Ross v. Comm'r of Internal Revenue (In re Estate of Johnson)

• Decision Date: 23 April 1948
• Docket Number: Docket No. 9596.
• Citation: 10 T.C. 680
• Parties: ESTATE OF OLIVER JOHNSON, DECEASED, ALLA J. ROSS, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

10 T.C. 680

ESTATE OF OLIVER JOHNSON, DECEASED, ALLA J. ROSS, EXECUTRIX, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 9596.

Tax Court of the United States.

Promulgated April 23, 1948.

Held, under the facts, certain transfers of property made by decedent were not in contemplation of death. Joseph Donald Brady, Esq., and Lucien W. Shaw, Esq., for the petitioner.

Earl C. Crouter, Esq., for the respondent.

The Commissioner determined a deficiency of $44,765.91 in estate tax liability. The value of the gross estate was determined in part by including the value of property transferred by the decedent during his lifetime. The sole issue for decision is whether such property was transferred in contemplation of death within the meaning of section 811(c) of the Internal Revenue Code. Other adjustments made by respondent are not here in issue. The parties have stipulated that certain costs and expenses incurred by the decedent's estate may be allowed as deductions in computations to be made pursuant to Rule 50.

FINDINGS OF FACT.

The parties have filed a stipulation of facts which is incorporated herein by reference.

The decedent, Oliver Johnson, died March 8, 1943, at the age of 94 years, a resident of Long Beach, California. He was survived by 5 children: C. Elmer Johnson, Alla J. Ross, Bertha J. Landreth, T. Leman Johnson, and Bula J. Simms. The children ranged between the ages of 50 and 68 at the date of decedent's death. The executrix of the estate is Alla J. Ross. The estate tax return was filed with the collector of internal revenue for the sixth district of California.

The decedent was born in Iowa on November 4, 1848. He was one of nine children, four of whom were alive in 1939. In 1878 he became a resident of Belleville, Kansas. In 1905 he moved to Courtland, Kansas, where he remained until 1918. During decedent's residence in Kansas he was primarily a farmer. He acquired 9 tracts of farm lands between 1883 and 1916, containing a total of 1,487 1/2 acres in Republic County, Kansas. Two of these tracts were improved with a house and barns; 2 others with a house each. Sometime prior to 1918 the decedent placed the active farming of these properties with tenants. He also made loans on notes and mortgages. For a short time before the first World War he owned a controlling interest in a small bank in Courtland, Kansas.

In 1918 the decedent and his wife decided to leave Kansas in order to escape the cold weather and move to California, where they had wanted to live and where they could be out of doors more often. Pursuant to their decision, they sold all of their household effects and set out for California by way of Wenatchee, Washington, where one or more of their children lived. They spent the winter in Washington and moved to Long Beach, California, in 1919.

The decedent arrived in Long Beach, California, shortly prior to his seventy-first birthday. He considered himself a retired farmer, but he retained an active interest in his farm properties. He returned to Kansas virtually every year during four or five months in the summer and fall of each year until 1939. During these months he inspected his farms, transacted business, and visited friends. In 1920 the decedent bought a house in Long Beach for himself and his wife. He acquired one other house in 1921 and in 1925 purchased a two-story office building in Corona, California, in which his daughter Bula and her husband operated a drug store.

In 1927 the decedent's wife died. The decedent purchased crypts for himself and his wife in the Sunnyside Mausoleum of Long Beach. The decedent then lived with his son Elmer for approximately one year. Thereafter he lived alone in rented rooms during the winters until 1937. In that year he purchased the Oliver Apartments in Long Beach, where he kept an apartment for himself until he moved to the home of his daughter Alla in August of 1940.

Prior to 1932 the decedent made a number of loans, usually at 6 per cent interest and secured by trust deeds and mortgages on real estate in California. These loans were made through the Golden State Bond & Mortgage Co. In 1932 the Golden State Bond & Mortgage Co. became financially embarrassed. Between 1932 and 1934 the decedent acquired the outright ownership of 21 or more small rental properties because of defaults on the loans he had made. In each case the decedent paid something for the equity and received deeds from the owners. In each case the title to these properties was encumbered by local tax and other municipal liens.

