*893 1. Where the wife of a decedent in a community property state (Washington) waives all her interest in the marital community and acquiesces in the creation by her husband of a testamentary trust disposing of all his property (with unimportant exceptions), including all community property, held, that there is no present transfer to the husband by reason of the waiver which will justify the inclusion of the wife's share of the community property in the decedent's gross estate.
2. Where the decedent by a trust indenture has subjected the proceeds, not otherwise includable in his gross estate, of policies of insurance on his life to the payment of the expenses of his last illness and burial, such proceeds are to that extent includable in his gross estate; following Marmaduke B. Morton, Administrator,23 B.T.A. 236">23 B.T.A. 236.
3. Since only one-half of the community estate passed at decedent's death, only one-half of the decedent's last illness and burial expenses are deductible, following Lang's Estate v. Commissioner, 97 Fed.(2d) 867.
*128 This case involves a deficiency in Federal estate tax of $2,036.85. As decedent died in 1934, the Revenue Act of 1926 as amended in 1932 and 1934, is applicable. Three questions are raised - (1) whether in the circumstances the entire property of the marital community was includable in the gross estate of the deceased husband; (2) whether the sum of $2,085.50, representing proceeds of policies of insurance on decedent's life, were includable; and (3) whether the funeral and administration expenses allowed by the respondent were in excess of the proper deduction.
FINDINGS OF FACT.
Petitioner is executor of the will of Frank V. Morgan, who died domiciled at Seattle, Washington, on November 17, 1934. On November 17, 1935, petitioner, as executor, filed a Federal estate tax return in which one-half of the property of the marital community was returned as the decedent's estate, the other half being treated as the property of the decedent's widow, Gertrude Grace. The Commissioner determined that the whole marital estate was taxable.
The decedent and Gertrude Grace Morgan were married on November 10, 1895.
*129 On*895 March 18, 1931, the decedent executed his last will, the pertinent parts of which are as follows:
FIRST: I direct that all my just debts and funeral expenses be paid as soon after my decease as conveniently may be.
SECOND: I declare that I have one, and child, namely, my son Percy Avery Morgan.
THIRD: I give, devise and bequeath unto my beloved wife Gertrude Grace Morgan, of Seattle, Washington, my residence property at No. 2114 Queen Anne Avenue, Seattle, Washington, more particularly described as Lot Thirteen (13) of Block Eight (8) of Cove Addition to the City of Seattle, King County, Washington; and in the event that said residence property shall have been sold or disposed of prior to my death, in that event I give, devise and bequeath unto my said wife such other property, including the land and buildings and improvements thereon situate, as may be used and occupied by myself and my said wife as our home at the time of my death.
I further give and devise unto my said wife that certain real estate situate in the county of King, State of Washington, described as follows: the East forty-eight feet of the South twenty feet of Lot Five, and the East forty-eight feet of the*896 South twenty feet of Lot Six, Block Eighteen, in Comstock's Addition to the City of Seattle, Washington.
I further give and bequeath unto my said wife all my household goods, furniture and furnishings and my automobile.
FOURTH: All the rest, residue and remainder of my property and estate, whether real or personal and of every description whatsoever and wheresoever situate, of which I may die seized and possessed or may be entitled to, I give, devise and bequeath unto the THE PACIFIC NATIONAL BANK OF SEATTLE, Washington, a corporation as Trustee, and upon the trusts and for the uses and purposes and with the powers specified and set forth in that certain Trust Agreement, bearing date March 18th, 1931, executed by and between myself as Trustor and the said PACIFIC NATIONAL BANK OF SEATTLE as Trustee.
FIFTH: I hereby declare that in making this, my Last Will and Testament, I am disposing of, devising and bequeathing not only any separate estate I may have at the time of my death but also all the community property and estate of myself and my said wife, including the community interest and share of my wife therein, to all of which my said wife has consented and has elected to*897 take under this will by written instrument executed by her and bearing date the 18th day of March, 1931.
SIXTH: After the admission of this my last will and testament to probate, I direct that no letters testamentary issue, and that my executor hereinafter named manage and settle my estate without the intervention of any court, and my said executor shall have, and is hereby given, full power and authority to sell, convey, mortgage or otherwise dispose of or encumber my property and estate, or any part thereof, without the order, intervention or confirmation of any court; it being my intention to make this what is commonly known as a nonintervention will.
