FARMERS'LOAN & TRUST CO. v. Bowers

• Decision Date: 08 January 1934
• Docket Number: No. 101,102.,101
• Citation: 68 F.2d 916
• Parties: FARMERS' LOAN & TRUST CO. v. BOWERS (two cases).
• Court: U.S. Court of Appeals — Second Circuit

68 F.2d 916 (1934)

FARMERS' LOAN & TRUST CO. v. BOWERS (two cases).

Nos. 101, 102.

Circuit Court of Appeals, Second Circuit.

January 8, 1934.

George Z. Medalie and Thomas E. Dewey, U. S. Attys., both of New York City (Samuel C. Coleman, Frank Chambers, Ralph E. Stone, and Ira Koenig, Asst. U. S. Attys., all of New York City, William Stanley, Asst. to Atty. Gen., and Carlton Fox, Sp. Asst. to Atty. Gen., of counsel), for appellant.

Taylor, Blanc, Capron & Marsh, of New York City (John W. Davis, Carl Taylor, Charles Angulo, and Russell L. Bradford, all of New York City, of counsel), for appellees.

Before MANTON, L. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

These actions, tried together before a court without a jury, will be considered in one opinion. The actions are by the trustee under two deeds of trust made by William Waldorf Astor, in his lifetime, to recover from the appellant the estate taxes paid to appellant as a result of the inclusion of the corpus of the trusts in the estate of Astor after his death. The tax was levied on two irrevocable trusts of realty in the United States, executed August 15, 1919, by Astor, a British subject and resident, who died October 18, 1919, at the age of 71 years. The property consisted of all the donor's realty in the United States, with the exception of certain cemetery lots. Each trust deed conveyed an undivided half of the settlor's real estate in trust, to pay the settlor a tax free annuity of $150,000 for life out of the income, or the corpus if necessary, the remaining income to a named son for life; then the corpus to be distributed to the named son's issue as the son shall appoint by will or in default of such payment in equal shares per stirpes.

The settlor's property consisted of a large fortune inherited from his father. Before 1916 he had made gifts to his children outright or in trust in excess of $24,000,000 in addition to some very valuable English property. On May 25, 1916, he created a trust of personalty of over $23,000,000 for his children which was under consideration by us in Farmers' Loan & Trust Co. v. Bowers, 29 F.(2d) 14. After this grant the bulk of his remaining property in the United States consisted of real property. On January 3, 1917, he executed a will of all his property in the United States in which he left the residuary estate in trust, the income of one-half to be paid to each son for life, the corpus to be distributed as they by will shall appoint and in default of appointment to their issue per stirpes.

The trust deeds of August 15, 1919, disposed of $46,000,000 of real estate, which was about all of the residuary estate under the 1917 will, in like manner as the will did with the exception of the annuity reserved to the settlor. On September 16, 1919, the settlor executed a very short will in which he bequeathed $50,000 to employees, repeating provisions of the 1917 will, and giving the remainder of his property in the United States to his son John Jacob absolutely. Under this will the net estate of $1,191,336.02, consisting of mortgages, notes, cash, insurance, and miscellaneous property, was administered. By an English will, executed January 3, 1917, the decedent disposed of £400,000 worth of English property, principally art collections. He disposed of an Italian villa by an Italian will.

The executor of the American will paid an estate tax of $70,633.60 on the claimed net estate of $1,191,336.02. The Commissioner assessed an additional tax of $15,961,321.34 adjusted to $15,769,069.86, which was paid under protest. In Farmers' Loan & Trust Co. v. Bowers (C. C. A.) 29 F.(2d) 14, that portion paid with respect to the 1916 trust of personalty was recovered. The trustee in the present actions, involving the 1919 trusts, seeks to recover $10,810,857.98 assessed against the realty which passed under these trusts.

The statute imposing the tax (Revenue Act of 1918, § 402, 40 Stat. 1097) provides:

"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."

