending December 31, 1976, and an addition to gift tax of $6,750.06 under section 6651(a)(1).¹ After concessions, the remaining issues are (1) whether Mr. Stewart transferred by gift a one-half interest in certain real property to his children, if so, (2) whether such gift was made in contemplation of death, and (3) whether petitioners are liable for an addition to tax under section 6651(a)(1) for the failure of Mr. Stewart to file a gift tax return for the quarter ending December 31, 1976.

The facts have been fully stipulated and are so found. Petitioners Robert E. Stewart and Mary June Stewart Roberts are the duly appointed coexecutors of Mr. Stewart's estate. Robert E. Stewart was a resident of Hope, Ind., and Mary June Stewart Roberts was a resident of Princeton, N.J., when the petition was filed herein.

In 1974, Mr. Stewart and his wife, Edith C. Stewart (Mrs. Stewart), both were diagnosed as having cancer. On March 20, 1976, Mr. and Mrs. Stewart (herein sometimes collectively referred to as the Stewarts) executed a “Joint, Mutual and Contractual Last Will and Testament” (the joint will). In the joint will, the Stewarts mutually contracted that one-half of their interest in certain real property held as tenants by the entirety would pass to their children upon the death of the first spouse. Mrs. Stewart died on November 16, 1976, and the joint will was probated as her last will and testament by the Superior Court of Bartholomew County, Ind. (the Probate Court). The Probate Court approved a distribution of Mrs. Stewart's property as provided by the joint will, including a transfer of a one-half interest in the real property to the children. Mr. Stewart died on January 29, 1978, and the joint will was probated as his last will and testament, also.

Petitioners reported one-half of the value of the real property in Mr. Stewart's gross estate. In his notice of deficiency, respondent included in Mr. Stewart's gross estate the full value of the real property. In a separate notice of deficiency, respondent asserted liability in Mr. Stewart's gift tax for the quarter ending December 31, 1976, and an addition to gift tax under section 6651(a) for failure to file a gift tax return.

The issue is whether Mr. Stewart made a gift of a one-half interest in the real property to the children after the death of his wife, and if so, whether such gift was made in contemplation of death so as to bring such interest within his gross estate. See sec. 2035. Resolution of this issue depends upon whether the Stewarts' execution of the joint will converted the tenancies by the entirety into tenancies in common. If such conversion occurred, then Mrs. Stewart's interest in the real property would have passed to the children under her will, rather than to Mr. Stewart by right of survivorship. In such case, Mr. Stewart could not have made a gift of such interest to the children. If no such conversion occurred, Mr. Stewart would have succeeded to Mrs. Stewart's interest in the real property, and, thus, could have made a gift of such interest to the children.

Petitioners argue the tenancies by the entirety were severed by execution of the joint will because it provided for disposition of the real property in a manner which was inconsistent with the Stewarts' rights of survivorship. Respondent asserts that under Indiana law, a tenancy by the entirety cannot be severed by the execution of a mutual will. Respondent argues in the alternative that even if a tenancy by the entirety can be severed by the execution of a mutual will, the execution of the joint will in this case did not sever the tenancies by the entirety because the joint will provided for a disposition of the real property in a manner which was not “inconsistent” with the Stewarts' rights of survivorship.

Whether the execution of a mutual will can sever a tenancy by the entirety is a question which must be analyzed under State law. The real property is located in Indiana; thus, the laws of Indiana are controlling. In the absence of a statute or decision by the Indiana Supreme Court, this Court must apply what it determines the law to be after giving proper consideration to rulings of lower Indiana courts. Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).

Under Indiana law, a joint or mutual will operates as both a will and a contract. Manrow v. Deveney, 109 Ind. App. 264, 33 N.E.2d 371 (1941). The “will” is ambulatory and can be revoked by either testator acting alone, even though revocation would be a breach of the agreement; however, in the event of such revocation, the contract is enforceable. Estate of Maloney v. Carsten, 381 N.E.2d 1263 (Ind. Ct. App. 1978).

The parties have not cited any Indiana case or case arising under the laws of any other jurisdiction which has specifically ruled whether a tenancy by the entirety may be severed by the execution of a mutual will, nor has our research uncovered any such case. However, several cases have held that the execution of a mutual will can operate to sever a joint tenancy. ² For instance, in In re Estate of Waks, 386 So. 2d 307 (Fla. Ct. App. 1980), the court held that execution by a husband and wife of a mutual will providing for disposition of jointly owned property in a manner inconsistent with the rights of survivorship operated as a severance of the joint tenancies. Under the mutual will in In re Estate of Waks, the tenants agreed that the jointly owned property would pass to certain beneficiaries upon the death of the first spouse. Since jointly owned property otherwise passes automatically to the surviving spouse by right of survivorship, the court held that the joint tenancies had been severed by the execution of the mutual will. In so holding, the court carried out the tenants' intention by allowing the jointly owned property to pass to the named beneficiaries. In accord, Wilcoxen v. United States, 310 F. Supp. 1006 (D. Kan. 1969); Lancellotti v. Lancellotti, 119 R.I. 1184, 377 A.2d 1315 (1977); Mamalis v. Bornovas, 112 N.H. 423, 297 A.2d 660 (1972); Berry v. Berry's Estate, 168 Kan. 253, 212 P.2d 283 (1949). See also McDonald v. Moreley, 15 Cal. 2d 409, 101 P.2d 690 (1940), wherein the court determined that the execution of another kind of agreement operated to sever joint tenancies.

Asserting there are fundamental differences between joint tenancies and tenancies by the entirety, respondent argues that these cases are irrelevant. This Court, however, faced a similar argument in Estate of Borner v. Commissioner, 25 T.C. 584 (1955), and held that:

Differences do exist between the two estates but such differences are not sufficient to compel unlike tax results under the provisions of section 811(c) [[[the predecessor of section 2035]. The only difference is tenancy by the entireties is based on the ancient common law fiction that husband and wife are one, and the right of survivorship cannot be destroyed without mutual consent, while in a joint tenancy one tenant, by transferring, can destroy the survivorship rights. We conclude as a practical matter, the tenancy by entirety and joint tenancies are so much alike that the rule applied in the joint tenancy cases should be applied here where the tenancies are by the entirety * * * [ Borner v. Commissioner, supra at 588; emphasis added.]

Similarly, section 25.2515-1(a),³ Gift Tax Regs., states: “An estate by the entirety in real property is essentially a joint tenancy between husband and wife with the right of survivorship.” The conclusions therein suggest that generally tenancies by the entirety and joint tenancies should be treated alike when Federal tax consequences are at stake.⁴

Moreover, we find no convincing reason for distinguishing between the two types of estates for purposes of the issue before us. The characteristics which distinguish the estate by the entirety from a joint tenancy rest on the ancient common law fiction which regards husband and wife as one person. See Sharp v. Baker, 51 Ind. App. 547, 96 N.E. 627, 629 (1911). As a result, in an estate by the entirety there is unity of estate, unity of conveyance, unity of possession, and unity of control. See Yarde v. Yarde, 117 Ind. App. 277, 71 N.E.2d 625 (1947). However, to hold therefore that a husband and wife cannot by mutual agreement sever a tenancy by the entirety would...