Case ID: us-ct-cl_143/html/0376-01.html
Source: Caselaw Access Project
Author: {"author": "Jones, Chief Judge,\n    ", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

WACHOVIA BANK AND TRUST COMPANY AND THURMOND CHATHAM, CO-EXECUTORS OF THE ESTATE OF LUCY HANES CHATHAM v. THE UNITED STATES
    [No. 330-54.
    Decided July 16, 1958]
    
      
      Mr. H. G. Hudson for the plaintiffs. Messrs. Vaughn, Hudson, Ferrell <& Garter, J. Milton Cooper, 'William T. Stephens, Robert O. Vaughn and Thomas D. Garter were on the brief.
    
      Mr. David R. Frazer, with whom was Mr. Assistant Attorney Generad Charles K. Rice, for the defendant. Mr. James P. Garland was on the brief.
   Jones, Chief Judge,

delivered the opinion of the court:

This case involves a question as to the proper valuation of certain business realty for purposes of determining the amount of the marital deduction to which plaintiff is entitled under § 812 (e) of the Internal Revenue Code of 1939.

In 1929, decedent and her husband acquired the property in question to which they took title as tenants by entirety. Each spouse furnished one-half of the purchase price and one-half of the costs of improving the realty. The money was obtained partly from their individual funds and partly from a loan of $250,000 upon their joint note secured by a deed of trust on the property. When the decedent passed away in 1949, one-half of the market value of this realty equaled $252,500. One-half of the obligation remaining on the joint note secured by the deed of trust equaled $51,517.64. "Under applicable state law, decedent’s estate was liable to pay this latter sum and the decedent had directed in her will that the executors pay or provide for payment of “all debts, taxes, and other charges” against the estate. The executors did pay this sum from the decedent’s separate general estate to the holder of the note.

On its estate tax return, the executors of the estate included the full market value of the decedent’s one-half interest in the realty, i. e., $252,500, in determining the gross estate. In determining the net estate, plaintiff then deducted the amount of the obligation which the estate owed on the joint note secured by the deed of trust as an “indebtedness” of the estate in respect to property under § 812 (b) (4) of the code. Plaintiff then deducted (still in the computation of the net estate) the entire value of decedent’s one-half interest in the realty, i. e., $252,500, as a marital deduction under § 812 (e) (1) (E) (ii) . The Commissioner of Internal Revenue reduced the amount of this latter deduction by the amount of the incumbrance on the property passing to the surviving spouse for which the estate had previously taken a deduction as an indebtedness under §812 (b) (4).

Plaintiff paid the increased tax resulting from this action and now sues to recover that amount plus interest on grounds it was entitled to deduct the full value of the realty which was obtained by the surviving spouse, as the surviving tenant, without regard to the incumbrance which the estate had discharged. The sole issue is whether the Commissioner was correct in reducing the marital deduction by the amount of the incumbrance on the property under these circumstances. We think that he was not.

It is the plaintiff’s position that if one makes a gift to another of property subject to an incumbrance, the value of the gift is merely the difference between the full value of the property and the amount of the incumbrance. But if the donor, at the same time he makes such a gift, discharges the incumbrance, the value of the gift is the full value of the property, that is, the value is unreduced by the incumbrance which has been discharged by the donor. This analysis would appear to be substantially correct and has authoritative support. D. S. Jackman, 44 B. T. A. 704 (1941); Commissioner v. Procter, 142 F. 2d 824 (4th Cir. 1944); Estate of D. Byrd Gwinn, 25 T. C. 31 (1955).

