1941 BTA LEXIS 1458">*1458 1. A Kentucky court entered a judgment fixing the alimony of decedent's former wife at $150,000, in accordance with an agreement between the parties, and directing decedent to pledge policies of insurance in the total face amount of $150,000 taken out by him on his own life to secure the payment of the amount fixed as alimony. As directed by the court, decedent assigned to his former wife policies in the total face amount of $150,000 to secure the payment of the amount fixed as alimony. After decedent's death the proceeds of the policies in the total amount of $150,000 were paid by the insurance companies to decedent's former wife. Held, (1) the proceeds of the policies should be included in the value of the gross estate under section 302(g) of the Revenue Act of 1926, as amended by section 404 of the Revenue Act of 1934,
1941 BTA LEXIS 1458">*1459 2. The administrators of decedent's estate paid $750 to his widow in accordance with section 1403 of Carroll's Kentucky Statutes. Held, the amount so paid should not be deducted from the value of the gross estate under section 303(a)(1)(E) of the Revenue Act of 1926 as so amended.
43 B.T.A. 813">*814 Respondent determined a deficiency in estate tax. He mailed a notice of deficiency to the petitioners on October 3, 1939, in which he stated that "the determination of the estate tax liability * * * discloses a deficiency of $38,400.01, as shown in the statement attached." This was an error in the notice because the statement attached to the notice, showing in detail respondent's determinations, shows a computation of a deficiency of $87,233.89. Respondent points out the error in his answer which was filed prior to the hearing. It therefore appears that respondent determined a deficiency of $87,233.89, or, if that is not technically true because of the1941 BTA LEXIS 1458">*1460 statement in the notice of deficiency itself, then respondent has made claim before the hearing to a deficiency in the latter amount, which he may do under section 308(e) of the Revenue Act of 1926. The questions are: (1) Whether the proceeds of certain life insurance policies which were pledged by decedent with his former wife to secure the payment of an amount fixed as alimony in a judgment of a Kentucky court should be included in his gross estate; (2) if so, whether the amount fixed as alimony in such judgment should be deducted from his gross estate; and (3) whether an amount paid to his widow pursuant to section 1403 of Carroll's Kentucky Statutes should be deducted from his gross estate. Other adjustments made by respondent are not contested or have been settled by the parties.
FINDINGS OF FACT.
The facts have been stipulated.
Silas B. Mason, hereinafter referred to as the decedent, was prior to and at the time of his death on April 14, 1936, a resident of Lexington, Kentucky. The petitioners are the coadministrators of decedent's estate.
For some time prior to December 8, 1931, and until February 29, 1932, decedent and Rosa Tucker Mason, both of Lexington, were1941 BTA LEXIS 1458">*1461 husband and wife.
On December 8, 1931, decedent and Rosa Tucker Mason entered into a written agreement which recited that decedent and Rosa Tucker Mason had ceased to live together as husband and wife and that they had agreed among themselves on a settlement of all property rights and differences existing between them.
The agreement provided in part as follows: that Rosa Tucker Mason was to institute proceedings for the purpose of securing an absolute divorce from decedent; that in any judgment for divorce which might be rendered neither party was to have the right to the 43 B.T.A. 813">*815 restoration of any property acquired by either of the parties directly or indirectly from or through the other during marriage; that upon the execution of the agreement decedent was to execute his nonnegotibale, collateral note, payable to Rosa Tucker Mason, on or before January 1, 1938, in the sum of $150,000, without interest except from maturity; that decedent's note was to be secured by the pledge of insurance policies on the life of decedent in the aggregate sum of $150,000, payable to Rosa Tucker Mason or her personal representatives, with assignment of loan and cash values of such policies1941 BTA LEXIS 1458">*1462 to Rosa Tucker Mason; that the note and the policies were to be deposited in escrow for delivery to Rosa Tucker Mason upon entry of a final decree of absolute divorce; that decedent was to execute such assignments and transfers as were required by the insurance companies issuing the policies in order to carry out the true intent and purpose of the agreement; that until the note was paid, decedent was to pay Rosa Tucker Mason $1,000 per month; that the policies were to be held as security also for the payment of the monthly payments to Rosa Tucker Mason; that upon default in any monthly payment Rosa Tucker Mason might surrender the policies for the cash surrender value thereof to the extent necessary to pay the sums then in default; that if the security for the payment of the note became impaired by reason of such surrender of policies, decedent was to furnish additional satisfactory security, and if he failed to do so, the note was to become due and payable; that upon payment of the note, the policies which had not been surrendered and any other collateral was to be delivered to decedent; and that within four months from the date of the entry of a decree of absolute divorce decedent1941 BTA LEXIS 1458">*1463 was to pay to Rosa Tucker Mason for the purchase of a home to be owned by her the actual cost of such home, which was not to exceed $20,000.
