The opinion
T.C. Memo. 1996-491
UNITED STATES TAX COURT
ESTATE OF CATHERINE E. DOWELL, DECEASED,
PATRICIA LOW, EXECUTRIX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16019-94. Filed October 30, 1996.
Joel L. Shoobe, for petitioner.
Albert G. Kobylarz and Richard E. Buchbinder, for
respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$127,304 in petitioner's Federal estate tax. Respondent filed an
amended answer asserting an additional deficiency of $61,532.
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Catherine E. Dowell (sometimes referred to as decedent or
mother) owned 75 percent of the stock of Dowell Insurance Agency,
Inc. (the stock or agency stock; the agency), at the time of her
death. Decedent had previously sold 25 percent of the agency
stock to her daughter, Patricia Low (sometimes referred to as
daughter), and was receiving monthly installment payments from
the sale. The obligation to make the installment payments1 (the
debt) was forgiven by decedent on her deathbed. Decedent's Last
Will and Testament (the will) bequeathed her remaining stock to
her daughter "with the understanding" that she would make monthly
payments of $5,000 to decedent's son for 10 years. A codicil to
decedent's will stated that monthly payments were to be made by
the daughter to decedent's husband instead. After her mother's
death, Patricia Low never made any of the monthly payments.
Decedent's husband was the residuary beneficiary under decedent's
will. Petitioner, decedent's estate, computed the sum of the
monthly payments called for in the codicil to be $450,000, and
claimed that amount as a marital deduction on its Federal estate
tax return. After concessions, the issues for decision are:
(1) Whether decedent's husband inherited her agency stock on
the failure of the daughter to make the payments called for in
the codicil; if decedent's husband did not inherit the agency
stock,
1
The record does not show that an installment note was
entered into by the daughter.
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(2) whether decedent's husband inherited an interest in the
stock that would qualify for the marital deduction under section
2056(a)2 and, if so, the value of that interest; and
(3) whether decedent's cancellation of her daughter's debt
to her resulted in a gift to her daughter.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, the legal residence of the executrix was in New
Jersey.
Decedent and Dowell Insurance Agency, Inc.
Decedent purchased 100 percent of the agency in 1975.
Before decedent's death, she was president and treasurer of the
agency, and Patricia Low was secretary of the agency. The
revenues of the agency were derived mostly from the sale of
commercial insurance policies to contractors or manufacturing
facilities. Both decedent and Patricia Low sold these policies.
Decedent built up the agency for 15 years before she died.
Decedent thought the agency was worth about $1 million when her
will was written in 1988.
2
Section references are to the Internal Revenue Code in
effect at the date of decedent's death, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
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Decedent previously had worked for another insurance agency
where she started as a secretary and worked her way up to vice
president over 17 years. She was one of the first women to own
an insurance agency that sold commercial lines of insurance in
northern New Jersey. Decedent was businesslike and tough; she
dictated what she wanted in business contracts and letters.
During 1988 decedent had a cancer operation and a long
recovery period. Decedent told her daughter that she felt the
business should live on after her death. The business was
decedent's legacy. She also told her daughter that she would
like to see the agency built up and her daughter to have the
opportunity to own the entire agency. After another bout with
cancer, decedent died testate on July 27, 1990.
Decedent's Husband
Decedent's husband, Sidney Dowell (sometimes referred to as
father or surviving spouse), was never active in the agency even
though he was listed as its vice president. Patricia Low never
saw her father at the agency's office. He was never licensed to
sell insurance. Sidney Dowell was a blue collar worker who
retired from his small electric motor repair business in about
1976. He had nothing to do with the insurance business nor any
interest in the insurance business before or after decedent's
death. Sidney Dowell died on May 2, 1994.
Patricia Low and Kenneth Dowell (sometimes referred to as
the son) are the only children of decedent and Sidney Dowell.
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Patricia Low
Patricia Low, the executrix, graduated from college in 1979
with a liberal arts degree in history and political science. She
started with the agency in 1983 after working at various retail
stores. While at the agency, she worked as a receptionist, a
personal lines customer service representative, a commercial
lines customer service representative, a claims person, and in
sales. She worked every job except her mother's and as
bookkeeper. Patricia Low worked full time with her mother for 6
years. Decedent was trying to teach her the business. Patricia
Low became president of the agency and managed its day-to-day
operations after decedent's death.
Kenneth Dowell
Kenneth Dowell has a bachelor's degree in history and
psychology and a master's degree in history and works for PR News
Wire in Jersey City. Kenneth Dowell never worked in the the
agency. Kenneth Dowell's relationship with his parents was
amicable. He is familiar with some of the circumstances
surrounding his mother's will.
