Opinion
No. 44660.
October 6, 1941.
Ashley M. Van Duzer, of Cleveland, Ohio (William B. Stewart, Walker H. Nye, and McKeehan, Merrick, Arter Stewart, all of Cleveland, Ohio, on the brief), for plaintiff.
Joseph H. Sheppard, of Washington, D.C., and Samuel O. Clark, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, Sp. Assts. to Atty. Gen., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Action by the Central National Bank of Cleveland, as executor of the estate of William G. Wilson, deceased, against the United States of America, to recover estate taxes paid.
Judgment for plaintiff.
This case having been heard by the Court of Claims, the Court, upon the report of a commissioner and the evidence, makes the following
Special Findings of Fact.
1. William G. Wilson, hereafter referred to as decedent, a citizen of the United States and a resident of Cleveland, Ohio, died on November 30, 1935. Plaintiff, Central National Bank of Cleveland, the same corporation by change of name as Central United National Bank of Cleveland and Central National Bank Savings Trust Company, was named executor in his will, duly qualified as such in the Probate Court of Cuyahoga County, Ohio, on December 10, 1935, and still acts as such. Plaintiff has made no assignment or transfer of all or any part of the claim or claims sued upon in this action.
2. On November 16, 1936, plaintiff, as executor, filed with the Collector of Internal Revenue at Cleveland, Ohio, an estate-tax return, which showed a net estate tax of $147,795.52, which amount the plaintiff paid to the Collector on February 26, 1937. On November 16, 1937, the Commissioner of Internal Revenue determined a deficiency of $384,225.75. This determination allowed credit for an inheritance tax of $40,918.02, which had been paid to the State of Ohio, but it was further determined that if the required evidence should be furnished showing payment of total inheritance taxes to the State of Ohio equal to or exceeding eighty percent (80%) of the estate tax under the Revenue Act of 1926, 26 U.S.C.A. Int.Rev. Acts, page 145 et seq., credit would be allowed accordingly and the net deficiency tax would be $319,757.38. On December 9, 1937, plaintiff paid the Collector $319,757.38 of principal and $14,927.89 of interest on account of this deficiency determination, accompanying the payment with a waiver of restrictions against the immediate assessment and collection of the balance of the deficiency, and reserving the right to file claim for refund on the ground that the deficiency was erroneous for reasons stated, and reserving also the right to file the required additional evidence to obtain the maximum credit for state inheritance taxes which might be subsequently paid. Additional interest of $38.38 was paid April 19, 1938, and the sum of $1 was paid May 13, 1938.
On April 13, 1938, the Commissioner determined a further deficiency of $115,596.43 which he said would be reduced to $40,521.32 if and when evidence was submitted showing payment to the State of Ohio of inheritance taxes equal to 80 percent of the Federal estate taxes levied by the Revenue Act of 1926. On May 6, 1938, the plaintiff paid to the Collector at Cleveland on account of this additional deficiency the sum of $40,521.32, accompanied by a waiver of restrictions in the same qualified form as the previous waiver. On May 21, 1938, the plaintiff paid interest of $2,883.12 on said deficiency assessment. The total payments thus made were $508,074.22 of principal and $17,850.39 of interest.
3. On October 11, 1938, plaintiff filed with the Collector of Internal Revenue at Cleveland its claim for refund for $301,233.72 of the total estate tax so paid and for interest at 6 percent per annum thereon from February 28, 1937. The claim alleged, in substance, as grounds for the refund:
That none of three certain trusts or amendments, known as L 2623, L 798, and L 1528, and being plaintiff's Exhibits 14, 12 and 13, respectively, was a transfer intended to take effect in possession or enjoyment at or after the decedent's death or in contemplation of death within the meaning of Section 302(c).
That even if parts of said trust estates were includible in the gross estate of the decedent, the value as of the decedent's death of the said estates for years of the decedent's children in the trusts, computed at $83,644.82, should be excluded.
