*1239 ESTATE TAX. - A decree of a state court, which was rendered after a hearing on the merits, in a suit which was between adverse parties and of which the court had jurisdiction, and determined that a transfer of certain property to decedent in her lifetime by her four children which was absolute on its face was intended to convey only a life estate in such property, and reformed the instrument of conveyance from one of absolute conveyance into a life estate only, is binding upon the Board as to the interest of decedent in the property at the time of her death. Freuler v. Helvering,291 U.S. 35">291 U.S. 35.
*62 This proceeding was brought for a redetermination of a deficiency in estate tax against the estate of Mamie D. Rhodes, deceased, in the amount of $13,299.60. The issues involved are (1) whether the decedent at the time of her death, January 22, 1934, had an absolute or only a life estate in certain property assigned to her by her four children on or about July 30, 1925, and*1240 (2), if the decedent's interest in the assigned property be held to be an absolute interest, whether the respondent erred in determining decedent's liability on certain notes to be $8,719.35 instead of $86,745.
FINDINGS OF FACT.
Petitioners are the administrators, cum testamento annexo de bonis non of the estate of Mamie D. Rhodes, deceased, who died testate on January 22, 1934, a resident of the State of Missouri.
Taylor Rhodes, husband of the decedent, died intestate in the city of St. Louis, Missouri, on November 20, 1924, leaving surviving him his widow, the decedent, and the following named children: Paul Taylor Rhodes, hugh Daniel Rhodes, Jonathan Jackson Rhodes, and Mary Baker Rhodes. The estate of Taylor Rhodes was administered *63 in the probate court in the city of St. Louis, Missouri, and decedent was appointed administratrix.
The estate of Taylor Rhodes consisted of 2,400 shares of the common stock of the International Shoe Co., 150 shares of the preferred stock of the International Shoe Co., and cash amounting to $1,775.54. The net value of the estate of Taylor Rhodes for distribution amounted to $278,338.60, and under the law of Missouri the widow*1241 and each of the children was entitled to a one-fifth interest therein or $55,667.72.
On or about December 5, 1925, Mamie D. Rhodes, as administratrix of her husband's estate, filed an affidavit with the respondent in connection with the settlement of the Federal estate tax liability of that estate, in which she stated:
As such administratrix, I prepared and returned to the taxing authorities of the State of Missouri in charge of the assessment and collection of State Inheritance Taxes, an inventory of said Estate on which said taxes * * * amounting to $3,680.12 was assessed, which I have * * * paid * * *.
My children were the sole heirs at law to my husband's estate and they have already assigned to me all their joint and several interests in said estate, so that I am now the sole individual person interested in said estate and neither they nor I have contemplated or do now contemplate any action of any kind with reference to Said Estate by which or as a result of which any reduction * * * of any part of said inheritance taxes assessed by the State of Missouri * * * might be effected.
Prior to the distribution of their father's estate, the children executed a waiver and*1242 assignment in favor of their mother, which reads as follows:
IN THE PROBATE COURT OF THE CITY OF ST. LOUIS In Vacation After June Term, 1925.
No. 60788.
Estate of
TAYLOR RHODES,
Deceased.
Waiver and Assignment by Heirs at Law in Favor of Widow.
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned,
Paul Taylor Rhodes (with whom joins his wife, Minnie Eugenia Rhodes)
Hugh Daniel Rhodes (single and unmarried)
Jonathan Jackson Rhodes (single and unmarried) and
Mary Baker Rhodes (single and unmarried),
all being of legal age and capacity and being the only children and also heirs at law of Taylor Rhodes who died intestate in the City of St. Louis on November 20th, 1924, and whose estate is in process of administration in the Probate Court of the City of St. Louis, in consideration of our love and affection for our mother, Mamie D. Rhodes, widow of said Taylor Rhodes, hereby jointly and severally waive any and all of our joint and several interests in the said estate, and hereby grant, transfer and assign the same to our said mother, Mamie D. Rhodes, and we hereby consent that the Probate Court of the City of St. Louis, in any partial and final distribution*1243 of said estate shall set over *64 and distribute to our said mother, Mamie D. Rhodes, all of said estate, including our joint and several interests and with the same force and effect as if she were the only party in interest in said estate.
IN TESTIMONY WHEREOF, we hereunto set our hands and seals this the 30th day of July, 1925.
[Then follows the signature of each child together with his or her respective acknowledgment before a notary public.]
The decedent, Mamie D. Rhodes, was also survived by the above named children. Her will was filed in the Probate Court of St. Louis County, Missouri, and administration was instituted upon her estate. On February 5, 1934, petitioners were appointed executors of her estate by the court and qualified as such.
Petitioner, J. Jackson Rhodes, an executor, on March 17, 1934, filed form 704, being "Preliminary Notice - Estate of Resident", in which he advised the collector that the approximate value of decedent's gross estate was $297,639.48.
On April 9, 1934, an extension of time having been granted, J. Jackson Rhodes and Hugh D. Rhodes, administrators, filed an individual income tax return for "Mrs. Mamie D. Rhodes, Deceased" *1244 for the taxable year 1933, in which they reported $19,889.42 as profit on the sale of International Shoe Co. stock, and $15,100 as dividends on stock of domestic corporations, received in 1933 during her lifetime.
