                         T.C. Memo. 1996-491



                       UNITED STATES TAX COURT



            ESTATE OF CATHERINE E. DOWELL, DECEASED,
             PATRICIA LOW, EXECUTRIX, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16019-94.                  Filed October 30, 1996.



     Joel L. Shoobe, for petitioner.

     Albert G. Kobylarz and Richard E. Buchbinder, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined a deficiency of

$127,304 in petitioner's Federal estate tax.     Respondent filed an

amended answer asserting an additional deficiency of $61,532.
                                - 2 -

     Catherine E. Dowell (sometimes referred to as decedent or

mother) owned 75 percent of the stock of Dowell Insurance Agency,

Inc. (the stock or agency stock; the agency), at the time of her

death.   Decedent had previously sold 25 percent of the agency

stock to her daughter, Patricia Low (sometimes referred to as

daughter), and was receiving monthly installment payments from

the sale.   The obligation to make the installment payments1 (the

debt) was forgiven by decedent on her deathbed.    Decedent's Last

Will and Testament (the will) bequeathed her remaining stock to

her daughter "with the understanding" that she would make monthly

payments of $5,000 to decedent's son for 10 years.    A codicil to

decedent's will stated that monthly payments were to be made by

the daughter to decedent's husband instead.    After her mother's

death, Patricia Low never made any of the monthly payments.

Decedent's husband was the residuary beneficiary under decedent's

will.    Petitioner, decedent's estate, computed the sum of the

monthly payments called for in the codicil to be $450,000, and

claimed that amount as a marital deduction on its Federal estate

tax return.    After concessions, the issues for decision are:

     (1) Whether decedent's husband inherited her agency stock on

the failure of the daughter to make the payments called for in

the codicil; if decedent's husband did not inherit the agency

stock,

     1
        The record does not show that an installment note was
entered into by the daughter.
                               - 3 -

     (2) whether decedent's husband inherited an interest in the

stock that would qualify for the marital deduction under section

2056(a)2 and, if so, the value of that interest; and

     (3) whether decedent's cancellation of her daughter's debt

to her resulted in a gift to her daughter.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time the petition

was filed, the legal residence of the executrix was in New

Jersey.

Decedent and Dowell Insurance Agency, Inc.

     Decedent purchased 100 percent of the agency in 1975.

Before decedent's death, she was president and treasurer of the

agency, and Patricia Low was secretary of the agency.    The

revenues of the agency were derived mostly from the sale of

commercial insurance policies to contractors or manufacturing

facilities.   Both decedent and Patricia Low sold these policies.

Decedent built up the agency for 15 years before she died.

Decedent thought the agency was worth about $1 million when her

will was written in 1988.




     2
        Section references are to the Internal Revenue Code in
effect at the date of decedent's death, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                                - 4 -

     Decedent previously had worked for another insurance agency

where she started as a secretary and worked her way up to vice

president over 17 years.    She was one of the first women to own

an insurance agency that sold commercial lines of insurance in

northern New Jersey.    Decedent was businesslike and tough; she

dictated what she wanted in business contracts and letters.

     During 1988 decedent had a cancer operation and a long

recovery period.    Decedent told her daughter that she felt the

business should live on after her death.    The business was

decedent's legacy.    She also told her daughter that she would

like to see the agency built up and her daughter to have the

opportunity to own the entire agency.    After another bout with

cancer, decedent died testate on July 27, 1990.

Decedent's Husband

     Decedent's husband, Sidney Dowell (sometimes referred to as

father or surviving spouse), was never active in the agency even

though he was listed as its vice president.    Patricia Low never

saw her father at the agency's office.    He was never licensed to

sell insurance.    Sidney Dowell was a blue collar worker who

retired from his small electric motor repair business in about

1976.    He had nothing to do with the insurance business nor any

interest in the insurance business before or after decedent's

death.    Sidney Dowell died on May 2, 1994.

     Patricia Low and Kenneth Dowell (sometimes referred to as

the son) are the only children of decedent and Sidney Dowell.
                                 - 5 -

Patricia Low

     Patricia Low, the executrix, graduated from college in 1979

with a liberal arts degree in history and political science.      She

started with the agency in 1983 after working at various retail

stores.    While at the agency, she worked as a receptionist, a

personal lines customer service representative, a commercial

lines customer service representative, a claims person, and in

sales.    She worked every job except her mother's and as

bookkeeper.    Patricia Low worked full time with her mother for 6

years.    Decedent was trying to teach her the business.    Patricia

Low became president of the agency and managed its day-to-day

operations after decedent's death.

Kenneth Dowell

      Kenneth Dowell has a bachelor's degree in history and

psychology and a master's degree in history and works for PR News

Wire in Jersey City.    Kenneth Dowell never worked in the the

agency.    Kenneth Dowell's relationship with his parents was

amicable.    He is familiar with some of the circumstances

surrounding his mother's will.

