Opinion
No. 44189.
May 5, 1941.
George D. Brabson, of Washington, D.C. (R.S. Doyle and Blair Korner, all of Washington, D.C., on the brief), for plaintiffs.
Joseph H. Sheppard, of Washington, D.C., and Samuel O. Clark, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Action by Robert H. Russell and another, executors of the estate of Henry L. Russell, deceased, against the United States to recover an estate tax paid by plaintiffs.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following special findings of fact:
1. Plaintiffs are the duly qualified and acting executors of the estate of Henry L. Russell (hereinafter sometimes referred to as the "decedent"), of Holyoke, Massachusetts, who died March 5, 1935, at the age of 73 years. Plaintiffs are citizens of the United States and reside at Holyoke, Massachusetts.
The decedent left surviving him his wife, two sons, and one daughter.
2. February 21, 1936, plaintiffs filed an estate tax return for the estate of decedent, which showed a gross estate of $299,191.67, deductions of $115,034.88, a net estate of $184,156.79, and a tax due of $13,679.05, which was paid on the same day that the return was filed. The return also showed various transfers made by the decedent during his life to members of his family, which were not included as a part of the gross estate and which will be hereinafter referred to more specifically.
3. Upon review and audit of the estate tax return the Commissioner of Internal Revenue proposed by letter of March 31, 1937, that decedent's gross estate be increased by including the value of certain property referred to in the return which the decedent had transferred to his wife and four children at various times from July 26, 1929, to March 24, 1931, which, with other adjustments not here in controversy, resulted in a gross estate of $874,847.29, deductions of $115,066.56, a net estate of $759,780.73, and a proposed additional tax of $102,034.20.
4. Upon further audit and reconsideration of that return the Commissioner on December 6, 1937, determined a gross estate of $803,866.29, a net estate of $638,799.73, and an additional tax of $86,418.38. The principal change from the letter of March 31, 1937, referred to in finding 3, insofar as transfers now in controversy are concerned, was the elimination from the gross estate of an item included as a part of that estate in the letter of March 31, 1937, representing the cancellation by the decedent on July 26, 1929, of unpaid balances on notes of decedent's three sons in the total amount of $42,150. The following transfers were included in the last determination:
-------------------------------------------------------------- | | Value at which | Returned | included by | | Commissioner | | in the gross | | estate -----------------------------------|--------- |--------------- (a) The corpus of four | | trusts created by the decedent | | on October 14, | | 1929, each of which consisted | | of 100 shares of | | Fidelity Phoenix Fire | | Insurance Company | | stock ........................ | 0 | $ 12,450.00 | | (b) The value of 2,400 shares | | of J. Russell Co. stock | | transferred by decedent | | to his three sons February | | 24, 1930 ..................... | 0 | 154,838.40 | | (c) The value of 500 shares | | of Henry L. Russell | | Realty Trust transferred | | by the decedent to his | | wife and four children | | on November 21, 1930 ......... | 0 | 82,850.00 | | (d) The value of stocks and | | bonds transferred by the | | decedent to his wife | | March 24, 1931 ............... | 0 | 252,658.25 --------------------------------------------------------------
In addition to the transfers set out above, which were included by the Commissioner in the decedent's gross estate, the following gifts or transfers without consideration had been made by the decedent to members of his family which were not included by the Commissioner as a part of the decedent's gross estate:
(a) Cancellation by the decedent in December 1924 of $25,000 from notes hereinafter referred to which the three sons had executed in favor of the decedent $75,000.00
(b) Trust established by the decedent in October 1925 for his daughter .......... 40,000.00
(c) Cancellation by the decedent on July 26, 1929, of unpaid balances on notes of his three sons ...................... 42,150.00
5. After receiving credit for State estate, inheritance, legacy, or succession taxes, plaintiffs on April 9, 1938, paid the deficiency referred to in the previous finding in the net amount of $73,594.51, together with interest of $8,143.78, that is a total of $81,738.29. The amount was paid pursuant to a waiver filed at the time of payment, waiving restrictions against the immediate assessment and collection of the deficiency. The payment was made under protest to stop the running of interest charges.
