Tax 2 Case Digest: Bull v. United States

Bull v. United States

295 U.S. 247 (1935)

Laws Applicable:

Lessons Applicable: estate tax, income tax,

FACTS:

• Archibald H. Bull died February 13, 1920. He had been a member of a partnership engaged in the business of ship-brokers. The agreement of association provided that, in the event a partner died, the survivors should continue the business for one year subsequent to his death, and his estate should "receive the same interests, or participate in the losses to the same extent," as the deceased partner would, if living, "based on the usual method of ascertaining what the said profits or losses would be. . . . Or the estate of the deceased partner shall have the option of withdrawing his interest from the firm within thirty days after the probate of will . . . , and all adjustments of profits or losses shall be made as of the date of such withdrawal."  The estate's representative did not exercise the option to withdraw.

o    share of profits from January 1, 1920, to the date of his death, February 13, 1920, was $24,124.20

o    Profits accruing to the estate for the period from the decedent's death to the end of 1920 were $212,718.79, $200,117.90 being paid during the year and $12,601.70 during the first two months of 1921.

• Court of Claims: the sum of $200,117.09 received in 1920 should have been returned by the executor as income to the estate for the period February 13 to December 31, 1920
• Board of Tax Appeals: sustained
• executor filed a claim for refund of this amount due to erroneous collection – rejected
• Petition for certiorari

ISSUE: W/N the profits accruing to the estate for the period from the decedent's death is subject to estate tax

HELD: NO. reversed

• amount received from the partnership as profits earned prior to Bull's death was income earned by him in his lifetime is included in his gross estate - estate tax
• sums paid his estate as profits earned after his death were not corpus, but income received by his executor - income tax for the years 1920 and 1921.

Tax 2 Case Digest: De Guzman v. De Guzman

G.R. No. L-29276 May 18, 1978

Laws Applicable: Sec. 3, Rule 84, Secs. 1 and 7, Rule 85, Rules of Court

Lessons Applicable: allowable administration expenses

FACTS:

• The late Felix J. de Guzman was survived by 8 children.  Letters of administration were issued to his son, Doctor Victorino G. de Guzman.  One of the properties left by the decedent was a residential house located in the poblacion of which 8 children were given a 1/8 proindiviso share in the project of partition.  3 heirs Crispina de Guzmans-Carillo Honorata de Guzman-Mendiola and Arsenio de Guzman interposed objections to the administrator's disbursements in the total sum of P13,610.48.

o    Expense for the improvement and renovation of the decedent's residential house

o    Living expenses of Librada de Guzman while occupying the family home without paying rent

o    Other expenses: Lawyer's subsistence, Gratuity pay in lieu of medical fee, stenographic notes, decedent's first death anniversary, representation expenses

o    Irrigation fee

• Lower court: allowed the expenses

ISSUE: W/N they were allowable administration expenses

Held: Some yes and some no.  Affirmed with modification.

• An executor or administrator is allowed the necessary expenses in the care, management, and settlement of the estate. He is entitled to possess and manage the decedent's real and personal estate as long as it is necessary for the payment of the debts and the expenses of administration. He is accountable for the whole decedent's estate which has come into his possession, with all the interest, profit, and income thereof, and with the proceeds of so much of such estate as is sold by him, at the price at which it was sold (Sec. 3, Rule 84; Secs. 1 and 7, Rule 85, Rules of Court).
• One of the Conditions of the administrator's bond is that he should render a true and just account of his administration to the court
• A hearing is usually held before an administrator's account is approved, especially if an interested Party raises objections to certain items in the accounting report
• Expenses:

o    Expense for the improvement and renovation of the decedent's residential house – allowable

§  5 out of 8 co-owners consented to the use of the funds of the estate for repair and improvement of the family home. It is obvious that the expenses in question were incurred to preserve the family home and to maintain the family's social standing in the community.

o    Living expenses of Librada de Guzman while occupying the family home without paying rent – disallowed

o    Other expenses:

