*276 Decisions will be entered under Rule 50.
1. Gifts which were made by decedent to his three living children on April 21, 1941, nearly four years prior to his death January 6, 1945, were made from motives associated with life and not death, were not made in contemplation of death, and were not testamentary in character. Held, the value of the property included in such gifts is not includible in decedent's gross estate under section 811 (c) of the Internal Revenue Code.
2. Decedent was the settlor of a trust estate in 1926 in which he reserved the income for life to himself with remainder over to others. The value of the property in this trust is includible as a part of decedent's gross estate. Decedent provided that at his death his two sons should become cotrustees with the corporate trustee. Upon decedent's death an accounting proceeding was had as to this trust and certain attorney fees and guardian fees were incurred and allowed by the Supreme Court of New York. Held, that such portion of the fees as were properly allocable to the usual issues involved in a trust accounting are deductible from decedent's gross estate. Elroy N. Clark et al., Trustees, 1 T. C. 663*277 and Haggart's Estate v. Commissioner, 182 F.2d 514">182 F. 2d 514, reversing 13 T. C. 14, followed. Held, further, that part of such fees as were incurred by reason of the litigation of issues involving undue influence upon decedent and fraud are not deductible and as to these amounts the Commissioner is sustained. Estate of Frederic E. Baldwin, 44 B. T. A. 900, followed.
*1294 These four proceedings for the redetermination of a deficiency in estate tax and the liability of transferees of the decedent have been consolidated.
The deficiency determined*278 against the estate is $ 254,320.95. The liabilities asserted against the transferees are as follows:
| Docket No. 22024 | $ 130,741.05 |
| Docket No. 22025 | 130,741.05 |
| Docket No. 22027 | 87,160.71 |
We do not understand petitioners to contest their liabilities as transferees in the amounts determined by the Commissioner in the event that there is any deficiency in estate tax.
The deficiency in estate tax determined by the Commissioner is due to adjustments to the net estate explained in the deficiency notice as follows:
| Adjustments to net estate | ||
| Net estate for basic tax as disclosed by return | $ 55,235.45 | |
| Additions to value of net estate and decreases in | ||
| deductions: | ||
| Real estate | $ 7,500.00 | |
| Other miscellaneous property | 175.00 | |
| Transfers during decedent's life | 3,151,478.54 | |
| Executor's commissions | 25,000.00 | |
| Miscellaneous administration expenses | 1,113.50 | 3,185,267.04 |
| Net estate for basic tax as adjusted | $ 3,240,502.49 | |
| Net estate for additional tax as adjusted | $ 3,280,502.49 |
The Commissioner in the deficiency notice gives the following explanation of the "Transfers during decedent's life $ 3,151,478.54" enumerated in the foregoing statement: *279
| Transfers during decedent's life | Return | Determined |
| Added Item 1 | None | $ 2,652,835.73 |
| Added Item 2 | None | 150,000.00 |
| Added Item 3 | None | 348,642.81 |
| Totals | None | $ 3,151,478.54 |
The foregoing additions included in Items 1, 2, and 3 are explained in the deficiency notice as follows:
*1295 Item 1. The trust created by decedent on October 21, 1926, is included in the gross estate as coming within the purview of Sections 811 (c) and (d) of The Internal Revenue Code.
Item 2. The trust created by Emu Associates, Inc., on August 18, 1936, is included as a transfer by the decedent coming within Section 811 (c) of the Internal Revenue Code.
Item 3. The gifts made by decedent on or about April 21, 1941, are included in the gross estate as transfers within the purview of Section 811 (c) of the Internal Revenue Code. Determined value is the total fair market values at date of death.
After making the foregoing adjustments the Commissioner computed the deficiency in estate tax as follows:
| Total net basic and additional taxes | $ 1,264,299.95 | |
| Estate Tax Assessed: Original, list April 1946, page | ||
| 100, line 4 | $ 18,882.16 | |
| First Suppl. list, | ||
| Jan. 1948, page 190, line 0 | 991,096.84 | 1,009,979.00 |
| Deficiency | $ 254,320.95 |
*280 The petitioners do not assign error as to the inclusion of Items 1 and 2 above, but do assign error as to the inclusion of Item 3.
