Estate of Grace v. United States

• Decision Date: 19 April 1968
• Docket Number: No. 400-59.,400-59.
• Citation: 393 F.2d 939
• Parties: ESTATE of Joseph P. GRACE, Deceased, Michael P. Grace, II, Joseph Peter Grace, Jr., and Charles MacDonald Grace, Executors et al. v. The UNITED STATES.
• Court: U.S. Claims Court

393 F.2d 939 (1968) ESTATE of Joseph P. GRACE, Deceased, Michael P. Grace, II, Joseph Peter Grace, Jr., and Charles MacDonald Grace, Executors et al. v. The UNITED STATES.

No. 400-59.

United States Court of Claims.

April 19, 1968.

William S. Downard, Dallas, Tex., attorney of record, and Edward Gossett, for plaintiffs. Henry W. Strasburger and Frank L. Skillern, Jr., Dallas, Tex., of counsel.

Philip R. Miller, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, SKELTON, and NICHOLS, Judges.

OPINION

PER CURIAM:

This case was referred to Trial Commissioner Mastin G. White with directions to make findings of fact and recommendation for conclusions of law. Following a trial on the merits, the commissioner filed an opinion and report, and the case was submitted to the court on the briefs of the parties. After hearing oral argument of counsel, we remanded the case to the commissioner for determination "whether the decedent Joseph P. Grace was motivated in the setting up of the Joseph Grace and the Janet Grace trusts, in December 1931, by the desire to avoid and lessen estate taxes." A further trial was held and thereafter the commissioner filed his supplemental report and a memorandum opinion.

After hearing additional oral argument and considering the briefs and exceptions of the parties, we have determined that the findings of fact made by the commissioner are amply supported by the record and that where such findings consist of inferences based on circumstantial evidence, the inferences may reasonably be drawn from the record. The court is also in agreement with the opinions of the trial commissioner, as modified and combined into a single opinion, and hereby adopts the same, together with his findings of fact, as the basis for its judgment in this case.^* Therefore, plaintiffs are entitled to recover and judgment is entered to that effect with the amount of recovery to be determined pursuant to Rule 47(c).

Commissioner White's opinions, as modified and unified by the court, are as follows:

The primary question to be decided in this case is whether the Internal Revenue Service acted correctly in adding to the gross estate of Joseph P. Grace, who died on July 15, 1950, the sum of $1,116,888.62, representing the value of a trust that had been created on December 30, 1931.

The Internal Revenue Service purported to act under the authority of Section 811(c) of the Internal Revenue Code of 1939, as amended.¹ That section, at the time of the decedent's death, provided (among other things) that the value of the gross estate of a decedent should be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, "To the extent of any interest therein of which the decedent has at any time made a transfer * * * by trust or otherwise * * * under which he has retained for his life * * * the possession or enjoyment of, or the right to the income from, the property * * *."

It is clear that under the provisions of the trust of December 30, 1931, the decedent for his lifetime had the right to the income from the income-producing portion of the trust property, and that he was entitled to the possession and enjoyment of the remainder of the trust property. On the other hand, the decedent, at least in form, was not the settlor of the trust, he had not directly "made a transfer" of any property or interest in property to the trust, and, strictly speaking, he had not "retained" any beneficial interest in the trust property but, rather, had obtained such interest by virtue of the instrument creating the trust. The person who executed the instrument creating the trust of December 30, 1931, and who directly transferred to that trust all the property covered by it, was the decedent's wife, Janet Grace. (For the sake of convenience, the trust of December 30, 1931, will usually be referred to hereafter in the opinion as "the Janet Grace trust.")

The defendant contends that the decedent, by himself creating on December 15, 1931, a reciprocal trust which conferred on Janet Grace benefits similar to those which were conferred on the decedent by the Janet Grace trust, furnished consideration for the creation of the Janet Grace trust; and, therefore, that for estate-tax purposes the decedent and Janet Grace should be switched or crossed as settlors and the decedent should be regarded as having been in substance the settlor of the Janet Grace trust. This contention is based upon a judicially developed rule that was first announced in the case of Lehman v. Commissioner of Internal Revenue, 109 F.2d 99 (2d Cir. 1940), cert. denied 310 U.S. 637, 60 S.Ct. 1080, 84 L.Ed. 1406.

