Court Opinion

ID: 4589010
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:43:18.852208+00
Date Added: 2024-06-11T07:50:10.984747
License: Public Domain

ALICE H. LESTER, AN INCOMPETENT PERSON, A. CRAWFORD GREENE, GUARDIAN OF THE ESTATE OF ALICE H. LESTER, AN INCOMPETENT PERSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lester v. CommissionerDocket Nos. 93404, 96315.United States Board of Tax Appeals41 B.T.A. 515; 1940 BTA LEXIS 1171; March 5, 1940, Promulgated *1171  1.  When the property of an incompetent is placed in the hands of a court, the court acts for and in the place and stead of the incompetent.  In such premises, the court by appropriate order may authorize a gift out of the property of the incompetent.  2.  Where a state court having jurisdiction of the estate of an incompetent finds that the husband and adult children of the incompetent are dependent on the estate of the incompetent and incapable of self-support and over a period of years makes them regular and special allowances for maintenance and support, held, the action of the state court is final and binding on the Board.  Such allowances being in recognition and satisfaction of an obligation imposed by law, they do not constitute gifts.  3.  Where the court, on petition, authorizes payments in distribution of the surplus income of the estate, such payments not being for maintenance and support or in satisfaction of an obligation imposed by law, the payments constitute gifts and are taxable as such.  Morris M. Doyle, Esq., for the petitioner.  Arthur Murray, Esq., and Frank T. Horner, Esq., for the respondent.  VAN FOSSAN *515 *1172   The respondent determined deficiencies in gift taxes of $1,332.50 and $4,077.50 for the years 1936 and 1937, respectively.  The facts were stipulated substantially as follows.  *516  FINDINGS OF FACT.  For more than thirty years last past Alice H. Lester has been and is now an insane and incompetent person and during all of said period she has been and is now confined in an institution for insane persons.  The estate of Alice H. Lester has been for more than thirty years last past and is now a matter pending in the Superior Court of the State of California in and for the County of El Dorado.  A. Crawford Greene is now and at all times since prior to June 6, 1932, has been the duly appointed, qualified, and acting guardian of the estate.  W. E. Lester was at the time of his death and for more than thirty years prior thereto had been the husband of Alice H. Lester.  W. E. Lester died on May 29, 1933.  Carolyn L. Loan and Beatrice L. Pauli are the daughters and the only children of Alice H. Lester and are the only children of Alice H. Lester and W. E. Lester.  Carolyn L. Loan is approximately forty-five years of age.  During the year 1930 Carolyn L. Loan, then Carolyn Lester*1173  Hamilton and previously Carolyn Lester, married Thomas J. Loan and ever since that date has been and is now the wife of Thomas J. Loan.  Carolyn L. Loan has no children.  Beatrice L. Pauli is approximately forty-three years of age.  During the year 1932 Beatrice L. Pauli, previously Beatrice Lester, married Frank F. Pauli and from said date until the year 1938 was the wife of Frank F. Pauli.  During the year 1938 Beatrice L. Pauli was divorced from Frank F. Pauli and is now unmarried and has never been married to any one other than Frank F. Pauli.  Beatrice L. Pauli has no children.  Alice H. Lester has always been a person of large financial means.  Prior to and at the time of the inception of her incompetency she, W. E. Lester, her husband, and Carolyn Lester (now Carolyn L. Loan) and Beatrice Lester (now Beatrice L. Pauli), her only children, all lived together as a family unit in luxury and in the manner of people of wealth.  W. E. Lester, Carolyn L. Loan, and Beatrice L. Pauli continued to live together as a family unit until the marriage of Carolyn L. Loan.  Thereafter W. E. Lester and Beatrice L. Pauli continued to live together until the marriage of Beatrice L. Pauli.  Since*1174  the incompetency of Alice H. Lester the only means of support available to Carolyn L. Loan and Beatrice Pauli has been the estate of Alice H. Lester.  Alice H. Lester has no will.  From time to time since the inception of the incompetency of Alice H. Lester, the Superior Court of the State of California in and for the County of El Dorado, acting in the matter of the estate of Alice H. Lester, made certain orders for the payment of money from the estate to W. E. Lester (until his death on May 29, 1933), *517  Carolyn L. Loan, and Beatrice L. Pauli.  (Copies of such orders were submitted as part of the stipulation of facts.) Typical of the findings of fact of the court, appearing in the several orders, are the following: That pursuant to orders of this court heretofore given and made in the above entitled matter, said petitioner [Carolyn L. Loan] is now receiving an allowance in the amount of One thousand (1,000) dollars a month out of the estate of said Alice H. Lester for her maintenance and support.  That since the amount of said allowance which said petitioner is now receiving out of the estate of said ward was fixed by this court living costs have increased ot such*1175  an extent that said allowance is no longer adequate to maintain and support said petitioner in accordance with her circumstances and accustomed mode of living.  That if said petitioner is to continue to live and maintain herself in the manner to which she is accustomed it is necessary that the allowance which she now receives out of the estate of said ward for said purpose be increased as hereinafter provided.  That said allowance in the amount of One thousand (1,000) dollars a month is not and for some time past has not been sufficient to enable said petitioner to pay the expenses of her maintenance and support without hardship and inconvenience.  That it is therefore necessary that said petitioner be granted a further allowance out of the income of the estate of said Alice H. Lester for her maintenance and support.  That it is necessary for the comfortable and suitable maintenance and support of the family of said Alice H. Lester, of which said petitioner is a member, that the aforesaid allowance which said petitioner is now receiving for her maintenance and support be increased from the sum of One thousand (1,000) dollars a month to the sum of One thousand two hundred and fifty*1176  (1,250) dollars a month.  That said petitioner is now and at all times herein mentioned has been wholly dependent upon the estate of said Alice H. Lester for her maintenance and support and that she has no other means with which to defray her living expenses.  That Thomas J. Loan is the husband of said petitioner and that he is unable to support and maintain said petitioner in the manner to which she has been accustomed or to make any substantial contribution toward meeting the expenses of the maintenance and support of said petitioner.  That the monthly income of the estate of said Alice H. Lester is amply sufficient to permit of said additional allowance being made to said petitioner without loss or injury ot said estate.  That said Alice H. Lester would, herself, if she had the capacity to act, consent that the allowance which said petitioner is now receiving for her maintenance and support out of the income of the estate of said ward be increased from One thousand (1Ooo) dollars a month to One thousand two hundred and fifty (1,250) dollars a month as hereinafter authorized and directed.  Typical of the phrasing of the orders of the court is the following: That said petition*1177  of Carolyn L. Loan be and the same is hereby granted.  That the allowance in the amount of One thousand (1,000) dollars a month which said Carolyn L. Loan is now receiving out of the income of the estate of said ward for her support and maintenance be and the same is hereby increased to the sum of One thousand two hundred and fifty (1,250) dollars a month, the said increased allowance to commence as of the eighteenth day of March, 1935, and to continue until the further order of this court.  *518  That A. Crawford Greene, as guardian of the estate of said Alice H. Lester, an incompetent person, be and he is hereby authorized, empowered and directed ot pay to said Carolyn L. Loan said increased allowance in the amount of One thousand two hundred and fifty (1,250) dollars a month out of the income of the estate of said ward monthly, in advance, on the first day of each and every calendar month hereafter until the further order of this court.  A. Crawford Greene, as guardian of the estate of Alice H. Lester, made payments of money from the estate during the period commencing June 6, 1932, and ending December 31, 1937, pursuant to said orders.  At the time of his death in*1178  May 1933, W. E. Lester left an estate appraised at approximately $38,000, consisting of securities, jewelry, and cash, which was thereafter, and during 1934, distributed in three equal shares to Carolyn L. Loan, Beatrice L. Pauli, and the estate of Alice H. Lester.  The estate had been accumulated by W. E. Lester from the payments made to him from the estate of Alice H. Lester, pursuant to court order.  