The opinion of the court was delivered by: HARTSHORNE
This is a suit for refund of Federal Estate taxes which plaintiffs were compelled to pay defendant. Defendant, after answer filed, moves for summary judgment, claiming that the pleadings and affidavits filed 'show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.' Fed. Rules Civ. Proc. rule 56, 28 U.S.C.A.
In outline, the undisputed facts are that decedent Samuel Rachles, on January 12, 1943, executed a trust agreement, in which he was known as the Trustor, to his son, Daniel Rachles, known therein as the Trustee, of a certain bond and mortgage, previously made by S. Rachles, Incorporated, a corporation, covering property in Passaic, New Jersey. This property had previously been owned by the Trustor, but had been deeded to the corporation, in part consideration of which the corporation had given the Trustor the above $ 22,000 purchase money mortgage. Meanwhile, the Trustor and his wife, who owned most of the stock of the corporation, had given this stock to their son, Daniel, the above Trustee. The trust agreement had, as its cestuis que trustent, the father, the Trustor, and certain children or other members of the family, obviously a family arrangement.
The Trustor father died April 5, 1945, and upon the audit of the estate by the Federal tax authorities, the above $ 22,000 mortgage, trusteed by the above agreement, copy of which is attached to the complaint, was included as a part of the estate, a deficiency determined, demanded, and paid the defendant, Collector of Internal Revenue, by plaintiffs.
Whether the refund sought by plaintiffs is due them, thus depends first, upon the pertinent terms of the Federal Estate Tax Act, 26 U.S.C.A. § 811(c), the second, primarily upon the terms of the above trust agreement, which alone took it out of decedent's estate, as claimed by plaintiffs.
The Estate Tax Act so far as pertinent on the present motion, imposes a tax, in substance, on property interests transferred by a decedent 'by trust or otherwise * * * under which he (decedent) has retained * * * the right to the income from, the property * * * for his life or * * * for any period which does not in fact end before his death'. Sec. 811(c)(1).
We turn to the trust agreement, attached to the complaint, Exhibit A. Paragraph 4 of the agreement provides:
'Notwithstanding the assignment of said bond and mortgage, the Trustor shall have the exclusive right during his lifetime to the interest due or to grow due on the indebtedness in said bond and mortgage referred to, to demand, collect, reduce or waive the same in his sole discretion. Any interest on said mortgage indebtedness, which shall be unpaid at the time of the decease of the Trustor, shall be cancelled and the Trustor hereby waives any right thereto and hereby expressly directs the Trustee to cancel the same.'
No language could more clearly preserve to the Trustor in the words of the statute, 'for his life * * * the right to the income from, the property'.
Paragraph 3 of the agreement provides:
'The Trustee shall have the right, in his sole discretion, to release any portion of the lands and premises from the lien of said mortgage upon payment to him of the reasonable value of the portion of the lands and premises so released. The payment so received shall be distributed among those entitled thereto in the proportions hereinafter set forth.'
Plaintiffs claim that the Trustee may accordingly receive payment of the mortgage and distribute such payment, thus terminating the trust, this possibly occurring before decedent's death. Plaintiffs then refer to the distribution clause of the agreement, Paragraph 7. This provides: 'The Trustee shall distribute the proceeds of the said bond and mortgage and the interest to accrue thereon after the decease of the Trustor, among * * *' certain children, or other members of the family.
But in the first place, the undisputed facts are that no such contingency occurred. The mortgage was never paid off by the mortgagor to the trustee. So, even if we disregard entirely the above reservation in Paragraph 4 of the agreement to the Trustor, of the exclusive right to the interest 'during his lifetime', we have a situation where the decedent still had the right to the income from the mortgage at the time of his death. Thus, the mortgage was taxable, under the very words of the statute, since the Trustor had the right to the income from the property for a 'period which does not in fact end before his death.' The period, of the existence of the mortgage before its payment, in fact continued till after decedent's death. It is the facts as they existed at the time of death to which this clause refers, according to the legislative history of the Act. Committee Reports 1932, amended House Report 708, 72nd Congress, 1st Session, Age 46-7. For this reason, mere contingencies which never occur are to be disregarded in applying the Act. Goldstone v. United States, 1945, 325 U.S. 687, 693, 65 S. Ct. 1323, 89 L. Ed. 1871.
Since this contingency as to the paying off of the mortgage is to be disregarded, it is quite immaterial whether plaintiffs' interpretation of this contingency is correct in the light of the extrinsic evidence which he claims he can introduce, i.e., that there paid off mortgage proceeds should be distributed immediately to the other beneficiaries than the Trustor, or whether, on the other hand, the defendant's interpretation of same is correct, to wit, that the trust continues as to such proceeds, and that same are not distributable till the death of the Trustor. For, in either event, the contingency never occurred. Indeed, it might ...