Igleheart v. Commissioner of Internal Revenue

• Decision Date: 21 May 1935
• Docket Number: No. 7389.,7389.
• Citation: 77 F.2d 704
• Parties: IGLEHEART et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

77 F.2d 704 (1935)

IGLEHEART et al. v. COMMISSIONER OF INTERNAL REVENUE.^*

No. 7389.

Circuit Court of Appeals, Fifth Circuit.

May 21, 1935.

John E. McClure, of Washington, D. C., for petitioners.

Frank J. Wideman, Asst. Atty. Gen., John MacC. Hudson, J. Louis Monarch, and Sewall Key, Sp. Assts. to Atty. Gen., and Robert H. Jackson, Asst. Gen. Counsel, Bureau of Internal Revenue, and Frank T. Horner, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before BRYAN, SIBLEY, and WALKER, Circuit Judges.

WALKER, Circuit Judge.

By petition for review the executrix and executor of the estate of Addison W. Igleheart, deceased, complain of the action of the Board of Tax Appeals under a petition for a redetermination of a deficiency of estate taxes assessed by the respondent against the estate of the decedent, who died on December 24, 1927.

On June 1, 1926, the decedent, then 74 years of age, the date of his birth being March 6, 1852, created two trusts, and executed his will, which superseded a will made in 1921, whereby, after a specific bequest to his wife, he gave the residue of his estate in equal shares to his wife and his four children; the will naming his wife as executrix and his son executor. One of the trusts was created by an instrument whereby the decedent transferred irrevocably to his wife corporate stock and bonds, including Federal Land Bank bonds, the property transferred then having a value of $498,599.88, in trust to receive for herself the net income during her life, upon her death the trust fund to be divided equally between the decedent's surviving children; the share of any deceased child of the decedent to go to that child's surviving issue. The other trust was created by an instrument whereby the decedent transferred to a named trust company described corporate stock, then having the value of $869,122.28, in trust to pay the net income of the trust property to the decedent during his natural life, and, upon the death of the decedent, the trust property to be divided equally between the decedent's children; the share of any deceased child of the decedent to go to that child's surviving issue. The decedent expressly reserved the right at any time during his lifetime to revoke, annul, or amend the trust created by that instrument. In February, 1926, Igleheart Bros., an Indiana corporation, of which decedent was a stockholder and officer, sold to the decedent for the cash surrender value thereof certain policies of insurance on the decedent's life which that corporation, prior to 1920, had taken out for its own benefit; the several applications therefor having been signed by the decedent. Pursuant to provisions contained in each of the policies the decedent caused the name of the beneficiary to be changed from that of the corporation to a named beneficiary other than the estate of the decedent, under the policies the decedent having the right further to change the beneficiaries. Upon the death of the decedent, $112,446.00 was paid under the policies to the designated beneficiaries chosen by the decedent. In August, 1927, the decedent took out a two-year endowment policy of $100,000 on the life of his wife, paying therefor a single premium of $97,225.

The estate tax deficiency in question, in so far as it was approved by the Board of Tax Appeals, resulted from adding to the amount shown by petitioners' return as subject to estate tax the following: The amount of the value at the date of the decedent's death of the property included in the trust created by him in favor of his wife primarily, the value of that property at that time being substantially greater than it was at the time that trust was created; the amount of the value at the date of the decedent's death of the property included in the trust created by the decedent in his own favor for life, that value being substantially greater than the value of such property at the time that trust was created; (in calculating the value or the amounts of property transferred by the decedent in creating the two trusts, an exemption of $5,000 was allowed for each of five beneficiaries) the amount collected on policies of insurance on the life of the decedent bought by the decedent from Igleheart Bros. of Indiana, less the statutory exemption of $40,000; the amount of the cash surrender value at the date of the decedent's death of the two-year endowment policy on the life of decedent's wife, and the amount of the value at the time of decedent's death of Farm Loan bonds held by the decedent and in trust in his favor; and from the disallowance of a deduction of $1,500, the amount of an obligation incurred by decedent's estate for the perpetual care and maintenance of a mausoleum and cemetery lot for the last resting place of the decedent.