That the value of certain estates for years of the decedent's children in another trust created by the decedent, known as the "Bankers Trust Company trust," computed at $25,956.34, should be excluded from the gross estate.
That certain pledges made by the decedent, to wit: a pledge made to the Cleveland Community Fund and a pledge made to the John Carroll University Building Fund, which said pledges were paid by plaintiff as executor, should have been allowed as deductions from the gross estate.
On March 13, 1939, the Commissioner of Internal Revenue rejected the claim for refund in its entirety, for the reasons that the trusts hereinafter referred to were transfers made by decedent in contemplation of death, within the meaning of section 302(c) of the Revenue Act of 1926, as amended, 26 U.S.C.A. Int.Rev. Acts, page 227 et seq., and that evidence had not been submitted that certain pledges claimed as deductions had been made by the decedent in consideration of the gifts of others.
4. On the dates shown the decedent created the following trusts:
1. Trust originally created by agreement dated December 31, 1920 (known as L-2623), between the decedent and the Union Trust Company of Cleveland as Trustee, Central National Bank of Cleveland having succeeded the Union Trust Company as Trustee in the year 1933.
2. Trust originally created by agreement dated January 3, 1921 (known as L-798), between the decedent and Central National Bank Savings Trust Company.
3. Trust originally created by agreement dated May 5, 1928 (known as Trust L-1528 and sometimes as the Margaret W. Hoffman Trust).
The entire value of the property covered by these trusts was included by the Commissioner in the gross estate of the decedent.
On June 14, 1934, as to Trusts L-2623 and L-1528, and on June 15, 1934, as to Trust L-798, the three trusts were amended by three supplemental agreements between William G. Wilson, the respective trust beneficiaries and the trustee. After the decedent's death Trust L-2623 and Trust L-1528 were consolidated with Trust L-798.
5. On February 2, 1927, the decedent entered into another trust agreement with the Bankers Trust Company of New York as trustee, which provided for the payment of the net income of the trust estate to the decedent's son, Robert W.G. Wilson, until he should reach the age of thirty-five years, and then for the principal of the trust estate to be distributed to him, and which contained substantially the same provisions relating to the right of revocation by the decedent upon giving notice of intention to revoke in the first fifteen days of December of any year preceding revocation.
On June 14, 1934, this trust was amended by an instrument executed by the decedent to provide for the payment of the entire net trust income in equal shares to his three children. On June 15, 1934, the decedent's son, Robert W.G. Wilson, transferred and assigned to the decedent, or to the estate of the decedent if he should then be deceased, his right to receive the trust principal upon reaching the age of thirty-five years, and on June 16, 1934, the decedent executed an instrument relinquishing and canceling all his rights to modify or revoke the trust.
Plaintiff concedes that the value of the remainder interest in this trust, which is distributable to the decedent's estate upon Robert W.G. Wilson becoming thirty-five years of age, is includable in the gross taxable estate, but claims that in determining this remainder interest there should be deducted from the net value of the trust assets the present value as of the decedent's death of the income rights or estates of the decedent's three children which were not to terminate and did not terminate until September 21, 1939.
6. Prior to the amendments to the aforesaid four trusts, the income of the trusts was not taxed to the decedent, but decedent and his advisers were of the opinion that the income would be taxable to him under the proposed Revenue Act of 1934. Primarily, in order to prevent this, and, secondarily, in order to equalize the income from the trusts among decedent's three children, the amendments of June 1934 were effected. After having determined on the amendments to be made in order to avoid having the income from the trusts included in his own income for income tax purposes, the proposed amendments were considered from the standpoint of estate-tax liability. Decedent's tax adviser advised him that, according to the trend of decisions in the Supreme Court, in his opinion the property transferred by the four trusts would not be includible in his gross estate at death. In so doing, this adviser relied upon the decisions of the Supreme Court in May v. Heiner, 281 U.S. 238, 50 S.Ct. 286, 74 L.Ed. 826, 67 A.L.R. 1244, and probably on McCormick v. Burnet, 283 U.S. 784, 51 S.Ct. 343, 75 L.Ed. 1413, and Helvering v. Duke, 290 U.S. 591, 54 S.Ct. 95, 78 L.Ed. 521.
