ROE, ESTATE JESSIE

Topic Code: D016Debts, Deduction, S246Settlement - Against the Will          Document Reference:

STATEMENT OF THE ISSUES, FINDINGS OF FACT AND CONCLUSIONS

THE ISSUES AND THE FINDINGS

The East of the North east , the North east of the South east of Section 32, and the South west of the North west , of Section 33, all in Township 72 North Range 4 West of the 5th P.M., Des Moines County, Iowa.

"THIRD: In conformity with the provisions of a contract which was made and signed today between myself and W. Channing Hall and his wife, relating to my future care for the remainder of my life, and also concerning the disposition of my property to W. Channing Hall and his heirs in the event that they have faithfully carried out the terms and provisions of said agreement, I hereby give, devise, and bequeath unto W. Channing Hall all the rest, residue and remainder of my estate, whether real, personal or mixed, and wheresoever located, to be his absolutely, provided the said W. Channing Hall, his heirs or assigns, at the time of my death shall have substantially carried out and performed the terms and conditions of said contract relative to my care."

"Wherefore, Plaintiff prays that judgment and decree be entered by the Court, declaring and determining that the payment made to Plaintiff, Evelyn S. Hall, by the Estate of Jessie F. Roe, in the amount of Twenty Thousand Dollars ($20,000) as a compromise settlement of the action filed in Des Moines County, Iowa, and the claim filed in the Estate, was in payment for services rendered the decedent during her lifetime, persuant to the contract marked Exhibit "B" and as such a compromise settlement of an obligation of the Estate of Jessie F. Roe, and further declaring and determining that the Estate of Jessie F. Roe is entitled to deduct said amount from the gross value of said Estate, as a debt for Inheritance Tax purposes under Section 450.12(1) of the 1958 Code of Iowa, and that the gross value of the Estate shall include the value of the farm real estate, which is the subject of the controversy, and which farm real estate was inventoried in Schedule IV of the Preliminary Inheritance Tax Report.

" 'The Plaintiff further prays that in the event the Defendant fails to abide by said judgment, that such further order be entered herein by the Court as shall be appropriate to define the orders, judgments, or decrees of the Court entered herein.' "

CONCLUSIONS

I

"Estates taxable. The estates of all deceased persons in any property whether the decedents be inhabitants of this state or not, and whether such estates consist of real, personal, or mixed property, tangible or intangible and any interest in, or income from, any such estate or property which estate or property is, at the death of the decedent owner within this state, or is subject to the jurisdiction of the courts of this state, or thereafter is brought within this state and becomes subject to the jurisdiction of the courts of this state; or the property of any decedent, domiciled within this state at the time of the death of such decedent, even though the property of such decedent so domiciled was situated outside of the state, except real estate located outside of the state, passing in fee from the decedent owner, which shall pass in any manner herein described shall be subject to tax as herein provided."

"Property included. The tax hereby imposed shall be collected upon the net market value and shall go into the general fund of the state to be determined as herein provided, of any property passing: ... 5. Property which is held jointly or as tenants in the entirety by the decedent and any other person or persons or any deposit in banks, or other institution in their joint names and payable to either or to the survivor, except such part as may be proven to have belonged to the survivor; or any interest of a decedent in property owned by a joint stock or other corporate body whereby the survivor or survivors become beneficially entitled to the decedent's interest upon the death of a shareholder. The tax imposed upon the passing of property under the provisions of this subsection shall apply to property held under all such contracts or agreements whether made before or after the taking effect of this chapter."

"Deductions of debts. There shall be deducted from the gross value of the estate as fixed by the inheritance tax appraisers appointed under the provisions of this chapter, or as fixed by the court, the debts defined as follows:

1. From the estate of such decedent who at the time of his death was domiciled within this state, there shall be deducted the debts owing by the decedent at the time of his death ...

Said debts shall not be deducted unless the same are approved and allowed by the court within eighteen months from the death of the decedent, unless otherwise ordered by the judge or court of the proper county."

"Where the estate of a decedent is insolvent in that his debts exceed the value of the property liable for their payment, so that the debts cannot be paid in full, but his gross estate for tax purposes includes property not liable for his debts, the question arises, under a statute allowing a deduction for the debts of a decedent in computing his net taxable estate, whether the total amount of the debts may be deducted, or the deduction must be limited to the value of the property liable for their payment, i.e., whether a deduction on account of the debts may be charged against property not liable for their payment as well as against property which is liable."

"We are unable to agree with appellant's contention because the Act is wholly clear and unambigous in its provisions that, in ascertaining the clear value of the estate, there should be allowed a deduction from the gross value thereof of 'the debts of the decedent'. What the Commonwealth would have the court do would be to add to this provision the words 'excluding, however, debts for which the property subjected to tax is not liable for payment and also debts which the testamentary assets are insufficient to pay'. Decedent's liability on the bond accompanying the mortgage on the Tyson Street property was clearly a 'debt of the decedent'; had there been assets in the testamentary estate it would have been payable therefrom and clearly deductible; the fact that there were no assets there to meet it does not make it any the less a debt of the decedent."

