Commissioner of Internal Revenue, Petitioner, v. Mildred Irene Siegel, Respondent, 250 F.2d 339 (9th Cir. 1957)

Before FEE and BARNES, Circuit Judges, and YANKWICH, District Judge.

YANKWICH, District Judge.

The question involved in this petition by the Commissioner of Internal Revenue to review¹  a decision of the Tax Court rendered October 3, 1956, turns on the correctness of the determination by the Tax Court of a deficiency, arising under the federal gift tax law for the taxable year 1950, of the respondent Mildred Irene Siegel, to be referred to hereinafter as the taxpayer.² 

On February 8, 1954, the Commissioner of Internal Revenue mailed to the taxpayer a notice of a deficiency in the total amount of $51,144.24. The assessment was based on a determination which read in part:

"The transfer by the above-named donor to her son of a remainder interest in her one-half interest in community property which she transferred to a testamentary trust established under the last will and testament of Irving Siegel, Deceased, is determined to constitute a transfer by said donor without consideration in money or money's worth, and a gift within the meaning of Section 1000 of the Internal Revenue Code."

On April 29, 1954, the taxpayer filed a petition with the Tax Court for a redetermination of the deficiency.³  The Tax Court entered its decision on October 3, 1956, determining, in effect, that the taxpayer's transfer having been made in consideration of her waiver of her community rights and her acceptance of the benefits under the will, only the excess of the value of her transfer over what she received was a taxable gift. The Tax Court determined the amount to be $4,314.87, which has been paid.

Facts Admitted or Uncontroverted.

In the main, the facts are not in dispute, either because they were stipulated or found by the Court on evidence which stands uncontradicted. So, unless the facts warrant different legal conclusions, the decision of the Tax Court must stand.⁴ 

In outline, the facts are:

The taxpayer and Irving Siegel, to be referred to as Siegel, were husband and wife and residents of the State of California. Siegel died in California on January 4, 1949. The Siegels had an adopted son, Richard Bruce Siegel, who was born on May 14, 1943, and who resides with the taxpayer. Siegel left an estate consisting entirely of community property acquired by him, as the Tax Court found, and his wife since 1927.⁵  The Tax Court also found that on the date of Siegel's death, the gross value of the community property was $1,422,897.14, and the gross value of the taxpayer's half share in it was $711,448.57. At the time of the hearing, the Tax Court determined that on January 5, 1950, the date of the taxpayer's election to take under the Will, to be referred to later on, the net value of Siegel's share to be $295,076.54 and that of the taxpayer's $584,035.44. The computation was arrived at in this manner:

 Siegel's Taxpayer's Share Share Gross value at Irving's death ........ $711,448.57 $711,448.57 Less: Debts and administration expenses .......................... 114,886.25 114,886.25 Federal estate tax ................. 201,840.48 Inheritance taxes on bequests other than to petitioner .......... 26,145.30 Inheritance tax on bequests to petitioner ........................ 9,026.88 Legacies other than to petitioner .. 35,000.00 Legacy to petitioner ............... 35,000.00 Automobiles bequeathed to petitioner ........................ 3,500.00 3,500.00 ___________ ___________ Total deductions ..................... $416,372.03 $127,413.13 ___________ ___________ Net value ............................ $295,076.54 $584,035.44

Siegel left a Will, dated March 28, 1948, which was admitted to probate in the Superior Court of Los Angeles County, California, on February 3, 1949. The will contained a provision bequeathing to the taxpayer, in addition to some minor gifts, the sum of $35,000 ("to offset", as the will stated, a like sum bequeathed to his "sisters and nephew") and created a trust to pay to her during her lifetime, and to the son, thereafter, the income of the estate. The instrument provided that the payments shall be such as the trustees

"deem proper to maintain at least the same standard of living to which she has been accustomed in recent years, but in no event less than the sum of $1000.00 per month."

The taxpayer was named one of three trustees and the will specifically provided that should she determine to take her community property share, "she should take nothing as a beneficiary under the trust". The three clauses relating to these matters are set forth in the margin.⁶  The reference to the standard of living in the will is important in view of the fact that the Tax Court found that in 1948, the year preceding his death, the living expenses of the taxpayer and her husband before income taxes were $46,500.

