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

Tax Court of the United States.Mar 31, 1958
29 T.C. 1223 (U.S.T.C. 1958)

Docket Nos. 36355 45461— 45465.

1958-03-31

ESTATE OF SAMUEL WANT, DECEASED, FANNYE M. WANT, EXECUTRIX, AND ESTELLE WANT, TRUSTEES AND TRANSFEREES, ET. AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

George D. Webster, Esq., 2 and Kenneth H. Liles, Esq., 3 for the petitioners. Paul E. Waring, Esq., for the respondent.


George D. Webster, Esq., and Kenneth H. Liles, Esq., for the petitioners. Paul E. Waring, Esq., for the respondent.

None.

Counsel for Estelle Want.

Counsel for Estate of Samuel Want and Estate of Jacob A. Want.


1. An order of a State court administering certain funds of a deceased executor and trustee (one of the original petitioners herein) adjudged that unless the United States asserted in proceedings before that court all the claims it had against that executor's estate it should be ‘barred and foreclosed of all right and claim against the funds of said estate.’ The United States refused to assert claims before that court on account of the gift and estate taxes here involved. Thereafter, that court entered an order directing that no claim not proved or allowed should participate in the funds of the estate administered by it until the claims proved and allowed were paid in full. Held, no order of the State court rendered the issues presented in these proceedings res judicata.

2. Transfers in trust for his 6-year-old daughter of $82,000 by ailing decedent at age 54, held, not to be in contemplation of death since decedent had no knowledge or realization of seriousness and fatal nature of disease contracted, from which he died approximately 2 years after transfer, and his dominant motive in making such transfers was to secure the daughter from dangers connected with decedent's life.

3. Held, value of contingent remainder under trust includible in decedent's gross estate under section 811(d),I.R.C. 1939.

4. Held, decedent's transfer of $25,000 in Treasury bonds to his executors and trustees in 1946 was for adequate consideration consisting of services rendered or to be rendered and, hence, is not includible in decedent's estate under section 811(c),I.R.C. 1939.

5. Held, fair market value, on date of transfer to trust, of 397 of the 400 outstanding shares of common stock of corporation was zero.

6. Held, sum of money proffered in payment to respondent by one taxpayer in connection with an offer of compromise of gift tax transferee liability, which has not been accepted by respondent, cannot be offset or credited against a similar tax liability of another taxpayer.

7. Held, petitioner Estelle liable as trustee and transferee for gift and estate taxes.

Upon motion of petitioners, these cases were consolidated for hearing.

In Docket No. 36355 respondent was determined that Samuel Want and Estelle Want are liable as trustees and transferees for Federal gift taxes and additions to the tax (under section 3612(d),I.R.C. 1939) of Jacob A. Want, deceased, donor and transferor, in the following amounts:

+----------------------------+ ¦Year¦Deficiency¦Addition to ¦ +----+----------+------------¦ ¦ ¦ ¦tax ¦ +----+----------+------------¦ ¦1945¦$774.09 ¦$2,024.71 ¦ +----+----------+------------¦ ¦1946¦23,222.82 ¦3,652.74 ¦ +----------------------------+

Samuel and Estell were named as executor and executrix and testamentary trustees of the estate of their brother Jacob who died testate on February 8, 1947, and were also trustees under a trust established by Jacob for the benefit of his minor daughter Jacqueline in 1945. The deficiency for 1945 arises by reason of respondent's determination that in addition to the gifts made by Jacob to the trust in that year (which were reported in the gift tax return filed on behalf of the deceased Jacob) there were unreported gifts made by Jacob in that year to Blossom S. Ost in the amount of $15,637.38. The deficiency for 1946 arises by reason of the respondent's determination that the gift by Jacob to the trust in that year of 397 shares of the common stock of J. A. Want Organization, Inc., reported in the return filed on behalf of the deceased Jacob for that year as having no fair market value, had a fair market value ‘of $79,400.00 equivalent to $200.00 a share,‘ and also that there were unreported gifts made by Jacob in that year to Blossom S. Ost in the amount of $34,186.71.

In Docket No. 45461 respondent determined a deficiency of $15,088.10 in the estate tax of the Estate of Jacob A. Want, deceased. He further determined that the deficiency constituted the personal liability of Samuel Want as fiduciary of the estate under section 3467, Revised Statutes of the United States. This deficiency arises by reason of respondent's determination that ‘the value of the trust created by the decedent * * * for Jacqueline * * * together with additions thereto made by decedent constitute taxable transfers.’ These ‘taxable transfers' in the total amount of $117,115 were computed by respondent by adding the following items: (a) $82,000 in cash transferred by decedent to the trust in 1945, (b) $25,000 worth of United States Treasury bonds, plus interest of $115, transferred by decedent in 1946, and (c) $10,000 in cash transferred by decedent in 1947. Respondent had conceded error with regard to the $10,000 item.

Docket No. 45463 involves a determination similar to that involved in Docket No. 45461, except that the fiduciary named therein was Estelle instead of Samuel.

In Docket No. 45462 a determination of a similar deficiency in Federal estate tax for the same reason was made against Estate of Jacob A. Want, deceased.

In Docket No. 45464 it was determined that Samuel and Estelle were liable for the deficiency in Federal estate tax ‘as trustees and beneficiaries of certain insurance policies includible in the Estate of Jacob A. Want, Deceased.’

In Docket No. 45465 it was determined that Samuel and Estelle were liable for the same deficiency in Federal estate tax as ‘transferees and trustees of certain insurance policies and of other property under an inter vivos trust created by the decedent.’

Petitioner Samuel Want died during the pendency of these proceedings, and Fannye M. Want, as executrix of the estate of Samuel Want, was substituted as petitioner wherever deemed appropriate.

The questions presented in the cases herein are:

(1) Whether the order of the Court of Common Pleas of Darlington County, South Carolina, dated December 3, 1956, results in making any of the issues involved in these proceedings res judicata;

(2) Whether the $82,000 which the decedent conveyed to an inter vivos trust in 1945 is includible in his gross estate under section 811(c) or (d) of the Internal Revenue Code of 1939;

(3) Whether the transfer of $25,000 in Treasury bonds to Samuel Want in 1946 was a transfer for adequate consideration in money's worth, or whether it is includible in the decedent's gross estate under section 811(c) as a transfer in contemplation of death;

(4) Whether the 397 shares of common stock in the J. A. Want Organization, Inc., had any fair market value at the date of their transfer on January 9, 1946, to the Jacqueline Want trust and, if so, the amount thereof;

(5) Whether a payment of $2,500 proffered by Blossom S. Ost, in connection with her offer of compromise in respect to her liability for gift taxes and additions, should be credited against any gift tax liability that may be determined against the petitioner; and

(6) Whether, in any event, Estelle Want is liable for any of the deficiencies in gift or estate taxes.

FINDINGS OF FACT

Some of the facts have been stipulated by the parties and are hereby found as stipulated.

