*788 1. ESTATE TAX - DEDUCTION FOR CLAIM AGAINST ESTATE - Where the executors allowed and paid a certain claim against decedent's estate with the approval of all the beneficiaries of the estate and such action was approved by a decree of the Orphans Court, held that such decree is not controlling in the Board's determination of the deductibility of the amount of the claim from the gross estate under the applicable revenue acts.
2. Id. - Upon the facts, held that the claim in question was not a valid and enforceable one against decedent's estate within the meaning of the applicable revenue acts and the amount thereof is, therefore, not deductible from decedent's gross estate.
*876 The Commissioner determined a deficiency in estate tax in the sum of $1,700.57. Petitioners allege error in the failure of Commissioner to allow as a deduction, in determining the net estate, a claim allowed and paid by the estate in the amount of $26,957.06.
The case was submitted upon a written stipulation of facts and exhibits annexed thereto, all of which*789 are included herein by reference; but only such of those facts as are deemed material to consideration of the issue involved are set out herein.
FINDINGS OF FACT.
Petitioners are the duly qualified executors of the estate of Arthur D. Forst, Sr., who died, testate, on April 2, 1934. His will provided, among other things:
* * * I further specifically direct that my said executors, or the survivor, shall consider only the principal sum or sums of any note or notes held by me of my sons, Daniel P. Forst and Arthur D. Forst, Jr., as constituting the full amount of the debt or debts thereby due and owing to me.
*877 On February 8, 1929, decedent was the owner of record of 4,158 shares no par common stock and 4,158 shares of no par preferred stock of the Robertson Art Tile Co., a New Jersey corporation, which had outstanding 7,000 shares of no par common stock and 7,000 shares of no par preferred stock.
On February 8, 1929, the decedent, as party of the first part, entered into an agreement with his son, Daniel P. Forst, as party of the second part, for the purchase by the latter from the former of 1,500 shares of no par common stock of the Robertson Art Tile Co. The*790 agreement provided, among other things, that:
1. The party of the second part agrees to purchase from the party of the first part one thousand five hundred shares of the common capital stock without par value of the Robertson Art Tile Company, and the party of the first part agrees to sell said number of shares to the said party of the second part. The said party of the second part agrees to pay to the party of the first part as the purchase price for the aforesaid shares of stock the book value thereof as of December 31, 1928, as same appears on the books of the said Robertson Art Tile Company, by giving to the party of the first part his promissory note payable on demand but subject as to demand and payment thereof, to the terms of this agreement, for the full value of the shares sold to him, said note to bear interest from the date thereof at the rate of six per cent per annum.
2. Upon the execution and delivery of the aforesaid promissory note by the party of the second part to the party of the first part, the party of the first part shall assign, transfer and set over unto the party of the second part the certificate or certificates representing the shares of the said*791 capital stock which the said party of the second part herein agrees to purchase and the said party of the second part shall thereupon cause his shares of stock to be transferred on the books of the Company to the said party of the second part, and upon receipt by the party of the second part of said certificates of stock the said party of the second part shall endorse in blank said certificates and deliver the same to the party of the first part to be by him held as collateral security for the aforesaid promissory note of the said party of the second part.
3. The said note representing the purchase price of the said stock shall be paid and satisfied solely from dividends which shall in the future be declared and paid upon said stock, the amount of the dividends so paid to the party of the first part shall be first credited to the payment of interest on said note and the balance, if any, shall be credited by the party of the first part on the principal amount of said note and notations of payments of principal and interest shall be made on the note. As and when the amount so credited by the party of the first part to the principal due on the said note of the party of the second*792 part shall equal the purchase price of each one hundred (100) shares of said capital stock, the party of the first part shall deliver or cause to be delivered to the party of the second part, the one hundred (100) shares of stock which have been so paid for by him.
4. When the amount of said promissory note with interest thereon shall have been fully paid to the party of the first part by the party of the second part, the said party of the first part shall deliver or cause to be delivered to the party of the second part the promissory note executed by him and all shares of said capital stock which may remain in the hands of the party of the first part as collateral security for the said note.
