Opinion
Docket No. 12521.
1949-07-13
ESTATE OF CAROLYN J. CLEMENT, DECEASED, NORMAN P. CLEMENT, HAROLD T. CLEMENT, AND STUART H. CLEMENT, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Daniel G. Yorkey, Esq., for the petitioners. Thomas R. Charshee, Esq., for the respondent.
Where trustees of a testamentary trust made unauthorized loans totaling $202,500 from the trust corpus to the life beneficiary, and the beneficiary repaid only $163,500 of the advances during her life, held, upon the facts, that the trustees had a valid claim under local law to recover the balance of $39,000 from the life beneficiary's estate, which was deductible under section 812(b) of the Internal Revenue Code in computing her estate tax. Daniel G. Yorkey, Esq., for the petitioners. Thomas R. Charshee, Esq., for the respondent.
The executors of the estate of Carolyn J. Clement, deceased, (hereinafter referred to as petitioner) seek a redetermination of the deficiency determined by the respondent in her estate tax in the amount of $12,025.24. All but one of the issues raised by petitioner were settled by stipulation, to which effect will be given in the recomputation under Rule 50. The sole remaining question for our decision is whether petitioner was entitled, for the purpose of computing the estate tax, to deduct the sum of $39,000 as a valid claim against decedent's estate under section 812(b) of the Internal Revenue Code.
Part of the facts were stipulated and are so found.
FINDINGS of FACT.
This proceeding was brought by Norman P. Clement, Harold T. Clement, and Stuart H. Clement, as executors of the estate of Carolyn J. Clement, deceased. Decedent died on December 29, 1943, and her will was duly admitted to probate by the Surrogate's Court of Erie County, New York. The estate tax return for her estate was filed by petitioners with the collector of internal revenue for the twenty-eighth district of New York, at Buffalo.
Stephen M. Clement, husband of decedent, died testate on March 26, 1913. His last will was duly admitted to probate in the Surrogate's Court of Erie County, New York, on April 12, 1913. He established a trust for the residue of his estate by paragraph fourth of his will, which reads:
FOURTH: All the rest, residue and remainder of my property and estate, real, personal and mixed, of every name, nature and description, and wheresoever the same may be situated I give and bequeath unto my executors hereinafter named, in trust nevertheless for the following uses and purposes, to with: to invest and reinvest said property and each and every part thereof so often as may be necessary; to collect and receive the rents, issues, income and profits thereof and subject to the limitations hereinafter mentioned, to apply the net rents, issues, income and profits thereof to the use of my wife, Caroline Jewett Clement, so long as she shall live. From the income so given to my wife I desire that she shall provide in such manner as she shall deem best for the maintenance, care and education of each of our children who shall survive me, whether born before or after my decease, until said children shall severally attain the age of twenty-five (25) years. Her discretion in this regard shall be absolute and conclusive. As each such child shall, during the life of my said wife, attain the age of twenty-five(25) years, I direct my executors out of the residue of my property and estate so held in trust for my said wife, as hereinbefore provided, to pay to each such child the sum of One Hundred Fifty Thousand Dollars ($150,000), less, however, any advances made by me to such child during my lifetime, provided that my said wife shall deem it for the best interests of such child under all the then existing circumstances to make such payment. If my wife shall deem best, instead of making payment direct to each child, such sum may be paid to a trustee or trustees for the use of such child, and my wife shall have authority to prescribe the terms of the trust thereby created, provided such terms, having regard to the provisions of this instrument, be in accordance with the laws of the State of New York. During the life of my said wife I direct that my trustees shall, from time to time, if she shall deem it necessary for her support or comfortable maintenance, permit her to apply to her own use such part of the principal of such trust fund as she shall deem best thereby supplementing the income as she shall deem necessary and essential for her comfort, and my said trustees shall make payment to her or deliver property from such trust fund in accordance with the request of my said wife, and any portion of the principal of said trust fund so released to her under this provision shall be discharged from the terms of the trust hereby created.
In determining the amount of advances made by me to each of my said children, my executors and trustees shall consult and be bound by the entries of advances made in a small book kept by me for that purpose and which will be found with this will, and no interest shall be charged on any such advances.
In making payment to any or all of my children upon their respectively arriving at the age of twenty-five (25) years as hereinbefore provided, my executors may make such payment in securities or cash, or both, as they may determine, such securities to be taken, however, and received at the fair market value thereof, at the time of such transfer.
