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District Court of Appeal, First District, Division 2, California.


Civ. 12629.

Decided: May 04, 1944

Raymond G. La Noue, Inheritance Tax Atty., of Sacramento, and Arthur W. Brouillet, Deputy Inheritance Tax Atty., and Richard C. O'Connor, Asst. Deputy Inheritance Tax Atty., both of San Francisco, for appellant. Pillsbury, Madison & Sutro, of San Francisco, for respondents.

This is an appeal by the State Controller from a judgment fixing inheritance tax. Madison, an eminent lawyer, died July 30, 1941. In August 1935, decedent had created three trusts, one for each of his three children, each with a principal of about $100,000. Each of the trusts for the two daughters provided that the income was to be paid to the daughter–beneficiary during the life of the trustor. At his death, the trusts were to terminate and the corpora to be delivered to the beneficiaries. During the trustor's lifetime an amount not to exceed $50,000, plus one–half of any addition to the corpora, could be paid to the beneficiaries with the consent of the trustee. Considerable sums had thus been paid to each of the daughters prior to trustor's death. The son's trust was similar except that the income was accumulated. No amounts were paid to the son from the corpus. The trustor was trustee of the son's trust; the son was trustee of the other two trusts. Each trust contained spendthrift provisions. The declarations contained no reservations or restrictions of any kind or nature in favor of the trustor. Except as may be herein noted, each declaration was substantially in the same form as each of the other two.

The declaration in favor of the decedent's son, in so far as the contentions made by the respective parties, among others contained the following provisions:

“This indenture of trust, dated the 19th day of August, 1935, by and between Frank D. Madison, of the County of Marin, State of California, first party (hereinafter called Trustor), and said Frank D. Madison, second party (hereinafter called Trustee), Witnesseth:

“That the Trustor hereby transfers, assigns and delivers to the Trustee, and the Trustee hereby acknowledges the receipt of, the following personal property: (Naming numerous stocks and bonds) but in trust, however, for the following uses and purposes:

“This trust shall continue during the lifetime of the Trustor and, during the continuance thereof, the Trustee shall collect all the income, gains, issues and profits (hereinafter referred to as income) of the trust property, and such income shall be accumulated and added to the trust property during the lifetime of the Trustor's son, Marshall P. Madison beneficiary hereunder, and, upon his death, all of the income received thereafter shall be paid by said Trustee to those whom said Marshall P. Madison may have designated to take said income by his last will and testament, and any portion not so disposed of shall be paid by the Trustee to the children of said Marshall P. Madison in equal shares and their heirs.

“Upon the death of the Trustor, the trust hereby created shall cease and terminate, and all of the trust property shall go to and vest in the said Marshall P. Madison, if he shall survive the Trustor, but, if he shall predecease the Trustor, then upon the death of the latter all of the trust property shall go to and vest in those whom said Marshall P. Madison may have designated to take said trust property by his last will and testament, and any portion not so disposed of shall go to and vest in his children in equal shares and their heirs.

“The interest or interests of the beneficiaries of the trust herein provided for shall not be assignable, and/or shall not be subject to the claims of their creditors or of the creditors of any of them; said trust being hereby created with the intent and upon the condition that the income and benefits thereof shall be personally and exclusively enjoyed by the respective beneficiaries hereinabove named to receive the same.

“The Trustee hereunder shall have full power and authority to hold, manage, and control the trust estate herein provided for, and to receive the income, gains, issues and profits thereof; to sell, exchange or otherwise dispose of all or any part of the real or personal property of such trust estate for such consideration and upon such terms and conditions as said Trustee may, in his discretion, deem proper; and to invest and reinvest the trust property and the proceeds of any sales of the trust property, and all moneys or other property which shall come into the hands of said Trustee, as consideration or in exchange for the trust estate originally delivered to said Trustee, or any part thereof, shall become a part of the trust estate the same as if originally included therein. * * *

“This indenture and the trust and the estate and interests in property hereby created may not be amended or altered in any manner or way or to any extent or revoked, in whole or in part, by the Trustor, either alone or in conjunction with any other person, firm or corporation. * * *

“In the case of the inability or unwillingness of the said Frank D. Madison to act as Trustee hereunder, then the said Marshall P. Madison shall have the right to name and appoint his successor as Trustee.

