McKelvy
v.
Comm'r of Internal Revenue (In re Estate of Sheldon)

This case is not covered by Casetext's citator
Tax Court of the United States.Oct 31, 1956
27 T.C. 194 (U.S.T.C. 1956)

Docket No. 53616.

1956-10-31

ESTATE OF MAY HICKS SHELDON, DECEASED, WILLIAM M. McKELVY, FRANK B. INGERSOLL AND FIDELITY TRUST COMPANY, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Donald L. McCaskey, Esq., and Robert F. Patton, Esq., for the petitioners. Albert J. O'Connor, Esq., for the respondent.


Donald L. McCaskey, Esq., and Robert F. Patton, Esq., for the petitioners. Albert J. O'Connor, Esq., for the respondent.

Gifts made while decedent was unaware of any illness and on advice that she would thus save income taxes, held, on the facts, not to be in contemplation of death.

Respondent determined a deficiency in estate tax of $379,219.31 of which $125,992.39, after credit for State inheritance and estate taxes and Federal gift tax, is still in dispute. The sole remaining issue is whether transfers to or for the benefit of her daughter made approximately 1 year before decedent's death were in contemplation of death.

FINDINGS OF FACT.

Some facts were stipulated and are hereby found.

The executors of the Estate of May Hicks Sheldon filed a Federal estate tax return with the collector of internal revenue for the twenty-third district of Pennsylvania. Respondent increased the reported gross estate of $2,841,219.95 to $3,496,683.51 in the notice of deficiency. Of the increase, $549,259.21 was attributable to transfers during decedent's life. Those transfers amount to about 16 per cent of the gross estate as valued in the notice of deficiency.

Decedent was born on May 14, 1869, and died on February 20, 1950, at the age of 80 years. Her husband predeceased her in 1937. Two daughters, Ruth Sheldon McKelvy, wife of William M. McKelvy, and Martha Sheldon Nuttall, survived her.

Prior to February 9, 1949, decedent transferred property valued at $149,242.01 as follows:

(a) On January 31, 1933, $21,720.03 to her husband.

(b) On October 30, 1935, $50,000 to her daughter Ruth.

(c) On June 12, 1940, $27,500 to Ruth.

(d) On May 27, 1941, $5,000 to Ruth.

(e) On September 15, 1941, $19,021.98

(f) On September 23, 1941, $13,000 to William.

¦

(g) In 1942, $8,000 to Ruth.

(h) In November 1944, a $5,000 bond to her grandson, William S. McKelvy.

She filed gift tax returns and paid the taxes due on these transfers.

On February 9, 1949, decedent transferred cash and securities, total value $100,000, to Ruth. At the date of death this transfer had a value of $109,226.25. On that same date she transferred cash and securities, total value $400,000, to William and the Union National Bank of Pittsburgh, hereafter referred to as the bank, as trustees for the benefit of Ruth. At the date of death this transfer had a value of $440,032.96. The rate of return on these securities averaged 3 to 4 per cent.

The trust instrument provided for distribution of income to Ruth in the sole discretion of the bank during decedent's lifetime. After her death, the trustees were to distribute all income to Ruth during her lifetime. Ruth could receive corpus distributions aggregating 25 per cent at her request. She also received a testamentary power to appoint among her husband, children, and issue of any deceased child. If none survived her, she could exercise a general power of appointment. If she failed to appoint, William would receive 75 per cent outright, 25 per cent remaining in trust for the children, if both survived. If not, the survivors took all, and if neither survived, the property would be devoted to ‘the purpose of assisting worthy boys to obtain an education in one of the various trades * * * .’

Petitioner filed a gift tax return for decedent reporting the transfers of February 9, 1949. It paid taxes on the transfers of $118,700.21.

In 1949 and 1950 the trust distributed all income currently to Ruth, and claimed the deduction for current distributions. Ruth reported the income. The trust net income before deductions for distributions totaled $10,440.98 in 1949 and $16,945.82 in 1950.

On February 9, 1949, decedent executed her last will and testament, revoking a will made on January 23, 1948. The later will contained provisions similar to those of the earlier will except that decedent increased principal distributions available to Ruth from 25 per cent to 33 1/3 per cent, and made William a remainderman in three-fourths of the corpus of a testamentary trust. It also reduced the legacies to decedent's servants. A codicil dated August 9, 1949, further restricted those legacies.

The testamentary trust provided Ruth with the income for life. She could receive one-third of the corpus during her life, limited to 5 per cent in any one year. On her death, if she survived decedent, she could appoint among her husband, her children, and issue of any deceased child, if they survived. If not, or if she failed to appoint, 75 per cent of the corpus would pass outright to William and 25 per cent in trust for the children, if both survived. If not, the survivors would take all, and if none, the property would be devoted to ‘the purpose of assisting worthy boys to obtain an education in one of the various trades * * * .’

