Opinion
Docket No. 2063.
1946-11-29
ESTATE OF D. I. COOPER, THE FIRST NATIONAL BANK OF PORTLAND (OREGON), EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Carl E. Davidson, Esq., and Charles P. Duffy, Esq., for the petitioner. Wilford H. Payne, Esq., for the respondent.
Decedent in 1936, 1937, and 1938 made outright gifts to his son of shares of stock in a corporation of which he was president, for the primary purpose of encouraging the son to take an active interest in the business and not to go out into some other line of work. In 1936 decedent also established two trusts, one for his wife and one for his daughter, under the terms of which the income was to be accumulated during decedent's life. At his death the trust funds were to be turned over to a bank, which is the executor of decedent's estate, ‘to be added to, become a part of, and distributed under the terms of the Trustor's will,‘ in the one case for the benefit of the wife and in the other case for the benefit of the daughter during their respective lifetimes. The trust for the wife further provided for the distribution of the property upon her death, ‘in accordance with the provisions of the said Trustor's will, ‘ and the trust for the daughter provided its own schedule for distribution of the trust property at her death. Decedent made transfers of stock in the corporation to each of the two trusts in 1936, 1937, 1938, and 1939. Held, the transfers of stock to decedent's son were not made in contemplation of death and are not subject to the estate tax; held, further, the transfer of stock to the trusts for decedent's wife and daughter were made in contemplation of death, and the corpora of the trusts are also includible in the gross estate under section 811(c) and (d), I.R.C., since until his death decedent might, by his will, have altered or varied the enjoyment of both the income and principal of the trust property. Carl E. Davidson, Esq., and Charles P. Duffy, Esq., for the petitioner. Wilford H. Payne, Esq., for the respondent.
Respondent has determined against the petitioner an estate tax deficiency of $17,500.80. Petitioner has acquiesced in all adjustments made by respondent except those whereby respondent included in the gross estate certain inter vivos transfers made by decedent to or for the benefit of his son, his wife, and his daughter. The issues for decision, therefore, are whether any of the transfers are includible under section 811(c) of the Internal Revenue Code as having been made in contemplation of death; and, alternatively, whether the transfers in trust for the benefit of decedent's wife and daughter were intended to take effect in possession or enjoyment at or after his death, within the meaning of section 811(c), or were subject to change through a power to alter, amend, revoke, or terminate, within the meaning of section 811(d).
The case was submitted upon a stipulation of facts, documentary evidence, and oral testimony.
FINDINGS OF FACT.
The decedent, D. I. Cooper, died a resident of Oregon on September 9, 1940, three days before his sixty-seventh birthday. His executor filed the estate tax return with the collector for the district of Oregon.
Decedent's will, executed July 14, 1936, was duly probated, together with a codicil thereto executed July 13, 1940. Under the terms of the will the residue of decedent's estate, after a specific bequest of personal effects to his wife, was to be held in trust, one-third for the benefit of Nellie Cooper, his wife, one-third for the benefit of Eileen V. Cooper, his daughter, and one-third for the benefit of Frank R. Cooper, his son.
The income from the one-third set aside for Nellie was to be paid to her during her lifetime, and at her death the corpus was to be divided equally and added one-half to each of the portions set aside for Eileen and Frank. The trustee was empowered, however, in its sole discretion to invade the principal to whatever extent might be necessary in addition to the income to provide for the maintenance and comfort of Nellie.
The income from the portion set aside for Eileen was payable to her during her lifetime, but the trustee was not empowered to pay her any of the principal. At her death the principal was directed to be paid to her surviving children, if any, but if there were no surviving children, then to Frank or to his surviving children.
The income from Frank's share was payable to him until he should reach the age of 30, at which time one-half of the then principal, as it might be augmented by the prior death of Nellie or Eileen, was to be distributed to him. Upon his attaining the age of 35, the rest of the principal was to be distributed to him, thus terminating the trust. If he should die during the term of the trust, the corpus was to be paid to his surviving children, if any, but if none, then one-half of the corpus to his surviving wife and one-half to the trust for Eileen. If no wife survived him, all the corpus was payable to the trust for Eileen, to be held and distributed in accordance with the provisions for her benefit.