6. June 16, 1938, plaintiffs filed a claim for refund of $81,738.29, with interest, such amount being the entire amount of tax and interest paid, as shown in the preceding finding. The general basis of the claim was that the transfers of the property in question were made by the decedent as bona fide gifts to the members of his family consistent with a long series or course of gifts which the decedent commenced in January 1920; that they were not made in contemplation of death, and hence were improperly included by the Commissioner as a part of decedent's gross estate. June 29, 1938, the Commissioner rejected the claim for refund.
7. The decedent was a wholesale merchant engaged in the hardware and machinery business at Holyoke, Massachusetts. It was a family business which had been started by decedent's grandfather, Joel Russell, in 1865, when Joel Russell purchased a small tool store for the purpose of setting up in business his son, Robert Russell, Sr., decedent's father, who was a machinist.
8. Robert Russell, Sr., carried on the business for a number of years as a tool store, but he was essentially a machinist and did little or nothing to increase the business. Decedent went to work in his father's store as a young man. He was a very progressive type of man who believed in modernizing the business and had definite ideas for its development, especially along the lines of mechanical and electrical engineering. He foresaw the tremendous industrial development that took place in New England and had his sons trained in engineering courses at Worcester Polytechnic Institute and at Dartmouth College so that they would be qualified to go into that field.
Decedent was a practical businessman, active and enterprising. He was extremely industrious and conscientious and he expected the same sort of conduct from his family and everyone associated with him.
As a result of decedent's plans and efforts the small tool store started by his grandfather in 1865 was built up over some forty years until it became one of the largest wholesale hardware and machinery businesses in New England, being known as J. Russell Co.
9. In developing the business of J. Russell Co. decedent hoped that he could build up a business that would "hold the interest and activities of his three sons when they grew up." However, his desires in this regard were conditioned upon the sons being competent to run the business and their ability to get along with each other, as to which the decedent entertained some doubt.
In 1915 the decedent advised his son, Robert, that the worst thing he could do would be to work for him (decedent), and following that advice Robert went to work for the Western Electric Company, where he was employed for two years. The father was pleased with this arrangement but after two years he asked Robert to come to work for him because he needed help very much. After his return to work for his father, and prior to his joining the Army in 1917, Robert had many talks with his father in regard to the son's future connection with the business of J. Russell Co.
10. By 1919 J. Russell Co., stimulated by war orders and transactions, had grown enormously. The burdens and problems of the business had also increased correspondingly because of the increased demands of war conditions. It was still a one-man business because decedent assumed responsibility for everything, including the making of every important decision, the buying, the selling, credits, and collections. Decedent had no real executive assistance in carrying on the business and was in need of assistants along that line upon whom he could rely. His eldest son, Newton, had been working in the business since 1908 but was not well suited for executive work. He did not like the routine or pace set by his father. Decedent's two younger sons, Robert and Stuart, had not yet returned from the World War.
11. In February 1919, before his two youngest sons returned from the World War, decedent's father, Robert Russell, Sr., died at the age of 88. He left a considerable fortune, all of which went to the decedent as the sole heir, and decedent was made administrator of the estate, which increased decedent's burdens as well as added to his personal fortune.
12. March 9, 1919, decedent wrote a letter to his son, Stuart, who was still in France, reading in part as follows: "Stuart, the plan I have in mind is to have you go into the store with Newt and Rob. There ought to be room enough and I feel that I am at that age where I would like to feel able to go and come. You know that if you are in real business it means real business; that is, early and late. It isn't the boss who can be late for the help only imitate the boss, so you see I have a reason for shifting some of the responsibility to younger shoulders. The only thing is, will three brothers agree. They have in the past, but you can see if they didn't now, business would suffer and instead of good only bad would result."
