*3249 1. Amount of deduction for executors' commissions, attorneys' fees and miscellaneous administration expenses determined.
2. A pledge of decedent upon condition held not a debt of decedent where the condition was not met before her death.
3. Certain school property held properly included in decedent's gross estate.
4. Transfer to trust held not in contemplation of death or intended to take effect in possession or enjoyment at or after death.
*423 His is a proceeding for the redetermination of a deficiency in estate taxes under the Revenue Act of 1921, in the amount of $1,835,902.91.
The petition, as amended, alleges errors on the part of the respondent as follows:
1. Valuation and inclusion in gross estate of the property known as the Stanley McCormick School at Burnsville, N.C., at $44,000, thereby wrongfully increasing the gross estate in the amount of $44,000.
2. Inclusion in the gross estate*3250 of property owned and held by United States Trust Co. of New York as trustee under trust agreement dated July 27, 1918, generally spoken of as "Eastern Trust," and income accumulated thereon at decedent's death, thereby wrongfully increasing said gross estate in the sum of $7,399,306.32.
*424 3. Disallowance of $269,955.56 of total amount of $382,342.09 deducted by petitioners as executors' commissions, attorneys' fees and miscellaneous administration expenses.
4. Disallowance of $6,000 of total amount of $1,076,402.49 deducted by petitioners as debts of deceased.
5. The respondent failed and refused to allow the petitioners a deduction of $2,500, attorneys' fees, paid to Lindabury, Depue and Faulks.
6. The respondent failed and refused to allow the petitioners deductions for expenses incurred subsequently to the filing of the return as follows: miscellaneous administration expenses, $49,730.52.
7. The respondent erred in that he failed and refused to hold that section 402(c) of the Revenue Act of 1921, under color of which the Commissioner of Internal Revenue undertook to include the amount of $7,399,306.32 representing property held and owned by the United*3251 States Trust Co. of New York under trust agreement, dated and effective July 27, 1918, as the property of Nettie Fowler McCormick, deceased, at the time of her demise, is in contravention to the Fifth Amendment to the Constitution of the United States and is and was wholly void.
8. The respondent erred in that he failed and refused to hold that section 402(c) of the Revenue Act of 1921, under color of which the Commissioner of Internal Revenue undertook to include the amount of $7,399,306.32 representing property held and owned by the United States Trust Company of New York under trust agreement, dated and effective July 27, 1918, as the property of Nettie Fowler McCormick, deceased, at the time of her demise, is in contravention of the Fifth Amendment to the Constitution of the United States and is and was wholly void in so far as it attempts to authorize the inclusion in the gross estate of a decedent of property transferred prior to the enactment of the Revenue Act of 1921.
9. The respondent erred in that he failed and refused to hold that sections 400 to 411, inclusive, of the Revenue Act of 1921, under color of which the Commissioner of Internal Revenue seeks to assert*3252 the taxes here involved as a liability against the estate of Nettie Fowler McCormick at the time of her demise, are in contravention of the Fifth Amendment to the Constitution of the United States and are and were wholly void.
10. The respondent erred in that he failed and refused to hold that sections 400 to 411, inclusive, of the Revenue Act of 1921, under color of which the Commissioner of Internal Revenue seeks to assert that the taxes here involved as a liability against the estate of Nettie Fowler McCormick at the time of her demise, are unconstitutional *425 and void for the reason that there was and is no provision in the Constitution authorizing the levying or collection of such taxes.
In the answer the respondent denies that the taxes in controversy amount to $1,835,902.91.
FINDINGS OF FACT.
Mrs. Nettie Fowler McCormick died on July 5, 1923, at the age of 88 years, and the petitioners in this proceeding are individual executors of her estate, having principal office at 30 North La Salle St., Chicago, Ill.
Mrs. McCormick's death was caused by acute bronchial infection and probably bronchial pneumonia, although the doctors were never able to pick out*3253 any areas of bronchial pneumonia. Her last illness lasted only four or five days.
