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