Upon the death of my wife, Caroline Jewett Clement, I direct that the principal sum then remaining in the hands of my trustees by the terms of this will, be divided into as many parts as I shall leave children her surviving, whether born before or after my death, including a part for the issue of any and every child then deceased and of whom issue shall be then surviving. To each of my children who shall have attained the age of twenty-five (25) years at the time of the decease of my said wife, subject to the provisions respecting my daughter or daughters hereinafter mentioned, I give, devise and bequeath one of such parts or portions. The remaining parts or portions shall be held in trust by my said trustees for the following uses and purposes, to wit: Each and every part or portion held for any child living at the time of the death of my said wife, not having attained the age of 25 years, shall be invested by my said trustees and they shall continue the investment thereof and apply the net income of the same so far as necessary to the support, maintenance and education of such child until such child shall have attained the age of twenty-one (21) years, if such child be a minor at the time of the decease of my said wife, and thereafter to apply the entire income and any accumulation of income to the use of such child until such child shall attain the age of twenty-five (25) years, when the part theretofore held in trust for the benefit of such child shall be distributed to such child. Each and every part held for the issue of any child or children who shall have died prior to the death of my said wife, shall be continued to be held in trust by my said trustees for the following uses and purposes, to wit: Each said part so held for the benefit of the issue of any deceased child shall be divided by my said trustees into as many parts as there shall be issue of such child entitled to take, and the income of each divisional share shall be applied by said trustees to the use of one of such issue as far as necessary for the support, maintenance and education of such beneficiary until such beneficiary shall reach the age of twenty-one (21) years, when the principal constituting such divisional share shall be distributed to such beneficiary. In case of the death of any issue of such deceased child after the death of my said wife, then the sum if any, held in trust for the person so dying shall be distributed to his or her heirs.
But notwithstanding anything herein contained and because of my desire to make special provisions for my daughter Marion and any other daughter who shall be born to me and shall survive my wife, and because of the many uncertainties to which a child of that sex is subject, I direct that any moneys distributed hereunder by way of principal to any daughter be not distributed to such daughter direct, but that it be set apart and held in trust for such daughter, and that the income derived therefrom until such daughter shall attain the age of twenty-one (21) years be applied so far as may be necessary for the support, maintenance and education of said daughter until said daughter shall attain the age of twenty-one (21) years, and that thereafter the entire income derived from the part so held for such daughter be applied to the use of such daughter in quarterly payments, so near as may be, so long as such daughter shall live. Provided, however, that at the request of any such daughter after she shall have attained the age of twenty-five (25) years, my said trustees shall pay over to her a sum not exceeding one-fourth of the funds then held in trust for such daughter, and the sum thus paid over shall be released from such trust. Upon the decease of such daughter, I direct that the principal sum then held by my trustees for her shall be distributed in such manner as such daughter shall by her last will and testament direct and appoint. In default of the exercise of such power of appointment I direct that it be distributed to the issue of such daughter, and if there be no such issue, then I direct that it be distributed to my heirs at law.
The trust created by Stephen M. Clement was at all times managed by Norman P. Clement, son of Carolyn Clement. He also handled his mother's business affairs under a power of attorney from her. During decedent's lifetime the trust paid her the income as provided under the will. The amount of money thus made available to her averaged approximately $68,000 a year until 1942, but in 1942 and 1943 she received only $52,450.31 and $40,323.48.
Carolyn Clement was also advanced a total of $202,500 from the corpus of the Stephen M. Clement trust from December 17, 1919 to October 30, 1939. These advances were requested, made, and used exclusively for charitable purposes. During the years from 1919-1943 decedent donated approximately $282,720.07 to charitable and educational institutions. At no time did she request payments from the trust corpus for her own living expenses or personal needs. It was Norman Clement's intent in advancing funds from the trust corpus to Carolyn Clement, and it was her intent in accepting them, that such advances be repaid out of the trust income she received. From April 19, 1920, to May 9, 1941, the decedent made twenty-three repayments to the Stephen M. Clement trust of such advances totaling $163,500. At the time of Carolyn Clement's death on December 29, 1943, the excess of the total of payments to decedent out of the trust corpus over the total of her repayments to the trust was $39,000. At all times she carried the balance of advances to her from the corpus over her repayments as an indebtedness on her accounts.