Witnesses who had known Mrs. McCormick for 25 to 40 years prior to her death never knew of her having any serious illness and never heard her complain of any ailment, or speak of any contemplation of imminent death. She was subject to colds but in the later years of her life they were very infrequent. She had one cold about 8 or 10 years before her death and another about 15 years before her death and these confined her to her bed for a few days. Mrs. McCormick would sometimes ask her physician for something to make her sleep better or would inquire whether he thought she was strong enough to "take this ride or have these people in to dinner." Periodical examinations were made of the decedent's kidneys and urine and it was almost certain that some albumin and occasionally a few casts would be found. She would feel an occasional, irregular heart beat and would comment upon it, but the doctor told her there was nothing serious about it. Her physician testified that these ailments were quite common with practically all people who have passed the middle age. He sometimes gave her cathartic pills*3254 or something to make her sleep better. She was active up to the time of her death, walked in her garden, took automobile rides and rode around her grounds in wheel chairs, one of which was equipped with a motor. She spent a great deal of her time out of doors. She walked up and down stairs unassisted and was seldom in need of a nurse, although she had one or two at all times. From 1916 on the doctor called upon her on an average of more than twice a week, but this was a precautionary measure taken at the insistence of Mrs. McCormick's children. For a number of years prior to her death she had gone to California upon the doctor's orders. This was also a precautionary measure, as the doctor wanted her to stay out of doors as much as possible and at her home in Lake Forest, Ill., this would have exposed her to catching cold.
*426 She was very much interested in charities and made large contributions thereto. She had a managing agent but took an interest in her affairs herself.
In 1918 she leased a house in Coronado, Calif., for a period of 5 years and occupied this house in the following years, the last time being in 1923, the year of her death.
Shortly before her*3255 death she was interested in making certain changes in her home and was interested in the future.
On July 27, 1918, Mrs. McCormick executed the following trust agreement:
THIS INDENTURE, Made this Twenty-seventh day of July, in the year of our Lord, One thousand nine hundred and eighteen (A.D. 1918), by and between Nettie F. McCormick, of the City of Chicago, in the State of Illinois, the party of the first part, and the United States Trust Company of New York (hereinafter termed the Trustee), a corporation of New York, having its prinipal place of business in the City of New York, the party of the second part.
WITNESSETH:
ARTICLE FIRST.
The party of the first part, being desirous of establishing and creating the, trust hereinafter mentioned, for the purposes and upon the terms set forth, in consideration of the premises and of one Dollar ($1,00) to her in hand paid, the receipt whereof is hereby acknowledged, does hereby sell, assign, transfer and set over unto the Trustee the following securities, to wit:
Thirty seven hundred and eighty-three (3783) shares of the capital stock of the McCormick Harvesting Machine Company, a corporation organized under the laws of the*3256 State of Illinois, together with all rights and interests now vested in the legal holder thereof, or which shall hereafter accrue to such holder under a certain indenture dated March 26, 1909, wherein Cyrus H. McCormick and Harold F. McCormick are parties of the first part, and Paul D. Cravath and George H. Sullivan are parties of the second part, - to be held and disposed of under and in pursuance of the terms of this agreement.
ARTICLE SECOND.
DISPOSITION OF INCOME DURING LIFE OF GRANTOR.
So long as the said party of the first part shall live the net income of said trust estate shall be accumulated and added to the principal of said trust estate except so much thereof as shall be required for the following purposes:
(1) If in any year the net income from the property and estate of said first party, retained in her own name and under her own control, after paying all income and other taxes, shall be less than two hundred and fifty thousand dollars ($250,000) said party of the first part shall have the right, within ninety (90) days after the expiration of such year, to request said Trustee to pay over such an amount of the net income of said trust estate as will, when added*3257 to her said net income from her property and estate retained within her control, equal the sum of two hundred and fifty thousand dollars ($250,000.00). And said Trustee, upon receiving any such request, shall pay over and deliver to said party of the first part the amount called for by such request. Said Trustee shall have the right to accept the statements contained in any such *427 request, in regard to the amount required to bring the net income of said first party up to the sum of two hundred and fifty thousand dollars ($250,000.00), as true without inquiry or investigation.
(2) Said Trustee shall from time to time in each year pay out of said net income for charitable uses and purposes such sums and amount of money as said first party shall designate and request in writing, specifying to whom the same is to be paid and the particular charitable uses and purposes to which the same is to be applied; and said Trustee shall not be under obligation to see to the application of the moneys so requested to be paid or to investigate the nature or character of the charitable uses and purposes specified in any such request.
The words "charitable uses and purposes" as used*3258 herein shall be held to include all religious and educational work, and all relief work, missionary work, Red Cross work, Y.M.C.A. and Y.W.C.A. work, and all work of a nature similar to either of the purposes above enumerated, and the enumeration of specific kinds of work herein shall not be construed in any way to limit or restrict the meaning of said general words "charitable uses and purposes," but the same shall be construed in their broadest sense and meaning.
AFTER THE DEATH OF SAID FIRST PARTY.