The First National Bank of Portland, Oregon, was named in the will as executor and trustee of the testamentary trusts.
For many years prior to his death decedent was president of the Howard-Cooper Corporation and owned a substantial amount of its stock. The corporation was engaged in the sale of heavy construction machinery, road-building machinery, fire-fighting apparatus, and logging equipment. It enjoyed a substantial volume of business— in 1936, between one and one-half and two million dollars.
The decedent's son, Frank Cooper, was 20 years old in 1936, and decedent was much interested in his progress in the business of the corporation. Decedent asked L. W. Gardner, the vice president of the corporation, to help train Frank, and Gardner suggested that decedent give Frank some stock in the corporation to increase his interest in the business.
On or about November 18, 1936, decedent gave Frank 100 shares of stock in the Howard-Cooper Corporation. Decedent told Frank that the gift was made in order that he might become actively interested in the business through ownership of the stock, and that if his interest continued to be active, he would probably one day be president of the company. Decedent made further gifts to Frank of stock in the corporation in the amount of 65 shares on December 2, 1937, and 25 shares on or about December 30, 1938. All these gifts were outright, with no conditions attached. Decedent, however, expressed the wish that Frank should consult him before selling any of the stock.
The dominant motive of decedent in making the gifts to Frank was to encourage him to take an active interest in the business of the corporation and induce him not to go out into another line of business. A secondary motive was the reduction of decedent's annual income tax burden.
On November 18, 1936, decedent established two trusts, one for his wife Nellie and one for his daughter Eileen, and he conveyed to each 100 shares of stock in the Howard-Cooper Corporation. His attorney, Allen H. McCurtain, was named as trustee in each instance.
The trust instruments for Nellie and Eileen were similar in most respects. Under the provisions of each, the trustee was to hold, invest, and reinvest the property, to collect the income and pay expenses therefrom, and to add the remaining income to principal.
Paragraph II(c) of the Nellie Cooper trust reads as follows:
Upon the death of the Trustor, the said Trustee shall pay over, unto The First National Bank of Portland, (Oregon), or its successor in interest, all of the said trust funds remaining in the hands of the Trustee, upon the date of the death of the Trustor, to be added to, become a part of, and distributed under the terms of the Trustor's will, for the sole use, benefit and account of NELLIE COOPER, wife of the Trustor, during her lifetime. Upon the death of the said Nellie Cooper, or, upon the date when said fund is delivered over to the said The First National Bank of Portland (Oregon), in the event she, the said Nellie Cooper, should predecease the Trustor, the said funds shall be equally divided by the said The First National Bank of Portland (Oregon), and one-half (1/2) thereof, added to the portions of the Trustor's estate set aside for each of his children, Frank R. Cooper, and Eileen V. Cooper, and distributed to them in accordance with the provisions of the said Trustor's will, but, in no event, to be administered by the said The First National Bank of Portland (Oregon), as a part of the Trustor's estate, for the reason that the said Trustor has paid both Federal and State Taxes on the trust hereby declared as a gift, and has and does hereby renounce all control over the same whatsoever.
Paragraph II(c) of the Eileen Cooper trust reads as follows:
Upon the death of the Trustor, the said Trustee shall pay over unto The First National Bank of Portland (Oregon), or its successor in interest, all of the said trust funds remaining in the hands of the Trustee, upon the date of the death of the Trustor, to be added to, become a part of, and distributed under the terms of the Trustor's will, for the sole use, benefit and account of EILEEN V. COOPER, daughter of the Trustor, during her lifetime. Upon the death of the said Eileen V. Cooper, or, upon the date when said fund is delivered over to the said The First National Bank of Portland (Oregon), in the event she, the said Eileen V. Cooper should predecease the Trustor, the said fund shall be distributed as follows: If she, the said Eileen V. Cooper, shall leave a child or children surviving her, all her interest in said Trust Estate, shall be by the said Trustee, paid over, and distributed to such child or children, share and share alike, but, upon the death of said Eileen V. Cooper, should she leave no child or children surviving her, all her interest in said Trust Estate shall be, by the Trustee, distributed to Frank R. Cooper, her brother, should he be living, but, should he be deceased at the time of the death of the said Eileen V. Cooper and should he leave a child or children surviving him, then such portion of said Trust Estate to the surviving child or children of Frank R. Cooper, share and share alike, but in no event, to be administered by the said The First National Bank of Portland (Oregon), as a part of the Trustor's Estate, for the reason that the said Trustor has paid both Federal and State Taxes on the Trust hereby declared as a gift, and has and does hereby renounce all control over the same, whatsoever.
