Court Opinion

ID: 4480299
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:12.127637+00
Date Added: 2024-06-11T07:57:31.974396
License: Public Domain

TaNNENwald, /., dissenting: It seems to me that the majority has been beguiled by Scottish law into permitting a deduction from the gross estate which, absent the local statute involved, would not be allowable. I also believe that even if the majority is correct on the question of consideration, the method of allocation which it adopts is erroneous. I. The Question of Consideration I am convinced that the majority decision can be supported only by importing section 2516 of the Internal Revenue Code of 1954 into the estate tax provisions, or by extending the rationale of Harris v. Commissioner, 340 U.S. 106 (1950), beyond its permissible limits. Either approach, in my opinion, constitutes unjustifiable indulgence in judicial legislation. In the Robert Story Crien Trust and in the Jane S. Durand Trust, decedent reserved life estates, one primary and one secondary. Section 2036 of the Internal Revenue Code of 1954 requires the inclusion of the principal of such trusts in the gross estate except to the extent that the transfers by which such trusts were established were made for “a consideration in money or money’s worth” within the meaning of section 2043. Subsection (b) of section 2043 specifically provides that “a relinquishment * * * of dower or curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the decedent’s property or estate, shall not be considered to any extent a consideration ‘in money or money’s worth.’ ” The basic question therefore is: What were the rights which decedent’s former wife, Jane Glen, had and which she surrendered in exchange for the provisions of the divorce settlement? The majority holds that, since under Scottish law she was entitled upon divorce to one-third of decedent’s movable estate, she surrendered at least that much. I disagree. The mere fact that a right is contained in a statute is not determinative. Waivers of statutory rights of election in the event of death are specifically excluded from consideration by section 2043 (b). The majority refers to the release by decedent’s former wife “of her rights upon divorce,” holding that this is what she gave up and that, to this extent, decedent received consideration. The hard fact is that the right of J ane Glen to one-third of the movable estate under Scottish law could not come into existence until the divorce occurred. Consequently, although divorce was contemplated, she had no right to that one-third when the settlement agreement was entered into and the transfers in trust made in May of 1938. It is significant that the agreement was in no manner contingent upon a divorce decree; it was binding upon the parties 3 months prior to the decree; If the facts in this case were that the divorce had never taken place because decedent bad died immediately following tbe establishment of the trusts (or there had been a subsequent reconciliation followed by decedent’s death), the agreement and transfers in trust would nevertheless have remained effective. I doubt that under such circumstances we would hold that the right to a full one-third would constitute consideration. It is, of course, true that many disputed claims are settled prior to the rendition of judgment or, indeed, even prior to the commencement of a lawsuit, and that in many such situations there is consideration flowing between the parties. But in each of these cases what is being settled is a right asserted to be enforceable at the time of the settlement.1 There is a difference in marital situations. A divorce decree changes the marital status and may indeed create rights the subsequent release of which would constitute adequate and full consideration. But'until the decree is entered many of those rights do not exist and therefore their earlier release does not constitute consideration within the meaning of the statute. See McMurtry v. Commissioner, 203 F. 2d 659, 664 (C.A. 1, 1953), modifying 16 T.C. 168 (1951); Farid-Es-Sultaneh v. Commissioner, 160 F. 2d 812, 815 (C.A. 2, 1947) (Judge Clark dissenting), reversing 6 T.C. 652 (1946). In my opinion, we must look to the rights Jane Glen possessed in May of 1938. Those rights were (1) an inchoate right of dower in the husband’s realty otherwise known under Scottish law as terce, (2) an inchoate right to inherit one-third of the decedent’s personal property, otherwise known under Scottish law as jus relictae, and (3) the right of a wife to support. Cloag and Henderson, Introduction to the Law of Scotland, pp. 525-531 (6th ed. 1956). These are the rights she gave up, not a statutory substitute for them which she would become entitled to only upon divorce. The only one of those rights which qualifies as adequate and full consideration is the right of support. See E.T. 19, 1946-2 C.B. 166, in which respondent recognized that release of support rights by a wife was consideration and expressly stated that he would no longer follow the cases relied upon in Estate of Robert Manning McKeon, 25 T.C. 697. It is true that the stipulation of the parties states that under Scottish law a di/oorced wife is not entitled to support. But a wife is entitled to support prior to divorce and the Scottish law provides that in the case of separation the wife is entitled to one-third of the husband’s gross income, until the first to occur of the death of the husband, the death of the wife, or the entry of a divorce decree. We have no probative evidence in the record of the decedent’s income or property other than the fact that he had $1 million of movable assets. On this basis, I think it reasonable to hold that at the minimum Jane Glen relinquished as part of the divorce settlement the right to one-third of the income on $1 million until her death or remarriage2 or until the decedent’s death, whichever first occurred, and that at least to this extent the statutory right to one-third outright was in the nature of a substitute for the right of support. Jane Glen, if she lived, was entitled to receive payments out of the income of the Jane S. Durand Trust for periods extending beyond