13. Decedent's two youngest sons, Robert and Stuart, returned to Holyoke from France in the early part of 1919. Robert married in 1919 and shortly thereafter went on a hunting and fishing trip with his father, the decedent. On that trip decedent discussed with that son what his desires were for the business. Decedent told him that he hoped that his three sons would take hold of the business and be able to run it and get along with each other so that he could turn the business over to them. Decedent also discussed his desires with his youngest son, Stuart, and told him that he wanted the sons to have the business and that he was going to give it to them but that he could not do this until he was assured that the sons would cooperate and go along together.
About the same time the decedent also discussed with his wife's sister his desires for taking his sons into the business but stated that he wanted to be assured first that they were fitted for the business and capable of handling it. He stated that he was going to have each of his sons give him a note for an interest in the business, that they were supposed to pay off the notes but he had no idea that they ever would.
In 1919 the decedent also discussed with his accountant his desire to take the boys into the business, but stated that he was reluctant to do so until they proved themselves worthy and capable of handling the business.
14. The store of J. Russell Co. originally occupied a very small section of the first floor of a building owned by decedent, the rest of which was occupied by a hotel. In 1919 the store took over the entire building consisting of five floors. During this reconstruction operation it was necessary to clean out all rooms of the building, put in new concrete foundations and new floors, and install an elevator. All of this work was performed by decedent's sons and other employees without hiring any outside help. In doing this work they carried steel beams up to the roof, rearranged the stock, and performed other laborious tasks, working nights, Sundays, and holidays. Decedent was very much pleased with the manner in which his sons carried out this work with so little trouble on his part.
15. In January 1920, the decedent organized a partnership of the business of J. Russell Co. and transferred to each of his sons a 3/20 interest in the business and retained the balance of 11/20. For the transfer of the interest to the sons, each of the sons gave to the decedent a note in the amount of $60,000 bearing interest at 6 percent. In fixing the amount of $60,000 for a 3/20 interest in the business, there was no negotiating or bargaining between the sons and the father as to the amount to be paid by the sons but it was an amount fixed by the father and accepted by the sons without question. Prior to that time the sons had been told by the father of his desire to take them into the business and the sons understood this giving of notes as a means on the part of their father of having them properly appreciate the value of an interest in the business as part owners and at the same time permitting the father to see whether the sons could cooperate and run the business.
The sons kept up the interest payments on the notes and also made payments on the principal. Some of the payments on the principal were made from the sons' distributive share of the profits. All payments made by the sons were accepted by the decedent and credited on the reverse side of the notes. Payments by the sons on the principal were not uniform.
16. The decedent's apprehensions as to his sons' ability to cooperate and get along together in the business were justified for a time, though, after some adjustments and readjustments with respect to their duties, the sons were able to work together in the business in a satisfactory manner.
17. In 1923 the partnership was incorporated and each son received 3/20 of the stock (750 shares), which amounted to 2,250 shares, and the decedent received 2,750 shares. Decedent became president of the corporation, Robert, vice president, Newton, treasurer, and Stuart, secretary. Decedent remained president of the corporation until his death in 1935 and Newton remained treasurer until his death in 1934.
18. The decedent was extremely devoted to his wife and to his family. It was his practice to give each of his children substantial amounts upon the occasion of their marriage, and he made gifts to each of his children and grandchildren on their birthdays and at Christmas. In making these gifts he endeavored to treat his children substantially alike.
19. At Christmas, 1924, the decedent, as a Christmas gift to each of his sons, canceled $25,000 from the principal of the three $60,000 notes heretofore referred to. At that time the decedent told his sons that he was not giving his wife or his daughter, Laura, any part of the business because he was afraid there would always be misunderstandings about the amounts to be paid to the sons as salaries and the amounts received by the wife and daughter as dividends, but that he was going to take care of them in another way and to make a gift to his daughter of other property to equalize the gifts to the sons.
20. In October, 1925, the decedent established a trust for his daughter, Laura, of certain stocks and bonds having the value of $40,000. The income therefrom was paid to her until she reached the age of 35, at which time she received the principal. At the time the decedent created that trust he told his daughter that he had already made gifts to his three sons, that he was giving her an amount through this trust to equalize the gifts to her and to his sons, and that through the gift he desired to give her a measure of financial independence. The trust produced from $2,000 to $3,500 annually.
