Before MAJOR, FINNEGAN and SWAIM, Circuit Judges.
This is an action for an estate tax refund brought by the "executor" of the estate of Eva Maxson Smith. A judgment was entered in favor of the plaintiff-taxpayer whereupon the Government prosecuted this appeal.
On December 31, 1934, the following agreement was entered into between Eva Maxson Smith (hereinafter referred to as the decedent) who was then a resident of the City of Auburn, New York, and her daughter, Jane Smith Greene:
"This Agreement made the 31st day of December 1934, between Eva Maxson Smith of the city of Auburn, County of Cayuga, State of New York, party of the first part, and Jane Smith Greene of Aurora, State of Illinois, party of the second part, Witnesseth:
"That Whereas, Eva Maxson Smith is the owner of the following chattels or items of personal property consisting of bonds, stocks, mortgages and cash as are more fully described and set forth in Schedule 'A' attached hereto, and
"Whereas, she is desirous of conveying and transferring the same to Jane Smith Greene, for a good and valuable consideration,
"Now, therefore, it is hereby agreed between the parties hereto that the said Eva Maxson Smith, for a good and valuable consideration hereinafter described, will and she hereby does transfer and convey all of the above described chattels to the said Jane Smith Greene, to be hers absolutely and in consideration of such transfer to her of said above described personal property, the said Jane Smith Greene agrees and contracts with the said Eva Maxson Smith party of the first part that she will manage and care for said above described property to the best of her ability and when deemed best, sell and reinvest said personal property. That she will manage and care for said property and any substitutions therefor to the best of her ability and collect, and care for the interest, dividends and any and all income received therefrom as the same shall become due and pay and deliver over the said interest, dividends and any and all income from said stocks, bonds and mortgages or from any securities substituted therefor and the interest on any uninvested cash there may be resulting therefrom, less the necessary and legal expenses or taxes that may be connected with the management thereof, to the said Eva Maxson Smith monthly during the period of her life. The date of said first payment shall be one month from the date of this instrument and monthly thereafter. And it is further
"Agreed and Contracted between the parties hereto that if the total yearly income from said above described personal property, less expenses, etc., for any yearly period shall not amount to the sum of $1500.00, that in that event the party of the second part, Jane Smith Greene, shall pay to the said Eva Maxson Smith, party of the first part, on the date of the last monthly payment of any said year, a sufficient sum of money (in addition to said income as aforesaid) to make the yearly income for said year equal to the sum of $1500.00.
"The stipulations and agreements herein are to apply to and bind the heirs, executors, administrators, successors, and assigns of the respective parties."
Pursuant to the contract, decedent transferred and delivered to Jane Smith Greene securities and cash having a value as of the contract date of $48,265.15.
On December 31, 1934, an identical contract was entered into between the decedent and Georgia H. Saunders, another daughter of decedent. Securities and cash having a value as of that date of $48,262.17 were transferred and delivered by decedent to Mrs. Saunders.
The respective securities which were transferred to Mrs. Greene and Mrs. Saunders, the only children of decedent, comprised practically all (95%) of decedent's assets.
On March 13, 1935, the decedent filed a federal gift tax return for the year 1934 in which she set forth the contracts with her daughters. In determining the gift tax payable decedent deducted the value of the income interest reserved by her (computed on the basis of her life expectancy) from the total value of the securities and cash ...