LASTLY: I nominate and appoint THE PACIFIC NATIONAL BANK OF SEATTLE, Washington, the executor of this my last will and testament, and direct that no bond be required of such executor; hereby revoking all former wills by me made.
The waiver of all community and separate property rights made by decedent's wife referred to in his will, which was executed on the same day as the will, was drawn upon a printed blank form furnished *130 by the Pacific National Bank of Seattle and acknowledged before a notary public, and is*898 as follows:
WAIVER OF WIFE TO COMMUNITY AND SEPARATE PROPERTY RIGHTS, AND ELECTION TO TAKE UNDER WILL
I, Gertrude Grace Morgan, the wife of said Frank B. Morgan, the maker of the foregoing WILL, having read it in its entirety, and clearly understanding that my said husband by his said WILL disposes not only of all of his separate estate, but also all of our community property, in case there is any such, including the share thereof which I am entitled to take and receive by law upon his death, as well as his own share or interest therein, being fully convinced in my own mind of the reasonableness and equity of said WILL and the wisdom of its provisions and in consideration of the provisions made for me therein, I hereby elect to and do accept, acquiesce in and agree to said WILL and all of its provisions, including disposition at the death of my said husband of all our community property thereunder, and hereby waive all claims to my share of any community property, and any and all other claims, rights, interests and estates which I may have at the time of the demise of my said husband, upon or in all of his separate property and all of our community property, including all of his*899 property exempt from execution, but not including, however, and expressly excepting therefrom, my right to a probate homestead, and to a family allowance out of the estate of my said husband during the probate administration thereon, and I hereby accept such of the said provisions of said WILL as apply to or concern me, except as above expressly excepted.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this day of March 18th, 1931, at the City of Seattle, County of King, State of Washington.
[Signed] GERTRUDE GRACE MORGAN.
On the same day as the execution of his will, March 18, 1931, the decedent made a gift in trust to petitioner as trustee, the trust agreement's first eight articles being a regular printed form used by the bank, and the other articles added to meet the specific requirements of the settlor. The agreement, so far as relevant, was as follows:
ARTICLE I. - Property Covered by Agreement.
This agreement shall cover:
(a) The money that may accrue or become payable at the Trustor's death upon the policies described in Schedule "A" attached hereto, including additional policies subsequently made subject hereto after deduction of any then outstanding*900 loans or advances now or hereafter made by the respective insurance companies on account of any such policies.
(b) Any other property, real or personal, devised, bequeathed, assigned, granted or conveyed to the Trustee by the Trustor or by any other person for the purpose of the trust hereby created, such property to be held by the Trustee subject to the terms of this indenture in the same manner as if it had been included in the description of the property hereby transferred to the Trustee.
* * *
ARTICLE IX. - DISTRIBUTION OF TRUST PROPERTY.
(a) From the funds received hereunder the Trustee shall pay the expenses of the last illness and burial of the Trustor.
*131 (b) The balance of the fund subject hereto shall be invested as provided herein and the Trustee shall pay the net income therefrom in approximately equal monthly installments to GERTRUDE GRACE MORGAN, wife of the Trustor, and hereinafter called the "beneficiary", as long as she shall live, provided, however, that if said net income does not equal Three Hundred ( $300) Dollars per month, the Trustee shall pay said beneficiary from both principal and income a minimum amount of Three Hundred ( $300) Dollars*901 each month; and provided further that the Trustee may in its discretion make additional payments to the beneficiary in excess of Three Hundred ( $300) Dollars per month or in excess of the net income of the trust property if such additional payments in the discretion of the Trustee are necessary or advisable to provide for the care and comfort of the beneficiary.
(c) At the death of the survivor of the Trustor and the beneficiary the balance of the trust estate shall be distributed to PERCY AVERY MORGAN, son of the Trustor and the beneficiary. If said son is not then living said balance shall be held in trust by the Trustee upon the following terms and conditions:
If Emma Morgan, wife of said son, shall survive him and if she shall then be unmarried and if at the time of the death of said son he and Emma Morgan were living together as husband and wife, the Trustee shall pay the net income from said trust property to Emma Morgan as long as she shall live, provided, however, that the Trustee may in its discretion pay her portions of the principal from time to time if such payments are necessary or advisable in the opinion of the Trustee to provide for her maintenance or for the*902 care, support and education of any child of Emma Morgan and said Percy Avery Morgan.
