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Estate of William A. Lidbury v. Commissioner of Internal Revenue

decided: September 3, 1986.


Author: Cummings

Before CUMMINGS, Chief Judge, CUDAHY and EASTERBROOK, Circuit Judges.

CUMMINGS, Chief Judge.

The Commissioner of Internal Revenue (commissioner) appeals from the Tax Court's determination that the estate of William Lidbury is not liable for gift tax. The estate appeals in the alternative from the Tax Court's estate tax assessment. These two cases have been consolidated for purposes of appeal.*fn1 Jurisdiction if found in 26 U.S.C. § 7482. We affirm the gift tax decision of the Tax Court and remand the state tax decision for additional calculations.

Statement of Case

The Commissioner determined deficiencies in federal gift taxes and estate taxes against William Lidbury, decedent. The executor of William's estate (his son, Harry Lidbury) petitioned the redetermination of the two assessments. The Tax Court entered an opinion and decision adverse to the Commissioner's gift tax position on February 5, 1985. On May 3, 1985, the Commissioner filed its notice of appeal. On June 7, 1985, the executor filed a notice of appeal from the estate tax decision. This Court ordered the two cases consolidated for briefing and argument on June 20, 1985.

The facts are undisputed. In 1951, William and Rose Lidbury (husband and wife) executed a joint and mutual will. In pertinent part, the will purported to dispose of their joint property (consisting primarily of a farm) by giving to the surviving spouse a life estate and passing all the property equally to their four children at the second spouse's death. Harry Lidbury was named executor of the survivor's estate. Specifically, in pertinent part the will provided:

SIXTH: We make this joint will in pursuance of a contract and agreement between us for the purpose of disposing of all the property which we now own, or may hereafter acquire, either jointly or severally, in accordance with a general plan agreed upon between us. In making this, our Last Will and Testament we, and each of us, do covenant and agree that upon the death of one of us, the survivor will not in any manner directly or indirectly dispose of his or her property to the end that the general plan of distribution ,as provided herein, shall be altered and changed in any from whatsoever; and we and each of us do further covenant and agree that the survivor of us shall hold and manage the property which he or she may own outright and of which he or she may have the use, by reason of this, our Last Will and Testament, in a careful and prudent manner, so as not to dissipate any of said property.

Rose died in 1964. The 1951 will was not admitted to probate at this time, apparently forgotten. Rose's estate for estate tax purposes consisted of her one-half interest in property held with William as joint tenants. William did not file a gift tax return in 1964. At William's death in 1977 the 1951 will was admitted to probate. The Commissioner asserted a fit tax deficiency for 1964, reasoning that the 1951 will imposed contractual obligations on William to make gifts of valuable property interests to his children.

The Tax Court held that the 1951 document was not a joint and mutual will and that no contract existed to limit William's right of disposition of the property at the time of Rose's death. In the alternative, the Tax Court held that even if it were an irrevocable contract, it did not transfer a present interest in the property. Thus the Tax Court concluded that William was not liable for gift tax in 1964. The Tax Court ruled in the estate tax case that all of the 210-acre farm and proceeds from the sale of the 80-acre farm (in 1975) were included in William's gross estate. In the estate tax case the executor had argued that if gift tax liability were found, then only one-half of the jointly held property should have been taxed under § 2031 of the Internal Revenue Code. These appeals followed.

The consolidated issued on appeal are as follows. First, was the 1951 document a joint and mutual will and second, did it create contractual obligations on the surviving spouse? Third, if so, did the contract act to deprive the surviving spouse of significant control over the property? If gift tax liability is found, then the fourth issue is whether the value of William's gift should be reduced by the value of consideration from Rose and fifth, whether only 50% of the jointly owned property should be included in William's gross estate. In any event as a sixth issue, the executor asks this court to remand to the Tax Court for Rule 155 calculations. We affirm the decisions of the Tax Court but remand for appropriate recalculations with respect to the estate tax decision.

I. Gift Tax Appeal

The Commissioner first argues that it was error for the Tax Court to rule that the document executed between William and Rose Lidbury was not a joint and mutual will. The Tax Court reasoned that because the 1951 will was not probated at the time of Rose's death in 1964 it was not a joint and mutual will. However, the document was a joint and mutual will under Curry v. Cotton, 356 Ill. 538, 543, 191 N.E. 307 (1934). The Illinois Supreme Court in Curry defined a joint and mutual will as

a written instrument executed and published by two or more person disposing of the property, or some part of the property, owned jointly or in common by them or in severalty by them. On the death of the testator first dying it is subject to record and probate as his will, and on the death of the surviving testator it is subject to probate as his will. A joint will may or may not be mutual or reciprocal. Mutual or reciprocal wills are the separate instruments of two or more person, the terms of such wills being reciprocal and by which each testator makes testamentary disposition in favor of the other. * * * A will that is both joint and reciprocal is an instrument executed jointly by two or more person with reciprocal provisions and shows on its face that the bequests are made one in considerations of the other.

Id. It is not necessary that the will be admitted into probate, because the issue here is whether the document was a valid contract. The Commissioner does not seek ...

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