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MOLNER v. UNITED STATES

May 22, 1959

LILLIAN L. MOLNER, ARTHUR REINHOLD, AND DAVID SILBERT, AS EXECUTORS UNDER THE WILL OF HERMAN MOLNER, DECEASED, PLAINTIFFS,
v.
UNITED STATES, DEFENDANT.



The opinion of the court was delivered by: Igoe, District Judge.

Plaintiffs, as executors under the will of Herman Molner, deceased, have brought this suit pursuant to Section 1346(a)(1) of Title 28, U.S.Code, to recover federal estate taxes alleged to have been erroneously or illegally assessed or collected by virtue of the death of Herman Molner, who died May 28, 1951, a resident of Cook County, Illinois, and a citizen of the United States. Plaintiff, Lillian L. Molner, is one of the executors and is the surviving spouse of Herman Molner.

This case has been submitted upon a stipulation of facts and motion for summary judgment by each party on the issue whether a surviving spouse's award allowed by the Probate Court of Cook County on November 1, 1951, and paid to the widow qualifies for the marital deduction under Section 812(e) of the Internal Revenue Code of 1939, 26 U.S.C. § 812(e), in computing the federal estate tax due on the estate of Herman Molner, deceased. Plaintiffs' right to recover is dependent upon such qualification.

The will of Herman Molner was admitted to probate by the Probate Court of Cook County, Illinois, on August 29, 1951, and letters testamentary issued thereon.

On November 1, 1951, pursuant to the provisions of the Illinois Probate Act, S.H.A. ch. 3, § 151 et seq., a surviving spouse's award of $25,000 was allowed to Lillian L. Molner, wife of Herman Molner, and was approved by the Probate Court. The award was paid in full to her by the executors in three equal installments on November 29, 1951, February 28, 1952, and May 30, 1952, respectively.

The executors filed a federal estate tax return on October 27, 1952, showing:

  Gross estate - $802,514.60
                     -
  Deductions: (other than marital
               and charitable)      -         $56,055.83
  Marital deduction:
   Surviving spouse's award     $25,000.00
   Schedules D, E, F              5,619.53
   Article Third of Will        221,946.41
                               ___________
                  Total        $252,565.94
  Charitable - $63,000.00.
  Total deductions: $371,621.77.
  Net Estate before Exemptions    -         $430,892.83;
  and paid a tax due thereon of $96,597.14.

Upon audit, the Director determined that the valuation of the gross estate should be increased by $30,300, thereby increasing the estate subject to tax by $20,200 (the difference passing under Article Third of the Will and qualifying for the marital deduction). No other change was made in the return as filed.

As a result of the increase in the net estate subject to tax, the federal estate tax due was increased by $5,817.60. The executors accepted the increase and paid the amount of the deficiency of $5,817.60 and $605.66 interest on July 23, 1954.

On June 26, 1956, plaintiffs filed a claim for refund of $5,871.18, based upon

(1) Additional expenses of administration and non-marital deductions — $3,778.26.

(2) Increase in marital deductions by reason of construction of Will by Appellate Court — $14,504.80.

Total — $18,283.06.

The Director allowed $1,107.35, the tax attributable to (1) but disallowed the balance of $4,763.83 applicable to (2).

The reason given by the Director for disallowing the claim of $4,763.83 was that the surviving spouse's award of $25,000 did not qualify for the marital deduction under Section 812(e) of the Internal Revenue Code of 1939, asserting (1) the award did not constitute an inheritance from the decedent and (2) it constituted a terminable interest under the Illinois law and was disallowed by virtue of Section 812(e)(1)(B) of the 1939 Code. This suit was brought to recover the amount of the tax allegedly overpaid by reason of such disallowance. In view of the amount repaid to plaintiffs in connection with that portion of the claim that was allowed, the amount, if any, due plaintiffs is $4,648.55.

The sole question for determination is whether the surviving spouse's award allowed and paid to Lillian L. Molner, widow of Herman Molner, pursuant to the Illinois law qualifies for the marital deduction under Section 812(e) of the Internal Revenue Code of 1939. If it qualifies, plaintiffs are entitled to judgment in the amount of $4,648.55, plus statutory interest thereon from July 23, 1954, and costs of this suit; if it does not qualify, defendant is entitled to judgment and plaintiffs shall take nothing by their suit.

Defendant has conceded that since the issuance of Rev.Rul. 83, 1953 — 1 Cum. Bull. 395, the award constitutes an interest which passes to the surviving spouse, but states that the position of the Treasury Department is that a surviving spouse's award will qualify for the marital deduction only if it appears that the spouse has a vested right of property which is not terminated by her death or other contingency; that whether any interest thus taken by the surviving spouse satisfies the statutory requirements in this respect is to be determined in the light of the applicable provisions of the State statutes, as interpreted by the local courts.

Rev.Rul. 83 states, in part:

    "Under the general rule of subparagraph (A) of
  Section 812(e)(1) of the Code, the marital deduction
  will be allowed with respect to any interest in
  property included in the gross estate which passes
  from a decedent to his surviving spouse as absolute
  owner. In order to qualify under this subparagraph,
  any right of a widow to an allowance in her husband's
  estate must be a vested right of property which is
  not terminated by her death or other contingency.
  Therefore, if a widow's allowance for the full period
  of settlement of the estate is such that the
  allowance, or any unpaid balance thereof, will
  survive as an asset of her estate in case she dies at
  any time following the decedent's death, the interest
  thus taken by the widow would clearly consitute a
  deductible interest under Section 812(e)(1)(A) of
  the Code. Whether any interest thus taken by a widow
  satisfies the statutory requirements in this respect
  is to be determined in the light of the applicable
  provisions of the State statutes, as interpreted by
  the local courts."

Defendant's contention is (1) that the surviving spouse's award is subject to the provisions of subparagraph (B) of Section 812(e)(1) and (2) that under Illinois law the award is a terminable interest as defined in (B).

Plaintiffs' position is (1) in view of the legislative history relating to the 1950 amendment to the 1939 Code (S. Rept. No. 2375, 81st Congress, 2d Sess. 1950-2CB 483, 525, 576, U.S.Code Cong. Service 1950, p. 3053), which eliminated the surviving spouse's allowance as a general deduction for estate tax purposes, the intention of Congress was that support allowances actually paid to a surviving spouse out of the decedent's gross estate should qualify for the estate tax marital deduction, citing as authority the opinion of Judge Pierce, concurring in part and dissenting in part, in Estate of Proctor D. Rensenhouse, 1959, 31 T.C. No. 81 (1959) (CCH Tax Court Reporter, 1959, p. 2069) (¶ 31.81 P-H T.C. 1959); and (2) in any event, the award allowed under Illinois law is not a terminable interest within the meaning of subparagraph (B) of Section 812(e)(1).

Assuming, without deciding, that subparagraph (B) of Section 812(e)(1) of the 1939 Code is applicable to the surviving spouse's award generally, in view of defendant's concession that it constitutes an interest which passes to the surviving spouse, before it can be disallowed as a marital deduction under Section 812(e), it must be established that it constitutes a "terminable interest" under subparagraph (B), that is an interest which will terminate or fail:

    "* * * Upon the lapse of time, upon the occurrence
  of an event or contingency, or upon the failure of an
  event or contingency to occur * * *
    "(i) if an interest in such property passes or has
  passed * * * from the decedent to any person other
  than such surviving spouse (or the estate of such
  spouse); and
    "(ii) if by reason of such passing such person (or
  his heirs or assigns) may possess or enjoy any part
  of such property after such termination or failure of
  the interest ...

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