Fannye M. Want is the executrix of the Estate of Samuel Want who died subsequent to the filing of the original petitions herein. Samuel and Estelle, the surviving brother and sister of Jacob A. Want, were the original petitioners, as trustees and transferees, and as the executor and executrix, respectively, of the Estate of Jacob A. Want, hereinafter referred to as the decedent, they signed the petition filed on behalf of the petitioner estate. The decedent was the founder and president, during the period June 13, 1927, to February 8, 1947, inclusive of the J. A. Want Organization, Inc., hereinafter referred to as the corporation, a corporation in New York City engaged in the Printing, Lithographing, Duplicating, and direct mail business. The corporation used an accrual method of accounting and was on a calendar year basis. It had outstanding 400 shares of common stock. In 1942 it had outstanding preferred stock having a total par value of $15,000. Decedent acquired 90 shares of its preferred stock and 150 shares of its common stock from the Estate of C. E. Hooven for a total consideration of $4,000 in 1942, following which acquisition he owned at least 397 shares of its common stock.

In 1944 decedent lived in an apartment in the Greenwich Village section of New York City; his brother Samuel lived in Darlington, South Carolina, where he was a lawyer and banker; and his sister Estelle, who was 10 years younger than decedent, lived in Washington, D.C., where she had been working as a secretary for the United States Chamber of Commerce since 1929 and had been supporting herself and, until 1942, had also partially supported her mother. The Wants had come to this country from Great Britain. Decedent came before his sister did. They were not close and did not see each other often.

On November 15, 1944, the decedent visited his physician with a complaint that he was losing power in his fingers and consequently was dropping objects from his hands and could not type on his typewriter as fast as formerly, and also that it was difficult for him to get up and walk. He was 54 years old at the time of this visit to his physician. This physician diagnosed his disease as amyosthenic lateral sclerosis of the spinal cord, which is a chronic degenerative disease of the central nervous motor system of the body and is associated with muscular atrophy, or the wasting away of the body from the want of nourishment. This is a disease of the glandular cells of the brain and of the cord to the brain which eventually makes the body immovable. This disease is usually fatal to the patient, who can only be expected to live from 2 to 6 years from the date of the diagnosis. The decedent's condition deteriorated in the years following the diagnosis, and the creeping paralysis of the upper portion of his body finally resulted in a complete paralysis of his entire body and his eventual death on February 8, 1947. The decedent's physician only advised him in 1944 that her diagnosis indicated he had ‘a sickness of the nerves,‘ but the nature of the disease was not explained to him nor was he warned of its probable fatal character. After completing her own diagnosis, the decedent's physician referred him to neurologists for further diagnosis. At the time of the diagnosis by his physician (November 15, 1944) decedent was active, talked pleasantly of the theater and music, and acted as a man who had many interests in life.

In December 1944 the decedent began to drag one of his legs. During most of 1945 the decedent continued to lead his normal life, working, visiting, and going out frequently. In September 1945 he was still driving his automobile even though it was difficult for him to use his hands. In November of that year he was hardly able to walk and used a wheelchair in going to his doctor's office. Beginning in January 1946 he no longer could use either his hands or his legs and it was necessary to employ male nurses to take care of him. This situation existed until he died, 1 year later, in February 1947.

In 1945 decedent was married but was not living with his wife, from whom he was estranged. He had an only child, his daughter, Jacqueline, who was 6 years old and whose mother had died in 1944. During the winter of 1944— 1945 Jacqueline had been in a boarding school in upstate New York. She and her father were greatly attached to each other and she wanted to stay at home with him in New York. Accordingly, she attended a school in New York in the fall of 1945. She was ‘very run down’ and ‘very frightened about the school.’ She was taken care of by a maid, who would not stay with her in the evenings or during weekends, and occasionally by decedent's women friends, including Blossom Ost.

Estelle had visited decedent in October 1944, when she had helped him arrange a Halloween party for Jacqueline, and also during the Christmas holidays of that year, when she had helped care for Jacqueline while she was home from school. In October of that year decedent's physical condition appeared normal, but at Christmastime Estelle noticed that he dragged one of his legs a little, although he said nothing concerning any illness. He went to his office every day, he ‘ate out daily,‘ entertained people frequently in the evenings, went to theaters, drove his car and ‘was going about as usual.’

Decedent was devoted to Jacqueline, his only child, and was always concerned about her future and financial security. When she was only a few years old he took out a $25,000 policy of life insurance, which named Jacqueline as beneficiary.

In the fall of 1945 Estelle received a long-distance telephone call from Samuel who had been visiting the decedent and who was distressed over the conditions having to do with the care of Jacqueline. At his request, Estelle got a leave of absence of 2 weeks from the Chamber of Commerce and went to New York for the purpose of either obtaining the services of a housekeeper for decedent who could look after Jacqueline, or arranging for her to be put into a boarding school. When she arrived in New York she found a little, run-down, frightened, motherless child who did not want to go away to boarding school; she found that the brother, the decedent, although still able to drive and go to his business, was a very sick man who required the help of a servant to dress on account of the loss of the use of his hands and whose speech was heavy and difficult to understand; she found that ‘everybody in the business' was talking about large sums of Federal income taxes owed for 3 years; and she found that considerable amounts of money and valuable articles of property were being given by decedent to Blossom Ost. She concluded that it was impossible to arrange matters in a short time as suggested by Samuel and, at the request of the decedent, she took a 3 months' leave of absence from her employer in Washington.

Shortly after Estelle's arrival in New York, decedent was taken to a hospital under the care of a neurologist and remained there until January 1946. Estelle took care of Jacqueline, escorted her to and from school, and visited the decedent while he was in the hospital where he dictated to her instructions, letters, and memoranda concerning his business. After his return from the hospital, decedent's physical condition was much worse and he had difficulty in making himself understood to persons other than Estelle, although his mind continued to be clear and active and he continued to be keenly interested in his business. Consequently, her secretarial and business assistance to the decedent became more important and her knowledge of the business and its problems and personnel increased. During this time Samuel made many trips to New York, where he consulted with decedent and Estelle and assisted the decedent in connection with his business, personal, and family problems.

In January 1945 the decedent executed a trust agreement for the benefit of his daughter Jacqueline as donee-beneficiary, in which he designated Samuel Want and Estelle Want, his brother and sister, as the cotrustees. The material parts of this trust agreement provide as follows:

The Donor has delivered to the Trustees, and the latter have temporarily deposited with the Citizens and Southern National Bank of Columbia, South Carolina, the sum to (sic) Seventy-five Thousand and no/100 ($75,000) Dollars, subject to the joint order of the said Trustees while both are living, and to the order of the survivor in the event of the death of either and subject to the further provisions hereof. The Donor may from time to time add funds or securities or both to said trust and may make certain life insurance policies payable to the Trustees, and may in his will devise and bequeath additional funds and/or property to the Trustees, and wherever hereinafter the expression ‘trust fund’ is used, it shall refer to all of the aforesaid funds and property in the hands of the Trustees herein named, derived from any of the sources hereinabove stated.

The said trust fund is hereby established and created by the Donor to provide for the support, maintenance and education of his daughter, Jacqueline Want, hereinafter named and styled the Donee, and subject to the further provisions hereof covering the contingency of the death of the Donee, the said trust fund shall be wholly applied as to income, and also as far as necessary by incursions upon the principal, to promote the general well-being and happiness of the Donee. At the present time the Donee is being supported, maintained and educated by the Donor. The duties of the Trustees in respect to the application of the trust fund for the support, maintenance and education of the Donee shall in any event begin immediately upon the death of the Donor, and shall begin at an earlier time if by reason of financial reverses or disability on the part of the Donor, this is rendered necessary or desirable in the best interests of the Donee.

