Source: https://supreme.justia.com/cases/federal/us/304/351/
Timestamp: 2019-04-26 16:17:35+00:00

Document:
1. A decedent in her lifetime promised educational institutions to establish an endowment fund and to pay salaries of orchestral musicians and a director of art. The promises were accepted and acted upon, and, under the state law, were binding upon her estate. Held that, in valuing the estate for taxation under the Revenue Act of 1926, the executor was not entitled to deduct the amounts payable under the promises, as being claims contracted "for an adequate and full consideration in money or money's worth," § 303(a)(1), or as "transfers," to or for the use of the promisee corporations, id., § 303(a)(3). Pp. 304 U. S. 355, 304 U. S. 357.
2. The legislative and administrative history of § 303(a)(1) of the Revenue Act of 1926, shows that a promise by a decedent to pay money to a charitable or educational institution, where the only consideration was a stipulated application of the amount received, does not constitute a claim against the estate contracted for an adequate and full consideration in money or money's worth, notwithstanding the fact that, under local law, the promise is enforceable. P. 304 U. S. 355.
3. A binding promise by a decedent to pay money to a charitable or educational institution, not attended by any allocation of funds in decedent's lifetime, is not a "transfer" within the meaning of § 303(a)(3), Revenue Act of 1926, and payment by the executor does not make it such by relation. P. 304 U. S. 357.
4. Only such transfers inter vivos as are testamentary in character are deductible under subsection (3), supra. P. 304 U. S. 358.
Certiorari, 303 U.S. 631, to review a judgment of the Circuit Court of Appeals which affirmed a decision of the Board of Tax Appeals, 33 B.T.A. 671, sustaining the disallowance of certain deductions in the valuation of an estate for taxation.
Revenue Act of 1926, 44 Stat. 72. [Footnote 1] The deductions were of amounts owing at the decedent's death upon the following contractual obligations.
By letter, the decedent agreed with the University of Cincinnati to establish a fund as a memorial to her husband, stating that she would make available to the trustees of the fund, whom she named, during the ensuing year, $50,000, during the following year $75,000, and, in each succeeding year, $100,000 or such other income as might be derived from a fund of $2,000,000 which she would ultimately transfer to the trustees. The letter outlined the terms of the trust to which the income was to be devoted. The offer was formally accepted by the Board of Directors of the University and, pursuant to the agreement, the decedent made payments to the trustees and her executor continued to pay sums on account of interest and principal. The University is an educational institution, and no profit enures to anyone from its operation.
Being deeply interested in the Cincinnati Institute of Fine Arts and its work, and having jointly with her husband and as an individual contributed large sums to this work, the decedent, to obviate the necessity of reducing the personnel of the orchestra the Institute conducts, agreed with the Institute that, if it would retain two musicians, she would pay their salaries under contracts covering two years. In reliance upon her promise the Institute reengaged the two men. The decedent paid the amount of their salaries prior to her death, and petitioner, as executor, paid them to the end of the contract term. The Institute would not have reemployed these men except for the agreement. It is a charitable corporation organized for the maintenance of a symphony orchestra and other activities, and no profit enures to anyone from its operations.
The decedent agreed by letter addressed to the Cincinnati Institute of Fine Arts that, if it would employ a director of art she would contribute $10,000 towards his salary. In reliance upon this undertaking, the institution engaged such a director at a salary of $10,000 per annum. She paid the stipulated amount for one and one-half years prior to her death, and the petitioner, as executor, paid for one year subsequent to her death. There were no available funds for the employment of a director except those received from the decedent, and the Institute would not have employed one except for her agreement. It is an educational institution and does not operate for profit.
sum remained due according to her promise which the petitioner paid.
to hold. The Revenue Act of 1916 permitted the deduction of the amount of claims against the estate "allowed by the laws of the jurisdiction . . . under which the estate is being administered." [Footnote 5] The Acts of 1918 and 1921 contain like provisions. [Footnote 6] Under these Acts, the claims in question would have been deductible as enforceable by state law irrespective of the nature of the consideration. [Footnote 7] The Act of 1924 altered existing law and authorized the deduction of claims against an estate only to the extent that they were "incurred or contracted bona fide and for a fair consideration in money or money's worth." [Footnote 8] Congress had reason to think that the phrase "fair consideration" would be held to comprehend an instance of a promise which was honest, reasonable, and free from suspicion whether or not the consideration for it was, strictly speaking, adequate. [Footnote 9] The words "adequate and full consideration" were substituted by § 303(a)(1) of the Revenue Act of 1926. There must have been some reason for these successive changes. It seems evident that the purpose was to narrow the class of deductible claims, and we are not at liberty to ignore this purpose.
