Opinion
Docket No. 19764.
1949-06-8
ESTATE OF MARGARET RUTH BRADY FARRELL, DECEASED, NEILE F. TOWNER, CENTRAL HANOVER BANK AND TRUST COMPANY, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Neile F. Towner, Esq., and Julian B. Erway, Esq., for the petitioners. Clay C. Holmes, Esq., and Michael Waris, Jr., Esq., for the respondent.
Indebtedness originally incurred by decedent's son and evidenced by note upon which decedent eventually became maker, held, on the facts, to have continued to be son's indebtedness and, decedent being in the position of surety, held, further, not a deductible claim against petitioner estate, the son having acquired sufficient means by inheritance from another estate at decedent's death. Estate of Charles H. Lay, 40 B.T.A. 522, followed. Neile F. Towner, Esq., and Julian B. Erway, Esq., for the petitioners. Clay C. Holmes, Esq., and Michael Waris, Jr., Esq., for the respondent.
These proceedings were brought for a redetermination of a deficiency in estate tax of $176,335.33. Petitioners claim an overpayment of $2,680.05. The primary litigated issue is whether respondent erred in disallowing as a deduction under Internal Revenue Code, section 812, a claim against the estate, representing a part of a note on which decedent was designated as maker.
The case was submitted upon a stipulation of facts and evidenced adduced at the hearing. Those facts hereinafter appearing which are not from the stipulation are otherwise found from the record.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Petitioners are the executors of the estate of Margaret Ruth Brady Farrell, who died on August 14, 1944, a resident of the city of Albany, New York.
The estate tax return involved was filed with the collector of internal revenue for the fourteenth district of New York.
Anthony Brady Farrell, a son of decedent, executed certain notes to the National Commercial Bank & Trust Co. and obtained the cash thereon as follows:
+--+ ¦¦¦¦ +--+
Date Amount Maturity 8-10-27 $30,000 12- 9-27 11-30-26 35,000 2-28-27 1-31-28 10,000 4-30-26 7-10-28 30,000 11-10-28 7-23-28 45,000 10-20-28 10-25-28 17,000 11-25-28 11-17-28 101,550 2-17-29 3-10-30 57,000 6-10-30 Total 325,550
All of those notes were made by Anthony and endorsed by decedent, except the note for $17,000, dated October 25, 1928, which was made by decedent and endorsed by Anthony.
The notes mentioned in the preceding paragraph were renewed in a similar form from time to time as they matured, until they were replaced by notes made by decedent and endorsed by Anthony on the following dates:
+--+ ¦¦¦¦ +--+
Date of original Amount Date of item replacement 8-10-27 $30,000 4-10-29 11-30-26 35,000 2- 5-29 1-31-28 10,000 1-30-29 7-10-28 30,000 3-12-29 7-23-28 45,000 4-22-29 10-25-28 17,000 11-26-28 11-17-28 101,550 2-19-29 3-10-30 57,000 9-10-31 Total 325,550
It was the practice of the National Commercial Bank & Trust Co. at the time of these replacements to have all guarantor endorsers or accommodation endorsers appear as payee endorsers.
Statements showing certain assets of decedent were obtained from her by the National Commercial Bank & Trust Co. after she became maker, and the requirement of such statements from Anthony ceased at that time. In these statements decedent referred to the fact that they were furnished in connection with her obligation to the bank and also referred to the only other indebtedness which she had. The statements of her assets showed that at all times material she was in financial position to pay the amount of the foregoing notes and that she owed securities free and clear in her safe deposit box in excess of one million dollars. At no time as each note made by decedent matured was any attempt made by the National Commercial Bank & Trust Co. to obtain payment of the note in cash from Anthony or decedent.
The following three additional notes made by decedent and endorsed by Anthony were given to the National Commercial Bank & Trust Co., Anthony receiving the cash thereon:
+-----------------+ ¦Date ¦Amount ¦ +--------+--------¦ ¦9-25-32 ¦$11,000 ¦ +--------+--------¦ ¦10-23-32¦2,500 ¦ +--------+--------¦ ¦5- 4-33 ¦19,900 ¦ +--------+--------¦ ¦Total ¦33,400 ¦ +-----------------+
Those three notes were renewed from time to time in the same form.
All the above notes aggregating $358,950 made by decedent and endorsed by Anthony were renewed from time to time until they, less a small payment on account, were consolidated into one note for $357,400 made by decedent and endorsed by Anthony; which note matured November 24, 1937.
About 1939 decedent turned over her business affairs to Neile F. Towner now one of the executors of her estate. Towner had represented decedent as an attorney prior to 1939, but knew little of her personal affairs. He made an inventory of her assets upon the assumption of his new duties and discovered that the three notes last above mentioned totaling $33,400 had been executed after June 6, 1932, the date upon which the gift tax became effective. He questioned decedent about these three notes and asked her about the transaction. She told him that it was her debt; that she intended to pay it; and that Anthony was under no obligation whatsoever to pay the notes. With respect to the three notes, Towner told decedent that she should have included them in a gift tax return. She replied she was not a business woman and not familiar with the gift tax. Towner advised her that the proper way to handle the matter was to have Anthony give his three notes, plus interest payable to decedent for the three notes executed after June 6, 1932.
On or about March 20, 1942, decedent obtained from Anthony three demand notes payable to her order for the original amounts with interest. They were executed and delivered because the original notes had been executed and delivered after the gift tax went into effect. These three notes made by Anthony appear in the estate tax return and are included in the total amount of his indebtedness to the estate, i.e., $723,174.55. This amount Anthony paid to the estate of decedent. He objected to satisfying these debts which he owed decedent and paid them only at the insistence of the executors.