Statements in the annual accounts of the trustees from 1919 through 1938 describing payments of corpus to Carolyn Clement were as follows:
Account May 31, 1949, to May 31, 1920: ‘Advances to Carolyn J. Clement represents (sic) advances made as of May 31, 1920 against income.‘
Account May 31, 1920, to May 31, 1921: ‘Advances. These represent advances out of principal to Carolyn J. Clement to meet her needs * * *.‘
Account May 31, 1921, to May 31, 1922: ‘Advances. Additional advances out of Principal have been made to Mrs. Carolyn J. Clement as provided in the Will to meet her necessary expenses. * * *‘
Account May 31, 1922, to May 31, 1923: ‘Advances. Additional advances have been made out of Principal to Mrs. Carolyn J. Clement, as provided in the Will, to meet her necessary expenses.‘
Account May 21, 1923, to May 31, 1924. Schedule B— Property on hand, shows the following entry:
+---------------------------------------------+ ¦Advances ¦ ¦ +-----------------------------------+---------¦ ¦Carolyn J. Clement ¦ ¦ +-----------------------------------+---------¦ ¦Balance, as per previous accounting¦65,000.00¦ +---------------------------------------------+
Account May 31, 1924, to May 31, 1925: ‘Advances— Carolyn J. Clement. The amount shown in the last accounting was increased by $2,000.00 on August 8th, 1924.‘
Account May 31, 1925, to May 31, 1926: ‘Advances— Carolyn J. Clement. There has been no change in this item, but it is hoped that a reduction may be made during the coming year as Mrs. Clement's income increases through distributions received from the Estate's holdings of stock in the Genesee Properties, Inc.‘
Account May 31, 1926, to May 31, 1927: ‘Advances— Carolyn J. Clement. As indicated in our statement on this item, in the last accounting, Mrs. Clement was able, during the year, to pay to the Estate $21,500.00 on account of advances made to her in previous years, thereby reducing the total amount of advances made by the Estate to $45,500.00.‘
Account May 31, 1927, to May 31, 1928: ‘Advances— Carolyn J. Clement. Additional advances totaling $10,000.00 were made to Mrs. Clement during the year to enable her to meet extraordinary expenses of a capital nature.‘
Account May 31, 1928, to May 31, 1929. Schedule B— property on hand, carries forward the entry:
+--------------------------------------------------+ ¦Advances ¦ ¦ +---------------------------------------+----------¦ ¦Carolyn J. Clement ¦ ¦ +---------------------------------------+----------¦ ¦Balance due, as per previous accounting¦$55,500.00¦ +--------------------------------------------------+
Account May 31, 1929, to May 31, 1932: ‘Advances— Carolyn J. Clement. During the fiscal period the beneficiary, Carolyn J. Clement, made a net reduction of $5,500.00, reducing to $50,000.00 her indebtedness to the Estate.‘
Account May 31, 1932, to July 31, 1938: ‘Advances— Carolyn J. Clement. It should be noted with satisfaction that in spite of these trying years of depression the beneficiary has reduced her indebtedness to the Estate from $50,000.00 to $44,000.00.‘
Carolyn Clement's independent income was never significant in amount during the years in question. Her living expenses in the years prior to 1941 averaged approximately $40,000, but in that year she became ill and required the services of a nurse for the remainder of her life. On May 27, 1943, decedent released her power to invade the corpus of the Stephen M. Clement trust.
The trustees of the Stephen M. Clement trust never presented a formal claim against decedent's estate for the $39,000 balance owed by decedent at the time of her death. Pursuant to the decree of the Surrogate's Court of Erie County, New York, upon judicial settlement of the accounts of the surviving executors and trustees of the estate of Stephen M. Clement, the $39,000 claim was assigned to the remaindermen under the trust on January 30, 1948. In March 1948, when the executors of the estate of Carolyn Clement made an intermediate accounting, they requested a ruling on the validity of this claim against the estate. The Surrogate's Court of Erie County approved and allowed the claim as a valid debt owing by Carolyn Clement's estate and ordered payment thereof to the assignees. This claim was not contested.
In his notice of deficiency disallowing deduction by petitioner of the $39,000, the Commissioner stated in part:
It is held that the claim for deduction of $39,000.00, representing the alleged indebtedness of decedent to the Estate of Stephen M. Clement does not constitute an allowable deduction under the provisions of Section 812(b) of the Internal Revenue Code.
OPINION.