In addition to this assignment of error petitioners in an amendment to the petitions assigned another error not included in the original petitions. That error is as follows:
The Commissioner erred in not allowing as a deduction in determining the $ 2,652,835.73 value of the inter vivos trust established October 21, 1926, as amended, which was held includible in the gross estate of Stephen Peabody, deceased, for Federal Estate Tax purposes, either as administration expenses or in diminution of the gross estate, the sum of $ 81,047.45 representing attorneys' fees and guardian fees which the Supreme Court of the State of New York, County of New York, on January 25, 1947 ordered the trustees to pay in an accounting proceeding necessitated under the law of New York by the death of Stephen Peabody.
FINDINGS OF FACT.
The petitioners in the estate of Stephen Peabody are the executors of the will of Stephen Peabody who died on January 6, 1945, a resident of Westport, Connecticut. Petitioner Stephen Peabody, Jr., resides in Stuart, Florida; petitioner George Peabody*281 resides in Westport, Connecticut; and petitioner Emma Peabody Abbett resides in Greenwich, Connecticut.
The estate tax return was filed with the collector of internal revenue for the district of Hartford, Connecticut.
Facts as to First Issue.
On April 21, 1941, Stephen Peabody gave to his three children who were then living, namely, Stephen Peabody, Jr., George Peabody, *1296 and Emma Peabody Abbett, certain securities valued at the time of the gifts at $ 207,427. The gifts were evidenced by a letter which decedent wrote to his three children, followed by a turning over to them of the securities listed in the letter. This letter, omitting a detailed listing of the securities named therein, was as follows:
April 21, 1941
Stephen Peabody, Jr.
George Peabody,
Emma Peabody Abbett.
Dear Children:
I am writing this letter for the purpose of recording the fact that as of the above date I have made a gift to you of the following securities:
* * * *
The securities and moneys referred to are to be divided among you in the following proportions:
Stephen Peabody, Jr., 25%
George Peabody, 37 1/2%
Emma Peabody Abbett 37 1/2%
Affectionately yours,
(Signed) Stephen Peabody
In his determination*282 of the deficiency the Commissioner has determined that these gifts were made in contemplation of death and has fixed their value at the date of decedent's death at $ 348,642.81. This valuation is not contested, and we find the valuation of $ 348,642.81 to be correct.
Decedent, born on March 22, 1858, died on January 6, 1945, at Westport, Connecticut, his residence, at the age of 86 years.
Decedent's wife Cornelia Haven Peabody, died in 1926.
Three of decedent's children, Griswold Haven, Cornelia, and Priscilla were deceased as of April 21, 1941, the date of the gifts in question.
Over the years decedent's doctors, when they gave him a physical checkup, found him a very rugged, healthy man. Prior to September 1938, the decedent had no illness that ever confined him for any appreciable length of time. His ailments up to that time had been only minor. In September 1938, decedent suffered what his physicians described as a cerebral accident which was possibly due to a slight hemorrhage or thrombosis. The cerebral accident lasted several weeks. After the cerebral accident decedent was paralyzed for a time on the right side and moderately restricted in motion. Thereafter, from February*283 1939 to April 1941, decedent recovered substantially from the cerebral accident. After the accident, decedent was able to walk. His handgrip which had been very strong returned very well. Following the cerebral accident, the decedent practiced by the hour until he could use his muscles and write so that he was able to write a letter, and his signature came back almost as good as it had been. Decedent drove his own car after the September 1938 *1297 cerebral accident and took an active interest in his own affairs and the affairs of his children and grandchildren.