*878 The book value as of December 31, 1928, of the 1,500 shares of stock referred to in the agreement was $103,881, and the note referred to in the agreement reads as follows:
$103,881.00
Trenton, N.J., February 8, 1929.
I hereby promise to pay to ARTHUR D. FORST sr., the sum of ONE HUNDRED THREE THOUSAND, EIGHT HUNDRED EIGHTY-ONE DOLLARS in the manner and subject to the terms, conditions and covenants contained in a certain agreement entered into between me and the said*793 Arthur D. Forst Sr. and dated of even date herewith and in a further certain agreement between me, Arthur D. Forst Sr. and Arthur D. Forst Jr. and dated of even date herewith. This note is not negotiable and the amount thereof represents the value of 1500 shares of the common stock of the Robertson Art Tile Company at the rate of $69.254 per share.
[Signed] DANIEL P. FORST
Between July 8, 1929, and January 2, 1930, Daniel P. Forst made payments on and reduced the principal amount of the note by payment to Arthur D. Forst, Sr., in the amount of $6,925.40, that amount being equal to dividends paid on the common stock, the subject of the purchase agreement.
The dividend record on the common stock of the Robertson Art Tile Co. from February 8, 1929, to April 2, 1934, the date of the death of decedent, is as follows: June 30, 1929, paid $1 per share, or $7,000; September 30, 1929, paid $5 per share, or $35,000. Since these dates in 1929, no dividend on common stock was paid by this company to and inclusive of April 2, 1934.
Daniel P. Forst made the following payments in cash to Arthur D. Forst, Sr., in the form of interest on the Robertson Art Tile Co. common stock, the subject*794 of the stock purchase agreement:
| July 1, 1929 | $2,597.03 |
| Jan. 2, 1930 | 1,454.33 |
| Mar. 31, 1930 | 1,454.33 |
| July 1, 1930 | 1,454.33 |
| Oct. 8, 1930 | 1,454.33 |
| Jan. 1, 1931 | 1,454.33 |
| Apr. 1, 1931 | 1,454.33 |
| July 1, 1931 | 1,454.33 |
| Oct. 1, 1931 | 1,454.33 |
| Jan. 1, 1932 | 1,454.33 |
| Apr. 1, 1932 | 1,454.33 |
| July 1, 1932 | 1,454.33 |
| Oct. 1, 1932 | 1,454.33 |
| Jan. 1, 1933 | 1,454.33 |
| Apr. 1, 1933 | 1,454.33 |
| July 3, 1933 | 1,454.33 |
| Oct. 2, 1933 | 1,454.33 |
| Jan. 2, 1934 | 1,090.75 |
| Total | 26,957.06 |
*879 Subsequent to the death of the decedent, Daniel P. Forst lodged proof of claim with the executors of the estate for reimbursement of those items of interest paid by him on the note and stock purchase agreement, as above set out, aggregating $26,957.06, as an indebtedness to him of the Arthur D. Forst estate. In his proof of claim he alleged, with reference to such payments, inter alia, that:
None of the aforesaid payments were made on account of receipts by the said Daniel P. Forst of dividends from the said stock, and the said Daniel P. Forst made such payments through misunderstanding and a mistaken conception of the terms of the said agreement.
Attached to the claim*795 as filed was the following approval of and request for its allowance by the beneficiaries of the estate:
We, being all the instant beneficiaries of the estate of Arthur D. Forst, deceased, hereby approve the foregoing claim, and request the allowance thereof by the executors of the said estate.
Approval of the allowance of the claim by the executors was made by the judge of the Orphans Court of Mercer County, New Jersey, in a decree approving the final account of the executors on August 13, 1937, and the claim was paid by the executors. The order of the court approving the final report of the executors and their allowance of the claim contains the following paragraph:
It is further ORDERED that the action of the executors in allowing the proof of claim of Daniel P. Forst in the amount of $26,957.06, as set forth in the account be, and the same is hereby approved, no objections being made and same being included in the account.
