Jacobs v. Commissioner

               CIRCUIT COURT OF APPEALS, EIGHTH CIRCUIT

JOHNSON, District Judge. Morris Eisestadt, now deceased, in his lifetime entered into an antenuptial contract with his widow, Marie Eisenstadt, then Marie Johnston, by which it was agreed that, if she survived him, she should be paid out of his estate the sum of $ 75,000, and that said sum should be in lieu of all her rights of dower and other marital rights. He died on July 27, 1923. His will contained a provision that his widow, at her election, in lieu of the $ 75,000 stipulated in the antenuptial contract to be paid her from his estate upon his death, should be paid during her natural life the net income from $ 250,000 of his estate, to be placed in trust for such purpose. The widow on September 17, 1924, notified the executors of the estate that she elected to accept the provision of the will in her favor in lieu of the $ 75,000 stipulated in the antenuptial contract. On September 24, 1924, the executors made return of the federal estate tax due from the estate, and in their return deducted this $ 75,000 from the value of the gross estate in determining the value of the net estate upon which to calculate the tax. The Commissioner of Internal Revenue disallowed the deduction, and was sustained by the Board of Tax Appeals. 9 B. T. A. 636. The matter is now before this court upon the petition of the executors for a review of the decision of the Board of Tax Appeals.

The statute involved is section 403 of the Revenue Act of 1921, 42 Stat. p. 279, c. 136, which so far as material reads:

     "That for the purpose of the tax the value of the net estate

     (1) That the antenuptial agreement was a valid and subsisting

     "It seems to be the settled law of the state of Missouri, as it

     "Since the claim of Mrs. Eisenstadt under the antenupital

The government states its contention in its brief in this language:

     "The will of Morris Eisenstadt created an interest in lieu of the

An analysis of the respective arguments reveals that the contention in behalf of the estate is built upon the antenuptial contract, and the moment of the death of the deceased as the chief corner stones of the structure. The argument in behalf of the government, on the other hand, makes the election of the widow to take under the provision of the will the decisive fact in the case.

The fact that the matter for decision lies within narrow limits does not render its solution less difficult, and for the same reason that it is more difficult, and for the same reason that it is more difficult to cross a stream over a foot pole than over a bridge. The foot pole is so narrow that balancing is difficult, and the slightest misstep hazardous; the bridge so broad that one is not conscious of balancing, and a misstep usually of no moment. The principle or principles controlling in a narrow case are usually uncertain and elusive. In a case of broader scope, the threads leading toward a correct solution are usually numerous, and to be encountered at many points.

The contentions of the parties are irreconcilable, and neither satisfying. Their consideration has led to the conclusion that the case turns upon what Congress intended to include by the phrase "claims against the estate," found in the statute, rather than upon the antenuptial contract and the moment of the death of the deceased, put forward by the estate, or upon the election of the widow, put forward by the government.

The Supreme Court of the United States, in Nichols v. Coolidge, 274 U. S. 531, page 541, 47 S. Ct. 710, 713 (71 L. Ed. 1184, 52 A. L. R. 1081), has said: "Taxes are very real things and statutes imposing them are estimated by practical results." In New York Trust Co. v. Eisner, 256 U. S. 345, 41 S. Ct. 506, 507, 65 L. Ed. 963, 16 A. L. R. 660, Justice Holmes remarked that: "A page of history is worth a volume of logic."

Tax laws deal with actualities, and the rules prescribed by Congress are intended to produce practical results, when applied by untechnical men. We think actually was the thought foremost in the mind of Congress when it put the phrase "claims against the estate" in this and other Revenue Acts. The claims which Congress intended to be deducted were actual claims, not theoretical ones. Indeed, a claim without a claimant is a sort of legal figment, which has the tendency to produce intellectual dizziness, comparable to that felt when gazing down into running water from an insecure footing. The widow never claimed anything from the estate under the antenuptial contract, and the gross estate was not decreased one single cent by reason of the $ 75,000 stipulated in the antenuptial contract. All the logic in the world cannot change these facts. If an executor or administrator leaves his statutory fees in the estate, can it be said that they should nevertheless be deducted in determining this tax? If a father or mother, holding an obligation of a deceased child, refuses to demand payment from his or her estate, would the obligation nevertheless be a claim against the estate to be deducted in determining this tax?

In our opinion a claim without a claimant was not in the mind or purpose of Congress when the words "claims against the estate" were written into the revenue statutes. The administration of an estate necessarily extends over a period of months, sometimes of years, and always under state laws requiring the orderly presentation and allowance of claims against it. It was, in our opinion, claims presented and allowed or otherwise determined as valid against the estate and actually paid or to be paid that Congress had in mind, when it provided for the deduction from the gross estate of "claims against the estate" in determining the value of the net estate for taxing purposes.