At all times from June 6, 1932, until his death on May 29, 1933, W. E. Lester was an invalid and was largely confined to bed and was unable to work and was, except for the payments made or accumulations from payments previously made to him from the estate of Alice H. Lester, a poor person unable to maintain himself by work.  Except to the extent of their interest, if any, in the estate of Alice H. Lester, and except for the payments made to them from the estate pursuant to court orders, and except for the aforesaid distributions ot them from the estate of W. E. Lester in 1934, Carolyn L. Loan and Beatrice L. Pauli, and each of them, have at all times since prior to June 6, 1932, been poor persons unable to maintain themselves by work.  Frank F. Pauli, husband of Beatrice L. Pauli, has*1179  never contributed to the support or maintenance of Beatrice L. Pauli.  Thomas Loan, husband of Carolyn L. Loan, has never contributed to the support or maintenance of Carolyn L. Loan.  Carolyn L. Loan and Beatrice L. Pauli were from birth accustomed to a life of ease and luxury, and neither of them was trained for any gainful occupation and neither of them was during any of said times able to engage in any gainful occupation.  Prior to the calendar year 1937, the Superior Court of the State of California, in and for the County of El Dorado, refused to order any payments to be made from the estate of Alice H. Lester to Carolyn L. Loan, Beatrice L. Pauli, and W. E. Lester, or any of them, except for their maintenance and support.  The amounts ordered by the court to be paid to them for maintenance and support were liberal and were influenced by the situation of the persons to whom the payments were to be made.  During the calendar year 1937 and thereafter *519  the court ordered certain payments to be made from the estate to Carolyn L. Loan and Beatrice L. Pauli in addition to payments for maintenance and support, and such payments were made pursuant to such orders.  Such additional*1180  payments were ordered to be made pursuant to the provisions fo the California Probate Code, section 1558, which was enacted in 1935, and which provides as follows: Allowances by court to next of kin of an insane or incompetent person out of surplus income. On the application of the guardian or next of kin of an insane or incompetent person, the court may direct the guardian to pay and distribute surplus income, not used for the support and maintenance of the ward, or any part of such surplus income, to the next of kin whom the ward would, in the judgment of the court, have aided, if said ward had been of sound mind.  The granting of such allowance and the amounts and proportions thereof shall be discretionary with the court, but the court shall give consideration to the amount of surplus income available after due provision has been made for the proper support and maintenance of the ward, to the circumstances and condition of life to which the ward and said next of kin have been accustomed and to the amount which the ward would, in the judgment of the court, have allowed said next of kin, had said ward been of sound mind.  Notice of the hearing on said application shall be given*1181  as provided in section 1557 of this code.  The dates and amounts of payments made to and received by W. E. Lester, Carolyn L. Loan, and Beatrice L. Pauli from the estate of Alice H. Lester pursuant to court order from and after June 6, 1932, to and including the calendar year 1937, are as follows: For the Year 1932.Date of paymentW. E. LesterBeatrice L. PauliCarolyn L. LoanJuly 1$1,250.00$1,000.00$1,000.00Aug. 11,250.001,000.001,000.00Sept. 1937.50750.00750.00Oct. 1937.50750.00750.00Nov. 1937.50750.00750.00Dec. 1937.50750.00750.00Dec. 28 Additional2,392.836,250.005,000.007,392.83For the Year 1933.Jan. 1$937.50$750.00$750.00Feb. 1937.50750.00750.00Mar. 1937.50750.00750.00Apr. 1937.50750.00750.00Apr. 27 Additional220.00May 1937.50750.00750.00May 19 Additional220.00June 1750.00750.00July 1750.00750.00July 7607.70816.49Aug. 1750.00750.00Sept. 1750.00750.00Oct. 1750.00750.00Nov. 1750.00750.00Dec. 1750.00750.005,127.509,607.709,816.49For the Year 1934.Date of paymentW. E. LesterBeatrice L. PaulCarolyn L. LoanJan. 2$750.00$750.00Feb. 1750.00750.00Mar. 1750.00750.00Apr. 2750.00750.00May 1750.00750.00May 23250.00250.00June 11,000.001,000.00July 21,000.001,000.00Aug. 11,000.001,000.00Sept. 11,000.001,000.00Oct. 11,000.001,000.00Nov. 11,000.001,000.00Dec. 11,000.001,000.0011,000.001 11,000.00*1182 For the Year 1935Date of paymentBeatrice L. PauliCarolyn L. LoanJan. 