The commissioner denied the deduction of $26,975.06 as a proper claim against the estate under the applicable statute.
OPINION.
TYSON: The only question presented for decision is whether under the facts in the record petitioners are entitled*796 to deduct for estate tax purposes the claim of Daniel P. Forst in the amount of $26,957.06. There is no question but that the claim was allowed and paid by the executors of the estate and that such action of the executors was approved and authorized by the Orphans Court of Mercer County, New Jersey.
The petitioners rely upon the claim submitted to the Mercer County Orphans Court and the decree of that court approving its allowance as establishing their right to the deduction here claimed from the gross estate of the decedent. The respondent contends that the decree of the Orphans Court was in effect a consent decree; that the court did not pass on the merits of the claim, there being no objection to its allowance by any of the beneficiaries of the estate or any one else; *880 and that in any event the decree is not controlling as to whether or not the deduction claimed here should be allowed. We agree with this contention. The facts show not only that there was no contest as to the allowance of the claim, but, on the contrary, that such allowance was consented to by all of the beneficiaries of the estate. In our opinion, the decree of the Orphans Court is not controlling*797 in determining the deductibility of the claim for tax purposes under the applicable statute. ; ; ; ; affirmed in part, ; , and authorities cited therein; cf. ; and .
Our inquiry, therefore, is whether the deduction claimed by the petitioners is an allowable one from the gross estate under the applicable statute, set out in the margin. 1
*798 Under the terms of the agreement between decedent and his son, Daniel P. Forst, the note given by the latter in payment for the 1,500 shares of common stock was to be paid "solely" from dividends on the stock, which payments were to be first credited to the payment of interest and the balance, if any, credited on the principal of the note. But notwithstanding this agreement Daniel P. Forst paid to the decedent during the period of July 1, 1929, and January 2, 1934, interest in the amount of $26,957.06, none of which payments, so he claims, were made from receipts by him during that period of dividends on the 1,500 shares of common stock. These payments of interest were received and accepted as such by the decedent. Under the agreement, the decedent could not have required the payment of interest on the note except from dividends received by Daniel P. Forst from the 1,500 shares of stock, but there was nothing in the agreement to prevent Daniel P. Forst from waiving the provision as to the source from which payment should be made. In our opinion, the payments of interest by Daniel P. Forst from funds not derived from dividends on the stock constituted a waiver by him of his privilege*799 under the agreement to make such payments only from such dividends and this, together with the acceptance of such payments *881 by the deceased, effectuated a modification of the original contract with reference to such payments, under which modification payments of the interest here involved were validly made. Both parties were mutually benefited by these payments, the deceased by receiving them at an earlier date than he would have received them had he waited for payment of dividends on the stock as prescribed in the original agreement, and Daniel P. Forst, by keeping up his interest payments, could have dividends, when paid, applied to the payment of the principal and when the amounts so applied equaled the purchase price of 100 shares these shares would be released to him by decedent, who held them as collateral security for the payment of the purchase price thereof.
A waiver may be defined as an intentional relinquishment of a known right or such conduct as warrants an inference of such intention. Words & Phrases, Fourth Series, Vol. 3, p. 825; *800 ; . It may be created by the act or conduct of the parties, Words & Phrases, Fourth Series, Vol. 3, p. 828; ;; ; ; and where a right has been waived it can not be regained. ; .
We do not think it can be seriously contended that Daniel P. Forst made these payments under a mistake of fact and could recover them for that reason, because the terms of the agreement and the note are clear and unambiguous and not susceptible of misunderstanding.
We conclude that Daniel P. Forst had no valid and enforceable claim growing out of the interest payments here in question against the decedent or his estate within the meaning of the applicable statute. The claimed deduction, therefore, *801 in the amount of $26,957.06, must be denied.
Decision will be entered under Rule 50.
Footnotes
1. [Revenue Act 1926.]
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 -
[Amendment by Revenue Act 1932, Sec. 805.]
(1) Such amounts -
* * *
(C) for claims against the estate,
* * *
* * * to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. * * * ↩