Later, when the Supreme Court decided the cases of Helvering v. St. Louis Trust Company, 296 U.S. 39, 56 S.Ct. 74, 80 L.Ed. 29, 100 A.L.R. 1239, and Becker v. St. Louis Trust Company, 296 U.S. 48, 56 S.Ct. 78, 80 L.Ed. 35, decedent's tax adviser notified him of these decisions, and decedent expressed gratification that they seemed to be on the right track.
7. In order to effectuate the amendments decided upon, the decedent on May 19, 1934, wrote his daughter Mrs. Margaret Dixon, one of the beneficiaries, with reference to the proposed amendments as follows:
"It would be particularly opportune if you decide to come at that time because you may or may not have noticed the changes which have been made in the revenue law signed a few days ago by the President. Among the changes so made they completely upset the victory which I won in the tax appeal matter which was pending for a couple of years and it effectively invalidates all of the different trust agreements making necessary an early and complete revision thereof or possibly an abandonment of the entire set-up. This latter, of course, I hope to avoid, and as soon as I can possibly get the time I expect to take competent legal advice as to the best plan of procedure. Insomuch as I hope to have all of this cleared up by or before June 10th and there may be important papers to execute, it would be an advantage and save correspondence should you be here."
On June 6, 1934, he wrote her again on the same subject and stated:
"To allay any undue anxiety or alarm which you may have felt respecting the Trust situation, let me give you briefly the high spots and a little history.
"The various Trust agreements contain provisions whereby they might be cancelled upon my taking an affirmative action in one year and following it with corresponding action during the next year. In other words, they could not be cancelled in any one year, and this corresponded with the provisions of the tax law defining such Trusts which may not be re-vested in the donor `in any taxable year.'
"Under the new Revenue Act the condition above quoted is now being eliminated so that in effect it invalidates all of these Trusts and makes the income thereon from January 1, 1934, taxable to me instead of to the beneficiaries. This, of course, would present an impossible, unjust, and intolerable burden.
"We have had numerous conferences with the Trust Company and legal authorities here and likewise with and through the Bankers Trust Company in New York. As a result we have determined upon a plan which should work satisfactorily for all concerned."
In that letter decedent further advised his daughter that his son, Robert, and one of the bank officials would bring the necessary papers east in order to acquaint her with them and obtain her approval and cooperation. Mr. Braley, the bank official, and the decedent's son went to New York and consulted with officials of the Bankers Trust Company about the form of the amendments to the trust, of which the Bankers Trust Company was trustee. The bank was satisfied with the amendments presented. They then went to Greenwich, Connecticut, where they obtained the signature of decedent's daughter, Mrs. Ruth Ermini, and then to Washington where they interviewed the other daughter, Mrs. Dixon, and secured her consent.
8. William G. Wilson, born February 23, 1871, was sixty-four years of age on November 30, 1935, the date of his death. He executed his last will and testament on July 24, 1934.
Until the date of his death decedent was active in his business, he was a hard worker, energetic and alert, always good-humored, and never melancholy. His entire career was devoted to the insurance business, in connection with which he operated offices in Cleveland as General Manager for Ohio of the Aetna Affiliated Group of Companies. His business was prosperous and from it he earned a large income from about the year 1906. For a number of years prior to his death (excluding the two worst depression years) his yearly business income, apart from his income on investments, averaged at least $100,000.
The decedent's family consisted of his wife, who died August 31, 1929, and three children, Margaret W. Dixon, Robert W.G. Wilson and Ruth W. Ermini, who are respectively 41, 35, and 31 years of age.
There was no change in the decedent's habits or activities during the years preceding his death. It was his custom to reach his office between eleven and twelve o'clock each morning and to work hard until rather late in the day or into the evening. This procedure continued up to the time of his death and there was no apparent cessation of business or other activities or diminution in vigor at any time.