Between 1934 and 1939 the decedent owned a total of 28 or more properties in Southern California, some of which were occupied by more than one tenant. Rent collections, repairs, and clearing of the titles required the work of 2 men. The decedent, who was 85 years of age in 1933, worked from 9 in the morning until 4:30 or 5 o'clock at night, 4 and 5 days a week. In 1933 the decedent hired his son Elmer as a full time employee at a salary of $350 a month. This salary was raised to $400 a month for the first 6 months in 1939. Elmer furnished transportation, acted as bookkeeper, and filled out the decedent's tax returns for the years 1930 to 1939, inclusive. The decedent had not owned an automobile since 1918 and had never filled out his own tax return. The decedent kept some accounts in a pocket notebook and retained his bank statements. When the decedent returned to Kansas each year the management of the Long Beach properties was carried on by Elmer. Bula J. Simms and her husband collected the rents on the Corona property. Elmer and Bula were authorized to and did make deposits on behalf of the decedent in bank accounts he maintained in Long Beach and Corona, respectively.

Prior to 1939, the decedent had stated several times that he did not like small rental PROPERTIES. He had so stated when a real estate broker attempted to interest him in such properties. In 1933 he told his daughter Bula that he was going to have to take active management of such properties, due to the failure of the mortgage company. He stated that he never liked the management and intended to give the properties to his children as soon as he could clear up the titles. He told the same thing to his son Leman in 1935, saying that when the titles were clear he was going to make a division of those properties for his children so that he could see them enjoy the properties while he was still alive. He was desirous of making an equal division and one that would satisfy the children. He had told Elmer of his intentions about the property division on several occasions.

The last encumbrance was cleared away in late 1938. A few days prior to March 3, 1939, the decedent told his daughter Bertha and her husband, who were then visiting in Long Beach, that he had a surprise which he thought would make all the children happy. The decedent had itemized gifts of his real property for all the children, saying that he had always intended making the gifts but had never before had them in the proper shape, free and clear of encumbrances. He stated that he wanted the children to look over these properties in order to make a division that would satisfy all of them. The three of them then drove to Corona to tell his daughter Bula.

The next morning the decedent stated that he wanted the children to know why he was making the gifts of his real property. He said that he did not want them to think that he was not going to live very long because he expected to live a long time. He stated that he did not think he wanted to go back to Kansas again and that he did not want to be bothered with the rental properties. He said that he would keep his notes and mortgages and would therefore never have to go to his children for care. Thereafter the party returned to Long Beach and made a tour of the Long Beach properties with his son Elmer. A short time later an attorney was given a description of the properties and told to draw up the deeds, which the decedent signed on March 3, 1939. Two of the decedent's children were not present in Long Beach when the gifts were made.

The gifts consisted of all the decedent's real properties. At the date of the gifts the decedent owned 9 Kansas farms, and each of the children received at least one tract. The Corona property was given in equal, undivided shares to Bertha and Bula. The latter took title jointly with her husband. The remaining 21 properties which the decedent had acquired between 1932 and 1934, in addition to 6 properties which he had purchased outright, all located in Long Beach, were divided among all of the children. There was an oral condition to the gift. Extensive repairs and alterations had been undertaken on the Corona property. The parties orally agreed that all the rentals from the Long Beach properties would be applied on the cost of the Corona repairs until July 1, 1939. This was done. Thereafter the decedent took no part in the management of any of the real property.

The decedent had valued all his real property at $175,000 and divided it so that each child received property valued at $35,000. Three children requested that title be given to them jointly with their respective spouses. As a result, the decedent claimed exclusions of $32,000 and an exemption of $40,000 no his gift tax return filed on January 30, 1940. The tax paid amounted to $7,582.50. As the result of an audit by the Bureau of Internal Revenue the total valuation of the gifts was increased to $203,900, and an addition tax of $3,684.75 was later paid. The agreed value of the property at the date of decedent's death in 1943 was $255,950.

At the date of the gift the decedent retained notes and obligations executed by 17 parties, ranging in amounts between $49.10 and $21,000, which had an aggregate value of $43,255.21. All of these obligations paid 6 per cent interest with the exception of one or two of the smaller ones. The decedent also retained...