Paragraph III of each instrument reads as follows:
The Trust hereby created, shall not be modified, or revoked, in whole or in part, by the Trustor, and he expressly declares this Trust to be irrevocable, and voluntarily and expressly waives all future control, of whatsoever kind, character or nature of said trust, fully and completely, so that the trustee hereunder shall be accountable to no person other than the beneficiaries herein named, for the faithful performance of this Trust, or any of its terms or provisions.
It was also provided in each trust that the trustee might at any time resign as trustee by transferring the trust property to the First National Bank of Portland (Oregon), which, as successor trustee, should hold it under the same terms and conditions as the original trustee. Also, in the event of the trustee's death, the trust funds were to be turned over to the bank as successor trustee.
On December 2, 1937, decedent transferred, without consideration, 65 shares of Howard-Cooper Corporation stock to the trust for Nellie and 65 shares to the trust for Eileen.
On December 30, 1938, decedent made further transfers, without consideration, of 25 shares of the same stock to each of the two trusts.
On January 26, 1939, decedent sold 21 1/2 shares of the same stock to each trust for $610, which was less than the fair market value of the stock, and the excess represented a gift from the decedent.
McCurtain, as trustee, purchased from the Howard-Cooper Corporation on January 2, 1937, 20 shares of its stock for each of the two trusts. From the decedent he purchased 18 1/2 shares for each trust on February 3, 1938, and 5 shares for each trust on May 8, 1939. All these purchases were made from the income of the trusts.
For many years prior to 1936 and until the spring of 1939 decedent enjoyed good health and was very active in business. He seldom took any vacation and was rarely absent from the office except on trips to the company's branch offices. He played golf regularly.
In March of 1939 decedent took a trip to Mexico and returned with his health impaired. He continued to take an active interest in the business, but spent less time at the office than formerly.
Allen H. McCurtain, the trustee of the Nellie and Eileen Cooper trusts, died June 23, 1940. The First National Bank of Portland, Oregon, became successor trustee on July 24, 1940.
After McCurtain's death decedent was fearful that the successor trustee might be persuaded to sell some of the trust stock to one Roy Nelson, a former officer of the Howard-Cooper Corporation who had been voted out of office at a directors' meeting in December 1938, on the occasion of his disagreement with other officers over questions of business policy. He did not want Nelson to gain control of the corporation. Decedent accordingly employed as his attorney one Maurice Eben, who had been associated with McCurtain, and discussed the matter with him.
Eben suggested that a board or committee be set up to advise the trustee with respect to voting and selling the trust stock. The matter was discussed also with the attorney for the First National Bank, who stated that if a committee were set up the bank would consider its advice in administering the trusts.
Eben accordingly prepared a codicil to decedent's will and a supplemental declaration of trust, both of which instruments were executed on July 13, 1940. Decedent, Frank, Nellie, and Eileen joined in the execution of the latter instrument.
In the codicil the decedent appointed an advisory board, consisting of Frank Cooper, Eben, and Edith C. Lundquist, secretary of the corporation and confidential secretary to decedent, and directed the executor and testamentary trustee to vote the stock according to the wishes of the board and not to sell, pledge, or otherwise deal with the stock without the board's consent. He also directed the executor and trustee to employ Eben as attorney in lieu of McCurtain, who was then deceased, to advise in connection with any matters calling for a construction of the will and codicil.
The supplemental declaration of trust likewise appointed an advisory board, consisting of Frank, Eben and Miss Lundquist, and directed the trustee ‘In so far as the trustee may legally do so‘ to vote the stock according to the request of the board and not to sell or pledge the stock without the board's consent. In any event, the trustee was requested to ‘give all possible weight to the advices from such board in arriving at its own judgment as to any course of conduct under consideration.‘
At the date of decedent's death, September 9, 1940, the stock of Howard-Cooper Corporation had a fair market value of $130.79 per share. Total gifts from decedent to Frank Cooper were 190 shares, having on that date an aggregate value of $24,850.10.