received therefor by the decedent. [Footnote 11]"
Since 1929, the regulations have excluded deductions such as those in issue here. Meantime, the estate tax provisions have been amended four times and the section under which the regulations were promulgated has been amended twice. We must assume that Congress was familiar with the construction put upon the section by the Treasury and was satisfied with it. The Board of Tax Appeals [Footnote 12] and the courts, [Footnote 13] with the exception of the Circuit Court of Appeals for the Third Circuit, [Footnote 14] have held that a promise to pay money to a charitable or educational institution, where the only consideration was a stipulated application of the amount received, does not constitute a claim against the estate contracted for an adequate and full consideration in money or money's worth, notwithstanding the fact that, under local law the promise is enforceable. In this view we agree.
made so as to convert her promise into a transfer by her. Here, the subject of the transfer was not identified by any allocation of decedent's funds during her life. This fact adds point to the view that she made no transfer.
"The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate."
The only transfers required to be included in the gross estate are those made in contemplation of death or to take effect in possession or enjoyment at or after death. [Footnote 15] In other words, only such transfers as are testamentary in character are to be included in the gross estate, and it follows that only those of that character are deductible under subsection (3). Those here in question were clearly not such. There is no claim that the agreements were made in contemplation of death or to take effect in possession or enjoyment at or after death.
should adopt a liberal construction of the Act to effectuate the intent of Congress even though the payments in question do not fall within the strict meaning of the words used. But we are not permitted to speculate as to the reasons why the policy evidenced with respect to other forms of gift was not extended to claims upon promises enforceable by state law. We are bound to observe the alterations made in the successive acts which, in the plain meaning of the language employed, exclude deduction of enforceable claims of the sort here involved, even though the case be a hard one. The testatrix was bound to bring her transactions within the letter of the statutory provisions and the regulations at the risk that noncompliance might deprive her estate of tax immunity as respects the pledges.
"Sec. 303. For the purpose of the tax, the value of the net estate shall be determined --"
"(a) In the case of a resident, by deducting from the value of the gross estate --"
"(1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property . . . to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money's worth, . . ."
"(3) The amount of all bequests, legacies, devises, or transfers, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual. . . ."
See Turner v. Commissioner, 85 F.2d 919; Commissioner v. Bryn Mawr Trust Co., 87 F.2d 607; Porter v. Commissioner, 60 F.2d 673; Bretzfelder v. Commissioner, 86 F.2d 713; Lockwood v. McGowan, 86 F.2d 1005.
Revenue Act 1916, § 203(a)(1), 39 Stat. 756, 778.
Revenue Act 1918, § 403(a)(1), 40 Stat. 1057, 1098; Revenue Act 1921, § 403(a)(1), 42 Stat. 227, 279.
Atkins v. Commissioner, 30 F.2d 761.
Revenue Act 1924, § 303(a)(1), 43 Stat. 253, 305.
See Ferguson v. Dickson, 300 F. 961, 964.
Regulations 68, Arts. 29, 36; Regulations 70, 1926 Ed., Arts. 29, 36.
See also Regulations 80, 1934 Ed., Art. 36; Regulations 80, 1937 Ed., Art. 36.
Porter v. Commissioner, 23 B.T.A. 1016, 1025; Turner v. Commissioner, 31 B.T.A. 446; Safe Deposit & Trust Co. v. Commissioner, 35 B.T.A. 259, 265.
Porter v. Commissioner, 60 F.2d 673; Bretzfelder v. Commissioner, 86 F.2d 713; Glaser v. Commissioner, 69 F.2d 254; Carney v. Benz, 90 F.2d 747, 749, 113 A.L.R. 365; Lockwood v. McGowan, 13 F.Supp. 966, aff'd, 86 F.2d 1005.
Turner v. Commissioner, 85 F.2d 919,; Commissioner v. Bryn Mawr Trust Co., 87 F.2d 607, 609.
See § 302(c), 44 Stat. 70.
"The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, . . ."
"(c) To the extent of any interest therein of which the decedent has at any time made a transfer, . . . in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth."
See also subsection (d), 44 Stat. 71.

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