Docket No. 7570.
William H. Hayes, Esq., and Leslie D. Dawson, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
The decedent, who died in 1942, was a cash legatee of $50,000 under the will of his father-in-law, who died in 1939. Before receiving the legacy the decedent paid $100,000 for 500 shares of stock in J. P. Morgan & Co., Inc. He had borrowed the money necessary to make the payment from his wife. About two weeks after the receipt of the legacy decedent used it in part payment of the debt owed his wife. In the estate tax return filed for decedent the value of the shares purchased for $50,000 was claimed as a deduction from the gross estate and disallowed by the respondent upon the ground that the 250 shares could not be identified as having come out of property of the prior decedent. Held, that the value of the shares in question is a legal deduction from decedent's gross estate. William H. Hayes, Esq., and Leslie D. Dawson, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
This proceeding is for the redetermination of a deficiency in estate tax in the amount of $19,805.71. The questions in issue are:
(1) Whether the estate is entitled to a deduction from the gross estate of the value of 250 shares of stock of J. P. Morgan & Co., Inc., which is claimed were purchased out of a legacy of $50,000 received from the estate of a decedent who died within five years from the date of death of the present decedent.
(2) Whether the estate is entitled to a deduction of an additional $1,000 for attorney's fees.
(3) Whether the estate is entitled to a credit against the basic estate tax for an amount paid to the State of New York in respect of property included in the gross estate of the decedent.
The respondent concedes upon the proof that the estate is entitled to the deduction of an additional attorney's fee in the amount of $1,000 and also to a credit for succession tax paid to the State of New York in the amount of $11,000.
FINDINGS OF FACT.
The petitioner, J. P. Morgan & Co., Inc., is the duly appointed, qualified, and acting executor of the last will and testament of Devereux Milburn, who died a resident of the State of New York on August 15, 1942. The estate tax return for the estate of decedent was filed with the collector of internal revenue for the first district of New York.
The decedent, Devereux Milburn, was one of the executors of the will of his father-in-law, Charles Steele, who died on August 5, 1939, a resident of Westbury, New York. He was a cash legatee of $50,000 under the will of his father-in-law.
The executors of the estate of Charles Steele duly field an estate tax return, which included in the gross estate the $50,000 above mentioned as a legacy, and paid the estate tax due thereon on or about November 2, 1940.
In the early part of 1940 it was proposed to organize under the Banking Law of the State of New York a corporation to be known as ‘J. P. Morgan & Co., Incorporated,‘ for the purpose of conducting the business of a bank or trust company. This corporation was to succeed to the business theretofore conducted by the partnership of J. P. Morgan & Co., of which Charles Steele had been a member and in which at the time of his death he had an interest of about $20,000,000.
Decedent Milburn was given the opportunity of subscribing to shares of stock of J. P. Morgan & Co., Inc. He discussed the matter with his attorney and told him that he wished to subscribe for as much of the stock of the new bank as he could possibly carry. Milburn and his attorney then reviewed his financial affairs to determine how much stock Milburn should subscribe for and how he should pay the subscription price. At that time he did not have liquid resources with which to pay for the stock but he did have the $50,000 legacy due him from the Steele estate, and he would be entitled to receive large amounts as commissions for his services as an executor of that estate.
Milburn was advised by his attorney that Milburn could not at that time pay himself his legacy from the Steele estate because the estate did not have sufficient cash with which to pay all legacies and the estate taxes which would be due. He was further advised that it was contemplated that on the day of the formation of the bank on March 27, 1940, the partnership would pay off decedent Steele's interest to his executors and the executors would then have sufficient cash over and above all taxes which might be due to pay his $50,000 legacy as well as all other legacies.
After reviewing all of the facts, Milburn concluded that he could afford to subscribe for 500 shares of J. P. Morgan & Co., Inc., at $200 per share, or $100,000. He accordingly subscribed to stock in that amount.
As he would be required to pay the subscription price before he received his legacy or his executor's commissions from the Steele estate, Milburn arranged to borrow $100,000 temporarily from his wife, Nancy Steele Milburn. He also arranged to borrow from her an additional $10,000 which he then required to meet various current obligations, including his personal income tax. The sum of $110,000 was loaned to Milburn by his wife on or about March 27, 1940, out of funds which she had borrowed from the Guaranty Trust Co. of New York, and he signed a promissory note in her favor in that amount. On the same day the new bank was formed Milburn's subscription price of $100,000 was paid, and a certificate for 500 shares of the stock was issued in his name.