“Said Frank D. Madison, Trustee hereunder, hereby accepts the trust hereby created and agrees to carry out the trust in accordance with the foregoing provisions.

“In witness whereof, as of the day and year first hereinabove written, the parties hereto have hereunto subscribed their names, respectively.

“F. D. Madison Trustor

“F. D. Madison Trustee”

At the time the declarations of trust were delivered, the securities mentioned therein were also delivered.

In a letter dated August 22, 1935, the decedent stated to his son Marshall his intentions in making said trust. He also stated that he was at that time in good health and had been for some months. The record is not clear whether said letter was admitted in evidence, however Mr. Madison took the stand as a witness and testified to the same facts. No witness was called to contradict him, in fact he was the only witness called. In giving his testimony Mr. Madison also adverted to a conversation he had with his father regarding the burden of tax paying: “He was speaking, or I might almost say complaining of the fact of the ever increasing income taxes, which were becoming larger and larger every year, and he was particularly speaking of the fact that a certain portion of his income upon which he was required to pay a very large tax was being turned over by him to my sisters, and he was thinking if there wouldn't be some way in which this tax––he could be relieved of the burden of the tax. * * * I suggested to him the possibility of getting up a trust and transferring to a trustee a substantial block of securities so that the income would go directly to my sisters, and would not go to my father, and this way his income burden could be relieved.” Later the decedent adopted the plan suggested by the witness.

After the declarations were delivered the trustee pursuant to the terms of the trust paid to one of the beneficiaries, Mrs. Baker, 20% of the amount of her trust, and paid to Mrs. Martin, another beneficiary, 30% of the amount of her trust.

The applicable provisions of the California Inheritance Tax Act (Stats.1935 p. 1266) are:

“Sec. 2. A tax shall be and is hereby imposed upon the transfer of any property, real or personal, or of any interest therein or income therefrom, in trust or otherwise, to persons, * * * said taxes to be upon the market value of such property at the date of death of the decedent * * * in the following cases: * * *

“(a) In contemplation of the death of the grantor, vendor, assignor or donor, or,

“(b) Intended to take effect in possession or enjoyment at or after such death, or in which a life income or interest is reserved by the grantor, either expressly or impliedly, or by the grantee promising to make payments to or care for the grantor.”

The appellant contends (1) that the transfers were intended to take effect in possession or enjoyment at the trustor's death; (2) that the evidence is conclusive that the transfers were made in contemplation of death. The respondents reply that both are questions of fact and that on the evidence before it the trial court made findings of fact in favor of respondents and against the appellant. Respondents call attention to Finding VI which in part is as follows: “That on August 19, 1935, at the time said trusts were created, the decedent was in good health, suffering from no sickness or physical disability of any kind, was actively engaged in the practice of the law, and spent a good portion of his recreational moments in the very vigorous sport of steelhead fishing on the Rogue River in Oregon.” They also call attention to Finding VIII, which in part provides as follows: “That the statement contained in Article V of said Report of Inheritance Tax Appraiser that decedent made certain transfers in trust ‘in contemplation of his death, and with the intent on the decedent's part that such transfers take effect in possession and/or enjoyment at or after his death’ is untrue, and said statement and each part of it conjunctively and disjunctively is untrue, and it is also untrue ‘that under the terms of each trust it was possible, during the decedent's lifetime, that the assets thereof would revert to the decedent's sole ownership.’ ” They also call attention to Finding IX, which is as follows: “That said trusts hereinabove referred to in the preceding paragraphs V, VI, VII, and VIII of these findings were not created with the intent on the decedent's part that such transfers would take effect in possession or enjoyment at or after his death but, on the contrary, the decedent executed said trusts and made the transfers necessary to create the same with the intention that said transfers take effect in possession and enjoyment immediately, and at the time of said transfers, towit, on the 19th day of August, 1935.”

