Opinion
No. 43188.
November 6, 1939.
Albert H. Veeder, of Chicago, Ill. (Francis E. Baldwin and Henry Veeder, both of Chicago, Ill., on the briefs), for plaintiffs.
J.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 briefs), for the United States.
Before WHALEY, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHITAKER, Judges.
Suit by the Harris Trust Savings Bank and another, executors of the estate of Albert R. Fay, deceased, against the United States to recover back additional estate taxes assessed by the commissioner against the estate.
Petition dismissed.
This is a suit to recover additional estate taxes assessed by the Commissioner against the estate of the plaintiffs' testator, resulting from the inclusion in his gross estate of the value of property included in a trust instrument executed by the decedent more than two years prior to his death, on the theory that the trust was executed in contemplation of death.
The case having been heard by the Court, upon the evidence and the report of a commissioner, it makes the following special findings of fact:
1. Plaintiff, Harris Trust Savings Bank, is a corporation of the State of Illinois, engaged in business as a bank and trust company, with its principal place of business in the City of Chicago, State of Illinois, and plaintiff, Jennie L. Fay, is a citizen of the United States. Plaintiffs are the executors of the Estate of Albert R. Fay, deceased.
2. The decedent, Albert R. Fay, died at the age of 73 years on January 22, 1933, a resident of Chicago. His last will and testament was duly admitted to probate in the Probate Court of Cook County, Illinois, on February 14, 1933, and letters testamentary were thereupon issued to Harris Trust Savings Bank and Jennie L. Fay.
3. The decedent, Albert R. Fay, and said plaintiffs have at all times borne true allegiance to the Government of the United States, and have not taken part in, aided, abetted, or given encouragement to rebellion or insurrection against the Government of the United States.
4. The plaintiffs are and always have been the sole and absolute owners of the claim presented in this litigation, and have made no transfer or assignment of said claim, or of any part thereof or interest therein, and no action upon said claim, other than this litigation, has been had before Congress or any of the Departments of the United States Government.
5. Decedent was employed by Swift Company for about 45 years, and for many years prior to his retirement therefrom was its traffic manager. He retired from Swift Company in 1926 or 1927. At the time of his retirement and for about one year thereafter he was vice president of South Side Trust Savings Bank of Chicago. At the time of his death, decedent was a large stockholder and a director of City Ice Fuel Company and a number of other corporations.
6. In 1926 or 1927 the decedent discussed with members of his family and with others, including his lawyers, the creation of a trust for the disposition of about one-half of his property. He declared his purpose in so doing to be, in part, to relieve himself of the burden of handling this portion of his estate, and to insure an income for himself and family during his life and, in part, to put the management of it after his death in hands he considered more capable than those of his wife and daughter, and thus insure to them an income after his death. However, he did not create a trust at this time, nor until June 12, 1930. During this period he was spending about one-half of his time away from his headquarters, principally in California in the winter and in Michigan in the summer.
7. Upon decedent's retirement in 1926 or 1927 he continued his private business activities, devoting the mornings to his work, and about three afternoons in the week to golf. Except for occasional minor ailments he enjoyed good health until about the year 1930.
He spent the winter of 1929-1930 in California. While there he consulted physicians, who advised him that he had arteriosclerosis and myocardial degeneration.
Upon his return to Chicago in March, 1930, he consulted his family physician, who confirmed this diagnosis. This physician found that decedent had a much enlarged heart, with two murmurs, a marked weakness of heart action, and marked lowering of blood pressure. He prescribed that the decedent entirely forego any athletic activities, and that he remain absolutely in bed for six weeks. He was even prohibited from going to the bathroom. After the expiration of this six weeks, sometime in May, 1930, he was allowed to be up with gradually increasing activities. After another period of from four to six weeks these restrictions were largely removed, and in June, 1930, decedent was permitted to go to his summer home in Michigan, where he resumed the playing of golf, almost daily. Before going to Michigan, however, he secured from his physician in Chicago the name of a physician in his summer home, Wequetonsing, Michigan, whom he might consult if necessary. He did consult this physician on July 6, 1930, and at subsequent times during the summer. He did not inform this physician of his heart trouble, nor was he examined therefor except superficially. No such trouble was found as a result of this examination.