From and after the death of the said party of the first part, the net income from said trust estate, as and when received by the Trustee, shall be distributed, paid over, and applied by the Trustee as follows:
(1) One-third (1/3) thereof shall be paid over and distributed to each of the following three (3) children of said party of the first part, viz., Cyrus H. McCormick, Anita M. Blaine and Harold F. McCormick, so long as they shall severally live;
(2) From and after the death of either of said three beneficiaries, his or her share of said net income shall be paid over in accordance with any directions in regard thereto contained in his or her last will and testament, and*3259 in default of any such directions, then to his or her surviving issue per stirpes, so long as there shall be any such issue surviving; and in default of any such issue, then to the beneficiaries entitled to participate in the balance of said income pro rata.
ARTICLE THIRD.
DISTRIBUTION OF PRINCIPAL OF TRUST ESTATE.
The trust estate hereby created shall in any and the latest event terminate upon the death of the last survivor of the three children of the said party of the first part, hereinbefore named.
Said first party may terminate said trust, in whole or in part, at any time by the delivery to said Trustee of an instrument in writing, signed by her and by one or more of her three children, hereinbefore named; and after the death of said party of the first part, said trust may be terminated, in whole or in part, at any time by an instrument in writing, signed by a majority in interest of the beneficiaries of lawful age entitled to share in the net income of said trust estate. Any such instrument terminating said trust shall take effect upon its delivery to said Trustee.
Upon the termination of said trust as aforesaid, either in whole or in part, the trust estate*3260 as to which said trust shall be so terminated, shall be paid over and delivered to said party of the first part, if she shall then be living, and *428 in the event that she shall not then be living, shall be paid over and distributed as follows:
(a) One third (1/3) thereof to each of the three children of said party of the first part, hereinbefore named, viz: Cyrus H. McCormick, Anita M. Blaine and Harold F. McCormick.
(b) If either or any of said three children shall not then be living, his or her one third (1/3) of said trust estate shall be paid over and distributed in accordance with any directions in regard thereto contained in his or her last will and testament; and in default of any such directions then to his or her surviving issue, if any, per stirpes; and in default of any such surviving issue, then to the other two children of said party of the first part, hereinbefore named, or their issue, per stirpes.
ARTICLE FOURTH.
The Trustee shall have power and authority at any time, and from time to time, -
(1) To receive and collect all dividends declared and paid upon any shares of stock at any time subject to the terms of this agreement, and the interest*3261 on all moneys, bonds or other obligations at any time held by it hereunder; and to receive any and all sums at any time payable in respect of any shares of stocks, bonds or other obligations or securities which may be subject to the provisions of this agreement, or which may be collectible by the owner of any such shares of stock.
(2) To sell, transfer and assign any or all of the stocks, bonds, obligations, securities or other property held at any time by said Trustee under this instrument, and to invest and reinvest the proceeds thereof in accordance with any directions given in writing by the said party of the first part during her life, or, after her death, by a majority in interest of the beneficiaries of lawful age then entitled to share in the income of said trust estate. It being the intention that no change shall be made by said Trustee in the securities or property held in trust hereunder without the written direction or approval of the party of the first part during her life, or by a majority in interest of the beneficiaries of lawful age then entitled to share in the income from said trust estate from and after the death of the said party of the first part; and that*3262 said Trustee shall be and is hereby authorized to make any and every change in the securities or other property held in trust hereunder which shall be directed or approved as aforesaid; and said Trustee shall be free from any liability or responsibility for any action by it done under or in pursuance of any such written direction or approval. And in no event shall any purchaser from the Trustee, or any other person or corporation dealing with the Trustee in respect to any of the securities held by it hereunder, be required to ascertain the authority and power of the Trustee to make any sale of such securities, or any transfer, assignment or delivery thereof to such purchaser; but such purchaser and all other parties shall be entitled to rely upon the delivery, transfer, assignment or other disposition of any such securities by the Trustee as having been in all respects fully authorized, and shall not be affected by any notice to the contrary or be required to see to the application of the purchase money;
(3) To exercise the voting power upon all shares of stock held by the Trustee hereunder, and to exercise every power, election and discretion, give every notice, meet every demand, *3263 and do every act and thing in respect of any shares of stocks or bonds, or other obligations and securities, held by the Trustee hereunder, which it could or might do if it were the absolute owner thereof; Provided, *429 however, that upon the written request of said party of the first part during her life, or of a majority in interest of the beneficiaries of lawful age from time to time entitled to participate in the income of said trust estate from and after the death of said first party, it shall be the duty of the Trustee to execute, or cause to be executed, to the person or persons named in said request, a proxy entitling him or them (with full power of substitution) to vote in respect to any shares of stock in such written request or proxy defined and mentioned, at any meeting or meetings of the stockholders of any corporation or corporations specified in such request and proxy;
(4) To receive any and all stock dividends declared, and any other distribution which may be made by any corporation, any of whose shares of stock at the time constitute a part of the principal of the trust estate, and also all proceeds which may be paid on or in respect of any such shares of*3264 stock on the liquidation of the company issuing the same, or upon the sale (whether voluntary or involuntary) of its assets or any part thereof, or which may be otherwise paid out of the capital or on account of the principal of any bond, stock or other security; and may in its discretion join in any plan of reorganization or readjustment of any corporation, any of whose shares of stock, bonds or other securities or obligations may at any time constitute a part of the principal of said trust estate, and accept the substituted securities in any by said plan allotted in respect of the securities and obligations so held by the Trustee: Provided, that any and all moneys, stock dividends or other securities received under this paragraph shall constitute and be a part of the principal of the trust estate, and not a portion of the income thereof; and that any and all funds paid to the Trustee under the provisions of this paragraph, shall be reinvested by the Trustee as and in the same manner as if the securities or obligations in respect of which such sums were received had been sold by the Trustee under the power above vested in it.