Any balance remaining at the death of said Emma Morgan or if said Emma Morgan shall not survive the Trustor, the beneficiary and said Percy Avery Morgan, or if she shall at that time have remarried, or if at the time of the death of Percy Avery Morgan he and said Emma Morgan were not living together as husband and wife, then at the death of the survivor of the Trustor and the beneficiary, said Percy Avery Morgan not then being living, the balance of the trust estate shall be held in trust for Uldene Morgan, granddaughter of the Trustor, upon the following terms and conditions:
The Trustee shall use the income and/or principal of said balance for the care, support and education of said granddaughter, with authority to the Trustee during her minority to make payments direct to her or to those supplying her with services or materials and without the necessity of accounting to a legally appointed guardian. It is the desire of the Trustor that the Trustee shall provide said granddaughter with funds in a reasonable amount to cover the expenses of her care and support and education, including college*903 or university training.
When said granddaughter shall have completed her school education, or when she shall have married, whichever event shall first occur, she shall thereafter receive in approximately equal installments the net income of the property subject hereto, except that the Trustee may in its discretion at any time pay her portions of the principal if in the opinion of the Trustee such payments are necessary or advisable for her maintenance.
Any balance remaining at the death of said granddaughter shall be distributed as provided in her Last Will and Testament, and should she leave no Will distributing said balance it shall be paid by the Trustee to her issue in equal shares, and should she leave no issue it shall pass to her husband if a husband survive her, otherwise to her legal heirs as provided by the laws of the State of Washington for the distribution of the estates of intestate persons.
*132 (d) In the event said Percy Avery Morgan shall leave surviving him either child or children in addition to said Uldene Morgan above mentioned, such afterborn child or children shall share equally in the trust herein created upon the same terms and conditions and*904 in the same manner as above provided in the case of said Uldene Morgan.
(e) If any stock in the Ice Delivery Company, a corporation which may be owned and held by the Trustor at the time of his death shall become and be subject to and covered by this trust agreement, then the Trustee shall pay to Percy Avery Morgan, son of the Trustor, one half of all dividends which may accrue and be paid on said stock; and in case said stock, or any part thereof, shall be sold by the Trustee, the Trustee shall pay to said Percy Avery Morgan one half of the proceeds of any such sale or sales of stock; the remaining one half of all such dividends and the remaining one half of the proceeds of any sales of such stock shall be subject to and distributed under the preceding provisions of this trust agreement.
All the property held by decedent at the time of his death and involved in this case had been acquired during coverture and none had been received by way of gift or inheritance; and in this property the decedent and his wife held equal shares under the law of the domiciliary state. From November 17, 1934, the day of the decedent's death, the petitioner as trustee has administered the whole*905 of the decedent's estate except his dwelling house, a certain lot in Seattle, and the house furnishings, all of which were devised or bequeathed by the decedent to his widow, pursuant to the terms of the decedent's will. The probate court has made no order requiring the decedent's widow to elect whether she will take under the will.
The decedent's wife, Grace, executed a will on April 17, 1914, leaving $1 to her son, and all the residue to her husband. The decedent was named her executor. A week after the death of the decedent in 1934, his widow on November 24, 1934, executed a second will, at the suggestion of the trust officer of the petitioner bank, in which she bequeathed her whole estate, after the payment of debts, to her son.
The decedent had insured his life under two policies, one for $1,500 and the other for $2,000, upon which he paid the premiums during his life. The proceeds of these policies at his death were paid over to petitioner as the decedent's trustee. The total amount of the expenses of the last illness and burial of the decedent was $2,085.53, which under order of the Superior Court of King County, Washington, in probate, was not paid, as the trust*906 indenture provided by its article IX(a), by the trustee out of the trust assets, but as the decedent's will, by its first article provided, out of his general estate before the residue was transferred to the trustee. OPINION.