Decedent did not follow strictly the instructions of his family physician in Chicago, and did not seem concerned about his physical condition; but, on the contrary, he appeared to believe that there was nothing seriously wrong with him.
Myocardial degeneration is a curable disease and the fact that he was suffering therefrom and from arteriosclerosis was not sufficient to cause decedent reasonably to believe that death would probably ensue therefrom.
Later in the year 1930 the decedent developed angina pectoris, but there was no indication of this disease or that it might develop when decedent was put to bed in March, 1930, or at the time he executed the trust instrument in question.
The decedent died of angina pectoris on January 22, 1933.
8. Shortly after he was permitted to get up from bed and while still under the care of his physician, decedent resumed his consultations with his lawyers relative to the creation of the trust, later executed on June 12, 1930. To his attorney he represented that he had a variety of bonds and municipal securities that he desired placed in a trust; that he did not have the time to devote to their administration, to keep track of the interest payments and substitutions that should be made from time to time and that he desired to pass that burden on to somebody who had the necessary statistical facilities.
9. The conditions of the trust were finally determined upon and embodied in the instrument. That instrument, executed by the decedent as donor June 12, 1930, was an irrevocable trust agreement, with Chicago Title Trust Company as trustee, and provided for the transfer, in trust, of numerous municipal bonds of the aggregate par or face value of approximately $850,000 and for the payment of the net income from the trust to the donor during his lifetime, and, after his death and during the lifetime of Jennie L. Fay, wife of the donor and as long as she should live, to Jennie L. Fay, and after the death of the donor and his wife, and during the lifetime of Helen Fay Hunter and so long as she should live, to Helen Fay Hunter; and provided, further, that upon the death of the last survivor of the donor, his wife and his daughter, the trust created by said agreement should terminate, and the principal thereof and all undistributed income therefrom should be distributed among the surviving issue, if any, of Helen Fay Hunter in such proportions and amounts as she, by deed or by her last will, should appoint under clause 11 of the trust agreement, and in the event of her failure to exercise the power of appointment, then to and among her issue in proportions and amounts as the survivor of the donor and his wife, by deed or will, should have appointed under clause 11; and, in the event at the termination of the trust no power of appointment, as aforesaid, should have been effectively exercised, the remainder of the trust estate should at that time be transferred, paid over and delivered to and among the surviving issue, if any, of the donor's daughter, and the issue of deceased issue, in equal parts per stirpes, and in the event that at the termination of the trust, as aforesaid, no lawful issue of the donor's daughter should be surviving, the entire corpus thereof, distributable as aforesaid, should be transferred, paid over and delivered to Garrett Biblical Institute, a corporation of the State of Illinois, upon certain terms and conditions set forth in clause 11.
The value of the property included in the trust instrument was substantially equal to the property remaining in decedent's hands at the time of his death.
10. Up to the time of the execution of this trust June 12, 1930, the decedent in 1913 had given his wife 2,000 shares of Swift Company stock of the par value of $100 per share. In April, 1925, decedent gave his daughter $15,000 par value of Toledo, St. Louis Western Railroad bonds, $20,000 par value of Livingston Baking Company bonds, and 200 shares of Swift Company stock of the par value of $100 per share, and on November 14, 1929, the decedent placed in an irrevocable trust for the benefit of his daughter during her lifetime or until she should attain the age of 50 years, 30,000 shares of no par value common stock of City Ice Fuel Company. Decedent for many years prior to June 12, 1930, had given to Garrett Biblical Institute, a theological seminary, of which decedent was a director (trustee), about $4,500 a year.
The above trust created for the benefit of the daughter produced an income to her of about $9,000 per year, and the other gifts gave her an annual income of about $5,000, a total of $14,000.