2$1,000.00$1,075.00Feb. 11,000.001,075.00251,000.00Mar. 11,000.0075.0011 Additional acct. illness561.0015 do245.0022 do245.0029 do131.00Apr. 11,000.001,075.003 Additional from Mar. 18 to Apr. 30 incl362.91362.915 Additional acct. illness80.0012 do35.0019 do35.0026 do35.00May 11,250.001,325.003 Additional acct. illness35.0010 do35.0017 do35.0024 do35.0031 do35.00June 11,250.001,325.007 Additional acct. illness20.0014 do20.00July 11,250.001,325.00Aug. 11,250.001,325.00Sept. 31,250.001,325.00Oct. 11,250.001,325.00Nov. 11,250.001,325.00Dec. 21,250.001,325.0014,362.912 16,844.91*1183 For the Year 1936Jan. 2$1,250.00$1,250.00Feb. 11,250.001,250.00Mar. 11,250.001,250.00Apr. 11,250.001,250.00Apr. 82,500.00Apr. 182,500.00May 11,250.001,250.00June 11,250.001,250.00July 11,250.001,250.00Aug. 11,250.001,250.00Sept. 11,250.001,250.00Oct. 11,250.001,250.00Oct. 73,500.003,500.00Nov. 11,250.001,250.00Dec. 11,250.001,250.0021,000.0021,000.00For the Year 1937Date of paymentBeatrice L. PauliCarolyn L. LoanJan. 2$1,250.00$1,250.00Feb. 11,250.001,250.00Mar. 11,250.001,250.00Apr. 11,250.001,250.00May 11,250.001,250.00May 135,000.005,000.00June 11,250.001,250.00July 11,250.001,250.00Aug. 21,250.001,250.00Sept. 11,250.001,250.00Oct. 11,250.001,250.00Nov. 11,250.001,250.00Dec. 11,250.001,250.0020,000.0020,000.00*521  On October 19, 1937, the Superior Court of the State of California, in and for the County of El Dorado, acting under the provisions of section 1558 of the California Probate Code, made an order directing the guardian to pay*1184  to Carolyn L. Loan and Beatrice L. Pauli, out of certain surplus income of the ward, the sum of $7,500 each in addition to the payments hereinbefore listed.  On October 20, 1937, pursuant to the court order, the guardian paid to Beatrice L. Pauli and Carolyn L. Loan out of such surplus income the sum of $7,500 each.  During the calendar years 1932 to 1937, both inclusive, the gross income of the estate of Alice H. Lester was approximately as follows: 1932$121,931.00193391,473.85193488,385.741935$68,468.911936109,673.531937142,614.13During the calendar years 1932 to 1937, inclusive, the net surplus income remaining in the estate after the payment of all costs of administration, support and maintenance of the ward, taxes, and all expenses of every kind and character (including the payments to W. E. Lester, Carolyn L. Loan, and Beatrice L. Pauli hereinbefore set forth) was approximately as follows: 1932$34,714.83193332,038.75193428,396.411935$9,036.16193635,791.09193740,575.05During the calendar years 1932 to 1937, inclusive, the sums necessary for and applied to the adequate care and maintenance of Alice*1185  H. Lester were approximately as follows: 1932$10,561.06193310,576.06193410,052.161935$9,450.3419369,367.3219379,886.26The value of the principal of the estate of Alice H. Lester during the period 1932 to 1937, both inclusive, has exceeded $2,000,000.  *522  Gift tax returns, in which the facts were set forth and nonliability claimed, were duly filed each year by the guardian.  Respondent determined deficiencies in gift taxes of $1,332.50 and $4,077.50 for the years 1936 and 1937, respectively.  OPINION.  VAN FOSSAN: In these cases we have the question whether payments made from the income of the estate of an incompetent woman, pursuant to order of a California court having jurisdiction of the estate, the payments being for the maintenance and support of the husband of the incompetent and her two daughters, are subject to gift tax under the provisions of section 501 of the Revenue Act of 1932, as amended by the Revenue Acts of 1934 and 1935.  There is also involved the status of payments made in 1937 by way of distribution of the surplus income of the estate.  Deficiencies for the years 1936 and 1937 only are in contest but computation*1186  of the deficiencies involves consideration of prior years and the extent to which the statutory exemption was exhausted in such years.  In support of the contention that none of the payments were gifts, petitioner urges that the incompetent was incapable of forming a donative intent; that the payments were obligatory under California law; that the action of the California court of jurisdiction is binding and can not be questioned by this Board.  We can not agree with petitioner's first argument, based on the inability of the incompetent to form a donative intent.  When the property of an incompetent is placed in the hands of the court, the court acts for, and in the place and stead of the incompetent.  In such a situation the incompetent, acting through the court, could make a valid gift.  City Bank-Farmers Trust Co. v. Hoey,23 Fed.Supp. 831; affd. (C.C.A., 2d Cir.), 101 Fed.(2d) 9; Farwell v. Commissioner, 38 Fed.