The Trustees covenant and agree that they will receive, hold and administer the said trust fund subject to all of the terms hereof, and in the filial spirit in which the trust is created, and they shall have and are hereby granted the following powers:

(1) To receive all funds and property provided by the Donor during his lifetime, or derived after the Donor's death from life insurance policies on the life of the Donor payable to the Donee or to the Trustees, or from the Donor's estate, and to administer the same in accordance with all of the provisions hereof.

* * * * *

(5) To institute and defend any and every character of action at law or in equity that may be necessary for the assertion and preservation and protection of the rights and interests of the Donee and the defense of her rights and interests against any claims or litigation that may be asserted or instituted against her or against the trusts (sic) estate or against any insurance or devises or bequests intended to become a part of the trust fund and which may be claimed by other persons.

(6 ) To use any part of the corpus of the trust fund that in their opinion may be necessary to promote the welfare and happiness of the Donee.

The Donor hereby vests in the Trustees full power and authority respecting the custody and education of the Donee, and charges them with the duty to consider the wishes of the Donee as she becomes mature enough to exercise sound wishes whenever in their opinion the best interests of the Donee will not be seriously impaired by so doing. It is the purpose of this trust to see that the Donee is reared in comfort and with the nearest approach to home conditions that can reasonably be provided, and that she be educated in a manner that will both provide her with a cultural background and also afford her a means of livelihood in some genteel occupation, the choice of which is to be left to her as far as the Trustees believe that this can be done with a proper regard for her future welfare.

If the Donee takes and completes a vocational education, and if in the opinion of the Trustees she has the competence and makes the associations and other arrangements that render such a course wise, the Trustees may provide the Donee with such amount as in their opinion may be reasonable at the time to enable her to go into some sound business venture that may be thought to afford her a future livelihood.

In keeping with the foregoing, and subject to all of the conditions hereof, the Trustees shall have power to make investments and reinvestments, to collect any character of indebtedness that may become due to the trust estate, to compromise and settle any character of claim made by or on behalf of or against the trust estate or the Donee, to employ counsel or other expert assistants in dealing with any legal or tax or other problems that arise in the course of the administration of the estate, and in all such matters and in all other matters to do and perform every character of act which they deem necessary or appropriate to carry out the trust purposes herein expressed.

On the eighteenth birthday of the Donee and on the Donee's birthday each year thereafter, while this trust remains in effect, the Trustees shall pay over to the Donee the sum of One Thousand ($1,000) Dollars using the corpus of the fund for that purpose if the accumulated income is insufficient, unless in the opinion of the Trustees the Donee will not use such funds judiciously. The Trustees shall have full discretion to make or refrain from making the said payment to the Donee in any year, and if they refrain from making such payment in any year, they may in their discretion in subsequent years increase the amount of the annual payment to make up the full sum of One Thousand ($1,000) Dollars per year for the period herein specified.

In the event of the marriage of the Donee the Trustees shall, unless they have good reason at the time to believe that such a course is unwise (and as to which their discretion shall be uncontrolled), pay over to the Donee a reasonable amount of money out of either the accumulated income (if any) or the corpus of the trust fund, or both, for the purpose of assisting in the establishment of a home, and in the same event, but only at such time as to the Trustees may seem proper, they may pay over to the Donee an additional reasonable amount for the purchase or construction of a home.

In the event of the death of the Donee before she attains the age of thirty years, leaving no child or children surviving, the balance of the trust fund in the hands of the Trustees shall be kept invested under the provisions hereof, and one-half of the income thereof shall be paid to the widow of the Donor so long as she lives, and the other half to my sisters, Estelle Want, Leah Levin and Celia Want. The child or children of any deceased sister shall take per stirpes the share of any deceased sister. Upon the death of the widow of the Donor, following the death of The Donee within the provisions hereof, the trust shall cease, and the whole amount in the hands of the Trustees shall be paid over to the extent of two-thirds thereof to my sisters, Estelle Want, Leah Levin and Celia Want, and to the extent of the other third thereof to my sister, Anna S. Libbert, my brothers, Abe Want, Harry Want, and Samuel Want, and to my nieces and nephews, Louise Libbert (daughter of Anna S. Libbert), LeRoy M. Want (son of Samuel Want), Selma Stein (daughter of Celia Want), Louis Levin and Melvin Levin (sons of Leah Levin), Albert Want (son of Abe Want) and the children of Harry Want. But the Donor reserves the right to change this list of beneficiaries at any time so long as he may live. In the event of the death of the Donee before she attains the age of thirty years, leaving a child or children surviving, the Trustees shall pay over all of the trust fund in their hands to such child or children in equal shares. If the Donee lives to attain the age of thirty years, the Trustees shall pay over to her the whole of the trust fund, including all accumulations.

In the event of the death of either of the Trustees herein named, the survivor shall become sole trustee, with all of the powers and subject to all of the duties herein set forth; but in such event, if the Donor is living, he shall have the right to name a co-trustee to take the place of the deceased trustee, and if the Donor is not living when Samuel Want, dies, the Donor hereby appoints the Citizens and Southern National Bank of Columbia, South Carolina, to serve as co-trustee with Estelle Want, with all of the powers herein conferred upon the Trustees. The Donor shall have the right in his will to appoint a substituted trustee to take the place of either Samuel Want or Estelle Want when either or both of them shall die, and if the Donor makes no designation of a substituted co-trustee or co-trustees either by will or inter vivos, Samuel Want shall have the right to name a substituted trustee or trustees in his will. Any co-trustee or substituted trustee so appointed shall have all of the powers and shall be subject to all of the duties herein provided. In the event of the death of both of the Trustees herein named without a co-trustee or substituted trustee having been designated as herein provided, the Citizens and Southern National Bank of Columbia, South Carolina, is hereby appointed Trustee, subject to all of the provisions hereof.

The Donee shall not have the right or power to assign, pledge, hypothecate or in any other manner encumber or transfer any of the rights or interests or funds vested in her by this instrument, or arising out of the existence of the trust fund, prior to her attainment of the age of thirty years, nor shall any creditor of the Donee have the right or power to impound by execution, attachment, garnishment, or any other character of legal process any part of the income or corpus of the trust fund. Both the income and the corpus of said trust fund shall have all of the characteristics of a spendthrift trust.

Samuel and Estelle accepted appointment as cotrustees of this trust in February 1945. Estelle's signature to the trust agreement was acknowledged in the District of Columbia, Samuel's signature in South Carolina. During the year 1945 the decedent transferred to the trust $82,000 in cash, $75,000 during January, and $7,000 during October. In 1946 he transferred 397 of the 400 outstanding shares of the corporation's common stock to the trust.

In 1946 Estelle resigned from her position with the United States Chamber of Commerce. She did this with great reluctance because she had established a considerable degree of seniority in employment there, because she enjoyed living in her small apartment in Washington, and because she could see no financial future or security for herself in connection with her services in New York, in spite of the salary of $275 a month with decedent had arranged for her and which was paid by the corporation. Samuel had also contributed much time and effort to the affairs of decedent and Jacqueline, having come up to New York from South Carolina once every 4 or 5 weeks since 1944. After many conferences between the three of them, it was finally agreed that decedent would give $10,000 net after taxes to Estelle and also to Samuel in consideration for their past, present, and future services in the care of Jacqueline and her affairs.

