Travelers Bank & Trust Co. v. Commissioner

THE TRAVELERS BANK & TRUST COMPANY, EXECUTOR UNDER THE WILL OF JOHN H. NOLAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Travelers Bank & Trust Co. v. Commissioner Docket No. 46686. United States Board of Tax Appeals 29 B.T.A. 88; 1933 BTA LEXIS 999; October 10, 1933, Promulgated *999 Transfers of stock by the decedent to his children five months prior to his death held to have been made in contemplation of death. George H. Day, Esq., for the petitioner. F. L. Van Haaften, Esq., for the respondent. SEAWELL *88 The petitioner seeks a redetermination of a deficiency of $25,736.26 in estate tax. The sole issue is whether gifts of 200 shares of capital stock of the Travelers Insurance Co. made by the decedent in May 1926 to each of his three children were made in contemplation of death. FINDINGS OF FACT. The petitioner is the executor under the will of John H. Nolan, who died testate October 31, 1926, at the age of 85 years, 5 months, and 21 days, from a heart attack lasting a few hours. The cause of his death was given in the death certificate as cardiovascular renal disease, arteriosclerosis, and myocarditis. The immediate cause of his death was probably acute dilation of the heart. He left surviving him two married daughters, Alice St. J. Hunt and Emily N. Prieth, a son, Julian St. J. Nolan, and one granddaughter, Helen Nolan, a child of Harry E. Nolan, who died December 15, 1925. The decedent's wife died June 25, 1923. *1000 For about 50 years prior to August 30, 1921, the decedent had been connected with the Travelers Insurance Co., a corporation writing life and other forms of insurance. For a large portion of that period he was general agent of the corporation's affairs in Chicag0, Illinois. He retired from business on or about August 30, 1921, 0n which date the Travelers Insurance Co. and Travelers Indemnity Co. paid him $25,000 cash and agreed to pay him an annuity for life of $600 per month, commencing January 1, 1921, in consideration of the surrender of his agency contracts with the corporations. The decedent had ulcers on the cornea of one of his eyes in and after 1894, and in about 1906 an operation was performed on the eye. Thereafter cataracts developed on both eyes. A successful operation was performed in 1918 or 1919 for the cataract on the eye operated on in about 1906, and in January 1921 an unsuccessful operation was performed for the cataract on the other eye. This latter eye was removed in June 1921, at the Knapp Memorial Hospital, New York City. Thereafter the decedent's eyesight was very *89 much impaired. The socket of the eye removed in 1921 and the remaining eye*1001 required home treatment several times daily and the services of an oculist frequently. The cataracts had no effect on the general health of the decedent. The decedent joined his wife and son in California in September 1921, and after living there for about three months they traveled abroad until the spring of 1923. During the latter part of June 1923, Dr. L. A. Conner, a heart specialist, was consulted respecting a chronic disease of the decedent's heart. The physician ascertained that the decedent was suffering from arteriosclerosis, myocarditis, and cardiovascular renal disease, general medical terms describing the existing condition of the decedent's heart, circulatory system and kidneys. The condition had existed for two or three years, and was in an advanced stage. Arteriosclerosis represents a thickening and hardening of the arteries and interferes with the normal flow of blood. As the disease progresses, the arteries become more brittle. The condition requires the heart to pump faster to force blood through the smaller openings of the arteries. It is practically a universal ailment of people 0f advanced years and its danger depends upon the organ it involves. *1002 In the case of the decedent, involvement was largely of the heart. Myocarditis is arteriosclerosis of the arteries of the heart, and causes a general weakening of the heart and its muscles. Dr. Conner also ascertained at the same time that the decedent had an enlarged heart and auricular fibrillation, a condition which disturbs the rhythm of the heart and represents a stage in the progress of heart disease. The condition had existed one or two years and, being permanently established, it could not be cured. The decedent's condition was not regarded by Dr. Conner as immediately dangerous. Persons suffering from auricular fibrillation may, with proper treatment, survive it for 10 or 12 years. The decedent had irregular beating of the heart and shortness of breath. He knew at the time that he had had heart trouble for a year or two and was aware that the digitalis he had been taking was prescribed for the condition of his heart. Dr. Conner prescribed a maintenance dose of digitalis (a drug to strengthen the heart and decrease heart beats), diet, rest, and limitation of activities. On or about July 1, 1923, the decedent went to Avon, New Jersey, to live with Mrs. Prieth and*1003 his son Harry. On July 2, 1923, Dr. Conner wrote the