The opinion of the court was delivered by: WILKIN
This case was submitted on the pleadings, the evidence, stipulations, and briefs. Jurisdiction of the court, authority of the plaintiffs, the assessment, collection, and payment of the tax, recovery of which is hereby sought, are admitted. It is also admitted that the claim for refund was filed in time, rejected, and that the commencement of this suit was within time. There is no dispute regarding the essential facts and therefore it is not necessary to repeat them here.
In March 1939, the plaintiffs reported and paid an estate tax of $ 166,374.43. The Commissioner determined a deficiency in the sum of $ 519,549.25, which with interest the plaintiffs now seek to recover. The Commissioner's additional assessment was based on the following determination: The foregoing property is included in the gross estate under the provisions of Section 302(c) of the Revenue Act of 1926, as Amended by Joint Resolution of March 3, 1931, Public No. 131 Seventy-First Congress, and by Section 803(a) of the Revenue Act of 1932, and under the provisions of Section 811(a) and (c) of the Internal Revenue Code (26 U.S.C.A.Int.Rev.Code, 811(a, c)). In arriving at this determination, the alleged indebtedness of this decedent to his sons, Robert B. Black, Donald S. Black and John B. Black (as shown by the records kept by the foregoing persons) is not recognized as a bona fide obligation of the decedent, and the alleged transfer of the foregoing property in satisfaction of such indebtedness is not regarded as a sale based upon an adequate consideration in money or money's worth, but as a transfer by decedent, testamentary in character, whereby decedent retained and exercised control over all the foregoing property up to the time of his death, and the further fact that all such transfers were made in contemplation of death.
At the outset it may be said that the action of the Commissioner can hardly be criticised in view of the facts and circumstances. The issues raised were so close and so subtle that the Commissioner was well within his right, if not his duty, when he made the additional assessment and left it to the claimants to seek recovery by proving the deficiency assessment erroneous. It was the province of the Commissioner to determine that the transfers here in dispute were without consideration and place the burden on the plaintiffs to produce sufficient evidence to convince this court that the deficiency assessment should not stand. The question is not, was the Commissioner's action wrong? The question now is, after a hearing of all the evidence, was there valid consideration for the transfers by the decedent, were the transfers valid gifts inter vivos? Or in the converse, were the transfers made in contemplation of death, i.e., to take effect in possession and enjoyment upon the decedent's death?
The first gifts of stock were made by the decedent in 1917. He transferred substantial blocks of stock to his two older sons and transferred similar blocks of stock to himself as trustee for each of his two younger sons. When the younger sons became of age, transfers were made to them directly of the stock which he had held as trustee. The defendant says these transfers were not valid gifts for three reasons. 1. Because the decedent never intended the transfers to be gifts in praesenti of the shares transferred. 2. Because the decedent never made any delivery of the shares so transferred. 3. Because the decedent never relinquished any dominion or control over the shares transferred, or over the income from them, or over the proceeds from their sale until his death.
The case turns on the consideration of the third reason. The first and second reasons present no difficulty. The evidence convinces the court that the decedent intended to transfer the shares to the legal possession of his sons and, under the law, what he did constitutes a valid transfer. The transfers were duly recorded on the books of the Ohio Brass Company and new certificates were issued in the names of the sons. Books of account were then opened for the estate of each son and the stock so transferred was listed therein and the income from the stock was entered in such books. Safety deposit boxes were rented and the stock certificates were deposited therein. Under the law such acts have been construed to constitute valid transfers and delivery. Marshall v. Commissioner, 6 Cir., 57 F.2d 633; Bardach v. Commissioner, 6 Cir., 90 F.2d 323; Bingham v. White, D.C. Mass., 31 F.2d 574.
As to the defendant's third reason, it cannot be brushed aside so readily. When the stock was transferred to the names of the sons, powers of attorney were executed by the sons to the father. The books that were opened for the sons' estates were kept by the father or were under his supervision. He had access to the safety deposit boxes. He managed the property and kept the accounts.
The decedent had been a very successful businessman and a good father. The sons were young and inexperienced. Much of the time they were away at school. The eldest son served in the army in World War I and died in 1923 as a result of disease contracted in service. It was quite natural for the father to look after the property of the sons while they were away. The sons testified that when they became of age and returned from school the father insisted that they become acquainted with the books recording the history and transactions of the estates in their respective names. The evidence discloses that dividends in cash and stock were paid on the holdings of the sons and that in every instance such dividends were passed to the credit of the sons respectively. At times stock of the sons was sold and the proceeds were credited to their respective accounts. Bonds were purchased and paid for by checks drawn against the accounts of the sons. Such bonds were then recorded in the journals and ledgers of the estates.
What the father did was quite natural in the circumstances. It was not unlawful; it was commendable. There was nothing in the circumstances to indicate that it was done in contemplation of death.
The decedent was engaged at that time (1930-1934) in the development of his Raemelton Farms with an extensive building program. His withdrawals from funds listed in the names of his sons reached large amounts. At the end of that period the books showed an indebtedness of the decedent to each son of about five hundred thousand dollars. After the decedent paid off his indebtedness to the banks and to the Ohio Brass Company, he then proceeded to liquidate the indebtedness to his sons. This was done partially by the transfer of real estate and partially by cash and securities.
Here again it can be said that there was nothing unnatural about the transactions in view of all the circumstances. It is of course considered unlawful and improper for an agent or trustee to borrow or use the funds intrusted to his care; but in this case the relation was also that of father and sons. In some of the later transactions the securities or checks passed to the father bore the signatures of the sons. It would have been unnatural and reprehensible if the sons had not been willing to make loans to the father at a time when he was in need of cash. In all instances exact bookkeeping records of the transactions were maintained.
When the son John died in 1923, no Letters Testamentary were issued and there was no regular legal administration of his estate. He left an estate of $ 496,708.39. The bulk of this estate was distributed to the father and to the three brothers, with gifts of twenty shares of preferred stock of the Ohio Brass Company to each of five friends of the deceased son. The conduct of the decedent with reference to this son's estate is more difficult to understand. It is not as natural and plausible as the other conduct mentioned. Yet in view of all the circumstances it can hardly be said that the conduct was arbitrary appropriation or usurpation. Considering the source of the property standing in the name of the deceased son and the father's need at the time, the distribution made of it cannot be severely criticised. Certainly it could not be attacked except by one having an interest in the estate. That was not done. It must be presumed now that the distribution was agreed to by all the heirs and next of kin.
The evidence reveals that the decedent sought the advice of his auditors and accountants as to the means of establishing separate estates for his sons and the methods of keeping proper records. The sons testified that as soon as possible the father drew them into the management of their own property and insisted that they become familiar with the records of their estates. If at any time any son or all the sons had wished to take over the complete management and control of their property they could have done so. If the father had ...