On January 5, 1950, the taxpayer executed and filed with the Superior Court an instrument electing to take under Siegel's last will and testament in lieu of all community property rights which she had in the estate. The Tax Court found that since that time, she received and expended from the trust the following amounts:

 Federal and State income taxes included Received Total in total from the expenditures expenditures trust 1950 .............. $24,000  $31,720.32 $ 4,500.00 1951 .............. 54,000 50,462.11 18,524.23 1952 .............. 54,000 43,313.60 20,296.83 1953 .............. 52,000 46,656.79 18,413.06 1954 .............. 48,000 47,267.98 22,329.39

In setting up these tables, the Tax Court made the following additional findings:

"Included in the above total expenditures were sums expended by petitioner for the support of her and Irving's son which averaged well under $3,000 per year.

"Under the economic conditions existing during the years subsequent to decedent's death and prior to this hearing it would cost petitioner $45,000 per year, including income taxes to maintain the standard of living to which she was accustomed in recent years prior to decedent's death."

On the basis of these findings, it concluded that the surrender by the taxpayer of her community property rights was a gift to the estate to the extent that the value of the interest thus surrendered exceeded the value of the interest she acquired under the terms of the will.

In determining the values the Tax Court ruled that the amount of the gift should be measured by the taxpayer's community interest reduced by the present value of her life interest in the entire community property and a specific bequest of $35,000 granted to her by the terms of the will.

In sum, the Tax Court treated the transfer as being one in which what the taxpayer surrendered was the consideration for what she received.

In this petition for review, the Commissioner contests this basic principle and the reasons upon which it is grounded.

The Problem of Consideration.

It is the contention of the Commissioner that in this manner the Tax Court misapplied to the facts Section 1002 of the Revenue Code of 1939, which reads:

"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, for the purpose of the tax imposed by this chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year."⁷ 

We are of the view that the Commissioner's contention that the transaction was donative and that, as his brief puts it, "the taxpayer received no consideration whatsoever, adequate or not, for making the election" is without merit. The issue must be determined in the light of the community property law of California and the law of wills.

The election made by the taxpayer reads:

"Election of Widow to Take Under Will

"I, the undersigned, Mildred I. Siegel, widow of Irving Siegel, deceased, do hereby elect to take under the Last Will and Testament of said deceased in lieu of any and all community property rights which I have in said estate." (Emphasis added.)

"Dated this 5th day of January, 1950."

Elections to take under a will by one of the spouses instead of property that he or she may be entitled to under state law have long been recognized as transactions in which the property surrendered is considered the consideration for the offer made in the will and accepted at the time of the execution of the will in a contemporaneous instrument or thereafter. In all instances, the effect of the election is determined by the status of the property under the law of the state.⁸ 

"The gift by will in lieu of the other right is said to be equivalent to an offer, and to offer something to the devisee in return for his property or interest."⁹ 

Most writers on the law of contracts and Courts which have dealt with the matter are in accord that the property surrendered is a consideration for that which is accepted, and what may begin as a unilaterial offer turns into a binding contract upon such acceptance.¹⁰ 

In the present case, the Tax Court found that the property left by Siegel was community property acquired by Siegel and the taxpayer in California since 1927. This date is of utmost importance. For, since 1927, the interests of husband and wife in community property in California are declared to be "present, existing and equal interests".¹¹ 

The California law of succession as to community property is stated in this manner:

"§ 201. Succession. Upon the death of either husband or wife, one-half of the community property belongs to the surviving spouse; the other half is subject to the testamentary disposition of the decedent, and in the absence thereof goes to the surviving spouse, subject to the provisions of sections 202 and 203 of this code."¹² 

The husband and wife may alter their legal relations as to property¹³  and only one-half of the community property is subject to the testamentary disposition of the decedent.¹⁴  When the husband makes a testamentary disposition of more than half of the community property and the wife chooses to take under the will, the half interest in the estate which she surrenders is a contract supported by adequate consideration. As stated by the Supreme Court of California in a noted case:

"The `waiver' was in fact a contract, by the terms of which plaintiff accepted certain devises and bequests under the will in lieu of any right she might have in any community property. Such an agreement is clearly supported by consideration and is binding upon the plaintiff, irrespective of any element of estoppel arising from the testator's change of position in reliance upon the representation contained in the instrument."¹⁵ 

And the rule is the same whether the waiver be attached to the will or is contained in a separate instrument.¹⁶  The wife is not put upon her election until the estate is ready for distribution.¹⁷ 

In view of the vested character of the interest of the wife in community property under California law even before death, if the property was, as was the case here, acquired since July 29, 1927,¹⁸  decisions arising in states in which the wife has a mere dower right are not controlling. Indeed the decision of the Court of Appeals for the Second Circuit, made under New York state law on which the Commissioner relies represents a minority view.¹⁹  A majority of the cases hold that although the widow's dower right is inchoate²⁰  upon the death of the husband she acquires a vested interest²¹  and becomes "a purchaser for value".²² 