Decedent's Will

      Jan Seigel performed all of decedent's general legal work.

Jan Seigel was also Patricia Low's lawyer and the family's

attorney.    Jan Seigel met decedent in 1975 when he started his

law practice in Hawthorne, New Jersey, in a building where they
                                - 6 -

both were tenants.   They saw each other daily.    Decedent executed

her will on March 9, 1988.

     Although Jan Seigel prepared decedent's will and codicil,

decedent dictated the provisions concerning the devise of her

agency stock.   The terms in the will and codicil relating to the

agency were actually drafted by decedent; Jan Seigel simply

copied decedent's language verbatim.     Decedent would bring legal

documents to Jan Seigel and say:     "This is what I want.   Do

this."   Paragraph Third of the will states in part:    "I give,

devise and bequeath all of my stock * * * to my daughter,

PATRICIA LOW, with the understanding that she will pay to my son,

KENNETH A. DOWELL, the sum of Five Thousand Dollars ($5,000.00)

per month for ten (10) years".3    Decedent's overriding intent

with respect to her children was that they be treated equally,

though she did not want her son to have any part of the agency.

The payments in the will, namely $5,000 per month for 10 years,

were intended to represent one-half of the value of the agency.

Buy-Sell Agreement

     On November 2, 1989, decedent entered into a written stock

purchase agreement (the agreement) in which she sold her daughter

25 percent of her agency stock on an installment basis for a

price of $2,500 per month for 10 years.     Jan Seigel represented

decedent in this transaction.     Decedent set the price of the

     3
        The father was substituted for the son in the codicil to
the will.
                               - 7 -

stock purchase and the terms of the agreement.   Two stock

certificates, each dated January 1, 1990, were issued.   One

certificate for 75 shares was issued to decedent, and the other

for 25 shares was issued to her daughter.   Jan Seigel prepared

and issued Patricia Low's stock certificate, but it was not

delivered to her.   A partial amortization schedule relating to

the agreement was prepared by William Grinwis, decedent's

accountant, and given to Patricia Low.   The agreement also gave

decedent and her daughter the option to buy each other's agency

stock upon certain conditions, including the death of a party.

     Patricia Low made the monthly payments called for in the

agreement until they were canceled.    One payment was made 10 days

late.   Decedent informed her daughter that if she was late with

another payment, decedent would cancel the agreement and tear up

the stock certificate issued to her daughter.

First Codicil to the Last Will and Testament

     Decedent executed a codicil to her will on March 16, 1990.

The codicil states in part:

     I hereby amend Paragraph Third of my Last Will and
     Testament to provide as follows: The sum of Three
     Thousand Seven-Hundred Fifty Dollars ($3,750.00) per
     month for a period of ten (10) years shall be paid to
     my husband, SIDNEY F. DOWELL. In addition, he shall be
     entitled to one-half (½) of the unpaid monthly payments
     due me at the time of my death from my daughter,
     PATRICIA LOW, from the sale of Twenty-Five (25 %)
     Percent of the stock in Dowell Insurance Agency, Inc.

The codicil was written to make two changes:    (1) To substitute

Sidney Dowell, decedent's husband, for Kenneth Dowell, decedent's
                                - 8 -

son, as recipient of the payments from Patricia Low; and (2) to

reflect the fact that Patricia Low had already purchased 25

percent of the agency stock.    Sidney Dowell was substituted for

Kenneth Dowell in the codicil because Kenneth was going through a

divorce and decedent did not want his wife to make a claim on the

payments called for in the will.    Jan Seigel advised decedent

that he did not think Kenneth Dowell's wife could make a claim on

an inheritance under New Jersey law, but decedent said she really

did not care what his advice was and that she wanted to do it her

way.    She wanted to make sure that her daughter-in-law could not

get the payments "in any way, shape, or form".    The change of

recipient in the codicil from Kenneth Dowell to Sidney Dowell was

not occasioned by decedent's being upset with Kenneth or by a

family dispute between decedent and him.

        Under the terms of the codicil, Patricia Low had to pay to

her father a total of $5,000 per month for almost 10 years, as

her monthly payments under the codicil were $3,750 and one-half

of the $2,500 that she owed under the agreement.

       The codicil was written approximately 2 years after the will

was executed.    Decedent discussed the codicil with her son in

1990.    She said that the provision in the original will by which

he would receive payments from the business was being changed.

Decedent told her son that the reason for the change was that he

had a divorce case pending and decedent did not want to have the

payments be part of a property settlement in his divorce case.
                                - 9 -

     Decedent died July 27, 1990, 4 months after the codicil was

written.   Kenneth Dowell did not inherit anything from decedent's

estate.

