Opinion
Docket No. 109861.
1943-03-17
ESTATE OF CHARLES DELANY, DECEASED, HOWARD S. DELANY, ET AL., EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Frank A. Moorshead, Esq., for the petitioners. Lewis S. Pendleton, Esq., for the respondent.
Decedent died suddenly in 1937 from coronary thrombosis at the approximate age of 80 years and 7 months. In 1917 he transferred a life insurance policy for $10,000 to his son as trustee, with instructions to invest the proceeds and pay the income in equal shares to his two daughters for life, with remainder over to their issue. In 1923 decedent conveyed to another trustee life insurance policies aggregating $200,000 and bonds of the face amount of $195,000, the income to be paid in equal shares to his two daughters for life, then to their issue, with remainder over to issue of the daughters when they attained the age of 21 years. In 1935 decedent transferred to trustees certain securities valued at $177,495.24, the income to be paid in equal shares to his two daughters for life, and thereafter to their issue per stirpes, with remainder over to decedent's lineal descendants and others, upon certain contingencies. All three trusts were irrevocable, and neither contained any express provision for the return to decedent or his estate of the corpus or any legal interest therein. In 1935 decedent also made an unconditional gift to his son of securities valued at $86,126.38. Held, the transfers to the trusts were not intended to take effect in possession or enjoyment at or after decedent's death, Commissioner v. Kellogg, 119 Fed.(2d) 54; held, further, on the facts, none of the transfers to the trusts, nor the gift to the son, was made in contemplation of death. Frank A. Moorshead, Esq., for the petitioners. Lewis S. Pendleton, Esq., for the respondent.
Respondent determined a deficiency in estate tax in the amount of $176,380.16, based upon a number of adjustments, some of which are not in controversy here. The issues for decision are whether or not certain gifts made by decedent during his lifetime to trustees for the benefit of his children and a gift made directly to his son constituted transfers intended to take effect in possession or enjoyment at death or were made in contemplation of death, within the meaning of section 302(c) of the Revenue Act of 1926, as amended.
FINDINGS OF FACT.
Howard S. Delany and Ada H. Donaghy are the executors of the estate of Charles Delany, deceased. Howard S. Delany resides at Bryn Mawr, Pennsylvania. The estate tax return was filed by the executors with the collector of internal revenue at Philadelphia, Pennsylvania, on December 19, 1938.
Decedent died testate on September 18, 1937, survived by three children, a son, Howard S. Delany, born in 1884, and two daughters, Ada H. Donaghy, born in 1886, and Sophia H. Powell (formerly Sophia H. Delany) born in 1892. Decedent's daughter Ada had two children, born in 1913 and 1923, respectively. Decedent's sister Rebecca S. Watson had three children born in 1884, 1886, and 1902, respectively, and three grandchildren born in 1909, 1913, and 1917, respectively. Decedent's sister Emily J. D. Asbury had three children and six grandchildren, two of the latter being born in 1928, two born in 1931, one born in 1935, and one born in 1938.
On August 21, 1917, decedent transferred to his son Howard S. Delany all of his right, title, and interest in a certain life insurance policy for $10,000, and on August 31, 1917, at the request of decedent, Howard S. Delany executed a written instrument in which he acknowledged and declared that he held title to such insurance policy, and all beneficial interests therein, as trustee for the benefit of decedent's two daughters, Ada H. Donaghy and Sophia H. Delany, in equal parts or shares. The instrument further recited that the proceeds of the insurance policy, when realized, should be invested in securities and the income therefrom paid over to decedent's two daughters for an during the whole term of their natural lives, for their sole and separate use and benefit, free from control of any present or future husband or husbands. Upon the death of either of decedent's daughters, leaving issue surviving, the principal sum was to be divided among such issue in such proportions as the deceased daughter by will might appoint, and, in default of appointment, the principal sum was to be divided among the respective issues, share and share alike. Should the daughters, or either of them, die without issue, then the principal was to be equally divided among the children, or issue thereof, of decedent, per stirpes. This trust will be referred to hereinafter as the insurance trust of 1917.