9. The decedent's health was apparently good all of his life, except for head colds once or twice a year. He never had any apparent illness and never complained about his physical condition to his family, friends, or associates. He took good care of his health. Thus it was his custom to have periodical check-ups made by his doctor and dentist, and he had periodical urine examinations made by a company engaged in that business. During the discussions preceding the trust amendments no mention was made of the subject of Mr. Wilson's health.
On July 11, 1933, the decedent obtained a $15,000 life insurance policy from the Mutual Life Insurance Company of New York, for which he was examined by Dr. John A. McVean of Cleveland, since deceased. The medical examiner's report was entirely favorable. At the time of the issuance of the policy, an additional $25,000 of life insurance to be issued in two other policies was made available to him by the company, but he later declined to accept them.
On December 20, 1934, the decedent went to the Cleveland Clinic, where he registered for examination with Dr. George Crile, Sr. A complete physical examination was made by Dr. George Crile, Jr. The decedent stated that three days before, while sitting in his office, he experienced a sensation of fullness, as if something were expanding inside his chest, rising into the neck and under the ears, seeming to hold the chin up. He further stated that belching with these attacks seemed to relieve it, and that he "was in perfect health" until three days before, when he was struck with this sensation. At that time the examination disclosed that there was no pain, no radiation of any sensation to the arms, but the patient noticed a choking sensation as if he were out of breath. There was no vomiting, no chest pain, and he had never been jaunddiced. Symptoms were definitely accentuated by effort. Patient had just returned from a fishing trip in Florida, but he had not been drinking. He had smoked much more than usual, about a pack a day. All symptoms were rapidly improving. Patient wondered if he had heart trouble.
The general examination was comprehensive. The only abnormalities revealed were a very slight elevation of blood pressure, not inconsistent with decedent's age, a slight inflammation of the gums, a few hemorrhoidal tabs, and an enlarged prostate, which, however, was smooth and of normal consistency.
Laboratory tests were then taken. An X-ray of the colon "showed a diverticulosis, that is, little out-pocketings off the colon, a very common condition in older people and of very little clinical importance." An X-ray of the chest showed a nodule about an inch and a half in diameter at the base of the left lung. This was an incidental discovery in the course of an examination of the heart by X-ray. This was considered to be a benign tumor, probably a chondroma. The decedent was told that it was benign.
By gastric analysis it was found that decedent was low in stomach acid, a minor abnormality. The examination disclosed a spastic condition of the colon, in that the colon did not relax as much as it should and a condition of tenseness and pain comparable to muscle cramp might take place. The decedent was also examined by Dr. A.C. Ernstene, one of the Clinic's specialists in heart and circulatory diseases, who was asked to give an opinion whether the symptoms complained of by the decedent prior to his examination indicated any heart disease. An electro-cardiogram and an X-ray of the chest were taken. Dr. Ernstene's conclusions were that there was no evidence that the symptoms were related to the heart, but that they were due to indigestion; that the heart was normal.
On December 29, 1934, Dr. Crile, Jr., sent the decedent a detailed report of the examination, which stated in substance the findings above set forth, and that there was no evidence of organic heart disease. He was advised to have a recheck made in about a month to make certain that the chondroma or benign tumor was not enlarging.
The decedent returned to the Clinic on January 27, 1935, and X-rays were taken of the chest wall, which showed no change in the size of the tumor. On July 17, 1935, a final X-ray was taken.
10. In the latter part of November 1935, three days preceding his death, the decedent went from his office to the final dinner banquet of the Cleveland Community Fund, after which he took a train to New York. His son was in New York at the time and had dinner with his father there on Thanksgiving evening, at which time the decedent appeared in good health and spirits. The decedent was going with a party of nineteen or twenty New York businessmen on a private car on a two weeks' fishing trip to Florida. He had taken several similar trips and was looking forward to this one. On the following evening, a couple of hours before the decedent took his train his son talked to him on the telephone. Nothing was said about his health. The decedent died suddenly on the train in South Carolina on the following day, November 30, 1935. His body was removed at Savannah, Georgia, where a death certificate was issued by the coroner showing that angina pectoris was the cause of death. He had never had a heart attack before the one which caused his death.