Cancellation of the Debt

      Decedent was readmitted to the hospital in July of 1990 and

was told she had only a short time to live.   Decedent knew her

daughter would have a problem paying for the agency stock.    On or

about July 18, 1990, 9 days before her death, decedent asked her

daughter to bring the agreement to her in the hospital.     Patricia

Low brought decedent the only thing she had at home, the

amortization schedule, which decedent signed, dated, and marked

"paid in full".   Decedent told her daughter that she was

canceling the payments due under the agreement.   Decedent did not

say why, and her daughter did not ask for her specific reason.

At the time of the cancellation, Patricia Low had made six

payments under the agreement.   The amortization schedule shows

her remaining obligation as $183,520.

     Patricia Low's Federal income tax return for the year 1990

does not include any item of income regarding debt cancellation.

Post-Death Events

     After decedent died, her daughter went to Jan Seigel and

asked him what she should do as potential executrix.   She did the

same with William Grinwis.   Patricia Low never asked Jan Seigel

any questions about the payments totaling $450,000 ($3,750 x 12 x

10) that she was to make to her father under the codicil.
                               - 10 -

Sometime in August 1990 after her mother's death, Patricia Low

decided not to make payments to Sidney Dowell.   However, she

never told him that the remaining 75 percent of the agency stock

was his.   Patricia Low never told Jan Seigel, and he was unaware,

that she was not making the payments.

     Neither Patricia Low nor Jan Seigel transferred decedent's

75 percent of the agency stock to Sidney Dowell.   Jan Seigel

prepared the New Jersey inheritance tax return for decedent's

estate.    The New Jersey inheritance tax return, which was signed

and filed by Patricia Low, shows her receiving, as beneficiary,

decedent's agency stock, less payments totaling $450,000 to be

made to her father.

     William Grinwis prepared the Federal estate tax return, in

part, from the information contained in the New Jersey

inheritance tax return which was provided to him by Jan Seigel.

William Grinwis was given copies of the will and codicil when he

prepared the estate tax return in either late 1990 or early 1991.

The Federal estate tax return, which was signed and filed by

Patricia Low, deducts the $450,000 in projected payments as a

bequest to the surviving spouse.

     Forms 1120S (U.S. Income Tax Returns for an S Corporation)

were filed for the agency for the years 1988 through 1993.   The

1990 through 1993 corporate tax returns were prepared by William

Grinwis and signed by Patricia Low as president.
                               - 11 -

     The 1990 Form 1120S of the agency shows Patricia Low owning

25 percent of the stock for the first 7 months of the year and

100 percent of the stock for the last 5 months of the year.

Patricia Low signed this return as president of the agency.

     The Forms 1120S of the agency for 1991, 1992, and 1993 each

show Patricia Low as owning 100 percent of the agency stock.

These returns were signed by Patricia Low as president.   The

Schedule K-1 for 1991 shows a loss of $80,830 flowing through to

Patricia Low, all of which she claimed on her individual Federal

income tax return for 1991.   The Schedules K-1 for 1992 and 1993

show agency income of $28,594 and $37,462, respectively, flowing

through to Patricia Low, all of which she reported on her Federal

tax returns.

     William Grinwis prepared Patricia Low's individual tax

returns for the years 1990, 1991, 1992, and 1993.

Procedural History of the Case

     Respondent determined that the alleged bequest of $450,000

did not qualify for the marital deduction because it was a "non-

deductible terminable interest" under section 2056(b).

Petitioner originally alleged in the petition that "Decedent's

Will creates an unequivocal non-terminable obligation to pay to

her husband, or his estate, $3,750 per month for 10 years".

Respondent's answer denied petitioner's assignment of error in

that regard and denied the facts alleged by petitioner in support

of the $450,000 deduction.    The Court granted respondent leave to
                              - 12 -

amend her answer, and she increased the estate tax deficiency by

treating, as a gift, decedent's cancellation of her daughter's

obligation to pay for the 25 percent of agency stock.   The Court

granted petitioner leave to amend its petition, and petitioner

subsequently alleged that decedent's will made a bequest of the

agency stock to her daughter subject to a condition precedent.

Since the asserted condition, payment of $3,750 a month for 10

years, was not met, petitioner alleged that the bequest to

decedent's daughter failed, and that the agency stock passed to

the surviving spouse as the residuary beneficiary.   Petitioner

alleged that the entire value of decedent's agency stock,

$567,534, qualifies for the marital deduction.   After trial, but

before opening briefs were due, petitioner and respondent filed a

"Stipulation of Settled Issue" that stated:

          Since the payments called for in the codicil,
     namely the sum of $3,750.00 per month for a period of
     ten years, have not been made, petitioner no longer
     contends that the payments, had they been made, would
     have qualified for the marital deduction pursuant to
     I.R.C. section 2056.