The plaintiff then argues that since § 812 (e) (1) (E) (ii) has adopted the standard of the gift taxation for the purpose of determining the value of the marital deduction with respect to incumbered property passing to the surviving spouse, the deduction, in the present case, must be the full value of the property (unreduced by the incumbrance) since the estate of the decedent was obligated to, and actually did, discharge the incumbrance, thereby increasing the value of the property received by the surviving spouse. In support of this position, plaintiff refers us to the following passage from the report of the Senate Committee on Finance which accompanied the Revenue Act of 1948 which act contained the present marital deduction provisions:

Clause (ii) of such subparagraph (E) directs that in determining the value of any interest passing from the decedent to the surviving spouse, incumbrances or obligations shall be taken into account in the same manner as if the value of a gift to the spouse of the interest passing were being determined. * * * If the decedent By his will leaves to his surviving spouse real estate subject to a mortgage (whether or not'such mortgage was a personal liability of the decedent) the value of the interest passing to the surviving spouse does not under this section include the mortgage. If, however, the decedent by his will directs the executor to pay off the mortgage, such -payment constitutes an additional interest passing to the surviving spouse. [Emphasis supplied.]

It is to be noted that if plaintiff’s analysis is correct, the amount of the discharged obligation apparently will be deducted twice, once from the gross estate in arriving at the net estate, i. e., under § 812 (b) (4) as an indebtedness of the estate in respect to property, and again under § 812 (e) as an interest in property passing to the surviving spouse from the decedent. This “double deduction”, according to the Government, was neither contemplated nor authorized by the Congress when it enacted the marital deduction provisions in 1948 and in support of this position we are again referred to the Senate report upon which plaintiff relies and from which we have quoted above:

An interest in property does not pass to the surviving spouse from the decedent within the definition in section 812(e) (3) by reason of a claim against the estate, or any indebtedness., in favor of the surviving spouse for which a deduction is allowed by section 812 (b). Neither the payments made in satisfaction of such a claim or debt nor the amounts expended in accordance with the local law for support of such surviving spouse during the settlement of the estate pass to such surviving spouse from the decedent within the meaning of section 812 (e) (3).

To the same general effect are the regulations which define an interest received by the surviving spouse for which a deduction has been allowed under § 812 (b) as a “nondeductible interest” for purposes of § 812 (e)

The limitation to which the above quotation has reference and upon which the regulations are based is found initially in § 812 (e) (1) (A) which provides that the marital deduction shall be an amount equal “to the value of any interest in property which passes or has passed from the decedent to Ms surviving spouse.” [Emphasis supplied.] In order to ascertain what interests “pass” within the meaning of this section, we must turn to § 812 (e) (3) which provides that,

For the purposes of this subsection an interest in property shall be considered as passing from the decedent to any person if amd only if—
(A) such interest is bequeathed or devised to such person by the decedent; or
(B) such interest is inherited by such person from the decedent; or
(C) such interest is the dower or curtesy interest (or statutory interest in lieu thereof) of such person as surviving spouse of the decedent; or
(D) such interest has been transferred to such person by the decedent at any time; or
(E) such interest was, at the time of the decedent’s death, held by such person and the decedent (or by them and any other person) in joint ownership with right of survivorship; or
(F) the decedent had a power (either alone or in conjunction with any person) to appoint such interest and if he appoints or has appointed such interest to such person, or if such person takes such interest in default upon the release or nonexercise of such power; or
(G) such interest consists of proceeds of insurance upon the life of the decedent receivable by such person. [Emphasis supplied.]

Concededly, the plaintiff in the present case was entitled to deduct, under §812 (b) (4), the amount of the unpaid indebtedness on the property since it had included the property, unreduced by such indebtedness, in computing the gross estate. The entire controversy is as to the amount of the marital deduction.

Within certain limitations which are not here relevant, an estate is entitled to deduct the actual value of property which has passed from the decedent to the surviving spouse. We think this is the plain intention of §812 (e) (1) (E) (ii) which refers to the gift tax standard for valuation of incumbered property. The rule there stated is a simple one: if the property received by the surviving spouse is incumbered by an obligation which has not been discharged, then, obviously, its value to the recipient is only the equity and the marital deduction is correspondingly reduced. But if the decedent’s estate is obligated to. discharge the incumbrance, and there are sufficient assets so that the incumbrance is actually discharged, the value of the property to the recipient is the full market value and there is no corresponding reduction in the amount of the marital deduction. Estate of D. Byrd Gwinn, 25 T. C. 31 (1955).

