Opinion
Docket No. 21133.
1950-08-24
ESTATE OF CYRUS M. BEACHY, JOHN D. McEWEN, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
W. A. Kahrs, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent.
Held, as determined by the Supreme Court of the State of Kansas, in McEwen v. Enoch, 167 Kan. 119, 204 P.2d 736, the trust involved was void because it violated the rule against perpetuities and the gifts to decedent's grandchildren were accelerated. Also, held, the gifts in question were not made in contemplation of death. W. A. Kahrs, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent.
The respondent determined a deficiency in estate tax in the amount of $68,461.59. Certain adjustments made by the respondent are not contested. The question is whether respondent erred in including the corpus of the Cyrus M. Beachy Trust No. 1 of a value of $74,084.80 in decedent's gross estate for estate tax purposes. A second issue raised by the pleadings has been conceded by the respondent.
FINDINGS OF FACT.
Cyrus M. Beachy, also known as C. M. Beachy, and sometimes hereinafter referred to as decedent, was born November 12, 1862. He died suddenly from a heart attack on February 18, 1945, at the age of 82. The estate tax return for the estate was filed with the collector of internal revenue for the district of Kansas.
On November 11, 1939, at the age of 76, decedent, a resident of Sedgwick County, Kansas, created the Cyrus M. Beachy Trust No. 1 by executing a written trust agreement as grantor and as trustee. During his lifetime the decedent transferred to the trust the following property which he reported as gifts and paid the gift tax thereon:
+---------------------------------------------------------------------+ ¦Date of ¦Description of transfer ¦Value of ¦ +--------+--------------------------------------------------+---------¦ ¦transfer¦ ¦transfer ¦ +--------+--------------------------------------------------+---------¦ ¦11-11-39¦Hillsborough County Road & Bridge District Bonds ¦ ¦ +--------+--------------------------------------------------+---------¦ ¦ ¦dated March 1, 1938 due 3/1/68 ¦ ¦ +--------+--------------------------------------------------+---------¦ ¦ ¦Nos. 22, 23, 24, & 27 ¦$3,000.00¦ +--------+--------------------------------------------------+---------¦ ¦11-11-39¦Sarasota County, Florida, Bonds dated 2/1/32 ¦ ¦ +--------+--------------------------------------------------+---------¦ ¦ ¦due 10/1/57, Nos. 515, 527-534, both incl. ¦7,650.00 ¦ +--------+--------------------------------------------------+---------¦ ¦11-11-39¦Bay County, Florida, Bonds dated 8/1/32 due 8/1/57¦ ¦ +--------+--------------------------------------------------+---------¦ ¦ ¦Nos. 2260, 2273, 2534-2558, both incl. ¦22,410.00¦ +--------+--------------------------------------------------+---------¦ ¦11-11-39¦1/4 Sec. 32, T 21S, R. 35W of 6th P.M. Finney ¦ ¦ +--------+--------------------------------------------------+---------¦ ¦ ¦County, Kansas ¦800.00 ¦ +--------+--------------------------------------------------+---------¦ ¦11-11-39¦100 Shares of Steffen Ice & Ice Cream Co. ¦6,000.00 ¦ +--------+--------------------------------------------------+---------¦ ¦12-29-41¦200 Shares of common stock Beacon Bldg. Co. ¦ ¦ +--------+--------------------------------------------------+---------¦ ¦ ¦par $50.00 ¦10,000.00¦ +---------------------------------------------------------------------+
The trust agreement recited that Cyrus M. Beachy, trustee, and his successors in trust shall hold the property delivered to the trustee for the following uses and purposes:
(a) Said trustee shall pay the net income from said trust to Owen Coe McEwen and Ellen McEwen (grantor's grandchildren), share and share alike, said payment to be made not less than semi-annually for the period hereinafter specified (except that the trustee may, in his judgment and at any time, permit not to exceed fifty percent (50%) of the net income to accumulate and be added to the corpus of the trust estate).
(b) The comfort, support and happiness of the beneficiaries are the primary wish and concern of the grantor and said trustee is hereby authorized to utilize and devote all or any part of the corpus of the trust estate for such purpose if in his opinion it is necessary. The trustee is hereby authorized to make such payment out of the corpus of the trust estate to any beneficiary not only while such beneficiary is entitled to part of the net income, but at any time before such beneficiary may become entitled to the net income if, in the opinion of such trustee, such course is advisable or necessary.