During 1946 and until decedent's death Estelle continued to care for Jacqueline, to maintain as normal a home life for her as possible, and to assist decedent in his business concerns. Decedent gave Estelle a power of attorney. In the latter part of that year Estelle learned that decedent was giving large amounts of money to Blossom Ost in response to her threats. Pursuant to the power of attorney, Estelle withdrew approximately $23,000 from decedent's bank account and deposited this sum in her own account in Washington in order to prevent its disbursement to Blossom. After decedent's death, Estelle paid some of his bills from this money and turned over the balance to Samuel. This balance was included in decedent's gross estate as shown in the Federal estate tax return filed by Estelle and Samuel.

During the calendar years 1945 and 1946 the decedent made transfers by gift to Blossom S. Ost in the respective amounts of at least $15,637.38 and $34,186.71. These gifts consisted of cash, bonds, jewelry, clothing, and an automobile. In 1955 Blossom stipulated in proceedings before this Court that she had gift tax transferee liability for 1945 of $774.09 and additions of $2,024.71, and for 1946 of $23,222.82 and $3,652.74 respectively. These are in the same gift tax liabilities determined against the petitioners herein in Docket No. 36355. Blossom Ost proffered payment to respondent in the amount of $2,500 in connection with an offer in compromise of these gift taxes, an offer which has not been accepted by the respondent.

On April 4, 1945, the decedent executed his last will and testament in which Samuel and Estelle were named executor and executrix of his estate and guardians of Jacqueline. This will provides in part as follows:

After the payment of my just debts * * * I devise and bequeath all of my estate, real, personal and mixed, whether now owned by me or that may hereafter be acquired by me, to my executor and executrix and trustees hereinafter named, subject to all of the provisions hereof, as follows:

FIRST: My executor and executrix hereinafter named, who hereby also are appointed trustees of my estate for the purpose of exercising powers not legally vested in executors, are hereby empowered to conduct any businesses which I may own or in which I may be the principal stockholder at the time of my death, and for that purpose to vote all stock in any corporation owned by me at the time of my death with the same powers that I could exercise if living. * * *

SECOND: I direct my executor and executrix and trustees to pay to my wife, Lillian, each week, so long as she shall live, the sum of One Hundred ($100.00) Dollars. I devise and bequeath the remainder of the income of my estate to Samuel Want and Estelle Want, as trustees for my daughter, Jacqueline Want, to be held and used by them for the support, maintenance and education of my said daughter. * * *

FOURTH: Upon the death of my wife, the whole of my aforesaid estate, including all additions thereto, shall be paid over to Samuel Want and Estelle Want, as trustees of my aforesaid daughter, to hold and administer the same in their uncontrolled discretion, for the support, maintenance and education of my daughter, and pay over the corpus thereof to my daughter in ten equal annual installments beginning on her twenty-fifth birthday, with the power, however, to pay over said estate to my daughter in larger installments or at any earlier time or times, if in their uncontrolled discretion it is wise so to do. * * *

NINTH: I hereby appoint Samuel Want and Estelle Want as executor and executrix of my will and as trustees of my estate. In their capacities as trustees they shall also be guardians of the estate and person of my daughter, Jacqueline Want. * * *

The decedent, Jacob A. Want, left life insurance in the amount of $32,097.60 payable to and received by Samuel and Estelle as trustees under the trust for the benefit of Jacqueline Want, which policies were reported in the decedent's Federal estate tax return as follows:

+---------------------------------------+ ¦Prudential Life Insurance Co¦$18,121.30¦ +----------------------------+----------¦ ¦Penn Mutual Life ¦5,006.40 ¦ +----------------------------+----------¦ ¦Guardian Life ¦6,027.10 ¦ +----------------------------+----------¦ ¦Connecticut Mutual ¦2,942.80 ¦ +----------------------------+----------¦ ¦Total ¦32,097.60 ¦ +---------------------------------------+

He also left Series E and G bonds in the amount of $13,266.49 in the name of ‘Estelle Want & Samuel Want, Legal guardians of Jacqueline R. Want, a minor.’

In accordance with the agreement that decedent would give to Estelle and Samuel $10,000 after income taxes, each, in consideration for what each was doing and agreed to do for Jacqueline, the decedent transferred United States Treasury bonds having a face value of $25,000 to Samuel and 1946, subject to his obligation to pay Estelle her share thereof. Samuel subsequently satisfied this obligation by paying Estelle $10,000 by check dated January 21, 1947, and by further check dated March 12, 1948, in the amount of $2,966, the approximate amount of the income taxes due on the $10,000 payment. Samuel retained the remaining $2,034 to defray the amount of the tax on his $10,000 share. Samuel and Estelle each included in his or her Federal income tax return for the year 1947 the $10,000 thus received from the decedent. Estelle paid taxes of $2,968.85 on the $10,000 in addition to $478.55 which was withheld from her salary for that year. Samuel's journal book listed the $10,000 as a fee collected from the decedent. Neither Samuel nor Estelle received any other remuneration for his or her services as a trustee under the trust set up for Jacqueline. The transfer by decedent of these Treasury bonds was for full and adequate consideration.

Both Samuel and Estelle fully performed their part of the agreement with the decedent to take care of Jacqueline. Samuel performed the managerial duties in respect to the trust and the estate; Estelle as cotrustee and executrix signed all papers, checks, and documents, such as tax returns and the sale agreement in 1952. In addition to withdrawing approximately $23,000 from the decedent's bank account prior to his death in order to keep that amount from being given by decedent to Blossom Ost, she also endorsed the Series E and G bonds left by the decedent. Jacqueline was devotedly cared for by Estelle, with whom she lived and who continues to give her care, guidance, and considerable financial support.

Estelle received $750 a month to cover the expense of taking care of Jacqueline and maintaining a home occupied by them both for some time after decedent's death. Monthly checks of this amount were made out to Estelle and were signed by Samuel for the J. A. Want Estate. She began to work for the corporation after the decedent died in February 1947 and continued to work there until the corporation was sold in 1952. Eventually she returned to Washington with Jacqueline and was able to obtain reemployment by the Chamber of Commerce, but with a salary and retirement rights considerably less than she would have had if she had not resigned her position there in 1946.

When the decedent died, Samuel became president of the corporation and, as such, determined the policies of the business while Estelle participated in its day-to-day operation. Samuel continued in that capacity until the corporation was sold in 1952. He was assisted in the management of the business of the corporation by Frederick F. Weiss, the secretary of the corporation, who had been with the business about 25 years. Weiss was an accountant and had been the decedent's principal assistant and also the bookkeeper of the corporation.

In January 1946, when the decedent transferred the 397 shares of common stock of the corporation to the Jacqueline trust, he was in bad physical condition and was in a hospital. The corporation had been entirely under the direction and control of decedent, and there was much concern among the employees and others closely related to the business as to the future of the corporation without the continued efforts of the decedent. The machinery generally had been purchased secondhand and was in poor condition and in need of excessive repair. The plant occupied by the corporation was not only in poor condition but also was unsuited for the type of work in which the corporation was engaged. The business of the corporation depended heavily upon the decedent. It consisted of a large number of small accounts and a small number of large accounts. Immediately, upon the decedent's death, the corporation began to run into acute financial difficulties. Samuel frequently had to send money from South Carolina to meet the corporate payroll and thereby keep the corporation going. The decedent died insolvent in 1947. Attempts were made to sell the corporation but no one was interested in view of the situation of the business, the condition of the machinery, and the possibility of large tax liabilities.