ARTICLE FIFTH.
CONCERNING THE TRUSTEE.
The trustee*3265 hereby accepts the trust created by this indenture, and agrees to act in accordance with the terms and provisions of said indenture, but only upon and subject to the following terms and conditions, which are hereby agreed to by the party of the first part, for herself, her heirs, and her legal representatives, and by each and every beneficiary accepting or receiving or claiming any benefit or right under or by virtue of this indenture, to wit:
The trustee shall be entitled to receive for its compensation in each year two and one half per cent (2 1/2%) of the first twenty thousand dollars ($20,000.00) of the gross income of said trust estate during such year, and one per cent (1%) on the residue of said gross income during such year; and also upon the termination of the trust, otherwise than by reason of the resignation of said Trustee, a sum equal to one per cent (1%) of the principal of said trust estate at the date of such termination, which several payments shall be in full payment for all services rendered by said Trustee.
The Trustee may consult with counsel and shall be fully protected in any action or nonaction taken, permitted or suffered by it in good faith and in accordance*3266 with the opinion of counsel selected or provided by it; and in case of legal proceedings involving the Trustee or the principal of the trust estate, the Trustee may defend such proceedings or may, upon being advised by such counsel that such action is necessary or advisable for the protection of the interests of the Trustee, or of the beneficiaries, institute any legal proceedings.
*430 The Trustee shall be reimbursed and indemnified against any and all liability, loss or expense because of the holding of any shares of stock or other properties constituting a part of the principal of the trust estate, either in its own name or in the name of a nominee, and shall have a lien upon the principal of the trust estate and the income therefrom for the amount of any liability, loss or expense which may be so incurred by it, including the expense of defending any action or proceeding instituted against it or such nominee by reason of any such holding.
Of the income of the principal of the trust estate, the Trustee shall pay all taxes, assessments or other governmental charges which it may be required to pay or to retain because or in respect of any part of the principal of the*3267 trust estate or the income therefrom or the interest of the Trustee therein, or the interest of any beneficiary or other person therein, under any present or future law of the United States, or of any state, county, municipality, or other taxing authority therein, any and all such taxes, assessments, or other governmental charges lawfully imposed being charged as a lien upon the said income, and in case of deficiency of said income upon the principal of the trust estate.
All payments or distribution of income to beneficiaries in this indenture provided for shall be made out of net income then in the hands of the Trustee and applicable to such purpose quarterly, within ten (10) days from the first days of January, April, July and October of each year.
The Trustee shall be entitled, before making any such payment or distribution, to deduct from the amount of the income in its hands the amount then accrued and due for its compensation and the reasonable expense incurred by it in and about the administration of the trust, including the compensation of counsel, the expenses of selling or purchasing securities hereunder, or investment or reinvestment, any liability, loss or expense*3268 to which it may have been subjected as aforesaid, and the amount of any taxes, assessments or other governmental charges which it may have been required to pay in the premises.
The Trustee shall not in any event be liable to any party in interest or to any person whatsoever save only for its own wilful default.
The said Trustee may resign at any time by giving notice in writing of such resignation to said first party while she shall live, and after her death by giving notice in writing of such resignation to either one of the beneficiaries hereinbefore named.