On the date of decedent's death the Nellie and Eileen Cooper trusts each consisted of 255 shares of Howard-Cooper Corporation stock of an aggregate value of $33,351.45; promissory notes, $2,295; accrued interest, $77.90; and cash, $360— a total value of $36,084.35 for each trust.
After decedent's death the First National Bank, as trustee of the Nellie and Eileen Cooper trusts, began to make quarterly distributions of the trust income to Nellie and Eileen. On or about June 26, 1941, to avoid a possible conflict of interests because of its debtor-creditor relationship with the Howard-Cooper Corporation, the First National Bank resigned as trustee of the Nellie and Eileen Cooper trusts. The trust funds were thereupon transferred to the Bank of California, Portland, Oregon, as successor trustee.
The First National Bank continued as executor of the estate and subsequently made a partial distribution of the estate to the Bank of California, as testamentary trustee. Thereupon, the latter bank set up a trust account for Frank and consolidated the inter vivos trusts for Nellie and Eileen with the testamentary trusts for their benefit, maintaining only one account for each.
In determining the deficiency respondent included in the gross estate the value of the gifts to Frank, $24,850.10, and the values of the Nellie and Eileen Cooper inter vivos trusts, $36,084.35 each— in all a total of $97,018.80.
The transfers of stock to decedent's son, Frank, were not made in contemplation of death. The transfers of stock to the Nellie and Eileen Cooper trusts were made in contemplation of death.
OPINION.
ARUNDELL, Judge:
Respondent's primary contention is that all the decedent's gifts here involved, both outright and in trust, were transfers made in contemplation of death. We shall, therefore, give first consideration to this contention.
In United States v. Wells, 283 U.S. 102, the Supreme Court laid down the tests for determining whether transfers are made in contemplation of death. It stated that the thought of death must be the ‘impelling cause,‘ the ‘inducing cause,‘ or the ‘controlling motive‘ prompting the disposition of property; that ‘the statute does not embrace gifts inter vivos which spring from a different motive‘; and that ‘the motive which induces the transfer must be of the sort which leads to testamentary disposition.‘
Applying these tests first to the gifts to Frank, we find that the decedent was most eager to have his son become active in the business of Howard-Cooper Corporation. L. W. Gardner, a fellow officer of decedent, whose aid decedent had sought in training Frank in the business, testified that he suggested to decedent that a gift of stock in the corporation, so as to provide Frank with an actual income, would stimulate Frank's interest. We think, from decedent's statement to his business associates and to Frank, as well as from other circumstances appearing of record, that decedent's primary concern was to train Frank, to encourage him to take an active interest in the business, and to keep him from going out into some other kind of work. Such motives are associated with life rather than with death. See Estate of Herbert G. Lowe, 38 B.T.A. 117.
It appears also that a desire to reduce his income tax burden was a factor contributing in part to the transfers to Frank. Although of perhaps minor importance, this, too, was a motive connected with life. Estate of Genevieve Brady Macaulay, 3 T.C. 350.
Respondent's position as to the gifts to Frank is not aided by a consideration of the state of decedent's health. They were all made prior to March 1939, when decedent first had any serious illness.
In the final analysis, the principal reason advanced by respondent for the inclusion of the transfers to Frank amounts to this: That the gifts to the Nellie and Eileen Cooper trusts were made at or about the same time as the outright gifts to Frank and, since the former were transfers in contemplation of death, it must be held that the latter were of the same category. We do not agree. The transfers to Frank and those to the trusts were separate and distinct, and each must be tested in the light of its own surrounding circumstances and underlying motives. While the time factor may be of some evidential value, it does not follow that a transfer to one person is in contemplation of death merely because it is made simultaneously with transfers to other persons, even though the latter transfers may be clearly in contemplation of death.
We conclude that the dominant motives prompting the gifts to Frank were associated with life, and that the thought of death was not the ‘impelling‘ or ‘inducing‘ cause. United States v. Wells, supra. Since contemplation of death is the only ground which was or could have been asserted in support of the includibility of these gifts, it follows that they are not subject to the estate tax.