Thereafter, in August 1934, petitioners, as executors of decedent's estate, petitioned the Probate Court of St. Louis County, Missouri, for the appointment of an administrator ad litem whose duties were to be limited solely to the acceptance of service and defense of a suit to be brought in equity by the above named children for the purpose of reforming the above waiver and assignment which they had executed on or about July 30, 1925. The petition states that the "instrument was drawn with the intention of carrying into execution an agreement previously made but which by mistake of the draftsman or scrivener did not fulfill the intentions of the parties thereto."
In accordance with the petition of the executors, the court appointed Walter Wehrle administrator ad litem, "his powers and duties to be limited solely to acceptance of service of process in said suit, the defense of said suit and all matters pertaining to handling of said suit, said Administrator *1245 ad litem to have no other powers or duties with respect to said estate, all as prayed for in said petition." Thereafter, Paul Taylor Rhodes, Minnie Eugenia Rhodes, his wife, Hugh Daniel Rhodes, Jonathan Jackson Rhodes, and Mary Baker Rhodes, as plaintiffs, brought the suit for reformation against Walter Wehrle, administrator ad litem of the estate of Mamie D. Rhodes, deceased, in the Circuit Court, County of St. Louis, State of Missouri, *65 Division No. 2. The decree in this proceeding, dated March 21, 1935, recites:
This cause having come on for hearing and the plaintiffs being present in court in person and being represented in court by their attorney, and the defendant being present in court and representing himself as attorney pro se, the court, upon consideration of the pleadings and the evidence adduced and being fully advised in the premises, it is
ORDERED, ADJUDGED AND DECREED AS FOLLOWS:
That the written instrument of which the following is a true copy: [Then follows the complete copy of the waiver and assignment executed July 30, 1925, which we have set out in full above except for the signatures and notary acknowledgments.] be and the same hereby*1246 is reformed as of the date of its execution to read as follows:
IN THE PROBATE COURT OF THE CITY OF ST. LOUIS In Vacation after June Term, 1925.
No. 60,788.
Estate of
TAYLOR RHODES,
Deceased.
WAIVER AND ASSIGNMENT BY HEIRS AT LAW IN FAVOR OF WIDOW.
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned,
[Then follows the names of all the children as in the original instrument.]
all being of legal age and capacity and being the only children and also heirs at law of Taylor Rhodes who died intestate in the City of St. Louis on November 20, 1924, and whose estate is in process of administration in the Probate Court of the City of St. Louis, in consideration of our love and affection for our mother, Mamie D. Rhodes, widow of said Taylor Rhodes, hereby jointly and severally grant, transfer and assign to our said mother, Mamie D. Rhodes, an estate, for her life only, in and to our joint and several interests in said estate of Taylor Rhodes, deceased, and we hereby consent that the Probate Court of the City of St. Louis, in any partial and final distribution of said estate of Taylor Rhodes, deceased, shall set over and distribute to our said mother, Mamie D. Rhodes, *1247 all of said estate, including our joint and several interests and with the same force and effect as if she were the only party in interest in said estate, it being understood that forthwith upon her death that certain life estate which we hereby assign to her shall terminate and our said joint and several interests shall thereafter be held and owned by us as if this instrument had not been executed.
IN TESTIMONY WHEREOF, we hereunto set our hands and seals this the 30th day of July, 1925.
[Then follows the signature of each child and that of Minnie Eugenia Rhodes, wife of Paul Taylor Rhodes together with his or her respective acknowledgment before a Notary Public.]
An agreement dated April 20, 1935, between Paul T. Rhodes, Mary B. Rhodes, Hugh D. Rhodes, and J. Jackson Rhodes, recited their status as the only children of Taylor Rhodes and Mamie D. Rhodes, *66 both deceased; their right at the death of their father to be each entitled, together with their mother, to a one-fifth interest in his net estate, which one-fifth interest was of a value of $55,667.72; and their assignment prior to distribution of all their interest in the estate to their mother, for her life*1248 only.
The agreement further recited Mamie D. Rhodes' property at the time of her death was insufficient to pay her debts; that her property, together with their property which had been assigned to her for life, consisted at her death of household and personal effects, an automobile, and 5,400 shares of no par value common stock of the International Shoe Co., 5,000 shares of which were deposited as collateral security for the payment of a loan contracted by Mamie D. Rhodes in the amount of $86,745; that 400 of these shares were claimed by Mary B. Rhodes as her separate individual property; that they intended to assume liability for all of their mother's debt and the expenses of administration of her estate; and that Mary B. Rhodes should be entitled to the 400 shares of stock claimed by her, subject to the liability of each of them for the payment of the debt of $86,745.
It was further stated in the agreement that it was thought necessary that a suit be brought for the purpose of determining the property owned by their mother and the property belonging to them and assigned to their mother, and for the purpose of construing their mother's will.