KERN: 1. Respondent's inclusion in the decedent's gross estate, under section 302, Revenue Act of 1926, with such additional tax as *133 may be required under section 401, Revenue Act of 1932, and section 405, Revenue Act of 1934, of the community interest of decedent's surviving widow rests wholly on the waiver which she executed on March 18, 1931, simultaneously with the execution by the decedent of his will and of the testamentary trust transfer; the respondent contending that this act transferred the wife's community property to the decedent during his lifetime and that consequently the entire estate held by the marital community passed at the decedent's death. Since the petitioner admits that the decedent's own one-half of the community property passed at his death and is taxable, no question arises on that. More elaborately stated, respondent's argument is that to treat the wife's community interest otherwise will enable her to transfer her*907 estate at death free of estate taxes; that this object to avoid taxes is implicit in the whole scheme; that the scheme itself is one which has generally been recommended by trust companies in community property states, as is evidenced by the general printed form of the trust instrument employed by the trust company here, and therefore contemplates tax avoidance on a large scale; and he draws the conclusion, it would seem, that the intention to avoid taxes vitiates the transfer.
We believe that we fully appreciate the force of this argument, but it is one which should properly be addressed to Congress. This Board, in so far as it performs a judicial function, may construe the statute so as to accomplish the ends which the statute itself makes plain; cf. Lucas v. Earl,281 U.S. 111">281 U.S. 111, and the other cases cited by Cardozo, J., in Burnet v. Wells,289 U.S. 670">289 U.S. 670, at 677; but there are necessary limits to judicial discretion, and when those limits are reached, administrative officers must find the stopgap in legislative action. Disregarding the motives, therefore, with which the transfer may have been made, we look to what was actually done and*908 the legal effect of those acts.
All the property in question here was acquired after the marital community had been established and, no part of it having been acquired by the husband by gift, bequest, devise, or descent (§ 6890, Remington's Compiled Statutes of Washington) nor any part so acquired by the wife (§ 6891, ibid. ); it was all community property (§ 6892, ibid. ). The husband is given the management and control of community real property but he may not sell, convey, or encumber it "unless the wife join with him in executing the deed", which he and she must both acknowledge. § 6893, ibid. The provision on descent of community property is as follows (Remington's Compiled Statutes of Washington § 1342):
§ 1342. Descent of Community Property. Upon the death of either husband or wife, one-half of the community property shall go to the survivor, subject to the community debts, and the other half shall be subject to the testamentary *134 disposition of the deceased husband or wife, subject also to the community debts. In case no testamentary disposition shall have been made by the deceased husband or wife of his or her half of the community property, *909 it shall descend equally to the legitimate issue of his, her, or their bodies. If there be no issue of said deceased living, or none of their representatives living, then the said community property shall all pass to the survivors to the exclusion of collateral heirs, subject to the community debts, the family allowance, and the charges and expenses of administration. [Cf. L. '75, p. 55, § 2; Cd. '81, §§ 3303, 2411, 2412; 1 H.C., § 1481.]
Dower and curtesy are abolished, § 1343, ibid.; and likewise survivorship between joint tenants, § 1344.
The community interest in realty may be transferred by either spouse to the other, as § 10572, ibid., provides:
§ 10572. [8766] Conveyances Between Husband and Wife. A husband may give, grant, sell, or convey directly to his wife, and a wife may give, grant, sell, or convey directly to her husband his or her community right, title, interest, or estate in all or any portion of their community real property. And every deed made from husband to wife, or from wife to husband, shall operate to divest the real estate therein recited from any or every claim or demand as community property, and shall vest the same in the grantee*910 as separate property. The grantor in all such deeds, or the party releasing such community interest or estate, shall sign, seal, execute and acknowledge the deed as a single person, without the joinder therein of the married party therein named as grantee: Provided, however, that the conveyances or transfers hereby authorized shall not affect any existing equity in favor of creditors of the grantor at the time of such transfer, gift, or conveyance: And provided further, that any deeds of gift conveyances or releases of community estate by or between husband and wife heretofore made, but in which the husband and wife have not joined as grantors, said deeds, where made in good faith and without intent to hinder, delay, or defraud creditors, shall be and the same are hereby fully legalized as valid and binding. [L. '88, p. 52, § 1; 1 H.C., § 1443.]