We come now to a consideration of the transfers to the Nellie and Eileen Cooper trusts. These, the respondent contends, not only were made in contemplation of death, but also were intended to take effect in possession or enjoyment at or after death, within the meaning of section 811(c) of the code, and were subject to change through the exercise of a power to alter, amend, revoke, or terminate, within the meaning of section 811(d).
Under the terms of each trust the income was to be accumulated and added to corpus. Upon the death of decedent, the trustee of the Nellie Cooper trust was to pay over the trust fund to the First National Bank of Portland, the executor of decedent's estate, ‘to be added to, become a part of, and distributed under the terms of the Trustor's will, for the sole use, benefit and account of NELLIE COOPER, wife of the Trustor, during her lifetime.‘ An identical provision was made with respect to Eileen in the Eileen Cooper trust.
The Nellie Cooper trust further provided that upon Nellie's death or on the date when the fund was delivered to the bank in the event she predeceased the settlor, the fund was to be equally divided and one-half thereof ‘added to the portions of the Trustor's estate set aside for each of his children, Frank R. Cooper and Eileen V. Cooper, and distributed to them in accordance with the provisions of the said Trustor's will.‘ The Eileen Cooper trust provided a schedule for distribution or disposition of the property upon the death of Eileen, or upon the date the fund was delivered to the bank in the event she predeceased the settlor.
It is thus apparent that the trust instruments were not complete in themselves. In executing them the decedent made disposition of the trust property dependent upon the terms of his ‘will‘— than which no document could be more testamentary in character. This mention of ‘the Trustor's will‘ is, in itself, strong evidence of the thought of death; and when, in addition, the disposition of the property is to be governed by his will, it is difficult to escape the conclusion that death was contemplated.
Respondent has determined that the transfers to these trusts were made in contemplation of death. To overcome the presumption attaching to that determination petitioner has not, as it did with reference to the gifts to Frank, produced convincing evidence of dominant motives associated with life. Frank Cooper testified that upon the occasion of the first gift to him the decedent told him that gifts were also being made to his mother and sister in order not to show partiality and that, since they lacked business experience, the gifts were in trust. From this the petitioner argues that the primary motive of decedent in making the transfers in trust was the equalization of gifts among members of his family, and that such a motive is one connected with life.
If Nellie and Eileen were to have any benefit from or enjoyment of the trust property during the lifetime of the decedent, we might agree that decedent was motivated by thoughts associated with life. But it is obvious that decedent did not intend them to benefit so long as he should live. Indeed, it was necessary that they survive him in order to derive anything from the property. That fact, the fact that the transfers in trust were conditioned upon the provisions of ‘the Trustor's will,‘ and almost every other circumstance point unmistakably to a primary purpose to make provision for his wife and daughter only after his death. We conclude that decedent's dominant motive was ‘of the sort which leads to testamentary disposition,‘ United States v. Wells, supra, and that the transfers to these trusts sprang from thoughts associated with death.
We likewise agree with the respondent that the trust property is also properly includible in the gross estate under other provisions of section 811(c) and under section 811(d). By tying in the transfers to trust with the provisions of his will, decedent might, by will, have varied or altered the enjoyment of both the income and corpus of the trust property up until his death. Cf. Estate of Florence Althea Gibb, 6 T.C. 1088; and see Chickering v. Commissioner, 118 Fed.(2d) 254; Porter v. Commissioner, 288 U.S. 436.
We find no merit in petitioner's argument that the provisions of decedent's will executed July 14, 1936, as it existed when the trusts were created, must be deemed to have been ‘incorporated by reference‘ into the trusts, and that decedent could not have changed the disposition of the trust property by executing a new will. Certainly the trust instruments do not, by their general reference to ‘the Trustor's will,‘ identify or describe any one existing instrument with particularity. Nor is any aid to be derived from the statements in the trusts to the effect that they are irrevocable and unamendable, which must give way before the realities of the situation. See William J. Garland, 42 B.T.A. 324. In this contention, it is not without significance, as bearing on decedent's more probable intent, that on July 13, 1940, less than two months before his death, decedent undertook to amend both his will and the trusts.
Decision will be entered under Rule 50.