Petitioner George Peabody first heard about the intent of his father to make the gifts in question from his father in March 1941. Decedent told petitioner George Peabody that he had been considering making gifts to his three children, and that George Peabody should ask decedent's attorney if decedent would get a substantial reduction in his income tax if he were to make gifts of $ 200,000-$ 250,000. Decedent's attorney indicated that on such gifts there would be an annual saving in decedent's income taxes of $ 9,000 or $ 10,000, and petitioner George Peabody reported this back to decedent. Later, decedent discussed*284 the gifts with petitioner Emma Peabody Abbett and with Stephen Peabody, Jr., who was summoned from Florida for this purpose. Decedent did not mention to his attorney, or to any of his three children to whom he was making the gifts, or to anyone else anything about saving on estate tax nor did he make mention of death in any way whatsoever.
At the time of making the April 1941 gifts to the petitioners, decedent said he was giving 37 1/2 per cent of the total to petitioner George Peabody, 37 1/2 per cent to petitioner Emma Peabody Abbett, and only 25 per cent to petitioner Stephen Peabody, Jr., because they had four, three, and one dependents, respectively. At the time of making the gifts, decedent told his three children that he was making the gifts to them so that they could enjoy the income therefrom during his lifetime and that thereafter he would not consider himself obligated to help them any more, that he wanted no more calls for money, and that he hoped that they were satisfied with the donations which he was making in these gifts.
After making the April 21, 1941, gifts decedent never thereafter referred to them.
After making the 1941 gifts, decedent had about $ 100,000 in*285 cash in his bank accounts. Between 1941 and date of death, decedent was receiving approximately $ 130,000 gross income from the 1926 trust, in addition to which he also received the life income from other trusts aggregating approximately $ 13,500. During this period decedent's living expenses amounted to approximately $ 15,000 per year.
Three months after making the gifts in question, decedent instructed the Central Hanover Bank and Trust Company on July 24, 1941, to send him literature bearing on his investments "in the future," that he wanted to look after making his own investments.
Decedent was never morbid or depressed and never discussed the prospect of death and the future life with members of his family, or even with his minister. To the contrary, decedent was interested *1298 in life, was determined to "carry on," and had an unusual alertness, drive and ambition to keep going.
On July 11, 1944, more than three years after the gifts here in question were made, decedent suffered a cerebral hemorrhage on his left side at which time his blood pressure was 230 over 120. Between February 23, 1944 and January 6, 1945, decedent was attended by his local doctor 28 times. *286 Digitalis and various sedatives were prescribed. On January 2, 1945, decedent suffered another cerebral hemorrhage. On January 4, 1945, decedent was comatose and on January 6, 1945, he died. The attending physician at the date of decedent's death attributed his death to hypostatic pneumonia, cerebral hemorrhage and arteriosclerosis.
At date of death, decedent's estate, as disclosed by the estate tax return, consisted of a piece of realty scheduled at $ 47,500, New York City Corporate Stock scheduled at $ 97,490, cash of $ 115,677, furniture, and a Cadillac car. Debts of the decedent, exclusive of funeral expense, executors' commissions, attorney fees, and administration expenses, amounted to $ 47,975.
The gifts which petitioner made to his three children on April 21, 1941, were not made in contemplation of death and were not testamentary in character, but were made from motives associated with life rather than death.
Facts as to Second Issue.
Decedent established an inter vivos trust by indenture dated October 21, 1926, which is governed by the law of New York and as to which the sole trustee was the Central Hanover Bank and Trust Company of New York. This trust was amended*287 by the settlor by amendments dated March 15, 1929, September 3, 1943, and September 23, 1943. In July 1939, decedent informed his attorney he did not wish the Central Hanover Bank and Trust Company to function as sole trustee of the trusts he had created on October 21, 1926, and that he wanted a cotrustee or cotrustees. The Central Hanover Bank and Trust Company was agreeable but stated that there would have to be an accounting before such cotrustees could be appointed. As of the date of decedent's death, the aforesaid trust, as amended, provided that the trust was irrevocable, that the life income was payable to decedent with several remainders over, and that on decedent's death his sons, petitioners George Peabody and Stephen Peabody, Jr., should join the Central Hanover Bank and Trust Company as cotrustees.