Decedent's Will
Jan Seigel performed all of decedent's general legal work.
Jan Seigel was also Patricia Low's lawyer and the family's
attorney. Jan Seigel met decedent in 1975 when he started his
law practice in Hawthorne, New Jersey, in a building where they
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both were tenants. They saw each other daily. Decedent executed
her will on March 9, 1988.
Although Jan Seigel prepared decedent's will and codicil,
decedent dictated the provisions concerning the devise of her
agency stock. The terms in the will and codicil relating to the
agency were actually drafted by decedent; Jan Seigel simply
copied decedent's language verbatim. Decedent would bring legal
documents to Jan Seigel and say: "This is what I want. Do
this." Paragraph Third of the will states in part: "I give,
devise and bequeath all of my stock * * * to my daughter,
PATRICIA LOW, with the understanding that she will pay to my son,
KENNETH A. DOWELL, the sum of Five Thousand Dollars ($5,000.00)
per month for ten (10) years".3 Decedent's overriding intent
with respect to her children was that they be treated equally,
though she did not want her son to have any part of the agency.
The payments in the will, namely $5,000 per month for 10 years,
were intended to represent one-half of the value of the agency.
Buy-Sell Agreement
On November 2, 1989, decedent entered into a written stock
purchase agreement (the agreement) in which she sold her daughter
25 percent of her agency stock on an installment basis for a
price of $2,500 per month for 10 years. Jan Seigel represented
decedent in this transaction. Decedent set the price of the
3
The father was substituted for the son in the codicil to
the will.
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stock purchase and the terms of the agreement. Two stock
certificates, each dated January 1, 1990, were issued. One
certificate for 75 shares was issued to decedent, and the other
for 25 shares was issued to her daughter. Jan Seigel prepared
and issued Patricia Low's stock certificate, but it was not
delivered to her. A partial amortization schedule relating to
the agreement was prepared by William Grinwis, decedent's
accountant, and given to Patricia Low. The agreement also gave
decedent and her daughter the option to buy each other's agency
stock upon certain conditions, including the death of a party.
Patricia Low made the monthly payments called for in the
agreement until they were canceled. One payment was made 10 days
late. Decedent informed her daughter that if she was late with
another payment, decedent would cancel the agreement and tear up
the stock certificate issued to her daughter.
First Codicil to the Last Will and Testament
Decedent executed a codicil to her will on March 16, 1990.
The codicil states in part:
I hereby amend Paragraph Third of my Last Will and
Testament to provide as follows: The sum of Three
Thousand Seven-Hundred Fifty Dollars ($3,750.00) per
month for a period of ten (10) years shall be paid to
my husband, SIDNEY F. DOWELL. In addition, he shall be
entitled to one-half (½) of the unpaid monthly payments
due me at the time of my death from my daughter,
PATRICIA LOW, from the sale of Twenty-Five (25 %)
Percent of the stock in Dowell Insurance Agency, Inc.
The codicil was written to make two changes: (1) To substitute
Sidney Dowell, decedent's husband, for Kenneth Dowell, decedent's
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son, as recipient of the payments from Patricia Low; and (2) to
reflect the fact that Patricia Low had already purchased 25
percent of the agency stock. Sidney Dowell was substituted for
Kenneth Dowell in the codicil because Kenneth was going through a
divorce and decedent did not want his wife to make a claim on the
payments called for in the will. Jan Seigel advised decedent
that he did not think Kenneth Dowell's wife could make a claim on
an inheritance under New Jersey law, but decedent said she really
did not care what his advice was and that she wanted to do it her
way. She wanted to make sure that her daughter-in-law could not
get the payments "in any way, shape, or form". The change of
recipient in the codicil from Kenneth Dowell to Sidney Dowell was
not occasioned by decedent's being upset with Kenneth or by a
family dispute between decedent and him.
Under the terms of the codicil, Patricia Low had to pay to
her father a total of $5,000 per month for almost 10 years, as
her monthly payments under the codicil were $3,750 and one-half
of the $2,500 that she owed under the agreement.
The codicil was written approximately 2 years after the will
was executed. Decedent discussed the codicil with her son in
1990. She said that the provision in the original will by which
he would receive payments from the business was being changed.
Decedent told her son that the reason for the change was that he
had a divorce case pending and decedent did not want to have the
payments be part of a property settlement in his divorce case.
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Decedent died July 27, 1990, 4 months after the codicil was
written. Kenneth Dowell did not inherit anything from decedent's
estate.