On September 27, 1952, Samuel individually, and Samuel and Estelle as executors under the will of Jacob A. Want, and as cotrustees for the Jacqueline trust, executed an agreement of sale of the 397 shares of the common stock of the corporation, subject to a right to repurchase all of this stock for a total consideration of $250 in the event the purchaser should conclude to discontinue the business. The consideration was stated as one-half of the future profits.

The opening balance sheet of the corporation included in its Federal income tax return for 1946 shows a net worth of $79,973.60, or a book value of approximately $200 a share for the common stock, after an allowance of $14,500 for the preferred stock. The additional Federal tax liabilities later assessed against the corporation for 1943, 1944, and 1945, and the additions thereon for 1943 and 1944, exceeded by $242,888.76 the net worth of the corporation as stated on its balance sheet of January 1, 1946.

On June 2, 1947, original gift tax returns for 1945 and 1946 for Jacob A. Want, deceased, were filed with the collector of internal revenue for the second district of New York, and amended returns were filed on September 27, 1949. The gift of $82,000 to the Jacqueline trust was reported on the 1945 gift tax return and a tax of $7,324.76 was paid thereon. The gift to the Jacqueline trust of the 397 shares of stock of the corporation was reported in the 1946 gift tax return as having no value. On September 21. 1949, a Federal estate tax return was filed for the Estate of Jacob A. Want with the collector of internal revenue for the fifth district of New Jersey. The additional gift taxes and additions to tax involved in the determination against petitioners in Docket No. 36355 were based on the following items: (a) The addition to the amount of taxable gifts made by decedent in 1945 of the sum of $15,637.38 transferred to Blossom S. Ost in that year, creating an alleged deficiency of $774.09, and a 25 per cent addition of $2,024.71 for failure to file a timely gift tax return for that year; and (b) a determination that decedent had made gifts in the amount of $34,186.71 to Blossom S. Ost in 1946, and a determination that the 397 shares of the corporation transferred to the Jacqueline trust in 1946 had a fair market value of $200 a share, creating a total deficiency of $23,222.82, and a 15 per cent addition of $3,652.74 for failure to file a timely return.

On June 22, 1948, and several years before the determinations of deficiencies here involved, the Commissioner of Internal Revenue determined that the net income of the corporation for the calendar years 1943, 1944, and 1945 should be adjusted as follows:

+--------------------------------------+ ¦Year ¦Reported ¦Corrected ¦Additional¦ +-----+----------+----------+----------¦ ¦1943 ¦$20,296.79¦$83,192.76¦$62,895.97¦ +-----+----------+----------+----------¦ ¦1944 ¦15,839.94 ¦134,947.53¦119,107.59¦ +-----+----------+----------+----------¦ ¦1945 ¦15,494.49 ¦151,568.35¦136,073.86¦ +-----+----------+----------+----------¦ ¦Total¦51,631.22 ¦369,708.64¦318,077.42¦ +--------------------------------------+

As a result of the above increases in the net income of the corporation, the Commissioner, on September 9, 1949, and several years before the determinations of deficiencies here involved, assessed additional income, declared value excess-profits, and excess profits taxes, and additions thereon against the corporation for the calendar years 1943, 1944 and 1945 as follows:

+-------------------------------------+ ¦Year ¦Tax deficiency¦Additions to tax¦ +-----+--------------+----------------¦ ¦1943 ¦$55,025.83 ¦$27,512.92 ¦ +-----+--------------+----------------¦ ¦1944 ¦96,458.29 ¦48,229.16 ¦ +-----+--------------+----------------¦ ¦1945 ¦110,136.16 ¦55,068.08 ¦ +-----+--------------+----------------¦ ¦Total¦261,620.28 ¦130,810.16 ¦ +-------------------------------------+

On June 22, 1948, the Commissioner of Internal Revenue determined that the net income of decedent for the calendar years 1943, 1944, and 1945 should be adjusted as follows:

+--------------------------------------+ ¦Year ¦Reported ¦Corrected ¦Additional¦ +-----+----------+----------+----------¦ ¦1943 ¦$10,318.85¦$41,292.44¦$30,973.59¦ +-----+----------+----------+----------¦ ¦1944 ¦8,057.68 ¦70,565.88 ¦62,508.20 ¦ +-----+----------+----------+----------¦ ¦1945 ¦9,720.00 ¦80,464.16 ¦70,744.16 ¦ +-----+----------+----------+----------¦ ¦Total¦28,096.53 ¦192,322.48¦164,225.95¦ +--------------------------------------+

As a result of the above increases in the net income of the decedent, the Commissioner, on August 19, 1949, assessed additional Federal income tax liabilities and additions to tax against J. A. Want, deceased, c/o Samuel Want, executor, for the calendar years 1943, 1944, and 1945 as follows:

+-------------------------------------+ ¦Year ¦Tax deficiency¦Additions to tax¦ +-----+--------------+----------------¦ ¦1943 ¦$15,988.54 ¦$8,210.11 ¦ +-----+--------------+----------------¦ ¦1944 ¦30,488.91 ¦15,244.46 ¦ +-----+--------------+----------------¦ ¦1945 ¦35,169.44 ¦17,584.72 ¦ +-----+--------------+----------------¦ ¦Total¦81,646.89 ¦41,039.29 ¦ +-------------------------------------+

This increase in decedent's income for the years 1943, 1944, and 1945 was largely attributable to funds allegedly diverted from the corporation by the decedent which were treated for tax purposes as follows:

+----------------------------------------------------+ ¦ ¦ ¦ ¦Capital gains ¦ +----+----------+-----------+------------------------¦ ¦Year¦Dividends ¦Returned on¦ ¦ ¦ +----+----------+-----------+-------------+----------¦ ¦ ¦ ¦stock ¦Cost of stock¦Gain 1 ¦ +----+----------+-----------+-------------+----------¦ ¦1943¦$21,388.38¦$40,100.58 ¦$23,250 ¦$16,850.58¦ +----+----------+-----------+-------------+----------¦ ¦1944¦6,255.54 ¦114,556.31 ¦6,000 ¦108,556.31¦ +----+----------+-----------+-------------+----------¦ ¦1945¦(2) ¦138,850.88 ¦(2) ¦138,850.88¦ +----------------------------------------------------+

The net income of the corporation reported for 1946 was $160,302.50.

On January 3, 1955, Fannye M. Want, individually and executrix of the Estate of Samuel Want, who died insolvent on December 9, 1953, brought an action for the settlement of the Estate of Samuel Want in the Court of Common Pleas for Darlington County, State of South Carolina. At the time this action was instituted all persons who had filed claims against Samuel's Estate were made defendants, but the United States was not a party thereto. On May 8, 1956, the Court of Common Pleas, after granting Fannye leave to amend her summons and complaint to include the United States as a defendant, ordered that the amended summons and complaint, together with a copy of the order, be served upon the United States and that it be required to prove in the action any and all claims of whatever kind and nature it had or claimed to have against the Estate of Samuel Want, deceased. The United States filed a demurrer to the amended complaint. After argument thereon, the Court of Common Pleas on July 21, 1956, entered an order overruling the demurrer of the United States to the amended complaint, and ordered that in the event the United States ‘fails to come into this action and assert any and all claims of whatsoever nature and kind which it has, or claims to have against the Estate of Samuel Want, deceased, then it shall be forever barred and foreclosed of all right and claim against the funds of said estate.’

