Opinion
Docket No. 6890.
1946-04-26
ESTATE OF JOHN J. TOELLER, FRANKLIN MAYO, ADMINISTRATOR WITH WILL ANNEXED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Charles R. Sprowl, Esq., and Cassius M. Doty, Esq., for the petitioner. Harold H. Hart, Esq., for the respondent.
Decedent established a trust which provided that one-third of the income should be payable to his estranged wife and the remaining income, after the payment of small annual sums to his children, should be payable to him. Upon his death the corpus was to be divided among his wife (if then living) and his children, or, if dead, to their descendants. The trust instrument provided that ‘should misfortune or sickness cause the expenses of Trustor to increase so that in the judgment of the Trustee the net income so payable to Trustor is not sufficient to meet the living expenses of Trustor, then * * * Trustee is authorized to pay * * * such portions of the principal * * * as may be necessary under the circumstances. Said Trustee is given the sole right to determine when payments from the principal sum shall be made and the amount of said payments.‘ It further provided that ‘All discretions conferred upon the trustee * * * shall, unless specifically limited, be absolute and uncontrolled * * *.‘ Held:
(1) The corpus of the trust is includible in the gross estate of decedent, following Blunt v. Kelly, 131 Fed.(2d) 632.
(2) Under the facts, the amount paid to a charitable organization pursuant to compromise of a will contest proceeding is deductible from the gross estate of decedent.
(3) Under the facts, certain expenses of the trustee of the trust of the trust established by decedent are not deductible from decedent's gross estate. Charles R. Sprowl, Esq., and Cassius M. Doty, Esq., for the petitioner. Harold H. Hart, Esq., for the respondent.
The Commissioner, on October 13, 1944, determined a deficiency in Federal estate taxes due from the estate of John J. Toeller, deceased, in the amount of $26,206.98, as a result of including in the gross estate the value of the corpus of a trust created by the decedent in 1930, and of disallowing deductions claimed on account of a charitable bequest and certain expense items.
A substantial part of the facts is stipulated. We find them to be as stipulated, and set out herein those facts taken from the stipulation and from the oral evidence which are necessary to an understanding of the questions before us.
John J. Toeller, a resident of Chicago, Illinois, died there on May 10, 1942, shortly before his 65th birthday. His last will and testament was duly admitted to probate in the Probate Court of Cook County, Illinois, on August 6, 1942; and on the same date Franklin Mayo was duly appointed and confirmed as administrator with will annexed of the estate of John J. Toeller.
On August 5, 1943, the administrator filed with the collector of internal revenue for the first district of Illinois a Federal estate tax return, in which the assets of the estate were valued at $7,666.50 as of the date of decedent's death. This return listed also, as deductions claimed, the amount of $374.67 for funeral expenses; executor's commission of $300, and attorneys' fees of $1,100; administration expenses totaling $223; and child's award to the minor daughter of decedent in the amount of $500, all of which totaled $2,497.67. The entire estate, after payment of the expenses of administration and funeral expenses, was shown to be payable to ‘The Society of The Divine Word,‘ an Illinois charitable institution located at Techny, Illinois, and a deduction on account thereof in the amount of $5,168.83 was claimed. The return showed no net estate subject to Federal estate tax.
On February 13, 1930, the decedent created a trust, naming Continental Illinois Bank & Trust Co. as trustee and transferring to it property which was valued, at the date of decedent's death in 1942, at $155,073.58, subject to certain accrued taxes then amounting to $3,350.82.
The trust instrument provided that the net income of the trust was distributable as follows: To Myrtle Toeller, wife of the grantor, who was living separately from him, one-third of the net income during her lifetime, with certain qualifications; to Virginia Toeller, daughter of the grantor, $500 per year for a period of not more than two years from the date of the trust instrument, while she remained unmarried and living at the home of her mother; to John J. Toeller, Jr., son of the grantor, $500 per year during his minority, and thereafter in the discretion of the trustee while he continued his education, but not beyond the age of twenty-seven; to Shirley Ann Toeller, daughter of the grantor, $500 per year during her minority; and to the grantor all the remainder of the income, if any. It was further provided that upon the death of the grantor, and after payment of funeral expenses and debts, except those represented by notes secured by real estate, the trustee should divide and distribute the corpus one-third to Myrtle Toeller, if living, and two-thirds (or all, if Myrtle Toeller were not then living) to be divided into as many parts as there might then be living children and deceased children leaving descendants, one such share to be distributed to each living child of grantor and Myrtle Toeller, and one share to the descendants of each deceased child, per stirpes. Provision was made for the share of any child to be applied, if needed, for the education and support of such child until he reached the age of thirty, when his share would be distributable. The trust was, in no event, to continue more than twenty-one years after the death of the survivor of Myrtile Toeller and her three children, and no beneficiary was to be allowed to anticipate any payment. The trustee was directed to pay out of the corpus any estate, inheritance, or other succession taxes which might be levied in connection with any gift under the indenture.