Cancellation of the Debt
Decedent was readmitted to the hospital in July of 1990 and
was told she had only a short time to live. Decedent knew her
daughter would have a problem paying for the agency stock. On or
about July 18, 1990, 9 days before her death, decedent asked her
daughter to bring the agreement to her in the hospital. Patricia
Low brought decedent the only thing she had at home, the
amortization schedule, which decedent signed, dated, and marked
"paid in full". Decedent told her daughter that she was
canceling the payments due under the agreement. Decedent did not
say why, and her daughter did not ask for her specific reason.
At the time of the cancellation, Patricia Low had made six
payments under the agreement. The amortization schedule shows
her remaining obligation as $183,520.
Patricia Low's Federal income tax return for the year 1990
does not include any item of income regarding debt cancellation.
Post-Death Events
After decedent died, her daughter went to Jan Seigel and
asked him what she should do as potential executrix. She did the
same with William Grinwis. Patricia Low never asked Jan Seigel
any questions about the payments totaling $450,000 ($3,750 x 12 x
10) that she was to make to her father under the codicil.
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Sometime in August 1990 after her mother's death, Patricia Low
decided not to make payments to Sidney Dowell. However, she
never told him that the remaining 75 percent of the agency stock
was his. Patricia Low never told Jan Seigel, and he was unaware,
that she was not making the payments.
Neither Patricia Low nor Jan Seigel transferred decedent's
75 percent of the agency stock to Sidney Dowell. Jan Seigel
prepared the New Jersey inheritance tax return for decedent's
estate. The New Jersey inheritance tax return, which was signed
and filed by Patricia Low, shows her receiving, as beneficiary,
decedent's agency stock, less payments totaling $450,000 to be
made to her father.
William Grinwis prepared the Federal estate tax return, in
part, from the information contained in the New Jersey
inheritance tax return which was provided to him by Jan Seigel.
William Grinwis was given copies of the will and codicil when he
prepared the estate tax return in either late 1990 or early 1991.
The Federal estate tax return, which was signed and filed by
Patricia Low, deducts the $450,000 in projected payments as a
bequest to the surviving spouse.
Forms 1120S (U.S. Income Tax Returns for an S Corporation)
were filed for the agency for the years 1988 through 1993. The
1990 through 1993 corporate tax returns were prepared by William
Grinwis and signed by Patricia Low as president.
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The 1990 Form 1120S of the agency shows Patricia Low owning
25 percent of the stock for the first 7 months of the year and
100 percent of the stock for the last 5 months of the year.
Patricia Low signed this return as president of the agency.
The Forms 1120S of the agency for 1991, 1992, and 1993 each
show Patricia Low as owning 100 percent of the agency stock.
These returns were signed by Patricia Low as president. The
Schedule K-1 for 1991 shows a loss of $80,830 flowing through to
Patricia Low, all of which she claimed on her individual Federal
income tax return for 1991. The Schedules K-1 for 1992 and 1993
show agency income of $28,594 and $37,462, respectively, flowing
through to Patricia Low, all of which she reported on her Federal
tax returns.
William Grinwis prepared Patricia Low's individual tax
returns for the years 1990, 1991, 1992, and 1993.
Procedural History of the Case
Respondent determined that the alleged bequest of $450,000
did not qualify for the marital deduction because it was a "non-
deductible terminable interest" under section 2056(b).
Petitioner originally alleged in the petition that "Decedent's
Will creates an unequivocal non-terminable obligation to pay to
her husband, or his estate, $3,750 per month for 10 years".
Respondent's answer denied petitioner's assignment of error in
that regard and denied the facts alleged by petitioner in support
of the $450,000 deduction. The Court granted respondent leave to
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amend her answer, and she increased the estate tax deficiency by
treating, as a gift, decedent's cancellation of her daughter's
obligation to pay for the 25 percent of agency stock. The Court
granted petitioner leave to amend its petition, and petitioner
subsequently alleged that decedent's will made a bequest of the
agency stock to her daughter subject to a condition precedent.
Since the asserted condition, payment of $3,750 a month for 10
years, was not met, petitioner alleged that the bequest to
decedent's daughter failed, and that the agency stock passed to
the surviving spouse as the residuary beneficiary. Petitioner
alleged that the entire value of decedent's agency stock,
$567,534, qualifies for the marital deduction. After trial, but
before opening briefs were due, petitioner and respondent filed a
"Stipulation of Settled Issue" that stated:
Since the payments called for in the codicil,
namely the sum of $3,750.00 per month for a period of
ten years, have not been made, petitioner no longer
contends that the payments, had they been made, would
have qualified for the marital deduction pursuant to
I.R.C. section 2056.
