APPEAL FROM THE UNITED STATES TAX COURT Tax Court Docket No. 8082-73.
Van Dusen and Rosenn, Circuit Judges, and Edward N. Cahn,*fn* District Judge.
The Estate of Robert F. Iversen, Deceased, Pittsburgh National Bank, Agent for John D. Iversen, Executor ("Estate"), appeals*fn1 from an Order and Decision of the United States Tax Court imposing a deficiency in federal estate tax payable by the Estate in the amount of $225,446.01. Robert F. Iversen, a resident of Florida, died testate May 24, 1969. By his Will dated December 20, 1966, he appointed his brother, John D. Iversen, as the executor. The executor, in turn, appointed the Pittsburgh National Bank as his agent in the administration of the Estate.
The Internal Revenue Service calculated the deficiency by making a number of adjustments to the value of the decedent's gross estate as reported on the estate tax return. The only adjustment which the Estate contested in the Tax Court, and continues to contest on this appeal, involves the validity of a deduction of $159,343.33. That deduction represents the commuted value, as of the date of decedent's death, of the contractual right of decedent's divorced spouse to receive, in accordance with a postnuptial agreement, the sum of $1,000 per month from the date of decedent's death until her death or remarriage. We hold the deduction was valid and, therefore, reverse the decision of the Tax Court.
The factual background*fn2 of this dispute is set forth in comprehensive detail in the opinion of the Tax Court. Estate of Robert F. Iversen, 65 T.C. 391 (1975). Nevertheless, certain basic facts should be outlined for a clear comprehension of this matter. The decedent, born April 16, 1916, married Mary Elizabeth McKeever, his first wife, on April 2, 1938, in Auburndale, Massachusetts. Following the marriage, the parties resided in Allegheny County, Pennsylvania except when Mr. Iversen was in service with the United States Navy. No children were born of this marriage. In early 1950 the couple separated. During the initial separation, Mrs. Iversen remained in possession of the family residence, and Mr. Iversen provided for the upkeep and maintenance of that real estate and paid for living expenses for Mrs. Iversen.
On September 8, 1950, the couple executed a legal document entitled "THIS AGREEMENT" which stated that it was entered into "in order to settle their marital and property rights without resorting to legal proceedings". The Agreement recited an intention on the part of the wife to obtain a divorce a vinculo matrimonii.*fn3 The Agreement obligated the husband to pay his wife the sum of $50,000 "in partial discharge of the wife's marital rights, other than maintenance and support . . ." The husband was also required to pay $1,000 to his wife for maintenance and support "as long as she remains his wife". If either party obtained a divorce decree, the husband was bound to continue the monthly payments "in lieu of alimony and in settlement of such legal obligation imposed upon him because of the marital relationship . . ." Under the Agreement the wife was entitled to receive the monthly payments until her death or remarriage. In the event of wife's remarriage, the husband was to pay her a lump sum of $75,000 which "will release in full the marital rights of said wife . . . ." The Agreement contained a release by wife of all other claims against husband for support and maintenance except as set forth therein. It should be noted that under the Agreement the husband or his estate must make the monthly payments whether or not either party obtains a divorce decree.
On September 8, 1950, Mr. Iversen, in compliance with specific provisions of the Agreement, entered into an Agreement of Trust with Commonwealth Trust Company of Pittsburgh to provide security for the monthly payments and for the $75,000 lump sum payment to be made in the event of remarriage. On September 14, 1950, wife filed for absolute divorce in the Court of Common Pleas of Allegheny County, and a decree of divorce a vinculo matrimonii was entered on December 12, 1950. Mr. Iversen remarried on January 12, 1951.
Over the five years prior to September 8, 1950, Mr. Iversen had an average after-tax income from investments and trust funds of $33,000 per annum. He had no earned income in that five year period. As of September 8, 1950, Mr. Iversen was the sole owner of securities in the amount of $514,014 and the dwelling house, valued at approximately $50,000, in which the couple had resided. These premises were not encumbered. In addition, the decedent was the sole beneficiary of a trust established by his father which, as of September 8, 1950, had an approximate value of $238,597. This trust provided that the income was distributable to Mr. Iversen in the discretion of the trustee and that the principal and accumulated income were distributable to him only after the death of his father and then in one-third increments as the beneficiary attained certain ages. Mr. Iversen's father died April 12, 1967, at which time the principal and accumulated income were distributed to Mr. Iversen. Mr. Iversen was also the beneficiary of an undivided one-fifth interest in two other trusts with combined assets on September 8, 1950, of $1,367,608. Mr. Iversen's rights under the two trusts were subject to certain limitations including a provision that not more than two-thirds of Mr. Iversen's interest was to be distributed before his attaining the age of sixty. At the time of his death, Mr. Iversen's taxable estate for federal estate tax purposes exceeded $2,000,000.
Upon the execution of the Agreement of September 8, 1950, Mr. Iversen paid his wife the lump sum of $50,000 and reported that amount for federal gift tax purposes. Mr. Iversen personally paid his first wife $1,000 per month from October, 1950, until the time of his death on May 24, 1969. Mr. Iversen's first wife, who never remarried, died on February 2, 1973, at the age of 58. From the time of Mr. Iversen's death in May, 1969, through February, 1973, the successor trustee (a consolidation of banks having taken place) made the $1,000 monthly payments. The successor trustee during that time frame paid the first Mrs. Iversen a total of $46,000.*fn4
The issue submitted to the Tax Court was whether the Estate was entitled to a deduction for the statistical value as of May 24, 1969, of the right of the first Mrs. Iversen to continue to receive $1,000 per month following the death of her former husband until her death or remarriage. The Tax Court sustained the deficiency imposed by the Internal Revenue Service and in so doing reached three separate conclusions. First, the Tax Court found that the establishment on September 8, 1950, of the trust to secure the $1,000 monthly payments was not supported by consideration in money or money's worth to support a deduction under Internal Revenue Code of 1954 § 2043(a)*fn5 because:
The transfer of assets to the trust was not made in exchange for Mary's marital rights including her right to support inasmuch as these marital rights were exchanged for the payments specified in the separation agreement for which Robert or his estate was liable and ...