In case of the resignation of any trustee acting hereunder, or of its disability or incapacity to further act as trustee, the said party of the first part, if living, shall have power to appoint a successor in trust by an instrument in writing delivered to such Trustee, and after the death of said first party the three beneficiaries hereinbefore named, or the survivors or survivor of them, shall have power to appoint a successor in trust by an instrument in writing duly signed and delivered to said Trustee, and upon the appointment of such successor in trust the said Trustee shall convey, assign, transfer and deliver*3269 to such successor in trust all of the trust estate then in its hands, and thereupon and thereafter such successor in trust shall have all the rights, powers, duties, and authority which were granted to or imposed upon said original Trustee under the provisions of this indenture.
Any of the provisions of this trust deed may be altered, changed or modified in any respect and to any extent at any time after the death of said first party by an instrument in writing, signed by a majority in interest of the beneficiaries of lawful age then entitled to participate in the income of said trust estate, and delivered to the Trustee; and after the date of any such modification or alteration this indenture as so modified or altered shall be in force and govern the *431 rights and powers of all parties concerned, the same in all respects as though said indeture had originally been executed in such modified or altered form.
The said grantor, Nettie F. McCormick, and the beneficiaries hereunder, or any or either of them may act through an attorney in fact in signing any and all instruments delivered to the Trustee under this indenture, with like effect as though signed in person, and*3270 any or either of said beneficiaries may act as such attorney in fact when authorized so to do.
The trust provisions and limitations of this indenture shall be construed according to the laws of the State of Illinois.
IN WITNESS WHEREOF the parties hereto have executed this instrument under seal and delivered the same at the City of Chicago, the day and year first above written.
(Signed) NETTIE F. MCCORMICK [SEAL.]
UNITED STATES TRUST COMPANY OF NEW YORK.
By: (Signed) EDWARD W. SHELDON, President.
Attest:
(Signed) W. J. WORCESTER,
Secretary.
At the time this instrument was executed, Mrs. McCormick was in the same state of health that she had been for years.
At the time of Mrs. McCormick's death the property held by the Trustee consisted of 57,638 shares of common stock and 25,784 shares of preferred stock of the International Harvester Co., a New Jersey corporation, and accrued income amounting to $148,448.07, all of which the respondent included in gross estate at a value of $7,399,306.32.
After the trust was created, Mrs. McCormick still had about one-half of her estate left. Her income, after the trust was made, was never less than $400,000 in*3271 any year. She never told the trust company how to vote the stock nor directed the company as to her investments. She never received any profit or benefit from the trust. Her orders for the contributions to charities were made to the trust company through her managing agent. Some of the contributions were to foreign charities, but most of them were to domestic charitable organizations. Only a few contributions were made to individuals.
Mrs. McCormick became interested in the Stanley McCormick school at Burnsville, N.C., in 1898. This was a little mission school under the Board of Home Missions of the Presbyterian Church. Some individuals at that place gave the land upon which the school was situated and the bricks for its construction. Mrs. McCormick gave money for its construction and running expenses. Between January 1, 1911, and September 22, 1917, she contributed $74,461 to the school. The school had a deficit each year and was not of such a character as to produce a profit. It was suitable only as a school for mountain children.
There were two mortgages on the property. One was given in 1903 by the Home Missions Committee of the Presbytery of French *432 *3272 Board to the Presbytery Board for Aid to Colleges and Academies in the amount of $12,105.
The other mortgage was given on August 3, 1899, by the trustees of the Stanley McCormick School to the College Board in the amount of $600. In 1914 the Board of Missions claimed that their interest in the mortgage was $3,600. This was due to the fact that other contributions which they made were added into the mortgage. These mortgages still encumbered the property at the time of Mrs. McCormick's death.
In 1911 a change in management of the school was made and Mr. Chesebro, who was principal at that time, attempted to straighten out the title to the property because Mrs. McCormick and others desired the title to be clear before other contributions were made. The property was deeded to Mrs. McCormick in 1915, subject to the two mortgages. The school was not opened in the fall of 1917 because the people in the locality were dissatisfied with Mr. Chesebro as head of the school. However, in the fall of 1920, the Board of Aid for Colleges of the Presbyterian Church felt that the school should be reopened, so Mrs. McCormick had Leroy F. Jackson inspect the property with a view to reopening*3273 the school. Mrs. McCormick promised to furnish $10,000 to put the school in shape and also $7,500 toward the running expenses of the school for the school year 1921 and 1922. That was on the condition that the entire charge of the school was to be taken over by the Presbyterian Board for the Aid of Colleges. They were to take all responsibility and she was simply to be a contributor to the running expenses as she saw fit. At this time Mrs. McCormick gave the Board of Aid for Colleges a lease on the property for 5 years at $1 per year. She received this consideration from the Board. Mrs. McCormick gave $7,500 in 1922 and 1923, and after her death the payments she had promised were made by her children, Mrs. Anita M. Blaine, Cyrus H. McCormick, and Horold F. McCormick, all of whom afterwards contributed to the running expenses of the school. They transferred the school property by deed to the Board of National Missions of the Presbyterian Church without reservation. No consideration was received for the property. The deed to the property was delivered in August, 1927.