OPINION
The issues in this case revolve around the decedent's
cancellation of her daughter's debt and the provisions of
decedent's will and codicil relating to the agency stock and the
monthly payments. The language in the will concerning the agency
stock was drafted by decedent, and the parties dispute its
interpretation.
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A. Who Inherited the Agency Stock
1. Contentions of the Parties
Respondent argues that Patricia Low inherited the agency
stock. According to respondent, the language "with the
understanding that she will pay" should be interpreted in one of
two ways. Either the language subjected the bequest of agency
stock to a charge to pay her father $3,750 a month for 10 years,
or it created a condition subsequent to the bequest.
Under New Jersey law, a charge against property gives the
holder of the charge a lien against the property to ensure
payment. Olsen v. Wright, 119 N.J. Eq. 103, 108, 181 A. 182, 185
(1935). It is undisputed that decedent wanted to treat her
children equally, though she wanted Patricia Low to eventually
own the agency. Originally, the will called for $5,000-a-month
payments for 10 years ($600,000) to be made to Patricia Low's
brother. Decedent believed the agency was worth $1 million.
Decedent sold 25 percent of the agency to her daughter in 1989 on
an installment basis that required payments of $2,500 a month for
10 years ($300,000).4 Respondent argues that the math of this
arrangement is compelling; if 25 percent of the stock can be
purchased for $300,000 of payments, then $600,000 of payments
4
A loan amortization schedule was prepared by decedent's
accountant which shows that this stream of payments, when
discounted for a 10-percent annual interest rate, equates to a
beginning principal balance of $189,177.91 or $7,567.12 a share.
This value was also used in the agreement.
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under identical terms equates to 50 percent of the value of the
agency. According to respondent, decedent wanted to give all of
the stock to her daughter while wanting her son to receive cash
for one-half of the agency's value, thereby creating a charge
against agency stock.
Respondent points out that after decedent's stock ownership
fell to 75 percent, she executed the codicil to her will that
decreased the monthly payments required under the will
proportionately to $3,750 (75 percent x $5,000). Decedent's
codicil also directed that Patricia Low had to make to her father
only one-half of the $2,500 payments called for under the
agreement. The codicil did not say what was to happen to the
other half of the payments; respondent argues that the other half
of the payments were to be forgiven. Consequently, Patricia Low
still would be paying $5,000 a month ($3,750 + $1,250) for almost
10 years (one-half the value of the agency stock) to own 100
percent of the agency stock. The change in the recipient to the
surviving spouse was to insure that decedent's daughter-in-law
got none of the payments in a divorce settlement.
Respondent further argues that decedent did not intend to
create a condition precedent, as petitioner contends. Under New
Jersey law, if a condition precedent to a bequest fails, then the
bequest fails; the bequest is never made. "[I]f a devise other
than a residuary devise fails for any reason, it becomes a part
of the residue." N.J. Stat. Ann. sec. 3B:3-36 (West 1983).
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Under decedent's will, if the bequest to her daughter failed, the
stock would pass to the surviving spouse as the residuary
beneficiary. Since the surviving spouse had no insurance
business experience, and was not licensed to sell insurance,
respondent argues that decedent would never have allowed her
husband to inherit 75 percent of the agency's stock.
Respondent's alternative argument is that the language
created a condition subsequent. A condition subsequent under New
Jersey law would cause the stock to vest immediately in Patricia
Low but she would subsequently be divested of it if she failed to
make the payments. Tizard v. Eldredge, 25 N.J. Super. 477, 481,
96 A.2d 689, 691 (1953).
Respondent cites various New Jersey cases to aid in
construing decedent's will. New Jersey courts do not favor
conditions in wills. Parmentier v. Pennsylvania Co. for Ins.,
122 N.J. Eq. 25, 30, 192 A. 62, 65 (1937), affd. 124 N.J. Eq.
272, 1 A.2d 332 (1938). However, if the testator's intent shows
that a condition is intended, then conditions subsequent are
favored over conditions precedent. Id. Respondent also points
out that if the language in question created a condition
precedent, as petitioner contends, then the stock ownership could
have been in limbo for 10 years had Patricia Low made the
payments, a situation that decedent would not have intended.
Respondent cites Tizard, which states: "Where there is a
prolonged period of time prescribed by the words of the bequest
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for its performance, it has been held to create a condition
subsequent". Tizard v. Eldridge, 25 N.J. Super. at 481, 96 A.2d
at 691.
Respondent also points out that Patricia Low acted as if she
were the sole owner of the agency after decedent's death; she
signed S corporation tax returns listing herself as the 100-
percent owner of agency stock and reported the corresponding
income or loss on her individual Federal income tax returns.
These actions indicate that Patricia Low believed she had
inherited the stock and had accepted the bequest, despite her
testimony to the contrary at trial.