The actual value of the property which was received by the surviving spouse was $252,500 in the instant case. Yet the Government would permit a deduction of only $200,982.36 for this property because, it says, the difference has already' been deducted once under §812 (b) (4). But the Government’s argument fails to recognize that the deductions under §812 (b) and under §812 (e) serve two different functions and are not necessarily related. The deduction under §812 (b) is allowed to determine the actual value of the property which is included in the decedent's estate. The estate is equally entitled to deduct thereafter under §812 (e) the actual value of the property which passes out of the estate to the surviving spouse. To say that the latter deduction, in the circumstances of the instant case, is in any way equal to, or the same thing as, the former, simply defeats the purpose of the marital deduction as the following examples will illustrate.

If a decedent leaves property subject to an incumbrance, but makes a bequest to the surviving spouse of an amount of money equal to the incumbrance, where is the difference between that case and the present one insofar as the estate tax is concerned? In reality, there is none. In our example, the estate would be entitled to include the full value of the property in the gross estate. It would then equally be entitled to deduct the amount of the incumbrance on the property under §812 (b) (4) as an unpaid mortgage upon property (the value of the decedent’s interest therein having been included in the gross estate undiminished by such mortgage). Under §812 (e), the estate could then deduct the value of the property received by the surviving spouse, which value would be reduced by the amount of the undischarged incumbrance under §812 (e) (1) (E) (ii). As a final step, the estate clearly could deduct the amount of money which equals the amount of the incumbrance as a “bequest” to the surviving spouse under §812 (e) (3) (A).

There has been no more a “double deduction” in our example than there is in the present case. An amount equal to the unpaid mortgage has been deducted twice, once under §812 (b) (4) and again as a bequest to the surviving spouse, yet we can hardly imagine the Government urging denial of the deduction of the bequest because an equal sum has been previously deducted in determining the actual value of the estate under §812 (b) (4).

Carrying our example one step further, suppose that, instead of making a bequest to the surviving spouse of an amount of money equal to the incumbrance, the decedent merely directs that the executors pay off the mortgage and the estate does so. This is the example given in the Senate report upon which plaintiff relies. Again we find the so-called “double deduction”, but, as indicated by the report, the decedent’s testamentary direction, if carried out, is quite as' much a “bequest” to the surviving spouse as the bequest of an equal amount of money and an additional interest in the property passes to the surviving spouse. The result, for tax purposes, is, therefore, the same as in our first example and precisely the same as would be accomplished by permitting plaintiff the marital deduction claimed in the present case.

In the case at bar, there was no necessity for the decedent to make a bequest of that which the surviving spouse would necessarily obtain by operation of the local law. Indeed, it would be a contradiction in terms to say that one could make a “bequest” or “devise” of a debt. But we do not think Congress intended to penalize a taxpayer merely because he was resident in a state where the requirements of local law precluded his making a bequest or devise of an additional property interest to the spouse. Under the Government’s theory of the case, a decedent in North Carolina, under the circumstances, would be precluded from gaining the full advantage of his marital deduction unless he paid all his debts prior to his death with respect to property which passed to his surviving spouse. We do not believe Congress intended such an arbitrary and inequitable result. We conclude therefore that the additional interest in the property in the present case was deductible under §812 (e) (1) (E) (ii), and the fact that an equal sum had been previously deducted under §812 (b) (4) is entirely immaterial.

There is nothing in our conclusion inconsistent with the quotation from the Senate report upon which the Government relies. We are not here dealing with an existing claim of the surviving spouse against the estate or a debt in his favor. Certainly, we agree, that the payment.of such a claim or debt by the estate does not pass any interest at all to the surviving spouse for the simple reason that the survivor has obtained no more than he always had: his account receivable has merely been realized. But it is a far different thing to conclude from this, that the payment of a debt to a third person cannot pass an additional interest to the surviving spouse. To the extent that the regulations have reached such a conclusion, they must be disregarded as inconsistent with the statute.