On July 17, 1923, decedent assigned and transferred certain policies of insurance on his life of the face value of $200,000 and certain bonds of the face value of $195,000 to the Provident Trust Co. of Philadelphia, as trustee, with directions to use so much of the net income as might be necessary to pay the premiums on the policies of life insurance and to pay the balance of the income to his two daughters for life, share and share alike, with spendthrift clause. If either daughter should die, leaving issue surviving, then the trustee was directed to pay the share of the principal held for the benefit of such deceased daughter to her issue as she might appoint by will, and in default of such appointment such share should be paid to the deceased daughter's issue living at her death, share and share alike, and to the then living issue of any then deceased child or children of the deceased daughter per stirpes. It was further provided that, if either of decedent's daughters should die without issue, then the trustee should hold the share of the trust principal theretofore held for the benefit of such deceased daughter and pay the net income, share and share alike, to such of decedent's children as were then living for their respective lives and to the living issue of any children of decedent then deceased, such issue to take per stirpes until they should attain the age of 21 years, when the trustee should pay over to them the shares of the principal of the trust then held for their benefit. The instrument by its express terms was declared to be irrevocable. This trust will for convenience be referred to hereinafter as the funded insurance trust of 1923.
The transfers to the funded insurance trust of 1923 were not made in contemplation of death.
On July 8, 1935, decedent transferred certain securities, valued for purposes of the estate tax at $177,495.24, to his son Howard S. Delany and the Provident Trust Co., as trustees. Under the terms of this trust, which will hereinafter be referred to as the 1935 trust, the income was to be paid in equal shares to decedent's two daughters for life, and thereafter to their issue per stirpes. Upon the death of either daughter without leaving issue surviving, the income which she had been receiving was to be divided equally, subject to certain payments to be made to her surviving husband, among decedent's surviving children per stirpes, and upon the death of the last survivor of the decedent's three children, and the two children of his daughter Ada, then living, the principal of the trust was to be divided among decedent's lineal descendants per stirpes, as and when they respectively should attain the age of 21 years. It was further provided that should all of decedent's children die without issue surviving, or should all of the issue of his children die before all of the principal of the trust had been distributed to them, then the trustees should pay one-half of the principal of the trust fund to the children of decedent's sister Rebecca S. Watson and the other half of the principal to the children of decedent's sister Emily J. D. Asbury, all in equal shares, issue of a deceased child or children to take the share the parent would have taken if living, and upon the death of the last survivor of the children of decedent's sisters, respectively, living at the date of the trust instrument, the trust principal was to be paid, per stirpes, to the grandchildren of decedent's sisters, as and when they should respectively attain the age of 21 years. The trust instrument, by its express terms, was declared to be irrevocable, and without power in decedent at any time ‘to revoke, change or annul‘ any of it provisions.
The transfers to the 1935 trust were not made in contemplation of death.
On July 8, 1935, decedent transferred to his son Howard S. Delany, by outright gift, securities having a value of $86,126.38 for estate tax purposes. Such transfer was not made in contemplation of death.
Decedent was born on February 12, 1857, and at the time of his death was approximately 80 years and 7 months of age. The principal cause of death was coronary thrombosis and coronary sclerosis. Other contributory causes were hypertension and arteriosclerosis.
Decedent was attended professionally by Dr. Samuel D. Spots of Philadelphia from time to time during the period January 5, 1934. to June 9, 1937. Dr. Spots examined decedent at his office for the first time on January 5, 1934. Decedent complained of eruptions of gas, constipation, and occasional pain in the abdomen. An examination disclosed nothing of consequence in decedent's abdomen. His liver was normal in size, and there was no enlargement of the spleen. His heart and lungs were normal.
The doctor saw decedent at his home on January 14, 1934, when he treated him for a severe cold. He saw decedent in March 1934 and in March 1935, at which later date Dr. Spots advised decedent to go to Dr. Willis Manges, professor of roentgenology at Jefferson Medical College, for a complete examination. The report of Dr. Manges disclosed that there was an abnormality of decedent's gastrointestinal tract, which was probably congenital; that the lungs were clear for a man of decedent's age; that the heart and aorta were possibly slightly large, pulsations were regular and fairly full; and that the kidneys, liver, and spleen were normal. Dr. Spots saw decedent on May 20, 1935, and on July 13, 1935. On both of these occasions decedent had no complaints. He saw him again on March 12, 1936, and on June 5, 1936, he made a general physical check-up. The electrocardiograph showed decedent's heart action was normal; blood pressure was 146 systolic, 80 diastolic.