21. From time to time after his sons became active in the business the decedent expressed a desire to be relieved of some of his responsibilities, gradually to retire from business, and to travel. Prior to 1924 he had never taken an extended vacation, confining himself to short fishing trips and vacations of that kind. In 1924 he took his first extended vacation on a trip to Europe with his wife and daughter, when he was gone for one or two months. In 1926 decedent took his wife and daughter on an extended cruise to the Mediterranean and was away for about six weeks. He continued to go to the office in the same manner that he had prior to that time, but he spent more and more time on his personal investments, made suggestions as to how the business should be carried on and was content to oversee the results.
In 1927 he took his wife and her sister for a still longer vacation to South America, which lasted about three months. Upon his return decedent found himself still more out of touch with the business than he was after his return from the previous trip and he did not thereafter undertake to direct the affairs of the business, other than in the most general sort of way, leaving all of the details thereof to his sons. He was well pleased with the manner in which the sons had carried on the business in his absence on these trips.
22. Prior to July 1, 1928, the decedent had enjoyed good health, and was a strong and vigorous man who had led an active life. About July 1, 1928, while he was preparing to go on a fishing trip, the decedent had a stroke of paralysis, resulting from a severe cerebral hemorrhage caused by the rupture of blood vessels, and was unconscious for several days.
23. The decedent was rendered completely unconscious for several days by the stroke and for a short time had to be fed rectally and to be given saline solutions with a hypodermic needle to supply moisture. In about a month he was able, with support, to stand and walk a little, and in approximately two to six months was able, with support, to go downstairs in his home. The effects of the stroke were mechanical, resulting in the paralysis of his right arm, right leg, and the loss of the power of speech. The other parts of his body were not affected. The decedent made steady and satisfactory progress toward recovery. His physicians were pleased with his progress and encouraged him in the belief that substantial recovery from the stroke was to be expected.
24. A registered nurse was the constant companion of the decedent from the time of his first stroke until his death and his physician made almost daily visits immediately after the stroke, and later less frequently, to watch over decedent's immediate physical condition, but more particularly, after the earlier visits, to guide and instruct him in recovering the use of the affected parts of his body, rather than because of any apprehension as to his physical condition. The number of visits by his physicians from the time the decedent was first stricken to the date of his death is shown below:
Visits
Between July 1928 and January 1929 ........... 100 During the year 1929 ......................... 178 " " " 1930 ......................... 140 " " " 1931 ......................... 47 " " " 1932 ......................... 29 " " " 1933 ......................... 22 " " " 1934 ......................... 35 January 1935 to March 1935 ................... 22
25. After the decedent had made some progress in recovering from the first stroke, he had a second stroke on October 8, 1929, which rendered him unconscious for two or three hours and required that he be confined to his bed for about a week. His physicians, however, did not advise him that he had had a second stroke, but merely told him that he had been "a little ill and had to remain in bed a few days." Within a short time decedent substantially recovered from the second stroke without any serious effects on the progress which had been made on the recovery from the first stroke, except that his power of speech was more impaired.
About 1930 decedent developed a skin rash known as itchy dermatitis, which remained for one or two years, during which time it would respond to treatment and then recur. During that time ointments and X-ray treatments were applied to relieve itching.
26. He became able to walk with the support of the nurse and when supported in that way he could walk a hundred yards or more and go up and down steps, though he could bear little weight on his right leg. He learned to write with his left hand, and one of the duties of his nurse was to give him kindergarten lessons in reading, writing, and arithmetic. These lessons also had for their purpose improvement in speech. He regained the use of his arm and hand to the extent that he could raise his arm and bend it and close his fingers. He regained the use of his leg to the extent that he could move it in walking and raise the foot off the ground and bend the knee slightly. He never regained the use of his speech beyond the ability to make certain articulate sounds, but he could not form his words completely except to a very limited extent, such as saying "yes" and "no" and other short words.