11. On January 25, 1934, plaintiffs in accordance with the provisions of the Revenue Act of 1926, as amended by the Revenue Act of 1932, filed in the office of the Collector of Internal Revenue a Federal estate tax return for the estate of the decedent, showing a tax liability of $53,413.63.
12. On December 29, 1933, plaintiffs as executors paid to the Collector of Internal Revenue, on account of this tax, $25,000, and on January 20, 1934, paid the Collector an additional sum of $28,413.63, being the remainder of the Federal estate tax shown to be due by the return.
13. On September 27, 1934, a letter was sent to the plaintiffs by the Internal Revenue Agent in Charge at Chicago, Illinois, notifying plaintiffs of certain proposed changes in the return and proposing, among other things, to include the value, as of the date of decedent's death, of the bonds constituting the corpus of the trust held under the agreement of June 12, 1930, as a part of the assets of the gross estate of the decedent.
14. On November 8, 1934, the plaintiffs paid to the Collector $15,000, to be applied and credited upon such additional estate tax as might thereafter be properly assessed upon the estate, and on April 10, 1935, paid to the Collector $715.07, which the Collector had demanded as interest from January 2, 1934, to November 8, 1934.
15. On March 6, 1935, the Commissioner of Internal Revenue sent a letter to the plaintiffs proposing an assessment of deficiency in Federal estate tax of $81,638.39, after allowing credit for the payments of $25,000, $28,413.63, and $15,000.
16. The letter of March 6, 1935, included for taxation, under Section 302(c) of the Revenue Act of 1926, as amended, 26 U.S.C.A. § 411(c), "as a transfer to take effect in possession or enjoyment at or after death," the value of the property held by Chicago Title Trust Company under the trust agreement of June 12, 1930.
Upon receipt of this letter the plaintiffs filed a waiver of their right to appeal to the Board of Tax Appeals and permitted the Commissioner to make an immediate assessment, and the additional tax was assessed.
17. A notice and demand, dated July 8, 1935, was sent to the plaintiffs by the Collector for additional Federal estate tax assessed against the Estate of Albert R. Fay, deceased, in the sum of $81,638.39, together with interest thereon from January 22, 1934, to June 7, 1935, in the sum of $6,723.42, the same being a total of additional tax and interest amounting to $88,361.81, which was paid August 6, 1935.
18. On September 21, 1935, plaintiffs filed with the Collector a claim for refund of $95,207.92, set forth therein as tax overpaid $88,172.98, and interest overpaid $7,034.94, the ground for refund being therein stated as follows: "The inclusion in decedent's gross estate for Federal Estate Tax purposes of the property constituting the trust estate held under said agreement dated June 12, 1930, and the imposition of a Federal Estate Tax thereon are the result of an unconstitutional construction and the application retroactively of Section 302(c) of the Revenue Act of 1926, as amended, to said irrevocable transfer in trust by agreement dated June 12, 1930, between the decedent and Chicago Title and Trust Company."
The claim for refund was rejected October 31, 1935, and it has not been paid.
19. The trust agreement of June 12, 1930, was made in contemplation of death.
The question here involved is whether or not a certain trust executed by the decedent on June 12, 1930, was executed in contemplation of death, in the sense that phrase is used in Section 302(c) of the Revenue Act of 1926, 44 Stat. 70, 26 U.S.C.A. § 411(c).
On this date of June 12, 1930, the decedent executed an irrevocable trust to the Chicago Title and Trust Company, as trustee, providing for the transfer to it, in trust, of municipal bonds of the approximate face value of $850,000. This was approximately equal to the value of the property remaining in the decedent's hands at the time of his death.
At the time of the execution of the trust the decedent was about 70 years of age and was suffering from arteriosclerosis and myocardial degeneration. He died on January 22, 1933, about two years and six months after the execution of the trust, from angina pectoris. At the time of the execution of the trust instrument there were no symptoms of this disease.