The note for $357,400 was renewed from time to time, each renewal being for three months, the last renewal for $332,400 ($25,000 having previously been paid on account by decedent on April 7, 1941) being dated May 24, 1944, and maturing August 24, 1944, after the date of decedent's death. This note was endorsed by Anthony. Towner would usually send the note to her to sign and she would sometimes return it to him or directly to the bank or sometimes to Anthony, who in turn would deliver it to the bank. As each note decedent made became due and a renewal note given in payment thereof the old note was marked paid. Prior to decedent's death in August 1944 Towner sent her a renewal of the note due August 24, 1944, which she signed and returned to him. Since decedent died on August 14, 1944, that note was not used and was still in Towner's possession when she died. This renewal note did not bear the endorsement of Anthony.
The National Commercial Bank & Trust Co. presented a claim against decedent's estate for the amount of the note, namely, $332,400, which was paid on or about September 8, 1944, with interest. Deduction was claimed for $331,938.33 which would have been payable as of the date of death after credit for unearned discount. No demand was made by the National Commercial Bank & Trust Co. upon Anthony.
The officer of the National Commercial Bank & Trust Co. who made all arrangements at the time the replacement notes were given by decedent and endorsed by Anthony, and who had full knowledge of the transaction, died in 1937.
Upon the death of decedent, Anthony received approximately $6,000,000 under his grandfather's will. The net amount Anthony thus received exceeded the value of the notes in controversy and Anthony was financially able to satisfy the original debt.
Decedent never made an effective gift to Anthony of the amount of the original indebtedness nor of her right to be reimbursed if she were required to pay the notes in question.
The executors made no effort to collect this claim against Anthony other than the three notes representing $33,400 described above which he paid.
The following table shows the values at which various shares of stock owned by decedent were included in the estate tax return, the prices at which and the dates when they were sold by the executors and the values respondent used in determining the deficiency:
+-------+ ¦¦¦¦¦¦¦¦¦ +-------+
Reported Determined Shares value Sale value per per price Date of share per share sale share Cons. Car-Heating Co. 170 $65.00 $69.00 $69.00 10-11-44 (unlisted) 11-2-44 ( 300 ) shs ( at 10 ) 7/8 Electric Bond & Share 328 10 5/8 ( 28 shs ) 10 3/4 12-23-44 Co ( at 10 ) 3/4 Morris Plan Indust. Bank of Albany 750 15.00 17.00 17.00 1-23-45 (unlisted) ( 60 shs ) Nat. Com. Bank & Trust Co. of Albany 104 435.00 ( at 470 ) (unlisted) State Bank of Albany 132 260.00 285.00 285.00 1-16-45 (unlisted) J.S. Young & Co. 49 86.00 91.40 91.40 10-2-44 (unlisted)
The fair market values at the date of decedent's death of the shares of stock involved in this proceeding are those set forth in the preceding paragraph as having been used by respondent in determining the deficiency.
OPINION.
OPPER, Judge:
The issue of fact which according to petitioners is dispositive of the primary question has been covered by our findings of fact. We can not conclude from the evidence that petitioners have borne their burden of showing that, by the change in the form of the notes or any other definitive action, decedent intended to or did relieve her son from his liability for the indebtedness which they represent. We are unable to find that kind of primary evidence of a gift— a direct transaction between donor and donee— which is necessary, see Blanche S. Ross, 28 B.T.A. 39, and presumably could have been shown, if it existed, by the production as a witness of the putative donee himself, decedent's son. This was not done, and its lack is not adequately explained. See Wichita Terminal Elevator Co., 6 T.C. 1158; affd. (C.C.A., 10th Cir.), 162 Fed.(2d) 513. Something more than mere promises or general statements is ordinarily necessary to effectuate a valid gift. See Estate of Theodore O. Hamlin, 9 T.C. 676; R. C. Coffey, 1 T.C. 579; affd. (C.C.A., 5th Cir.), 141 Fed.(2d) 204. We find nothing to fill that requirement.
Assuming that legal questions nevertheless exist, they may be disposed of summarily. Once it is concluded that there was no ultimate assumption of the obligation by decedent, her participation was that of surety, regardless of whether she might in the first instance have been compelled to make good on the debt. ‘The relation as to the debt between the defendant (the accommodated party) and Flint (the accommodation endorser and plaintiff's intestate) in so far as it is involved in this action was that of principal and surety. ‘ Blanchard v. Blanchard, 201 N.Y. 134; 94 N.E. 630. The original indebtedness was that of the son, and petitioner estate could have required him to satisfy the obligation in its stead out of any property becoming available to him. Blanchard v. Blanchard, supra. Even if his solvency resulted only from an inheritance out of the same estate, that result would follow. Estate of Charles H. Lay, 40 B.T.A. 522. ‘ * * * where an estate is liable only as surety or endorser, it cannot take any deduction because of such liability where the principal has ample assets to pay the indebtedness. ‘ Estate of Elizabeth Harper, 11 T.C. 717, 719. This proceeding is distinguishable from the Harper case on the grounds thus stated as a distinction from Estate of Charles H. Lay, supra. And, contrary to the situation in the Harper case, the solvency of the primary obligor here was established by his inheritance from another estate, not that as to which the issue is being raised. It follows that for both reasons Estate of Elizabeth Harper, supra, is inapplicable and that the situation falls squarely within the principle of Estate of Charles H. Lay, supra.
The only evidence as to the value of the securities in the estate supports respondent's determination and petitioner has abandoned this issue. The amounts of deductions by reason of estate expenses are by stipulation to be increased by $3,500 for costs of administration. Other expenses are by agreement to be disposed of in the recomputation.
Decision will be entered under Rule 50.