The parties then, "for the purpose*1249 of finally determining and settling the rights of the parties hereto * * * and for the purpose of arriving at an equitable division of said property among the parties hereto," agreed to confirm a prior agreement relative to: The division of the household, personal effects, and automobile belonging to their mother; equal shares in the real estate standing in their mother's name at the time of her death; Mary B. Rhodes' claim of sole ownership of the 400 shares of International Shoe Co. stock, subject to her payment of her share of the $86,745 indebtedness; an equal division of the remaining 5,000 shares of International Shoe Co. stock, subject to their payment of the $86,745 indebtedness and subject to an adjustment because of inequality in receipt of dividends of the 5,400 shares of stock; assuming and paying the debt of $86,745 as follows:
| Paul T. Rhodes | $20,686.25 |
| Hugh D. Rhodes | 20,686.25 |
| Mary B. Rhodes | 23,186.25 |
| J. Jackson Rhodes | 22,186.25 |
and assuming and paying all other debts equally; the bringing of the suit by Hugh D. Rhodes and J. Jackson Rhodes, individually, and *67 as executors of the estate of Mamie D. Rhodes, deceased; and not asserting*1250 thereafter that they were entitled to any greater share of the property, or that any of them were liable because of anything arising prior to the agreement.
Thereafter, J. Jackson Rhodes and Hugh D. Rhodes, individually, and as executors and trustees under the will of Mamie D. Rhodes, deceased, as plaintiffs, brought suit against Paul T. Rhodes, individually, and as one of the trustees under the will of Mamie D. Rhodes, deceased, and Mary B. Rhodes, as defendants, in the Circuit Court of St. Louis County, Missouri, Division No. 3.
The petition, after repeating allegations similar to those in the reformation action, alleged that in the January term, 1935, the Circuit Court of the County of St. Louis, Missouri, reformed the assignment in accordance with the intention of the parties so that it transferred only a life interest to Mamie D. Rhodes; that Mamie D. Rhodes died in the County of St. Louis, Missouri, in January 1934, leaving a will in which she undertook to dispose of all of the property standing in her name without regard to whether she was the owner of the property or had only the use thereof for her lifetime; that on December 1, 1925, the 150 shares of preferred stock*1251 of International Shoe Co. were redeemed and Mamie D. Rhodes received $17,250 therefor; that on April 1, 1926, 1,000 of the 2,400 shares of common stock of the International Shoe Co. were transferred to the name of Mamie D. Rhodes, and on December 2, 1926, the remaining 1,400 shares were likewise transferred; that on April 9, 1926, Mamie D. Rhodes gave each of the plaintiffs and defendants 100 shares of the common stock, leaving a balance of 2,000 shares in her possession; that on December 1, 1927, the common stock was reissued on the basis of 4 shares for 1, thereby increasing the number of shares in the name of Mamie D. Rhodes to 8,000 and increasing the 100 shares of Mary B. Rhodes to 400; that on February 8, 1932, Mary B. Rhodes loaned her mother 100 shares of the common stock and on June 22, 1932, loaned her 300 additional shares, all of which were transferred to the name of Mamie D. Rhodes; that on July 1, 1932, there were standing in the name of Mamie D. Rhodes 8,400 shares of common stock of the International Shoe Co., 400 of which were the property of Mary B. Rhodes; that on April 25, 1933, Mamie D. Rhodes sold 1,400 shares of the stock, and between July 15 and August 4, 1933, sold*1252 1,600 shares, thus leaving in her name and possession 5,400 shares, which included the 400 shares which were the property of Mary B. Rhodes.
It further alleges that on January 11, 1932, Mamie D. Rhodes was indebted in the amount of $103,500, and on June 22, 1932, she was indebted in the further sum of $44,198.53, which loans were consolidated, *68 and Mamie D. Rhodes had deposited as collateral security thereon some of the 5,400 shares of common stock, and there was consolidated with this total loan, indebtedness of plaintiffs and defendants in the following amounts: J. Jackson Rhodes, $38,465.85; Hugh D. Rhodes, $20,968; Mary B. Rhodes, $5,314.17; and Paul T. Rhodes, $26,000, making a total consolidated loan indebtedness of $238,446.55, all standing in the name of Mamie D. Rhodes as borrower, but in fact the liability for the payment was apportioned among the above mentioned parties and Mamie D. Rhodes; that as collateral for this loan Mamie D. Rhodes had deposited 8,100 shares (Note: The court later found 8,000 shares.) of the common stock of the International Shoe Co. which belonged in equal parts to plaintiffs, defendants, and Mamie D. Rhodes, including the 400 shares*1253 which had been loaned to her by Mary B. Rhodes; that on June 22, 1932, Mamie D. Rhodes reduced her portion of the loan to $145,750.97; that on April 25, 1933, J. Jackson Rhodes paid $18,380 on his portion of the consolidated loan, leaving his share of the indebtedness $20,085.56 (Note: The court later found $20,085.85.); that on April 25, 1933, Mamie D. Rhodes sold 1,400 shares of the common stock for $69,840.15, which was applied on the payment of the consolidated loan, the payment amounting to a reduction in the amount of the loan of each of the parties, plaintiff and defendant and Mamie D. Rhodes, of $10,292.03; that thereafter Mamie D. Rhodes paid $4,583.36 on her portion of the loan, at which time the indebtedness of the several parties to the loan was as follows: Mamie D. Rhodes, $130,875.58; J. Jackson Rhodes, $9,793.82; Hugh D. Rhodes, $10,675.97; and Paul T. Rhodes, $15,707.97; and Mary B. Rhodes was entitled to a credit of $4,977.86; that between July 15 and August 4, 1933, Mamie D. Rhodes sold 1,600 shares of the stock for $83,808.65 and of that amount each of the parties, plaintiff and defendant and Mamie D. Rhodes, was entitled to a credit of $16,761.73, and that on*1254 that date the amount of the loan was $78,266.83, but the account in regard to the loan, taking into consideration the fact that one-fifth of the proceeds of the sale of the 1,600 shares of stock should be credited to each of the five parties to the loan, stood as follows: Mamie D. Rhodes owed the full amount of $78,266.83, plus the following stated sums to each of the parties, plaintiff and defendant, to wit: J. Jackson Rhodes, $6,697.91. (Note: The court later found $6,967.91.); Hugh D. Rhodes, $6,085.76; Mary B. Rhodes, $21,739.59; and Paul T. Rhodes, $1,053.76, making a total indebtedness of $114,113.85 at this time on the part of Mamie D. Rhodes; that thereafter the loan of Mamie D. Rhodes was increased from $78,266.83 to $86,745. (The petition also here makes allegations as to certain real estate owned by decedent at the time of her death and mortgage indebtedness against said property. Also that she owned *69 certain household and kitchen furniture. There is no contest about these matters and the allegations with reference to them are omitted.)