The doctor saw decedent on July 13, 1936, and again on September 4, treating him for a slight cold. He saw decedent on September 18, 1936, when his blood pressure was 156 over 96. On January 10, 1937, decedent complained of a slight cold; his blood pressure then was 146 systolic, 80 diastolic; his heart action was good, and the gastrointestinal tract was functioning well. On February 12, 1937, the examination disclosed that decedent generally was in good health, his urine was negative, and his heart action good.
On April 27, 1937, decedent visited Dr. Spots for a physical check-up. At that time his condition was normal, so far as physical signs were discernible. His blood pressure was 144 systolic, 82 diastolic, and he was in unusually good spirits.
Dr. Spots saw decedent for the last time on June 9, 1937. Decedent complained of the heat, and of being somewhat tired. His heart action at that time was good; there were no murmurs and his pulse was regular.
Coronary thrombosis usually is an acute condition which may cause immediate death, although sometimes the occlusion may canalize and continue for a long period of time. Prior to his death decedent had no marked evidence of coronary thrombosis or coronary sclerosis, indicated by electrocardiogram or physical examination. From 1910 to the date of his death in 1937, decedent's health generally was very good; he had no illness which confined him to his bed, other than an occasional cold; he had no ‘last illness,‘ immediately preceding his death. In August 1937, shortly before his death, decedent went to visit his daughter at Green Farms, Connecticut. A few days before his death on September 18, 1937, decedent became somewhat ill and at the insistence of his daughter a doctor was called in. However, decedent at that time was not confined to his bed, and the family was not apprehensive of his condition. On the night of his death, his daughter Sophia and her husband had gone out to a dinner party. He was sitting up reading a book. Shortly afterwards, he had a violent coughing spell and his daughter Ada gave him a little whiskey and then ‘he was gone.‘
Decedent's mother died in 1923 at the age of 94 years; a cousin of his mother died at the age of 101 years, and another at the age of 103 years. Decedent's sister is still living at the age of 81 years.
Decedent's gross estate was returned by petitioners at a valuation of $763,754.22, and was determined by respondent at $1,489,091.17.
OPINION.
HILL, Judge:
Petitioners assigned as error the action of respondent in including in decedent's gross estate the value of (a) the one-third interest of decedent in the estate of Theodore M. Delany, (b) the corpus of each of the three trusts above described, and (c) the direct gift of securities made by decedent to his son in 1935. At the hearing, respondent conceded that the value of decedent's interest in the estate of Theodore M. Delany should be excluded from the gross estate herein. In respect of the remaining four issues, substantially only two questions are submitted for decision, namely, whether or not some of the transfers were made in contemplation of death and others intended to take effect in possession or enjoyment at or after death, within the meaning of subsections (c) and/or (g) of section 302 of the Revenue Act of 1926, as amended.
SEC. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the United States—(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death * * * except in case of a bona fide sale for an adequate and full consideration in money or money's worth.(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.
Respondent contends that the transfers to the insurance trust of 1917, to the funded insurance trust of 1923, and to the trust of 1935 were all intended to take effect in possession or enjoyment at decedent's death. He further contends that the funded insurance trust of 1923, the trust of 1935, and the gift of securities by decedent to his son in 1935 were transfers made in contemplation of death.
In support of his position on the question of whether or not certain of the transfers mentioned above were intended to take effect in possession or enjoyment at decedent's death, respondent points out that if the policies of insurance transferred to the insurance trusts had been held by decedent at the date of his death and had provided for payment of the proceeds to him or to his estate if he survived the designated beneficiaries, the retention of such reversionary interests would clearly require inclusion of the proceeds in the gross estate under the provisions of section 302(g), supra, citing, inter alia, Estate of John E. Cain, Sr., 43 B.T.A. 1133. Similarily, respondent says that the securities transferred to the funded insurance trust of 1923 and to the 1935 trust would plainly be includible in the gross estate under section 302(c), supra, if decedent had expressly provided in the trust instruments that the funds should revert to him upon the predecease of the named beneficiaries, citing Helvering v. Hallock, 309 U.S. 106, and Estate of Horatio Gates Lloyd, 47 B.T.A. 349.