Since the transfers were made within two years before the death of the donor, the burden rested upon the appellee to establish that such transfers were not made in contemplation of death.

The settlor was very much concerned and disturbed about the heavy taxes which war expenditures made necessary. He was in constant communication with his British solicitor, Barchard, and his American lawyer, Peabody, concerning taxes and the creation of a trust, much of which is set forth in correspondence between Peabody and Barchard. On October 3, 1915, Astor wrote a letter to Peabody in which he commented upon the English taxes on a foreign income and stated: "I see no remedy except if my life is prolonged a few years, & if John survives the war to make an important assignment of real estate in equal portions to him and to Waldorf."

A proposal in the House of Commons to force owners of foreign securities to surrender them to the Exchequer prompted a letter of October 8, 1915, from Astor to Peabody, suggesting the assignment of all Astor's stocks and bonds in the United States. This was accomplished by the trust of 1916, which anticipated the British government's compulsory surrender move early in 1917, and successfully avoided appropriation of his American securities. The correspondence of 1917, of Astor, Peabody, and Barchard, discussed United States income taxes of 1916 and the War Revenue Act of 1917 and the problem of double taxation of income. Peabody wrote to Astor, November 26, 1917, suggesting a policy disposing of property in the United States and reinvestment in England to avoid double income taxation. In a letter of December 28, 1917, to Peabody, Astor disposed of Peabody's suggested policy by calling attention to the British death duties and discussed the great advantage that New York realty is not subject to such duties. However, it was not until 1918 that the donor and his solicitor gave attention expressly to the disposition of his real estate in the United States. After an interview with Astor, Barchard, on May 16, 1918, disclosed Astor's plan in writing to Peabody. He wrote: "Your client has been discussing with us the present position and future prospects of his real estate. His idea is to anticipate the provision of his Will, to some extent, by transferring the property to the Trustee Company upon trust to pay him a fixed proportion of, or sum out of, the income and the balance of the income to his sons in equal shares, without any accumulation."

On June 13, 1918, Peabody wrote to Barchard a letter which was forwarded to Astor and read in part:

"I have received your letter of May 16th, and have given full consideration to the subject of the same and conferred on two occasions with the solicitors of the Trustee Company.

"Answering the questions contained in your letter, in order, my view is as follows:

"1. The advisability of any such arrangement generally. The main advantages that I see in connection with the matter have their origin in the heavy burden now placed upon the large estates by reason of the abnormal income tax and the high rates which now exist in the case of what we call the transfer tax, which arises on the transfer of the property by way of devise or inheritance. We can, no doubt, expect these high rates of taxation to exist for a considerable time, and indeed I think no one expects rates ever to return to the old basis of a few years ago. This Country, entirely aside from the war, has entered upon a system under which a substantial part of its expenses is to be met by income and inheritance taxes, rather than by the system of a high protective tariff, through which, a few years ago, a large part of its National income was raised. It would follow from this that the direct taxes upon property and the tax through incomes and inheritance are not simply war measures, but are likely to last indefinitely in the future. If a trust, such as you describe, were made for the life of the grantor and the grantor should reserve to himself a certain share of the income, or a certain round sum per annum, and the balance of income were to be divided between his two sons, it would, undoubtedly, make a substantial decrease in the amount of Income Tax that is to be paid, because each one would pay the tax upon his own income and the rate would, therefore, not rise to the high rate to which the tax on the aggregate income would rise if it were treated as the income of one alone.

"The same principle would be applied to the question of the transfer tax, and indeed I am inclined to think that a trust might be created in such form that the transfer tax might be almost wholly, if not wholly, saved. In the case of a gift inter vivos there would be no transfer tax imposed, and although there is a section of the law which imposes such a tax in case of a gift made in contemplation or anticipation of death, yet if the grantor survives the gift two or more years the presumption would be under the law that such a gift was not in contemplation or anticipation of...