As contemplated in the plan, the partnership of J. P. Morgan & Co., on or about March 27, 1940, paid off the interest of the Steele estate, and the executors then had sufficient cash to pay all legacies and other obligations. The executors thereupon, on or about April 9, 1940, paid Milburn's $50,000 legacy by check drawn to the order of Guaranty Trust Co. of New York, and counsel for Milburn, at his request, paid over the check in reduction of the loan from Mrs. Milburn to her husband. The decedent never personally had possession of the $50,000.
On or about May 20, 1940, Milburn received $416,083.50 on account of his commissions as an executor of the Steele estate and on that day he paid off the $60,000 balance of the loan from his wife, plus interest thereon.
The decedent continued to own his 500 shares of J. P. Morgan & Co., Inc., stock until the date of his death.
In the Federal estate tax return filed for the estate of Milburn the executor elected that the property included in the gross estate should be valued as of August 15, 1943, the applicable optional valuation date, in accordance with the provisions of section 811(j) of the Internal Revenue Code. In schedule B of the return the executor reported 250 shares of J. P. Morgan & Co., Inc., as taxable property and in schedule I of the return it reported the other 250 shares as property previously taxed, claiming that the last mentioned 250 shares had been acquired with the $50,000 legacy from the Steele estate.
On the optional valuation date the 250 shares of J. P. Morgan & Co., Inc., stock previously reported as taxed property were of a value of $40,225. After making the proportionate reduction of such value as required by section 812(c) of the Internal Revenue Code, the executor, in schedule P of the return, claimed as a deduction for property previously taxed in computing the net estate for basic tax the sum of $29,857.37, and in schedule Q claimed as a deduction for property previously taxed in computing the net estate for additional tax the sum of $34,419.13. The respondent in his notice of deficiency disallowed these deductions. He allowed no deduction whatever on account of the above mentioned $50,000 legacy which Milburn received from Steele's estate.
On or about November 13, 1943, the petitioner paid the collector of internal revenue for the first district of New York Federal estate tax in the sum of $110,741.27 shown to be due by the estate tax return. On or about June 12, 1945, pursuant to notice and demand therefor, the petitioner paid to the collector of internal revenue, as deficiency estate tax, the sum of $10,041.01, together with interest thereon of $832.90, or a total of $10,873.91.
The only question for decision in this case is whether 250 shares of J. P. Morgan & Co., Inc., stock of a value of $40,225 at the optional valuation date can be identified as having come from the $50,000 legacy which Milburn received from the estate of his father-in-law, Charles Steele.
Section 812 of the Internal Revenue Code, as amended by section 407 of the Revenue Act of 1942, provides, so far as material, as follows:
SEC. 812. NET ESTATE.
For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate
(c) PROPERTY PREVIOUSLY TAXED.— An amount equal to the value of any property (1) forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent, * * * where such property can be identified as having been received by the decedent * * * from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received. * * * This deduction shall be allowed only where * * * an estate tax imposed under this chapter or any prior Act of Congress, was finally determined and paid by * * * the estate of such prior decedent * * * and only in the amount finally determined as the value of such property in determining the * * * gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate, and only if in determining the value of the net estate of the prior decedent no deduction was allowable under this subsection, section 861(a)(2), or the corresponding provisions of any prior Act of Congress, in respect of the property or property given in exchange therefor.
In his denial of the right of the estate to treat the value of the 250 shares of J. P. Morgan & Co., Inc., stock as being traceable to the legacy of $50,000 received by Milburn from Steele's estate, the respondent relies upon section 81.43 of Regulations 105, which provides that the burden of identifying property as acquired in exchange for property included in the gross estate of the prior decedent for Federal estate tax purposes rests upon the executor and that the deduction for substituted property extends to property acquired by purchase with the proceeds of the sale of property received from the prior decedent, ‘so long as such proceeds can be conclusively identified as such and clearly traced to the property originally so received.‘
On brief the respondent submits:
Thus, in the instant proceeding, if the decedent had deposited in a separate bank account the $50,000 legacy involved herein and had made investments therefrom. keeping intact his inherited funds, he might have extended his right of deduction for previously taxed property to any securities into which these funds could be clearly traced, regardless of the number of transactions involved. But it is what was actually done, and not what might have been done or what the decedent may have expressed an intention to do, which is controlling herein. * * *
He then submits that:
It is the respondent's position that, under the facts presented herein, the petitioner has not met the burden of identifying the shares of stock of J. P. Morgan & Company, Inc., as having been acquired in exchange for property received by bequest, as required by the statute.