following letter to Dr. James F. Ackerman, Asbury Park, New Jersey: I have seen twice during the past week Mr. Nolan, the father-in-law of Doctor James Ramsay Hunt of this city, who is spending the summer, I think, at Avon and whom I think you have seen once or twice. Mr. Nolan's wife has Just died and he has been pretty badly shaken by it. *90 He has, as you know, a somewhat dilated heart with auricular fibrillation which has been kept under fairly good control for a year or two by the continuous use of digitalis. At present he is taking 45 drops of the tincture of digitalis every day except Sunday. This seems to control his heart very well and is apparently not more than he can tolerate well, so that I have told his nurse to continue that amount, unless there seemed some reason either for decreasing it or increasing it. His heart rate, I think, will be the best guide to the amount of digitalis he requires and, so long as it is in the neighborhood of 75 or 80 and there is no pulse deficit, the digitalis will be doing all that can be expected of it I think. I feel that for some time Mr. Nolan should be under the*1004 supervision of a trained nurse and Miss Swan, who is to go back with him, will notify you if things are not going satisfactorily. In September 1923 the decedent removed to California, where he remained until about December 15, 1925, when his daughter Alice brought him to New York City. Upon his arrival in New York he went directly to the Knapp Memorial Hospital, where he remained for a month or six weeks, receiving treatments for serious ulcers on his eye. At that time the condition of decedent's eye was such that he could only distinguish light from dark. He was, however, very cheerful and jovially remarked that he expected to live to be 100 years old. Dr. Conner examined the condition of decedent's heart on December 15, 1925, and found no material change in its condition since June 1923. Aside from his heart and the condition of his eye, the decedent was then in a good physical condition for a man of his age, but he could not walk far or climb stairs freely. He had been living a quiet life and taking maintenance doses of digitalis for his heart once or twice daily. For about a month Dr. Conner visited the decedent professionally every few days, and thereafter, until about*1005 the end of May 1926, he called upon him at intervals of two or three weeks. During this period Dr. Conner changed the dosage of digitalis from time to time when necessary to keep the condition of the decedent's heart under control. The decedent lived with Alice St. J. Hunt, at 46 West 55th Street, New York City, from about February 1 until about May 30, 1926. He was confined to his room practically all of the winter of 1925-1926, 1926, during which he easily tired, had shortness of breath and his exercise consisted of moving about on the floor on which his room was located. During the spring of 1926, the decedent, at his own expense, constructed a one-story wing to Mrs. Hunt's summer home at Katonah, New York, for his own accommodation. The addition consisted of one long narrow room, a bedroom and bath, with a separate heating plant so that the quarters could be heated to suit the occupant. From the time of his removal to Katonah until his death the decedent was under the care of Dr. Jas. A. G. McPhail of Katonah. *91 He prescribed digitalis and occasionally catharsis, with as much rest as possible. The decedent's exercise after May 1926 consisted principally of*1006 kicking his legs while lying on his back and moving his arms up and down while standing against a wall supported by his nurse. During the last three years of the decedent's life he was cheerful and optimistic, but at times impatient due to the limitation placed upon his activities. The decedent on April 12, 1923, executed a will leaving $1,000 to a nephew, his personal belongings to his children and the residue of his estate to the Travelers Bank & Trust Co. in trust, with directions to pay from the income of the trusteed property $500 per month to his wife for life, together with such further sums from the net income as might be agreed upon by the testator's children. Upon the death of his wife the income from the property in trust was to be paid to the testator's four children in equal amounts for life, and upon the death of any child, one fourth of the principal was to go to such person or persons as the deceased child designated in his or her will. On August 5, 1925, the decedent modified his will so as to provide for the equal distribution of the net income of the trusteed property between the testator's two daughters, son Julian, and Helen Nolan, for life. The codicil*1007 provided that upon the death of either of his daughters or his son Julian, one fourth of the principal of the trust should pass to the person or persons named in the beneficiary's will. As to Helen Nolan, it provided that should she predecease her father without issue the one fourth share of the trust held for her benefit should be held for Harry E. Nolan for life, and at his death, to the surviving children of the