(2d) 791; In re Farmers' Loan & Trust Co.,168 N.Y.S. 952">168 N.Y.S. 952. We agree, however, with petitioner's position, and respondent does not seriously contend otherwise, that, in so far as the court of jurisdiction*1187  in the matter decreed the payments to be necessary for the support and maintenance of the dependents of the incompetent and so ordered, this Board is powerless to review such action.  Freuler v. Helvering,291 U.S. 35">291 U.S. 35; Blair v. Commissioner,300 U.S. 5">300 U.S. 5; Susan B. Armstrong,38 B.T.A. 658">38 B.T.A. 658; Estate of Frederick R. Shepherd,39 B.T.A. 38">39 B.T.A. 38. There is no claim by respondent that the payments were procured by collusion.  It matters not that we might, on the evidence, have acted differently.  The orders of the court have become final and are conclusive.  *523  It is stipulated, in effect, that the husband and two daughters were at all times dependent on the estate for maintenance and support and that except for the support so received they "have at all times since prior to June 6, 1932, been poor persons unable to maintain themselves by work", thus satisfying the requriements of section 206 of the California Civil Code. 1 See also section 1502, California Probate Code2 and cases cited below. 3*1188  Thus all payments specifically allowed and ordered by the court as necessary for the maintenance and support of the three dependents take their character from such orders, and, being in satisfaction of an obligation imposed by law, are not to be classed as gifts.  The above conclusion eliminates from discussion all items except the payment of $7,500 to each of the daughters pursuant to the court order of October 19, 1937.  These payments were authorized by the court after receipt of a petition of the daughters, dated September 18, 1937, in which a partial account of the income and expenses of the estate was incorporated.  The petition recites the fact of the allowance of $1,250 per month to each daughter for maintenance and support; informs the court of the impossibility of the incompetent returning to competency; states that "no purpose is served by further accumulations of income in said estate", and asks distribution of "all or so much of the aforesaid surplus income" as the court shall deem proper.  The order of the court decreed as follows: ,"that the sum of $7,500 be and it is hereby allowed and distributed to each of the said Carolyn L. Loan and Beatrice L. Pauli out of*1189  the aforesaid surplus income of said ward." The order did not purport to authorize additional payments for maintenance and support.  The question is, Were they gifts?  Light is thrown on the situation by examination of the order of the court dated May 13, 1937, denying an application of the guardian dated March 18, 1937, for authority to make a similar distribution of all or part of the surplus income to the children.  It was stated "that this court is not convinced that said Alice H. Lester, if she were competent and able to act for herself, would at this time make to each of her said daughters a gift of income as prayed for in said petition." After the above observation the court "ordered, adjudged and decreed *524  as follows: That said petition be and it is hereby denied in so far as an allowance or distribution in the nature of a gift to said daughters of said Alice H. Lester of the aforesaid income of said ward, or any part thereof, is concerned." (Emphasis supplied.) The court thereupon made a special additional allowance to each daughter specifically for maintenance and support.  The payments of $7,500 were exactly such payments as would have been made in*1190  response to the petition of the guardian had the court then been convinced that it should authorize the payments.  Although the characterization by the court of the payments as gifts in denying a previous application is not in the same category and of the same legal effect here as the characterization of payments for maintenance and support, at the least it is persuasive.  If distributions of surplus income, not specifically for maintenance and support, were, in the court order denying the application of the guardian to distribute surplus income, properly characterized as "a gift of income" or "in the nature of a gift", it would seem to follow that such distributions of income, when authorized on the petition of the daughters, constituted gifts.  In our opinion the payments of $7,500 to the daughters in 1937, not being for maintenance and support and thus not being in satisfaction of an obligation by law, were gifts.  