Safe Deposit & Trust Co. v. Tait

• Decision Date: 27 March 1933
• Docket Number: 4651.,No. 4487,4487
• Parties: SAFE DEPOSIT & TRUST CO. OF BALTIMORE v. TAIT, Collector of Internal Revenue.
• Court: U.S. District Court — District of Maryland

3 F. Supp. 51

SAFE DEPOSIT & TRUST CO. OF BALTIMORE v. TAIT, Collector of Internal Revenue.

Nos. 4487, 4651.

District Court, D. Maryland.

March 27, 1933.

COPYRIGHT MATERIAL OMITTED

Arthur W. Machen, Jr., of Baltimore, Md., for plaintiff.

Simon E. Sobeloff, U. S. Atty., and Charles G. Page, Asst. U. S. Atty., both of Baltimore, Md., for defendant.

CHESNUT, District Judge.

The above consolidated cases at law have been tried to the court on the pleadings and testimony, a jury having been waived. Certain questions of law arising on demurrers to the pleadings have been ruled upon. (D. C.) 54 F.(2d) 383, 387.

The object of the suits is to recover alleged overpayment of federal estate taxes under the Revenue Act of 1921, c. 136, 42 Stat. 227, 277, 278. Three separate items of property are involved, the questions being whether the whole value thereof or some part of the whole value, are respectively properly included in the computation of the gross estate. They are as follows: (1) Certain preferred and common stock of the Marine Securities Company valued at $193,004, transferred to his wife by the decedent more than two years prior to his death; (2) certain real estate owned in fee simple by the decedent at the time of his death and valued at $100,000; (3) certain Baltimore City stock (constituting funded indebtedness of the city of Baltimore) standing in the names of the decedent and his wife as joint tenants, valued at $103,458.81. Different questions arise as to these three items of property and will be separately discussed.

1. The Marine Securities Company Stock. — The applicable provisions of the 1921 Revenue Act are as follows:

"Sec. 402. That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated — * * *

"(c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bona fide sale for a fair consideration in money or money's worth. 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 without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title."

The issue here is one of fact only, whether the stock transferred by the decedent to his wife was "in contemplation of * * * his death." The transfer was absolute both in form and in effect, the stock certificates theretofore standing in the name of the decedent having been transferred on the books of the corporation into the name of the wife, and new certificates duly issued therefor and delivered to her agent. Thereafter dividends on the stock so transferred were paid to her. This transfer was effected in December, 1920; the decedent died July 24, 1923.

The principles of law to be applied in determining the question of fact have recently been authoritatively stated by the Supreme Court in United States v. Wells, 283 U. S. 102, 51 S. Ct. 446, 75 L. Ed. 867, and reannounced in Heiner v. Donnan, 285 U. S. 312, 52 S. Ct. 358, 76 L. Ed. 772. Very shortly stated, the principle of law is that the trier of fact must test the testimony by finding the dominant motive which actuated the transferor. Thus, "contemplation of death" as used in the statute means "the thought of death as a controlling motive prompting the disposition of property." But if the dominant motive is "found to be related to purposes associated with life rather than in distribution of property in anticipation of death," then the property so transferred is not within the reach of the statute. And the facts and circumstances of each case "must be carefully scrutinized to detect the dominant motive of the donor in the light of his bodily and mental condition."

Applying these principles, I have no difficulty in reaching the conclusion, and find as a fact from the testimony, that this transfer of stock was not made in contemplation of death. It is not necessary to detail the testimony at any great length. The facts and circumstances of this case are, of course, peculiar to itself. The controlling facts, however, may be briefly stated to show the basis for the conclusion of fact.

The decedent was Thomas H. Bowles, who, for a period of ten years or more, was a well-known figure in the financial and banking life of Baltimore City. He was interested as a stockholder in the Baltimore Dry Docks & Shipbuilding Company and, in association with others, organized and acquired a large percentage of the preferred and common stock of the Marine Securities Company, which was a holding company based on the properties of the former company in Baltimore. The financial and legal transactions which resulted in his acquisition of the Marine Securities Company stock were somewhat complex and involved some litigation. In addition to legal advice he naturally had the sympathy, interest and advice of his wife in the transaction which he apparently regarded as of value at the time because on one occasion during its progress or when nearing its conclusion, he presented her with a box of roses bearing his card and addressed (doubtless with amiable pleasantry), "To my associate counsel." His widow as a witness in the case testified also that he had said at the time that he intended to give her one-half of the stock but preferred not to do so while he still had outstanding indebtedness which, at that time, amounted to the considerable sum of about $300,000 owing to banks and others, growing out of related financial transactions. This indebtedness was not finally liquidated until some time in 1919. In the meantime, in 1918, Mr. Bowles' health became undoubtedly seriously impaired and by the advice of his counsel he relinquished active personal participation in business affairs and turned over the management of his very considerable property to the Safe Deposit & Trust Company of Baltimore as his agent. About the same time he executed his will, making his wife the chief beneficiary of his then ample estate worth possibly a million and a half dollars, and also made her the beneficiary (without power of revocation) of his life insurance, also making the Safe Deposit & Trust Company of Baltimore his executor.

The above facts have been related because they doubtless furnish, in some measure at least, a background for the subsequently consummated gift of the stock in December, 1920. But I find that the immediate and dominant motive for the transfer when it was actually made was to lessen federal income taxation. Owing to war conditions and the greatly enhanced value of all shipping interests, the stock of the Marine Securities Company had become valuable probably far in excess of even anticipation, and in the latter part of 1920 it became known that during 1921 there would be distributed to stockholders approximately $1,000,000, representing a dividend of about 52 per cent. on the capital stock. The amount of this dividend which would have been payable on the whole stock held by Mr. Bowles was approximately $163,000. A business associate referred to the former promise to his wife and advised that it should be then consummated by the gift to her. Correspondence then ensued between Mrs. Bowles (writing for her husband) and the Safe Deposit & Trust Company in December 1920, as a result of which one-half of Mr. Bowles' entire stock was transferred to his wife. Contemporaneous correspondence amply confirms the testimony of Mrs. Bowles to the effect that the important and dominant motive for the transfer was to lessen prospective income taxes arising from this very substantial dividend. The actual net saving in the aggregate income taxes of both husband and wife for the following year was $27,218.60.

Counsel for the defendant urges, on the question of fact, that the health of Mr. Bowles, both mental and physical, was such that I should find as a reasonable inference that contemplation of death was the dominant motive. Mr. Bowles' health from 1918 to the time of his death was admittedly bad. But there is no evidence of any crisis or marked change in his condition, either mental or physical, at or about the time of the transfer. Nothing was said or done by him, so far as the testimony reveals, at that time to indicate the dominant motive of the transfer of the stock was contemplation that his death was imminent, and nothing indeed seems to have been said which indicated in any way that he had the fact of death in contemplation at all. His death did not occur until two years and six months after the transfer and then resulted immediately from a cerebral hemorrhage which followed an extensive dental operation. At the time of his death he was sixty-eight years of age. The value of the stock transferred was approximately 10 per cent. of the value of his whole property.

I conclude, therefore, that this item of property was improperly included by the Commissioner in the valuation of the gross estate.

2. The Item of Real Estate. — The applicable section of the taxing act is as follows:

"Sec. 402. That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated —

"(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate;

"(b) To the extent of any interest therein of the...