Section 6894 provides specifically for the mode of transfer of any community property by one spouse to the other, as follows:
§ 6894. [5919] Agreements as to Status of. Nothing contained in any of the provisions of this chapter, or in any law of this state, shall prevent the husband and wife from jointly entering into any agreement*911 concerning the status of disposition of the whole or any portion of the community property, then owned by them or afterward to be acquired, to take effect upon the death of either. But such agreement may be made at any time by the husband and wife by the execution of an instrument in writing under their hands and seals, and to be witnessed, acknowledged, and certified in the same manner as deeds to real estate are required to be, under the laws of the state, and the same may at any time thereafter be altered or amended in the same manner: Provided, however, that such agreement shall not derogate from the rights of creditors, nor be construed to curtail the powers of the superior court to set aside or cancel such agreement for fraud, or under some other recognized head of equity jurisdiction, at the suit of either party. [Cd. '81, § 2416; 1 H.C., § 1401.]
The decedent in his will declared (art. 5th) that he was disposing of "not only any separate estate I may have at the time of my death but also all the community property and estate of myself and my said *135 wife, including the community interest and share of my wife therein, to all of which my said wife has consented*912 and has elected to take under this will by written instrument executed by her and bearing date the 18th day of March, 1931." The decedent's wife in her waiver executed on the same day declared this likewise to be her intention, electing to take under the will, and waiving all claims to her share of the community property. This waiver she on the same day duly acknowledged before a notary public.
Petitioner urges that section 6894 has provided an exclusive method of transfer of community property between spouses and that its requirements have not been complied with, citing Bloor v. Bloor,105 Wash. 110">105 Wash. 110; 177 Pac. 722. Respondent relies on Sponogle v. Sponogle,86 Wash. 649">86 Wash. 649; 151 Pac. 43; Shea v. Commissioner, 81 Fed.(2d) 937, and other cases to support an opposite conclusion. We do not think it necessary, however, to discuss or decide the question whether an effective transfer under local law could have been made by decedent's wife to him during his lifetime by the means she employed. The wife's transfer to the trustee has been treated as effective, it may be noted, by all parties concerned, *913 and we may assume in respondent's favor that a transfer to the husband by the same means would have been effective. We can not on that account, however, conclude the case for the respondent, for we must look to what the waiver sought to accomplish and, on our assumption that the proper statutory forms were employed, did accomplish.
The wife's transfer of her interest in the marital community to her husband was not a present outright transfer to him, such as respondent attempts to spell out, but a transfer in trust to named trustees, under the fourth article of the will by which decedent disposed of the residue of his estate bty a transfer in trust, the wife's transfer in trust being limited by the condition precedent that her husband predecease her. The husband created a testamentary trust, the wife made a gift in trust inter vivos on the condition named. A recent writer on the subject, cited by petitioner's counsel, has concisely stated the conclusion to be drawn in respect of the analogous state inheritance law when he says:
* * * For it is manifest that at the time of the death of the husband, under a will such as we are here discussing, the state is in no position to*914 levy any tax whatever upon the wife's half of the community property.
Before the state can plausibly make such an attempt, a further voluntary and affirmative action on the part of the wife is required. In other words, she must agree and consent, either by a formal written acceptance of the will and relinquishment of her interest in the community property, or by virtue of an estoppel, that her half of the community property shall, along with the husband's half, be turned into the trust. But this amounts to nothing more than a conveyance by the wife to the trustee, after the death of the husband, of her interest in the community property. The fact that the entire community *136 property finds its way into the trust does not mean that the trustee of the beneficiaries under the trust receive the property by will or inheritance; it simply means that one-half of the community property goes to the trustee for the benefit of the named beneficiaries by virtue of the will of the husband, and the other half of the community property goes into the trust because of the voluntary and, what clearly seems to be, the legally affirmative act of the wife. [Judson F. Falknor, *915 5 Wash. Law Review 55, at 63 (1930).]
Our decision in Coffman-Dobson Bank & Trust Co., Executors,20 B.T.A. 890">20 B.T.A. 890, supports the same conclusion and involves facts very similar to those here. There:
The last will of the decedent disposed of his own estate, which, under the laws of the State of Washington, is 1/2 of the aggregate property, and further provided that if the widow would permit her property to be placed in trust and be disposed of ultimately, as directed by the decedent, she would receive the income from the whole estate. The widow elected to take under the will.