                              OPINION

     The issues in this case revolve around the decedent's

cancellation of her daughter's debt and the provisions of

decedent's will and codicil relating to the agency stock and the

monthly payments.   The language in the will concerning the agency

stock was drafted by decedent, and the parties dispute its

interpretation.
                               - 13 -

A.   Who Inherited the Agency Stock

     1.     Contentions of the Parties

     Respondent argues that Patricia Low inherited the agency

stock.    According to respondent, the language "with the

understanding that she will pay" should be interpreted in one of

two ways.    Either the language subjected the bequest of agency

stock to a charge to pay her father $3,750 a month for 10 years,

or it created a condition subsequent to the bequest.

     Under New Jersey law, a charge against property gives the

holder of the charge a lien against the property to ensure

payment.    Olsen v. Wright, 119 N.J. Eq. 103, 108, 181 A. 182, 185

(1935).    It is undisputed that decedent wanted to treat her

children equally, though she wanted Patricia Low to eventually

own the agency.    Originally, the will called for $5,000-a-month

payments for 10 years ($600,000) to be made to Patricia Low's

brother.    Decedent believed the agency was worth $1 million.

Decedent sold 25 percent of the agency to her daughter in 1989 on

an installment basis that required payments of $2,500 a month for

10 years ($300,000).4   Respondent argues that the math of this

arrangement is compelling; if 25 percent of the stock can be

purchased for $300,000 of payments, then $600,000 of payments


     4
        A loan amortization   schedule was prepared by decedent's
accountant which shows that   this stream of payments, when
discounted for a 10-percent   annual interest rate, equates to a
beginning principal balance   of $189,177.91 or $7,567.12 a share.
This value was also used in   the agreement.
                               - 14 -

under identical terms equates to 50 percent of the value of the

agency.   According to respondent, decedent wanted to give all of

the stock to her daughter while wanting her son to receive cash

for one-half of the agency's value, thereby creating a charge

against agency stock.

     Respondent points out that after decedent's stock ownership

fell to 75 percent, she executed the codicil to her will that

decreased the monthly payments required under the will

proportionately to $3,750 (75 percent x $5,000).    Decedent's

codicil also directed that Patricia Low had to make to her father

only one-half of the $2,500 payments called for under the

agreement.   The codicil did not say what was to happen to the

other half of the payments; respondent argues that the other half

of the payments were to be forgiven.    Consequently, Patricia Low

still would be paying $5,000 a month ($3,750 + $1,250) for almost

10 years (one-half the value of the agency stock) to own 100

percent of the agency stock.   The change in the recipient to the

surviving spouse was to insure that decedent's daughter-in-law

got none of the payments in a divorce settlement.

     Respondent further argues that decedent did not intend to

create a condition precedent, as petitioner contends.    Under New

Jersey law, if a condition precedent to a bequest fails, then the

bequest fails; the bequest is never made.   "[I]f a devise other

than a residuary devise fails for any reason, it becomes a part

of the residue."   N.J. Stat. Ann. sec. 3B:3-36 (West 1983).
                                - 15 -

Under decedent's will, if the bequest to her daughter failed, the

stock would pass to the surviving spouse as the residuary

beneficiary.   Since the surviving spouse had no insurance

business experience, and was not licensed to sell insurance,

respondent argues that decedent would never have allowed her

husband to inherit 75 percent of the agency's stock.

     Respondent's alternative argument is that the language

created a condition subsequent.    A condition subsequent under New

Jersey law would cause the stock to vest immediately in Patricia

Low but she would subsequently be divested of it if she failed to

make the payments.     Tizard v. Eldredge, 25 N.J. Super. 477, 481,

96 A.2d 689, 691 (1953).

     Respondent cites various New Jersey cases to aid in

construing decedent's will.    New Jersey courts do not favor

conditions in wills.     Parmentier v. Pennsylvania Co. for Ins.,

122 N.J. Eq. 25, 30, 192 A. 62, 65 (1937), affd. 124 N.J. Eq.

272, 1 A.2d 332 (1938).    However, if the testator's intent shows

that a condition is intended, then conditions subsequent are

favored over conditions precedent.       Id.    Respondent also points

out that if the language in question created a condition

precedent, as petitioner contends, then the stock ownership could

have been in limbo for 10 years had Patricia Low made the

payments, a situation that decedent would not have intended.

Respondent cites Tizard, which states:         "Where there is a

prolonged period of time prescribed by the words of the bequest
                                - 16 -

for its performance, it has been held to create a condition

subsequent".     Tizard v. Eldridge, 25 N.J. Super. at 481, 96 A.2d

at 691.

     Respondent also points out that Patricia Low acted as if she

were the sole owner of the agency after decedent's death; she

signed S corporation tax returns listing herself as the 100-

percent owner of agency stock and reported the corresponding

income or loss on her individual Federal income tax returns.

These actions indicate that Patricia Low believed she had

inherited the stock and had accepted the bequest, despite her

testimony to the contrary at trial.