testator or distributed to those designated by them at their decease. In case she died without issue after her father, the share of the trusteed property was to pass to the other beneficiaries or the person or persons named by them in their wills, and if she died, leaving legal issue, before or after her father, the trust was to terminate as to her share and pass absolutely to her legal issue. The instrument also recited that the testator had already made adequate provision for his son Harry by a separate trust agreement. Under another codicil to his will, executed May 7, 1926, the testator made the distribution of the net income to his granddaughter contingent upon the happenings of certain specified events. In other respects the terms of the will as modified by the*1008 first codicil were not materially changed. On April 12, 1923, the decedent gave his daughter Alice and son Julian each 150 shares of stock of the Travelers Insurance Co. and transferred 300 shares of the same stock to the Travelers Bank & Trust Co., in trust, one half for his daughter Emily and the other half for his son Harry. In each of the years 1923, 1925, and 1926 *92 he made gifts of $5,000, $4,000 and $6,000, respectively, to each of these four persons, a total of $60,000, to cover subscriptions to additional stock of the Travelers Insurance Co. During the winter of 1925-1926, the decedent considered making a substantial gift of stock of the Travelers Insurance Co. to each of his then three surviving children on May 10, 1926, his eighty-fifth birthday. He first proposed gifts of 85 shares, then 185 shares, and finally decided to give each child 200 shares. Due, however, to the fact that the decedent did not have 600 shares of the stock until the completion of a then pending increase in the capital stock of the Travelers Insurance Co., the gifts were delayed the major part of a month. On or about May 27, 1926, the decedent, in contemplation of death, transferred*1009 200 shares of stock of the Travelers Insurance Co. to each of his three living children. The value of the stock 0n May 25, 1926, was $705,000. When the gifts were made the decedent addressed a letter to each child, reading as follows: I am now in my 86th year. This is a long time to live. Few men live so long and are so free from aches and pains of all sorts as I am. And all my life I have been free from aches and pains and accidents of every sort. Few men live to be as successful as I have been. But then I had great aims and purposes and I kept steadily and everlastingly after them. And my success shows what can be accomplished by getting on the right track and going steadily ahead. I intend to make you a present now that will open your eyes and decide that you and your children will follow in my footsteps and arrive when you are 85 where you can give away to your children such sums. This applies to you Bobbie and Dick and Julian; and you Ben and Richie. Few men have worked harder, early and late, than I have. Harry, I am sorry to say, was my worst enemy and his daughter's worst enemy. He could have protected her from her maternal progenitor and all her tribe, *1010 but he didn't. I have had a mighty problem all the days of his life and now even after his death I find myself having to overcome his had schemes to frustrate me and my wishes. I am, therefore, going to give you, to trust you and to bank on you by giving you each outright 200 shares of the stock I now hold. Mind you are worthy of it. During the later years of the decedent's life the annuity of $600 per month he received from the Travelers Insurance Co. was sufficient for all of his personal needs. In the estate tax return filed for the decedent's estate the petitioner reported a gross estate of $88,048.67 and deductions of $124,119.52, including $100,000 as a specific exemption. The 600 shares of stock transferred on or about May 27, 1926, were not included in the gross estate. In his audit of the return, the respondent included the stock in the gross estate at the value of $705,000, less an exemption of $5,000 for each of the three gifts. *93 OPINION. SEAWELL: The issue relates only to the question of whether the gifts of stock made by the decedent on or about May 27, 1926, were made in contemplation of death within the meaning of section 302(c) *1011 of the Revenue Act of 1926, set forth in the margin. 