Stewart v. Usry

• Decision Date: 18 July 1967
• Docket Number: Civ. A. No. 15671.
• Citation: 273 F. Supp. 302
• Parties: Mrs. Marie de Jaham STEWART, Co-Executrix, Mrs. Margaret Stewart Johnson, Co-Executrix of the Estate of Seymour J. Stewart, Plaintiffs, v. Chester A. USRY, District Director of Internal Revenue, New Orleans District, Defendant.
• Court: U.S. District Court — Eastern District of Louisiana

273 F. Supp. 302

Mrs. Marie de Jaham STEWART, Co-Executrix, Mrs. Margaret Stewart Johnson, Co-Executrix of the Estate of Seymour J. Stewart, Plaintiffs, v. Chester A. USRY, District Director of Internal Revenue, New Orleans District, Defendant.

Civ. A. No. 15671.

United States District Court E. D. Louisiana, New Orleans Division.

July 18, 1967.

COPYRIGHT MATERIAL OMITTED

Arthur V. Flotte, Thomas J. Taylor, New Orleans, La., for plaintiffs.

Peter Winstead, Atty., Tax Div., Dept. of Justice, Ft. Worth, Tex., Louis C. LaCour, U. S. Atty., New Orleans, La., for defendant.

CASSIBRY, District Judge.

This cause came to trial on cross motions for summary judgment on the pleadings, stipulation of facts and exhibits.

The question to be decided is whether the property rights which a surviving spouse received in property which is the subject of an imperfect usufruct under Louisiana law qualifies for the marital deduction provided in Section 2056 of the Internal Revenue Code of 1954.

Plaintiffs herein are the duly qualified executrices of the Estate of Seymour J. Stewart, who died in New Orleans, Louisiana, on October 10, 1961.

The last will and testament of Seymour J. Stewart, dated December 3, 1960, provided as follows with respect to the disposition of his property:

"I give and bequeath to my beloved wife Marie de Jaham Stewart, the usufruct of all the property that I may die possessed of, of whatsoever nature and kind wheresoever situated.

I give and bequeath to my four (4) children * * *, share and share alike, the naked ownership of all of the property that I may die possessed of, of whatsoever nature and kind and wheresoever situated subject to the usufruct in favor of my wife, Marie de Jaham Stewart."

A federal estate tax return was filed on behalf of the Estate of Seymour J. Stewart with the District Director of Internal Revenue, New Orleans, Louisiana, which reported a total gross estate of $151,997.75, and a taxable estate of $48,775.23.

In the estate tax return, the total gross estate reported of $151,997.75 consisted of separate property valued at $52,113.03 and community property, one-half of which was valued at $99,884.72.

In the estate tax return filed for the Estate of Seymour J. Stewart, the deduction under Section 2056 of the Internal Revenue Code of 1954 for bequests, etc., to surviving spouse amounted to $26,056.51. The property which plaintiffs determined qualified for the marital deduction consisted in part of furniture, homestead certificates, automobiles, merchandise and materials, cash, savings bonds and insurance proceeds. All this property belonged to the community existing between Seymour J. Stewart and Mrs. Marie de Jaham Stewart.

The federal estate tax shown to be due on the estate tax return for the Estate of Seymour J. Stewart, $6,660.35, was paid in full with the return.

Upon examination of the estate tax return filed for the Estate of Seymour J. Stewart, the Commissioner of Internal Revenue determined that the return contained certain errors in valuation of property, and further determined that the estate was entitled to a deduction in calculating the estate tax liability for "bequests, etc., to surviving spouse" (or the marital deduction provided by Section 2056 of the Internal Revenue Code of 1954) of $2,635.82.¹ The Commissioner's determination which permitted the Estate of Seymour J. Stewart to deduct $2,635.82 on the marital deduction, was based upon the theory that all properties other than those itemized in this paragraph passing from decedent to his surviving spouse were subject to the terminable interest limitations provided by Section 2056(b) of the Internal Revenue Code of 1954.

Pursuant to the determinations described in the preceding paragraph, on February 12, 1965, a deficiency in estate tax of $8,536.08 and interest to January 10, 1964, of $1,024.33 was assessed and this aggregate, $9,560.41, was paid on behalf of the Estate of Seymour J. Stewart on February 19, 1965.