11. None of the four trusts were made in contemplation of death, nor were the amendments in 1934 made in contemplation of death.
12. The decedent had executed certain agreements for subscriptions or pledges to John Carroll University and the Cleveland Community Fund which are set forth in the second cause of action in the petition. Plaintiff paid a total of $7,150 on these pledges after the decedent's death and claims this amount should have been allowed as a deduction from the gross taxable estate. As these subscriptions were made in consideration of the gifts of others, defendant concedes that plaintiff is entitled to the deduction of this amount from the gross estate.
During the years 1920 to 1928 the deceased created four trusts for the benefit of his wife and children, reserving the right to alter, amend, modify or revoke any one of them in any calendar year, if notice of such intention were given the trustee within the first 15 days of December of the preceding calendar year. Prior to the Revenue Act of 1934 it was held that the income from these trusts was not taxable to the settlor; however, that Act required the settlor to include the income from each of them in his own income. To avoid this, and also for the purpose of equalizing the income from them among his children, decedent in the middle of June 1934 amended them so as to surrender his right of revocation or amendment.
However, three of the trusts, after amendment, provided that if the deceased should be living at midnight on December 31, 1937, the trusts should terminate and their corpora should be paid over to the settlor. The amendment to the other trust directed the trustee to transfer its corpus to the grantor or his estate when the original beneficiary thereof, deceased's son Robert, arrived at the age of thirty-five years.
The plaintiff concedes that the remainder value of the last mentioned trust, known as the W.G. Wilson trust, should be included in decedent's gross estate; the controversy is over whether or not any part of the value of the corpora of the other three trusts should be included in his estate. The defendant says that the entire value of the trust property of each of these three trusts should be included in decedent's estate. The plaintiff says that no part of the value of the property covered by these trusts should be included, but that in no event no more than deceased's reversionary interest therein should be included.
1. The defendant says that the value of the trust property should be included in deceased's gross estate because the transfers of this property were made in contemplation of death, or that they were intended to take effect in possession and enjoyment at or after decedent's death, by reason of the provision that the trust property should be paid over to the decedent if he should be living at midnight on December 31, 1937.
There is no merit in defendant's contention that the trusts were made in contemplation of death. One was executed on December 31, 1920, another on January 3, 1921, another on February 22, 1927, and the last one on May 5, 1928. When the first trust was executed the deceased was 48 years old, and when the last one was executed he was 56 years old, and at all times he was in perfect health. There is nothing whatever to indicate that the trusts were originally created in contemplation of death. They were amended in the middle of June, 1934, when decedent was slightly over 63 years of age, and when he was in perfect, if not vigorous, health, and the record leaves no doubt of his purpose in amending the trusts. That purpose was to prevent the inclusion within his gross income of the income from the trusts, and, secondarily, to equalize among the beneficiaries the income from the four trusts. There is not the faintest suggestion that in so doing he was actuated by thoughts of death.
2. On the other hand, plaintiff apparently concedes that under the decision of the Supreme Court in Helvering v. Hallock, 309 U.S. 106, 60 S.Ct. 444, 84 L.Ed. 604, 125 A.L.R. 1368, all of the trusts except the W.G. Wilson trust were intended to take effect in possession and enjoyment at or after decedent's death, and that the value of his reversionary interest in the property should be included in his gross estate. It, however, says that notwithstanding this decision, no part of the value of the property should be included in decedent's estate, because when the trusts were amended they were amended in reliance upon and to conform with the decisions of the Supreme Court in May v. Heiner, 281 U.S. 238, 50 S.Ct. 286, 74 L.Ed. 826, 67 A.L.R. 1244, McCormick v. Burnet, 283 U.S. 784, 51 S.Ct. 343, 75 L.Ed. 1413, and Helvering v. Duke, 290 U.S. 591, 54 S. Ct. 95, 78 L.Ed. 521, under which no part of the value of the property was includable in decedent's estate. These decisions, it says, are in conflict with the decision in Helvering v. Hallock, supra, and that decision should not be applied retroactively.