From his boyhood until April, 1926, when all of the stock of Igleheart Bros. of Indiana was sold, the decedent was connected with the business of that corporation; that business being a flour milling business which was established by the father of the decedent. In the earlier years the decedent was a clerk and salesman, and from 1905 to April 1, 1926, he was vice president and treasurer. The decedent and his two brothers each had one son. The decedent and his two brothers each owned two-ninths of the common and preferred stock of Igleheart Bros., and each of the sons owned one-ninth thereof. Following negotiations, on April 1, 1926, after the preferred stock, having a par value of $810,000, had been retired, all the common stock of that corporation was sold to the Postum Company for $595,000 cash and 95,000 shares of Postum Company stock; the liquid assets of the corporation consisting of cash and securities being distributed pro rata to the stockholders at the same time. Contemporaneously there was organized a Delaware corporation, called Igleheart Bros., Inc., which received the 95,000 shares of the Postum Company stock and in exchange therefor delivered to the former stockholders of Igleheart Bros. of Indiana its own class A stock in proportion to their respective interests. As a result of the retirement of the preferred stock of Igleheart Bros. of Indiana and the sale of the common stock to the Postum Company, the decedent acquired cash and stock amounting in value to $2,424,000. Before these transactions his net worth, excluding his interest in Igleheart Bros. of Indiana, was approximately $100,000, and after the sale of the common stock of Igleheart Bros. of Indiana to the Postum Company, the decedent was possessed of independent means in excess of $2,500,000.

In November, 1915, the decedent suffered a stroke described as a right-side hemiplegia, a condition brought about by the rupture of a blood vessel in the left side of the brain which might result from any one of a number of causes, such as thickening or hardening of the arteries, embolism, stomach disease, nephritis, and other causes. Medical examination of the decedent after the stroke failed to disclose the cause. His urine was normal; there was no heart trouble and he had no kidney disease. Decedent was confined to his bed about four weeks and then regained normal health, except that the use of his right arm and leg was seriously impaired from the time of the stroke to his death. His mind, speech, hearing, and eyesight remained normal until his death, but because of lack of use of the right arm he learned to write with his left hand. Until three days before his death the decedent had general good health, his appetite remained normal, and he was not attended by a physician except on two or three occasions for minor ailments unrelated to the hemiplegia. After the stroke the decedent could and did walk short distances about his house with assistance and the help of a cane, but for the most part he spent his time sitting in a chair in the house or on the veranda reading or talking with his family, friends, or business associates. In good weather he took some trips of several hundred miles. The decedent remained cheerful and optimistic to the end, was never morose, but always of a sociable nature with a sense of humor, and did not talk about the condition of his right leg and arm.

After the stroke in 1915 the decedent did not go to his office but continued as vice president and treasurer of the corporation and kept in active touch with the business through records of business, statements of daily sales, reports of the wheat market and business telegrams regularly sent to him, and in later years when at his home in Indiana the office manager called once a week and discussed the affairs of the corporation. The decedent and his two brothers were the directors and no major business policy was adopted without unanimous consent, meetings of the directors on major policies being held, after the stroke in November, 1915, at decedent's home at Evansville or Newburgh, Ind., unless he was absent from both of those places. The decedent after his stroke did not discuss with his family, his friends, or his business associates the subject of his death. In the later years of his life the decedent spent the late fall and winter months in Florida, and spent part of his time in the summer at Newburgh, Ind. After the decedent created the two trusts and made his last will, he made his home in Florida, living in a residence he bought, the title to which was taken in his wife's name. Shortly after the sale to the Postum Company was made the decedent returned to Indiana from Florida, and discussed with one of his brothers the investment of their capital in such manner as to relieve their wives of the burden of its care in the event of their "absence." That brother was a witness for the petitioners in the hearing before the Board of Tax Appeals. The following is an extract from his testimony: "After we merged with Postum and had received our payment, he, as well as myself, was very much concerned as to how to invest this money so that in the...