The will and codicil were probated in Allegheny County, Pennsylvania.

Decedent believed William should share in her estate in case of Ruth's death, since there was a possibility of decedent surviving her daughter.

William was the senior partner in a brokerage firm. He and Ruth, who was 47 years of age on February 9, 1949, experienced no marital difficulties at that time. Decedent and the McKelvys were familiar with each other's financial position.

From 1944 through 1948, decedent reported the following information on her individual income tax returns:

+-------------------------------------------------------------------------------+ ¦ ¦1944 ¦1945 ¦1946 ¦1947 ¦1948 ¦Average ¦ +----------+----------+-----------+-----------+----------+----------+-----------¦ ¦Income ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦except ¦$53,178.69¦$51,936.94 ¦$37,650.63 ¦$62,821.18¦$72,278.12¦$55,573.11 ¦ ¦capital ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦gains ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------+----------+-----------+-----------+----------+----------+-----------¦ ¦Capital ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦gains ¦(4,008.11)¦31,002.48 ¦59,585.96 ¦(2,428.00)¦(2,123.59)¦16,405.75 ¦ ¦(losses) ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------+----------+-----------+-----------+----------+----------+-----------¦ ¦Gross ¦$49,170.58¦$82,939.42 ¦$97,236.59 ¦$60,393.18¦$70,154.53¦$71,978.86 ¦ ¦income ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------+----------+-----------+-----------+----------+----------+-----------¦ ¦Nontaxable¦31,541.24 ¦36,702.72 ¦37,784.82 ¦35,593.25 ¦27,844.25 ¦33,893.26 ¦ ¦income ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------+----------+-----------+-----------+----------+----------+-----------¦ ¦Total ¦$80,711.82¦$119,642.14¦$135,021.41¦$95,986.43¦$97,998.78¦$105,872.12¦ ¦income ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------+----------+-----------+-----------+----------+----------+-----------¦ ¦Net ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦taxable ¦31,808.36 ¦38,576.42 ¦32,347.79 ¦41,072.65 ¦42,089.06 ¦37,178.86 ¦ ¦income ¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------+----------+-----------+-----------+----------+----------+-----------¦ ¦Tax due ¦15,289.33 ¦18,287.56 ¦13,240.30 ¦19,181.63 ¦18,169.24 ¦16,833.61 ¦ +-------------------------------------------------------------------------------+

From 1944 through 1947, Ruth reported the following information on her individual income tax returns, and in 1948 on a joint return with William:

+-----------------------------------------------------------------------------+ ¦ ¦1944 ¦1945 ¦1946 ¦1947 ¦1948 ¦Average ¦ +-----------+----------+----------+----------+----------+----------+----------¦ ¦Income ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦except ¦$27,057.83¦$20,896.21¦$13,663.91¦$18,751.67¦$27,972.40¦$21,668.40¦ ¦capital ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦gains ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+----------+----------+----------+----------+----------¦ ¦Capital ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦gains ¦29,579.66 ¦41,560.15 ¦3,698.30 ¦3,016.21 ¦(1,119.23)¦15,347.02 ¦ ¦(losses) ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+----------+----------+----------+----------+----------¦ ¦Gross ¦$56,637.49¦$62,456.36¦$17,362.21¦$21,767.88¦$26,853.17¦$37,015.42¦ ¦income ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+----------+----------+----------+----------+----------¦ ¦Nontaxable ¦265.08 ¦3,535.00 ¦535.00 ¦1,335.00 ¦960.00 ¦1,326.02 ¦ ¦income ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+----------+----------+----------+----------+----------¦ ¦Total ¦$56,902.57¦$65,991.36¦$17,897.21¦$23,102.88¦$27,813.17¦$38,341.44¦ ¦income ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------+----------+----------+----------+----------+----------+----------¦ ¦Net taxable¦28,658.30 ¦32,910.58 ¦1,228.80 ¦ ¦ ¦ ¦ ¦income ¦ ¦ ¦ ¦ ¦48,729.49 ¦ ¦ +-----------+----------+----------+----------+----------+----------+----------¦ ¦Tax due ¦12,044.40 ¦14,232.68 ¦233.47 ¦ ¦

¦ ¦ ¦ ¦ ¦ ¦ ¦17,084.08 ¦ ¦ +-----------+----------+----------+----------+----------+----------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+

7,772.74¦ ¦2,428.13 ¦ ¦ +---------------------------+------------+----------+---------+----------¦ ¦Safe-deposit box ¦