On or about May 20, 1920, Mrs. McCormick sent the following telegram to Rev. C. O. Gray, President, Tusculum*3274 College, Greeneville, Tenn.:
I will be one of three to give $6,000 each toward a Science Building. Announce gift as from a friend of Tusculum. Regret journey prevents my being with you.
(Signed) N. F. MCCORMICK.
*433 On June 23, 1925, the following letter was sent by C. O. Gray to R. R. Roberts, assistant to Judson Stone, who was Mrs. McCormick's managing agent.
It is very gratifying indeed to receive your letter enclosing the check for $6,000 in payment of Mrs. McCormick's pledge toward our science hall. I certainly appreciate this very much and am so glad that we have been able to comply with the conditions of the promise as promptly as we have.
It has been rather hard to secure money this year to meet our current expense budget, and that in addition to the $12,000.00 for the science hall, has kept me on the alert, but it is all over now and I am very glad.
Again I want to thank you with all sincerity for the prompt remittance of this pledge.
The office of Mrs. McCormick's managing agent was informed in June, 1925, that the conditions of the contribution had been complied with and the executors paid the amount of the pledge, $6,000.
The petitioner*3275 submitted in evidence a statement showing that miscellaneous administration expenses incurred by the executors of the estate of Nettie Fowler McCormick were in the amount of $109,227.39. This same statement shows personal property taxes paid in Lake County and Cook County in the amount of $125,280.17. It shows unpaid personal property taxes in Lake and Cook Counties in the amount of $21,197.62. It also shows an estimated administrative expense for one more year of $23,845.22.
The estate will be open until 1929, at least. No accounting has been rendered to the court.
The executors have paid the firm of Tenney, Harding, Sherman & Rodgers the amount of $125,000 for legal services in connection with the estate, and there is to be paid a further amount of $25,000 to this firm. The executors also paid the amount of $2,500 to a firm of New Jersey lawyers for legal services in that State in connection with the estate. The respondent allowed a deduction of $75,000 on account of attorneys' fees and $37,386.53 on account of miscellaneous administration expenses.
The transfer of assets to the United States Trust Co. on July 27, 1918, by the decedent was not made in contemplation*3276 of death or intended to take effect in possession or enjoyment at or after death.
OPINION.
SIEFKIN: Before proceeding to a discussion of the principal issue involved in this proceeding there are three minor questions to be settled. One of those questions, the amount of the deduction for executors' commissions, attorneys' fees and miscellaneous administration expenses, has been conceded in the respondent's brief to the extent of $323,186.08 in addition to the amounts which he allowed in *434 determining the deficiency. The details of such amounts are as follows:
| Executors commissions | $150,000.00 |
| Attorneys' fees ($152,500, less | |
| $75,000 allowed in the 60-day notice) | 77,500.00 |
| Miscellaneous administration expenses | |
| ($109,227.39, pages 1 to 3 of Exhibit 29 | |
| attached to depositions, plus $23,845.22, | |
| estimated amount of additional administration | |
| expenses as itemized at bottom of page 4 of | |
| Exhibit 29 attached to the depositions, less | |
| $37,386,53 allowed in the 60-day notice) | 95,686.08 |
| Total | 323,186.08 |
The petitioners contend that the additional amount should be $329,186.08, but this increase includes an item of $6,000 on account of a pledge in that*3277 amount to Tusculum College which will be considered later. In the computation of the deficiency, therefore, the said deduction should be increased by $323,186.08.
A pledge of $6,000 was made to Tusculum College by Mrs. McCormick by a telegram in which she stated that she would be one of three to give $6,000 each towards a science building. At the time of her death the other two gifts had not been obtained. They were obtained some time after her death and the executors paid the pledge from the funds of the estate and ask that a deduction be allowed for the amount as a debt of the decedent. We do not believe it can be so considered. The general rule undoubtedly is that a subscription or pledge lapses upon the death of the subscriber if that event occurs before there is an acceptance and before a consideration is furnished. See Beach v. Fairbury First M. E. Church,96 Ill. 177">96 Ill. 177. As to this pledge, the consideration was that like pledges should be obtained from two others, not merely that an effort be made to obtain such pledges. We conclude that the amount was not a debt of the decedent.