On or about August 20, 1956, the United States filed an intervening complaint in the action pending in the Court of Common Pleas, asserting a claim against the Estate of Samuel Want for alleged transferee and fiduciary liability of Samuel as coexecutor of the Estate of Jacob A. Want, with respect to certain income tax liabilities of Jacob. In this intervening complaint the United States alleged that it was precluded from presenting its claims for estate and gift tax liability against the Estate of Samuel Want because those claims were the subject of these proceedings presently pending in the Tax Court. In their joint answer dated September 1, 1956, to the intervening complaint of the United States, the plaintiff and certain other parties to the action in the Court of Common Pleas denied the validity of the claim of the United States asserted by it in its intervening complaint. The answer to the intervening complaint admitted the pendency of these Tax Court proceedings with regard to the estate and gift tax claims of the United States, but denied the legal conclusion asserted by the United States that section 6213 of the Internal Revenue Code of 1954 prevented the assertion of those claims in the Court of Common Pleas until the decision of the Tax Court becomes final.

The Court of Common Pleas referred the cause to a special referee to take and report testimony with respect to all claims asserted against the Estate of Samuel Want, and to make recommendations both as to the law and the facts presented.

On November 12, 1956, the referee made his first report to the Court of Common Pleas in which he determined that Samuel and Estelle, as coexecutors of the Estate of Jacob A. Want, deceased, had received assets in the amount of $26,344.34 from the decedent; that there was deductible therefrom for expenses of administration the sum of $22,836.95; and that of the remaining assets of $3,507.39 the United States was entitled to $1,147.08, which he concluded should be paid in accordance with the relative priority which he determined, the United States standing last in the order of priority. In this report the referee concluded that the United States was not precluded by section 6213 of the Internal Revenue Code or any of the provisions of the law from presenting its estate and gift tax claims due by decedent against the Estate of Samuel Want, and that ‘(a)ny and all claims against the Estate of Samuel Want not proved and allowed herein be barred from participating in the funds of the Estate of Samuel Want, unless and until the claims herein approved and allowed have been paid in full.’ On December 3, 1956, the Court of Common Pleas entered an order which confirmed the referee's report and which ‘ORDERED, ADJUDGED AND DECREED’ with regard to claims not proved and allowed therein in language exactly similar to that quoted above from the referee's report.

The United States had caused to be served and filed a notice of intention to appeal to the Supreme Court of South Carolina from the final order of the Court of Common Pleas.

None of the issues presented herein are rendered res judicata by reason of the proceedings or orders of the Court of Common Pleas of South Carolina.

None of the transfers by the decedent in 1945 (the cash transferred to the trust) or 1946 (the bonds transferred to Samuel and Estelle) were made in contemplation of death.

The 397 shares of common stock of the corporation transferred to the Jacqueline trust in 1946 had no fair market value at the time of the transfer.

OPINION

KERN, Judge:

Petitioners' first contention is that the decision of the South Carolina court entered December 3, 1956, in the proceeding described in some detail in our Findings of Fact has made the issues before us res judicata and requires a decision of them by us in petitioner's favor. This contention is without merit.

This Court is concerned with the determination of the correct Federal tax liability of taxpayers properly invoking its jurisdiction. It is not concerned with problems incident to the collection of Federal taxes. The South Carolina court was concerned with the distribution of the funds of the Estate of Samuel Want, which were being administered under the jurisdiction of that State. Although it held that it had jurisdiction to pass upon the validity of claims against Samuel Want arising out of the Federal gift and estate tax liability of Jacob and his estate and directed the United States to assert those claims upon pain of being ‘barred and foreclosed of all right and claim against the funds of said estate,‘ the United States did not present such claims before the State court for its adjudication, and the State court did not purport to adjudge the validity or amount of those Federal tax liabilities. The adjudication of the State court related only to the administration of the funds of Samuel Want within its jurisdiction. Its decision was that without regard to the merits of the claims predicated on the Federal gift and estate tax liability of Jacob and his estate they should not be entitled to participate in the funds of Samuel's Estate within its jurisdiction, since they had not been proved and allowed, either ‘forever’ according to the first order of the State court or ‘unless and until the claims * * * approved and allowed have been paid in full’ according to the second order of that court. It is thus apparent that the adjudication of the State court related only to the collection of these claims from a particular fund (a matter beyond the realm of our concern), and did not relate to the validity or extent of those claims.

It is unnecessary for us to express our opinion as to whether the State court erred in its conclusion that it had jurisdiction to decide the validity and extent of the deficiencies in Federal gift and estate taxes already at issue in proper proceedings pending in this Court, a matter which we understand is now on appeal. While the State court, as we have pointed out, held that it had such jurisdiction and directed that such claims should be filed in the proceedings before it, these claims were not so filed by the United States, and the decision of the State court, whether considered as embodied in its first order or second order, did not purport to adjudicate the validity or extent of the claims, but merely adjudicated their participation in certain funds of Samuel's Estate.

We conclude that the issues presented herein were not rendered res judicata by any order or decision of the South Carolina court.

We next consider the question of whether the transfers made by the decedent to Jacqueline's trust in 1945 were properly included in petitioner's gross estate as transfers made in contemplation of death within the meaning of section 811(c),I.R.C. 1939.

The words ‘in contemplation of death’ have been construed by the Supreme Court in United States v. Wells, 283U.S.102, as meaning that the thought of death is ‘the impelling cause of the transfer.’ The opinion in that case also indicates that the thought of death must be the ‘controlling motive’ or ‘compelling motive’ or ‘dominant motive’ or ‘inducing cause’ of the transfer. As illustrating a purpose of transfer ‘associated with life, rather than with the distribution of property in anticipation of death,‘ the Supreme Court in that opinion said:

It is common knowledge that a frequent inducement (to the making of gifts) is * * * to have children * * * 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.

The main thrust of the respondent in the trial of these cases, with regard to the question of whether these transfers were includible in decedent's gross estate, was an attempt to prove by the physician who diagnosed decedent in the fall of 1944 (the only medical witness who testified) that she had informed decedent fully concerning the illness which was beginning to affect him and especially as to its fatal nature. In this attempt respondent failed. Contrary to the apparent expectation of respondent's counsel, the physician testified that she had not informed decedent as to the serious or fatal nature of his illness, but had merely advised him that he had ‘a sickness of the nerves.’ To the average layman 54 years old, as was the decedent, the receipt of information from his physician that he had ‘a sickness of the nerves' might well have caused apprehensions on his part as to the continued normal use of his limbs and other physical members with a consequent impairment of his normal social and business life, but it would not, in our opinion, give rise to such a ‘thought of death’ on the part of the decedent, who is described in the record as pleasant, active, interested in many facets of life, sociable, and fond of many forms of entertainment, and apparently not given to morbid thoughts, as to constitute ‘a controlling motive prompting the disposition of property * * * .’ See United States v. Wells, supra.

The circumstances present in the instant proceedings indicate that at or about the time of the creation of Jacqueline's trust and the transfers to it here in question, the decedent had other pressing concerns in addition to his possible concern over the potential effects of his ‘sickness of the nerves.’ His primary concern appears to have been for the welfare and financial security of his only child, Jacqueline, to whom he wad devoted. It is apparent from the circumstances described in our findings that only a most callous person could have been insensitive to the problems besetting that child. In connection with his concern for Jacqueline, decedent may well have been troubled by his relations with Blossom Ost. Those relations are not made explicit in the record, but we do know that he was ‘obsessed’ by her, that she made demands on him, and that he gave to her during 2 years cash, bonds, jewelry, clothing, and other property of a total value of approximately $50,000. Decedent was not living with his wife. She was not the mother of Jacqueline and from the entire record it appears that her attitude toward Jacqueline would be far from friendly. In addition decedent must have been aware of the financial manipulations in connection with his business which led to the ultimate determination of large deficiencies in income tax, plus additions for fraud against him and his corporation as set forth in our findings. In 1945 decedent was a man of many worries, and they all related to matters which might adversely affect Jacqueline.