The plaintiff further says, if incorrect in the foregoing, that the trusts were maintained for some two weeks after the decisions in Helvering v. St. Louis Trust Co., 296 U.S. 39, 56 S.Ct. 74, 80 L.Ed. 29, 100 A.L.R. 1239, and Becker v. St. Louis Trust Company, 296 U.S. 48, 56 S.Ct. 78, 80 L.Ed. 35, and that under these decisions no part of the value of the property would be includable in decedent's gross estate, and the trust having been maintained in reliance upon these decisions, the decision in Helvering v. Hallock, supra, should not be applied retroactively so as to include in his estate some part of the value of the property.
In May v. Heiner, 281 U.S. 238, 50 S.Ct. 286, 74 L.Ed. 826, 67 A.L.R. 1244, the trust created a life estate in the settlor's husband and, after his death, if he predeceased her, a life estate in herself, with remainder in her children. The entire fee was disposed of by the instrument; the beneficiaries acquired no additional right by the settlor's death. At the grantor's death the beneficiaries came into the possession of the thing, title to which had already been given them. Hence, it was held there had been no transfer at death subject to the tax.
The next decision in point of time was Klein v. United States, 283 U.S. 231, 51 S. Ct. 398, 75 L.Ed. 996. In this case the grantor conveyed a life estate to his wife and also the entire fee, but the latter only in the event that she should survive him. If she died first her interest in the property ceased. It was held that since she would receive the remainder only on the contingency of the grantor's prior death, she did not acquire by the deed a vested remainder, but only a contingent one, and since the death of the grantor was necessary in order that the grantee's contingent remainder might become a vested remainder, the transfer was held subject to the tax.
In Burnet, Commissioner of Internal Revenue, v. McCormick, 7 Cir., 43 F.2d 277, the trust instrument provided for the payment to named beneficiaries of the income from the trust property after the grantor's death. It also provided for the termination of the trust instrument on the death of the last survivor or sooner if the grantor and one of the beneficiaries consented thereto. On termination of the trust the property was to be reconveyed to the grantor if she should then be living; otherwise it was to go in the way directed. This was held to be taxable by the Circuit Court of Appeals, but it was reversed by the Supreme Court in a per curiam opinion, 283 U.S. 784, 51 S.Ct. 343, 75 L.Ed. 1413, on the authority of May v. Heiner, 281 U.S. 238, 50 S.Ct. 286, 74 L. Ed. 826, 67 A.L.R. 1244.
In Helvering, Commissioner, v. Duke, supra, there was a provision in the trust instruments providing for the reversion to the grantor of the trust property in case the beneficiary predeceased him. J.B. Duke, the grantor, was designated as trustee to act during his lifetime. He was required under the instrument to pay to the beneficiary only such part of the income as he thought best; but after his death his successor trustee was required to pay a designated part of the income, and, under one of the trusts, a designated part of the principal at certain times. Both the Board of Tax Appeals, 23 B.T.A. 1103, and the Circuit Court of Appeals, 3 Cir., 62 F.2d 1057, held the transfer nontaxable. This was affirmed by the Supreme Court without opinion, the court being equally divided ( 290 U.S. 591, 54 S.Ct. 95, 78 L.Ed. 521).