The petition further alleges that the plaintiffs and defendants have assumed and agreed to pay all of the indebtedness*1255 of Mamie D. Rhodes, and in fact have paid claims against the estate in the amount of $9,961.53.
The plaintiffs pray for a decree determining the ownership of all of the property held in the name of Mamie D. Rhodes at the time of her death, as between the estate, on the one hand, and the plaintiffs and defendants, on the other.
Copies of the reformation decree of the Circuit Court, Division No. 2, and of the will were made a part of the petition as exhibits.
Defendant Paul T. Rhodes, individually and as one of the trustees under the will of Mamie D. Rhodes, deceased, answered the above petition, stating that its allegations were true, and joined in the prayer of the petition.
Defendant Mary B. Rhodes filed an answer and cross-petition whereby she stated that the allegations of the petition were true, and joined in its prayer, adding certain affirmative allegations. To this new matter in her answer, J. Jackson Rhodes and Hugh D. Rhodes, individually and as executors, and two of the trustees under the will of Mamie D. Rhodes, deceased, plaintiffs, replied and denied each and every allegation therein.
This cause was tried on May 24, 1935, the decree therein, rendered June 5, 1935, reciting:
*1256 This cause coming on for hearing this 24th day of May, 1935, and the plaintiffs being present in court in person and represented in court by their attorney, and the defendants being present in court in person and being represented by their attorney * * *.
In the decree, "upon consideration of the pleadings and the evidence adduced and being fully advised in the premises" the court made findings, which were substantially as alleged in the petition. (In setting out the allegations of the petition above, we have noted in parentheses the instances where the court found the facts to be different from those alleged.) The court them concluded its findings as follows:
* * * That in respect to all of the property herein mentioned, with the exception of the shares of common stock of the International Shoe Company, there was an innocent confusion and comingling [sic] of the same by said Mamie D. Rhodes to such an extent that the ownership of any specific part of the same cannot be accurately traced, and that there was such use of all of the property, including said common stock, by said Mamie D. Rhodes as to make the property belonging to plaintiffs and defendants individually in which*1257 said Mamie D. Rhodes had but a life estate liable for the debts of said Mamie D. Rhodes and thereby greatly reducing the value of said property belonging to there plaintiffs *70 and defendants individually; and that at the time of the death of said Mamie D. Rhodes her estate was insolvent. That at the date of the death of said Mamie D. Rhodes the total value of all of the property then standing in her name, including both that which she owned outright and that in which she had a life interest, was $258,933.81, made up as follows:
| 5,000 shares of common stock of International Shoe Company at $48.50 a share | $242,500.00 |
| Real Estate (one parcel) | 13,154.33 |
| Real Estate (one parcel) | 140.00 |
| Jewelry, House furnishings, automobile, etc | 1,610.00 |
| Cash | 1,529.48 |
| Total | $258,933.81 |
that at said last mentioned date said Mamie D. Rhodes was indebted in the amount of $134,241.93, made up as follows:
| Owing to bank | $86,745.00 |
| Bills proved against the estate | 9,961.53 |
To her children for overpayment on their proportional part of said consolidated loan as follows:
| J. Jackson Rhodes | 6,967.91 |
| Hugh D. Rhodes | 7,774.14 |
| Mary B. Rhodes | 21,739.59 |
| Paul T. Rhodes | 1,053.76 |
| Total | $134,241.93 |
*1258 that after subtracting the liabilities against the estate of Mamie D. Rhodes from the total value of all of said property standing in the name of Mamie D. Rhodes at her death as aforesaid the net value of all of said property at the date of her death was $124,691.88; that each of the parties hereto individually would, if he or she took a one-fourth of said entire property at the date of the death of said Mamie D. Rhodes after paying said indebtedness above mentioned be entitled to only $31,172.97, instead of $55,667.72, the amount each of said parties turned over to said Mamie D. Rhodes to be used for her life only, and that therefore each of said parties hereto would suffer a loss of $24,494.75.