The facts in the Lehman case were stipulated by the parties. According to the stipulation, two brothers, Harold M. and Allan S. Lehman, owned equal shares in certain stocks and bonds. Harold agreed to transfer his share in trust for Allen and the latter's issue, in consideration of Allan transferring his share in trust for Harold and Harold's issue, and trusts were created in accordance with the agreement. The income from the trust property transferred by Harold was to be paid to Allan for his life, with the remainder to Allan's issue, and Allan had the right to withdraw not to exceed $150,000 of the principal. Similarly, the income from the trust property transferred by Allan was to be paid to Harold for his life, with the remainder to Harold's issue, and Harold had the right to withdraw up to $150,000 of the principal. Harold later died, and the court was called upon to decide whether trust property transferred by Allan was taxable as part of Harold's estate. This question was answered in the affirmative. The court said (109 F.2d at pp. 100-101) that Harold, by transferring his share of the stocks and bonds in trust for the benefit of Allan and the latter's issue, had "paid for and brought about" the transfer by Allan of his share of the stocks and bonds in trust for the benefit of Harold and Harold's issue; and, therefore, that Allan's transfer was in substance a transfer by Harold, so as to make the property so transferred part of Harold's taxable estate.

There are two divergent views of the precise proposition that the Lehman case stands for, each espoused in several cases. Since in this case the same result is reached under either view, we have not felt it necessary to choose between the two lines of cases. Each shall be considered in turn.

According to one line of cases, the crucial factor in the Lehman case was that, under the agreed facts, Harold Lehman had furnished consideration for — i. e., he had "paid for and brought about" the transfer of property by Allan Lehman in trust for the benefit of Harold Lehman and the latter's issue. In re Lueders' Estate, 164 F.2d 128, 133-134 (3d Cir. 1947); Newberry's Estate v. Commissioner of Internal Revenue, 201 F.2d 874, 877, 38 A.L.R.2d 514 (3d Cir. 1953); McLain v. Jarecki, 232 F.2d 211, 213 (7th Cir. 1956); Tobin v. Commissioner of Internal Revenue, 183 F.2d 919 (5th Cir. 1950), cert. denied, 340 U.S. 904, 71 S.Ct. 280, 95 L.Ed. 654. See, also Estate of Lindsay, 2 T.C. 174 (1943); Guenzel's Estate v. Commissioner of Internal Revenue, 258 F.2d 248 (8th Cir. 1958). In the present case, it becomes necessary, under the rule followed in the above-cited cases, to determine whether the decedent by creating the trust of December 15, 1931, was furnishing consideration for — i. e., whether he was paying for — the subsequent creation of the Janet Grace trust on December 30, 1931. This is a question of fact, which involves an inquiry into the element of motivation. The facts show that when decedent created the Joseph Grace trust, he was not paying for the transfer of the property covered by the Janet Grace trust and that when Janet Grace made such transfers to the Janet Grace trust, she was not induced or caused to do so by reason of the previous establishment of the Joseph Grace trust by the decedent.

Unfortunately, it is necessary to rely largely on circumstantial evidence in making the factual determination that is crucial in the disposition of this case, as both the decedent and Janet Grace were dead at the time of the trial. Consequently, it will be necessary to outline in considerable detail the known facts which appear to be pertinent in drawing inferences with respect to the motivation which led the decedent and Janet Grace to create the trusts of December 15 and 30, 1931.

The decedent and Janet Grace were married in August 1908. Five children, three sons and two daughters, were born to them. One of the daughters died in 1935, but the other four children were living at the time of the trial.

The decedent was a man of great wealth at the time of his marriage to Janet Grace and thereafter. Janet Grace, on the other hand, had no wealth or property of her own at the time of her marriage to the decedent, and she did not thereafter inherit any substantial wealth. However, Janet Grace acquired the ownership of extensive property and financial interests during her marriage to the decedent as the result of transfers which the decedent made to her, either directly or indirectly. For example, when the decedent on April 5, 1911, paid the purchase price for and acquired a 167-acre farm on Long Island for the purpose of developing it into a homestead for the family, he caused the legal title to be vested in Janet Grace. Thereafter, the decedent proceeded at great expense to convert the acreage into a country estate for use as the family home. The property was called Tullaroan, and it included among the numerous improvements a 65-room colonial-style residence for the family. Tullaroan became the home of the decedent and Janet Grace in about 1911, and it continued to be their home for the remainder of their lives.

There is in the record evidence concerning 24 transfers of property...