Paragraphs 7 and 8 of the agreement provided as follows:
7. It is further understood and agreed that this contract is to be submitted to the Court, having jurisdiction of said divorce proceedings, for its ratification and approval, and each of the parties hereto agrees to request said court to ratify and approve same, and it is agreed that the judgment of the Court with respect to alimony and the marital property rights of the parties incorporate this contract as a part thereof, if the same be deemed right and proper by the Court.
,8. Each of the parties hereto hereby agrees to accept the agreements herein set out, in full satisfaction of all rights, claims and interests in the property, real, personal and mixed of the other, incident to or acquired through the marital relation, or otherwise, and to release and relinquish to each other any and all such rights by such instruments of writing, as may be required by either of the parties hereto.
43 B.T.A. 813">*816 The following list of life insurance policies which were to be pledged by decedent1941 BTA LEXIS 1458">*1464 to secure his note for $150,000 was attached to, and made a part of, the agreement:
| Issued by - | Number | Face amount | Cash value |
| Phoenix Mutual Life Ins. Co | 292183 | $25,000 | $7,050.00 |
| Aetna Life Insurance Co | 217843 | 25,000 | 5,375.00 |
| Mutual Life Ins. Co. of N. Y | 3698305 | 25,000 | 3,083.50 |
| Mutual Benefit Life Ins. Co | 875373 | 10,000 | 2,268.80 |
| 1015742 | 15,000 | 3,118.50 | |
| 1093294 | 25,000 | 4,418.75 | |
| 1263222 | 25,000 | 3,333.50 | |
| Total | 150,000 | 28,648.05 |
The policies listed above were taken out by decedent on his own life. At the time of the execution of the agreement Rosa Tucker Mason was named as the beneficiary in each of the policies and the right to change the beneficiary was reserved by decedent in each of the policies with the exception of policy No. 292183, issued by the Phoenix Mutual Life Insurance Co.
Thereafter, Rosa Tucker Mason instituted divorce proceedings against decedent in the Fayette Circuit Court of the State of Kentucky. On February 29, 1932, a judgment was entered in such proceedings granting Rosa Tucker Mason an absolute divorce from decedent. The agreement of December 8, 1931, was approved and incorporated by the court in1941 BTA LEXIS 1458">*1465 the judgment. It was further ordered by the court in the judgment, among other things, that on accordance with the agreement of December 8, 1931, "the alimony of the plaintiff be and the same is hereby fixed at the gross sum of one hundred and fifty thousand ($150,000) Dollars, to be paid by the defendant to the plaintiff, on or before January the 1st, 1938, without interest, except from January 1st, 1938, which said sum shall be evidenced by a non-negotiable note, executed by the defendant to the plaintiff, and payable to the plaintiff on or before January 1st, 1938, without interest except from maturity, which said note shall be secured by the pledge of life insurance policies on the life of said Silas B. Mason in the aggregate sum of $150,000.00, payable in case of the death of said Silas B. Mason, to Rosa Tucker Mason, as beneficiary, and in the case of the death of said Rosa Tucker Mason, prior to the death of Silas B. Mason, to her personal representatives"; that the assignments of the policies were to cover the loan and cash values thereof; and that upon payment of the note the policies were to be delivered to decedent and the endorsements thereon canceled.