Virginia Toeller was born June 23, 1911; Shirley Ann Toeller was born June 23, 1925, and John J. Toeller, Jr., died December 25, 1931, never having been married and leaving no descendants.
Myrtle Toeller executed an instrument, which was attached to the trust indenture, in which she acknowledged that she had read and understood the provisions of the trust instrument; that she was satisfied with it and would execute and deliver any further written instruments necessary to carry out its terms; and that the trust provisions would be accepted by her in full satisfaction of any and all of her claims to support, alimony, or separate maintenance, and all claims, right, title, and interest whatsoever, whether vested or inchoate, consummate or contingent, and however existing, including claims for dower, widow's award, and homestead.
The trust agreement contained the following provisions:
ELEVENTH E: * * * Should misfortune or sickness cause the expenses of Trustor to increase so that in the judgment of the Trustee the net income so payable to Trustor is not sufficient to meet the living expenses of Trustor, then, and in such event said Trustee is authorized to pay in addition to the income from said Trust Estate such portions of the principal of said Trust Estate as may be necessary under the circumstances. Said Trustee is given the sole right to determine when payments from the principal sum shall be made and the amounts of said payments.
TWELFTH: Upon the death of the Trustor, and after payment of all funeral expenses and debts of Trustor, except such as may be represented by notes which are a lien on real estate, Trustee shall divide and distribute said Trust Estate as follows:
SEVENTEENTH: All discretions conferred upon the Trustee by this instrument shall, unless specifically limited, be absolute and uncontrolled and their exercise conclusive on all persons in this trust or Trust Estate.
Myrtle Toeller, from whom the decedent was divorced on January 12, 1937, and Virginia and Shirley Ann, daughters of the decedent and Myrtle Toeller, survived the decedent. The son, John J. Toeller, Jr., died in 1931, unmarried and without descendants.
In his last will and testament, executed on November 8, 1938, decedent stated that he had made provision for his wife by virtue of the trust dated February 13, 1930, which had been accepted by her in satisfaction of her claim to alimony, support, and maintenance, and of her claims to testator's property, including dower and homestead interests, and that she should take nothing under the will, it being his intention that the provisions of the trust should be taken in lieu of any gift, devise, or bequest under the will, or of any interest in any of his property. The will further stated that his daughters had also been provided for, and that they should take nothing under the will, but that the provisions of the trust should be taken to be in lieu of any gift, devise, or bequest under the will, or any other interest in his property. Decedent also stated in his will that he had made provision in the trust for the payment of his funeral expenses and all his debts except such as might be represented by notes secured by real estate, and for payment of estate, inheritance, or other succession taxes levied in connection with the transfers in trust. The will left all of decedent's estate, after payment of his debts represented by notes secured by real estate, to the Society of the Divine Word, a charitable organization. The value of the assets passing to the administrator with will annexed, not including any of the assets of the trust estate, as of the date of the decedent's death, was $7,731.50.
On August 21, 1943, Shirley Ann Toeller, decedent's daughter, filed a complaint to contest the will, and on March 31, 1944, a compromise agreement was entered into whereby one-half of the net estate was to go to the Society of the Divine Word should be paid by the society, while those arising out of the shares of the two daughters should be paid by them. The value of the assets having increased after decedent's death, the society received $6,516.60 and each of the two daughters received $3,258.30.
On December 18, 1942, the trustee of the trust filed a complaint in Chancery in the Circuit Court of Cook County, seeking construction of certain provisions in the instrument of trust, particularly the first sentence of section 12, providing for distribution of the trust assets as therein set forth: ‘Upon the death of the Trustor, and after payment of all funeral expenses and debts of Trustor, except such as may be represented by notes which are a lien on real estate * * * .‘ The suit also sought directions of the court with respect to termination of the trust and distribution of the assets. Myrtle Toeller, Virginia Toeller Miller and Howard Austin Miller, her husband, and Harry Booth Miller, III, their infant son, Shirley Ann Toeller, Franklin Mayo, as administrator with will annexed of the estate of John J. Toeller, and the Society of the Divine Word were made defendants, and all filed answers. The court entered a decree finding that the words ‘and after payment of all funeral expenses and debts of Trustor, except such as may be represented by notes which are a lien on real estate‘ should be disregarded, rejected, and held for nought, and further ordered the trust terminated as to Myrtle Toeller and Virginia Toeller Miller, but continued as to Shirley ann Toeller until she became 30 years old.