Accordingly, following decedent's death, an accounting was instituted by the trustee Central Hanover Bank and Trust Company in the New York Supreme Court, New York County. By judgment of *1299 that court dated January 25, 1947, the accounts of the trustee were settled and petitioners George Peabody and Stephen Peabody, Jr., were appointed as cotrustees with the trustee*288 Central Hanover Bank and Trust Company. Although the accounting was not specifically required by New York statutory law, it was necessitated and required by orderly procedure so that the trustee Central Hanover Bank and Trust Company might account before it assumed to function with cotrustees. In this accounting proceeding in the New York Supreme Court issues of law and issues of fact were raised. The issue of law had reference to the reserved power of the decedent in the original indenture to change the beneficiaries. The issues of fact related to alleged undue influence exercised over the decedent with respect to the September 1943 amendments to the trust and fraud. In that judicial accounting a question of law was also raised by the pleadings as to the liability of the trust with respect to Federal estate tax of the decedent if the corpus of the 1926 trust was includible in the gross estate of the decedent. The corpus of the 1926 trust has been included by the respondent in the gross estate of the decedent and no issue has been raised thereon in this proceeding.
In connection with the January 25, 1947, judgment in the 1945 accounting proceeding, the Supreme Court of the State*289 of New York, County of New York, allowed and approved the said account and ordered the trustees to pay attorney fees and guardian fees in the amount of $ 81,047.45, which fees were paid by the trustees. The allowances amounting to $ 81,047.45 made in the aforesaid 1945 trust accounting were allocable, 50 per cent to the usual issues involved in an ordinary trust accounting proceeding and 50 per cent to the issues of undue influence raised by the objections to the accounting.
OPINION.
Issue 1.
As has been mentioned in our preliminary statement the Commissioner, in his determination of the deficiency, has added three items to the net estate as reported by petitioners on the estate tax return: Item 1 was the value of the corpus of a trust which decedent created October 21, 1926, and which the Commissioner valued at $ 2,652,835.73; Item 2 was the value of the corpus of a trust which was created by Emu Associates, Inc., on August 18, 1936, and which the Commissioner valued at $ 150,000; and Item 3 was the value of gifts which decedent made to his three children on April 21, 1941, and which respondent has determined were made in contemplation of death. The Commissioner has determined*290 the value of the property included in these *1300 gifts to decedent's three children at the date of decedent's death to be $ 348,642.81.
The petitioners do not contest the inclusion by the Commissioner of Items 1 and 2 and on brief state they have already paid $ 977,790.49 on account of the Federal estate tax due to the adjustments which they do not contest. However, petitioners do contest Item 3 above and contend that the gifts which decedent made to his three children on April 21, 1941, were not made in contemplation of death but were made entirely from motives associated with life. These gifts were made nearly four years prior to decedent's death and there is, therefore, no statutory presumption that the gifts were made in contemplation of death. There is, however, a presumption that the determination of the respondent is correct. Petitioners recognize this fact and at the hearing introduced much testimony to overcome the presumptive correctness of respondent's determination. We think petitioners have succeeded in doing this and have shown that the gifts in question were not made in contempation of death, but were made from motives associated with life and were in no *291 sense testamentary in character.