(c) In the event of the death of either of the beneficiaries named in paragraph (a) above before the termination of the trust hereby created and in the event such beneficiary die leaving issue him or her surviving, then such surviving issue shall take the part of deceased parent, per stirpes.
(d) In the event of additional grandchildren such additional grandchildren shall share equally and under the same conditions as the beneficiaries mentioned in paragraph (a) above.
(e) The trust created hereby shall be terminated when the youngest of the beneficiaries named in paragraph (a) above shall have attained the age of forty (40) or would have attained such age had he survived. Upon the termination of the trust estate the property shall pass absolutely to the beneficiaries named in paragraph (a) above. In the event such beneficiary or either of them dies before the date of the termination of said trust estate leaving no issue him or her surviving, then the portion which would have vested in him or her shall pass to his or her heirs under the statute of descents and distributions of the State of Kansas provided that this shall not include as heirs the surviving spouses (sic) of such deceased child. Issue of any deceased beneficiary shall take per stirpes and not per capita.
The trust agreement authorized the decedent as trustee in his uncontrolled judgment and discretion to ‘possess, hold, manage, control * * * said trust estate, * * * collect and hold title to the principal or corpus, income, rents and profits of the trust property, and * * * invest and reinvest the same, loan and reloan * * * .‘ The indenture of trust empowered the trustee to lease or sell all real property of the trust estate, to borrow money, to convey to any purchaser absolute title to real and personal property of the trust estate, to vote any corporate stock of the trust estate and ‘to determine what is income and what is principal.‘
At the time of signing the trust agreement Owen Coe McEwen was 15 years of age and Ellen McEwen, now Ellen McEwen Enoch, was 11 years of age. Owen Coe McEwen and Ellen McEwen Enoch, the named beneficiaries in the trust agreement, were the two grandchildren of Cyrus M. Beachy and the latter individual had not then and never has had any other grandchild.
Decedent died testate, a resident of Sedgwick County, Kansas. His will, executed June 17, 1938, was duly admitted to probate in the Probate Court of Sedgwick County, Kansas. The decedent's will gave and devised, with minor exceptions, one-third of his property to his only child, Bernice B. McEwen, and the remaining two-thirds of his property to John D. McEwen and Bernice B. McEwen in trust for the use and benefit of decedent's two grandchildren. John D. McEwen was named executor of the estate.
Decedent's daughter predeceased him. She died on January 24, 1945, leaving surviving her, her husband, John D. McEwen, and their two children, Owen Coe McEwen and Ellen McEwen Enoch.
Decedent left surviving him, his wife, Anna O. Beachy, who is living at the present time and who is the grandmother of Owen Coe McEwen and Ellen McEwen Enoch.
John D. McEwen is not related in any wise by blood to decedent or Anna O. Beachy.
The residence of Anna O. Beachy, Owen Coe McEwen, Ellen McEwen Enoch, John D. McEwen and Bernice B. McEwen has at all times pertinent hereto been in Sedgwick County, Kansas.
The 50 per cent of the net income of the trust estate which the trust indenture required be paid to the beneficiaries not less than semiannually was never distributed to either of the named beneficiaries. On February 11, 1944, Cyrus M. Beachy, as trustee, and Owen Coe McEwen and Ellen McEwen Enoch, beneficiaries under the trust agreement of November 11, 1939, agreed
* * * that said trustee shall retain such income and any future income and invest the same as trustee upon the same terms and conditions as specified in said trust agreement until such times as the said beneficiaries shall request in writing that the trustee distribute to them or either of them the said 50% of the net income. This request may be made by both or either of said parties, but if made by only one, then only that portion due said beneficiary shall be distributed.
No payment of net income was ever made by Cyrus M. Beachy, trustee, to either of the named beneficiaries.
The property held by decedent as trustee of the Cyrus M. Beachy Trust No. 1 at the time of his death had a total value of $74,084.80.
Cyrus M. Beachy, as trustee, had custody of the securities of the Cyrus M. Beachy Trust No. 1 from the time of its creation on November 11, 1939, to his death on February 18, 1945.
On November 11, 1939, decedent's health appeared to be good. He was president of the Steffen Dairy Foods Company, formerly known as Steffen's Ice and Ice Cream Company. This concern had an average volume of business of $5,000,000 annually. Decedent's office hours were from 7 a.m. to 6 or 7 p.m. He made all decisions as to policies of the company until he ceased to be president in 1943. However, even after 1943 he continued to participate actively in the affairs of that company and kept the same office hours as before. Decedent's outlook at the time of the transfer in question was cheerful and optimistic. He never complained of ill health to those who were associated with him. On the day of his death decedent was at one of the plants of the company discussing the construction of a garage and the purchase of a sweetener for ice cream.