On such findings the court decreed:
That 400 shares of common stock of International Shoe Company out of 5,400 shares standing in the name of Mamie D. Rhodes is the absolute property of mary B. Rhodes, subject to the payment of the debt to which it is deposited as collateral; that Item 4 of the last will of Mamie D. Rhodes, insofar as it attempts to create a trust estate of 400 shares of common stock of International Shoe Company in favor of Mary B. Rhodes, is void and of no effect; *1259 that all of the property, both real and personal, which Mamie D. Rhodes owned outright at the date of her death or in which she had a life interest is the absolute property of Paul T. Rhodes, Hugh D. Rhodes, J. Jackson Rhodes, and Mary B. Rhodes in equal parts; and the executors of the will of Mamie D. Rhodes are directed to distribute said property among said Paul T. Rhodes, Hugh D. Rhodes, J. Jackson Rhodes, and Mary B. Rhodes in equal parts, or in such proportions as Paul T. Rhodes, Hugh D. Rhodes, J. Jackson Rhodes, and Mary B. Rhodes in writing shall direct the executors so to deliver said property; subject, however, to the payment of the indebtedness *71 to which the said stock of International Shoe Company is deposited as collateral security and subject to the payment of all other debts of Mamie D. Rhodes and the expenses of admistration of her estate; that the executors of the will of Mamie D. Rhodes are directed to cause said 400 shares of common stock to be transferred on the books of the International Shoe Company into the name of Mary B. Rhodes, and that said executors are likewise directed to cause the remaining 5,000 shares of common stock of the International*1260 Shoe Company to be transferred on the books of said International Shoe Company into the name of Paul T. Rhodes, Hugh D. Rhodes, J. Jackson Rhodes, and Mary B. Rhodes in equal parts, or in such proportions as said Paul T. Rhodes, Hugh D. Rhodes, J. Jackson Rhodes, and Mary B. Rhodes may in writing direct said International Shoe Company.
On May 9, 1935, petitioners, through their attorney, addressed a letter to the respondent's representative in St. Louis, Missouri, in which reference is made to a letter of May 7, 1935, from the Treasury Department, requesting a return on form 706 in decedent's estate. The reasons stated for the failure to file the return were that the above mentioned reformation of the agreement had been ordered by the court and that decedent during her lifetime had borrowed considerable money and deposited all of the stock comprising the bulk of the estate as collateral security for the payment of her loans. The letter further advised that in a short time suit would be filed for the purpose of ascertaining ownership of all the property standing in decedent's name at the time of her death. An offer was made to forward a copy of the pleadings in this suit. The*1261 letter concluded that such a suit might show that decedent's estate was insolvent.
Copies of the pleadings in the last mentioned suit were forwarded to respondent's representative in St. Louis on May 15, 1935, with the advice that the cause was set for trial on May 24, 1935. Respondent was not represented at that time.
On June 6, 1935, petitioner's counsel wrote the collector at St. Louis, enclosing certified copies of the decrees of the court in the suit to reform the instrument and the suit to determine the ownership of decedent's property at the date of her death. On July 2, 1935, the collector at St. Louis, Missouri, advised petitioner's counsel that he had received a letter from respondent stating that the data pertaining to the estate of decedent indicated that the estate was not of sufficient size to warrant the filing of estate tax returns and that the Bureau had colsed its records in connection therewith. It was further stated that the Bureau reserved the right to reopen the case in the event additional facts indicated an estate tax liability.
The respondent determined that, exclusive of the exemptions of $100,000 and $50,000 provided by section 303(a)(4) of the*1262 Revenue Act of 1926 and section 401(c) of the Revenue Act of 1932, respectively, the decedent's "net estate" at the time of her death, upon *72 which the deficiency was based, amounted to $242,217.74, computed as follows:
| GROSS ESTATE: | |||
| Residence Property | $40,837.66 | ||
| Lot | 2,600.00 | ||
| 5,000 shares of common stock of International Shoe Company at $48.50 a share | 242,500.00 | ||
| Cash | 1,529.48 | ||
| Jewelry, House Furnishings, automobile, etc | 1,610.00 | ||
| Settlement of claim for automobile injury | 98.65 | ||
| Total gross estate | $289,175.79 | ||
| DEDUCTIONS: | |||
| Funeral expenses | $1,005.61 | ||
| Attorney's fee | 840.00 | ||
| Miscellaneous administration expenses | 163.25 | ||
| Debts of decedent: | |||
| Owing to bank | $8,719.35 | ||
| All other, except mortgages | 5,973.15 | ||
| 14,692.50 | |||
| Mortgage on residence, including interest | 27,683.33 | ||
| Mortgage on lot, including interest | 2,573.36 | ||
| Total deductions | 46,958.05 | 46,958.05 | |
| NET ESTATE (exclusive of the exemptions) | $242,217.74 |
Of the 5,000 shares of common stock of the International Shoe Co. included by the Commissioner in decedent's gross estate as shown above, decedent was the absolute owner of 1,000 shares at*1263 the time of her death. She had only a life interest in the remaining 4,000 shares and this life interest ceased at her death.
OPINION.
BLACK: The estate tax and the additional estate tax imposed by sections 301(a) of the Revenue Act of 1926 and 401(a) of the Revenue Act of 1932, respectively, are "upon the transfer of the net estate of very decedent * * *." The term "net estate" means the "gross estate" as defined in section 302 of the Revenue Act of 1926 as amended, less the deductions specified in section 303 as amended. See also section 300(b), Revenue Act of 1926. The respondent determined that, under subdivision (a) of section 302 of the Revenue Act of 1926, the value of decedent's gross estate was $289,175.79, $242,500 of which represented the value of 5,000 shares of common stock of the International Shoe Co. Subdivision (a) provides as follows:
SEC. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated -
(a) To the extent of the interest therein of the decedent at the time of his death;
*73 What was the decedent's*1264 "interest" in the property the value of which the respondent has included in the decedent's gross estate? The respondent contends that the decedent was the sole owner of all the property which she attempted to dispose of in her will, including the shares of International Shoe Co. stock assigned to her by her children on or about July 30, 1925, and that the two decrees of the Circuit Court of St. Louis County, Missouri, referred to in our findings, are not binding upon the Board as requiring a holding contrary to the respondent's determination.