The nurse not only assisted him in the exercises for the purpose of improving the use of the affected members of his body but also was in constant attendance to attend to his physical needs in washing and dressing him, assisting him in going to the bathroom where he could not go unassisted, and taking care of other matters of that kind. She slept on a cot in his room. A typical day's routine in the life of the decedent after he had recovered sufficiently to be up and about the house was as follows: He arose at seven-thirty, after which the nurse helped him to dress, wash, and brush his teeth. He and his wife and the nurse then had breakfast in his room, after which the nurse massaged his arm and leg and gave him exercises. He and the nurse would then ride down to the store where they would remain for one or two hours, returning home for dinner at noon. After dinner he would sleep for an hour and a half and then take an automobile ride for one or two hours. After supper he would play pachisi or some other game with members of his family and his nurse until time to retire, at 9 p.m.
27. For five consecutive summers after 1928 decedent made an automobile trip from Holyoke to Cape Cod, requiring about six hours, where he visited his sister-in-law and enjoyed seeing the various places of interest. He also made two automobile trips to Atlantic City, one in 1929 and another in 1931. On all of these trips, as well as local automobile trips, he was always accompanied by his nurse. While he had practically retired from the business of J. Russell Co. at the time of his first stroke, he continued thereafter to remain interested in what was being done, and on his visits to the store evidenced a keen interest in what was being done. He also continued his interest in local affairs, though he was unable to take any active part therein. He continued his substantial contributions to his church and to charitable organizations. In 1931 he gave $20,000 to a local hospital to endow beds in memory of his wife's parents which was the same amount he had given in 1927 to endow beds in memory of his parents.
28. In July 1929 decedent made a gift to each of his three sons of approximately $14,000 by canceling that amount from each of the $60,000 notes, heretofore referred to, such amount being the smallest amount which any one of the sons then owed on his note and resulting in the complete liquidation of Newton's note. There remained, however, approximately $12,000 and $7,000 due on the notes of Robert and Stuart, respectively, after the cancelation, and they borrowed these amounts from banks and paid off the notes in accordance with the express desire of the decedent.
29. October 14, 1929, the decedent established four trusts for the benefit of his daughter and his three daughters-in-law, each of the trusts comprising $3,112.50 in securities. The trusts were created largely on the suggestion of decedent's wife, who stated that she felt a married woman should be independent of her husband with respects to small amounts of money desired by her and should not be placed in the position of having to make requests when she desired money for small expenditures. While the trusts were created in October 1929, they were given to the beneficiaries as Christmas presents. The trust agreements, which were similar in terms, provided in part as follows: "Donor reserves no power to revoke this trust, but he does reserve the right at any time, upon written notice by him delivered to the Trustee, to change the terms of this trust in any manner acceptable to the Trustee to take effect immediately and in the life of Donor, provided, however, that no such change shall be made that has the effect of restoring or transferring to the Donor any portion of the principal of the trust property. And the Donor also reserves to himself the right at any time in his discretion to demand in writing the resignation of the Trustee hereunder and to nominate his successor in the trust. And the Trustee agrees, upon such written demand, to release said trust, to transfer, convey, and deliver over the title and possession of the property thereof to its properly designated successor, and to account for its management and conduct of the trust within a reasonable time, not to exceed two months from the receipt of such demand."
30. In February 1930, decedent gave to each of his three sons 800 shares of stock in J. Russell Co., which, when added to the amount previously held by them and acquired in the manner heretofore shown, gave each of them 1,550 shares, that is, all of the stock of the corporation except 350 shares, which the decedent retained until his death, and was then acquired by the corporation and is now held as treasury stock.
31. November 21, 1930, decedent created a trust known as the Henry L. Russell Realty Trust and conveyed to the trustees certain real estate for the benefit of his wife and four children. Each beneficiary received 100 shares in the trust. The real estate had been looked after by the decedent's son, Robert, since the decedent's trip to South America in 1928, and his securities during the same time, by his son, Newton, but in both instances under the general supervision of the decedent and under power of attorney from decedent.
