Michigan Trust Co. v. Commissioner

*24 This proceeding is for the redetermination of deficiencies in income taxes of $12,355.80 for the years 1920 and 1922. At the hearing *25 petitioner waived that portion of its petition contesting a March 1, 1913, value of certain assets, leaving as the only issue the validity of an alleged gift made in 1920 by Charles P. Limbert to his sister, Clara T. Limbert. Petitioner computes the amount in controversy as the result of that issue to be $4,307.09, all in the year 1922.

FINDINGS OF FACT.

For many years prior to 1920 Charles P. Limbert had been the dominating spirit and controlling stockholder in the Charles P. Limbert Co. located at Holland, Mich., and Grand Rapids, Mich. On December 27, 1920, the directors of the Charles P. Limbert Co. declared a stock dividend of 50 per cent. Before the declaration of such dividend, Mr. Limbert's stockholding was 2,020 shares of the par value of $100 each, *2689 a total of $202,000. His share of the stock dividend was 1,010 shares of the par value of $101,000. He desired to make a gift of this dividend stock to his sister, Clara T. Limbert, and before the dividend stock was issued, he directed the corporation to issue the certificate to her, and on December 28, 1920 the stock certificate was so issued to Clara T. Limbert for 1,010 shares direct to her and never was issued or stood in the name of Charles P. Limbert. At all times thereafter, Clara T. Limbert appeared as the owner of this stock throughout the corporate proceedings until both she and her brother disposed of their stockholdings and retired from the company.

Instances of the manner in which the stock was held follow: On January 26, 1921, at the annual stockholders' meeting, Mr. Limbert was recorded as having only 2,020 shares, his original holding. The same is true of a meeting held on May 10, 1921, to which date the annual meeting was adjourned. On January 25, 1922, at the annual meeting, neither Charles P. Limbert nor Clara T. Limbert was present in person. Each had given a proxy to John P. Homiller, an officer and stockholder of the company and a close personal friend*2690 of both. The record shows that John P. Homiller appeared as proxy for Charles P. Limbert, representing 2,020 shares, and as proxy for Clara T. Limbert, representing 1,010 shares. The proxy of Clara T. Limbert is pasted in the record book of the company and bears her personal signature.

In the summer of 1922, negotiations were begun looking toward the sale and exchange of the stock held by Charles P. Limbert, Clara T. Limbert, and John P. Homiller. These negotiations ran through a period of some weeks and throughout the negotiations and sale Clara T. Limbert consistently appeared as the owner of 1,010 shares, being represented by John P. Homiller, to whom she had given a power of attorney. In the negotiations it was contemplated, and *26 ultimately arranged, that Charles P. Limbert, Clara T. Limbert, and John P. Homiller should sell part of their stock for cash and exchange a part of it for securities. To carry out this plan, and while the negotiations were pending, a new certificate dated August 3, 1922, was issued to Charles P. Limbert, Clara T. Limbert, and John P. Homiller, jointly, for 2,780 shares of stock, being the part which was expected to be sold for cash. *2691 Clara T. Limbert personally endorsed the stock certificate for 1,010 shares, which she had previously held, and delivered it to her attorney-in-fact, John P. Homiller, who turned it in to the company.

On September 25, 1922, another certificate for 1,000 shares was issued to the same three persons jointly, representing the part of the stock for which they were to receive securities. These two reissued certificates represented the combined holdings of all three individuals.

The new certificates were signed by Charles P. Limbert as president of the company, and by John P. Homiller as assistant secretary. At the time of the sale and exchange they were endorsed by Charles P. Limbert and John P. Homiller on their own behalf, and by John P. Homiller as attorney for Clara T. Limbert.

On September 22, 1922, a formal contract was entered into between Charles P. Limbert, Clara T. Limbert, and John P. Homiller on the one part, and the purchasers on the other part, for the sale and purchase of 2,780 shares at $155 per share, cash to be paid within 30 days.

A separate contract was entered into on the same day for the disposition of 1,000 shares at the same price to be received in*2692 securities. These contracts stated the number of shares held by each of the parties including the 1,010 shares held by Clara T. Limbert.

The deal was closed and the consideration paid on or about October 6, 1922, John P. Homiller receiving his share of the proceeds and the share of Clara T. Limbert as her representative. The proceeds were apportioned between Charles P. Limbert, Clara T. Limbert, and John P. Homiller according to the number of shares held by each, giving full credit to Clara T. Limbert for the 1,010 shares given her by her brother.

For many years Charles P. Limbert and Clara T. Limbert were the only surviving members of their family. Both were unmarried and lived together at a home in Grand Rapids owned by Clara T. Limbert. This home was a property of considerable size, including about 10 acres of ground, a large residence, greenhouses, boathouses, and tenants' houses, etc. Several persons were employed in and about the house and on the grounds. Clara T. Limbert operated greenhouses on the property for her own pleasure at the expense of several thousands of dollars per year. Several times prior to the *27 year 1920 her brother had stated to her, *2693 and to John P. Homiller, a close family friend, that he desired to provide an independent income for her. At the time of the gift of the stock dividend in 1920, no sale of the stock or business was in contemplation, nor was there any other reason for the making of the gift, except that he desired his sister to have the stock.