Petitioners contend that the determination of the decedent's "interest" in the property in question is purely one of the determination of property rights, and, as such, is controlled by the two decrees of the local circuit court.
We agree with the petitioners' contention. If the decedent owned only a life estate in the International Shoe Co. stock assigned to her in 1925 by her children, no part of the value of such property so assigned should be included in her gross estate, only her own share of the stock which she inherited from her husband's estate, which was one-fifth, should be included. Article 11 of Regulations 70, 1929 ed. and*1265 Regulations 80, 1934 ed., and article 13 of Regulations 80, 1937 ed., all provide: "Nor shall anything be included [in the decedent's gross estate] on account of an interest or an estate limited for the life of the decedent." The determination of whether the decedent owned only a life estate in the property assigned to her in 1925 by her children or whether she owned an absolute interest therein is clearly a determination of property rights, and, as such, is controlled by local law. ; ; ; ; , reversing, per curiam, ; ; .
The Circuit Court for the County of St. Louis, State of Missouri, Division No. 2, after a full hearing in the matter, decreed on March 21, 1935, that the assignment executed by the children on July 30, 1925, "be and the same is hereby reformed as of the date*1266 of its execution to read" that the children "hereby jointly and severally grant, transfer and assign to our said mother, Mamie D. Rhodes, an estate, for her life only, in and to our joint and several interests in said estate of Taylor Rhodes, deceased * * *." The assignment as reformed also provided that upon the death of Mamie D. Rhodes "that certain life estate which we hereby assign to her shall terminate and our said joint and several interests shall thereafter be held and owned by us as if this instrument had not not been executed."
There is no evidence that this decree was obtained for the purpose of defeating any Federal estate tax; or that it was obtained by *74 collusion. Such evidence as we do have points to the fact that it was a decree rendered after there was a hearing on the merits and was not a mere consent decree. The respondent has placed in evidence before us the testimony of Leona Kemp, who testified at the hearing before the local circuit court held on March 15, 1935. The substance of her testimony was that she was the secretary to W. E. Baird, the attorney who prepared the original assignment; that Baird had since died; that prior to the preparation*1267 of the assignment she remembered seeing "Mr. and Mrs. Paul Rhodes and Mr. Hugh Rhodes" at Baird's desk, which was adjacent to her own; that she "heard Mr. Paul Rhodes tell Mr. Baird he wanted to have him draw up a document whereby they could give their share of the estate to their mother for the time of her life, and Mr. Baird made a notation on his calendar pad"; that about four or five days later, Baird placed a paper written in long hand on her desk and asked her to copy it; and that the paper thus handed to her was the original assignment. All of the evidence before us, including the recitals in the decree itself, indicates that the decree was rendered after a hearing on the merits and was in every respect regular. It was a decree adjudicating property rights. There is no evidence that it was ever modified or reversed, and, upon the authority of the above cited cases, it must be taken as establishing conclusively that the children assigned to their mother only a life estate in their interest in their father's estate.
Shortly after the reformation decree J. Jackson Rhodes and Hugh D. Rhodes, individually, and as executors and trustees under the will of Mamie D. Rhodes, deceased, *1268 filed a suit in the Circuit Court of the County of St. Louis, State of Missouri, May term, 1935, against Paul T. Rhodes, individually and as one of the trustees under the will of Mamie D. Rhodes, deceased, and Mary B. Rhodes, praying "for a decree of this court determining the ownership of all of the property held in the name of Mamie D. Rhodes at the time of her death on January 22, 1934, as between the estate of said Mamie D. Rhodes on the one hand and the plaintiffs and defendants herein on the other, and for such other and further orders and decrees as to the court may seem just and proper." The circumstances surrounding this suit are fully set out in our findings and need not be repeated here. Suffice it to say that on June 5, 1935, the court handed down its decree, in which it gave full faith and credit to the decree of the Circuit Court of the County of St. Louis, Division No. 2, heretofore mentioned and discussed.
It is our opinion that the two decrees in evidence before us establish conclusively that the decedent did not own outright any more *75 than one-fifth of the 5,000 shares of common stock of the International Shoe Co. which the respondent has included in*1269 her gross estate and we have so found in our findings of fact. Her "interest" in the remaining four-fifths of the 5,000 shares was a life interest, which ceased with her death, and under the above cited provisions of the respondent's regulations it was error for the respondent to include as a part of the decedent's gross estate the value of 4,000 shares, amounting to $194,000. Excluding $194,000 from the net estate as determined by the respondent leaves a net estate (exculsive of the exemptions) of $48,217.74, which is less than the exemption of $100,000 allowed by section 303(a)(4) of the Revenue Act of 1926 and also less than the exemption of $50,000 allowed by section 401(c) of the Revenue Act of 1932. It follows that there is no Federal estate tax due. Even if it should be held that the second court decree rendered by Division No. 3, June 5, 1935, was a consent decree because it followed substantially the lines of a written agreement which had been previously entered into by the parties, nevertheless, the first court decree of Circuit Court No. 2, reforming the original instrument of transfer, was not a consent decree and settled the question as to ownership of the International*1270 Shoe Co. common stock and we are bound by it.