32. The decedent and his wife had started out in life with practically nothing. Over a period of forty years he had built up a large and prosperous business and a considerable personal fortune. He owed a large measure of his success and fortune to his wife, because of her frugality, interest, and general cooperation not only in the home but also in his business, and he often expressed to his sons and to others his gratitude for what she had done and his feeling as to how much of his success was due to her efforts and cooperation. They lived on a limited budget and during the earlier years had no domestic help. Until at least as late as the period when one of the younger sons was in high school, decedent and his wife had lived on $1,200 a year.
Decedent was a man of few words, having sound judgment and an astute mind. He was a stern disciplinarian and a power unto himself, usually offering no explanation for his actions. When his sons began working for him they each received $3 a week. Later they were advanced to $6, and later to $12 a week. In 1919, when they returned to the business after the war, each received a salary of $25 per week and their distributive share of the partnership profits, which amounted to about $2,000 per year.
33. On various occasions for a period of at least seven or eight years prior to 1931, the decedent had discussed the transfer of a substantial amount of property other than an interest in the business of J. Russell Co., to his wife. He was opposed to having either his wife or daughter become stockholders in the corporation for reasons heretofore stated. For some time he had been impressed with the large amount of income tax he had to pay and had considered the effect on his income tax of conveying some of his property to his wife. He told his son, Robert, that some of the stocks and bonds which he held were not the kind which he desired to transfer to his wife, as he was afraid she would not look after the property under changing business conditions. They were local industrial, nonlisted stock and he desired to make a conveyance in securities which would require less attention on her part. He stated he would change the stocks into bonds which would be more suitable for his wife to hold.
On March 24, 1931, after a list of securities had been prepared by his accountant in collaboration with one of his sons, and carefully considered by the decedent as to their character, the decedent transferred to his wife certain securities which had a value at the date of decedent's death of $252,658.25.
34. Except for the disabilities resulting from the strokes of paralysis heretofore referred to, decedent continued substantially in good health, both mentally and physically, until about February 1935, when a prostate condition developed, which was followed by an acute infection of the kidneys, from which he died some two or three weeks later.
35. The transfers referred to in Finding 4, as having been included by the Commissioner in the decedent's gross estate, constituted a material part of the decedent's gross estate, were made without adequate consideration in money or money's worth, and were made in contemplation of death.
Henry L. Russell, a resident of Holyoke, Massachusetts, died on March 5, 1935, from an acute infection of the kidneys. The Commissioner of Internal Revenue assessed additional estate taxes upon the ground that certain transfers, prior to his death, were made in contemplation of death and should be included in the taxable estate under Section 302 of the Revenue Act of 1926, c. 27, 44 Stat. 9, 26 U.S.C.A. Int.Rev. Acts, page 227. The amount of the additional tax was paid by the executors and claim for refund was filed. The refund claim was rejected by the Commissioner and the executors brought this suit to recover the amount paid.
The decedent died at the age of seventy-three years, leaving surviving him his wife and three children, two sons and one daughter, his oldest son having died in 1934.
When a young man, Henry L. Russell and his father established a hardware and machinery business and through hard work and diligent efforts they built up the business to one of the largest hardware and machinery businesses in New England. Decedent had his sons trained in electrical courses at engineering colleges. He was extremely industrious and conscientious and expected the same sort of conduct in his family and everyone associated with him. Decedent's desire was to have his three sons enter the business which he had so strenuously built up and successfully established. One of the sons worked for his father and the other two sons went to war, returning from France in 1919 when they resumed work with their father. The business, stimulated by war transactions, grew enormously. The decedent expressed the desire, time and time again, to his sons to have them go into business with him, if they showed a capacity to manage it, as he wanted them to work together. After the sons had been working with him for a short time, in January 1920, the decedent organized a partnership of the business of J. Russell Company and transferred to each of his sons a 3/20 interest in the business and retained the balance of 11/20. Decedent required his sons to give him notes in the amount of $60,000 each, bearing interest at 6 per cent. The amount of the notes was fixed by the father and there was no negotiating or bargaining between them. In 1923 the partnership was incorporated and each son received 3/20 of the stock, or 750 shares, totalling 2,250 shares for the sons and the decedent received 2,750 shares. In 1924 decedent made to each of his sons a Christmas gift of $25,000 by way of canceling that amount from each of the three $60,000 notes which they had given to him. In October 1925 the decedent established a trust for his daughter of certain stocks and bonds having a value of $40,000. The daughter was not to receive the principal, but only the interest, until she reached the age of thirty-five years.