The third issue relates to the inclusion in the gross estate of the*3278 decedent the property known as the Stanley-McCormick School. The facts as to the acquisition of the title are set out in our findings. While it is clear that Mrs. McCormick had no intention of profiting at the expense of the school, but on the contrary took title in order to make certain that her contributions to it would do the most good, we are unable to hold that the property was conveyed to or received by her in trust. We, therefore, hold that the value of such property should be included in the decedent's gross estate. Although we have some doubts as to the value being $44,000, the amount fixed by the respondent, we must affirm his determination in that regard because the evidence which creates those doubts is not sufficient to permit us to say either that the property had no value or what the value was.
*435 The principal issue in this proceeding, both as to the amount involved and the difficulty of solution, is a question as to the inclusion in the gross estate of Nettie Fowler McCormick of an amount of $7,399,306.32, being the value of certain property as determined by the respondent involved in the trust created by her July 27, 1918.
Section 402(c) of the*3279 Revenue Act of 1921 provides:
SEC. 402. That 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 -
* * *
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bona fide sale for a fair consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.
The trust was created July 27, 1918. The decedent died July 5, 1923. The respondent assigned no reason for including the property in the gross estate of the decedent other than that his action*3280 was "in accordance with the law and regulations." In this hearing he contends that the transfer into the trust was either intended to take effect in possession or enjoyment at or after death or was in contemplation of death.
We are satisfied that the transfer was not in contemplation of death as that phrase has been interpreted by the courts and by this Board. All of the evidence points to the conclusion that the expectancy of death in the near future (and not merely in the usual course of events) was not present and was not the moving cause of the conveyance to the trustees. See Schwab v. Doyle,269 Fed. 321; Gaither v. Miles,268 Fed. 692; Meyer v. United States,60 Ct.Cls. 474, 483; Estate of Lozier,7 B.T.A. 1050">7 B.T.A. 1050; Estate of John B. Phillips,7 B.T.A. 1054">7 B.T.A. 1054, and many other cases to the same effect.
We are, therefore, brought to a consideration of the question as to whether the transfer was "intended to take effect in possession or enjoyment at or after * * * death (whether such transfer or trust is made or created before or after the passage of this Act)."
*3281 We are met at the threshold of the inquiry with the decision of the Supreme Court of the United States in Nichols v. Coolidge,274 U.S. 531">274 U.S. 531; 47 Sup.Ct. 710. The concluding paragraph of the decision is as follows:
This court has recognized that a statute purporting to tax may be so arbitrary and capricious as to amount to confiscation and offend the Fifth *436 Amendment. Brushaber v. Union Pacific R.R.240 U.S. 1">240 U.S. 1 24; Barclay & Co. v. Edwards,267 U.S. 442">267 U.S. 442, 450. See also Knowlton v. Moore,178 U.S. 41">178 U.S. 41, 77. And we must conclude that Section 402(c) of the statute here under consideration, in so far as it requires that there shall be included in the gross estate the value of property transferred by a decedent prior to its passage merely because the conveyance was intended to take effect in possession or enjoyment at or after his death, is arbitrary, capricious and amounts to confiscation. Whether or how far the challenged provision is valid in respect of transfers made subsequent to the enactment, we need not now consider.
*3282 Since the decision of the Supreme Court we have held in several cases that gifts or transfers made prior to the Act under which the decedent died could not be included in the gross estate. See Edward H. Alsop, Executor,7 B.T.A. 848">7 B.T.A. 848; James Duggan,8 B.T.A. 482">8 B.T.A. 482; David W. Crews,8 B.T.A. 949">8 B.T.A. 949; Northern Trust Co., Executor,9 B.T.A. 96">9 B.T.A. 96. See also Estate of Harris,5 B.T.A. 41">5 B.T.A. 41, and the recent decision of Judge Lowell in Wilmington Trust Co. v. United States, 28 Fed.(2d) 205. The Circuit Court of Appeals for the Seventh Circuit has recently held to the same effect in Reinecke v. Northern Trust Co., 24 Fed.(2d) 91. The case is now pending before the Supreme Court of the United States, a writ of certiorari having been granted on April 23, 1928.
