Opinion ID: 324987
Heading Depth: 2
Heading Rank: 2

Heading: Payment to Guardian of Beatrice Tina

Text: 34 The second issue on this appeal involves the deductibility for estate-tax purposes of a $264,000 payment by the executors of decedent's estate to Constance Trevor de Schulthess, as guardian for her daughter Beatrice Tina. 35 The decedent and his second wife, Constance, were married on February 2, 1958. On August 13, 1958, their daughter, Beatrice Tina, was born. One year later Constance filed an action for divorce. Following extensive negotiations, the decedent and Constance entered into a property-settlement agreement, one clause of which provided as follows: 36 '12A. Testamentary Gift to Child.--The Husband shall promptly make and execute and keep in effect until his death a Will under which he shall devise and bequeath property to Beatrice Tina de Schulthess in an amount at least equal to the sum of the following: 37 (a) $250,000, and 38 (b) the greater of: 39 (i) the difference between an amount equal to the product of $6,000.00 multiplied by the number of January 15ths since the date of this agreement and the aggregate of the amounts contributed to the trust estates referred to in Paragraphs 11 and 12 of this agreement, or 40 (ii) the difference between $54,000.00 and the aggregate of the amounts contributed to the trust estates referred to in Paragraphs 11 and 12 of this agreement. 41 The provisions contained in this Paragraph 12A are in addition to those contained in any and all other paragraphs hereof.' 42 This property-settlement agreement was approved and incorporated into an interlocutory judgment of divorce entered on January 17, 1961. 43 Although the decedent did make a bequest to Beatrice Tina, the amount was uncertain. Constance filed a creditor's claim for $273,900 based on the quoted clause of the property-settlement agreement. The executors rejected the claim in part, but after Constance had filed suit in state court, the matter was settled, and $264,000 was paid to Constance in satisfaction of the claim filed on behalf of Beatrice Tina. 44 In their claim for refund, the taxpayers contended that this payment was a deductible claim against the estate under section 2053(a)(3) of the Internal Revenue Code, 26 U.S.C. § 2053(a)(3). The government replied that although Beatrice Tina had an enforceable claim under local law, the claim was not supported by adequate and full consideration in money or money's worth, as required by section 2053(c)(1)(A). See Lyeth v. Hoey, 305 U.S. 1888 194, 59 S.Ct. 155, 83 L.Ed. 119 (1938). The district court agreed with the taxpayers, finding that the $264,000 payment was based upon a promise by the decedent contracted bona fide and for an adequate and full consideration, and concluding that the payment was deductible. 45 Section 2053(a)(3) does authorize deductions from the gross estate for amounts paid to satisfy 'claims against the estate.' However, subsection (c)(1)(A) further provides that deductions 'shall, when founded on a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth   .' One purpose of this limitation is to prevent testators from depleting their estates by transforming bequests to the natural objects of their bounty into deductible claims. United States v. Stapf, 375 U.S. 118, 130--133, 84 S.Ct. 248, 11 L.Ed.2d 195 (1963). 46 We begin our analysis by looking to two decisions of this court construing an analogous provision of the Internal Revenue Code. 4 In United States v. Past, 347 F.2d 7 (9th Cir. 1965), we scrutinized a property-settlement agreement made in anticipation of divorce. There the husband and wife jointly transferred certain community property into a trust, with the income payable to the wife for her life and the remainder payable to the couple's children. When the wife died, the Commissioner included the entire corpus of the trust in her gross estate. The district court held instead that none of the property was includible because the decedent had received adequate and full consideration from her husband for making the transfer. We reversed, holding that the fact that the transfer was part of a property-settlement agreement incident to a divorce was insufficient in itself to make the transfer one for an adequate and full consideration. The value of what the decedent received must be measured against the value of what she transferred. Since in Past the decedent received less than she transferred, we held that the trust property was not excludible from federal estate tax upon her death. 47 In Estate of Haskins v. United States, 357 F.2d 492 (9th Cir. 1966), we again were faced with a property-settlement agreement incident to a divorce. There, as part of the agreement, the husband placed money in a trust in which he reserved a life estate with the remainder to his children. We affirmed a district court decision holding that the corpus of this trust was includible in the decedent's gross estate. We noted that both parents were devoted to their children and keenly mindful of parental obligation. Testamentary provisions for the care of children, even though required by a property-settlement agreement, were not necessarily made for monetary consideration but could be viewed as a form of estate planning by the couple. 