     Petitioner argues that the stock bequest was subject to a

condition precedent; if the monthly payments were not made by

Patricia Low, then the condition would fail, and the stock would

pass under the residuary clause to her father.     Under New Jersey

law, gifts subject to a condition precedent do not vest until the

condition is met.     Tizard v. Eldredge, supra.   Under petitioner's

reasoning, since it is undisputed that Patricia Low did not make

the payments, the stock would pass directly from decedent's

estate to the surviving spouse and thus qualify for the marital

deduction.     Petitioner argues that even if the will is

interpreted as giving the stock to Patricia Low subject to a

charge to make monthly payments, the surviving spouse still

inherited something at decedent's death; namely, the right to

either a stream of payments or the stock.     This right, according
                               - 17 -

to petitioner, is an interest in the stock that qualifies for the

marital deduction.

     Petitioner also argues that Patricia Low paid no attention

to the agency's corporate tax returns and her individual tax

returns and that she did not notice that the returns treated her

as the sole shareholder of the agency.     Petitioner further argues

that nothing Patricia Low did after her mother's death could

possibly have a bearing on decedent's intentions when drafting

her will and codicil.

     In the alterative, petitioner argues that the will merely

gave Patricia Low an option to buy the stock.     Patricia Low

testified that her mother told her she would have an opportunity

to purchase the agency stock upon her mother's death, and

petitioner argues that decedent's attorney, Jan Seigel, supported

this interpretation.    Respondent counters by pointing out that

the testimony is self-serving, uncorroborated, and incredible

since the stock purchase agreement already gave Patricia Low an

option to purchase the agency stock upon her mother's death, and

her actions after her mother's death call her veracity into

question.

     Petitioner argues that the New Jersey doctrine of probable

intent controls the interpretation of decedent's will, not

general rules of will construction.     According to petitioner,

decedent would not have wanted her daughter to inherit any stock

if she did not fully and completely comply with her wishes, as
                              - 18 -

stated in the will and codicil.   Petitioner stresses that

decedent dealt with her daughter in a businesslike manner, even

in personal matters which involved money.   Petitioner believes

that the only two possible interpretations that respect

decedent's intent as to the stock are a condition precedent or an

option to purchase.   In either event, petitioner argues that the

doctrine of probable intent requires us to construe the will in a

manner that maximizes the marital deduction, citing In re Estate

of Erickson, 74 N.J. 300, 377 A.2d 898 (1977).

     2.    New Jersey Law

     As a general rule, State law determines the property rights

and interests created by a decedent's will, but Federal law

determines the tax consequences of those rights and interests;

E.g., Morgan v. Commissioner, 309 U.S. 78, 80 (1940).     Because

decedent died a resident of New Jersey, the parties agree that

New Jersey law governs the construction of her will.    See

Helvering v. Stuart, 317 U.S. 154, 162 (1942).    The decisions of

the Supreme Court of New Jersey are conclusive as to that State's

law, but we give "proper regard" to relevant rulings of the lower

State courts.   Commissioner v. Estate of Bosch, 387 U.S. 456, 465

(1967).   For petitioner to receive a marital deduction for the

value of the agency stock, it must establish that the stock

passed from decedent to the surviving spouse.    The resolution of

this threshold issue depends on the interpretation of the phrase

"I give, devise and bequeath all of my stock * * * to my
                                - 19 -

daughter, PATRICIA LOW, with the understanding that she will

pay".    We must determine whether this phrase creates a condition

precedent, a condition subsequent, a charge on the bequest, or an

option to purchase agency stock.

     "The judicial function in construing a will is to ascertain

and give effect to the probable intention of the testator."      In

re Estate of Conway, 50 N.J. 525, 527, 236 A.2d 841, 842 (1967).

The Supreme Court of New Jersey has given the following guidance

on will construction and the "doctrine of probable intent":

        While a court may not, of course, conjure up an
        interpretation or derive a missing testamentary
        provision out of the whole cloth, it may, on the basis
        of the entire will, competent extrinsic evidence and
        common human impulses strive reasonably to ascertain
        and carry out what the testator probably intended
        should be the disposition if the present situation
        developed. [In re Estate of Burke, 48 N.J. 50, 64, 222
        A.2d 273, 280 (1966).]

     We are no longer limited simply to searching out the
     probable meaning intended by the words and phrases in
     the will. Relevant circumstances, including the
     testator's own expressions of intent, Wilson v.
     Flowers, 58 N.J. 250, 262-63, 277 A.2d 199 (1971), must
     also be studied, and their significance assayed.
     Within prescribed limits, guided primarily by the terms
     of the will, but also giving due weight to the other
     factors mentioned above [citing In re Estate of Burke,
     supra], a court should strive to construe a
     testamentary instrument to achieve the result most
     consonant with the testator's "probable intent."
     [Engle v. Siegel, 74 N.J. 287, 291, 377 A.2d 892, 894
     (1977); emphasis added.]