The respondent stresses the importance of the fact that the decedent, after the original assignment from her children in 1925, thereafter treated the property as her own. It is true that she so testified in the affidavit referred to in our findings; that she actually sold 3,000 shares of the stock; that she pledged the remaining stock on loans; and that she attempted to dispose of all the stock in her will. As we look at this case, those were the facts for the local circuit court to consider in arriving at its decision in the matter. We may not assume that it did not do so. The decree having been rendered by a court of competent jurisdiction in a suit between adverse parties after a hearing upon the merits, we feel that we are bound by it. Whether the decree ever should have been rendered under the evidence is not a matter for us to decide. The question of property rights there decided is no longer an open question for the Board or the Federal Courts to consider. Freuler v. Helvering; Blair v. Commissioner; Sharp v. Commissioner, all supra.
The conclusion which we here reach is not contrary to our recent*1271 decision in . In that case we held that a decree of the Orphans' Court of Mercer County, New Jersey, approving a certain claim against the estate was not binding upon the Board as to whether the claim was deductible under section 303 of the Revenue Act of 1926, in arriving at the net estate. *76 That question was altogether different from the one we have here to decide. Congress has established its own criterion as to what claims are deductible. Cf. .
In view of our holding on the first issue, we need not decide the second issue.
Reviewed by the Board.
Decision will be entered for the petitioners.
STERNHAGEN, dissenting: I do not think that this Board is universally bound by a decree of a state court without regard for the circumstances in which it is rendered. The record in this proceeding does not prove that there was a substantial controversy in which the mother or her estate was unsuccessful in establishing that when she died she owned the International shares and in which the children established against opposition that*1272 she had but a life estate. On the contrary it proves that the state court decree was the sanction of a mutually satisfactory agreement in which no one - the administrator ad litem, the creditors, the heirs and legatees, or anyone else - was adversely interested. Whether that was an arrangement deliberately aimed at the Federal Government's tax interest in the decedent's estate, it is not possible to say; but that still leaves it less than an adversary proceeding resulting in a judicial decree immune to Federal question. Generally I think my brother Opper has correctly analyzed the state court proceedings and shown the fallacy of recognizing the decree as binding here.
OPPER, dissenting: The issue before us is one of fact, 1 - Did the decedent and others perform such acts that she acquired the property by gift or otherwise, and owned it when she died? Once the facts are ascertained, there will be no difficulty in applying appropriate principles of law. It is our function to ascertain the facts.
In this forum the burden of proof rests upon petitioners. Respondent determined by his notice of deficiency*1273 that this property belonged to decedent when she died. All facts necessary to reach the opposite conclusion must be proved here, and if there is a material failure of such proof the respondent must prevail. ; ; .
In 1934 these petitioners made their oath to the fact that the property which is the subject of this proceeding belonged to decedent when she died and was part of her estate.
*77 Petitioners are here making a claim which is palpably inconsistent with the solemn statement. But the latter is not contradicted by anything that appears in this record. The majority may assume that it is explained away by the reformation decree. But that clearly is no more than an hypothesis. Petitioners did not take the stand. They did not testify that their statement was erroneous. They did not explain the error if there was one. They did not produce a single witness. There is accordingly not a scintilla of evidentiary justification for making that assumption.
*1274 But, even if that were the proffered explanation, it would not suffice without more. For all we know decedent's title may have rested on a transaction totally distinct from the assignment which was reformed in the state court. If that is not true petitioners could presumably have shown it. But merely producing the decree of reformation accomplishes nothing, since the result is purely a negative pregnant. It meets the respondent's presumptively correct determination, the petitioners' statement under oath, and the circumstantial proof, 2 to the effect that Mrs. Rhodes owned this property on January 22, 1934, by the claim that she did not get the property on July 30, 1925. The former present the issue here, whatever the state court may justifiably have felt its more limited function to be. Certainly we need not assume, although I recognize that the majority does, that those considerations would have been appropriate or relevant if presented to that court. Cf. . It seems to me to follow that the reformation decree is of no benefit to petitioners in seeking to persuade us that their own verified admission and the facts appearing*1275 from the documents produced, to say nothing of respondent's determination, should be overthrown.
If the second judgment, the decree of distribution, is relied upon, 3 it affords petitioners no greater comfort. That decree was entered, as the proceeding which engendered it was commenced, by agreement *78 of all the interested parties.*1276 4 No issues were raised by the pleadings. 5 There was no real dispute among the "litigants", 6 no substantial difference in their property rights under either hypothesis. 7 This Board has consistently held that a state court decree entered under such circumstances is not conclusive, particularly as to a question of fact. 8 This principle was not thought to be impeached by . 9 Indeed, that decision makes it clear that it does not apply to a case where "the proceeding in the state court was a collusive on - collusive in the sense that all the parties joined in a submission of the issues and sought a decision which would adversely affect the Government's right to additional * * * tax", supra, at p. 45.