Except for an ingenious argument of the respondent we might well hold with our prior decisions which we deem in accord with Nichols v. Coolidge, supra, and hold that a trust created in 1918 is not to be included in the gross estate of a decedent dying under the Act of 1921. The respondent's argument, *3283 however, compels us to consider whether or not the retroactive feature condemned by the Supreme Court is present. The argument is based upon the decision of the Supreme Court of Illinois in People v. McCormick,327 Ill. 547">327 Ill. 547; 158 N.E. 861">158 N.E. 861, construing this trust instrument. The holding of the Supreme Court of Illinois, briefly stated, is that the beneficial interest in the property covered by the trust created by Mrs. McCormick on July 27, 1918, did not vest in her children at that time. It is argued, because the property did not vest in the children at the time the trust was created, that the transfer must necessarily have been as of the date of her death and that, therefore, the application of the act can not be said to be retroactive. There is a fatal flaw in this argument in that the Supreme Court of Illinois did not decide that Mrs. McCormick did not divest herself of all interest in the property but merely decided that the property did not vest in her children until after her death. The latter holding is of no assistance in determining the question which we have before us. The Supreme Court of Illinois was considering the question from the*3284 standpoint of the Illinois inheritance tax, which differs from the Federal tax in that it is a tax upon the right to receive, whereas the Federal *437 estate tax is upon the right to transmit. We still have the question "did Mrs. McCormick, by the instrument of July 27, 1918, part with the possession and enjoyment of the property included in the trust." The arguments that she did not are based upon the following provisions of the trust instrument:
1. The provision by which she reserved the right to direct the investments. Article 4(2).
2. The provision by which she reserved the right to request the issuance of proxies on the stock. Article 4(3).
3. The provision for the accumulation of income and the reservation of the right to direct the payments of income to designated charities. Article 2(2).
4. The provision by which she reserved the right to be paid a portion of the income of the trust in case her income should fall below $250,000 in any year. Article 2(1).
5. The provision that should the decedent survive the beneficiaries, the trust would terminate and she would take the trust property. Article 3.
*3285 Provisions similar to the first, second and third provisions above were considered by the Circuit Court of Appeals, Seventh Circuit, in Reinecke v. Northern Trust Co., supra. The court there said:
We are of opinion that the reservations in the 1919 trusts, as above herein enumerated, must be held to be reasonable and prudent provisions which in no way affect or defeat the real purposes of the trusts. The settlor by those reservations took nothing for himself, but each reservation is a pledge on his part or advice and assistance to the trustee for the benefit of the beneficiaries.
See also Shukert v. Allen,273 U.S. 545">273 U.S. 545.
Before considering the fourth and fifth provisions noted above, it should be noted that Mrs. McCormick's income never did fall below $400,000 a year and, in fact, she did not survive the beneficiaries. In considering the question, the purpose of the Federal estate tax must be kept in mind. In Knowlton v. Moore,178 U.S. 41">178 U.S. 41, the Supreme Court said:
Although different modes of assessing such duties prevail, and although they have different accidental names, such as probate duties, stamp duties, *3286 taxes on the transmission, or the act of passing of an estate or a succession, legacy taxes, estate taxes or privilege taxes, nevertheless tax laws of this nature in all countries rest in their essence upon the principal that death is the generating source from which the particular taxing power takes its being and that it is the power to transmit, or the transmission from the dead to the living, on which such taxes are more immediately rested.
We are satisfied that the provisions of section 402(c) of the Revenue Act of 1921 are to be tested, at least in part, by asking whether the transfers involved are testamentary in character. If it is found that they are not, close scrutiny must be given to such transfers to determine whether they bear any reasonable relation to *438 or afford any reasonable measure of the privilege being taxed by the Federal government. In Schlesinger v. State of Wisconsin,270 U.S. 230">270 U.S. 230, the Supreme Court said, in holding the Wisconsin tax unconstitutional:
Gifts inter vivos within six years of death but in fact made without contemplation thereof are first conclusively presumed to be so made without regard to actualities, *3287 while like gifts at other times are not thus treated. There is no adequate basis for this distinction. Secondly, they are subjected to graduated taxes which could not be properly laid upon all gifts or indeed upon any gift without testamentary character.
When this test is applied to the facts in this proceeding, we came to the conclusion that the transfer of July 27, 1918, five years before the death of Mrs. McCormick was not testamentary in character and bore no relation to the privilege taxed, and that the property included in the trust was not part of her estate for purposes of the Federal estate tax. We come to this conclusion by looking at the purpose of Congress, as we conceive it, to include as a measure of the estate tax, in addition to those assets which are held at death, only such assets disposed of prior to death as bore a reasonable relation to the privilege taxed. We are confirmed in this conclusion when we consider that Mrs. McCormick completely divested herself of legal title and beneficial ownership five years prior to her death, subject only to certain restrictions and contingencies which, in fact, never operated.
The transfer of assets to the United States*3288 Trust Co. on July 27, 1918, by the decedent was not made in contemplation of death or intended to take effect in possession or enjoyment at or after death.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MARQUETTE and ARUNDELL dissent on the fourth point.