     The obligation of a court * * * is to effectuate the
     probable intent of the testator when consideration of
     the will as a whole together with extrinsic evidence,
     demonstrates, under all the circumstances, that a
     patent or latent ambiguity exists in the language used
     and such intent, overcoming the mere literal reading of
                                  - 20 -

     the instrument, is thereby made "manifest." * * * [In
     re Estate of Munger, 63 N.J. 514, 521, 309 A.2d 205,
     209 (1973); citation omitted.]

See also N.J. Stat. Ann. sec. 3B:3-33 (West 1983).

     As both parties have argued, New Jersey also has specific

guidelines on will construction.        "[C]ourts favor the immediate

vesting of estates and will construe a condition to be subsequent

wherever possible, rather than precedent * * * unless such a

construction would be clearly inconsistent with the intention of

the testator."       Fidelity Union Trust Co. v. Egenolf Day Nursery

Association, 64 N.J. Super. 445, 455, 166 A.2d 402 (1960).        In

Tizard v. Eldredge, 25 N.J. Super. at 481, 96 A.2d at 691, the

Superior Court of New Jersey stated:

          When faced with the question of whether or not a
     devise or bequest is absolute or conditional, the
     construction making the bequest absolute will be
     preferred.

                 *      *    *    *      *    *    *

          Where there is a prolonged period of time
     prescribed by the words of the bequest for its
     performance, it has been held to create a condition
     subsequent. * * *

Where personalty "is devised to a person who is directed to pay a

legacy, the legacy is an equitable charge upon the devise unless

a contrary intention is expressed in the will or can be fairly

implied from its provisions."         D'Arcangelo v. D'Arcangelo, 137

N.J. Eq. 63, 68, 43 A.2d 169, 172 (1945).         However, the key for

construing wills remains the probable intent of the testator.

"Rules for construing wills are but guides, drawn from the common
                               - 21 -

experience of mankind, to assist the court in finding the

testator's intent."   Fidelity Union Trust Co. v. Robert, 67 N.J.

Super. 564, 574, 171 A.2d 348, 354 (1961).

     3.   Application of New Jersey Law

     We shall be mindful of the New Jersey Supreme Court's

language in Engle v. Siegel, supra, and start with the will to

ascertain decedent's intent.   Decedent herself drafted the

language whose interpretation is questioned.   Her will stated:

"I give, devise and bequeath all of my stock * * * to my

daughter", which clearly states an intent to make a bequest of

decedent's stock; the present tense is used.   The second part of

the sentence, "with the understanding that she will pay to my

son" indicates action that must be taken in the future, after the

daughter had inherited the stock; the future tense is used.

However, the exact meaning of the expression "with the

understanding" is sufficiently ambiguous that it is appropriate

to examine extrinsic evidence.   Wilson v. Flowers, 58 N.J. 250,

263, 277 A.2d 199, 207 (1971).

     At the time the codicil was drafted, decedent wanted two

things:   (1) For her daughter to own all of the agency stock, and

(2) for her daughter to pay for one-half of decedent's stock.5

Our will construction problem is caused by her daughter's failure


     5
        The daughter's obligation to make payments under the
agreement was forgiven by decedent on her deathbed, after the
codicil had been drafted.
                              - 22 -

to make the payments.   We must ask ourselves, how would decedent

resolve this situation if she knew of the problem?     In re Estate

of Burke, supra.

     We first deal with petitioner's argument that the will must

be construed to maximize the marital deduction.    The case cited

by petitioner, Estate of Ericson v. Ericson, 74 N.J. 300, 377

A.2d 898 (1977), does not support petitioner's argument.    The

court in Ericson specifically found that one of the intentions of

the testator was to minimize taxes through the use of the marital

deduction, and thus the court interpreted the will accordingly.

In our case, there is no evidence of an intent to minimize taxes,

much less utilize the marital deduction.    Therefore, an intent to

maximize the marital deduction will not be read into the will.

     We do not believe that decedent wanted to create an option

for her daughter to buy the stock.     Decedent wanted her daughter

to own the stock.   The daughter owned 25 percent of the agency

stock and already had an option to purchase the remaining stock

upon her mother's death.   The stream of payments was calculated

to equal only one-half the value of decedent's agency stock.

Decedent's own words were:   "I give, devise and bequeath"; these

are not words that a business person would use to create an

option.   Patricia Low's testimony that her mother wanted her "to

have the opportunity to buy the stock" upon her death is not

plausible as a true reflection of her mother's intent under the

circumstances.   Petitioner offered no other evidence to support
                               - 23 -

this theory.   Patricia Low consistently acted as if she owned 100

percent of the agency as shown by the New Jersey inheritance tax

return, the Federal estate tax return, the agency's Federal

corporate tax returns, and her Federal individual income tax

returns.   Although her actions after her mother's death do not

reflect on decedent's intent, they do reflect on Patricia Low's

credibility.   Contrary to her testimony at trial, we find it

implausible that Patricia Low, an experienced business person,

never noticed that numerous tax returns, all signed under the

penalties of perjury, listed her as the sole owner of the agency.