1 We are not concerned with the gifts made prior thereto, but the respondent points out in his brief that they are of the same class. *1012 It does not appear of record that the respondent ever determined from an investigation of the circumstances surrounding the transfers that the gifts were, in fact, made in contemplation of death. From the fact that he allowed an exemption of $5,000 for each gift it seems that he relied altogether on the conclusive presumption provision of section 302(c). The petitioner points to this condition of the record and argues that, by showing that the clause seemingly followed by the respondent is unconstitutional (), its burden of proof has been met. It argues further that under the circumstances the respondent's determination is not prima facie correct. In the case of , we held, on the basis of similar facts, that the burden of proof did not shift from the petitioner to the respondent. In the case of (reversing in part ), the court, based upon a lack of showing that the Commissioner had, in fact, determined that the transfers in question were made in contemplation*1013 of death, held that the action of the Commissioner did not make out a prima facie case. This holding of that court, to which an appeal lies from our decision in this proceeding, would doubtless be followed if it were called upon to consider the question raised here. We need not pause, however, to attempt to reconcile the two decisions or pass upon the preliminary question raised by the petitioner, for we are convinced that there is affirmative proof in the record that the transfers made by decedent in this proceeding were in contemplation of death. *94 The intent and meaning of the phrase "contemplation of death" is set forth in in which the court said: * * * Transfers in contemplation of death are included within the same category, for the purpose of taxation, with transfers intended to take effect at or after the death of the transferor. The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. * * * As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor's motive. *1014 Death must be "contemplated," that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition. * * * The dominant motive of the decedent for the transfers in question here could not have been the carrying out of a policy of long standing to make substantial gifts to his children during his lifetime, for the record discloses no gifts of any kind prior to April 1923, when he gave to or for the benefit of each child 150 shares of stock of the Travelers Insurance Co. These were followed by like gifts of cash, aggregating $60,000, over a period of about two and one half years, and the large gift in question a little over three years later. It does not appear that any of the donees required the last gift to meet their individual needs. The gifts made prior thereto were substantial in amount and doubtless made the donees financially independent of the decedent if they were not already in that position. All of the gifts were made after the decedent retired from business and at a time when the annuity of $600 per month he was receiving was adequate to meet his personal needs. He was then past 80 years of age and had for several years been*1015 suffering from a heart disease from which there was no hope of recovery. While he might not have known that the disease would cause his death, he must have fully realized its seriousness because it had confined him to one floor the winter preceding the gift in question and was otherwise brought home to him in a forceful way. The first gifts were made on the day the decedent executed his will and were in the same proportions as the donees were to receive the decedent's residuary property under the will. The 1926 gifts were under consideration prior to and at the time the second codicil was written and indicate in a forceful way that the decedent regarded the two acts as part of one plan to dispose of his entire estate in contemplation of death. The net estate of the decedent five months after the completion of the gifts was about $88,000, an amount less than the specific exemption allowed by the statute. This indicates that the gifts left the decedent with a small estate in comparison with what it had been. On similar facts present in the case of *1016 , the court said "the fact that the transfers here involved were practically contemporaneous and closely connected *95 with the execution of Mr. Anneke's will, makes it difficult, if not impossible, to reach any other conclusion than that, taken together, they were all of a testamentary character." See . The frame of mind of the decedent at the time the gifts in controversy were made is also shown by the contents of the letter of May 27, 1926, to his children notifying them of the transfers. In his letter the decedent acknowledged his extreme old age and endeavored to impress upon the donees the fullness and success of his life and the real value of his gifts. The petitioner points to the decedent's correspondence and expressions during the later years of his life, together with an expenditure of about $10,000 in the spring of 1926 for an addition to his daughter's summer home for his own convenience, as negativing any idea that he contemplated death. Answering a similar contention made in *1017 ; affd., , we said: "* * * but we do not regard them as conclusive of the issue before us, since man sometimes exudes optimism and courage when pessimism and fear exist within." From a consideration of all of the facts we are of the opinion that the gifts in question were made in contemplation of death. Decision will be entered for the respondent. Footnotes 1. SEC. 302. (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death but prior to the enactment of this Act, without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. ↩