Opinion
Docket No. 10587.
1947-10-14
ESTATE OF THEODORE O. HAMLIN, BY LINCOLN ROCHESTER TRUST COMPANY (SUCCESSOR BY MERGER TO ROCHESTER TRUST AND SAFE DEPOSIT COMPANY), EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Scott Stewart, Jr., Esq., for the petitioner. Thomas R. Charshee, Esq., for the respondent.
Commuted value of claim against decedent's daughter for money advanced to her during his lifetime and acknowledged by her to writing, held, includible in decedent's gross estate for lack of evidence that advances were intended as a gift. Scott Stewart, Jr., Esq., for the petitioner. Thomas R. Charshee, Esq., for the respondent.
The Commissioner determined a deficiency of $8,599.92 in estate tax, part of which resulted from the inclusion in the gross estate of the commuted value of an instrument executed by the decedent's daughter on July 5, 1933. The petitioner assigns that action as error.
FINDINGS OF FACT.
The petitioner is the executor under the will of the decedent, who died on November 6, 1941. He was then ninety-six years of age and was survived by two daughters. The petitioner filed its return with the collector of internal revenue for the twenty-eighth district of New York.
In 1932 the decedent was widower and lived with one of his daughters, Esther H. Covill, in Rochester, New York. At that time Esther and her husband wanted to build a one-story summer cottage on Lake Ontario, but they lacked sufficient funds. Esther approached the decedent, who told her not to worry about the money because he would take care of that himself. He helped them select a five-acre plot of ground, which was larger than they had originally planned. He paid the initial deposit and Esther took title to the property in her name. Thereafter, the decedent insisted on various changes in the plans for the cottage in order to provide a second story for the quarters which he was to occupy. After all the construction contracts were signed, the decedent went to California to spend the winter with his other daughter. The Covills eventually built a two-story house suitable for winter occupancy. The total cost was in excess of $20,000, of which the decedent furnished $18,100.
The Covills assumed that the funds furnished by the decedent were a gift. However, the decedent sent Esther a letter from California in which he enclosed a paper calling for the payment of $18,100. Esther wrote to her sister, who told her not to sign the paper because she also thought that their father was making a gift of the property. Esther also consulted the decedent's attorney, who, to the contrary, advised her to sign the paper in order not to antagonize her father. She did not sign this paper. When the decedent returned to Rochester in June or July 1933 he and his daughter both consulted the attorney, and at that time the wording of the original paper was changed. On July 5, 1933, Esther executed the following instrument, which was thereupon delivered to the decedent:
I do hereby acknowledge advances made to me by my father, Theodore O. Hamlin, in the sum of eighteen thousand one hundred dollars ($18,100.00), which shall bear no interest and shall not become due and payable until my death except with my consent.
The decedent died a resident of Rochester, leaving a will dated April 8, 1937, which was probated in Monroe County, New York. By the first clause of the will the decedent made certain bequests of personal property and by the second clause he gave the remainder of his estate in trust, the income therefrom to be paid to his two daughters in equal shares. The third clause of the will reads as follows:
THIRD: I have heretofore loaned to my daughter, Esther Hamlin Covill, the sum of eighteen thousand one hundred dollars ($18,100.00), and have taken from her an acknowledgment of said indebtedness, dated July 5, 1933, which provides that said indebtedness shall bear no interest and shall not become due and payable until the death of my daughter, except with her consent. It is my desire that she shall have the privilege of making payments in reduction of said indebtedness at any time and that neither my Executors nor my Trustees shall make any effort to collect any part of the same throughout her life, nor shall such indebtedness bear any interest. Said indebtedness shall, however, constitute a portion of the share of my estate set apart in trust for her throughout her life, and, upon her death, any unpaid balance thereof shall be charged against her remainder interest in my estate.
By the fourth clause of the will the decedent gave $68,000 of the principal of the trust in specified amounts to twenty-six named charities, subject to the life estates and effective only upon the death of the survivor of his daughters. He also gave the ‘balance of that portion of my estate which it shall be legal for me to bequeath‘ to seven named charities in equal shares. By the fifth clause of the will the decedent gave the balance of the principal of the trust to his two daughters in equal shares.