On April 25, 1932, the1941 BTA LEXIS 1458">*1466 decedent, as insured, and Rosa Tucker Mason, as beneficiary, executed an instrument requesting the Phoenix Mutual Life Insurance Co. to change policy No. 292183 issued 43 B.T.A. 813">*817 by that company so that the beneficiary of the policy was the executor, administrator, or assignee of the decedent. The Instrument also provided that decedent assigned the policy as so changed to Rosa Tucker Mason as security for the performance of the judgment of the Fayette Circuit Court; that Rosa Tucker Mason, her executor, administrator, or assignee, was to have the right to receive from the insurance company the entire amount payable as a death claim under said policy, to borrow upon the policy, and to surrender the policy; and that Rosa Tucker Mason or her representative was to account to the decedent for any amount received upon the policy in excess of the amount necessary to satisfy the obligation secured by the policy. On the same date decedent executed an instrument requesting the Aetna Life Insurance Co. to change the beneficiary in policy No. 217848 issued by that company so that both the death beneficiary and the life beneficiary under the policy was Rosa T. Mason, her executors, administrators, 1941 BTA LEXIS 1458">*1467 or assigns, and also an instrument assigning policy Nos. 875373, 1015742, 1093294, and 1263222, which were issued by the Mutual Benefit Life Insurance Co. to Rosa Tucker Mason, her executors, administrators, or assigns, to secure the payment of decedent's note to her and of the amounts payable monthly until the note was paid. The instrument also provided that on payment of the note Rosa Tucker Mason or her executros or administrators were to reassign the policies to decedent and that Rosa Tucker Mason was empowered to borrow on or surrender the policies. On May 24, 1932, decedent executed an instrument assigning policy No. 3698305, issued by the Mutual Life Insurance Co. of New York, to Rosa Tucker Mason, her executors, administrators, or assigns. The provisions of this instrument were substantially similar to the provisions of the instrument under which decedent assigned the policies issued by the Mutual Benefit Life Insurance Co. to Rosa Tucker Mason, her executors, administrators or assigns.
During his lifetime decedent made no payments to satisfy his obligation for the $150,000 which was fixed by the Fayette Circuit Court as the alimony of Rosa Tucker Mason. Upon decedent's1941 BTA LEXIS 1458">*1468 death the several insurance companies which had issued the policies in question paid Rosa Tucker Mason the aggregate sum of $150,000, which was the total face amount of the policies.
On February 21, 1938, petitioners paid to the decedent's widow, Susanne B. Mason, $750 in accordance with section 1403 of Carroll's Kentucky Statutes.
OPINION.
HARRON: The first question is whether the proceeds of the policies of insurance which were taken out by decedent upon his own life and 43 B.T.A. 813">*818 which were pledged by him with his former wife to secure the payment of the amount allowed her as alimony by the Fayette Circuit Court should be included in the decedent's gross estate, under section 302(g) of the Revenue Act of 1926, as amended by section 404 of the Revenue Act of 1934, the pertinent provisions of which are set forth in the margin. 1
1941 BTA LEXIS 1458">*1469 On their estate tax return petitioners did not include the proceeds of the policies in the gross estate. In the statement attached to the deficiency notice respondent included the proceeds of the policies in the gross estate on the ground that "the record discloses that decedent, at the time of his death, was vested with such incidents of ownership of the life insurance policies involved as to bring them within and to make them a part of his taxable estate."
In their brief petitioners assume that the proceeds of the policies were receivable by a beneficiary other than decedent's "executor" within the meaning of subsection (g) and argue that the proceeds of the policies may not be included in the gross estate because at the time of his death decedent retained no incidents of ownership in the policies. Petitioners rely on
In our opinion the proceeds of the policies should be included in the gross estate. The proceeds of policies of insurance taken out by a decedent upon his own life which in terms are payable to a beneficiary other than the decedent's "executor", but which are required to be used, and are in fact used, to satisfy debts of decedent or his estate, should be treated as being receivable by the decedent's "executor" within the meaning of subsection (g) and should be included in the decedent's gross estate.
1941 BTA LEXIS 1458">*1472 Even if the proceeds were regarded as receivable by a beneficiary other than the decedent's executor within the meaning of subsection (g), the proceeds should be included in the gross estate because at the time of his death decedent retained certain incidents of ownership in the policies. See
1941 BTA LEXIS 1458">*1474 Petitioners contend in the alternative that the amount fixed in the judgment of the Fayette Circuit Court as the alimony of Rosa Tucker Mason, i. e., $150,000, should be deducted from the value of the gross estate under section 303(a)(1)(D) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932 and section 403(a) of the Revenue Act of 1934, the pertinent provisions of which are set forth in the margin. 4
1941 BTA LEXIS 1458">*1475 It is clear that the amount fixed as alimony in the judgment of the Fayette Circuit Court was an "indebtedness in respect to, property where the value of decedent's interest therein, undiminished by such * * * indebtedness, is included in the value of the gross estate" 43 B.T.A. 813">*821 within the meaning of section 303(a)(1)(D). Decedent's obligation to pay the amount fixed as alimony in the judgment of the Fayette Circuit Court was an "indebtedness",
However, respondent contends that the indebtedness in question was founded upon the agreement between decedent and Rosa Tucker Mason; that the consideration for the agreement was the relinquishment by Rosa Tucker Mason of "marital rights in the decedent's property or estate"; that the consideration for the agreement was not a consideration1941 BTA LEXIS 1458">*1476 "in money or money's worth" under section 303(d) of the Revenue Act of 1926, as amended by section 804 of the Revenue Act of 1932, the pertinent provisions of which are set forth in the margin, 5 and that thus the amount of the indebtedness in question was not deductible under section 303(a)(1) which requires that an indebtedness founded on an agreement be contracted "for an adequate and full consideration in money or money's worth."
