Chase National Bank v. Commissioner of Int. Rev.

• Decision Date: 10 October 1955
• Docket Number: No. 15081-15083.,15081-15083.
• Parties: The CHASE NATIONAL BANK OF THE CITY OF NEW YORK — Trust Division — and Eileen June McDonald, Trustees of the Last Will and Testament of D. G. McDonald, Deceased, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Eileen June McDONALD, Executrix of The Estate of D. G. McDonald, Deceased, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Eileen June McDonald THOMPSON, Executrix of the Estate of D. G. McDonald, Deceased, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

225 F.2d 621 (1955)

The CHASE NATIONAL BANK OF THE CITY OF NEW YORK — Trust Division — and Eileen June McDonald, Trustees of the Last Will and Testament of D. G. McDonald, Deceased, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Eileen June McDONALD, Executrix of The Estate of D. G. McDonald, Deceased, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Eileen June McDonald THOMPSON, Executrix of the Estate of D. G. McDonald, Deceased, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 15081-15083.

United States Court of Appeals Eighth Circuit.

September 16, 1955.

Rehearing Denied October 10, 1955.

James D. Conway, Hastings, Neb., for petitioners.

Carolyn R. Just, Sp. Asst. to the Atty. Gen. (H. Brian Holland, Asst. Atty. Gen., and Ellis N. Slack, Sp. Asst. to the Atty. Gen., with her on brief), for respondents.

Before GARDNER, Chief Judge, and WOODROUGH and VOGEL, Circuit Judges.

Rehearing Denied No. 15083 October 10, 1955.

VOGEL, Circuit Judge.

Petitioners herein seek review of the correctness of decisions of the Tax Court of the United States, In re McDonald's Will, 19 T.C. 672, determining deficiencies against the petitioners.

The first two cases may be treated as one because they involve the same income tax deficiencies, one by the executrix of the estate and the other by trustees, who have admitted transferee liability if the deficiencies are sustained. These two cases determined income tax deficiencies for the calendar years 1944, 1945, 1946 and in 1947 to May 16, 1947, in the respective amounts of $26,681.29, $26,973.16, $19,076.55 and $28,047.73. The third case relates to estate tax deficiency in the amount of $335,471.29.

The facts as stipulated by the parties and as found by the Tax Court may be summarized as follows:

D. G. McDonald, hereinafter called the decedent, married Lenore E. McDonald in 1912 in Kansas. Neither had any property at the time of marriage. Shortly thereafter they moved to Kellogg, Idaho, where the decedent engaged in the general merchandising business and acquired an interest in several stores in Idaho. On or about July 1, 1913, the Kellogg store was consolidated into the J. C. Penney Company chain as Store No. 42. As a result, decedent acquired 20 shares of Penney classified common stock. Decedent managed the store until March, 1917, when he and his wife moved to St. Paul, Minnesota. In St. Paul decedent had supervision of a buying office for Penney and in 1922 was transferred to New York City where he was an executive and director of the company until severing all connections with it in 1929.

From July, 1913, to September, 1924, decedent acquired 1135 shares of Penney stock at a cost of $56,200.00. At least 185 of these shares were procured by him from other individuals, with the remainder being the exercise of options and rights arising from the original 20 shares. After various conversions, split-ups, and sales, decedent owned 21,204 shares of Penney common stock on November 10, 1930.

In the spring of 1930, Lenore and the decedent moved to California. The decedent intended to retire.

Decedent and Lenore McDonald had two children, a son, Delos, born December 13, 1914, and a legally adopted daughter, Nedra, born October 2, 1925. The family maintained a high standard of living, with the children being afforded every advantage of locale, travel, etc. Decedent and Lenore separated in September, 1930, and never lived together again.

On November 10, 1930, decedent created a trust entitled "Trust No. 924" with the Bank of America National Trust and Savings Association as trustee and decedent designated as trustor. Lenore joined in the instrument and assigned to the trustee and waived any community or other interest she had or would have in the trust res. Decedent transferred 12,000 shares of his Penney common stock to the trust and gave the trustee the usual powers.

Article I of the trust provided that the trustee could not sell any of the stock without written direction of the trustor and Lenore or survivor. Article III gave the trustor power to add additional property. Article V provided for the disposition of the income. If not sooner terminated, the trust was to terminate upon the death of the survivor of Lenore and Delos and the trustee was to distribute the entire trust estate to the issue of Delos, per stirpes, or, in the event of no surviving issue of Delos, to the trustor if living, and if not living to the executor or administrator of the trustor.