Patricia Low reported and paid income tax on 100 percent of the

agency's income after her mother's death.6   "We know of no rule

that uncontradicted testimony must be accepted by a court finding

the facts, particularly where, as here, the testimony is given by

interested parties."    Wood v. Commissioner, 338 F.2d 602, 605

(9th Cir. 1964), affg. 41 T.C. 593 (1964).   We find it highly

unlikely that in the will and codicil decedent intended to give

to her daughter merely an option to buy agency stock.

     Nor do we believe that decedent would have wanted her

daughter to have the stock subject to a charge to make the

installment payments.   A charge would mean that if Patricia Low

failed to make the installment payments, she would, nevertheless,

still own the stock.    Her father's only recourse would be to go


     6
         The agency was an S corporation.
                              - 24 -

to court to enforce the equitable lien on the stock.     The record

is replete with compelling evidence that decedent conducted

business only on her own terms.   Simply put, business

arrangements were done her way or not at all.   Decedent would not

have wanted her daughter to keep the stock if she did not follow

her wishes.

     Having eliminated the creation of a charge or an option to

purchase, we are left with a condition, precedent or subsequent,

as best reflecting the probable intent of decedent.    This

interpretation is consistent with petitioner's argument and

respondent's alternative argument on brief that decedent wanted

the bequest of stock to be subject to a condition.

     We believe the best indication of decedent's intent can be

derived from how she handled an earlier transaction with her

daughter, her sale of 25 percent of the agency stock to her

daughter.   The agreement, like the will, called for 10 years of

monthly payments.   The stock was issued in Patricia Low's name as

of the effective date of the agreement, January 1, 1990.

Although Patricia Low became the owner of 25 percent of the

agency stock on January 1, 1990, physical possession of the stock

certificate was to be withheld, by her mother's instruction,

until all the payments had been made.   When a single payment was

made late, decedent threatened to tear up her daughter's stock

certificate.
                                  - 25 -

     In summary, Patricia Low was issued agency stock at the

beginning of the transaction, not after all the payments had been

made.     Only physical possession of the stock certificate was

denied to her, a common security technique when dealing with the

sale of commercial paper.     Decedent's threatened remedy to deal

with a default was to divest her daughter of ownership of the

stock.

     We hold that the most probable construction of decedent's

will is that she wanted her daughter to have the stock upon

decedent's death, but to be divested of it should her daughter

fail to make the payments, a condition subsequent.     "Where there

is a prolonged period of time prescribed by the words of the

bequest for its performance, it has been held to create a

condition subsequent."     Tizard v. Eldredge, 25 N.J. Super. at

481, 96 A.2d at 691.

B.      Marital Deduction Issue

        1.   Law

        Section 2056(a) allows a marital deduction from the value of

the adjusted gross estate in "an amount equal to the value of any

interest in property which passes or has passed from the decedent

to his surviving spouse, but only to the extent that such

interest is included in determining the value of the gross

estate."     To obtain the marital deduction, an executor must

establish (1) that the decedent was survived by his or her

spouse; (2) that the property interest passed from the decedent
                               - 26 -

to his or her spouse; (3) that the property interest is a

deductible interest; and (4) the value of that property interest.

Sec. 20.2056(a)-1(b), Estate Tax Regs.    Item (1) is not in

dispute, and only petitioner has addressed item (4), which we

need not address for the reason stated below.    Deductions are a

matter of legislative grace; petitioner has the burden of showing

that it is entitled to any deduction claimed.    New Colonial Ice

Co. v. Helvering, 292 U.S. 435, 440 (1934).

     2.   Whether the Agency Stock Qualifies for the Marital
          Deduction

     We have held that the agency stock was inherited by Patricia

Low subject to a condition subsequent.    Patricia Low did not make

the payments called for in decedent's will.    Therefore, Patricia

Low was divested of her rights to the agency stock and they were

passed to her father, the surviving spouse.    However, at the time

of decedent's death, the agency stock did not pass to the

surviving spouse.    "It is well settled that the nature of the

interest in property passing to the surviving spouse and the

valuation of that interest are to be determined as of the time of

decedent's death."    Provident Natl. Bank v. United States, 581

F.2d 1081, 1086 (3d Cir. 1978) (citing Jackson v. United States,

376 U.S. 503, 508 (1964)); sec. 20.2056(b)-4(a), Estate Tax Regs.

Therefore, we hold that the agency stock is not eligible for the

marital deduction.
                               - 27 -

     3.   Whether the Stream of Payments Constitutes an Interest
          in the Agency Stock Which Qualifies for the Marital
          Deduction