From May 13, 1930, to May 10, 1942, the date of the decedent's death, the trust income was distributed annually by the trustee to and for the benefit of decedent, his wife, and their children. The payments for John J. Toeller, Jr., were discontinued at the time of his death in 1931. They payments to Virginia Toeller were discontinued in 1932, when she married. Payments to decedent ranged from the lowest of $1,299.96 in 1935 to the highest of $3,949.96 in 1937.
After the death of the decedent the trustee paid out of the trust corpus to itself, as trustee's fees, a total sum of $2,724.70, and paid expenses arising out of the action for construction of the trust, including court costs, guardian ad litem fees, and attorneys' fees, totaling $1,906.44, and state inheritance taxes on the interests of decedent's daughters, in the amount of $984.90.
OPINION.
KERN, Judge:
The first question to be resolved is whether the transfers to the trust involved in this proceeding were intended to take effect in possession or enjoyment at or after the trustor's death, within the meaning of section 811(c) of the Internal Revenue Code, as respondent contends.
Because it was executed prior to the passage of the Joint Resolution of Congress of March 3, 1931, this trust enjoys the protection of the rule announced in Reinecke v. Northern Trust Co., 278 U.S. 339; May v. Heiner, 281 U.S. 238; McCormick v. Burnet, 283 U.S. 784; and Hassett v. Welch, 303 U.S. 303. We may not, therefore, consider the reservation of a life interest in the trust income by the trustor in this connection. Estate of Edward E. Bradley, 1 T.C. 518; Proctor v. Commissioner, 140 Fed.(2d) 87.
The provision of the trust instrument (par. 11-E), upon which respondent chiefly relies, has been set forth in our findings.
It is the respondent's position that this provision has the effect of reserving in the trustor during his life an enforceable right to have the corpus invaded for his benefit, within the rule applied in Blunt v. Kelly, 131 Fed.(2d) 632; Estate of Margaret P. Gallois, 4 T.C. 840; affirmed on another ground, 153 Fed.(2d) 81; Chase National Bank v. Higgins, 38 Fed.Supp. 858; Estate of Ida Rosenwasser, 5 T.C. 1043; and Malcolm D. Champlin, Administrator, 6 T.C. 280.
Petitioner, however, argues that the power to invade the corpus was conferred on the trustee, to be exercised in its sole, absolute, and uncontrolled discretion, and did not constitute a retention by the trustor of any right. Petitioner cites and relies on Commissioner v. Irving Trust Co., 147 Fed. (2d) 946.
A comparison of Blunt v. Kelly with Commissioner v. Irving Trust Co., supra, brings into relief the critical distinction upon which the determination of this issue depends.
In Blunt v. Kelly, supra, the trust instrument provided: ‘Should, in their opinion the necessity arise, the Trustees are hereby empowered to use such portion of the principal of the trust fund as may seem proper for the support, care or benefit of the party of the first part.‘
No such invasion of the principal was ever sought or made.
The court said:
In the present case, however, the trust deed specified the circumstances under which the settlor would be entitled to receive the principal during her lifetime, namely, should the necessity arise, in the opinion of the trustees, to use the principal for her support, care and benefit. It is true that under this provision the trustees, one of whom held an adverse interest, were required to form an opinion as to the existence of any such necessity, but in so doing the trustees were not making a free and uncontrolled decision. They were of course bound to form their opinion on the existence of any such necessity in good faith and were subject to the control of the equity courts if they failed to do so. Read v. Patterson, 44 N.J.Eq. 211, 14 A. 490, 6 Am.St.Rep. 877; Restatement of the Law of Trust, Sect. 187. Under these circumstances, the lower court properly held that the transfer of the securities by the trust deed was one which did not take effect in possession or enjoyment until the death of the settlor, since, until then, it might have become necessary under the terms of the trust to apply the principal to her support, care or benefit.