*1277 Issues of fact are tendered by the parties.10 They can not be litigated unless they are, and they can not be decided unless they are litigated. It follows that an agreement of the parties to withhold factual issues, whether it be called collusive or not, must have the effect of precluding a decision. Under such circumstances there can be no adjudication which "settles the property rights", no "judgment which *79 fixed the rights." 11 It is the agreement, not the decree, which has that effect, if anything has. . Since there was no decision of the factual issue in the state court proceeding because of the agreement, there is no excuse for abdicating our duty to determine the facts. The state court has not done it for us here, even if it could do so under other circumstances. Cf. ; First National Bank in ; certiorari denied, .
*1278 The agreement was neither alleged in the pleadings nor mentioned in the decree. The effect upon the Government's tax claim - apparently the only possible practical result of the litigation - was presumably not disclosed. Collusion is a harsh word and we should not be required to apply it. But the proceeding was unquestionably nonadversary, the result obviously a consent decree. It need not be characterized as fraudulent to be considered ineffectual. Even if not collusive in the stricter sense, , it meets the test laid down in From either standpoint that decree, like the other, utterly failed to overcome the factual preponderance of the present record. ; reversed on other grounds, ; .
Under the circumstances, the least that should be required of petitioners is that they produce evidence, if they can, that these decrees were not entered by consent, *1279 and that the estate tax result was not their only purpose; or, in the alternative, that they accept their responsibility as litigants before this Board and furnish it with the primary evidence. Absent such a record, I am of the opinion that petitioners should not prevail because there is nothing before us to warrant the requisite finding of ultimate fact. That is not a technical matter, nor one depending upon an inadvertent omission or careless oversight. Failure to produce these petitioners and their equally interested brothers and sisters as witnesses can not but suggest that their testimony would be less than favorable. 12 It furnishes inadequate support for ignoring the rule which places upon taxpayers the burden of proving necessary facts. To relax that rule in such a case as this, without an unmistakable mandate in appellate court decisions, can not but result in depriving the tribunals established for that purpose, including this Board, of essential jurisdiction; and, what *80 is of infinitely greater moment, in withdrawing from the administrative arm of the Federal Government the indispensable prerogative of maintaining*1280 its position in some judicial forum.
HILL and DISNEY agree with this dissent.
Footnotes
1. This is demonstrated by the last finding of fact herein. ↩
2. The documents introduced show that in December 1925 decedent swore that her children had "assigned to me all their joint and several interests in said estate so that I am now the sole individual person interested * * *"; that in the same month decedent received the full consideration for the redemption of part of the stock; that in April and December, 1926, the remaining stock was transferred into her name; that in 1933 she sold a part of the stock and retained the proceeds and at various times all or parts of it were deposited as collateral to secure her loans; that some was so pledged when she died, and the remainder stood in her name; and that all is disposed of by her will. See ; . ↩
3. Apparently that is petitioners' real reliance for they did not take the position even in the state court that the reformation decree settled the ownership of the property as of decedent's death. The petition in the distribution action, filed after the reformation decree concludes:
"WHEREFORE, plaintiffs pray for a decree of this court determining the ownership of all of the property held in the name of Mamie D. Rhodes at the time of her death on January 22, 1934, as between the estate of said Mamie D. Rhodes↩ on the one hand and the plaintiffs and defendants herein on the other, * * *." [Emphasis added.]
4. "WHEREAS, it is thought necessary that a suit be brought in the Circuit Court of the County of St. Louis, Missouri, for the purpose of determining the property owned by said Mamie D. Rhodes at the time of her death * * *.
"Now, THEREFORE, in consideration of the premises and for the purpose of finally determining and settling the rights of the parties hereto in and to the property mentioned in the last preceding paragraph hereof, * * * it is agreed as follows:
* * *
"2. The interest of said Mamie D. Rhodes and of the parties hereto in the real estate standing in the name of Mamie D. Rhodes at the time of her death shall belong to the parties hereto in equal shares.
* * *
"4. The remaining 5,000 shares of said common stock of the International Shoe Company shall be divided equally among the four parties hereto, subject to the payment by each of his part of the said debt of $86,745.00 * * *.
* * *
"6. The above mentioned suit shall be brought by Hugh D. Rhodes and J. Jackson Rhodes individually and as executors of the estate of Mamie D. Rhodes, deceased. * * *.
"7. No party hereto shall hereafter assert that he is entitled to any greater share of the property herein referred to * * *." ↩
5. The rights of lienors and vendees, who would otherwise have been necessary parties, , were not in issue. The children, by their agreement, had volunteered to observe interests in this respect which were actually inconsistent with their claims. The decree respected and enforced that protection. ↩
6. "Moreover, the claimant in the Probate Court and the executor who filed no objections to the claim were one and the same party, a party situation which should not be permitted." . ↩
7. This probably accounts for the elusive character of the decree which merely directs distribution in the manner prayed for and makes no finding of ownership. ↩
8. ; ; ; ; ; ; cf. . ↩
9. Both the Jackson and Blair cases were decided after the Freuler case, and purport to follow it. They were written by the same Board Member, and both were reviewed by the full Board. They can be reconciled only on one hypothesis, with which the Freuler case, the Blair↩ case in the Supreme Court, , affirming the Board, and , are in complete accord. That is, that a decree entered without contest can not take the place of factual proof.
10. ; ; R. S. Missouri, 1929, Sec. 932. ↩
11. . ↩
12. "The non-production of witnesses when procurable creates a presumption that their testimony, if procured, would be unfavorable." Hamel, Practice and Evidence before the U.S. Board of Tax Appeals, sec. 252, citing ; . ↩