The opinion of the court was delivered by: MARIS
These two suits were instituted by the executors of the will of George McFadden, deceased, against the United States for the refund of a portion of the estate tax paid by the petitioners and which they claimed was in excess of the amount legally due. The cases involved the same facts, and were consolidated for trial by this court. They will both be disposed of in this opinion. From the evidence I make the following special
The petitioner's decedent, George McFadden, died January 5, 1931, as the result of an accident. He was then fifty-seven years and eight months of age, in vigorous health for a man of his age, and actively engaged in directing a large business. His will was probated January 12, 1931, in Delaware county, Pennsylvania, and letters testamentary were granted thereon to the petitioners who are still acting as such.
Petitioners filed their estate tax return on January 5, 1932. The return disclosed the amount of decedent's gross estate to be $5,270,701.05. The total deductions claimed were $452,165.11, leaving a net estate subject to tax of $4,818,535.94. The total estate tax shown to be payable was $478,095.03. The petitioners claimed credit for state estate, inheritance, legacy, or succession taxes paid of $382,476.02. The balance of estate tax payable to the United States was $95,619.01. $3,429.05 of this amount was paid to the Collector of Internal Revenue at Philadelphia on June 2, 1932, and the balance of $92,189.96 was paid to the acting collector on June 22, 1932.
In the estate tax return, under the heading of "Transfers," petitioners made the following statement: "Decedent on February 9, 1928, created a trust, with Girard Trust Company of Philadelphia as Trustee. Decedent within two years of death transferred to the trust, in addition to the property covered thereby at the date thereof, certain securities or funds and as the transfers thereof were not made in contemplation of death no part of the value of said securities is returned for taxation. Decedent, being in full health, died suddenly from accidental electric shock. As that part of the Revenue Act of 1928, requiring all property transferred within two years to be returned for taxation, has been declared unconstitutional by various Federal Courts and the Board of Tax Appeals, it is not deemed necessary to return for taxation any of the property held by the trust. A copy of the deed of trust is submitted as part of this return." In said return, under the heading "Debts of Decedent," petitioners claimed as a deduction a note of George McFadden to George McFadden, Ella L. Browning, Barclay McFadden, and Girard Trust Company, trustees under the will of George H. McFadden, deceased, dated November 18, 1927, for $250,000, with interest of $2,000 accrued thereon from November 18, 1930, to January 5, 1931.
On May 8, 1934, the Commissioner of Internal Revenue sent petitioners a letter advising them that he had determined a deficiency of $534,433.76 in the federal estate tax liability of decedent's estate. This resulted from his action in including in decedent's gross taxable estate the value of the property comprising the trust held by the Girard Trust Company as trustee which had been created by decedent by deed of trust dated February 9, 1928, and also by disallowing as a deduction the note for $250,000 and interest of $2,000 accrued thereon, above referred to.
Thereafter petitioner submitted to the Commissioner evidence of payment of state estate, inheritance, legacy, or succession taxes in the aggregate amount of $382,476.02, the amount disclosed in the estate tax return as filed, credit for which was allowed by the Commissioner, resulting in a net deficiency of $151,957.74. No petition was filed with the United States Board of Tax Appeals for redetermination of this deficiency. On July 24, 1934, 20 per cent. of the net deficiency, $30,391.54, and interest thereon of $4,626.17, was assessed, and the total sum, $35,017.71, was paid to the Collector of Internal Revenue at Philadelphia on August 22, 1934.
Upon payment of this portion of the deficiency and interest there still remained outstanding and unpaid 80 per cent. of the deficiency amounting to $121,566.20, which represented the credit for state estate, inheritance, legacy, or succession taxes under section 301(b) of the Revenue Act of 1926, 44 Stat. 69, payable to the State of Pennsylvania. This remaining deficiency, together with interest thereon, was assessed against petitioners by the Commissioner in December, 1934. In March, 1936, petitioners made application for an extension of time for the payment of this balance, and under date of May 20, 1936, the Commissioner granted an extension until June 28, 1937. Thereafter a further extension of time was granted for payment thereof pending a final decision of these cases.
On December 4, 1936, petitioners filed with the Collector of Internal Revenue a further claim for refund of $35,607.07, representing estate taxes alleged to have been overpaid. This claim for refund was based upon the same grounds set forth in the first claim and in addition thereto upon the ground that certain corporate stocks included in the trust fund above referred to had not been transferred to the trustee by the decedent but by his wife Josephine B. McFadden. This claim for refund was rejected by the Commissioner on March 1, 1937, whereupon petitioners brought the suit in No. 19830 to recover the amount claimed upon the grounds alleged in the second claim for refund.
The two suits were consolidated for trial by order of this court, and at the trial the parties filed the following stipulation:
"1. The issues in the above causes are identical, except the issue raised by Paragraph 13 of the Petition in Cause No. 19830 and respondent's Answer thereto.
"2. Petitioners agree to eliminate from Cause No. 19830 for purposes of trial the issues in the above causes which are identical, to wit, all issues except those raised by Paragraph 13 of the petition in Cause No. 19830 and respondent's Answer thereto.
"3. In computing the amount of any judgment to be entered for plaintiffs in Cause No. 19830, there shall be excluded the amount of any item included in any judgment entered for the plaintiffs in Cause No. 18624 based upon an issue which is duplicated in Cause No. 19830 and which has been eliminated for purpose of trial as indicated in Paragraph 2 hereof."
On or about February 9, 1928, the decedent executed a deed of trust to Girard Trust Company as trustee, whereby he conveyed and thereafter transferred to the trustee property having a value at the date of his death of $983,070.89. The deed of trust directed the trustee to collect the income and "during the lifetime of George McFadden to pay the net income to and among Josephine, wife of George McFadden, George, Caroline, Emily and Alexander, children of George McFadden, and the child or children of any of said four children of George McFadden as hereinafter provided, or to any one or more of his said wife, his said children, and their children, in such shares, proportions or amounts as shall from time to time be directed in writing by George McFadden to the Trustee, with like effect as if said directions were specifically set out herein, and in default of such direction equally to and among his said wife and his said four children, or the child or children of any deceased one of such four children, such child or children taking their parent's share by representation and per stirpes; in trust, upon the death of George McFadden to pay over the net income in equal shares or parts to his wife, Josephine, so long as she shall not remarry, and to his said four children, or such of them as shall be living at the death of George McFadden, for and during their natural lives, respectively, and to the child or children of any deceased one of the four children of George McFadden until such child or children shall respectively reach the age of twenty-one years, such child or children being entitled to receive and to take their parents' share by representation and per stirpes;" There were further limitations upon the death of decedent's wife and children. The deed authorized decedent to appoint new trustees and expressly provided that it should be unalterable and irrevocable. It was, however, not joined in by ddecedent's wife and, therefore, a second deed of trust bearing the same date and identical in terms except for the joinder of decedent's wife was executed three months later.
The property transferred to the Girard Trust Company as trustee under these deeds of trust was not transferred by the decedent in contemplation of his death, nor were the transfers intended to take effect in possession or enjoyment at or after his death. The enjoyment of none of the property so transferred was subject at the time of decedent's death to any change through the exercise of a ...