In Commissioner v. Irving Trust Co., supra, cited by petitioner, the trust instrument contained the following provision:
The trustee may from time to time in its absolute discretion, and as often as it deems advisable to pay over, transfer, convey, assign and deliver to the Settlor all or any part of the principal of the said trust fund, at all times retaining, however, a sufficient Principal fund to provide the income to be paid to Bertha L. Beugler as aforesaid, and upon such payment or transfer, all obligation of the Trustee in reference to that part of the principal so paid over shall forthwith cease.
The court distinguished Bankers Trust Co. v. Higgins, 136 Fed.(2d) 477, and Blunt v. Kelly, supra, on the ground that, under the trust instruments involved there, the settlor had a right to require payments to be made out of the trust funds in order to meet his financial needs because of other circumstances set forth in the trust instruments and independent of the mere will of the trustee. It concluded that:
* * * In a case where the return of any part of the corpus to the settlor will depend solely upon the discretion of the trustee, the true test as to its inclusion * * * is whether the trustee is free to exercise his untrammelled discretion or whether the exercise of his descretion is governed by some external standard which a court may apply in compelling compliance with the conditions of the trust instrument. If the former, the corpus is not subject to taxation as a part of the settlor's estate. In the case at bar, the discretion of the trustee was absolute and no court could compel its exercise.
Petitioner contends that the discretion vested in the trustee in the instant case is free and untrammeled, absolute and uncontrolled, and that we should therefore be governed by Commissioner v. Irving Trust Co., supra. His contention in this regard is based on the language of the provision of subparagraph E of paragraph 11, already quoted and considered, that ‘Said Trustee is given the sole right to determine when payments from the principal sum shall be made, and the amounts of said payments,‘ and the further language toward the end of the entire instrument, in paragraph 17, which states that:
All discretions conferred upon the Trustee by this instrument shall, unless specifically limited, be absolute and uncontrolled and their exercise conclusive on all persons in this trust or Trust Estate.
However, the use of such words as ‘absolute‘ and ‘uncontrolled‘ or ‘sole discretion‘ does not mean that the discretion conferred in the trustee is unlimited, where external standards are provided in the trust instrument for the guidance of the trustee in the exercise of his discretion. These words may enlarge the limits of the trustee's discretion, but the provision of external standards by the trustor indicates unmistakably that limits still exist. See Scott on Trusts, vol. 2, sec. 187, in which it is said:
* * * The extent of the discretion may be enlarged by the use of qualifying adjectives or phrases, such as ‘absolute‘ or ‘uncontrolled‘. Even the use of such terms, however, does not give him unlimited discretion. A good deal depends upon whether there is any standard by which the trustee's conduct can be judged. Thus, if he is directed to pay as much of the income and principal as is necessary for the support of a beneficiary, he can be compelled to pay at least the minimum amount which in the opinion of a reasonable man would be necessary. If, on the other hand, he is to pay a part of the principal to a beneficiary entitled to the income, if in his discretion he should deem it wise, the trustee's decision would normally be final * * *.
With regard to paragraph 17, it seems to us that the specification in paragraph 11 of the circumstances under which invasion of the corpus by the trustee is authorized constitutes the external standards to which we have already referred, and, as such, it delimits the absolute discretion of the trustee. Had the trustor intended to confer, in this respect, absolute and uncontrolled discretion, the provisions setting up the external standards would have been quite unnecessary and meaningless. The trustee is vested with discretion in the performance of many of its duties, and paragraph 17 is not without its importance with respect to them. But we do not believe it was intended to apply to paragraph 11, subparagraph E, where specific limitations are expressly set forth. There fore, we conclude that the trustor retained the right, under the cirucmstances provided in paragraph 17, to the payment to him of the trust corpus and that this right was independent of the will of the trustee.
The application of the ‘true test‘ suggested by the court in Commissioner v. Irving Trust Co., supra, to the facts in this case effectively demonstrates the existence here of that distinction upon which the courts have consistently relied in the solution of these questions. The trust instrument involved here provided the external standards which are so important as to be virtually decisive of the issue. We therefore follow the decisions in Blunt v. Kelly, supra, and Estate of Ida Rosenwasser, supra, and conclude that the trust corpus is includible in the gross estate for estate tax purposes.
Petitioner next urges that, if any part of the trust estate is held includible in the grantor's taxable gross estate, the value of the interest reserved in the trustor, as of the date of his death, was much less than the statutory exemption granted under the Federal estate tax laws, so that no tax ever became due or payable.