From 1927 until his death petitioner had made gifts each year of substantial amounts. From 1939 until his death he purchased approximately $250,000 of properties which included real estate, stocks and bonds.
The property which he transferred to the trust involved had a value of only 5 per cent of the total property in decedent's estate.
The transfers to the Cyrus M. Beachy Trust No. 1 made on November 11, 1939, and December 29, 1941, were not made in contemplation of death.
In the course of the examination and investigation of the estate tax return the examining internal revenue agent discussed the matter of including the property of the Cyrus M. Beachy Trust No. 1 in the decedent's gross estate with the attorney for the executor. At that time when the controversy arose as to the construction of the trust agreement the internal revenue agent expressed the view that the transfers to the Cyrus M. Beachy Trust No. 1 violated the rule against perpetuities.
On July 31, 1947, the internal revenue agent in charge, Wichita, Kansas, issued a thirty-day letter to the petitioner in which it was determined that the value of the property of the Cyrus M. Beachy Trust No. 1 was includible in the gross estate of decedent for estate tax purposes.
Thereafter the attorney for the executor advised the internal revenue agent that he now also believed that the transfers to the Cyrus M. Beachy Trust No. 1 violated the rule against perpetuities and that he was going to institute an action in the District Court of Sedgwick County, Kansas, to get an interpretation.
Subsequently on September 5, 1947, John D. McEwen as successor trustee instituted in the District Court of Sedgwick County, Kansas, an action against Ellen McEwen Enoch and Owen Coe McEwen for a declaratory judgment to determine the validity of the trust agreement. In the petition the successor trustee alleged that the trust was void from the beginning because it violated the rule against perpetuities and that the trust agreement of November 11, 1939, transferred the trust property absolutely to the two named beneficiaries. The beneficiaries in their answer alleged that the trust was void from the beginning because it violated the rule against perpetuities and that the property of the trust passed absolutely to them upon the execution of the trust agreement on November 11, 1939. The case was submitted on the pleadings and stipulated facts. On December 20, 1948, the District Court of Sedgwick County, Kansas, entered a decree adjudging that the trust was invalid because it violated the rule against perpetuities and that the gift to the beneficiaries was accelerated.
The successor trustee appealed that judgment of the District Court to the Supreme Court of the State of Kansas. On April 9, 1949, the Kansas Supreme Court affirmed the District Court. In its opinion the Court stated:
The two defendant grandchildren were intended to be the ultimate recipients of the purported trust estate, and the trust having been held non-existence because it offends the perpetuity rule, the settlor's gift to the two grandchildren was accelerated.
Petitioner paid an inheritance tax to the State of Kansas in the amount of $45,078.32. The estate is entitled to a credit of this amount for Federal estate tax purposes.
In the statement attached to the notice of deficiency respondent states as follows with respect to the amount involved:
The value of the property transferred by the decedent to the Cyrus M. Beachy Trust No. 1 is includible in the gross estate as a transfer where the decedent had the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom within the meaning of Section 811(c)(2) of the Internal Revenue Code, and also as a transfer where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by decedent alone or in conjunction with any person, to alter, amend or revoke, within the meaning of Section 811(d)(2) of the Internal Revenue Code.
OPINION.
HILL, Judge:
The respondent urges that the value of the property of the Cyrus M. Beachy Trust No. 1 is includible in the decedent's gross estate under any one of three theories: (1) that it represented property in which decedent had an interest under section 811(a) of the Internal Revenue Code; (2) that the transfer on November 11, 1939, and subsequent transfers to the trust in question were in contemplation of death, or to take effect at death under section 811(c); or (3) that the transfers were revocable within the purview of section 811(d)(1).
The value of the property is not includible in decedent's gross estate, the petitioner argues, because the Supreme Court of the State of Kansas ruled in McEwen v. Enoch, 167 Kan. 119, 204 P.2d 736, which case involved the same trust as is before us, that the trust agreement violated the rule against perpetuities. Hence, as the Kansas Court ruled, gifts of the trust property to the two grandchildren were accelerated and became absolute on the dates of transfer and neither section 811(a) nor 811(d)(1) is applicable. Moreover, it claims that the transfers were not made in contemplation of death or to take effect in enjoyment at or after death under section 811(c).