117.72 ¦ ¦48.00 ¦ ¦ +---------------------------+------------+----------+---------+----------¦ ¦Bookkeeper ¦

490.52 ¦ ¦ ¦ ¦ +---------------------------+------------+----------+---------+----------¦ ¦Postage on bond redemptions¦59.63 ¦ ¦ ¦ ¦ +---------------------------+------------+----------+---------+----------¦ ¦ ¦_ ¦ ¦_ ¦ ¦ +---------------------------+------------+----------+---------+----------¦ ¦ ¦ ¦27,989.06 ¦ ¦12,894.39 ¦ +---------------------------+------------+----------+---------+----------¦ ¦ ¦ ¦_ ¦ ¦_ ¦ +---------------------------+------------+----------+---------+----------¦ ¦ ¦ ¦$43,289.06¦ ¦$50,529.49¦ +---------------------------+------------+----------+---------+----------¦ ¦Exemptions ¦ ¦1,200.00 ¦ ¦1,800.00 ¦ +---------------------------+------------+----------+---------+----------¦ ¦ ¦ ¦_ ¦ ¦_ ¦ +---------------------------+------------+----------+---------+----------¦ ¦Net income ¦ ¦$42,089.06¦ ¦$48,729.49¦ +---------------------------+------------+----------+---------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------------------------------------------------------+

1 Unknown.

2 Includes William's income.

3 Insufficient information.

The deductions and exemptions claimed in decedent's 1948 income tax return and the joint income tax return of William and Ruth are as follows:

+------------------------------------------------------------------------+ ¦ ¦Decedent ¦William and Ruth ¦ +---------------------------+-----------------------+--------------------¦ ¦Adjusted gross income ¦ ¦$71,278.12¦ ¦$63,423.88¦ +---------------------------+------------+----------+---------+----------¦ ¦Deductions: ¦ ¦ ¦ ¦ ¦ +---------------------------+------------+----------+---------+----------¦ ¦Contributions ¦$8,583.77 ¦ ¦$1,196.97¦ ¦ +---------------------------+------------+----------+---------+----------¦ ¦Interest ¦27.40 ¦ ¦1,444.45 ¦ ¦ +---------------------------+------------+----------+---------+----------¦ ¦Taxes ¦10,937.28 ¦ ¦5,158.51 ¦ ¦ +---------------------------+------------+----------+---------+----------¦ ¦Medical expense ¦ ¦ ¦2,618.33 ¦ ¦ +---------------------------+------------+----------+---------+----------¦ ¦Investment counsel fee ¦

1 Represents 75.4641 per cent of expense incurred; portion applicable to taxable income.

From 1938 until her death decedent consulted a firm concerning her investments and financial affairs. The founder of the firm was familiar with her affairs, although not personally in charge of her account. He knew the sources and amounts of Ruth's income and of William's investment income but not his income from the brokerage business.

In 1948 he expressed concern over heavier income and state taxes being proposed. Decedent considered her income to exceed her needs and decided to increase her daughter's income.

The investment counsel calculated income tax savings of about $7,900 if decedent transferred $500,000 in trust for Ruth. Decedent was interested in reducing her income taxes. The investment counsel discussed the proposition with William and Ruth and advised decedent's personal attorney of the proposal. He discussed the matter with decedent and the investment counsel. Tax men in the attorney's office checked the investment counsel's calculations. The investment counsel suggested that the gift be to a discretionary trust, so that the income might be taxed to the trust at lower rates if Ruth didn't need the income.

Ruth and William desired to purchase a new and larger boat. Decedent expressed interest in the boat after an overnight trip in 1946 or 1947. Decedent left the decision entirely to Ruth as to the gift being outright or in trust. The parties agreed to have $100,000 given outright to purchase a new boat and the balance placed in trust as originally suggested by the investment counsel. Ruth and William had a boat built for a little over $100,000.

Decedent, for at least 20 years before making these gifts, was active, vigorous, and mentally alert. She had a good appetite, enjoyed a drink before dinner, and a good story. As late as the summer of 1949, her appearance was attractive, her carriage erect, and her skin clear.

Decedent did her own shopping, including Christmas shopping in October 1949. She never used the elevator installed in her residence for her husband's use during his last illness. She enjoyed walking and used the stairs in her home, which had ceilings 16 feet high, as well as the stairs in her 2-story summer home in Maine.

Decedent's summer home was 14 miles from the nearest settlement. She spent her summers there except during World War II when gasoline was rationed and in 1937 when she went abroad.