These gifts were not included by respondent in the transfers determined to be in contemplation of death. We may assume therefore that they concededly ‘related to purposes associated with life.’

We conclude that the controlling and dominant motive of decedent in making the transfers here in question was to provide security for Jacqueline's support and welfare against the following dangers: (a) A possible serious impairment of decedent's physical activity and earning capacity by reason of his ‘sickness of the nerves,’ (b) a possible serious drain upon his financial resources resulting from the claims of or his own weakness with regard to Blossom Ost, (c) unformulated fears with regard to the possible demands and probable antagonism of his estranged wife, and (d) the financial troubles which might be anticipated as a result of his tax difficulties; and that the controlling and dominant motive of decedent in making the transfers was not the thought of death.

We, therefore, conclude that the transfers here in question were not made in contemplation of death.

Respondent's argument (which is mentioned in his brief but not pressed) that the gifts to the trust were transfers to take effect in possession or enjoyment at or after decedent's death is without merit, since it is apparent that the transfers were immediately effective.

Respondent devotes a few phrases of his brief filed herein to the proposition that these transfers are includible in decedent's gross estate under section 811(d) of the Internal Revenue Code of 1939, the pertinent parts of which are set forth in the margin hereof. That part of his brief reads as follows:

SEC. 811. GROSS ESTATE.(d)REVOCABLE TRANSFERS.—(1) TRANSFERS AFTER JUNE 22, 1936.— To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of decedent's death;

and since the decedent reserved the right to change the contingent beneficiaries of the trust at any time so long as he may live, and was also empowered to name a substitute trustee in the event of the death of one of the designated trustees, it follows that the transfers in the trust for the benefit of Jacqueline are includible in the gross estate and are subject to federal estate tax under * * * section 811(d) of the 1939 Internal Revenue Code.

No authorities for this proposition are cited. In his reply brief respondent makes no reference to this contention.

With regard to any such contention based upon the power of decedent to name a substitute trustee in the event of the death of one of the designated trustees, we have no hesitancy in deciding it against respondent. This was a contingent power, the condition for the existence of which (as distinguished from its exercise) was not fulfilled during decedent's life. Estate of Cyrus C. Yawkey, 12T.C.1164; Helvering v. Tetzlaff, 141F.2d8; Jennings v. Smith, 161F.2d74. See also Estate of Sallie Houston Henry, 4T.C.423,441.

However, it does seem apparent that decedent retained a present power during his life of changing those beneficiaries whose rights were contingent upon the death of Jacqueline without issue prior to her 30th birthday and the death of decedent's wife. This power is a power to alter or amend within the meaning of section 811(d). Fanny M. Dravo, et. al., Executors, 40B.T.A.309. While not conceding this conclusion petitioners direct their principal argument on this question to the effect that since the only amount includible in decedent's gross estate on account of transfers to the trust would be the value of the contingent remainder interest subject to the power, and any actuarial valuation of these contingent remainders, even if such a valuation were possible, would result in a de minimis amount, it follows that no amount should be included in the gross estate.

We agree that only the value of the contingent remainder interest subject to the power is includible in the gross estate. Estate of Albert E. Nettleton, 4T.C.987,933. See also Fanny M. Dravo, et. al., Executors, supra at 325.

With regard to petitioners' argument that the contingent remainder interest subject to the power cannot be evaluated by actuarial science (for which proposition they cite Robinett v. Helvering, 318U.S.184) and, even if such an evaluation were possible, that the value of such an interest would be a de minimis amount, we are greatly troubled by the state of the record herein. As we have pointed out, the main thrust of respondent's argument is that the transfers are includible in decedent's gross estate in their entirety as transfers in comtemplation of death. While section 811(d) is referred to in respondent's determination and, to the extent quoted, in his brief, there has been no determination as to the value of the contingent remainder interest subject to the power and no evidence was submitted by any of the parties with regard to its value or the possibility of its evaluation. A cursory examination of respondent's regulations suggests the strong probability that even though a valuation should consider only the simplest of the contingencies, i.e., that Jacqueline should die during decedent's life before attaining the age of 30 years, the value of the contingent interest, if any, would be considerably less than the full value of the trust corpus. Under the circumstances before us, we are unwilling to make a decision relying upon failure of proof or upon an actuarial guess. We conclude that the value, if any, of the contingent interest subject to decedent's power of designating beneficiaries is includible in his gross estate. We assume that the parties will agree upon its value in filing computations under Rule 50, but if this proves to be impossible we will, upon proper motion, reopen these proceedings for the purpose of permitting testimony with regard to its valuation and value.

The next issue concerns the inclusion for estate tax purposes in the decedent's gross estate of United State Treasury bonds of a value of $25,000 which the decedent handed over to Samuel early in 1946. Petitioners contend that prior to the death of the decedent and after numerous discussions the decedent agreed to transfer to Samuel bonds having a face value of $25,000, and that Samuel and Estelle were to receive $10,000 apiece for what each of them was doing and agreed to do in taking care of Jacqueline Want. The remaining $5,000 was to pay the income taxes on the payments in order that each would have $10,000 net amount. The respondent's position is that these sums were not transferred for an adequate and full consideration in money's worth and, therefore, were includible in the gross estate under either section 811(c) or (d) as of the date of his death and subject to Federal estate tax. In his opening statement the respondent restricts his argument to 811(c), but on brief he apparently continues to rely on 811(d) also, although he gives no reason for such reliance.

Upon the record before us, we have concluded that the transfer of the $25,000 worth of Treasury bonds was made for full and adequate consideration consisting of the promised services on behalf of Samuel and Estelle toward the care and welfare of Jacqueline. The transfer constituted a payment for services rendered or to be rendered rather than a gift. As to the application of section 811(d), we can see no relevancy of that section to the situation herein. We have found that there was adequate consideration for the transfer. Obviously there were no retained powers of revocation or alteration attached thereto.

The next issue is whether the decedent's gift in 1946 of 397 shares of common stock of the corporation to Samuel and Estelle, trustees for the benefit of Jacqueline, had any fair market value as of the date of gift and, if so, what that value was. The respondent's determination of the fair market value of the stock of the corporation was based solely on the book value of the shares of stock, as shown on the balance sheet of the corporation that was included in its Federal income tax return for the calendar year 1946, which balance sheet showed a net worth of $79,973.60 or a book value of approximately $200 a share for the entire 400 shares of common stock after allowance of $14,500 for the preferred stock as of January 1, 1946. Petitioners contend that the stock had no fair market value at the date of its transfer on January 9, 1946 to the Jacqueline Want trust, first, because the book value of the stock should have been adjusted to reflect the additional Federal income tax liabilities determined against the corporation for the 3 preceding years and, second, because other evidence indicates the worthlessness of the stock on the valuation date.