On March 15, 1965, a claim for refund of estate taxes was filed with the District Director of Internal Revenue, New Orleans, Louisiana, by plaintiffs herein. The District Director has not allowed this claim for refund. In plaintiffs' claim for refund and in their complaint herein, they claim that the Estate of Seymour J. Stewart is entitled to a marital deduction of $30,105.95.²

On August 9, 1962, Mrs. Marie de Jaham Stewart, surviving spouse of decedent, was placed and put in possession of all of the property left by decedent, including his separate and community property, as usufructuary so long as she shall live.

In the present action plaintiffs seek to recover $7,293.72 in estate taxes, plus interest according to law.

Plaintiffs contend that the property rights which passed to the surviving spouse, as usufructuary of an imperfect usufruct under the law of the State of Louisiana, qualified for the marital deduction under Section 2056(a) of the Internal Revenue Code of 1954 and are not subject to the terminable interest limitations provided by Section 2056(b) (1) of the Internal Revenue Code of 1954, because of the specific exception to the terminable interest rule provided by Section 2056(b) (5), Internal Revenue Code. In addition, they contend that the limitation of 2056(b) (1) is not applicable because the conditions of 2056(b) (1) (B) are not met.

Defendant contends that the property rights which passed to the surviving spouse, as usufructuary of the imperfect usufruct under the law of the State of Louisiana, do not qualify for the marital deduction provided in Section 2056 of the Internal Revenue Code of 1954, for the reason that such property rights constitute a terminable interest within the meaning of Section 2056(b).

The marital deduction, which now appears as Section 2056 of the Internal Revenue Code of 1954³ was enacted in 1948 in an attempt to promote equality of estate tax treatment between married residents of community and non-community property states.⁴ In order to counteract the estate tax benefit received by married couples in community property states, who were permitted to report only one-half of the community property in the estate of the first marital partner to die, the Congress permitted a deduction of up to 50 percent of the "adjusted gross estate" for property passing from the decedent spouse to the surviving spouse. It was contemplated that those assets which were removed from taxation in the estate of the spouse first to die would be exposed to estate tax upon the death of the surviving spouse, who was required to be the owner of the assets to the same extent as the surviving spouse in a community property state who received her one-half interest in community property assets. This principle was enunciated by the court in In Re Reilly's Estate v. Commissioner, 239 F.2d 797, p. 799 (3rd Cir. 1957), in which the court stated:

"* * * The assets so removed from the tax in the estate of the spouse first to die are to be exposed to the tax at the death of the surviving spouse. Fundamentally postponement of the tax is contemplated so that if the full marital deduction is taken, the property of the marital community will be subject to the tax only once in the estate of either spouse.

In order to prevent abuse and tax avoidance through the marital deduction, the terminable interest rule was enacted. Broadly, it excepts from the marital deduction any asset of the estate transferred to the spouse which may by any event ultimately pass from the decedent to any other person for less than full consideration in money or money's worth. * * *"

Section 2056(b) represents the codification of the "terminable interest rule". The rule has in effect three requirements to invoke its operation. First, it must be an interest in property, such as a life estate, which will terminate or fail upon the lapse of time or some other event. Secondly, an interest in the same property must pass from the decedent to a person other than the surviving sponse. Finally, by reason of its passing the other person or his heirs or assigns may possess or enjoy any part of the property after the termination or the failure of the spouse's interest. Treasury Regulations on Estate Tax (1954 Code), Sec. 20.2056(b)-1(c).

The plaintiffs admit that the imperfect usufruct, being merely a life estate, is an interest in property which will terminate on the lapse of time or on the occurrence of an event, namely, the death of the surviving spouse, hence, the first requirement of the "terminable interest rule" specified in Section 2056(b) (1) has been satisfied.

The plaintiffs also admit that an interest in the same property has passed from the decedent to a person other than the surviving spouse, namely, the decedent's four children who were vested with the naked ownership in the property transferred to the surviving spouse, hence, the second requirement of the terminable interest rule specified in Section 2056(b) (1) (A) has been satisfied.

The plaintiffs contend that the "terminable interest rule" is not applicable by reason of the fact that the requirement of Section 2056(b) (1) (B) has not been satisfied, namely, a person other than the surviving spouse may not "possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving spouse."

Both parties agree that the nature and character of property interests passing to a widow for determining whether the interest is terminable for purposes of estate taxation must be judged in accordance with state law.⁵ Thus we must look to the law of Louisiana to determine the nature of the interest of the surviving spouse.

The Louisiana Civil Code defines usufruct as "the right of enjoying a thing, the property of which is vested in another * * *" LSA-C.C. Art. 533. The Civil Code breaks usufruct down into two types, perfect usufruct, which is of things which can be enjoyed without changing their substance, and...