HILL, Judge:
Trustees of the testamentary trust of Stephen M. Clement made payments out of trust corpus totaling $202,500 to decedent, Carolyn J. Clement, during the years from 1919 through 1939. She in turn paid the trust a total of $163,500 over the period from 1920 through 1941. The sole question for our determination is whether the assignees of the surviving trustees of the Stephen M. Clement trust had a valid claim for the balance of $39,000 against decedent's estate which the latter might deduct under section 812(b) of the code in computing its estate tax. By the express language of this statute, in order for a claim against an estate to be deductible under section 812(b) it must be allowed by the laws of the jurisdiction under which the estate is being administered. In the instant case the law of New York controls the validity of the claim.
Respondent contends the surviving trustees had no valid claim against decedent's estate because the sums paid out of the trust corpus to decedent constituted authorized invasions of principal which decedent was in no way obligated ro repay. Petitioners, on the other hand, argue that all these payments were unauthorized loans of trust principal, and that the trustees had the right to recover the $39,000 balance of these advances from decedent's estate under New York law.
We agree with petitioners' contentions. The terms of the Stephen M. Clement trust negate the possibility that the total of $202,500 paid out of trust corpus to Carolyn Clement constituted authorized invasions of corpus. Respondent concedes that all payments to decedent from trust principal were used by her exclusively for charitable donations. Paragraph fourth of Stephen M. Clement's will, setting up the trust, does not expressly authorize the use of the trust res by Carolyn Clement for this purpose. But respondent argues that giving away money was a part of decedent's comfortable living, and thus that authority for these payments out of corpus to her may be implied from the language of paragraph fourth of the will empowering her to invade the trust corpus where necessary for her ‘comfortable maintenance.‘ We can not adopt such a strained construction of the language in paragraph fourth of the will. That paragraph expresses the trustor's intent to make adequate provision for his wife for her life, even to the point of invading principal if the income should prove insufficient for her to maintain her customary mode of living. Yet it is plain from the detailed provisions for the trust remaindermen that the testator also desired that the trust principal unneeded by his wife for this specific purpose pass to his children and their issue. Her power of invasion was not a blank check permitting her to use such funds to gratify her wish to make charitable gifts, but was merely added insurance that she herself would not want for the comforts of life.
Furthermore, respondent's interpretation of paragraph fourth is not sustained by the courts of New York, whose decisions are controlling in the construction of Stephen M. Clement's will. See Freuler v. Helvering, 291 U.S. 35; Blair v. Commissioner, 300 U.S. 5. In the case of In re Smith's Will, 11 N.Y.S.(2D) 945, 948, where a mother gave her daughter a life interest in her estate, with the right to invade the principal of the estate for her support and maintenance as in her sole discretion she deemed necessary, the court characterized her right to the principal in the following words:
* * * the right of use or consumption of the principal by the beneficiary is not absolute * * * the right to consume must be exercised fairly, honestly, and in good faith for the use and benefit of the beneficiary and in such manner as not in bad faith to divert the principal of the estate or portions thereof from the beneficiaries of the testatrix, and all within the limitations set forth in the will.
In Terry v. St. Stephen's Protestant Episcopal Church, 79 App.Div. 527; 81 N.Y.S. 119, the testator created a trust giving his wife the right to the income therefrom for life and the further right to use so much of the principal of the trust as she saw fit. Despite this broad language, the court held she had no power to set up a trust of the corpus for the purpose of giving it to a church. The court said in part, at page 121:
* * * The provisions for the widow were undoubtedly intended for her personal benefit during her life. I fail to find in the will any evidence of any intention on the part of the testator to constitute the widow the almoner of his bounty, or give her power to create a trust for that purpose. His limitation of her power to her lifetime is indicative of a contrary intention. He designed to fully provide for his wife, but he expected there would be a remainder at her death. * * *
See also In re Bullock's Estate, 54 N.Y.S.(2d) 33; In re Becker's Will, 31 N.Y.S.(2d) 482; and In re Wells' Will, 300 N.Y.S. 1075. Thus it is apparent that in the instant case the payments from trust corpus to decedent were not invasions of trust principal authorized by the terms of the trust.