her remarriage or decedent’s death and, to that extent, the value of her interest exceeded her technical right of support as a wife. However, I do not think we should attempt to refine the value of her support rights that closely. Perhaps if she had settled only for payments during the period of decedent’s legal obligation she would have received an interest of the same value as she actually received. The commuted value of the full interest transferred to Jane Glen has been stipulated to be $190,131. I would hold that to this extent decedent received consideration. Edward B. McLean, 11 T.C. 543 (1948); cf. Meyer’s Estate v. Commissioner, 110 F. 2d 367, 369 (C.A. 2, 1940) (Judge Hand dissenting), affirming a Memorandum Opinion of this Court, certiorari denied 310 U.S. 651. Even if the majority is correct that decedent furnished consideration to the extent of the full one-third of $1 million, I would not allow a deduction for the excess over $190,131 which decedent put in trust for the son. It seems to me that we ought not to involve ourselves in whether the transfers for the benefit of the son were motivated by the generosity of decedent or that of his former wife. To do so would be an unwarranted probing of that “elusive state of mind,” which the Supreme Court has held to be contrary to the intent of Congress. Commissioner v. Wemyss, 324 U.S. 303 (1945); see Estate of Hubert Keller, 44 T.C. 851, 860 (1965). As I have already pointed out, the right to the full one-third never vested in decedent’s former wife. She was not entitled to it until the divorce decree was entered and by that time she had waived it. There is no more of a constructive transfer here from Jane Glen to the son than there is when a legatee renounces a bequest under a will or a widow waives her right of election or her right to take in intestacy. Brown v. Routzahn, 63 F. 2d 914 (C.A. 6, 1933), certiorari denied 290 U.S. 641; sec. 25.2511-1 (c), Gift Tax Regs. Harris v. Commissioner, supra, in my opinion, has no application to tbe instant situation. That case involved the question of importing into the gift tax the “founded upon a promise or agreement” requirement of section 812(b) of the Internal Revenue Code of 1939 (the predecessor of section 2053(c) (1) (A) of the Internal Revenue Code of 1954). Neither section is involved in the instant case. The operative part of the opinion of the Supreme Court in Harris at no point states that there was consideration for the transfer or that the divorce decree constituted such consideration. In fact the Court grounded its decision on the conclusion that, because of the particular statutory provision, the divorce decree was the “operative fact.” See 340 U.S. at 110-111. In short, the presence or absence of consideration was wholly immaterial — at most the decree was a substitute for, or in lieu of, consideration. The divorce decree herein did not incorporate or otherwise deal with the marital settlement agreement between decedent and his former wife. Moreover, there is no evidence that the divorce court had any power to vary that agreement, a factor which has been considered significant in cases decided subsequent to Harris. McMurtry v. Commissioner, supra; Estate of Myles C. Watson, 20 T.C. 386 (1953), affd. 216 F. 2d 941 (C.A. 2, 1954); Rev. Rul. 60-160, 1960-1 C.B. 374. Finally, the provision discussed in Harris v. Commissioner, supra, deals with claims against the estate. In this case, we are dealing with inclusions in the gross estate covered by another section of the estate tax which has its own definitional requirements. I do not believe that, under such circumstances, we should pull ourselves up by our own bootstraps by accepting the importation of one provision of the estate tax into the gift tax via Harris and then reimporting that provision back into the estate tax — indeed, into another provision of the estate tax. It may well be that Harris ought to be extended so as to eliminate the requirement that the marital settlement agreement be incorporated in the divorce decree. But, until this case, this Court has been reluctant to extend Harris. Estate of Hubert Keller, supra; Karl T. Wiedemann, 26 T.C. 565 (1956). And Congress in a major overhaul of the entire Internal Revenue Code in 1954 saw fit so to extend Harris only in the gift tax area. See sec. 2516. Since that time, Congress has made major changes in the Internal Revenue Code by the Technical Amendments Act of 1958, the Revenue Act of 1962, and the Revenue Act of 1964. On none of these occasions did Congress attempt to incorporate section 2516 into the estate tax area, although the American Bar Association had been concerned about the problem and had recommended such action as early as 1956.3  Nor do I believe that section 2516 can be incorporated into the estate tax under the doctrine of pari materia — this possibility is suggested by the majority opinion, although it carefully refrains from specifically so doing. Much of what I have previously outlined regarding the history of section 2516, and its relevance to the estate tax, is in point here. But, beyond this, section 2516 is a substantive as distinguished from a definitional provision. Under such circumstances, I do not believe that the doctrine of pari materia is properly applicable. This distinction was clearly drawn in the opinion of the Circuit Court of Appeals in Harris v. Commissioner, supra, in dealing with another issue in that case which was not before the Supreme Court. 