Finally, the Government urges that, although the unin-cumbered portion of the property “passed” to the surviving spouse within the meaning of §812 (e) (3) (E) since it was held in joint ownership, the additional interest did not so “pass” by “bequest”, “devise”, or “inheritance” within the meaning of §812 (e) (3) and is, therefore, nondeductible. In Lyeth v. Hoey, 305 U. S. 188, 194 (1938), the Supreme Court held that these three terms are of the broadest possible connotation generally embracing “all acquisitions in the devolution of a decedent’s estate.” The additional interest in the present case was acquired by the surviving spouse as a result of the decedent’s death and in the direct devolution of her estate. It, therefore, “passed” to him by “inheritance” within the meaning of §812 (e) (3) (B) and is deductible. See Estate of Proctor D. Rensenhouse, 27 T. C. 107 (1956) (dissenting opinion adopted on appeal, 252 F. 2d 566 (6th Cir. 1958)).

There is no basis, either in logic, policy, or in tax consequences, for adopting the Government’s distinction between obligations of the estate in respect to property passing to the surviving spouse which are imposed by local law and those which are imposed by the decedent voluntarily. In either case, so long as the obligation is fulfilled, the estate is entitled to deduct the additional interest thereby passing to him.

Accordingly, plaintiff is entitled to recover, together with interest as provided by law, and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Eule 38 (c).

Laeamoee, Judge; MaddeN, Judge; Whitaker, Judge; and LittletoN, Judge, concur.

FINDINGS OF FACT

The court, having considered the pleadings, the stipulation of the parties, and the briefs and argument of counsel, makes findings of fact as follows:

1. The plaintiff Thurmond Chatham is a resident of Winston-Salem, Forsyth County, State of North Carolina. The plaintiff Wachovia Bank and Trust Company is a North Carolina corporation with its principal office in Winston-Salem, Forsyth County, North Carolina.

2. Lucy Hanes Chatham, a resident of Winston-Salem, North Carolina, died on July 13, 1949, leaving a will appointing the plaintiffs executors.

3. This will was duly admitted to probate. The plaintiffs qualified as executors in the Superior Court of For-syth County, North Carolina, on the 10th day of August, 1949, and continuously after that date acted as executors until February 5, 1957. Since said date, Wachovia Bank and Trust Company has acted as sole executor. Item V of the will directed the executors to pay or provide for the payment of all “debts, taxes, and other charges” against the estate.

4. On or about October 13, 1950, the plaintiffs filed with the Collector of Internal Revenue at Greensboro, North Carolina, the federal estate tax return for the estate of Lucy Hanes Chatham, and on October 16, 1950, paid to the collector the taxes shown upon the return, amounting to $293,770.24.

5. Thereafter the said estate tax return was examined and audited by the Commissioner of Internal Bevenue. A report thereof (30-day letter), proposing a deficiency of $63,262.48, was sent to the petitioners under date of April 23, 1952. The plaintiffs filed a protest. After conference further revisions and adjustments were made, resulting in a proposed deficiency of $39,822.07, which revisions and adjustments are shown in a conference report prepared by the District Director dated October 21, 1952. The plaintiffs executed a waiver of restrictions on assessment under date of October 17, 1952, which was filed with the District Director of Internal Bevenue at Greensboro, North Carolina, on or about October 20,1952.

6. The deficiency of taxes and interest as set forth in the waiver of restrictions on assessment, amounting to $39,822.07 additional estate taxes and $4,878.20 interest, was listed on the District Director’s October 30, 1952, assessment list. Form 23C, Certificate of Assessment, was signed by the Commissioner or his delegate on November 7, 1952. The said taxes and interest were assessed when the Certificate of Assessment was signed by the Commissioner or his delegate on November 7,1952.

7. On October 28, 1952, the plaintiffs paid to the District Director of Internal Bevenue at Greensboro, North Carolina, additional estate taxes amounting to $39,822.07 with interest amounting to $4,878.20, a total of $44,700.27.