     Even with the stock subject to a condition subsequent, the

surviving spouse inherited either the right to receive the stream

of monthly payments or, ultimately, the stock.   Petitioner argues

that since the surviving spouse was entitled to either the stock

or the stream of payments, he was vested in a property interest

in the stock that passed from decedent at her death.   Respondent

argues that, as no payments were actually made, there can be no

marital deduction since no property passed from decedent to the

surviving spouse.   Respondent also points out that petitioner has

settled this issue by entering into the following "Stipulation of

Settled Issue":

          Since the payments called for in the codicil,
     namely the sum of $3,750.00 per month for a period of
     ten years, have not been made, petitioner no longer
     contends that the payments, had they been made, would
     have qualified for the marital deduction pursuant to
     I.R.C. section 2056.

Focusing on the phrase "no longer contends", we will treat this

"Stipulation of Settled Issue" as a concession by petitioner.

     Respondent believes that petitioner has restricted itself to

arguing that the surviving spouse inherited the stock at

decedent's death, rather than an interest in the stock

represented by the payments.   Petitioner seems to treat the

concession as an abandonment of its original pleading that the

payments themselves qualify for the marital deduction.   However,
                                - 28 -

petitioner apparently believes that its amended petition leaves

it room to argue that the surviving spouse inherited either the

stock or an interest in the stock.       We believe that respondent's

interpretation is correct; petitioner has conceded arguing that

the stream of payments, however categorized, qualifies for the

marital deduction.7   Therefore, accepting petitioner's

concession, we hold that decedent's husband did not inherit an

interest in the agency stock that qualifies for the marital

deduction.

C.   Cancellation of Debt Issue

     Respondent first raised the cancellation of debt issue in an

amended answer.   Consequently, she bears the burden of proof on

this issue.   Rule 142(a).   The facts surrounding the cancellation

of Patricia Low's obligation to pay her mother under the

agreement are not in dispute.     While on her deathbed, decedent

canceled her daughter's obligation to make the payments called

for in the agreement; no reason was given by decedent.

Petitioner argues that decedent was not making a gift to her

daughter but was reducing the purchase price of the stock.

Petitioner further argues that decedent had no donative intent,

so there could be no gift.   No evidence was offered by petitioner


     7
        We note that the daughter, who neither made the payments
to her father called for in her mother's will, nor, as executrix,
ever caused the Agency stock to be transferred to her father,
argues that the estate is nevertheless entitled to a marital
deduction. We find this argument to be disingenuous.
                              - 29 -

to support this theory.   Respondent argues that donative intent

is not a requirement for a taxable gift, citing section 2512(b):

     Where property is transferred for less than an adequate
     and full consideration in money or money's worth, then
     the amount by which the value of the property exceeded
     the value of the consideration shall be deemed a gift,
     and shall be included in computing the amount of gifts
     made during the calendar year.

Respondent reasons that since the evidence shows that no

consideration was given by Patricia Low for the cancellation of

the debt, the amount of the gift must equal the debt, citing

section 25.2512-8, Gift Tax Regs.   Respondent is correct.

     The gift tax regulations provide:

     Transfers reached by the gift tax are not confined to
     those only which, being without a valuable
     consideration, accord with the common law concept of
     gifts, but embrace as well sales, exchanges, and other
     dispositions of property for a consideration to the
     extent that the value of the property transferred by
     the donor exceeds the value in money or money's worth
     of the consideration given therefore. * * * [Sec.
     25.2512-8, Gift Tax Regs.]

     The Supreme Court has interpreted these provisions as

follows:

     Congress chose not to require an ascertainment of what
     too often is an elusive state of mind. For purposes of
     the gift tax it not only dispensed with the test of
     "donative intent". It formulated a much more workable
     external test, that where "property is transferred for
     less than an adequate and full consideration in money
     or money's worth," the excess in such money value
     "shall, for the purpose of the tax imposed by this
     title, be deemed a gift . . ." And Treasury
     Regulations have emphasized that common law
     considerations were not embodied in the gift tax.
     [Commissioner v. Wemyss, 324 U.S. 303, 306-307 (1945)
     fn. ref. omitted.]
                               - 30 -

Decedent forgave a debt owed by her daughter, a family member.

No consideration was given for the cancellation.    "The

presumption is that a transfer between closely related parties is

a gift."   Estate of Reynolds v. Commissioner, 55 T.C. 172, 201

(1970).    Respondent has met her burden of proof on this issue,

and petitioner has offered no evidence, only conjecture, to

counter such a finding.    We hold that the cancellation of the

debt is a taxable gift from decedent to her daughter.

     To reflect the foregoing,

                                          Decision will be entered

                                     under Rule 155.