Petitioner argues that the stock bequest was subject to a
condition precedent; if the monthly payments were not made by
Patricia Low, then the condition would fail, and the stock would
pass under the residuary clause to her father. Under New Jersey
law, gifts subject to a condition precedent do not vest until the
condition is met. Tizard v. Eldredge, supra. Under petitioner's
reasoning, since it is undisputed that Patricia Low did not make
the payments, the stock would pass directly from decedent's
estate to the surviving spouse and thus qualify for the marital
deduction. Petitioner argues that even if the will is
interpreted as giving the stock to Patricia Low subject to a
charge to make monthly payments, the surviving spouse still
inherited something at decedent's death; namely, the right to
either a stream of payments or the stock. This right, according
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to petitioner, is an interest in the stock that qualifies for the
marital deduction.
Petitioner also argues that Patricia Low paid no attention
to the agency's corporate tax returns and her individual tax
returns and that she did not notice that the returns treated her
as the sole shareholder of the agency. Petitioner further argues
that nothing Patricia Low did after her mother's death could
possibly have a bearing on decedent's intentions when drafting
her will and codicil.
In the alterative, petitioner argues that the will merely
gave Patricia Low an option to buy the stock. Patricia Low
testified that her mother told her she would have an opportunity
to purchase the agency stock upon her mother's death, and
petitioner argues that decedent's attorney, Jan Seigel, supported
this interpretation. Respondent counters by pointing out that
the testimony is self-serving, uncorroborated, and incredible
since the stock purchase agreement already gave Patricia Low an
option to purchase the agency stock upon her mother's death, and
her actions after her mother's death call her veracity into
question.
Petitioner argues that the New Jersey doctrine of probable
intent controls the interpretation of decedent's will, not
general rules of will construction. According to petitioner,
decedent would not have wanted her daughter to inherit any stock
if she did not fully and completely comply with her wishes, as
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stated in the will and codicil. Petitioner stresses that
decedent dealt with her daughter in a businesslike manner, even
in personal matters which involved money. Petitioner believes
that the only two possible interpretations that respect
decedent's intent as to the stock are a condition precedent or an
option to purchase. In either event, petitioner argues that the
doctrine of probable intent requires us to construe the will in a
manner that maximizes the marital deduction, citing In re Estate
of Erickson, 74 N.J. 300, 377 A.2d 898 (1977).
2. New Jersey Law
As a general rule, State law determines the property rights
and interests created by a decedent's will, but Federal law
determines the tax consequences of those rights and interests;
E.g., Morgan v. Commissioner, 309 U.S. 78, 80 (1940). Because
decedent died a resident of New Jersey, the parties agree that
New Jersey law governs the construction of her will. See
Helvering v. Stuart, 317 U.S. 154, 162 (1942). The decisions of
the Supreme Court of New Jersey are conclusive as to that State's
law, but we give "proper regard" to relevant rulings of the lower
State courts. Commissioner v. Estate of Bosch, 387 U.S. 456, 465
(1967). For petitioner to receive a marital deduction for the
value of the agency stock, it must establish that the stock
passed from decedent to the surviving spouse. The resolution of
this threshold issue depends on the interpretation of the phrase
"I give, devise and bequeath all of my stock * * * to my
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daughter, PATRICIA LOW, with the understanding that she will
pay". We must determine whether this phrase creates a condition
precedent, a condition subsequent, a charge on the bequest, or an
option to purchase agency stock.
"The judicial function in construing a will is to ascertain
and give effect to the probable intention of the testator." In
re Estate of Conway, 50 N.J. 525, 527, 236 A.2d 841, 842 (1967).
The Supreme Court of New Jersey has given the following guidance
on will construction and the "doctrine of probable intent":
While a court may not, of course, conjure up an
interpretation or derive a missing testamentary
provision out of the whole cloth, it may, on the basis
of the entire will, competent extrinsic evidence and
common human impulses strive reasonably to ascertain
and carry out what the testator probably intended
should be the disposition if the present situation
developed. [In re Estate of Burke, 48 N.J. 50, 64, 222
A.2d 273, 280 (1966).]
We are no longer limited simply to searching out the
probable meaning intended by the words and phrases in
the will. Relevant circumstances, including the
testator's own expressions of intent, Wilson v.
Flowers, 58 N.J. 250, 262-63, 277 A.2d 199 (1971), must
also be studied, and their significance assayed.
Within prescribed limits, guided primarily by the terms
of the will, but also giving due weight to the other
factors mentioned above [citing In re Estate of Burke,
supra], a court should strive to construe a
testamentary instrument to achieve the result most
consonant with the testator's "probable intent."