"It is important to note that it took an express amendment in the Federal Revenue Act of 1942, U.S.C.A. & 812, to effect the change which the Commonwealth would now have the court make in our own Act by judicial construction."

" 'There shall be disallowed the amount by which the deductions specified in clauses (a), (b), (c) and (d) of this paragraph exceed the value, at the time of the decedent's death, of property subject to claims. For the purposes of this paragraph, the term "property subject to claims" means property includible in the gross estate of the decedent, which, or the avails of which, would, under the applicable law, bear the burden of the payment of such deductions in the final adjustment and settlement of the estate.' "

"Clearly, we are not concerned at all with the application of estate assets to the payment of debts. Indebtedness of the estate need not even be paid from estate assets, if actual beneficiaries in good faith compromise the claim or pay it or become liable for it, for such debt to be a valid deduction in computing the inheritance tax. People v. Tatge, 267 Ill. 634, 108 NE. 748. There is no authority which implies that the source of payment of a decedent's debts controls their allowance as deductions. Hence, the Attorney General's argument on that basis has no relevancy to the problem at hand and deserves no further consideration."

"No justification exists in the language of our state Inheritance Tax Law when construed as a whole for ignoring the fundamental principle that the inheritance tax is in this state a succession tax on the amount that is in fact received by the beneficiary.

"It is our view that the legislature must have intended, as the Board of Tax Appeals found, that the class of deductions involved in the case at bar should be granted as allowable whether the gross estate consists solely of probate assets or non-probate assets, or a mixture of the two."

"Excluding, however, debts for which the property subject to tax is not liable for payment and also debts which the assets are insufficient to pay."

III

"It is unimportant whether decedent, in the matter before us, promised to leave to appellant his whole estate or whether he promised only so much as would be fair compensation. In either case, she could maintain an action for damages for breach of contract. And the sum which ought to be adjudged her in such an action, is deductible in order to determine the taxable value of the estate, for it is one of the 'debts of the decedent owing at the date of death.' R.S. 54:34—5, N.J.S.A. The word debt in the statute is not used in its narrow sense as liquidated demands; but includes all enforceable pecuniary obligations incurred by testator and in existence at his death. In general, the net estate for the purpose of taxation is that portion of the whole which the next of kin are entitled to receive. In re Dillinger, 94 N.J. Eq. 409, 120 A 27 (prerog. 1922)."

"The Attorney-General counts heavily on Savings Inv. & Tr. Co. v. Martin, supra. There testatrix breached a contract she had made to transfer her entire estate by will to a certain person. He sued in Chancery to establish a trust and compel the legatees and devisees to transfer the estate to him. By way of compromise embodied in a consent decree, the residuary beneficiaries conveyed to him part of the lands and the executor was required to pay him a considerable sum. On these facts, the Prerogative Court held that the amount or value so transferred to decedent's promisee was not deductible in calculating the tax. The decision was put principally on the ground of election, that the promisee chose to assert a trust rather than a debt. 'The decree in Chancery was not for the payment of a debt but for the transfer of property decreed to be held in trust for him by those to whom it had been transferred by decedent's will.' We need not consider the soundness of that decision, for we are satisfied that it does not apply to the instant case, for here appellant has not elected to assert a trust instead of a debt. She asserted both theories in her suit, and the consent judgment entered therein, like the contract on which it was based, does not depend on the trust theory. The device chosen by the parties to effectuate the settlement was to secure appellant's appointment as administratrix so that, by operation of law, she took title to decedent's personalty as his representative and not as transferee of the next of kin. Then on receipt of $17,000, the latter estopped themselves, by release, from demanding that she account as administratrix."

"Where a testator left certain property to his housekeeper, stating that he did so because of the kindness she had shown him through the number of years she had been in his employ and for the balance due her for services rendered for which she had not been paid in full, and after the testator's death, the housekeeper, who had filed a claim against the testator's estate for housekeeping services, settled her claim by entering into an agreement in open court whereby she accepted the property devised to her by the decedent plus a certain amount in cash, the total value of the property and the amount received being about 50 per cent of her claim, it was held, in ALBRIGHT v. STATE TAX COMMISSION (Iowa) (reported herein) ante, 959, that by accepting the property devised to her as part of the settlement she did not elect to take under the will so as to subject the property to an inheritance tax."