Respondent argues that the only material distinction between the present case and those cited above lies in the fact that in the cited cases there were express provisions for the return of the property to the donors upon certain contingencies, whereas in the case at bar reversionary interests were reposed in the decedent by operation of law, resulting from his failure to provide for dispositions over in the event the designated beneficiaries should predecease him. This, respondent contends, is ‘a distinction without a difference,‘ in so far as it affects the underlying principle of the Hallock decision.
The argument of both parties here rests upon the premise that the question of the inclusion in the gross estate of the corpora of the three trusts, other than the proceeds of insurance policies, is governed by the provisions of section 302(c), and this view is supported by the plain language of the statute. But whether inclusion of the life insurance policies is dependent only upon the provisions of section 302(g), or the provisions of both subdivisions (c) and (g), is unimportant here if it should be determined that the transfers involved were not made in contemplation of death and were not intended to take effect at or after death. However, on this question, see Estate of John E. Cain, Sr., supra, involving the transfer of a life insurance policy intended to take effect at or after death, and May Billings et al., Executors, 35 B.T.A. 1147, 1153, involving life insurance policies assigned in contemplation of death. Also, cf. Old Point National Bank, Executor, 39 B.T.A. 343, 355.
In any event, it seems clear to us that if all the transfers to the trusts here in controversy fall without the ambit of section 302(c), no amount may be included in the gross estate in respect of the life insurance policies under subdivision (g), and our further discussion of the issues will be limited to the questions directly presented, namely, whether any of the transfers were intended to take effect at or after death or were made in contemplation of death.
Thus, the first question presented in respect of the corpus of each of the three trusts, including both insurance policies and securities, is whether or not the transfers were intended to take effect in possession or enjoyment at decedent's death.
All three trust instruments were irrevocable, and neither contained any express provision whereby the corpus, or any incident of legal ownership therein, would revert to the grantor. But respondent bases his argument upon the contention that reversionary interests were reposed in decedent by operation of law, that is, that the corpora would revert to decedent upon failure of the trusts, and that, under the doctrine of the Hallock case, such reposed interests bring the trusts within the gross estate of decedent as effectively as though expressly retained in the trust instruments. We can not agree with respondent's conclusions on this point.
In Helvering v. Hallock, supra, and in the companion cases decided therewith, the grantors expressly reserved contingent reversionary interests, which, the court held, were within the gross estates as transfers ‘intended to take effect in possession or enjoyment at or after death.‘ In Commissioner v. Kellogg, 119 Fed.(2d) 54, the Circuit Court of Appeals for the Third Circuit held that the trust property should not be included in the grantor's gross estate where there was no expressly reserved reversionary interest, the corpus being given to the children of the grantor and their issue, provided that if all of such children should predecease grantor and his wife, the property should pass to the then surviving next of kin of the grantor. It is to be noted, however, that a contingent reversionary interest was reposed in the grantor by operation of law by reason of the fact that the corpus would have reverted to him upon failure of the trust, as in the instant case.
The court distinguished the Kellogg case as not controlled by the Hallock decision on the very ground which respondent here urges is not material. We recognized the validity of that distinction in Estate of Edward Lathrop Ballard, 47 B.T.A. 784, and Estate of Edward E. Bradley, 1 T.C. 518, where we pointed out that the court in Commissioner v. Kellogg refused to apply the doctrine of the Hallock decision to a case where the trust property transferred by the decedent might revert to the decedent not by virtue of the terms of the trust instrument but because of the failure of the trust, and expressed the opinion that the Kellogg case imposed a logical limitation on the scope of section 302(c). See also Estate of Horatio Gates Lloyd, supra, and Estate of Flora W. Lasker, 47 B.T.A. 172, 179.
The corpus of the insurance trust of 1917 would have reverted to decedent by operation of law only in the event that his two daughters and their issue predeceased him. Likewise, no reversionary interest in the funded insurance trust of 1923 was reposed in decedent except upon the condition that he survived his two daughters and their issue, and in case the daughters died without issue, then the issue of any of decedent's children. And the return to the decedent of the corpus of the 1935 trust was dependent upon his survival of his two daughters and their issue, and all of the decedent's lineal descendants, as well as the children of the decedent's two sisters and their issue. In the case of the last named trust the possibility of reverter plainly approaches absurdity, and for that reason should be disregarded.