[Engle v. Siegel, 74 N.J. 287, 291, 377 A.2d 892, 894
(1977); emphasis added.]
The obligation of a court * * * is to effectuate the
probable intent of the testator when consideration of
the will as a whole together with extrinsic evidence,
demonstrates, under all the circumstances, that a
patent or latent ambiguity exists in the language used
and such intent, overcoming the mere literal reading of
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the instrument, is thereby made "manifest." * * * [In
re Estate of Munger, 63 N.J. 514, 521, 309 A.2d 205,
209 (1973); citation omitted.]
See also N.J. Stat. Ann. sec. 3B:3-33 (West 1983).
As both parties have argued, New Jersey also has specific
guidelines on will construction. "[C]ourts favor the immediate
vesting of estates and will construe a condition to be subsequent
wherever possible, rather than precedent * * * unless such a
construction would be clearly inconsistent with the intention of
the testator." Fidelity Union Trust Co. v. Egenolf Day Nursery
Association, 64 N.J. Super. 445, 455, 166 A.2d 402 (1960). In
Tizard v. Eldredge, 25 N.J. Super. at 481, 96 A.2d at 691, the
Superior Court of New Jersey stated:
When faced with the question of whether or not a
devise or bequest is absolute or conditional, the
construction making the bequest absolute will be
preferred.
* * * * * * *
Where there is a prolonged period of time
prescribed by the words of the bequest for its
performance, it has been held to create a condition
subsequent. * * *
Where personalty "is devised to a person who is directed to pay a
legacy, the legacy is an equitable charge upon the devise unless
a contrary intention is expressed in the will or can be fairly
implied from its provisions." D'Arcangelo v. D'Arcangelo, 137
N.J. Eq. 63, 68, 43 A.2d 169, 172 (1945). However, the key for
construing wills remains the probable intent of the testator.
"Rules for construing wills are but guides, drawn from the common
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experience of mankind, to assist the court in finding the
testator's intent." Fidelity Union Trust Co. v. Robert, 67 N.J.
Super. 564, 574, 171 A.2d 348, 354 (1961).
3. Application of New Jersey Law
We shall be mindful of the New Jersey Supreme Court's
language in Engle v. Siegel, supra, and start with the will to
ascertain decedent's intent. Decedent herself drafted the
language whose interpretation is questioned. Her will stated:
"I give, devise and bequeath all of my stock * * * to my
daughter", which clearly states an intent to make a bequest of
decedent's stock; the present tense is used. The second part of
the sentence, "with the understanding that she will pay to my
son" indicates action that must be taken in the future, after the
daughter had inherited the stock; the future tense is used.
However, the exact meaning of the expression "with the
understanding" is sufficiently ambiguous that it is appropriate
to examine extrinsic evidence. Wilson v. Flowers, 58 N.J. 250,
263, 277 A.2d 199, 207 (1971).
At the time the codicil was drafted, decedent wanted two
things: (1) For her daughter to own all of the agency stock, and
(2) for her daughter to pay for one-half of decedent's stock.5
Our will construction problem is caused by her daughter's failure
5
The daughter's obligation to make payments under the
agreement was forgiven by decedent on her deathbed, after the
codicil had been drafted.
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to make the payments. We must ask ourselves, how would decedent
resolve this situation if she knew of the problem? In re Estate
of Burke, supra.
We first deal with petitioner's argument that the will must
be construed to maximize the marital deduction. The case cited
by petitioner, Estate of Ericson v. Ericson, 74 N.J. 300, 377
A.2d 898 (1977), does not support petitioner's argument. The
court in Ericson specifically found that one of the intentions of
the testator was to minimize taxes through the use of the marital
deduction, and thus the court interpreted the will accordingly.
In our case, there is no evidence of an intent to minimize taxes,
much less utilize the marital deduction. Therefore, an intent to
maximize the marital deduction will not be read into the will.
We do not believe that decedent wanted to create an option
for her daughter to buy the stock. Decedent wanted her daughter
to own the stock. The daughter owned 25 percent of the agency
stock and already had an option to purchase the remaining stock
upon her mother's death. The stream of payments was calculated
to equal only one-half the value of decedent's agency stock.
Decedent's own words were: "I give, devise and bequeath"; these
are not words that a business person would use to create an
option. Patricia Low's testimony that her mother wanted her "to
have the opportunity to buy the stock" upon her death is not
plausible as a true reflection of her mother's intent under the
circumstances. Petitioner offered no other evidence to support
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this theory. Patricia Low consistently acted as if she owned 100
percent of the agency as shown by the New Jersey inheritance tax
return, the Federal estate tax return, the agency's Federal
corporate tax returns, and her Federal individual income tax
returns. Although her actions after her mother's death do not
reflect on decedent's intent, they do reflect on Patricia Low's
credibility. Contrary to her testimony at trial, we find it
implausible that Patricia Low, an experienced business person,
never noticed that numerous tax returns, all signed under the
penalties of perjury, listed her as the sole owner of the agency.