Both sides have discussed in their briefs numerous cases dealing with the "contemplation of death" issue, including the leading case of United States v. Wells, 283 U.S. 102">283 U.S. 102. Manifestly it would not be practicable to discuss and comment upon the numerous cases cited and discussed by the parties in their briefs. Each case involving the issue of "comtemplation of death" must naturally depend largely upon its own facts. In United States v. Wells, supra, the Supreme Court stated that the phrase "contemplation of death" as used in the statute does not refer to the general expectation of death which all entertain; it must be a particular concern giving rise to a definite motive. "Death must be 'contemplated,' that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition." The Court continued: "Old age may give premonitions and promptings independent of mortal disease. Yet age in itself cannot be regarded as furnishing a decisive test, for sound health and purposes associated with life, rather than with death, may motivate the transfer." The*292 Supreme Court further stated in the Wells case:
* * * It is common knowledge that a frequent inducement is not only the desire to be relieved of responsibilities, but to have children, or others who may be the appropriate objects of the donor's bounty, independently established with competencies of their own, without being compelled to await the death of the donor and without particular consideration of that event. There may be the desire to recognize special needs or exigencies or to discharge moral obligations. The gratification of such desires may be a more compelling motive than any thought of death.
*1301 Without undertaking to restate in this Opinion the facts embodied in our Findings of Fact, we think it is sufficient to say that we think these facts establish that the gifts which decedent made to his three living children on April 21, 1941, were not made in contemplation of death nor were they intended to be testamentary in character. The evidence convinces us that the dominant motives which prompted decedent to make the gifts were associated with life, and not with death.
We, therefore, hold that the Commissioner erred in including the value of the property covered*293 by these gifts in decedent's gross estate under section 811 (c), I. R. C.
Issue 2.
Petitioners in an amendment to their petitions claim a deduction of $ 81,047.45 representing attorney fees and guardian fees which the Supreme Court of the State of New York on January 25, 1947, ordered the trustees to pay in an accounting proceeding which was had in that court. Petitioners claim this deduction, either as administration expenses or in diminution of the gross estate. It was not claimed as a deduction by the executors when the estate tax return was filed because it had not yet been incurred.
The amounts which were paid in this accounting proceeding and which payments were approved by the New York Supreme Court are not in dispute. Respondent does contend, however, that none of the $ 81,047.45 in question is deductible as administrative expenses or in diminution of the gross estate and, in the alternative, he contends that if any of it is deductible that only 50 per cent of it can be deducted as administrative expenses and that the remaining 50 per cent was clearly not administrative expenses but was incurred in the settlement of issues between the claimants of the trust estate.
*294 The applicable statute is printed in the margin. 1
*1302 Petitioners in support of their contention that the entire amount is deductible rely on Haggart's Estate v. Commissioner, 182 F.2d 514">182 F. 2d 514, reversing 13 T. C. 14.*295 Respondent in support of his contention that none of the $ 81,047.45 is deductible relies on our decision in Estate of Elizabeth W. Haggart, 14">13 T. C. 14, and contends that the Third Circuit was wrong in reversing the Tax Court in that case. In the Haggart case the Commissioner contended that certain expenses incurred by the trustees of a revocable trust, the assets of which on the death of the settlor were under the provisions of section 811 (c), I. R. C., taxable to the estate of the settlor, could not be considered either a charge on the assets of the trust estate or a deduction from the gross estate for the purposes of taxation, unless they were definitely incurred by the trust estate prior to the death of the settlor. In that case we sustained respondent's contention, closing our opinion with these words:
The respondent did not err in his determination that the value of the trust property includible in the gross estate of decedent may not be reduced by attorney fees and other expenses attributable to the administration of the trust.
As has already been stated the Third Circuit reversed our decision and in reversing us the court, among other*296 things, said:
* * * The net value of this inter vivos trust is subject to the estate tax. Int. Rev. Code, §§ 811 (c) (1) (B), 811 (d) (1), 26 U. S. C. A. § 811 (c) (1) (B), (d) (1). The taxpayers do not contend to the contrary. If the corpus of the trust is to be included as a subject of taxation it seems incongruous for the expenses involved in determining decedent's net estate to be disregarded. It was necessary, under the law which governed the trustees in their administration of the trust, to have an acccounting after the decedent's death. Her life interest had terminated, obviously, and a new trustee was to be substituted also. Her personal estate outside the trust was to go to the trustees to be administered in accordance with the terms of the trust. All this was done and, as the statement of facts shows, the fee for this work was allowed by the proper court in Pennsylvania.