In 11 C.J. p. 817, it is said: "The word [claim] is a broad and comprehensive term, and in its legal use has been understood in a somewhat enlarged sense, being defined as a demand of some matter as of right by one person on another to do or to forbear to do some act or thing as a matter of duty, embracing every species of legal demand, and including 'demand' and 'debt.'" On page 819 it is said: "In statutes providing for the administration of the estates of deceased persons, requiring a presentation of claims against the estate, it is generally construed by the authorities as referring to demands of a pecuniary nature, which could have been enforced against the deceased in his lifetime, and when so used the word has been judicially defined as the asserted liability of decedent and his estate to pay a sum of money; a legal demand for money to be paid out of an estate."

In Knutsen v. Krook, 111 Minn. 357, 127 N. W. page 13, 20 Ann. Cas. 852, the Supreme Court of Minnesota uses this language: "The word 'claim,' as generally employed, has a broad and comprehensive meaning, embracing every species of legal demand. 7 Cyc. 180. But, as employed in a particular statute, its meaning is often restricted and limited, and in statutes providing for the administration of the estates of deceased persons, requiring a presentation of claims against the estate, is by the authorities generally construed as referring to demands of a pecuniary nature, and which could have been enforced against the deceased in his lifetime." See, also, Words and Phrases, Second Series, vol. 1, pp. 727, 728.

Of course there are deductions which are determined as claimed by the executors by the facts and conditions existing at the date of the death. The Supreme Court of the United States, in Ithaca Trust Co. v. United States, 279 U. S. 151, 49 S. Ct. 291, 73 L. Ed. 647, has held that the value of gifts to charity which were subject to the life estate of the widow should be determined by the use of mortuary tables notwithstanding the death of the widow before the tax was in fact ascertained. The court said:

     "The estate so far as may be is settled as of the date of the

     "That if no administration is granted upon the estate of a

     "Deduction of Claims, Expenses, etc. -- In order to be deductible

In our opinion, the department in its regulations has correctly construed the statute, and in this case we are convinced the Commissioner and the Board of Tax Appeals correctly applied it.

The petition for review is dismissed.

DISSENTING OPINION OF JUDGE McDERMOTT

McDERMOTT, District Judge (dissenting). I regret my inability to concur. The estate tax is a creature of statute, and, if we leave the statute, we are lost. Rightly or wrongly, the statute provides that there shall be deducted "from the value of the gross estate * * * claims against the estate. * * *" The Treasury Department interprets this to mean exactly what it says, in article 39 of its Regulations:

     "Claims against the Estates. -- The amounts that may be deducted

But the $ 75,000 debt here was paid. Bear in mind the concession of an existing legal obligation; that at any time between July 27, 1923, and September 17, 1924, the widow could collect it by presenting a claim for it, or by suing on her contract; and if she sued on her contract the executor could not defend by setting up the option in the will; and if she died during that period her administrator could collect it, and in fact would have no other alternative. What happened on September 17, 1924? The widow, availing herself of an option given her by the will, accepted a trust fund of $ 250,000, from which she was to have the income for life; and thus the estate satisfied the debt. So the debt was paid, and presumably well paid. Doubtless the satisfaction cost the estate more than the $ 75,000; for a fair presumption is that, if the widow could have taken her $ 75,000 in cash and purchased a better annuity than the one the will provided, she would have done so.

Moreover, this opinion seems to me to be in conflict with the principle of the decision of Allen v. Brandeis, 29 F.(2d) 363, decided by another division of this court. There a widow had a statutory widow's share of the estate, worth $ 483,727.79. Her husband's will, in effect, gave her the option of an income for life of $ 50,000 a year, and she exercised it. The government undertook to tax these annuities as income. The court held that she purchased them with her statutory right, which was not taxable, and that the annuity payments were not taxable until her nontaxable capital invested therein was returned to her. To the same effect is U. S. v. Bolster (1 C. C. A.) 26 F.(2d) 760, 59 A. L. R. 491; Warner v. Walsh (2 C. C. A.) 15 F.(2d) 367. In other words, the option in the will did not change the tax liability.

The practical test suggested by the majority opinion is not pursued far enough. True, the beneficiaries of this estate did not pay the $ 75,000; they paid more, for they find that their enjoyment of $ 250,000 is postponed an indefinite number of years, and the income therefrom going to the widow.Yet the government declines to allow either the $ 75,000 as a deduction, or the commuted value of $ 250,000. That is not right. By reason of this enforceable claim, this estate was worth $ 75,000 less than its gross amount at the date of the testator's death; was worth that much less every day until September 17, 1924; on that date and thereafter it was depleted by the commuted value of a life estate in $ 250,000. But the government says it is not depleted by anything on account of this claim, and makes no deduction at all.

But neither words, nor the citation of such authorities as those above, or of such as Ferguson v. Dickson, 300 F. 961 (C. C. A.), certiorari denied 266 U. S. 628, 45 S. Ct. 126, 69 L. Ed. 476, can add much to the proposition that the statute requires that legally enforceable claims, existing at the time of death, shall be deducted, and that all parties, the government and the majority of the court, concede a legally enforceable claim did exist, and was not deducted.

I therefore must dissent.