48 The government contends that Haskins requires us to reverse the judgment of the district court holding that the payment to Constance was a deductible claim against the estate. However, in Haskins the district court specifically found that there was no consideration for the transfer; here, the district court found that there was. Moreover, Haskins did not establish a per-se rule that a testamentary provision for one's own children could never be made for monetary consideration. 49 In Hartshorne v. Commissioner, 402 F.2d 592, 594 n. 2 (2d Cir. 1968), the government did take the position that a bequest to one's own children can never be a 'claim against the estate' within the meaning of section 2053 because such a bequest is simply an agreement to make a testamentary disposition to persons who are the natural objects of one's bounty. The Court of Appeals for the Second Circuit rejected this absolute position, and so do we. The Second Circuit noted, in language which conforms to the test laid down in Past and Haskins: 50 '   Under exceptional circumstances    it may be that a claim by someone who might otherwise inherit from the decedent should be deductible under section 2053. If the claim is not simply a subterfuge for a nondeductible legacy, if the claim is supported by 'adequate and full consideration,' and if the consideration is a non-zero sum which augmented the decedent's estate, then it would seem that the deduction should be allowed. Whether or not a particular claim is deductible, then, will depend on the facts in each case.' 402 F.2d at 594--595 n. 2. 51 Constance's claim on behalf of Beatrice Tina meets this standard. The case presents the 'exceptional circumstances' to which the Second Circuit alluded. 52 The testimony before the district court was sharply conflicting on the question whether the decedent's agreement to make the bequest to Beatrice Tina was bargained for or merely gratuitous. Because the taxpayers prevalied gratuitous. Because the taxpayers prevailed evidence in the light most favorable to them. United States v. Disney, 413 F.2d 783, 787 n. 2 (9th Cir. 1969). Viewing the evidence in this light, we affirm as not clearly erroneous the district court's finding that decedent's promise was contracted bona fide and for an adequate and full consideration. 53 Decedent's will suggests that Beatrice Tina might not necessarily have been a natural object of the decedent's bounty. His will established his first wife and her daughters as the residuary beneficiaries of his estate; by contrast, nothing was left to Constance and no more to Beatrice Tina than was required by the property-settlement agreement. His attorney testified that the decedent knew that his first two daughters' share of the residuary estate would be worth considerably more than the amount promised to Beatrice Tina. Moreover, these two daughters already had the inter vivos trusts which are the subject of the first issue on this appeal. 54 The record strongly suggests that the decedent and Constance were not equally concerned with the financial walfare of their daughter, and that Constance felt she had to wrench from her husband--or at least from her husband's lawyers--the promise to leave a bequest to Beatrice Tina. She feared that because of the circumstances concerning the marriage and the birth of their daughter, her child might not be treated equally with the children of the first marriage, The decedent's attorney testified that the decedent did give a preference in financial matters to his first two daughters, in part because he felt that Constance was more self-assertive than his first wife and would always manage to provide for her child. 55 Constance's initial demands for support payments for herself were within the range of California court awards in similar cases. Nonetheless, she accepted a substantially smaller sum, partly in consideration for her husband's promise to bequeath more than $250,000 to their daughter. Constance apparently felt that she could spend her support payments more freely and would not have to set aside part for her estate if she knew that her child would be taken care of in the event of her ex-husband's death. Thus, by accepting reduced alimony, Constance paid for her husband's promise to leave money to their daughter; in effect, she diverted to her daughter that consideration which otherwise would have flowed to herself. Although the property-settlement agreement might have spelled out more precisely what Constance relinquished in exchange for her husband's promise to leave their daughter a bequest, the record supports the finding that the promise was contracted for in good faith for value which augmented the decedent's estate. 56 The district court's holding that only the actuarial value of the remainder interests in the trusts for Celeste and Catherine was includible in the gross estate is reversed. The remainder of the district court's holding is affirmed. 57 The district court's judgment is vacated and remanded for entry of a modified judgment consistent with this opinion. Neither party shall recover costs.