These were the cases on which the deceased is said to have relied, or which he should have considered. The facts in none of them were the same as in the case at bar. In no one of them, unless in McCormick v. Burnet, supra, could the interest of the beneficiaries be divested out of them during their lifetimes and vested in the grantor, as is the case here. In this case the interest of the beneficiaries would have been defeated had the grantor lived until December 31, 1937; in none of the others, with the possible exception stated above, could they have been defeated by any contingency that might occur during their lives. The prior death of the grantor in this case ripened their defeasible interest into an indefeasible one. In May v. Heiner, supra, the interest of the beneficiaries was in no way affected by the grantor's death, but his death did have some effect on their rights in McCormick v. Burnet, supra. In the Duke case the interest of the beneficiary was affected by the death of the grantor, in that prior to his death her return from the trusts was uncertain, but after his death was definite and fixed, and also in that after his death she could dispose of the remainder. In the Klein case the life estate of the beneficiary was increased by the acquisition of the remainder into the full fee on the death of the grantor.
Such was the state of the law when these trusts were amended. We dare say no lawyer would have been willing to say that under these decisions there could be no doubt that the trusts as amended would definitely come within the decision in the Klein case or within the rule of one of the others. At any rate, the justices of the Supreme Court were in sharp disagreement about it. The majority of the court in the St. Louis Trust Company cases thought similar trusts were not controlled by the rule of the Klein case; four justices thought they were. In Helvering v. Hallock, the majority of the court said the St. Louis Trust decisions were in conflict with the Klein decision and overruled the St. Louis Trust decisions; the Chief Justice apparently saw no conflict, but thought the case there was controlled by the Klein decision; two justices thought the St. Louis Trust decisions were a logical outgrowth of May v. Heiner and McCormick v. Burnet, and were not inconsistent with the Klein case. Under such circumstances it clearly cannot be said that any definite rule of property had been established by these decisions. The rule of stare decisis is only applicable where the law has been settled, not when it is uncertain.
About eighteen months after the trusts were amended the Supreme Court decided the two St. Louis Trust Company cases. This was about two weeks before decedent died. Plaintiff says that the trusts were maintained although not created, in reliance on these two decisions. They do fit plaintiff's case.
In Helvering v. St. Louis Trust Company, 296 U.S. 39, 56 S.Ct. 74, 80 L.Ed. 29, 100 A.L.R. 1239, the grantees were vested with the full fee at the time of the execution of the instrument, but the grantor retained a reversionary interest in the property, under which the property was to be reconveyed to him if the beneficiaries predeceased him. Because in the Klein case the death of the grantor ripened a contingent remainder interest into a vested one, whereas, in the St. Louis Trust cases the trust instruments created a vested interest, subject to be divested, the majority of the court said the two cases were distinguishable. The Chief Justice and Justices Stone, Cardozo, and Brandeis dissented. This was the first time the court had said that the difference between a contingent remainder and the possibility of a reverter affected the taxability of the transfer. Plaintiff says, although decedent did not create the trusts in reliance on these decisions, he did not alter them after their announcement, and therefore relied upon them, and because of this the rule announced in them should be held applicable, and the rule announced in Helvering v. Hallock, supra, should not be applied retroactively.
The St. Louis Trust Company decisions were announced about two weeks before decedent died; the trusts had been amended some eighteen months previously. They were amended for the primary purpose of preventing the plaintiff's decedent from being liable for income taxes on the income from them, and to equalize the income to the beneficiaries, and not to bring them within any supposed rule exempting the transfer from estate taxes. It is true this feature was not ignored by decedent's advisers, but it was only incidentally considered; it was not the motivating cause of the amendments. And, gratifying though it was, no doubt, that the Supreme Court in the St. Louis Trust cases had held that such transfers were not subject to the estate tax, such decisions affected neither one way nor the other the grantor's primary purposes, to escape income-tax liability and to equalize the income among the beneficiaries. Had it been the grantor's purpose in amending the trusts to escape estate tax, there would be more weight to the argument.
But, even so, can it be said that because a taxpayer correctly divines in advance what the Supreme Court is going to say about some act he takes, does he acquire some vested right from its later decision upholding that act, which later decision still later turns out to have been wrong? We know of no such rule of law. We know of no principle upon which such a rule of law could be based. The taxpayer did not act in reliance on the previously announced rule in the St. Louis Trust cases; he acted without any pronouncement, hoping he was right. No decision induced him to act in a certain way; he acted without any decision.