Petitioners contend that the indebtedness in question was founded upon a liability imposed by law and not upon an agreement and that section 303(a)(1) does not require that an indebtedness founded upon a liability imposed by law be contracted "for an adequate and full consideration in money or money's worth." In support of these contentions petitioners rely especially on 1941 BTA LEXIS 1458">*1477
Section 303(a)(1) of the Revenue Act of 1926 as originally enacted required that the deduction allowed in the case of any indebtedness be limited to the extent that such indebtedness was "incurred or contracted bona fide and for an adequate and full consideration in money or money's worth." Section 303(a)(1) was amended by section 805 of the Revenue Act of 1932. As so amended section 303(a)(1) required that the deduction allowed in the case of any indebtedness " when founded upon a promise or agreement" be limited to the extent that such indebtedness was "contrated bona fide and for an adequate and full consideration in money or money's worth." The legislative purpose for this amendment was stated in the reports of the Committee on Ways and Means and the Committee on Finance to be as follows:
A clarifying provision limiting the requirement of an adequate and full consideration in money or money's worth to liabilities founded on contract. 43 B.T.A. 813">*822 The existing law might be open to a construction under which no claim against the estate would be deductible unless supported by an "adequate and full consideration in money1941 BTA LEXIS 1458">*1478 or money's worth," but the real intent could hardly have been to deny the deduction of liabilities imposed by law or arising out of torts, and the amendment whereby the requirement of a consideration applies only where the liability is founded on contract is designed to clear up any doubt which may be thought to exist. 6
In
It is true that Katherine P. Young and the decedent entered into an agreement during the pendency of the divorce proceedings which provided inter alia for the payment of alimony in the event a decree for divorce was granted, but 43 B.T.A. 813">*823 the wife's right to alimony grows out of the legal duty of the husband to support her and not out of a promise or agreement.
Even if the parties have settled their property rights, and have made provision for the support of the wife by a written agreement, the court may disregard the agreement and award such alimony as it deems right. In such case the right to alimony is predicated on the action of the court and not upon the agreement of the parties.
* * *
It would seem to follow that the claim which Katherine P. Young asserted against the decedent's estate rested immediately upon the judgment and decree of the Iowa court, which in turn was a judicial determination of the amount required from decedent to discharge an obligation imposed by law. Neither the obligation, nor the amount thereof, was created or determined by the agreement of the parties. The law imposed the one and the decree of court determined and adjudicated the other.
In our opinion the decision in 1941 BTA LEXIS 1458">*1482
In view of the conclusion that the indebtedness in question was not founded "upon a promise or agreement," it is not necessary to consider the further contention advanced by respondent that the indebtedness was not contracted "for an adequate and full consideration in money or money's worth."
43 B.T.A. 813">*824 The final question is whether the amount of $750 which petitioners paid to the decedent's widow in accordance with section 1403 of Carroll's Kentucky Statutes should be deducted from the value of the gross estate under section 303(a)(1)(e) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932 and section 403(a) of the Revenue Act of 1934. Section 303(a)(1)(e) as so amended is set forth in the margin. 7
1941 BTA LEXIS 1458">*1484 On their estate tax return petitioners took a deduction of $750 paid the widow of decedent under section 1403 of Carroll's Kentucky Statutes, the pertinent provisions of which are set forth in the margin. 8
The deduction was disallowed by respondent.
1941 BTA LEXIS 1458">*1485 In
In our opinion the decision in
On their estate tax return petitioners took a deduction of $4,000 for miscellaneous administration expenses. Respondent disallowed the deduction. The parties have stipulated that petitioners are entitled 43 B.T.A. 813">*825 to deduct from the gross estate $3,270.43 as expenses actually and necessarily incurred in the administration of the estate.