Patricia Low reported and paid income tax on 100 percent of the
agency's income after her mother's death.6 "We know of no rule
that uncontradicted testimony must be accepted by a court finding
the facts, particularly where, as here, the testimony is given by
interested parties." Wood v. Commissioner, 338 F.2d 602, 605
(9th Cir. 1964), affg. 41 T.C. 593 (1964). We find it highly
unlikely that in the will and codicil decedent intended to give
to her daughter merely an option to buy agency stock.
Nor do we believe that decedent would have wanted her
daughter to have the stock subject to a charge to make the
installment payments. A charge would mean that if Patricia Low
failed to make the installment payments, she would, nevertheless,
still own the stock. Her father's only recourse would be to go
6
The agency was an S corporation.
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to court to enforce the equitable lien on the stock. The record
is replete with compelling evidence that decedent conducted
business only on her own terms. Simply put, business
arrangements were done her way or not at all. Decedent would not
have wanted her daughter to keep the stock if she did not follow
her wishes.
Having eliminated the creation of a charge or an option to
purchase, we are left with a condition, precedent or subsequent,
as best reflecting the probable intent of decedent. This
interpretation is consistent with petitioner's argument and
respondent's alternative argument on brief that decedent wanted
the bequest of stock to be subject to a condition.
We believe the best indication of decedent's intent can be
derived from how she handled an earlier transaction with her
daughter, her sale of 25 percent of the agency stock to her
daughter. The agreement, like the will, called for 10 years of
monthly payments. The stock was issued in Patricia Low's name as
of the effective date of the agreement, January 1, 1990.
Although Patricia Low became the owner of 25 percent of the
agency stock on January 1, 1990, physical possession of the stock
certificate was to be withheld, by her mother's instruction,
until all the payments had been made. When a single payment was
made late, decedent threatened to tear up her daughter's stock
certificate.
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In summary, Patricia Low was issued agency stock at the
beginning of the transaction, not after all the payments had been
made. Only physical possession of the stock certificate was
denied to her, a common security technique when dealing with the
sale of commercial paper. Decedent's threatened remedy to deal
with a default was to divest her daughter of ownership of the
stock.
We hold that the most probable construction of decedent's
will is that she wanted her daughter to have the stock upon
decedent's death, but to be divested of it should her daughter
fail to make the payments, a condition subsequent. "Where there
is a prolonged period of time prescribed by the words of the
bequest for its performance, it has been held to create a
condition subsequent." Tizard v. Eldredge, 25 N.J. Super. at
481, 96 A.2d at 691.
B. Marital Deduction Issue
1. Law
Section 2056(a) allows a marital deduction from the value of
the adjusted gross estate in "an amount equal to the value of any
interest in property which passes or has passed from the decedent
to his surviving spouse, but only to the extent that such
interest is included in determining the value of the gross
estate." To obtain the marital deduction, an executor must
establish (1) that the decedent was survived by his or her
spouse; (2) that the property interest passed from the decedent
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to his or her spouse; (3) that the property interest is a
deductible interest; and (4) the value of that property interest.
Sec. 20.2056(a)-1(b), Estate Tax Regs. Item (1) is not in
dispute, and only petitioner has addressed item (4), which we
need not address for the reason stated below. Deductions are a
matter of legislative grace; petitioner has the burden of showing
that it is entitled to any deduction claimed. New Colonial Ice
Co. v. Helvering, 292 U.S. 435, 440 (1934).
2. Whether the Agency Stock Qualifies for the Marital
Deduction
We have held that the agency stock was inherited by Patricia
Low subject to a condition subsequent. Patricia Low did not make
the payments called for in decedent's will. Therefore, Patricia
Low was divested of her rights to the agency stock and they were
passed to her father, the surviving spouse. However, at the time
of decedent's death, the agency stock did not pass to the
surviving spouse. "It is well settled that the nature of the
interest in property passing to the surviving spouse and the
valuation of that interest are to be determined as of the time of
decedent's death." Provident Natl. Bank v. United States, 581
F.2d 1081, 1086 (3d Cir. 1978) (citing Jackson v. United States,
376 U.S. 503, 508 (1964)); sec. 20.2056(b)-4(a), Estate Tax Regs.
Therefore, we hold that the agency stock is not eligible for the
marital deduction.