§  Lawyer's subsistence – allowable

§  Gratuity pay in lieu of medical fee – allowable

§  stenographic notes – disallowed

§  decedent's first death anniversary - disallowed

§  representation expenses - unexplained = disallowed

• Irrigation fee – allowable since unquestioned though duplicate

Tax 2 Case Digest: Morgan v. Commissioner

Morgan v. Commissioner

309 U.S. 78 (1940)

Laws Applicable:

Lessons Applicable: general power of appointment

FACTS:

• Morgan is the executor of Elizabeth S. Morgan, who was the donee of 2 powers of appointment over property held in 2 trusts created by her father by will and by deed.  The property remaining in the trustees' hands for Elizabeth S. Morgan was given, at her death, to the appointee or appointees named in her will, with gifts over in case she failed to appoint. Under both trusts, if in the judgment of the trustees, property going to any beneficiary would be dissipated for any reason, or improvidently handled, the trustees were to withhold any part of such property, with directions for disposition, in such event, of what was withheld. The decedent appointed in favor of her husband.
• The Commissioner ruled that the value of the appointed property should be included in the gross estate, and determined a tax deficiency. The Board of Tax Appeals approved his action. The Circuit Court of Appeals affirmed the Board's decision.

ISSUE: W/N it was the trust had a general power of appointment

HELD: YES. Judgment affirmed.

• general power of appointment - donee may appoint to anyone, including his own estate or his creditors, thus having as full dominion over the property as if he owned it
• special power of appointment - donee may appoint only amongst a restricted or designated class of persons other than himself.
• The important consideration is the breadth of the control the decedent could exercise over the property, whatever the nature or extent of the appointee's interest.

o    inasmuch as the trustees had an unfettered discretion to withhold principal or income from any beneficiary, they could exercise their discretion as respects any appointee of the decedent

Tax 2 Case Digest: United States v. Wells 283 U.S. 102 (1931)

United States v. Wells

283 U.S. 102 (1931)

Laws Applicable:

Lessons Applicable: donation in contemplation of death

FACTS:

• As early as the year 1901, John W. Wells, a resident of Menominee, Michigan, began the making of advancements of money and other property to his children.  In 1918, 1919, January 1, 1921, January 26, 1921, he transferred stocks to his children. 
• May 1919: he went to a hospital in Chicago for treatment of asthma and remained there for 11 days
• April, 1920: he had ulcerative colitis (inflamed large intestine)
• June, 1920: physicians in California found him to have cancer of the intestines
• September 14, 1920:  physicians told him he can be absolutely cured if he is careful
• September 22, 1920: he was discharged and is in excellent condition
• January 14, 1921: medical examination showed his ulcerative colitis 90% normal
• April, 1921: he had a recurrence and was advised for operation because he might have cancer
• June, 1921: reentered hospital in Chicago as his viral infection failed to yield to treatment
• August 17, 1921 : he died at the age of 73 survived by his wife and 5 children. The Commissioner of Internal Revenue assessed additional estate taxes, upon the ground

that certain transfers by the decedent WITHIN 2 years prior to his death, were made in contemplation of death and should be included in the taxable estate.   The additional estate tax for the transfer in 1919, January 1, 1921, January 26, 1921 was paid by the executors and claim for refund was filed but rejected.

• Court of Claims: Favored the executors since immediate and moving cause of the transfers was the carrying out of a policy, long followed by decedent in dealing with his children of making liberal gifts to them during his lifetime
• They filed a Court granted a writ of certiorari

ISSUE: W/N it was a donation in contemplation of death

HELD: NO. Judgment affirmed.

• The best evidence of the state of the decedent's health at the time the transfers were made is the statement of his doctor.
• The best evidence of the decedent's state of mind at that time and the reasons actuating him in making the transfers are the statements and expressions of the decedent himself, supported as such statements are by all the circumstances concerning the transfers.
• Death must be "contemplated" -- that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition.  The natural and reasonable inference which may be drawn from the fact that but a short period intervenes between the transfer and death is recognized by the statutory provision creating a presumption in the case of gifts WITHIN 2 years prior to death. BUT this presumption, by the statute before us, is expressly stated to be a rebuttable.
• It is contemplation of death, not necessarily contemplation of imminent death, to which the statute refers. The words "in contemplation of death" mean that the thought of death is the impelling cause of the transfer, and, while the belief in the imminence of death may afford convincing evidence, the statute is not to be limited, and its purpose thwarted, by a rule of construction which, in place of contemplation of death, makes the final criterion to be an apprehension that death is near at hand.

Tax 2 Case Digest: Balanay Jr. v. Martinez G.R. No. L-39247 June 27, 1975

G.R. No. L-39247 June 27, 1975

     Laws Applicable: Art. 792, Art. 179[1], Art. 1041, Art. 1060[1], Art.  750 and 752  Civil

                              Code

 

     Lessons Applicable: illegal provision in a will, donation, preterition of surviving spouse

FACTS:

• Leodegaria Julian, a native of Sta. Maria, Ilocos Sur, died on February 12, 1973 in Davao City at the age of 67. She was survived by her husband, Felix Balanay, Sr., and 6 legitimate children: Felix Balanay, Jr., Avelina B. Antonio, Beatriz B. Solamo, Carolina B. Manguiob, Delia B. Lanaban and Emilia B. Pabaonon
• Felix J. Balanay, Jr. filed in the lower court for the probate of his mother's notarial will dated September 5, 1970 which is written in English where Leodegaria Julian declared (a) she was the owner of the "southern half of 9 conjugal lots (b) she was the absolute owner of 2 parcels of land which she inherited from her father (c) it was her desire that her properties should NOT be divided among her heirs during her husband's lifetime and that their legitimes should be satisfied out of the fruits of her properties (d) after her husband's death (age of 82 in 1973) her paraphernal lands and all the conjugal lands should be divided and distributed in the manner set forth in that part of her will. She devised and partitioned the conjugal lands as if they were all owned by her.
• Although initially opposing, Felix Balanay, Sr. signed a Conformation of Division and Renunciation of Hereditary Rights manifesting that out of respect for his wife's will he waived and renounced his hereditary rights in her estate in favor of their 6 children.  In that same instrument he confirmed the agreement, which he and his wife had perfected before her death, that their conjugal properties would be partitioned in the manner indicated in her will.
• Avelina B. Antonio, an oppositor, in her rejoinder contended that the affidavit and conformation" of Felix Balanay, Sr. were void for illegally claiming the conjugal lands
• David O. Montaña, Sr., claiming to be the lawyer of Felix Balanay, Jr., Beatriz B. Solamo, Carolina B. Manguiob and Emilia B. Pabaonon filed a motion for leave of court to withdraw probate of the will and requesting authority to proceed by intestate estate proceeding also referring to the provisions relating to the conjugal assets as compromising the future legitimes
• Lower Court: Will was void and converted to intestate proceedings
• Felix Balanay, Jr., through a new counsel, Roberto M. Sarenas, asked for the reconsideration of the lower court's order on the ground that Atty. Montaña had NO authority to withdraw the petition for the allowance of the will
• Lower Court on motion for reconsideration: Denied and clarified that it declared the will void on the basis of its own independent assessment of its provisions and not because of Atty. Montaña's arguments.

ISSUE: W/N the will should be void and interstate proceeding should follow

HELD: NO.

• illegal declaration does NOT nullify the entire will and may be disregarded
• Felix Balanay, Sr. could validly renounce his hereditary rights and his one-half share of the conjugal partnership but insofar as it partakes of a donation, it should be subject to the limitations prescribed in articles 750 and 752 of the Civil Code. A portion of the estate should be adjudicated to the widower for his support and maintenance. Or at least his legitime should be respected.
• The will is intrinsically valid and the partition therein may be given effect if it does not prejudice the creditors and impair the legitimes. The distribution and partition would become effective upon the death of Felix Balanay, Sr.  In the meantime, the net income should be equitably divided among the children and the surviving spouse.
• The preterition of surviving spouse did not produce intestacy. Moreover, he signified his conformity to his wife's will and renounced his hereditary rights.