In the statement attached to the notice of deficiency respondent1941 BTA LEXIS 1458">*1486 computed a gross deficiency in estate tax of $87,233.89 and stated that no allowance was made for a credit on account of state estate, inheritance, legacy, or succession taxes paid, but that if the full 80 percent credit were allowed, the net deficiency in estate tax would be $38,400.01. However, in the notice of deficiency respondent actually determined a deficiency in estate tax of $38,400.01. In the answer respondent alleged that petitioners had not paid any state estate, inheritance, legacy, or succession taxes and that respondent had erroneously allowed the full 80 percent credit in determining the amount of the deficiency and prayed that the Board allow an increased deficiency in estate tax of $87,233.89. The parties have stipulated that petitioners paid $21,529.47 to the State of Kentucky as inheritance and estate taxes and $7,500 to the State of Washington as inheritance and estate taxes, or a total of $29,029.47. Upon computation under Rule 50 petitioners should be allowed a credit in that amount.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the United States -
* * *
(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life. ↩
2. Article 26 of Regulations 80 has been amended recently by
T. D. 5032 , promulgated January 10, 1941, to provide as follows:"Art. 26. Insurance in favor of the estate.↩ - The statute requires the inclusion in the gross estate of all insurance receivable by the executor or administrator or payable to the decedent's estate, and all insurance which is in fact receivable by, or for the benefit of, the estate. It includes insurance effected to provide funds to meet the estate tax, and any other taxes, debts, or charges which are enforceable against the estate. The manner in which the policy is drawn is immaterial so long as there is an obligation, legally binding upon the beneficiary, to use the proceeds in payment of such taxes, debts, or charges. The full amount of the proceeds so receivable, without the benefit of any exemption, forms a part of the gross estate, though all the premiums or other consideration wherewith the insurance was acquired may have been paid by a person other than the decedent. If the decedent procured insurance in favor of another person or corporation as collateral security for a loan or other accommodation, the insurance is considered to be receivable for the benefit of the estate. The amount of the loan outstanding at decedent's death will be deductible in determining the net estate, and the interest thereon will be deductible in accordance with the provisions of article 36."
3. ART. 25. Taxable insurance. - * * *
* * *
* * * Legal incidents of ownership in the policy include, for example: The right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc. ↩
4. SEC. 303. For the purpose of the tax the value of the net estate shall be determined -
(a) in the case of a citizen or resident of the United States, by deducting from the value of the gross estate -
(1) Such amounts -
* * *
(D) for unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, and
* * *
as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, but not including any income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate, succession, legacy, or inheritance taxes. The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. ↩
5. SEC. 303. (d) For the purposes of this title, a relinquishment or promised relinquishment of dower, 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." ↩
6. Report of the Committee on Ways and Means, h. Rept. No. 708, 72d Cong., 1st sess., p. 48: Report of the Committee on Finance, S. Rept. No. 665, 72d Cong., 1st sess., p. 51. ↩
7. SEC. 303. For the purpose of the tax the value of the net estate shall be determined -
(a) In the case of a citizen or resident of the United States, by deducting from the value of the gross estate -
(1) Such amounts -
* * *
(E) Reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent. ↩
8. SEC. 1403. Personal estate of intestate; surplus; how distributed; articles or money set apart to widow or children; appraisement; renunciation of will. - Where any person shall die intestate as to his personal estate, or any part thereof, the surplus, after payment of funeral expenses, charges of administration and debts, shall pass and be distributed among the same persons, and in the same proportions, to whom and in which real estate is directed to discend, except as follows:
* * *
Fifth. Personal property or money on hand or in bank to the amount of seven hundred and fifty dollars ( $750) shall be exempt from distribution and sale, and shall be set apart by the appraisers of the estate of an intestate to his widow and infant children, or if no widow, to his infant children or child surviving him. And a like amount of property or cash shall be exempt from distribution and sale and shall be set apart by them to the surviving infant children or child of a widow who dies intestate.
The appraisers shall state in their appraisement the money or the articles and value of each, set apart by them to the widow, or infants, separately to the articles appraised for sale, but if the widow be present at the time of the appraisement, or any one authorized by her in writing, she may make her selection out of the property appraised to the amount of said seven hundred and fifty dollars ($750.00) and said appraisers shall so report. The provisions of this section shall apply to cases where the husband dies testate and the widow renounces the provisions of the will in the time prescribed by law. ↩