Decedent was a vigorous and strong man who had always led an active life. On July 1, 1928, he suffered a stroke of paralysis resulting from a cerebral hemorrhage and was unconscious for a week or more. After a month he was able to stand and walk a little with support, and in about two or more months he was able with support to go downstairs in his home. The effect of the stroke was the paralysis of the right arm, right leg, and the loss of the power of speech. A registered nurse remained with him, day and night, sleeping in his room and accompanying him wherever he went. Until his death, a registered nurse was always with the decedent.
After the decedent had made some small progress in recovering from the first stroke he had a second stroke on October 8, 1929, which rendered him unconscious for several hours and required that he be confined to his bed for a week. Decedent never regained the full use of his right arm or leg, nor his power of speech other than to make articulate sounds after months of coaching. In July 1929 the decedent cancelled $14,000 from each of the $60,000 notes heretofore referred to and required the sons to liquidate the balance on the notes and to pay the interest which remained due thereon.
After his second stroke in October 1929 the decedent established four trusts for his daughter and his three daughters-in-law, each trust consisting of securities in the value of $3,112.50. In February 1930, decedent gave to each of his three sons 800 shares of stock in J. Russell Co. The result of these gifts was that each son had 1,550 shares of the capital stock of 5,000 shares, leaving only 350 shares to the decedent which he retained until his death. In November 1930 decedent created a realty trust known as the Henry L. Russell Realty Trust for the benefit of his wife and four children. In March 1931 he transferred to his wife certain securities valued at $252,658.25.
We have only to consider the transfers made by the decedent after the second stroke in October 1929. The Commissioner of Internal Revenue has not included in the decedent's gross estate the $14,000 which was given to each of the three sons and applied to their notes in July 1929, the Commissioner having found that only the transfers to the daughter and the daughters-in-law, the transfers of 800 shares of stock to each of the sons, the realty trust to his wife and four children, and the transfer of securities to his wife were made in contemplation of death. The burden is on the plaintiffs to establish by the preponderance of evidence that the decision of the Commissioner of Internal Revenue is erroneous.
In our judgment, the plaintiffs have failed to overcome this presumption. It will be seen from the facts in this case that the decedent, during his entire life, made relatively small gifts to his wife, and, prior to his sudden and unexpected paralytic stroke in 1928, only small gifts to his sons and daughter, although he was a very rich man and had a very prosperous and successful business. These amounts given to his four children were small in comparison to what decedent possessed and allowed them only a small income for the support of themselves and their families. The evidence does not disclose that the decedent made any gifts of property or securities to his wife until after he had his second stroke. It is true that he desired, as every male parent does who has built up a successful business by hard work and diligence, to have his sons enter the business and to carry it on in future years. But, there is nothing to show that there was any well-considered or established plan on his part to divest himself of any interest in the business, prior to his stroke, whereby he was to part with the control of his business. When decedent died in 1935 he left a gross estate, excepting these gifts, of $299,191.67. If these gifts, above referred to, had not been excluded, the gross estate would have been $803,866.29. Therefore, decedent gave away approximately two-thirds of his property to his wife and children after he had suffered a second stroke of paralysis and when he had not been able to speak for a year and had not had the full use of his right arm and leg.
It is contended by the plaintiffs that decedent was of a bright, cheerful disposition; that his mind was clear; and that he did not believe he was going to die or that he was in a very serious condition. It is impossible to reconcile this view with the fact that, after his first stroke in July 1928 until the day of his death, decedent could not speak other than make a few articulate sounds. There is nothing in the evidence to show that he ever wrote anything except his name to the documents transferring property. During all of this period while decedent was afflicted with lack of speech, lack of the use of his right arm and leg, and was dependent upon a trained nurse for support and attention constantly day and night, there is not a single line of evidence to show that he read a paper or magazine or had a paper or magazine read to him. Decedent may not have thought that death was imminent, but a man, with as keen a mind as his before he was stricken, must have known that he was in a serious condition and in a doubly serious condition after his second stroke.