It is true he could have surrendered his reversionary interest if the decision had gone the other way; but there are many other considerations that might have induced him not to do so. Whether he would have done so or not, none can say.
The Supreme Court did not limit the decision in Helvering v. Hallock to cases thereafter arising, and we must hold that it, and not the St. Louis Trust Company decisions, decides plaintiff's rights. Under it we hold that an interest in the property transferred took effect in possession or enjoyment on the grantor's death.
3. This makes it necessary for us to determine the extent of the value of the trust property which should be included in decedent's gross estate. On the trial of the case the parties entered into the following stipulation:
Should this court determine that the transfers involved in the case were made to take effect in possession or enjoyment at or after the decedent's death, the estate would be entitled to reduce the value of the corpora of the various trusts involved by the values at the date of the decedent's death of the interests of the trust beneficiaries. Such deduction would produce a refund to the plaintiff in an amount not now readily ascertainable.
The defendant now asks to be relieved of this agreement and asks the court to hold that the entire value of the property should be included in the gross estate, since it says the court in Helvering v. Hallock, supra, said, impliedly at least, that this should be done. We find no such indication from the decision in the Hallock case. As the plaintiff points out in its reply brief, the Government, before the Circuit Court of Appeals in the Hallock case and in its petition for certiorari to the Supreme Court therein, conceded that it was only the remainder interest or reversionary interest which was subject to the tax. No issue was made before the Supreme Court as to the extent of the value of the trust property to be included, and after the decision in the Hallock case the deficiency was computed upon the value of the remainder only and this was done with the consent of the defendant.
In Reinecke v. Northern Trust Co., 278 U.S. 339, 347, 348, 49 S.Ct. 123, 125, 73 L. Ed. 410, 66 A.L.R. 397, the court said of the section of the Revenue Act under consideration: "In its plan and scope the tax is one imposed on transfers at death or made in contemplation of death and is measured by the value at death of the interest which is transferred. [Italics ours.]"
This is further indicated by Justice Stone in his dissenting opinion in Helvering v. St. Louis Trust Company, supra [ 296 U.S. 39, 56 S.Ct. 77, 80 L.Ed. 29, 100 A.L.R. 1239], in which he says that the section imposes a tax "on the value of the interest which is shifted from donor to donee on the former's death."
In Klein v. United States, supra, it appears that the tax was assessed on the value of the property "after deducting therefrom the value of the life estate."
It would be difficult to reach any other conclusion, for the Act, § 402, 40 Stat. 1097 provides for the inclusion within the gross estate of property "To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust * * * intended to take effect in possession or enjoyment at or after his death."
The Act, therefore, expressly says that there should be included in the gross estate only that interest which was intended to take effect in possession or enjoyment at or after death. It must follow therefrom that the interest in the property which had already vested in the beneficiaries and which was not transmitted by death is to be excluded from the gross estate.
4. There is one further issue in the case, the right of the plaintiff to deduct two pledges made by the decedent during his lifetime, one to John Carroll University and the other to the Cleveland Community Fund. The defendant now concedes that these deductions were proper, and we agree. Charles J. Brown et al., Executors, v. United States, 37 F. Supp. 444, 93 Ct.Cl. 217.
5. The plaintiff is entitled to a credit of the Ohio inheritance taxes, computed in accordance with this opinion. This credit will be allowed when the taxes are paid.
If the parties are unable to stipulate as to the following matters, the case will be referred to a commissioner for the taking of proof thereon: (1) the value of the interests transmitted at death of decedent, computed in accordance with this opinion (the petition alleges the value of the interests transferred at death, but there is no proof thereon); (2) the amount of Ohio inheritance taxes paid; and (3) the correct amount of estate tax due or the refund due, computed in accordance with this opinion. The entry of judgment will be withheld until the incoming of this stipulation or a report of the commissioner. It is so ordered.