The case at bar is not distinguishable from Commissioner v. Kellogg, supra, and as the court there pointed out in its opinion, no inter vivos trust could ever be made that would not be includible in the grantor's estate for purposes of the estate tax if the Commissioner's contentions prevailed. We are not persuaded that the doctrine of the Hallock decision should be extended to include such a construction of section 302(c), supra. Accordingly, we hold that the transfers to the three trusts here in controversy were not intended to take effect in possession or enjoyment at decedent's death, and that no part of the corpus of either trust is includible in his gross estate for that reason.
The remaining question for decision is whether or not the funded insurance trust of 1923, the trust of 1935, and the gift of securities by decedent to his son in 1935, or either of them, constituted transfers made in contemplation of death and were on that account includible in gross estate. Whether or not these transfers were made in contemplation of death is a question of fact, which we must determine from the evidence before us. The phrase ‘in contemplation of death‘ means that the thought of death must be the dominant or impelling motive for the transfer. United States v. Wells, 283 U.S. 102. We have found as a fact that the transfers in controversy were not made in contemplation of death, within the meaning of the statute, for reasons which will be briefly discussed below.
The testimony in the record before us bearing on this question is singularly free of contradictions, and its credibility is unimpaired by conflict with any of the surrounding facts and circumstances. Eleven witnesses, including members of decedent's family, his physician, friends, and business associates, testified to decedent's health over a long period of years, extending up to the time of his death. This evidence overwhelmingly establishes that throughout decedent's adult life his health was unusually good; the witnesses used such terms as excellent, rugged, very good, robust. Decedent never suffered from any serious illness, and only on a few occasions was confined to his bed with a cold. He was very active and alert and was never morbid, but on the contrary was extremely cheerful. He was always planning for the future years and never expressed apprehension of approaching death. He suffered no ‘last illness‘ as that term is commonly understood; he died very suddenly from coronary thrombosis or coronary occlusion. Examinations of decedent's heart by electrocardiogram and otherwise, on several occasions prior to his death, disclosed no indication of coronary thrombosis or sclerosis.
The predominant motives of decedent in making the gifts in controversy were (1) to relieve himself of the responsibility of handling a portion of his extensive holdings of securities; (2) he wanted his children to assume responsibility of management during his lifetime; and (3) he desired to reduce income tax liability. It is also shown that the decedent was moved to make gifts to the trusts for the purpose of providing his daughters with independent incomes, and the gift to his son was for the purpose of equalizing the gifts among the children. All of these were purposes associated with life rather than death, and, in such circumstances, the value of the gifts is not includible in decedent's gross estate. Estate of Robert Wetherill, 36 B.T.A. 1259, 1267; Estate of Caroline Foerderer Artman, 38 B.T.A. 1020; Constance McCormick, Executrix, 38 B.T.A. 308; Edith Huggard Sharp et al., Executors, 33 B.T.A. 290; affd., 91 Fed.(2d) 804; Central National Bank of Cleveland v. United States (Ct. Cls.), 41 Fed.Supp. 239.
Decedent was approximately 80 years and 7 months of age at the date of his death, and was past 78 when he made the last two gifts in 1935, but age alone is not the decisive test. See Estate of Robert Wetherill, supra, in which case the decedent was 83 years old at death. In Edward C. Moore, Jr., et al. Executors, 21 B.T.A. 279, the decedent died at the age of 86, and the gifts were made within two years of death. In Estate of Katharine H. Talbott, 43 B.T.A. 1081, the decedent died of coronary occlusion at the age of 71 years. In the two latter cases we held that the gifts were not made in contemplation of death. The facts in the Talbott case are strikingly similar to the case at bar. As the Supreme Court pointed out in United States v. Wells, supra:
Old age may give premonitions and promptings independent of mortal disease. Yet age in itself can not be regarded as furnishing a decisive test, for sound health and purposes associated with life, rather than with death, may motivate the transfer.
We find nothing in the present record to indicate that the contested transfers were gifts causa mortis or were intended as substitutes for testamentary dispositions. While the aggregate of the gifts was very substantial in amount, decedent retained a material portion of his property, which he disposed of by will. The value of the gross estate was returned by petitioners at $763,754.22 and was determined by respondent at $1,489,091.17.
On the issue submitted, respondent's action is reversed.
Decision will be entered under Rule 50.