No dividends were paid on the stock of the Charles P. Limbert Co. after the date of the gift in 1920 until about January 25, 1922, at which time a dividend of 6 per cent was declared, of which Clara T. Limbert's share was $6,060. At the time this dividend was declared Charles P. Limbert and Clara T. Limbert were in Honolulu and had arranged, before they left, that John P. Homiller, their friend and associate, should represent them in their absence and each gave a power of attorney to that effect. It was also arranged that Charles P. Limbert would draw against his account in the Old National Bank at Grand Rapids for expenses while on the trip and that any dividends declared in their absence should be placed in that account so as to be available for their joint expenses. It was also arranged that John P. Homiller should pay out of this account the necessary*2694 expenditures at the home, which, as above stated, was owned by Clara T. Limbert. Early in February Charles P. Limbert was taken seriously ill in Honolulu, and his sister cabled to have funds placed in her personal account at the Grand Rapids National Bank. Accordingly, Mr. Homiller checked $5,000 out of Charles P. Limbert's account at the Old National Bank and deposited it to the credit of Clara T. Limbert in a checking account at the Grand Rapids National Bank. She, personally, checked it out from time to time as she needed it.

On May 6, 1922, while Charles P. Limbert was still absent from Grand Rapids, a dividend of 5 per cent was declared on the stock. The dividends on the 2,020 shares standing in the name of Charles P. Limbert, and on the 1,010 shares standing in the name of Clara T. Limbert, were both placed in the bank account of Charles P. Limbert at the Old National Bank. During all of this time John P. Homiller was checking out of such account substantial amounts in payment of Clara T. Limbert's personal accounts. In addition to such substantial amounts, John P. Homiller, on May 6, 1922, checked out of the account of Charles P. Limbert a sum of approximately $10,000*2695 to pay off a mortgage outstanding against the residence owned by Clara T. Limbert, it having been arranged before the departure of the brother and sister that this should be done if the consent of the mortgagee to such payment could be procured.

After the sale in October, 1922, Charles P. Limbert took steps to further provide for his sister, Clara T. Limbert, by making preliminary *28 arrangements toward a trust fund designed to pay her an income of at least $1,000 a month. Accordingly, he suggested that the money and securities, amounting to $156,550, realized from the sale and exchange of the 1,010 shares held in her name, be placed in a permanent trust fund together with further securities to be added by him and deposited with the Michigan Trust Co. for her sole benefit. Securities were selected to the amount of about $290,000 and placed in the hands of the Michigan Trust Co. under a temporary written agreement which provided that the trust company should pay the entire net income therefrom to Clara T. Limbert, and that in case of her death, the whole fund should go to her legatees or, in default of a will, to her heirs at law. The agreement also provided that it should*2696 be subject to termination on 30 days' notice by either party. Philip H. Travis, Esq., who was the attorney and counsel for Charles P. Limbert and his sister, was in Europe at the time and it was decided that the matter should thus rest in temporary form until his return, when the matter could be put in permanent form. Philip H. Travis returned in June, 1923, and discussed the matter with the brother and sister, but during the discussion and before any final decision was reached, Charles P. Limbert died on July 12, 1923. He left a will in which he gave everything to his sister, Clara T. Limbert, and appointed the Michigan Trust Co. and John P. Homiller as executors. Both executors qualified but all of the details of handling the estate were left to the Michigan Trust Co.

During the existence of the temporary trust agreement above mentioned, the Michigan Trust Co. had been paying Clara T. Limbert the sum of $1,000 a month. Shortly after Charles P. Limbert's death, it was arranged that these payments would continue.

The inventory of the estate of Charles P. Limbert was prepared by an assistant secretary of the Michigan Trust Co. who had no personal knowledge of or connection*2697 with the creation of the temporary trust of October, 1922. In preparing the inventory of the estate, this individual assumed that the securities in the possession of the Michigan Trust Co. making up the $290,000, all belonged to the estate of Charles P. Limbert. This individual also included such amount in the Federal estate-tax return. John P. Homiller, the coexecutor, had nothing to do with the preparation of either the inventory or the return and did not know that the proceeds from the sale and exchange of the stock standing in the name of Clara T. Limbert had been included in either the inventory or the estate of Charles P. Limbert for purposes of the Federal estate-tax return.

The transfer of 1,010 shares of the stock of the Charles P. Limbert Co. by Charles P. Limbert to his sister, Clara T. Limbert, in December, 1920, was a valid, bona fide and completed gift on that date and passed to her a complete title in such stock.

*29 OPINION.

SIEFKIN: At the hearing petitioner waived its contention as to the March 1, 1913, value allowed by the Commissioner for the stock in the Charles P. Limbert Co. The only issue remaining is as to the validity of the transfer of*2698 December, 1920. The respondent contends that the circumstances tending to show the gift was not bona fide are: (1) That the proceeds from the sale of the stock went to Charles P. Limbert and not to Clara T. Limbert; (2) that such proceeds were not received by Clara T. Limbert until after the death of her brother and were then received by her as his heir; (3) that the proceeds from the sale of the stock were included in the inventory of the estate in the probate proceedings and in the estate-tax return to the Federal Government; (4) that the amount of such proceeds was included in an attempted trust which Charles Limbert purported to create for the benefit of his sister at or about the time of the sale of the stock.

As to the first and second points, it is our opinion that the evidence shows clearly that the proceeds of the sale became the separate property of Clara T. Limbert. As to the third point, the inventory and estate-tax return were made by a minor officer of the Michigan Trust Co. who had no knowledge of the conditions under which the proceeds of the sale were received or were dealt with in October, 1922, and that when the matter was discovered by persons cognizant*2699 of the facts and authorized to act for the estate, steps were taken to correct the mistake. The fourth contention is based upon facts which, in our opinion, instead of showing that the brother considered the proceeds as his own, tend to show that he intended his sister to have such property absolutely.

Clara T. Limbert, the only living relative of Charles P. Limbert, was the natural object of his bounty, and we are fully convinced from the testimony of the witnesses who appeared at the trial, and from the circumstances surrounding all of the transactions in question, that the gift to the sister was a valid one.

Judgment will be entered on 15 days' notice, under Rule 50.

Considered by TRAMMELL, MORRIS, and MURDOCK.