Article VI of the trust agreement read as follows:

"The Trustor reserves the right, while he shall be competent to act, and while Lenore E. McDonald, wife of the Trustor, shall be living and competent to act, to change or amend any of the provisions of this trust or any of the trusts hereby created, and also to revoke the trust in whole or in part and take out of the trust and remove from the operation thereof any part or all of the trust estate, provided, however, that any change or amendment of the trust shall be made only by written declaration or agreement, subscribed by the Trustor, Lenore E. McDonald, wife of the Trustor, and by the Trustee, and revocation, either partial or as to the whole trust, shall be by notice in writing, signed by the Trustor and Lenore E. McDonald, wife of the Trustor, and delivered to the Trustee. This trust shall not be subject to amendment or revocation after the death of either the Trustor or Lenore E. McDonald, wife of the Trustor."

On November 10, 1930, when the trust was created, decedent hoped for a reconciliation with Lenore, but about Christmas of that year Lenore advised him that she was going to get a divorce. Both were represented by counsel. Acrimonious negotiations concerning a property settlement and the divorce extended over a period of several months in 1931, leading up to a written agreement between Lenore and decedent executed on November 30, 1931, and also to amendment, partial revocation, and addition to Trust No. 924 by instrument dated November 30, 1931.

On November 30, 1931, a complaint for divorce was filed which asserted that a property settlement had theretofore been entered into between the parties and prayed that the property settlement be embodied in the decree.

The property settlement agreement referred to in the complaint read in part as follows:

"Whereas, the parties hereto desire to forever settle and adjust their property rights, both present and future, including division of the community property of the parties, and

Whereas, the parties have agreed upon a full and complete settlement of all property rights including support and maintenance of the party of the first part and their children, and

* * * * * *

2. The parties hereto agree that Trust No. 924, Bank of America, shall be so revised and amended as to permit the withdrawal therefrom of 5,500 shares of the J. C. Penney Co. stock now subject to said Trust, which said 5,500 shares shall be delivered to first party, free from the provisions of said Trust and shall become and be her sole and separate property. That there shall be added to said Trust by second party hereto an additional 500 shares of said J. C. Penney stock of the same kind, as is now covered by said Trust, making a total number of shares remaining in said Trust of 7,000; * * *"

Paragraph 4 of the agreement provided that it "is expressly understood and agreed that the property transferred and conveyed to first party under this agreement, and under said Amended Trust Agreement," now is and henceforth shall be her sole and separate property, and second party relinquishes any interest which he has or hereafter may acquire in and to said property.

In paragraph 7 it was provided that each of the parties does relinquish, release, renounce, waive, and give up all interest or claim against the person, property, or estate of the other, "including the right of alimony, support, maintenance, and any and all rights of inheritance which shall be a part of the estate of the other, * * * it being expressly understood that included therein is any community right, right of dower, right of homestead, right of former allowance, or any other right or claim * * *" the parties have or may have.

Paragraph 10 stated that the income from the amended trust created for the benefit of the children would be the sole property of Lenore, with the understanding that it was for the purpose of supporting, educating, and maintaining said children. This provision was to be in full satisfaction of all obligations of decedent for support, etc., of the children.

The interlocutory judgment of divorce was filed on December 7, 1931, and embodied the property settlement, the original trust and the amended trust.

The amended trust agreement added the following to Article I of the original agreement:

"So long as any of the capital stock of the said J. C. Penney Company is held in this trust, the Trustee shall vote the said stock or shall execute and deliver proxies therefor in accordance with the written directions executed by the Trustor and the said Lenore E. McDonald during their joint lives, and executed by the survivor of them after the death of either, and delivered to the Trustee."

The amended trust agreement further directed the trustee to hold the trust estate in the proportions of six-sevenths for Delos and one-seventh for Nedra. The share of Delos was to be distributed to Lenore until Delos reached age 21, when he was to receive $3,600. yearly. At age 25 Delos was to receive all the net income from his share, and since December 13, 1939, it has been so distributed. Nedra's share was to be delivered to Lenore until Nedra attained the age of 18 years and after that was to be and has been distributed to Nedra. The principal of the share of each child was to be distributed to such child upon attaining the age of 35 years.

Article V(f) of the trust instrument as amended provided that in the event of the death of...