The determinations of deficiencies involved in these proceedings were made in 1951 and 1952. In 1949 the respondent determined deficiencies in the corporation's liability for Federal income, declared value excess-profits, and excess profits taxes for the years 1943, 1944, and 1945 in the total amount of $261,620.28, together with additions of $130,810.16. These deficiencies were determined pursuant to the adjustments made by respondent in 1948. The corporation being on an accrual basis of accounting, the liability for additional Federal taxes should have been reflected on its books as of the year or years for which they were payable and the additions as of the year or years in which returns were filed. Estate of Esther M. Stein, 25T.C.940,965,967. Therefore, the balance sheet of the corporation as of January 1946 understated its Federal tax liability by the sum of $337,362.36 (the total amount of deficiencies and additions determined for 1943, 1944, and 1945 less the addition determined for 1945 in the amount of $55,068.08) It follows that a correct balance sheet of the corporation as of January 1946 would not have shown a net worth of $79,973.60 but, to the contrary, would have shown a considerable deficit. When the respondent made the determinations of deficiencies here involved in 1951 and 1952, not only was the figure of $79,973.60 (representing net worth) wrong but it was known to be wrong by respondent in view of his adjustment and determination made, respectively, in 1948 and 1949. Accordingly, we conclude that respondent's determination with regard to the value of the corporation's stock as of January 1946 was erroneous since it was concededly predicated on a net worth figure appearing on the corporation's balance sheet, which the record shows to be erroneous and in reality nonexistent. If we were to take the balance sheet of the corporation as the sole criterion of the value of the corporation's stock as of January 1946, as respondent evidently did, we would be forced to the conclusion that the stock was worthless.

No expert testimony was adduced as to the value of this stock. However, from Estelle's testimony and from other parts of the record, the following facts appear: The corporation was primarily a one-man organization, namely, the decedent who had organized it and was its guiding force; its success depended on his continued personal efforts; its machinery was, for the most part, secondhand and in poor condition; its plant was rundown and unsuited to the type of work in which the corporation was engaged; it had a large number of small accounts and only a few large ones; after the decedent's death it was impossible to operate the business successfully, and although attempts were made to sell it, no one was interested in purchasing it in view of its condition. Eventually the stock was sold for a nominal consideration. Of the stock sold, decedent had purchased 150 shares in 1942. This stock and 90 shares of preferred stock were purchased for a total consideration of $4,000. Aside from this sale and the one consummated in 1952, the record discloses no sales of the corporation's common stock. There was no public market for it.

In arguing that this stock had a fair market value in January 1946 of at least $200 a share, the respondent can properly stress the fact (which seems to us to be the only fact shown by the record which tends to establish a value for the stock) that the net income reported by the corporation for 1946 was $160,302.50.

With regard to petitioner's contention that if the properly accruable Federal tax liabilities of the corporation were reflected on its books as they should have been, the liabilities of the corporation would have exceeded its assets by approximately $200,000, respondent contends that since these additional tax liabilities were not formally determined until September 1949 and were thus not publicly known as of January 1946, they should not be considered in an evaluation of the stock of the corporation as of that date.

We disagree with this argument for two reasons. In the instant proceedings we are considering the evaluation of the securities which were not ‘actually bought and sold during the critical period’ ‘on an open and public market at a price reasonably constant for a long period of time’ and for which there was not ‘a universally accepted market price, the result of numerous transactions in which the general public freely participated.’ Cf.Estate of Millie Langley Wright, 43B.T.A.551,555,557,556. Here the stock was closely held, was not listed nor dealt in on any exchange, and the only two sales shown by the record (which tend to show little, if any, fair market value for the stock) took place several years before and after the critical date. Therefore, we must consider the fair market value of the stock to be the price which it would obtain in a hypothetical transaction between a hypothetical buyer and a hypothetical seller. As a part of the hypothesis we suppose that the buyer and the seller were each willing, under no compulsion to buy or sell, and both ‘were aware of the facts' (James Couzens,11B.T.A.1040,1162) or were ‘familiar with the situation’ (George D. Harter Bank, Executor, 38B.T.A. 387,396). Therefore, under the facts present in the instant proceedings, we must consider the question of what was the fair market value of the stock as of the critical date upon the assumption that the pertinent facts as to value were known. Certainly a most pertinent fact would be that the liabilities of the corporation exceeded its assets by approximately $200,000. In the second place, aside from the assumption or hypothesis of a knowledge of these additional tax liabilities as an incident to the legal concept of the fair market value, there is uncontradicted testimony in the record that there were such prevalent rumors with regard to the additional tax liabilities of the corporation that we must make the factual inference (as distinguished from a legal hypothesis) that any prospective buyers of the corporation would inquire and ascertain the facts concerning them. Estelle testified that ‘(t)he minute i got up there (to New York) i heard there were taxes due. In fact, everybody in the business knew it’; and, further, that ‘the rumor was all over the city about this tax case, everybody in the business knew about it, they all backed away and it cost us a lot of money.’

We conclude that under all of the facts shown by the record herein the petitioners have demonstrated that respondent's determination as to the fair market value of the stock here in question was erroneous, and that they have established by a preponderance of the evidence that the stock had no fair market value as of the critical date.

Another issue concerns the liability of petitioners for the gift tax and additions involved for the failure to report certain gifts made by the decedent to Blossom S. Ost of $15,637.38 in 1945 and $34,186.71 in 1946. Petitioners concede that these gifts must be taken into account in determining the decedent's gift tax liability. Blossom Ost has stipulated in this Court her transferee liability in the amount determined by the respondent. She has proffered the payment to the respondent of $2,500 and has deposited this amount with him in connection with an offer in compromise of her gift tax liability, but that offer has not been accepted by the respondent. Petitioners now seek to have us take the $2,500 deposited by Blossom Ost with the respondent in connection with this offer into account as an offset against any gift tax liability that might be determined against them. As Blossom Ost's offer of compromise was neither accepted nor rejected by the respondent, we do not believe that the facts involved herein impose the duty on the respondent to offset petitioners' liability by the amount offered in compromise. See Isaac Michael Green, 26B.T.A. 719. We reject petitioner's argument as to an offset of the $2,500 proffered to the Commissioner by Blossom Ost in connection with an offer of compromise of her tax liability.

The last question has to do with Estelle's liability for any of the deficiencies here involved. She argues that she was a fiduciary in name only, that she did not actually and personally receive any funds of the decedent as transferee or trustee, that she did not know of the existence of the tax liabilities of decedent here involved until 1954, and that she consequently has no liability as transferee or trustee. After a careful consideration of the entire record we are convinced that the facts and the inferences to be fairly made from the facts support respondent's determinations that she is so liable. She was aware of all the facts having to do with the extent of decedent's estate, and cooperated materially in steps necessary to its preservation. She was aware from a date considerably before decedent's death that he had made gifts described by her as ‘huge’ to Blossom Ost. She was an adult woman trained in business, and performed important services in the operation of the corporation's business. She must be assumed to know that under the law gift taxes and estate taxes were payable. Through her and by her cooperation large sums from the assets of decedent were put into the custody of Samuel, and were then received by her from the account of the estate maintained by him and disbursed by her and under her direction. From her testimony in these proceedings we formed the opinion that she was a woman of strong personality, high intelligence, and considerable ability. We are unable to believe that all matters connected with the trust and the estate and in the transactions connected therewith in which she participated she was a mere automation directed by Samuel.

Decisions will be entered under Rule 50.

-------- Notes: