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STEPHENSON v. UNITED STATES

February 8, 1965

Henry M. STEPHENSON, Executor of the Estate of Jane M. Stephenson, Plaintiff,
v.
The UNITED STATES of America, Defendant



The opinion of the court was delivered by: HENDERSON

This action for a refund of estate taxes is brought by Henry M. Stephenson as Executor of the Estate of Jane M. Stephenson. Sought to be recovered is $ 62,940.65, representing estate taxes and interest assessed against and collected from the estate.

The issue is whether certain securities, valued at $ 196,637.33 on May 5, 1957, were properly included by the Commissioner in the estate of Jane M. Stephenson or whether they should have been included in the estate of Henry L. Stephenson.

 Henry L. Stephenson, the husband of Jane M. Stephenson, died a resident of Erie County, State of New York, on September 22, 1930. The aforementioned securities were a part of his estate and under the terms of his Will passed to his wife. The second article in his Will provided:

 'All the rest, residue and remainder of my estate, real, personal and mixed, wheresoever situated, of which I may die seized or possessed, or to which I am entitled at the time of my decease, I give, devise and bequeath unto my wife, JANE MILLER STEPHENSON, so long as she remains unmarried.' *fn1"

 The Government takes the position that under this Will Jane M. Stephenson took a fee simple interest subject to defeasance only in the event of remarriage. The taxpayer claims that she took only a life estate.

 Supporting the taxpayer's construction is a decree of the Surrogate's Court, Erie County, dated April 23, 1958. In pertinent part that decree provides:

 '1. That it was the intention of Henry L. Stephenson, in and by Article Second of his Last Will and Testament to give his residuary estate unto his widow, Jane M. Stephenson, for and during her lifetime or until she should remarry. '2. That said Article Second of the Last Will and Testament of said Henry L. Stephenson vested a life use of his residuary estate in his widow, Jane M. Stephenson, subject to be divested upon her remarriage, and that said widow never remarried. '3. That it was the intention of Henry L. Stephenson in and by Article Second of his Last Will and Testament to give unto his children, Henry M. Stephenson, Jane S. Burgess and Laura S. Kelly, a vested remainder in his residuary estate, subject to the aforesaid life use in Jane M. Stephenson. '4. That said Jane M. Stephenson died on May 5, 1957 without having remarried and thereupon her son, Henry M. Stephenson and her daughters, Jane S. Burgess and Laura S. Kelly each became the owner of and entitled to receive one-third of the residuary estate of Henry L. Stephenson.'

 Ordinarily the state court's determination of the property rights involved would be conclusive for federal tax purposes. An exception arises, however, if the state court's determination was obtained by collusion. *fn2"

 The Government argues that the Surrogate's decree in this case is not binding because it was obtained in a non-adversary proceeding. Further, in the Government's view the result reached by the Surrogate is at odds with settled New York law.

 With respect to non-adversary proceedings, the Third Circuit Court of Appeals in Gallagher v. Smith, 223 F.2d 218, 224-225 (1955) observed:

 Whatever may be the case with respect to consent decrees, however, it is clear that if the question at issue is fairly presented to the state court for its independent decision and is so decided by the court the resulting judgment if binding upon the parties under the state law is conclusive as to their property rights in the federal tax case, regardless of whether they occupied adversary positions in the state court or were all on the same side of the question. It is clear, as suggested by the Supreme Court in the Freuler and Blair cases, that a state judgment obtained by collusion to defeat a federal tax need not be given conclusive effect in a suit in a federal court involving that tax. And the non-adversary character of a state suit is undoubtedly relevant as evidence of such collusion. But we think that the fact that the parties all favored the same result in the state court is relevant only so far as it is evidence of collusion and should not in and of itself vitiate in the federal court such conclusive effect as the state law gives to the judgment with respect to the property rights determined by it. For if in the absence of fraud such a judgment does determine the rights of the parties in the property they must thereafter live with it so far as their enjoyment of the property is concerned. It is certainly logical, therefore, that such taxation as is based solely upon the ownership of the property should follow such a judgment.

 'Furthermore we think that our conclusion is soundly based in public policy. For it is quite common and highly commendable for all the members of a family group interested in a decedent's will to take a common view as to their rights under it, thus promoting family harmony and preventing that unseemly and disturbing spectacle, a family fight over a deceased relative's property. It is certainly quite proper for the persons interested in a trust estate thus frankly to express to the court which has jurisdiction a common view as to the correct legal solution of any questions which exist as to their rights in the trust. If the questions are fairly posed to the court and the tribunal is left free to decide them according to its own independent judgment it should not be necessary for the parties to take formal adversary positions and engage in legal shadow boxing in order that the judgment of the court should have conclusive effect, taxwise as well as propertywise.'

 Although the Government argues that other courts have applied a less severe test, the court believes that, in general, these cases turn not upon less respect for the competence of state tribunals in non-adversary proceedings, but upon findings that the issues had not been fairly and squarely presented to and resolved by the state courts.

 In the present case, putting aside the question of estate taxes, it is clear that the beneficiaries gained equally under either Will. And while resolution of the initial dispute among the parties may have been aided by tax considerations, and such considerations therefore ultimately may have contributed to the urging of a common view before the Surrogate, these facts alone do not compel a finding of collusion.

 This is particularly true in light of the evidence relating to an earlier Surrogate's proceeding and the subsequent actions of Jane M. Stephenson under the Will of her husband. While the Government argues that this evidence is irrelevant and immaterial, it demonstrates that the position originally taken by one beneficiary and later acceded to by all, was not newly conjured to avoid the payment of estate taxes but was one which had been recognized and followed for more than a quarter of a century. Furthermore, although accord had been reached among the parties, completion of the 1958 ...


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