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STANSBURY v. UNITED STATES

May 7, 1982

THOMAS A. STANSBURY, SUCCESSOR EXECUTOR OF THE ESTATE OF MARJORIE S. STEVENS, DECEASED, PLAINTIFF,
v.
THE UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Roszkowski, District Judge.

ORDER

Before the court are cross-motions for summary judgment brought by the parties in this federal estate tax refund case. For the reasons hereinafter stated, plaintiff's motion for summary judgment is granted; defendant's motion for summary judgment is denied.

For purposes of these motions, the facts are not in dispute. On April 4, 1934, Mary E. Stevens, a resident of Illinois, died intestate, leaving as her only heirs her children Delmar A. Stevens ("Delmar") and Elsie Stevens ("Elsie"). The assets of her estate included: (1) 692 shares of Chas. A. Stevens & Co. stock ("the Stevens stock"); (2) the Delmar Stock Farm in Crystal Lake, Illinois ("the farm"); and (3) a Chicago residence on South Shore Drive ("the Chicago residence"). Under Illinois intestate law, Elsie and Delmar were entitled to one-half each of the Stevens stock, the farm, and the Chicago residence. Delmar acted as administrator of the estate from April 24, 1934 until March 16, 1945.

On December 30, 1955 and May 1, 1956, respectively, in order to avoid the claims of his creditors, Delmar conveyed to his wife Marjorie without consideration title to the farm and 104 1/6 shares of the Stevens stock. Delmar died on March 5, 1959.

On March 21, 1969, the 104 1/6 shares of Stevens stock were exchanged for 2,440 shares of Series A Cumulative Convertible Preferred Stock of Hart, Schaffner & Marx ("the stock"). By a Trust Agreement dated March 25, 1971, Marjorie conveyed the stock and the farm to a revocable trust with Home State Bank of Crystal Lake as Trustee for the benefit of persons other than Elsie. Marjorie died on July 25, 1971 with the Trust Agreement still in effect. Both the stock and the farm were included in her gross estate for purposes of determining the federal estate tax due thereon.

On November 1, 1971, Elsie sought to recover the stock and the farm by filing a two-count complaint in the Circuit Court of McHenry County, Illinois against the trustee and beneficiaries of the trust in a cause entitled Stansbury v. Home State Bank of Crystal Lake, et al., No. 71-3089. Count I, as amended, alleged that a constructive trust arose as to the farm and the stock because Delmar breached his fiduciary duty to Elsie by making an unequal distribution of Mary Stevens' estate in February, 1945. Count II, as amended, alleged breach of an oral contract to make a will.

The Circuit Court granted defendants' motion to dismiss on the grounds that Count I was barred by the statute of limitations and that Count II failed to state a cause of action. On September 28, 1976, in Stansbury v. Home State Bank of Crystal Lake, 42 Ill. App.3d 58, 355 N.E.2d 613 (2d Dist. 1976), the Illinois Appellate Court reversed the dismissal and remanded the case to the Circuit Court. The Illinois Supreme Court denied defendants' petition for leave to appeal the Appellate Court's decision.

The case went to trial and, on December 28, 1977, the Circuit Court issued its Judgment Decree and Order in favor of Elsie on Count I and in favor of defendants on Count II. The Court found that, at the time of the events in question, a fiduciary relationship existed between Delmar and Elsie and that Delmar breached his duty as a fiduciary by engaging Elsie in a fraudulent transaction. Although the Court found for defendants on Count II of the complaint because of "technical rules of proof", the Court elected to impose a constructive trust on the entire farm and the stock and ordered the Home State Bank of Crystal Lake, as constructive trustee, to convey the farm and the stock to Elsie. Leave to appeal to the Appellate Court was filed and dismissed.

After final determination by the Circuit Court and the Appellate Court, the Successor Executor of Marjorie's estate pursued a previously filed claim for refund of the federal estate taxes paid on the farm and the stock. The instant action for refund of the taxes was filed when the Internal Revenue Service failed to grant plaintiff's claim.

Plaintiff, the Successor Executor of Marjorie's estate, claims that, at her death, Marjorie only owned naked legal title to the property in question. Because the Circuit Court found that Delmar and his successors held the property as constructive trustees for the benefit of Elsie, plaintiff contends that Delmar and his successors had no power to transfer the property to another. Thus, Elsie was at all times the beneficial owner of the property and it was improperly included in Marjorie's gross estate.

Although federal law determines which of the decedent's property interests shall be taxed, it is state law that determines the nature and extent of those interests. Morgan v. Commissioner, 309 U.S. 78, 80, 60 S.Ct. 424, 425, 84 L.Ed. 585 (1940). In the instant case, the Illinois Circuit Court has made a determination that, due to Delmar's breach of his fiduciary duty to Elsie, the property in question should be impressed with a constructive trust of which Elsie and her heirs are the beneficiaries.

In a federal estate tax controversy, this court is not bound by a state court determination of property interests where the United States was not a party to the proceeding. See, Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967). The Bosch Court did point out, however, that it is appropriate to give "proper regard" to the state court decree. Id. at ...


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