8. The District Director of Internal Bevenue for the district of North Carolina who was in office on October 28, 1952, held office continuously until July 17, 1953. He was succeeded in office by an Acting District Director who took office on July 18,1953, and held office continuously until after the filing of the petition in this suit on August 12, 1954.

9. The payment made by the plaintiffs to the District Director who was in office on October 28, 1952, was applied to the payment of the above taxes and interest by his successor on September 25, 1953. Usually such application is made within thirty days after assessment. The failure to apply the credit prior to the date of September 25,1953 was an oversight.

10. On February 9, 1953, the plaintiffs fded with the District Director of Internal Revenue at Greensboro, North Carolina, a claim for refund in the amount of $25,000.

11. On or about June 17, 1953, the plaintiffs received from the office of the Commissioner of Internal Revenue a letter proposing the disallowance of the said claim for refund. On July 19, 1953, the Commissioner of Internal Revenue disallowed the plaintiffs’ claim for refund filed February 9,1953, by registered mail.

12. On April 15, 1954, the plaintiffs filed a second claim for refund with the District Director of Internal Revenue at Greensboro, North Carolina.

13. On or about May 3, 1954, the Commissioner of Internal Revenue disallowed the plaintiffs’ claim for refund filed April 15,1954, by registered mail.

14. The petition in this suit ivas filed in the Court of Claims on August 12, 1954.

15. The decedent, Lucy Hanes Chatham, and the plaintiff Thurmond Chatham were husband and wife.

16. In June, 1929, Lucy Hanes Chatham and Thurmond Chatham purchased certain business real estate in the city of Winston-Salem, North Carolina, to which they took title jointly as tenants by entirety. Each spouse provided one-half of the purchase price and the cost of improvements from their separate funds, partly in cash, and partly by borrowing from Wachovia Bank and Trust Company, as trustee of various trusts, the sum of $250,000 upon a joint note secured by a deed of trust on the property. For convenience, the note was made payable to Charles E. Norfleet, an employee of Wachovia Bank and Trust Company, and was endorsed by him and held by Wachovia Bank and Trust Company as trustee. Thereafter, Thurmond Chatham and Lucy Flanes Chatham executed and delivered to Wachovia Bank and Trust Company two extension agreements, the first dated October 11, 1934, and the second dated June 12, 1939. On the 10th day of August 1949, an entry was made on the record of the said deed of trust in the office of the Register of Deeds of Forsyth County, North .Carolina, Book No. 290 of Mortgages on page 158.

17. At the time of the death of Lucy Planes Chatham on July 13, 1949, there was a balance due on the mortgage debt of $103,035.28, evidenced by the original note, the-original deed of trust and the two extension agreements' set forth in paragraph 16 above, all of which were signed, by Thurmond Chatham and Lucy Hanes Chatham.

18. In Schedule L of the Estate Tax Return, a deduction was taken'in the amount of $51,517.64, which was one-half of the outstanding mortgage debt at the time of Lucy Hanes Chatham’s death. The executors paid this sum out of Lucy Hanes Chatham’s estate on November 22,1949. The-executors also reported to the State of North Carolina for inheritance tax purposes the following items:

Jointly owned property, being business real estate described in Paragraph 16 above_$252, 500. 001
The home place of Lucy Hanes Chatham devised to Thurmond Chatham by Item II, Paragraph 2 of her will (life estate)__ 44, 02S. 44
An automobile of Lucy Hanes Chatham bequeathed to Thurmond Chatham by Item II, Paragraph 3 of her will_:__ 450. 001
A life estate bequeathed to Thurmond Chatham in the residuary estate by Item V of the will of Lucy Hanes Chatham_ 214, 811. 77
Total_ 511, 790.21

After deducting the $2,000 exemption allowed by law, the executors paid to the North Carolina Department of Revenue a tax on the said properties of $26,558.66, which payment was made on or about July 11, 1950. Subsequent adjustments in the value of securities in the residuary estate resulted in an additional tax of $26.65 which was paid on or about December 10,1952.