We think the respective contentions of the appellant are not sound and that the replies of the respondents are sound for the following reasons. The appellant claims said findings are not supported by the evidence and that the record presents only questions of law. In that connection he asserts that the “transfer” contemplated by the statute was the combination of facts arising upon the death of the trustor which operated to terminate the trusts––that then and not till then was a “transfer” made. That assertion is made in the teeth of the proof by making the additional claim that the proof on which said findings were made was so improbable as not to constitute any proof and that this court is bound to so hold and to ignore the findings of the trial court. It will be freely granted that in some cases a court of review may have a record before it in which the court can say that the proof is so improbable that a court will disregard it but the record before us is by no means such a record. No such vulnerable evidence is specifically quoted. We have found none. The record shows that the declaration uses the word “transfer” and recites facts showing it was a transfer. Each declaration showed on its face that the trustor did at that time pass to the trustees named for the respective beneficiaries the documents evidencing the properties named in said respective declarations and that from the instant of the delivery of said declarations the trustor, as such, parted with all his title thereto. The statute above quoted imposes a tax on “succession”. In re Estate of Rath, 10 Cal.2d 399, 405, 75 P.2d 509, 115 A.L.R. 836. In applying the statute the question at once turns on when did the succession occur? Manifestly in the instant case it occurred when the trustor parted with his title, that is, when he delivered the declarations of trust and the properties therein enumerated. Hunt v. Wicht, 174 Cal. 205, 208, 162 P. 639, L.R.A. 1917C, 961.

The appellant's allegations that the transfers dated August 19, 1935, were made (1) in contemplation of death, and (2) were intended to take effect in possession and enjoyment at or after the death of the trustor were negatived by the findings. But the appellant claims the evidence was “improbable”, and should be disregarded and that the trial court should have so found. Mr. Marshall Madison was the only witness who testified as to the decedent's intentions or motives. His testimony was clear, direct and positive. He was the son, partner, and companion of the trustor. The record shows no facts warranting any court in holding that the testimony of the witness was improbable and not worthy of belief. In this connection the appellant shows that there were two possible inferences involved––one in favor of the holding of the trial court and one against such holding. The appellant contends this court should draw its own inference on those facts, substitute its inference in the place of the inference adopted by the trial court, and hold otherwise. It may not do so. When conflicting inferences exist, it is the function of the trier of the facts, in this instance the trial court, to determine which inference is to be adopted. Spreckels v. State, 30 Cal.App. 363, 379, 158 P. 549; Reay v. Butler, 95 Cal. 206, 214, 30 P. 208; Dallman v. Frank, 1 Cal.App. 541, 82 P. 564; Huston v. Anderson, 145 Cal. 320, 78 P. 626. There is an abundance of evidence to the effect that the declarations of trust were not made in contemplation of death. The phrase “in contemplation of the death of the grantor, * * *” Stats.1935, p. 1266, sec. 2, sub. (3), par. (a), has been clearly defined. In Spreckels v. State of California, 30 Cal.App. 363, 369, 158 P. 549, 551, the court said: “A reasonable and just view of the law in question is that it is only where the transfer of property by gift is immediately and directly prompted by the expectation of death that the property so transferred becomes amenable to the burden. Or, as counsel for the respondents with singular aptness states the proposition: ‘It is only when contemplation of death is the motive without which the conveyance would not be made that a transfer may be subjected to the tax.’ That is, the expectation of death must be the direct, specific, and immediate animating cause of the transfer.” Clearly the facts hereinabove set forth do not bring the instant case within said rule.

As to the claim that the transfers were intended to take effect in possession or enjoyment at the date of the trustor's death, the appellant's case is still weaker. As shown above the transfers took effect from the date they were delivered. Thereafter the trustor retained no rights whatsoever. The corpus was held by the trustee as the agent of the beneficiaries. Being in writing the declarations show on their face that the trustor made no reservation and delivered the declarations with the intention that they should take effect in possession and enjoyment immediately. The declarations were so interpreted by all of the parties. During the life of the trustor one daughter was paid 20% of her trust fund and the other daughter was paid 30% of her trust fund. Moreover the share of the son was, during that period, duly accumulated according to the terms of the declaration made in his favor.

In closing the appellant states: “If the stamp of nontaxability is put on this type of transfer, the door is opened to widespread tax evasion. A man can transfer a large estate to a friendly trustee––say to his son––under the same trust provisions as those here; the beneficiaries being all of the donor's children. No legal or enforcible obligation is laid on the latter, beneficiaries or trustees, to make any reciprocal provision for the donor–father during his life.” In effect the contention of the appellant is that unless gifts inter vivos are taxed, there is danger of fraud being committed against the state. That contention should have been addressed to the legislature. But in 1935 we had no statute imposing taxes on mere gifts.

The judgment appealed from is affirmed.


NOURSE, P. J., and SPENCE, J., concur.