Subsequent to the probate of the will, Esther instituted a proceeding in the Surrogate's Court of Monroe County to determine the validity, construction, and effect of the fourth and fifth clauses of the will. In particular, she requested a determination of whether more than one-half of the estate after the payments of debts was bequeathed to charitable institutions contrary to the provisions of section 17 of the Decedent Estate Law of the State of New York, and a determination of the amount of any excess payable to her. A citation was issued to all interested parties and the charities were represented by counsel.
On October 26, 1942, the surrogate's court ordered, adjudged, and decreed: First, that the names of certain parties be corrected of record; second, that the provisions contained in the fourth and fifth clauses of the decedent's will are a valid disposition of property; and, third, that the decedent gave to the charities a portion of the principal of the trust equal to one-half of the gross estate after the payment of debts and that such portion is to be distributed only upon the death of the survivor of the decedent's daughters, whose executors, administrators, legatees, or assigns, would thereupon receive the balance of the principal of the trust. The court ordered the principal of the trust to be apportioned and distributed upon the termination thereof as follows:
IV. The portion of the principal of the trust to be apportioned and distributed to the charities upon the termination of the life estates for the benefit of said daughters, is that portion thereof determined by multiplying one-half of the gross estate after the payment of debts by the gross value of the principal of the trust at the termination thereof before payment of trustees' fees and expenses of the final accounting and settlement, and by dividing the result by the gross value of the principal of the trust received by the trustees.
The formula for such division would be as follows: Taking ‘A‘ as representing one-half of the gross value of the estate after the payment of debts; ‘B‘ as representing the gross value of the principal of the trust at the termination thereof before the payment of trustees' commissions and expenses of the accounting; ‘C‘ as representing the gross value of the principal of the trust received by the trustees; and ‘X‘ as representing the portion of the principal of the trust to be distributed to charities as above provided: Then X: A: : B : C and X equals (A x B): C.
V. The balance of the principal of the trust after all trustees' commissions and the expenses of administration and accounting are paid shall be distributed by the trustees of the executors, administrators, successors or assigns of the two daughters, Eva Smith Hamlin and Esther Hamlin Covill, in such proportion that the share distributed to the executors, administrators, successors or assigns of Eva Smith Hamlin shall exceed the share distributed to Esther Hamlin Covill by an amount equal to the unpaid balance of the $18,100 referred to in Paragraph THIRD of said last Will and Testament, which unpaid balance is to be charged against the remainder interest of Esther Hamlin Covill, as provided in said paragraph.
Thereafter, an appeal was taken from the aforesaid decree to the Appellate Division of the Supreme Court of the State of New York. On November 15, 1944, the Appellate Division rendered the following decision:
Decree in so far as appealed from modified on the law by striking therefrom that portion of the third ordering paragraph marked therein ‘IV‘ and as so modified affirmed without costs of this appeal to any party.
Memorandum.
The instrument of July 5, 1933, signed by Edith Hamlin Covill, is an acknowledgment of an advance of money payable only (unless she otherwise consented) after her death. The provisions of paragraph ‘THIRD‘ of the last Will and Testament of the testator made such advance (unless Mrs. Covill otherwise consented) not only payable after her death but solely from her interest, if any, in the residue of her father's estate. As there was no definite proof of value of the estate before the Surrogate and this is not an accounting proceeding (Matter of Apple, 141 Misc. 380; Matter of Lord, 155 Misc. 628), that portion of the decree below contained in the third ordering paragraph and marked ‘IV‘ was not a necessary or proper provision. All concur. (The portion of the decree appealed from construes a will.)
Present: Cunningham, P. J., Dowling, Harris, McCurn and Larkin, JJ.
Thereafter, a further appeal was taken from the aforesaid decision to the Court of Appeals of the State of New York, which is a court of last resort in that state. On January 24, 1946, the Court of Appeals affirmed the decision without opinion.
The parties have filed a stipulation of facts. We have summarized the material facts herein and we incorporate all of the stipulated facts by reference.
OPINION.
