First Nat'l Bank of Chicago v. Comm'r of Internal Revenue (In re Estate of Copley)

• Decision Date: 18 July 1950
• Docket Number: Docket No. 18621.
• Citation: 15 T.C. 17
• Parties: ESTATE OF IRA C. COPLEY, DECEASED, THE FIRST NATIONAL BANK OF CHICAGO AND JAMES S. COPLEY, EXECUTORS OF THE WILL OF IRA C. COPLEY, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

15 T.C. 17

ESTATE OF IRA C. COPLEY, DECEASED, THE FIRST NATIONAL BANK OF CHICAGO AND JAMES S. COPLEY, EXECUTORS OF THE WILL OF IRA C. COPLEY, DECEASED, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 18621.

Tax Court of the United States.

Promulgated July 18, 1950.

GIFT TAX— YEAR OF GIFT— ANTENUPTIAL AGREEMENT.— Transfers of property made in 1936 and 1944 pursuant to an antenuptial agreement which became binding upon the marriage of the parties in 1931 were not subject to gift taxes in the years 1936 and 1944. Albert L. Hopkins, Esq., and Harry D. Orr, Jr., Esq., for the petitioner.

H. H. Hart, Esq., for the respondent.

OPINION.

MURDOCK, Judge:

The Commissioner determined a deficiency in gift taxes of the decedent for 1936 in the amount of $66,337.50 and a deficiency for 1944 in the amount of $51,955.58. The issues for decision are whether the transfers which the petitioner made in each of the taxable years were not subject to gift taxes for those years because they were made pursuant to a binding antenuptial agreement entered into in and made effective by the marriage in 1931, and, in the alternative, whether $16,755.78 of the specific exemption of $40,000 was available to the petitioner as an offset against the 1936 and 1944 gifts. All of the facts, with an exception hereafter noted, were stipulated.

Ira C. Copley, the decedent, died on November 2, 1947. He filed gift tax returns for 1936 and 1944 with the collector of internal revenue for the first district of Illinois.

Copley and his intended wife, Chloe Davidson-Worley, entered into an antenuptial agreement on April 18, 1931, reciting that they contemplated marrying each other; Copley owned property as indicated on an attached list; and he desired to make suitable provision for Chloe in lieu of dower and any interest in his property which otherwise she might have. Copley agreed in consideration of the marriage and of the covenants contained in the agreement to pay Chloe ‘to be effective immediately after the solemnization of said marriage, the sum of one million dollars, the said sum to become and to be her sole and separate property,‘ and Chloe agreed to accept that sum in lieu of all of her rights in the property of Copley. The agreement further provided:

In consideration of the nature of the property set forth in the memorandum attached to and made a part of this contract of agreement, the nature and extent of which is fully understood by the party of the second part, it is the desire of the party of the second part, and it is, therefore, Agreed that the party of the first part shall take over the management of the one million dollars this day given by him to the party of the second part, to the end that its value may be preserved and made productive.

* * * It is the desire of the party of the second part, and is, therefore,

Agreed that upon her death, should she pre-decease the party of the first part, that half of her said one million dollars shall revert to the party of the first part, or in the event that his death precedes hers, that the said one-half shall go to his estate.

The parties were at that time in France and on that same day Chloe executed a memorandum of agreement to the effect that as soon as she returned to the United States she would create a trust to administer the $1,000,000 for her benefit during her life and for the benefit of her legal heirs in accordance with the terms of the marriage contract to which the agreement was attached as a supplement.

The parties were married on April 27, 1931, after which they returned to Aurora, Illinois, where they continued to reside until the death of Copley.

Copley assigned to Chloe on January 1, 1936, $500,000 face amount of Southern California Associated Newspapers 6 per cent notes. He acquired those notes subsequent to April 18, 1931. Chloe, as donor, and Copley, as trustee, entered into a revocable trust agreement dated January 2, 1936, and on the same day Chloe assigned the notes to the trust. The trust thereafter received the interest on the notes. The trust was exclusively for the benefit of Chloe. It was to terminate at the death of the trustee or at the death of the donor, whichever should first occur, at which time all property was to go to the donor or her estate.

Copley transferred 5,000 shares of 6 per cent cumulative preferred stock, par value $100 per share, of The Copley Press, Inc., in trust on November 20, 1944. He and Chloe had entered into a trust agreement dated that same day reciting that it was for the purpose of giving effect in part to the antenuptial agreement of April 18, 1931; Copley had recognized and admitted his continuing obligation to comply fully with the terms of that agreement, including his obligation to set aside $500,000 for the benefit of Chloe, which would revert to him or his estate upon her death, and ‘For reasons of convenience, the undersigned Chloe D. Copley has from time to time agreed that compliance with said obligation of Ira C. Copley should be postponed but has never released said Ira C. Copley therefrom.‘ The trust agreement then contained provisions whereby the property placed in trust was to be held in accordance with the antenuptial agreement.

Copley made no assignments for the benefit of Chloe between April 18, 1931, and January 1, 1936, except as set forth above.

It is hereby found from the testimony that Copley discussed at least once a year, and sometimes oftener, with his chief accountant, who had charge of his personal affairs, and at times with his lawyers, ways and means of transferring property to comply with the antenuptial agreement; Copley delayed in making transfers to carry out the antenuptial agreement because he did not have property in his possession which he felt was suitable for the purpose; the transfers and agreements of January 1st and 2d, 1936, and the transfers and agreements of November 20, 1944, were made pursuant to and to carry out the provisions of the antenuptial agreement of April 18, 1931.

The Commissioner, in determining the deficiencies, treated the transfer of $500,000 face amount of Southern California Associated Newspapers 6 per cent notes as a taxable gift made in 1936, and the transfer of 5,000 shares of 6 per cent cumulative preferred stock, par value $100 per share, of The Copley Press, Inc., as a taxable gift in 1944 to the extent of the life interest of Chloe in that property, and he valued that life interest at $200,926. No issue is raised with respect to the valuations. Chloe died on August 1, 1949.

The petitioner recognizes that under the decisions of the Supreme Court in Commissioner v. Wemyss, 324 U.S. 303, and Merrill v. Fahs, 324 U.S. 308, gift taxes would be due if the antenuptial agreement had been made within a year when there was a gift tax law in effect. These parties contracted when there was no gift tax law in effect. Gifts made in 1931 were not subject to any gift tax. The petitioner contends that the antenuptial agreement became a binding contract when the parties were married on April 27, 1931; Copley became obligated at that time to make without delay the payments which he subsequently made; there was valuable and adequate consideration for that contract flowing from Chloe to Copley; and, consequently, the payments which he made in 1936 and 1944 were not taxable under any theory as gifts made for the first time in those years. He cites Harris v. Commissioner, 178 Fed.(2d) 861, certiorari granted on other points 339 U.S. 917, in which Judge Learned Hand, holding that the present...