In answer to petitioner's contention, however, respondent states that this Court is not required to give effect to the decree of the Supreme Court of Kansas because ‘Unequivocally the record in the Kansas State Court proceeding discloses that there was no real controversy between the parties for determination. The state court decision was nothing more than a consent decree and is not binding on the Tax Court.‘
Even assuming, arguendo, that the decree of the Court of Kansas was entered by consent of the parties, nevertheless, we feel that the decision of the Supreme Court of that state evidences the law of that state on the question of whether the trust instrument before us violates the rule against perpetuities and accelerates the gifts in question. We therefore shall hold, in accordance with the decision of the Kansas Supreme Court, that the trust instrument herein violated the rule against perpetuities and that the gifts were accelerated. See Estate of Melusina H. Varick, 10 T.C. 318; Restatement of the Law, Property section 236, page 1003.
The question of acceleration was posed by the Supreme Court of Kansas as follows:
3. If the trust is void because it may not vest within such required period, is the gift to the two defendants accelerated by the failure of the prior estate so that it became an absolute gift to them as of November 11, 1939?
The court answered this question in the affirmative, stating in part as follows:
It is well established by decisions of this court, and by authorities generally, that where it is possible to determine the intention of the testator (or the settlor) that intention must control (Blake-Curtis v. Blake, 149 Kan. 512, 523, 89 P.2d 15, and cases cited therein). In the instant case it seems equally clear that the intent of C. W. Beachy, the settlor, was to make a gift of his property to his grandchildren Owen and Ellen McEwen. If his efforts to delay the time of their possession and enjoyment of the property failed because of legal difficulties, they should nevertheless become the recipients of his bounty as he obviously intended.
In Restatement of the Law, Property, as adopted and promulgated by the American Law Institute, the following is stated in section 236, page 1003:
Sec. 236. TRUST ATTEMPTED TO BE CREATED FOR UNLAWFUL DURATION—ACCELERATION OF SUCCEEDING INTEREST.
When an attempted prior interest fails because it is a trust interest limited to last for a duration not permitted by applicable law, then, in the absence of a manifestation of a contrary intent,
(a) except as stated in Clause (b) the succeeding interest is accelerated in favor of the person described in the limitation as entitled thereto ascertained in accordance with the facts existing at the time when the attempted prior interest, if valid, would have become a present interest; and
(b) if the succeeding interest is otherwise effectively created subject to a condition precedent not fulfilled at the time when the attempted prior interest, if valid, would have become a present interest, the succeeding interest is accelerated as soon as such condition precedent is fulfilled in favor of the person described in the limitation as entitled thereto, ascertained in accordance with the facts then existing.
In view of our holding that the trust was void and that the gifts were accelerated, respondent must fail in so far as his contentions that section 811(a) or 811(d) is applicable. Moreover, the transfer was not one intended to take effect in possession or enjoyment at or after death under section 811(c). We must still determine, however, whether or not the transfer in question was made in contemplation of death within the meaning of section 811(c).
Upon a consideration of the record before us we have found that the decedent did not make the transfer in question in contemplation of death. True, he was almost 77 years of age on November 11, 1939, when the trust was created. However, the evidence adduced at the hearing indicates that at that time he was president of a large business and active in planning its activities. His office hours then, and to the time of his death, were from 7 a.m. to 6 or 7 p.m., 6 days a week. He remained president of the company until 1943, and even after that date until his death was active in its affairs. His health at all times until his sudden death in 1945 appeared to be good. He never told those who were closely associated with him that he suffered from any ailment. His outlook at the time of the gifts involved was cheerful and optimistic. The gift in question was only one of many which decedent had made since 1927 and the amount of the property transferred on November 11, 1939, based upon the valuation of his property for estate tax purposes, was proportionately only 5 per cent of the property retained. The trust instrument shows that primarily the wish of the decedent in establishing the trust was for the comfort, support and happiness of the beneficiaries and that
* * * The trustee is hereby authorized to make such payment out of the corpus of the trust estate to any beneficiary not only while such beneficiary is entitled to part of the net income, but at any time before such beneficiary may become entitled to the net income if, in the opinion of such trustee, such course is advisable or necessary.
We therefore believe that the thought of death was not the impelling cause of the transfer; rather the gift sprang from a motive associated with life. United States v. Wells et al., Executors, 283 U.S. 102; Estate of Oliver Johnson, 10 T.C. 680.
It follows that respondent erred in his determination.
Decision will be entered under Rule 50.