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3. Whether the Stream of Payments Constitutes an Interest
in the Agency Stock Which Qualifies for the Marital
Deduction
Even with the stock subject to a condition subsequent, the
surviving spouse inherited either the right to receive the stream
of monthly payments or, ultimately, the stock. Petitioner argues
that since the surviving spouse was entitled to either the stock
or the stream of payments, he was vested in a property interest
in the stock that passed from decedent at her death. Respondent
argues that, as no payments were actually made, there can be no
marital deduction since no property passed from decedent to the
surviving spouse. Respondent also points out that petitioner has
settled this issue by entering into the following "Stipulation of
Settled Issue":
Since the payments called for in the codicil,
namely the sum of $3,750.00 per month for a period of
ten years, have not been made, petitioner no longer
contends that the payments, had they been made, would
have qualified for the marital deduction pursuant to
I.R.C. section 2056.
Focusing on the phrase "no longer contends", we will treat this
"Stipulation of Settled Issue" as a concession by petitioner.
Respondent believes that petitioner has restricted itself to
arguing that the surviving spouse inherited the stock at
decedent's death, rather than an interest in the stock
represented by the payments. Petitioner seems to treat the
concession as an abandonment of its original pleading that the
payments themselves qualify for the marital deduction. However,
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petitioner apparently believes that its amended petition leaves
it room to argue that the surviving spouse inherited either the
stock or an interest in the stock. We believe that respondent's
interpretation is correct; petitioner has conceded arguing that
the stream of payments, however categorized, qualifies for the
marital deduction.7 Therefore, accepting petitioner's
concession, we hold that decedent's husband did not inherit an
interest in the agency stock that qualifies for the marital
deduction.
C. Cancellation of Debt Issue
Respondent first raised the cancellation of debt issue in an
amended answer. Consequently, she bears the burden of proof on
this issue. Rule 142(a). The facts surrounding the cancellation
of Patricia Low's obligation to pay her mother under the
agreement are not in dispute. While on her deathbed, decedent
canceled her daughter's obligation to make the payments called
for in the agreement; no reason was given by decedent.
Petitioner argues that decedent was not making a gift to her
daughter but was reducing the purchase price of the stock.
Petitioner further argues that decedent had no donative intent,
so there could be no gift. No evidence was offered by petitioner
7
We note that the daughter, who neither made the payments
to her father called for in her mother's will, nor, as executrix,
ever caused the Agency stock to be transferred to her father,
argues that the estate is nevertheless entitled to a marital
deduction. We find this argument to be disingenuous.
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to support this theory. Respondent argues that donative intent
is not a requirement for a taxable gift, citing section 2512(b):
Where property is transferred for less than an adequate
and full consideration in money or money's worth, then
the amount by which the value of the property exceeded
the value of the consideration shall be deemed a gift,
and shall be included in computing the amount of gifts
made during the calendar year.
Respondent reasons that since the evidence shows that no
consideration was given by Patricia Low for the cancellation of
the debt, the amount of the gift must equal the debt, citing
section 25.2512-8, Gift Tax Regs. Respondent is correct.
The gift tax regulations provide:
Transfers reached by the gift tax are not confined to
those only which, being without a valuable
consideration, accord with the common law concept of
gifts, but embrace as well sales, exchanges, and other
dispositions of property for a consideration to the
extent that the value of the property transferred by
the donor exceeds the value in money or money's worth
of the consideration given therefore. * * * [Sec.
25.2512-8, Gift Tax Regs.]
The Supreme Court has interpreted these provisions as
follows:
Congress chose not to require an ascertainment of what
too often is an elusive state of mind. For purposes of
the gift tax it not only dispensed with the test of
"donative intent". It formulated a much more workable
external test, that where "property is transferred for
less than an adequate and full consideration in money
or money's worth," the excess in such money value
"shall, for the purpose of the tax imposed by this
title, be deemed a gift . . ." And Treasury
Regulations have emphasized that common law
considerations were not embodied in the gift tax.
[Commissioner v. Wemyss, 324 U.S. 303, 306-307 (1945)
fn. ref. omitted.]
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Decedent forgave a debt owed by her daughter, a family member.
No consideration was given for the cancellation. "The
presumption is that a transfer between closely related parties is
a gift." Estate of Reynolds v. Commissioner, 55 T.C. 172, 201
(1970). Respondent has met her burden of proof on this issue,
and petitioner has offered no evidence, only conjecture, to
counter such a finding. We hold that the cancellation of the
debt is a taxable gift from decedent to her daughter.
To reflect the foregoing,
Decision will be entered
under Rule 155.