Wolff v. Comm'r of Internal Revenue
| Decision Date | 11 September 1946 |
| Docket Number | Docket Nos. 6549,6550. |
| Parties | H. EDWARD WOLFF AND LOUISE C. WOLFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LOUISE C. WOLFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Annual payments made out of current income from property, in lieu of defaulted annuity payable for purchased life estate therein, held to measure amount and time of deduction for exhaustion of acquired interest, notwithstanding that payments were required to and did continue to be made to vendor's estate after her death. Emanuel Wagner, Esq., for the petitioners.
Francis X. Gallagher, Esq., for the respondent.
By these proceedings, consolidated for hearing and consideration, petitioners challenge part of the following deficiencies in income tax, as determined by respondent:
+--------------------------+
¦Docket No.¦Year¦Deficiency¦
+----------+----+----------¦
¦6550 ¦1938¦$314.07 ¦
+----------+----+----------¦
¦6550 ¦1939¦337.30 ¦
+----------+----+----------¦
¦6550 ¦1940¦481.11 ¦
+----------+----+----------¦
¦6549 ¦1941¦1,479.52 ¦
+--------------------------+
Petitioners having waived an issue raised in the pleadings, the remaining questions are whether rents which were assigned to a trustee pursuant to an agreement of May 1, 1937, constitute income taxable to petitioners when collected during the taxable years in question; if so, whether petitioners may deduct the payments of such rents made to the stepmother of one of them and, after her death, to her estate, as allowances for exhaustion of the stepmother's interest acquired by one of the petitioners or as business expenses.
Some of the facts were orally stipulated.
The stipulated facts are hereby found accordingly.
Petitioners, who are husband and wife, reside in New Jersey, and filed their tax returns with the collector of internal revenue for the fifth collection district of New Jersey. Louise C. Wolff will be referred to hereinafter as petitioner.
Petitioner was the only child of August Heidritter, who died testate on December 28, 1921, leaving a net estate of an agreed value of $786,685.77 at the time of his death.
In the estate tax return the net estate was valued at $533,372.68; the total gross estate, at $683,506.45, composed of the following:
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¦Real estate ¦$235,889.28¦
+----------------------------------------------------------------+-----------¦
¦Stocks and bonds ¦365,402.29 ¦
+----------------------------------------------------------------+-----------¦
¦($342,500 of this amount consisted of 1,370 shares of stock($100¦ ¦
+----------------------------------------------------------------+-----------¦
¦par value) of Heidritter Lumber Co., returned at a value of ¦ ¦
+----------------------------------------------------------------+-----------¦
¦$250 per share) ¦ ¦
+----------------------------------------------------------------+-----------¦
¦Mortgages, notes, cash, and insurance ¦80,261.38 ¦
+----------------------------------------------------------------+-----------¦
¦Other miscellaneous property ¦1,953.50 ¦
+----------------------------------------------------------------------------+
By his will dated May 8, 1918, and admitted to probate by the Surrogate's Court of Union County, New Jersey, decedent made the following provisions, inter alia, for the disposition of his estate:
One-half of said rents, interest, issues and profits shall be paid to my said wife, Eugenie Heidritter, and the remaining half to be paid to my daughter, Louisa C. Wolff, wife of Henry E. Wolff, during the lifetime of my said wife.
NINTH: All the residue of my estate, after the death of my said wife, I give and bequeath to my daughter, Louisa C. Wolff, wife of Henry E. Wolff, to have and to hold to her and to her heirs and assigns forever.
Eugenie Heidritter was petitioner's stepmother. She was born on August 27, 1863, and died on July 3, 1938.
Following the death of August Heidritter, considerable litigation ensued between petitioner and her stepmother with reference to the validity of his will; controversy also existed as to their respective rights under the will of Frederick L. Heidritter, a brother of August, who had died in 1911.
These differences were resolved by an agreement entered into between petitioner and her stepmother on July 9, 1924. Petitioner agreed to pay to her stepmother $10,000 per year for a period of two years, $12,000 per year for the succeeding two years, and thereafter $15,000 per year for and during the remainder of her stepmother's life. Upon the death of the stepmother petitioner was required to pay only the quarterly payment due up to and including the date of the stepmother's death. She also agreed to pay $6,450.80 upon the execution of the agreement and an additional sum of $1,000 annually in consideration of the stepmother's transfer of her life interest in the homestead. The stepmother, in return, agreed to ‘sell, assign, transfer and set over‘ to petitioner ‘all the right, title and interest of the party of the second part (the stepmother) of every nature and kind whatsoever in the estate of the said August Heidritter, deceased, except as above expressly reserved, and also in and to the Estate of Frederick L. Heidritter, deceased, without limitation.‘
The payments which petitioner was required to make were to be secure by a mortgage of $300,000 on certain real estate situate in Elizabeth, New Jersey, occupied by the Heidritter Lumber Co.
Thereafter petitioner defaulted in the payments and the mortgage was foreclosed; a final decree was entered in the New Jersey Court of Chancery on January 8, 1935, directing that the premises be sold.
A new agreement was entered into between petitioner and her stepmother on May 1, 1937, modifying their earlier agreement. At that date petitioner was in arrears in payment under the earlier agreement in the amount of $46,650.93.
Petitioner agreed:
(a) To pay her stepmother $6,500 upon the execution of the agreement, which sum was actually paid by her husband;
(b) To obtain the cancellation of a second mortgage in the sum of $45,000 covering the mortgaged premises;
(c) Upon cancellation of the second mortgage, to hold and retain title to the premises in trust, and to sell and dispose of the property to such persons and upon such terms and conditions and for such consideration as her stepmother might determine and direct;
(d) Not to sell or encumber the property in any way except with express written consent of her stepmother, and meanwhile to continue existing leases and assign all rents, issues, and profits realized from the property to the trustee designated in the agreement;
(e) Upon sale of the property, to transfer and deliver all net proceeds thereof to the trustee.
The stepmother agreed to make application for dismissal of the foreclosure proceedings; to release petitioners of any personal liability under the original agreement; that all liability for the payments provided in the original agreement was to be limited to the property and proceeds thereof; that she would claim no legal or beneficial interest in the property remaining unsold, after full payment to her on her estate of the amounts due; and the remainder was to become the property of petitioner.
It was further provided that if all arrears and future installments should not have been paid in full and the property should not have been fully liquidated upon the stepmother's death, the right of the stepmother to determine the terms and conditions of sale were to pass to her executors, administrators, and assigns in order to secure full payment of the required sums.
The trustee agreed to pay over to the stepmother the amounts received, application of the proceeds being first made to cancel out the arrears and thereafter paying future annual installments of $16,000 as they should accrue. The trust was to terminate when all amounts due the stepmother were paid in full.
During the taxable years the amounts of rents collected and paid to the stepmother or her estate were as follows:
+---------------+
¦1938¦$3,819.27 ¦
+----+----------¦
¦1939¦4,342.93 ¦
+----+----------¦
¦1940¦4,515.15 ¦
+----+----------¦
¦1941¦4,422.15 ¦
+---------------+
It is these amounts which respondent seeks to tax to petitioners and which petitioners in the alternative seek to deduct from their income on account of the exhaustion of the life interest or as business expenses. The total amount paid to the stepmother and her estate up to and including the year 1944 was $181,377.41.
From the death of her husband up to the date of her first agreement with petitioner, Eugenie Heidritter was entitled to receive from her husband's estate the sum of...
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