The theory which gives rise to this contention is that any right which he might have to compel invasion of the corpus for his benefit would be limited to a right to so much of the corpus as would be necessary, in addition to his share of the income, to meet the trustor's living expenses in the event of misfortune and sickness. Petitioner argues that the trustor's life expectancy at the time of his death was approximately 9 1/2 years, and that had he lived at least $5,000 per year could have been paid out of the corpus without reaching the amount of the statutory exemption, and he concludes that no court, in the exercise of reasonable judgment, could or would in any event have ordered the use of so great an amount for the trustor's benefit. With that conclusion we are unable to agree. The term ‘sickness or misfortune‘ used in the trust instrument is so broad in scope as to cover any conceivable form of calamity, physical, mental, or even economic, to which humanity is subject. It is not beyond the realm of possibility that the trustor's needs might approach or exceed the magnitude suggested by petitioner, or that a court would decide that his care, in that event, would be of greater importance than the ultimate inheritance of his former wife and children, of whom only one was still a minor in the later years of the trustor's life. The exigencies of life are such that the probabilities in this regard can not be accurately measured. The important point is that the possibility was present, by reason of the language employed by the trustor, and no limit was imposed on the extent to which the corpus could be so applied, beyond the setting up of the standards which should invoke the application. Assuming the need should arise, as there set forth, and continued to exist for a period of years, the entire corpus would have been available to whatever extent it was needed. In this important respect are the facts here distinguishable from those which existed in Bankers Trust Co. v. Higgins, supra, upon which the petitioner relies, where the trust provided for the use of the corpus to make up the difference between the actual income of the trust and $60,000 per year. The court there held that it was possible to determine with reasonable accuracy, in the light of past experience, the amount of the corpus which might be subject to that use, and that only that amount should be included in the gross taxable estate of the trustor.
We are of the opinion that the language of the trust instrument before us justifies the action of the respondent in including the entire corpus in the trust estate. See Malcolm D. Champlin, Administrator, supra.
It is, in view of this holding, unnecessary to decide whether the entire corpus is includible in the gross estate also by reason of the existence of a possibility of reverter by operation of law, or to discuss in greater detail the evidence contained in the trust instrument which respondent cites as further supporting his theory that the trust was intended as a substitute for testamentary distribution.
Section 812(d) of the Internal Revenue Code provides for a deduction from the value of the gross estate in the ‘amount of all bequests, any corporation organized and operated exclusively for religious, charitable, scientific, literary or educational purposes,‘ etc. It is stipulated that the Society of the Divine Word is an organization which fulfills the requirements of the statute.
Respondent did not allow any deduction for the value of the bequest to charity, on the ground, stated in the explanation attached to the notice of deficiency, that it was impossible to ascertain the amount of the bequest. The bequest was residual in character, and the amount was therefore not specified in the will. Respondent based his action on the fact that the will was being contested. The record discloses that the action contesting the will had, in fact, been finally settled by compromise approximately six months prior to October 13, 1944, the date of the notice of deficiency. By the terms of the compromise agreement, the charity had waived its right to one-half of the residuary estate, which was valued at $5,168.83 as of the date of decedent's death. Petitioner now claims a deduction for only half of that amount, in accordance with section 81.44 of Regulations 105, which states that:
If as the result of a controversy involving a charitable bequest or devise, the charitable organization assigns or surrenders a part thereof pursuant to a compromise agreement in settlement of such controversy, the amount so assigned or surrendered is not deductible as a bequest or devise to such charitable organization.
In view of the undisputed fact that the only two factors essential to a computation of the amount of the bequest had long since been established, i.e., the value of the residuary estate at decedent's death and the terms of the settlement determining the share to be paid the charitable beneficiary, we are of the opinion that respondent erred in failing to allow the proper deduction for this item.
With respect to petitioner's contention relating to the expenditures made by the trustee out of the trust corpus after the death of the decedent, consisting of trustee's fees, attorneys' fees arising out of an action brought by the trustee for construction of the trust, guardian ad litem fees made necessary by the same action, and inheritance taxes paid to the State of Illinois, we are of the opinion that none of these constitutes an allowable deduction for expenses of administration under the statute and the regulations. Sec. 812(b)2, I.R.C.; Regulations 105, arts. 32-35; Frederick E. Baldwin, 44 B.T.A. 900; Frederick R. Shepherd, 39 B.T.A. 38; Regulations 105, sec. 81.37.
Decision will be entered under Rule 50.