The court continued at page 516:
Whether they are to be allowed as expenses of administration or whether they are to be allowed in diminution of the gross estate does not matter in this case. It comes out the same either way and, therefore, we refrain from committing*297 ourselves to a choice.
The two Court of Appeals decisions in Commissioner of Internal Revenue v. Bronson, 8 Cir., 1929, 32 F. 2d 112, and Commissioner of Internal Revenue v. Davis, 1 Cir., 1943, 132 F. 2d 644, tend to support our conclusion. We think the Tax Court was mistaken in endeavoring to distinguish its earlier case, Elroy N. Clark, 1943, 1 T.C. 663">1 T. C. 663. That decision, we think, is in accordance with the result reached here.
We agree with the Third Circuit that we were wrong in deciding that the Haggart case, supra, was distinguishable on its facts from Elroy N. Clark, et al., Trustees, 1 T. C. 663. In the Clark case we said:
*1303 * * * These [fees] being for service in connection with trustees' accountings, in our opinion they were, like the trustees' commissions, necessary charges against the estate at the date of death. Estate of Frederic E. Baldwin, 44 B. T. A. 900, relied on by the respondent, involved attorneys' fees for controversies arising after the death; here the trustees must necessarily*298 file accounting, in order to pass the estate. The deduction of the attorneys' fees from gross estate is allowed.
We think, therefore, that in the instant case we should follow the Clark case and the Third Circuit's reversal of our decision in the Haggart case, supra, rather than our own decision in Estate of Elizabeth W. Haggart, supra. By this we mean we should allow as a deduction that part of the $ 81,047.45 which was expended for attorney fees and guardianship fees in the settlement of the usual issues involved in a trust accounting. It is clear that this accounting proceeding was deemed necessary by the Central Hanover Bank and Trust Company which was the trustee during decedent's lifetime preparatory to taking in as cotrustees decedent's two sons, Stephen, Jr., and George. The uncontradicted evidence is that 50 per cent of the total fees allowed could fairly be allocated to the straight usual issues involved in a trust accounting and that 50 per cent of the total fees allowed could be fairly allocated to the other issues of law and fact involved in the proceedings.
During the course of the accounting proceeding certain issues arose*299 of undue influence on the grantor with respect to the September 23, 1943, amendment raised by the objections to the accounting. It is the testimony of competent witnesses that 50 per cent of the $ 81,047.45 is properly attributable to this part of the litigation and we have so found in our Findings of Fact. We do not think that this particular part of the expenditures can be properly classed as administrative expenses. This 50 per cent of the $ 81,047.45 is not deductible. See Estate of Frederic E. Baldwin, 44 B. T. A. 900. In the Baldwin case, the estate sought a deduction of $ 8,000 as administrative expenses which the executor and trustee had paid, not as administrative expenses but in settlement of attorney fees incurred in litigation attacking the deed of trust and the will and codicil of decedent. We held that attorney fees incurred in litigation arising among the beneficiaries after decedent's death were not deductible as administrative expenses. We think we have a comparable situation here insofar as the 50 per cent is concerned which was incurred in the litigation to settle issues which arose outside the usual scope of an accounting*300 proceeding.
Decisions will be entered under Rule 50.
Footnotes
*. Proceedings of the following petitioners are consolidated herewith: George Peabody; Stephen Peabody, Jr., George Peabody, and Emma Peabody Abbett, Executors of the Will of Stephen Peabody, Deceased; and Stephen Peabody, Jr.↩
1. Internal Revenue Code.
SEC. 812. NET ESTATE.
For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate --
* * * *
(b) Expenses, Losses, Indebtedness, and Taxes. -- Such amounts --
* * * *
(2) for administration expenses,
(3) for claims against the estate, and
* * * *↩
as are allowed by the laws of the jurisdiction, whether within, or without the United States, under which the estate is being administered, but not including any income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate, succession, legacy, or inheritance taxes. * * *