Colorado National Bank of Denver v. Nicholas

• Decision Date: 29 December 1954
• Docket Number: Civ. A. No. 3514.
• Citation: 127 F. Supp. 498
• Parties: The COLORADO NATIONAL BANK OF DENVER, as Executor of the Estate of Gertrude H. Cuthbert, Deceased, Plaintiff, v. Ralph NICHOLAS, U. S. Collector of Internal Revenue for the District of Colorado, Defendant.
• Court: U.S. District Court — District of Colorado

127 F. Supp. 498

The COLORADO NATIONAL BANK OF DENVER, as Executor of the Estate of Gertrude H. Cuthbert, Deceased, Plaintiff, v. Ralph NICHOLAS, U. S. Collector of Internal Revenue for the District of Colorado, Defendant.

Civ. A. No. 3514.

United States District Court, D. Colorado.

December 29, 1954.

Grant, Shafroth & Toll, Morrison Shafroth and Erl H. Ellis, Denver, Colo., for plaintiff.

Donald E. Kelley, U. S. Atty., for District of Colorado, Denver, Colo., Clifford C. Chittim, Asst. U. S. Atty., Boulder, Colo., H. Brian Holland, Asst. Atty. Gen., Andrew D. Sharpe, James P. Garland, Sp. Assts. to the Atty. Gen., for defendant.

KNOUS, Chief Judge.

The plaintiff herein seeks to recover $166,109.45, with interest, representing a portion of the Federal estate taxes paid by the decedent's estate.

The sole question presented is whether the Commissioner of Internal Revenue erred in including in the decedent's taxable estate the value of the personal property embraced in trusts made by the decedent for the benefit of her three daughters on November 16, 1935, as being "transfers in contemplation of death" within the meaning of section 811(c), Title 26 U.S.C.A.

All of the authorities in this field agree that the question of whether a donor's dominant motive is associated with life rather than with the distribution of property in contemplation of death is a question of fact in each case.

The evidence shows that the decedent had been twice married, first to Charles Berger who died in 1891, and later to Lucius M. Cuthbert, who passed away in 1915. The elder of decedent's three daughters, Charlotte Berger Barbour, was born as issue of the first marriage, and the two others, Gertrude Cuthbert Wheelwright and Alice Cuthbert Pierce, presently Doles, were children of the second marriage. The decedent, a woman of wealth, was well educated and well read. She was a confirmed world traveler from as early as the mid-twenties until the outbreak of World War II which caught her in Germany, obliging her to escape through Denmark to the United States in a refugee ship in 1939. Beside regular trips to England, the European continent and South America, she made long journeys through and into the more inaccessible areas of the world, such as the hills of Burma and the overland route from Capetown to Cairo in Africa, and explored portions of New Zealand on foot. As a result of her travels she held the title of a Fellow of the Royal Geographical Society. Consistent with the adventurous life she chose, the evidence portrays her as an outspoken woman of strong feelings and actions.

It is clear from the evidence that from the time of their birth to the date of the creation of the 1935 irrevocable trusts, the needs of her daughters were judged by the decedent under her own standards and ideas. In the pattern of her own life, the girls were brought up and maintained in an atmosphere of luxury during their childhood days and periods of education which was provided by instruction from governesses rather than in the public schools culminated by their attendance in exclusive eastern and continental private schools. Financial support from the decedent in the form of substantial gifts and regular monthly allowances continued after the respective marriages of the daughters with the obvious purpose on the part of the decedent to enable them to live according to a certain standard despite the fact that their spouses were not able to support their families on that basis.

In the beginning, decedent's contributions to her daughters generally were in the form of periodic gifts in such amount as the decedent deemed appropriate in the circumstances. Thus, in 1921 decedent gave Charlotte $60,000 for the purchase of a home and its establishment, and in 1930 substantially increased the monthly allowance to Gertrude when her first child was born. As the married lives of the daughters became more stabilized, the decedent's gifts to them more and more began to assume the form of monthly remittances in varying amounts as the decedent deemed proper.