He further submits:
* * * The decedent's intention is not apparent from the record, however, and it would seem to be immaterial in view of the fact that when the anticipated legacy was actually received by the decedent, by check dated April 10, 1940, it was not used to purchase any stock but was applied to reduce the loan of $110,000 which the decedent had obtained from his wife under date of March 27, 1940. * * *
In Rodenbough v. United States (C.C.A., 3d Cir.), 25 Fed.(2d) 13, the court stated:
A statute must be read in the light of its purpose. Tucker v. Alexander, 275 U.S. 228 * * * As it is clear that the Congress intended completely to avoid the inequity of double taxation, we shall, in order to effectuate its intention, give the statute a construction as broad as the intention itself. * * *
The facts which obtain in this proceeding are much the same as those which obtained in Estate of Mary D. Gladding, 27 B.T.A. 385. There the decedent in 1919 had purchased from her mother stock for $91,125 and, as the decedent had no money to pay for the stock, she gave her mother two notes for the purchase price. The mother died in 1920 and the notes were included as a part of her estate and tax was paid thereon. Under her mother's will one-fifth of her estate was bequeathed to the daughter and the executors used $91,125 of the daughter's interest in the estate in payment of the notes, the net result being the same as if they had paid the daughter for full interest in the estate and had then compelled her to pay the notes. The daughter died within five years still owning the stock which she had purchased from her mother. In holding that the stock had been received in exchange for previously taxed property and was therefore not taxable in the daughter's estate, we said:
* * * This note was satisfied out of funds of the prior decedent coming to Mary D. Gladding as a beneficiary of that estate, and as a result she received the stock relieved from any lien for the purchase price. In effect, she received funds from the prior decedent with which she paid the purchase price of the stock. The situation is not different from a case where a second decedent takes funds from a prior decedent on which the estate tax has been paid and purchases stock. * * *
See also Elmer E. Rodenbough, Executor, 1 B.T.A. 477.
In McIntyre v. Whitney, 139 App.Div. 557; 124 N.Y.S. 234; affd., 201 N.Y. 526; 94 N.E. 1096, it appeared that a customer had sent his broker $5,000 and had instructed him to purchase stock valued at $45,000. In discussing the nature of the resulting transaction the court said:
* * * When purchased, the shares of stock became the plaintiff's property precisely the same as though he had advanced the whole purchase price. In fact, he did advance the whole purchase price, borrowing for the purpose $40,000 of the defendants. * * *
See also Walter G. Pietsch, Executor, 6 B.T.A. 582.
In his brief the respondent claims that the answer to the question proposed by this proceeding should be in his favor because (1) the stock had been paid for before Milburn had received his legacy and, therefore, the legacy was not used to pay for the stock, but to reduce the loan, and (2) as the decedent had enough other assets to repay the loan it was not necessary for him to use the legacy for this purpose.
The respondent has cited no case supporting his argument in this proceeding. We do not think the fact that the legacy was not received until after Milburn had paid for his stock, or that the legacy was used to pay off a loan which Milburn had made for the purpose of purchasing the stock, bars the right of the estate to claim that the 250 shares of J. P. Morgan & Co., Inc., stock here in question are directly traceable to the prior taxed property.
In McFeely v. Commissioner, 296 U.S. 102, it was held that a legatee of specific property was the owner of the property from the date of the death of the decedent. In the instant proceeding Milburn did not acquire title to his legacy at the date when the money was paid over to him, but at the date of the death of Steele. The proof is clear that the $50,000 legacy received by Milburn was used to pay off one-half of the $100,000 borrowed by him from his wife for the purpose of purchasing 500 shares of the stock. We do not find anything in the Commissioner's regulations opposed to such a conclusion. We have here merely a question as to whether the proof shows that the 250 shares of stock in question were purchased out of funds received from a prior estate. We hold for the petitioner upon this issue.
Decision will be entered under Rule 50.