Albeit it is stipulated that the payments were made by virtue of section 1558 of the California Probate Code providing for distribution of surplus income to the next of kin whom the ward would, in the judgment of the court, have aided if said ward had been of sound mind, *1191  we are convinced that in authorizing such payments the court considered that it was authorizing gifts in the amounts specified.  City Bank-Farmers Trust Co. v. Hoey, supra;Farwell v. Commissioner, supra, and cases there cited.  We hold these payments taxable as gifts.  Certain minor adjustments arising from concessions of the parties will be taken into account in the recomputation consequent hereon.  Reviewed by the Board.  Decisions will be entered under Rule 50.MELLOTT dissents.  STERNHAGEN, DISNEYSTERNHAGEN, dissenting: The amounts distributed by the guardian to the husband and the daughters were transfers without "an adequate and full consideration in money or money's worth" and, therefore, by reason of section 503 of the Revenue Act of 1932, they should "be deemed a gift." Furthermore, I think the order of the state court does not per se establish that the transfer was in discharge of an obligation or that it was other than a gift under the revenue act.  MURDOCK and HARRON agree with this dissent.  $525 *525 DISNEY, dissenting: I must dissent.  If this was a transfer for less than full and adequate*1192  consideration it was pro tanto a gift.  Sec. 503, Revenue Act of 1932.  Assuming, without holding, that the discharge of a legal obligation would be such consideration, there is nothing in this proceeding which justifies the assumption that any legal obligation of the incompetent was commensurate with the payments in question.  I do not believe that section 206 of the California Civil Code should be construed to require the father or mother of an adult child, not physically nor mentally incompetent, to maintain such child to an extent fully commensurate with the financial ability of the parent.  I think the statute means that such parent should provide the reasonable necessities, if he is able and to the extent that he is able, but not that he should do more and supply luxuries or beyond the point of necessities merely because he is financially able so to do.  Other California statutes, I think, indicate this to be sound construction, for Act 5814, California Criminal Code, provides that a parent is liable for the support of a poor person to the amount determined upon by the supervisors of the poor and for clothes and other supplies furnished such poor person; while P270, page*1193  176, of the California Criminal Code makes a father guilty of misdemeanor for failure to supply "necessary food, clothing, shelter or medical attendance", for a minor child.  Therefore, I think it is not only out of line with the general law upon the subject, but out of line with the California law, to hold as the majority opinion holds that a parent must maintain adult children, not physically nor mentally incapacitated, upon a scale of living measured by the wealth of the parent, even though such scale is far beyond ordinary necessities.  Furthermore, it seems to me that the statute construed by the California Probate Court was section 1502, California Probate Code, and that therefore the decision of the court is of no further or broader effect and is not binding upon us under the principles of Freuler v. Helvering,291 U.S. 35">291 U.S. 35. OPPER agrees with this dissent.  Footnotes1. In addition to the aforesaid allowances received by her, Carolyn L. Loan during the calendar year 1934 received the sum of $542.13 to repay her for various legal fees incurred by her. ↩2. This sum includes $900 paid to Carolyn L. Loan during 1935 to reimburse her for expenses incurred in the upkeep and maintenance of certain property of the estate of Alice H. Lester. ↩1. It is the duty of the father, the mother and the children of any poor person who is unable to maintain himself by work, to maintain such person to the extent of their ability.  [Sec. 206, California Civil Code↩.] 2. Every guardian of an estate must manage it frugally and without waste, and apply the income, as far as may be necessary, to the comfortable and suitable support, maintenance and education of the ward and his family, if any; and if the income is insufficient for that purpose, he may sell or mortgage or give a deed of trust upon any of the property, as hereinafter provided. [Sec. 1502, California Probate Code↩.] 3. Tuller v. Superior Court,10 Pac.(2d) 43 (Cal.); Janes v. Edwards,41 Pac.(2d) 370 (Cal.); 20 California Jurisprudence 416; Gamble v. Leva,102 So. 120">102 So. 120↩ (Ala.).