Davidson's Estate v. Commissioner of Internal Rev.

• Decision Date: 09 December 1946
• Docket Number: No. 3330.,3330.
• Citation: 158 F.2d 239
• Parties: DAVIDSON'S ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Tenth Circuit

158 F.2d 239 (1946)

DAVIDSON'S ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 3330.

Circuit Court of Appeals, Tenth Circuit.

November 11, 1946.

Rehearing Denied December 9, 1946.

Harvey C. Osborne, of Wichita, Kan. (Chas. G. Yankey and J. G. Sears, Jr., both of Wichita, Kan., on the brief), for petitioner.

Carlton Fox, of Washington, D. C. (Douglas W. McGregor, Sewall Key, and Helen R. Carloss, all of Washington, D. C., on the brief), for respondent.

Before PHILLIPS and HUXMAN, Circuit Judges, and BROADDUS, District Judge.

HUXMAN, Circuit Judge.

The question in this case is whether the transfer by the insured decedent of life insurance policies totaling $105,000 to a trust was made in contemplation of death within the meaning of Section 811(c) of the Internal Revenue Code, 26 U.S.C.A. Int. Rev.Code, § 811(c). To present a clear picture, a rather detailed statement of the facts is necessary.

The decedent, Augusta Reta Davidson, was the widow of William Davidson, who died, testate, in 1917. The second provision of his will bequeathed $15,000 to his wife for life, with remainder to his niece, Agnes Pottenger. The fourth provision bequeathed $50,000 to her for life, with remainder to John Pottenger. He expressed a desire in his will that to expedite matters his wife execute a will and provide for the payment of such sums to the remaindermen.

Augusta Reta Davidson had no children. In 1910 she began making gifts of money and personal property at irregular intervals to her three sisters, Grace T. Gallie, Mina Irish, and Mollie Hagenbuch; to her brother, Carl J. Rockser; to her niece, Grace Lawrence, and later to a nephew, Donald Rockser. These persons were her closest relatives. Commencing in 1926, gifts of money were made more regularly by checks. The payments thus made from 1926 to 1941 aggregated $88,466.54.

On October 11, 1932, she transferred certain securities and cash to the First National Bank in Wichita in trust, with directions to pay out of principal or income $150 monthly each to Grace T. Gallie and Mina Irish, and $100 each to Mollie Hagenbuch and Carl J. Rockser and Grace Lawrence for the life of the beneficiaries. The interest of each beneficiary in the trust was to cease upon his or her death, except that in the case of Carl J. Rockser, the $100 monthly payments were to be made to his son, Donald, until the termination of the trust. On April 30, 1936, the trust was amended to provide for additional payments. To sustain the monthly payments, she made contributions to the trust, aggregating $97,700, through 1939, including $35,000 contributed at the time of the creation of the trust. The monthly payments provided for in the trust were made during the remaining life of the trustor.

In 1936 the decedent took out five life insurance policies on her life, aggregating $105,000. At the time the policies were issued, the decedent was contemplating the execution of a trust with life insurance as principal, for the payment of the $15,000 bequest to Agnes Pottenger and the $50,000 bequest to John Pottenger under her husband's will. The insurance agent suggested that she create such a trust with the insurance, and that she take out an additional $65,000 of insurance to pay death taxes and costs of administration.

In January, 1937, she, referring to her sisters, brother, nephew and nieces, told one of her sisters in substance, that she wanted to have them provided for regularly; that her husband had made a will requesting her to make one giving the $15,000 to Agnes Pottenger and the $50,000 to John Pottenger, and for these reasons she thought it would be a good idea to establish the insurance trust; that she would then feel free and have peace of mind and could go on enjoying the rest of her life if those two things were taken care of. On July 21, 1937, she irrevocably transferred all her interest in the life insurance policies to the First National Bank in Wichita, succeeded by the Fourth National Bank in Wichita on March 28, 1940, in trust, with directions to collect the proceeds of the policies upon her death, and thereafter at a terminable time to divide the trust estate into ten equal parts, two parts to be held in trust for each of her three sisters and her brother, and one each for her nephew and niece. At the time of these transfers she was in good health and had no occasion to feel that death was imminent.

The sisters and brother were to receive out of the principal and income of this trust $250 a month for life, and the niece $125 a month for life. Upon the death of any of the beneficiaries, the corpus and undistributed income of such share was to go to the trust created for the nephew, who was to receive one-third of the corpus of the trust when he reached thirty years of age, one-half of the remainder five years later, and the balance when he became forty years old. In the meantime, he was to receive out of the principal and income $200 a month. Any funds distributed to the trust after the nephew attained forty years of age were to be immediately delivered to him, free and clear of the trust. If the nephew died before receiving his full distributive share, leaving issue, the trust was to retain the principal and accrued income in equal shares, and make distributions when each child reached the age of twenty-one, and during their minority the income was to be used for their maintenance and support. In case the nephew survived the trustor and died without issue before receiving his full distributive share, the trustee was directed to distribute the principal and accumulated income in equal shares among the then subsisting trusts for the sisters, brother and niece, and upon the death of the beneficiary of any such trusts, the trust fund was to be distributed in equal shares to the remaining subsisting trusts. Upon the death of the beneficiary of the last subsisting trust, the trustee was directed to distribute the trust fund to the heirs of the grantor. All the beneficiaries survived the decedent.

The decedent agreed to pay and did pay all the premiums on the policies. The beneficiaries, however, were authorized to pay the premiums in the event insured failed to do so. The decedent, in assigning the insurance policies to the trust, reserved no legal interest in the insurance and did not reserve the right to change the beneficiaries thereafter.

Article 4 of the Trust Agreement provided that the purpose thereof was two-fold, first, that of providing a trust estate to be administered in accordance with the provisions contained therein for the benefit of the beneficiaries, and, second, that of creating a fund of cash and placing such cash at the disposal of the trustees for the purpose of purchasing assets from the executor, administrator or trustees appointed under the will of the donor, thereby equipping the estate of the donor with a fund of cash which it was contemplated would be used by the executor or administrator of the estate of the donor in effecting and terminating the distribution of two certain trusts or life tenancies, aggregating $65,000, which were created under the will of her husband. The trust instrument further provided that upon the death of the donor, the trustee was given the absolute, unqualified and unconditional privilege to purchase from the executor, administrator or trustees appointed under her will any assets of which she died seized or possessed.

The decedent executed a will in 1932, and thereafter signed several codicils thereto. It was the practice of the First National Bank in Wichita to request clients to rewrite wills having several codicils, in order, as it was alleged, to save probate costs. In accordance with this policy, and pursuant to a request of the First National Bank in Wichita, the original will and codicils were rewritten as a new will with some additional provisions. The decedent signed this will on July 21, 1937, and executed a codicil thereto on March 23, 1940. This codicil contained a provision which bequeathed her residuary estate, which consisted of substantially her entire estate, except some small specific bequests, to the First National Bank in Wichita in trust, with directions to hold and administer the property in accordance with the terms of the insurance trust. Decedent was admitted to the hospital on October 14, 1941, and died two days thereafter.

The Tax Court found that the transfer of the insurance policies to the trust was made in contemplation of death. Judgment was entered in conformity with this finding, and the executor of the estate has appealed. Two questions are presented upon which the parties disagree. The first is one of law, and the other is one of fact. The first question requires an examination and definition of what constitutes a transfer in contemplation of death.

Appellant cites a large number of decisions of Circuit Courts of Appeals in support of its contention that these gifts were not made in contemplation of death within the meaning of the applicable sec...