LEMIRE, Judge:
The petitioner reported the instrument of July 5, 1933, in its return as a ‘note‘ having ‘no value.‘ The Commissioner determined that there was a commuted value at the time of the decedent's death. While the parties have now agreed upon the question of value, they differ as to whether any value whatsoever is includible in the gross estate under section 811 (a).
The petitioner contends that the instrument is not a note, but merely a memorandum of a gift. We think it is unnecessary to determine the exact nature of the instrument. The question is whether at the time of his death the decedent had an enforceable claim against his daughter for money advanced to her during his lifetime. If the advances were not a gift, they would support a claim of the decedent against his daughter's estate. See In re Roe's Estate, 261 N.Y.Supp. 946, reversing 143 Misc.Rep. 361; 257 N.Y.Supp. 273. The instrument, whatever its nature, is evidence of the claim. Whether the claim was enforceable depends upon the intention of the decedent in making the advances to his daughter. The petitioner has the burden of proving the decedent's intention.
We are not convinced by the evidence that the advances were intended as a gift. The decedent simply told his daughter that he would ‘take care‘ of the money which she and her husband needed to build a summer home. Such a statement is inconclusive as evidence of his intention. While the decedent's daughter was a natural object of his bounty, the facts show that the expected repayment of the advances. As soon as the total amount of the advances was known, the decedent sent his daughter a paper calling for the payment of $18,100. She did not sign this paper, but she did sign an instrument which deferred the time of payment until her death. The decedent recited in his will that he had ‘loaned‘ his daughter $18,100 and further described the transaction as an ‘indebtedness.‘ He also expressly showed therein that he expected repayment from her estate under certain conditions. There is no evidence that a gift tax return was filed by the decedent. There is no evidence that a gift was clearly and unmistakably intended. The evidence is the other way.
The petitioner further contends that the decedent's will rendered the instrument unenforceable. It is true that the will had the effect of changing the time and method of repaying the advances. The New York courts construed the will as making such advances not only payable after the daughter's death, but solely from her interest, if any, in the residue of the decedent's estate. The state courts construed the will as well as the instrument of July 5, 1933. We are concerned here only with a claim evidenced by the instrument. Regulations 105, section 81.13, directs that ‘Notes or other claims held by the decedent should be included (in the gross estate), though they are canceled by his will.‘ Similarly, we are not concerned with the decedent's testamentary dispostion of his property interest in the claim against his daughter's estate. Since we are not concerned with the will as such, we are not concerned with the construction of the will in the state courts. The Appellate Division said of the instrument signed by the decedent's daughter that it was ‘an acknowledgment of an advance of money payable only (unless she otherwise consented) after her death.‘ It did not say that the money was not payable. It did not say that the claim for such money was not an asset of the decedent's estate.
The petitioner further contends that the instrument in question is an acknowledgment of an advancement from the decedent's estate. An advancement is ‘an irrevocable gift in praesenti.‘ Estate of Genevieve Brady Macaulay, 3 T.C. 350, 356; affd., 150 Fed.(2d) 847. For the reasons already given, there is no basis in fact for treating the advances as a gift. Moreover, the doctrine of advancement is governed by statute in New York and applies only in case of an entire intestacy. In Messmann v. Egenberger, 46 App.Div. 46; 61 N.Y.Supp. 556, it was said:
* * * The object of the statute is quite clear. When a will has been made disposing of the testator's real and personal estate, it will be presumed that his intention as to charges for advancements made to his children during their lives will be disposed of by the will, or provision made for carrying out his intentions in regard to them. Where he makes no will, then the law steps in and disposes of his estate; and, in order to make an equitable and proper disposition of it, it is necessary to consider the advancements made by the testator during his life, and for that purpose provision is made which will insure the equitable disposition of the intestate's property.
The decedent treated the advances made to his daughter as a loan, not as a gift. She acknowledged the advances in an instrument which evidenced an enforceable claim of the decedent's estate. It was not enforceable until her death, but it had some value at his death. The parties have agreed upon the commuted value.
We hold that the Commissioner did not err by including the agreed value of the instrument of July 5, 1933, in the gross estate of the decedent.
Reviewed by the Court.
Decision will be entered for the respondent.