After decedent's decision, following the death of Mr. Cuthbert, to choose for her own life residence and travel abroad, it would seem that she became more inclined to express her unquestioned love and affection for her daughters by gifts of money and her semiannual visits rather than by the devotion of the bulk of her time to living with or near them as had been her previous course. As a result of the extended periods of her residence abroad, she in 1921 invoked the aid of her brother-in-law and banker, William Berger of Denver, Colorado, in handling her affairs. Until his death, Mr. Berger, as a personal matter, made her investments, collected her income and deposited the same in an account in his bank from which he made remittance to the children and decedent as directed by her. This arrangement terminated when Mr. Berger died in 1931, and on August 4 of that year decedent created what will hereinafter be referred to as the 1931 revocable trust consisting of securities in excess of one million dollars. Under its terms she was to receive the income for life with the provision that upon her death the corpus should go to her heirs and legal representatives. Decedent also reserved the right to "direct" or "approve" all trust investments. This trust remained in effect until decedent's death. On the day of the execution of that trust she addressed a letter to the trustees and George V. Berger, another of her brothers-in-law, and the Colorado National Bank, directing them to pay from income of the trust to her three daughters the following monthly amounts: Mrs. Charlotte Berger Barbour, $350, Mrs. Gertrude Cuthbert Wheelwright, $550 and Mrs. Alice Cuthbert Pierce (now Doles), $550. At this time the girls were all married, and had inherited a considerable sum of money from an aunt, while their respective husbands were building up more earning power. Charlotte, as a witness, accounted for the lesser amount of her allowance on the basis that, at the time, she was a "little more prosperous than the other two." The last mentioned payments were made regularly to the children until the November 16, 1935, irrevocable trust, here in concern, became effective.

Matters progressed so until 1935, when on August 23 of that year the decedent, then in Europe, wrote to George Berger, her banker and brother-in-law, the letter around which the Government primarily builds its case, which reads as follows:

"My dear George—

"Thank you so much for your letter, dated August 8th, which came this morning! You have made it all clear to me. I knew it was a matter of book-keeping, and you must think I am very stupid, which I am.

"In the course of time, I would like an opinion from you, or from one of the Trust officers, as to how and where and how much I am likely to be `stunk' by the new soak-the-rich taxes—In some way it must be circumvented that my allowances to my 3 girls, and to Miss Eyre, should be considered as `gifts'. In the case of the 3 girls it might be simple enough to claim that they were sharing in their father's estate, that is, for Gertrude and Alice; and, with a little stretching, that might apply to Charlotte also.

"In Miss Eyre's case, too, there must be a way. It is ridiculous, of course, that either she or I should be taxed on her allowance. The whole thing is so outrageous any way. I feel too bitterly to make comments, even! It's the death duties and inheritance taxes that are going to play the devil for one's heirs. And all for what? To pay out billions of dollars to people without the ability or the energy or the thrift to make any money for themselves, and who mostly have done nothing to build up or develop the country—whereas the men & women who have done all of that are going to be stripped bare! Isn't that true?

"My love to Carry—and always for yourself.

"Affectionately—Gertrude—"

The "allowances" to her three girls mentioned in the foregoing letter refer to the monthly payments directed by the decedent to be made from the 1931 revocable trust hereinabove referred to.

As plaintiff points out, the forebodings expressed by the decedent concerning taxes on her "allowances to my three girls" and to Miss Eyre, were largely figments of her ignorance of the revenue laws since, as a matter of fact, at that time the specific exemption for each annual gift was $5,000; thus her allowances to Charlotte and Miss Eyre were entirely exempt, and only $3,200 totally of the allowances to the other two daughters were taxable. Under the "new" law she mentioned, she was in fact required to pay no tax on this overcharge of $3,200 until the aggregate of such accumulated amounts reached the $40,000 specific exemption provided in the new law.

However, there can be no question, as the Government stresses, that the decedent did have in mind estate taxes when she wrote: "It's the death duties and inheritance taxes that are going to play the devil for one's heirs."

In due course, Mr. Berger referred the foregoing letter, to which I shall refer hereinafter as Government's Exhibit 3, to Mr. McLean, Trust Officer of the Colorado National Bank, for his suggestions, which were duly made in the form of a letter addressed to the decedent and dated October 4, 1935. Mr. McLean began this letter by assuring decedent that she need not be much concerned about gift taxes under her existing program of giving and said that the income tax was not a serious matter since such a large proportion of her holdings were in tax-exempt securities. He then pointed out that the heaviest incidence of the new taxes would be in the way of estate taxes and suggested that the creation of an irrevocable trust before the end of 1935 would be advantageous taxwise and then proceeded to give a concrete example of such an arrangement on an assumed net estate of one million dollars, to be distributed equally among three children. On October 5, 1935, Mr. Berger mailed...