"A contract to make a will giving one-fifth of the promisor's estate in consideration of the promisee's personal services is a contract, not a will. It is supported by consideration. It is irrevocable, except by mutual consent. Liability arises from its breach. A will is revocable, ambulatory, the antihesis of a contract in fundamental respects. 'If the contract is thought of as a contract to pass property at death, and the will thought of as a vehicle for passing the property, much of the confusion and conflicts would disappear. The contract, not the will, gives the promisee a right to the property, and when litigation arises, it is the contract that must always be established. Once the contractual right is established the interests of the promisee are protected whether or not a will has been executed.' Sparks, Contracts to Make Wills (N.Y.U. 1956), p. 112"

DIVISION IV

"The facts indicate clearly that under the contract the plaintiffs were either entitled to the property or they were not, depending upon whether there was performance in accordance with the contract. There is no evidence in the record that there was substantial, or full performance, by the plaintiffs, so as to allow them specific performance under the contract. Nor is there any evidence in the record substantiating that these were services in the amount of $20,000.00 involved during the period of time Mrs. Roe remained with plaintiffs under the contract. The compromise payment was in essence a payment to dispose of asserted claims against the property. The validity and extent of the claims certainly were not established by virtue of the compromise. To say that they had a $20,000.00 interest in the property ignores the terms of the contract, and to say that they had a $20,000 claim for services cannot be supported under the evidence.

"This is not to say, that the settlement was improper, since this lies wholly within the province of the parties to the settlement, we only question the validity of claiming it as a debt against the estate where the evidence fails to support such a conclusion." (Emphasis this Court's)

"It is insisted on behalf of the people that the county court ought not to have allowed the deduction, because the claim was allowed as a result of a compromise after the decedent's death, and there was no proof of a valid, existing indebtedness against the estate." ...

"No proof was make that the estate of Theodor Dackerman was indebted to Martha Dackerman. She claimed a much larger amount than allowed, and the persons beneficially interested in the estate settled with her for the smaller amount. There was no evidence on either side as to the good faith of the transaction. In such a case the question ought to be open to investigation whether the transaction is used as a device for defeating, in part, the inheritance tax; but where nothing appears to impugn the good faith of the settlement, a compromise by the parties actually interested should be regarded as evidence of the validity of the debt. The burden of showing the contrary rests upon the people."

V

"... but said debts shall not be deducted unless the same are allowed or established within the time provided by law, unless otherwise ordered by the judge or court of the proper county, ..."

"... but it seems quite plain to us that the equity powers of the superior court were quite sufficient to give it jurisdiction to determine any controversies that might arise between the tax commissioner and the heirs of the deceased as to the amount of inheritance tax due the state, and incidental thereto the amount of debts of the estate which the heirs may be entitled to have deducted therefrom in computing the tax, in the absence of formal probate proceedings in the superior court. We are of the opinion that the superior court in this case had jurisdiction to determine the amount of indebtedness of the estate which those inheriting it were entitled to have deducted, for the purpose of determining its net value upon which inheritance tax should be computed."

"Definitions controlling division. For the purpose of this division and unless otherwise required by the context:

1. The words 'taxable income' mean the net income as defined in section 422.7 minus the deductions allowed by section 422.9, in the case of individuals; in the case of estates or trusts, the words 'taxable income' mean the taxable income (without a deduction for personal exemption) as computed for federal income tax purposes under the Internal Revenue Code of 1954, but with the adjustments specified in section 422.7 plus the Iowa income tax deducted in computing said taxable income and minus federal income taxes as provided in section 422.9."

" 'Net income'—how computed. The term 'net income' means the adjusted gross income as computed for federal income tax purposes under the Internal Revenue Code of 1954, with the following adjustments:" (Here follow provisions for adjustments not material to this case.)

"In 1940 T. Shannon Hunter of Mobile, Alabama promised to give Mrs. Ethel Cotnam one-fifth of his estate, if she would serve him as an attendant or friend for the rest of his life. Mrs. Cotnam quit her job at the Saenger Theatre, left her home in Springhill, moved to Mobile, and served T. Shannon Hunter faithfully as attendant and friend until he died four and one half years later. He died without a will. In 1948, after a long, hard fought suit against the Administrator of the Estate of T. Shannon Hunter, the Supreme Court of Alabama upheld the validity of Mrs. Cotnam's contract with Hunter and awarded her a judgment of $120,000."

"The nature of the transaction underlying the judgment, not the judgment itself, controls the tax effects. United States v. Safety Car Heating Co., 1936, 297 U.S. 88, 56 S.Ct. 353, 80 L.Ed. 500;

"When Hunter died without a will Mrs. Cotnam's only remedy was by an action on the contract. The relief available depends upon principles of contract law, and the fact that the consideration moving from the promisor was the making of a will does not distinguish it from any other contract where a promisee has to do something or give something. The substance of the Hunter-Cotnam transaction was Hunter's agreement to give one-fifth of his property to Mrs. Cotnam on his death for her services. The Alabama Supreme Court enforced a contract, not a non-existent will."