The question before us is whether these gifts were made as substitutes for testamentary dispositions, and thus provide an evasion of the estate tax. We must determine the motive which induced the transfers.
As was said in the case of United States v. Wells, 283 U.S. 102, 116, 117, 118, 51 S.Ct. 446, 451, 75 L.Ed. 867:
"* * * Transfers in contemplation of death are included within the same category, for the purpose of taxation, with transfers intended to take effect at or after the death of the transferor. The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. Nichols v. Coolidge, 274 U.S. 531, 542, 47 S.Ct. 710, 71 L.Ed. 1184, 52 A.L.R. 1081; Milliken v. United States, 283 U.S. 15, 51 S.Ct. 324, 75 L.Ed. 809, decided March 2, 1931. As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor's motive. Death must be `contemplated,' that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition. As a condition of body and mind that naturally gives rise to the feeling that death is near, that the donor is about to reach the moment of inevitable surrender of ownership, is most likely to prompt such a disposition to those who are deemed to be the proper objects of his bounty, the evidence of the existence or nonexistence of such a condition at the time of the gift is obviously of great importance in determining whether it is made in contemplation of death. * * *
"As the test, despite varying circumstances, is always to be found in motive, it cannot be said that the determinative motive is lacking merely because of the absence of a consciousness that death is imminent. It is contemplation of death, not necessarily contemplation of imminent death, to which the statute refers. It is conceivable that the idea of death may possess the mind so as to furnish a controlling motive for the disposition of property, although death is not thought to be close at hand. Old age may give premonitions and promptings independent of mortal disease. Yet age in itself cannot be regarded as furnishing a decisive test, for sound health and purposes associated with life, rather than with death, may motivate the transfer. The words `in contemplation of death' mean that the thought of death is the impelling cause of the transfer, and while the belief in the imminence of death may afford convincing evidence, the statute is not to be limited, and its purpose thwarted, by a rule of construction which in place of contemplation of death makes the final criterion to be an apprehension that death is `near at hand.'
"If it is the thought of death, as a controlling motive prompting the disposition of property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive. Such transfers were made the subject of a distinct gift tax, since repealed. * * * The purposes which may be served by gifts are of great variety. It is common knowledge that a frequent inducement is not only the desire to be relieved of responsibilities, but to have children, or others who may be the appropriate objects of the donor's bounty, independently established with competencies of their own, without being compelled to await the death of the donor and without particular consideration of that event. There may be the desire to recognize special needs or exigencies or to discharge moral obligations. The gratification of such desires may be a more compelling motive than any thought of death."
When it is taken into consideration that the decedent made no provision for his family, with the exception of the small amounts given to his sons and daughter, and no provision for his wife, previous to his sudden affliction, and then, after his second stroke, disposed of over half of his entire estate, it is impossible to arrive at any other conclusion, taking his mental and physical condition into consideration, than that the thought of death was the impelling motive for the transfers, thereby avoiding testamentary dispositions. Myers, Adm. v. United States, 2 F. Supp. 1000, 77 Ct.Cl. 429, certiorari denied, 292 U.S. 629, 54 S.Ct. 628, 78 L.Ed. 1483; Harris Trust Savings Bank et al. v. United States, 29 F. Supp. 876, 90 Ct.Cl. 17, certiorari denied, 310 U.S. 632, 60 S.Ct. 1074, 84 L.Ed. 1402.
The determination of the Commissioner of Internal Revenue that the transfers to decedent's daughter and daughters-in-law, the transfers to his sons, the realty trust created for his wife and four children, and the transfer to his wife which constituted the material part of his estate, were made without adequate consideration of money or money's worth and were made in contemplation of death, we think, is correct.
The petition is dismissed. It is so ordered.