19. The plaintiffs also reported under Schedule E one-half of the market value of the real estate jointly owned by the decedent and the plaintiff Thurmond Chatham as an asset of decedent’s estate at a valuation of $252,500.

20. The plaintiffs as executors included the full value of decedent’s one-half interest in the jointly held property, amounting to $252,500, in the marital deduction in Schedule M of decedent’s federal estate tax return.

21. The Commissioner of Internal Kevenue reduced the amount of the marital deduction to the extent of one-half of the mortgage debt, namely $51,517.64, thus reducing the amount of the marital deduction taken by the plaintiffs on the federal estate tax return by reason of the property referred to from $252,500 to $200,982.36. The additional taxes originally resulting from this adjustment amounted to $16,879.22, and this amount, plus interest thereon amounting to $2,067.70, or a total of $18,946.92 was assessed against the plaintiffs and paid by them by reason thereof.

22. A proper claim for refund was filed by the plaintiffs as executors within two years following the date of the alleged overpayment, and this action was commenced within two years from the date of disallowance thereof by the Commissioner of Internal Eevenue.

23. The plaintiffs have incurred or will incur by reason of the action of the Commissioner, legal and other expenses necessarily incurred by the estate in connection with the assessment and payment of the said deficiency and with respect to this suit the sum of $5,000.

24. No action has been taken on the plaintiffs’ claims by Congress or by any department of the Government, or in any judicial proceedings, including any in the Tax Court of the United States.

25. The plaintiffs in their capacities as executors of the decedent’s estate are and always have been the sole and absolute owners of this claim, and no assignment or transfer thereof or interest therein has been made.

26. Thurmond Chatham, a co-executor of the estate of Lucy Hanes Chatham, and one of the plaintiffs herein, died on February 6, 1957. Wachovia Bank and Trust Company is now the sole executor and the sole plaintiff.

CONCLUSION OE LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiffs are entitled to recover, with interest as provided by law, and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38 (c).

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due thereunder, it was ordered on December 12, 1958, that judgment for the plaintiffs be entered for $20,743.35, with interest as provided by law from October 28, 1952, 
      
       Thurmond Chatham, a co-executor of the estate of Lucy Hanes Chatham, and one of the plaintiffs herein, died on February 6, 1957. Wachovia Bank and Trust Company is now the sole executor and sole plaintiff.
     
      
       See § 811 (e), Internal Revenue Code of 1939.
     
      
      
         “§ 812. NET ESTATE.
      “Por the purpose of the tax the value of the net estate shall be determined, * * * by deducting from the value of the gross estate—
      *****
      “(b) EXPENSES, LOSSES, INDEBTEDNESS, AND TAXES.
      “Such amounts—
      * * * * *
      “(4) for unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, * *
     
      
       “(e) BEQUESTS., BTC., TO SURVIVING SPOUSE.
      (1) ALLOWANCE OP MARITAL DEDUCTION.
      (A) IN GENERAL.
      “An amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.
      *****
      “(H) VALUATION OP INTEREST PASSING TO SURVIVING SPOUSE.
      “In determining for the purposes of subparagraph (A) the value of any interest in property passing to the surviving spouse for which a deduction is allowed by this subsection—
      *****
      “(ii) where such interest or property is incumbered in any manner, or where the surviving spouse incurs any obligation imposed by the decedent with respect to the passing of such interest, such incumbrance or obligation shall be taken into account in the same manner as if the amount of a gift to such spouse of such interest were being determined.”
     
      
       S. Rept. No. 1013, March 16, 1948, U. S. Code Congressional Service, 80th Cong., 2d Sess., Vol. 2, pp. 1227-1228.
     
      
       S. Rept. No. 1013, March 16, 1948, U. S. Code Congressional Service, ibid., p. 1224.
     
      
       26 C. E. R. § 81.47b (1949 Ed.).