A leading Massachusetts case has summed up the principle in this manner:

"The widow is a purchaser for value, in accepting the provisions of the will, and is not treated as a gratuitous object of the testator's bounty. By a relinquishment of her dower, the estate acquires a valuable right of property."²³ 

There is general accord on the subject.²⁴ 

The dower cases, as is evident, are based upon the theory that the contingent estate of the wife becomes vested upon the death of the husband. California law gives to each spouse a "present, existing and equal" interest in community property acquired since July 29, 1927.²⁵  During the lifetime of the husband, the entire community property is subject to his management and control.²⁶  Upon his death the property is released of his limited managerial and control powers and one-half of it, as the statute says, "belongs to the surviving spouse."²⁷  The other half is subject to the testamentary disposition of the decedent

"and in the absence thereof goes to the surviving spouse, subject to the provisions of sections 202 and 203 of this code."²⁸ 

Only one of the sections referred to affects the wife by providing that the community property passed from the control of the husband "is subject to his debts and to administration and disposal."²⁹ 

This Court, in interpreting California law, as changed by the Act of July 29, 1927, has held that the wife's interest being vested, her half never became a part of his estate:

"The Tax Court appears to have assumed that, upon decedent's death, petitioner's half of the community property ceased to be hers and became a part of decedent's estate. The assumption is incorrect. Petitioner's half, like decedent's half, was subject to administration, but, unlike his half, her half never became a part of his estate."³⁰ 

The principle was reaffirmed by this Court in a recent case.³¹  Significantly, both in the cases arising under dower rights and those arising under the community property laws of California the election made by the widow after the death of the husband is considered binding on her if the language of the waiver is clear, as it was in the case before us.³² 

The Events Which Led to Surrender.

Factually, the record shows that the decision to accept the legacy under the will in lieu of the community property which she surrendered to the trust chiefly for the benefit of her son was arrived at by the taxpayer after full consultation between her and the trustees. In the hearing before the Tax Court, she testified in substance:

Her husband was only forty-seven years of age at the time of his death, dying of a coronary thrombosis which was sudden and unexpected. He had been a builder and contractor for over twenty-five years. They had been married for twenty-seven years, residing in California during the entire period of marriage except four years. The property accumulated was community property. She did not own any separate property of any consequence before marriage and neither of them had acquired any property by gift or inheritance at the time of her husband's death. The home they occupied cost $62,500, on which they made repairs amounting to $30,000, the furnishings of the house having been appraised in 1950 on the replacement basis as $60,000. They also owned a home at Palm Springs, completely furnished. For the calendar year 1947, the net income for federal tax purposes was $479,422.99 and for the year 1948, $230,399. Their living expenses, including the taxes for the year 1948 — as shown by excerpts from the books — were $46,551.49.³³ 

At the time of Siegel's death, the adopted son was five and one-half years of age.

Of the two persons named as co-trustees, one Ben Weingart was a close friend and associated in business with Siegel. The other, N. B. Allison, was also a close friend whom the taxpayer and Siegel had known since arriving in California in 1926. They were suggested as trustees with her because Siegel considered them the most capable men to administer his estate and to be trustees of the trust. Although she was named as one of the co-trustees, Siegel did not discuss with her the terms of his Will prior to his death. About two weeks after his death, Weingart and the attorney for the estate explained the Will to her. She understood that if she took her half of the community property, she received nothing under the Will.

The matter was also discussed with the other co-trustees and finally, on the advice of Weingart, she decided to take under the will, for by so doing, she would have the benefit of the advice of the co-trustees as to investment and the entire estate would be under one management instead of two.

She summed up her testimony by saying that she took under the will because she could not maintain her standard of living on the income from her half and did not wish to lose control of the other half.

These facts were, in the main, confirmed by Weingart, who was consulted by Siegel about the terms of the will. He also corroborated the taxpayer's statement that he advised her to take under the will.

A good portion of the estate consists of the ownership of apartment properties.

In the light of this recital of facts, it is quite evident to us that the Tax Court's determination that there was a transfer, the consideration for which was the value of the community property interest that she surrendered taxable only to the amount of the excess of the value of her transfer over what she received, is not clearly erroneous.³⁴  Indeed, we believe that no contrary conclusion is warranted. And, as the foregoing discussion discloses, we are also of the view that the Tax Court applied the law correctly to the facts.³⁵ 

The petition for review is denied and the order of the Tax Court affirmed.