178 F. 2d 861 (C.A. 2, 1949); see also MacDonald v. United States, 139 F. Supp. 598 (D. Mass. 1956); Harris v. Commissioner, 340 U.S. 106, 113, 115 fn. 2 (Mr. Justice Frankfurter dissenting); 1 Mertens, Law of Federal Gift and Estate Taxation, sec. 4.05. At various points in the majority opinion, it is suggested that there are elements of hostility or arm’s-length bargaining in connection with divorce settlements which are not present in other types of nuptial arrangements. This may be true but it is not always the case. In any event, I do not believe it is the function of the courts to decide— at least in gift and estate tax cases — whether the relationship between husband and wife reflects the romantic waltz or the violent apache dance. The gift and estate tax provisions of the Internal Bevenue Code set forth an objective standard by which consideration is to be measured.4 Commissioner v. Wemyss, supra; Merrill v. Fahs, 324 U.S. 308 (1945). II. Allocation of Consideration A determination that Jane Glen furnished consideration of $190,131 does not settle the question of how much should be excluded from decedent’s gross estate. The answer to this question requires an examination of the language of section 2043 and the relationship of that section to, in this case, section 2036. Section 2043 specifies that in the case of certain transfers for insufficient consideration “there shall be included in the gross estate only the excess of the fair market value at the time of death of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent.” (Italics supplied.) The italicized words are crucial. It would appear that, in determining the amount of consideration to be deducted, the property must first be fragmentized into the various interests therein and a determination made of which interests are includable in the gross estate without regard to the existence of consideration. Only when an interest is found so to be included does one get to the question of how the consideration for that interest is to be treated. If there had been no consideration whatsoever, the value of Jane Glen’s outstanding life interest at the time of decedent’s death would be excluded under section 2036. Sec. 20.2036-1 (a), Estate Tax Regs. Such being the case, this interest is not otherwise included within the meaning of section 2043. Consequently, the consideration paid “therefor” (for this interest) should not be taken into account and the only amount that should be excluded for that interest is the amount excluded by the operation of section 2036, to wit, $82,991.35.5  The fact that only the $82,991.35 representing Jane Glen’s life interest ought to be excluded does not settle the question of how the $190,131 which she paid for her interest at the time the trust was established should be taken into account in determining the consideration under section 2043 for the other interests in the trusts. The fact is that, whatever may be the measure of the total amount of consideration which she paid, $190,131 was for her life interest. This means that, even if the majority is correct that decedent received approximately $333,000 as consideration, only approximately $143,000 of that consideration should be allocated to the remaining interests. I agree with the allocation in this regard contained in the majority opinion;6 The majority, however, goes on to give decedent credit for both the $190,131 under section 2043, and a portion of the value of J ane Glen’s life interest at the date of decedent’s death under section 2036. In this respect, I believe the majority is in error. It seems to me that, although $190,131 is deducted for purposes of calculating the amount of the consideration allocable to interests other than that of J ane Glen, it is not allowable as a deduction for the value of her outstanding life interest. That deduction is limited under 2036 to the agreed value as of the date of decedent’s death in the amount of $82,991.35, and section 2043 has no application.7    This would appear to be the rationale of decisions involving marital settlements where the parties had or were claiming present rights in each other’s property. See, e.g., United States v. Past, 347 F. 2d 7 (C.A. 9, 1965); Estate of Josephine S. Barnard, 9 T.C. 61 (1947), modified 176 F. 2d 233 (C.A. 2, 1949).    In fact, Jane Glen remarried 11 days after tlie divorce decree and approximately 3 months after the settlement agreement and transfers in trust. The record, however, does no.t-reveal that this was known to decedent at any time prior to its occurrence, although respondent was specifically afforded the opportunity of presenting evidence in this regard. Moreover, even if it’were known to decedent in May of 1938, the probabilities of remarriage within such a short period are not susceptible to actuarial calculation. -I would therefore apply only the normal actuarial values relating to remarriage and would not indulge in calculations based on actual fact, as is sometimes done in cases involving health. Cf. Commissioner v. Shively’s Estate, 276 F. 2d 372 (C.A. 2, 1960), reversing a Memorandum Opinion of this Courts    See 81 A.B.A. Rept. 155, 167. A specific proposal to incorporate sec. 2516 into the estate tax is now contained in the revenue bill introduced in the closing days of the last session of Congress. See H.R. 11450, 89th Cong., 1st Sess. (1965), sec. 71.    In dealing with the question of the effect of arm’s-length bargaining in the income tax area, the Supreme Court specifically stated that it was “unfettered by the language and considerations ingrained in the gift and estate tax statutes.” See United States v. Davis, 370 U.S. 65, 69 fn. 6 (1962).    It should be noted that, in any event, the fair market value at the date of death of an included interest is the limiting factor on the deduction permitted under sec. 2043 ; any excess in the value of the consideration paid cannot be deducted. Thus, even if Jane Glen’s interest were includable, for some reason not readily apparent, the amount excluded from decedent’s gross estate would still be limited to $82,991.35.    It will still be necessary to determine under the Rule 50 computation whether the allocation of the remaining consideration based upon ratios at the time the trusts were established should be brought forward to the date of decedent’s death. United States v. Past, supra; Vardell’s Estate v. Commissioner, 307 F. 2d 688 (C.A. 5, 1962), reversing 35 T.C. 50 (1960); Estate of Lillian B. Gregory, 39 T.C. 1012 (1963).    This; of course, produces what is superficially a peculiar situation, in that the value of what is excluded by virtue of the operation of see. 2036 is substantially less than the value of the consideration paid for the interest excluded. This, however, is nothing more than a reflection of the inevitable operation of actuarial factors based on the mortality table.