Upon discovering that decedent was suffering from arteriosclerosis and myocardial degeneration, his physician put him to bed and allowed him to take no exercise whatever, not even to the extent of going to the bathroom. He was so confined for six weeks. After the lapse of this time he was permitted to get up and gradually increase his physical activities, and after several weeks more he was permitted to go to his summer home in Wequetonsing, Michigan, and to resume the playing of golf, of which he was very fond.
The trust was executed while the decedent was under the care of his physician, but apparently after the first six weeks of absolute quiet.
Although his physician had prescribed such a complete cessation of physical activity, the decedent, to all outward appearances, at any rate, was not at all alarmed about his physical condition; but, on the contrary, treated it lightly, and insisted that it was foolish for him to be put to bed.
Myocardial degeneration is a curable disease. The treatment for it is complete rest.
The execution of this trust was not first conceived while the decedent was confined to his bed in 1930, but had been previously discussed by him with members of his family, his lawyers, and others as far back as 1926 or 1927, at a time when he was in good health.
In 1926 or 1927 his declared motive for contemplating the execution of a trust instrument was twofold. It was, first, in order to relieve himself of the burden of keeping track of his securities, and to insure an income for himself and family during his lifetime. Secondly, it was for the purpose of putting the management of his property after his death in the hands of those whom he considered more capable than his wife and daughter, and thus to insure an income for them after his death.
When he actually executed the trust the only reason he assigned for doing so was that he desired to shift from himself to others who had the necessary statistical facilities the burden of keeping track of the interest payments and the substitutions that should be made from time to time. No doubt he was actuated in part also by the motive expressed by him in 1926 or 1927, which was to put the management of his property after his death in the hands of those he considered more capable than his wife and daughter, and to insure for them an income after his death. Not only is this a fair inference from the fact he had had such a motive when he had previously contemplated such a trust, but also from the fact that the instrument executed accomplished this purpose.
These are the essential evidentiary facts from which the ultimate fact and conclusion must be drawn.
This case is not free from doubt, but after careful consideration we conclude that the thought of death was the impelling motive for the creation of the trust. We are driven to this conclusion by these considerations: In 1926 or 1927 the decedent, when in good health, contemplated the creation of a trust such as he later executed. At that time he was actuated by two motives. One was to relieve himself of the burden of administering his securities, of determining when to discard some and to substitute others, etc. This motive was not induced by thoughts of death. The other was to put his property in the hands of those whom he considered more competent to handle it after his death than his wife and daughter. This motive was induced by thoughts of death. Which was then the dominant or controlling motive, we do not know.
Both motives combined, however, were not sufficient to induce him at that time to carry out his contemplated plan. He did nothing about it for three or four years and not until he had developed a heart disease, which necessitated absolute physical inactivity, even to the extent of not getting out of bed to go to the bathroom. He was in bed with this disease for six weeks. Shortly after getting up, on a regimen of restricted activity, he executed the trust contemplated three or four years before. He took action only when he had developed a heart trouble, not necessarily fatal, but which had condemned him to a six-weeks' period of absolute physical inactivity.
This action is inconsistent with the idea that he treated lightly his ailment. In our opinion the thought that tipped the scales and finally induced him to do the thing he had been contemplating for three or four years was this heart trouble.
The fact that he died from a heart trouble unconnected with the one from which he was then suffering seems to us immaterial. The material consideration is the effect created on decedent's mind by the heart trouble with which he was then suffering. This we believe was the inducing motive for the creation of the trust. If so, under the authority of Wells v. United States, 69 Ct.Cl. 485, 39 F.2d 998; United States v. Wells, 283 U.S. 102, 51 S.Ct. 446, 75 L.Ed. 867; and Becker v. St. Louis Union Trust Co., 296 U.S. 48, 56 S. Ct. 78, 80 L.Ed. 35, the trust must be held to have been created in contemplation of death. And this is true, we think, notwithstanding the fact that one of his motives was consistent with thoughts of life, because the motive that impelled him at the time, the dominant motive, was one induced by the precarious condition of his health.
Plaintiffs are not entitled to recover, and the petition is therefore dismissed. It is so ordered.