The evidence convinces us that all the payments to Carolyn
Clement out of the corpus of the Stephen M. Clement trust constituted loans. Both the managing trustee, Norman P. Clement, and decedent at all times regarded the payments to her from trust corpus to be loans which she was under a duty to repay. Pursuant to such understanding, decedent actually repaid, and thereby restored to the trust corpus, such advances to the extent of $163,500 in twenty-three separate payments during the years from 1920 through 1941. The evidence does not support respondent's hypothesis that her payments to the trust were voluntary or, in effect, gifts from decedent to the trust.
We are not persuaded by respondent's arguments opposing the conclusion that the trustees loaned the $202,500 received by Carolyn Clement out of the trust corpus. While it is true that the language of the Stephen M. Clement trust does not expressly or impliedly authorize the trustees to make loans out of the trust res to decedent, yet this does not serve to overcome Norman P. Clement's express intent to lend his mother these sums from the trust corpus or her intent to receive them as loans. Norman P. Clement readily admitted that he was not authorized to do so under the terms of the trust, but he felt he could assume the responsibility because he was not only managing executor and trustee under Stephen Clement's will, but also he handled decedent's financial affairs under a power of attorney from her and was named as an executor in her will. He testified that he knew that, if the loans were not repaid in her lifetime, there were ample assets in her estate to make good the debt. Respondent correctly points out there were no notes or written agreements evidencing that the payments from corpus were loans, yet written evidence is not essential to the establishment of a valid loan. Respondent contends the release by Carolyn Clement of her power to invade the corpus of the trust in 1943 constitutes an admission that she had previously invaded it. We think that other and weightier evidence in the record negatives this conclusion. Clear evidence that during the last years of her life she continued to acknowledge her indebtedness to the trust for the balance of payments out of the trust principal to her offsets the fact she made no payments to the trust after 1941, though she lived until December 1943. This failure on her part is explained by the reduction in trust income and the added expenses of her illness during those two years which left her little, if any, funds after her personal needs were satisfied.
Respondent places special emphasis upon the trustees' descriptions of the payments from the trust res to Carolyn Clement in their accounts filed in 1921, 1922, and 1923 as indications that these sums were not loans. Respondent points out that in those records the payments are stated to be advances out of principal to meet decedent's necessary expenses or needs as provided in the will. It is true that the accounts referred to contain the language indicated, but, in our opinion, they are contradicted and outweighed by other evidence pointing to the conclusion that all the payments were loans. We note that in the years 1921, 1922, and 1923 Carolyn Clement paid the trust a total of $29,000, a strong indication that payments to her out of corpus in that period were loans. Respondent concedes that all funds decedent received from the trust res were used exclusively for charitable gifts and not for necessary expenses or to meet her personal needs, as stated in the early accounts. In later accounts the trustees noted that decedent had made reductions in her indebtedness to the trust on account of advances to her, thus denominating the transactions as loans. In later accounts they also computed the balance of her indebtedness based upon all prior payments of corpus to her and all her previous payments to the trust, thus showing that no distinction was intended between earlier and later payments to her out of trust corpus, but that all such advances were loans.
Thus we found as a fact that the total of $202,500 paid out of the trust corpus to decedent constituted loans by the trustees, notwithstanding the lack of authority therefor. It is clear that under New York law a trustee may recover unauthorized loans paid to a beneficiary out of trust principal, and, therefore, the surviving trustees of the Stephen M. Clement trust had a valid claim to recover the balance of $39,000 from Carolyn Clement. See Moss v. Cohen, 158 N.Y. 240; 53 N.E. 8; In re Jones' Estate, 280 N.Y.S. 521; In re Peters' Estate, 72 N.Y.S.(2d) 583, and Surrogate's Court Act, Sec. 267. The fact that the trustees never filed a formal claim for this account against decedent's estate did not prejudice their right of recovery. De Planter v. De Kryger, 190 N.Y.S. 861, 862, and O'Brien v. O'Brien, 16 N.Y.S.(2d) 799, 802. Actually the personal representatives of decedent were aware of her indebtedness to the Stephen M. Clement trust, for she carried the balance of payments from the trust corpus over her payments to the trust as a debt on her accounts at all times.
Respondent does not deny that such a right of recovery against Carolyn Clement would survive her and be enforceable against her estate or that there was a valid assignment of this claim by the surviving trustees to the remaindermen under the Stephen M. Clement trust. We therefore hold that the assignees of the surviving trustees had a valid claim against decedent's estate for $39,000, which was deductible in computing its Federal estate tax under section 812(b) of the code.
Decision will be entered under Rule 50.