As thus submitted we have for determination a single issue of law, viz., Does the act of a widow in placing her part of community property in a trust created by the will of her deceased husband, in consideration of a condition in said will giving her the income from the trust, which also included the interest of the decedent, vest, ad interim, her part of such property in the decedent's estate, so as to subject it to the Federal estate tax?
After briefly reviewing the necessary procedure under Washington law to effect a transfer from wife to husband of community property, *916 we concluded at page 891:
There is no claim here that the decedent required, or that the widow attempted to accomplish, a transfer of her interest in the community property to the former's estate if, by such informal procedure as indicated, it could have been done. The only condition specified by the will was that the widow permit her property to be placed in trust, and it was this condition to so permit it to be placed that she accepted in the election made. Without passing upon any hypothesis not before us as to what might have been done had the parties so intended, it is clear, under the facts here shown, that the interests of the widow in the property put in trust passed direct from her to said trust, and that it at no time was a part of the taxable estate of the decedent.
The respondent seeks to distinguish this case, but we find nothing different in substance from the instant case. We are unable to accept his suggestion that the arrangement there was "an ordinary election" by the widow between her right to take by descent or under the will. Such an election is ordinarily made after the testator's death and while the will is in probate, not by an agreement inter*917 vivos between the testator and his wife. There is nothing in the Coffman-Dobson case to indicate that the wife's consent or waiver was not absolute, as respondent contends, but even if it were so in that case and not so here, we still think that in the instant case the wife's waiver created no present property interest in her husband and did no more than create a trust effective only on the condition precedent that her husband predecease her.
*137 On the first point, therefore, we hold for petitioner.
2. The respondent contends that the proceeds of decedent's life insurance to the amount of $2,085.50, which was the sum of the expenses of the decedent's last illness and burial, should be included in the gross estate. There is no dispute over the amount. Respondent insists that since these proceeds were subject, under article 9(a) of the trust agreement, to "the expenses of the last illness and burial of the Trustor", an equivalent amount should be added to the gross estate. It is contended that the policy proceeds, although not expressly includable as such under section 302(g), Revenue Act of 1926, since they are payable to beneficiaries other than the executors*918 and are not in excess of $40,000, are includable as part of the estate as being subject to charges against the estate, expenses of administration, or to distribution; includable, that is, to the extent used for these purposes. The insurance proceeds, it is said, were used to the extent mentioned for the benefit of the estate, and as such are subject to the estate tax. Marmaduke B. Morton, Administrator,23 B.T.A. 236">23 B.T.A. 236, is relied on. Petitioner contends that the decedent's funeral expenses and expenses of his last illness had in that order priority under Washington law (§ 1541, Remington's Statutes) over all other expenses; and that they were in fact paid out of the general and not the trust estate. Petitioner also relies on the direction in decedent's will that "I direct that all my just debts and funeral expenses be paid as soon after my decease as conveniently may be." It is obvious that this direction is insufficient to alter the prior express direction in the trust deed, and, since the insurance proceeds were in law subjected to the charge in question, it is immaterial that they were in fact paid otherwise.
We think it is clear on the authority of that case*919 that, notwithstanding the fact that the proceeds here were not payable to the bank as executor but as trustee, they were subjected by the trust agreement to the charges in question and to that extent and on that account are properly includable in the gross estate.
It does not appear from the record of this case when the insurance policies were issued nor whether the premiums were paid from community funds. Therefore no question is presented similar to those involved in Lang v. Commissioner,304 U.S. 264">304 U.S. 264, and Elizabeth C. McCoy, Administratrix,39 B.T.A. 822">39 B.T.A. 822.
3. A further question is raised by the respondent in respect of the deduction properly allowable for the decedent's last illness and burial. It is said that if we hold that only the decedent's half of the marital estate passed at his death, only one-half of the sum claimed for such expenses, $2,085.50, is allowable as a deduction. The additional deficiency thus claimed has been properly pleaded in the respondent's *138 amended answer; and since its correctness is admitted by the petitioner in its reply brief, we sustain the respondent on this point. Cf. *920 Lang's Estate v. Commissioner, 97 Fed.(2d) 867.
Decision will be entered under Rule 50.