Decedent was bedridden for only about 2 weeks in 1940 with erysipelas, and did not have any other confinement from 1930 until the summer of 1949. The only medications used by decedent were an old-fashioned liver pill and annual cold shots intended to alleviate a slight asthmatic condition.

Decedent's physicians never discussed her physical condition with William. The only contacts with physicians were for the cold shots and an annual check-up in June, before going to Maine. The check-ups led decedent to believe that she was ‘fit as a fiddle.’

In the spring of 1949, decedent made her usual plans to go to Maine and left Pittsburgh in July. When she reached William's home in Ventnor, New Jersey, she complained of impaired vision in one eye. Ruth and William called a physician and decedent remained there for 7 to 10 days. The physician approved of her return to Pittsburgh by car. She remained confined to bed in Pittsburgh for 3 or 4 weeks. After this illness, she resumed her normal activities in the fall of 1949.

Decedent decided not to make a planned trip to New Jersey that fall to avoid Ruth's concern over her. Being greatly disappointed in not getting to Maine in the summer of 1949, she planned then, and on into the winter, on going the following summer.

Decedent died in February 1950. Her physician told her attorney in November 1949 that she would not recover. The cause of death stated on the estate tax return was congestive heart failure. Three physicians attended decedent during her illnesses in 1949.

Decedent never discussed impending death with her son-in-law, personal attorney, financial adviser, estate superintendent, or the latter's wife until 2 weeks before her death. Here thoughts were optimistic and of an active life.

Decedent came from a family noted for longevity. Her mother lived until 92 or 93. Her brother is still living at 84. One uncle was the oldest living graduate of the University of Pittsburgh when he died. Two aunts died in their 80's.

The transfers by decedent on February 9, 1949, were not made in contemplation of death.

OPINION.

OPPER, Judge:

Decedent was 80 years old when she died. The transfers which respondent has determined to have been in contemplation of death took place only about a year earlier. These are significant contributory facts in determining decedent's dominant motive. United States v. Wells, 283 U.S. 102; Oliver v. Bell, (C.A. 3) 103 F.2d 760; Estate of Ambrose Fry, 9 T.C. 503. They are nullified here, however, by her apparent good health and the recognized longevity of her family.

Respondent disagrees with the conclusion that decedent's health was apparently good, or at least with the statement that petitioner has carried its burden of proving it. But we think the conclusion warranted notwithstanding the absence of any medical testimony. At the time of questioning, the lay witnesses gave unanimous evidence of decedent's vigor and lack of any experience of serious illness; and even after she became subject to the condition which eventually proved fatal, the evidence is clear that she was unaware of it and that information about it was purposely withheld from her. The testimony adduced, in our view, overcomes both the presumption supporting respondent as well as any unfavorable inferences to be drawn from decedent's age and the absence of expert testimony. There is the further negative factor that the amount transferred, though large, was a comparatively small portion of her total estate. See, e.g., Estate of Oliver Johnson, 10 T.C. 680.

Even so, and without more, the proof would be in such equipoise that respondent might prevail. There is in addition, however, the testimony given by decedent's financial adviser as to decedent's motive for the transfer, or at least his motive in advising her. Estate of Frank F. Tillotson, 44 B.T.A. 644. His statements were made under oath, and were corroborated in a general way by decedent's attorney, and in the absence of specific contradiction we do not feel free to disregard or fail to credit them. His evidence was that he ‘recommended some plans to reduce her income tax * * * I recommended specifically that she make a gift for the benefit of her daughter which we estimated would save for the family between herself and her daughter over $7,900 a year in income tax. * * * That if she made a gift of $500,000 that the gross income that she was giving away would not be the amount of spendable income that she was reducing * * * .’ The transfers ensued almost immediately thereafter, following the advice thus given, and it is fair to infer she obtained her motivation from that cause. Estate of Louis Richards, 20 T.C. 904, affirmed per curiam (C.A. 9) 221 F.2d 808. A purpose to save income taxes while at the same time retaining the income in the family is one associated with life and contradicts any assumption of contemplation of death. Estate of Charles J. Rosebault, 12 T.C. 1; Estate of Genevieve Brady Macaulay, 3 T.C. 350, affd. (C.A. 2) 150 F.2d 847. See City Bank Farmers Trust Co. v. McGowan, (C.A. 2) 142 F.2d 599, modified 323 U.S. 594.

We have accordingly determined, as embodied in our Findings of Fact, that the transfers in controversy were not made in contemplation of death. Such a finding disposes of the issue. Colorado National Bank v. Commissioner, 305 U.S. 23; Allen v. Trust Co., 326 U.S. 630.

For the purpose of permitting computation of estate fees and expenses,

Decision will be entered under Rule 50.