Opinion
Docket No. 31374.
1952-06-12
ESTATE OF CHARLES S. INMAN, DECEASED, ANDREW SHILAND, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Allen T. Klots, Esq., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent.
1. In 1940, the decedent created a trust for a 10-year term under which his three nephews were the trustees, income beneficiaries, and remaindermen. In the event that a nephew died during the term of the trust, the property would pass under the nephew's limited power of appointment by will to relatives or to his distributees. The only power retained by decedent was in conjunction with all the nephews to terminate the trust and accelerate the remainders. Held, that decedent had a power to terminate under section 811(d)(1) of the Internal Revenue Code and the trust is includible in his gross estate. Held, further, that decedent's legal incompetency prior to his death did not mitigate his power to terminate in so far as section 811(d)(1) is concerned.
2. Held, that the value of the trust to be included in the estate is the corpus less the value of the defeasible term of years. Allen T. Klots, Esq., for the petitioner. Rigmor O. Carlsen, Esq., for the respondent.
The respondent determined a deficiency in estate tax liability of $64,377.50. Respondent has added $144,652.15 to the value of the net estate which is explained in the deficiency notice as follows:
+-----------------------------------------------------------------------------+ ¦Transfers During Decedent's life: ¦Returned ¦Determined ¦ +-----------------------------------------------------+----------+------------¦ ¦Value of property under trust dated December 27, 1940¦$0.00 ¦$144,652.15 ¦ +-----------------------------------------------------------------------------+
The value of the property transferred by the decedent through the medium of a trust created on December 27, 1940, less the value of the temporary estates is includible under Section 811(d) of the Internal Revenue Code.
Petitioner assigns errors to the above adjustment on the following grounds:
(a) The determination by respondent that a portion of the corpus of the trusts created by Charles S. Inman, the decedent herein, under a deed of trust dated December 27, 1940 * * * should be included in the decedent's gross estate as a transfer taxable under Section 811(d) of the Internal Revenue Code;
(b) The determination by respondent that $144,652.15 represents the value of the portion of the corpus of said trusts dated December 27, 1940 for inclusion in the decedent's gross estate for federal estate tax purposes;
(c) The determination by respondent that only the value of the temporary estates should be deducted in valuing the portion of the said trusts included for estate tax;
(d) The determination of respondent errs in that it fails to deduct from the value of said trusts the value of the right to receive all the income during its term and all of the corpus of the trusts upon the termination of said trusts on December 27, 1950;
(e) The determination of respondent errs in not holding that the value of decedent's right to veto the termination of the trusts was ‘slight and trivial‘ and therefore not taxable;
(f) Respondent errs in not finding that the power to veto the termination of said trusts was nonexistent due to the fact that the Settlor, decedent herein, was judicially declared incompetent December 5, 1944, some years prior to his death.
Two other adjustments which reduce the net estate and increase deductions are not contested.
FINDINGS OF FACT.
The facts have been stipulated and are found accordingly.
The petitioner Andrew Shiland is the surviving executor of the last will and testament of the decedent Charles S. Inman of the City, County, and State of New York. The petitioner resides in New York City. John I. Pearce, the other executor named originally as one of the petitioners in the petition filed herein, died February 2, 1951. The decedent died on August 2, 1946.
The estate tax return for the decedent was filed with the collector of internal revenue for the third district of New York on or about October 3, 1947, and the estate tax shown to be due on the return was paid.
On December 27, 1940, decedent executed an indenture of trust to his three nephews as trustees. The trust fund was to be divided into three equal parts for the benefit of the three nephews. The trust instrument provided for the following disposition of each part:
To hold, invest and reinvest one of said parts and pay over the net income of said part to (the nephew) individually. Upon the death of (the nephew), or on December 27th, 1950, the trust as to that part held for the benefit of (the nephew) shall terminate. The trust as to said part may be also terminated at any time by the joint action of all three persons named as trustees, but such action shall not be effective if the grantor is alive at that time unless the grantor shall likewise give his consent to such termination in writing. If (the nephew) is alive at the termination of the trust as to said part, the trustees shall deliver and pay over to (the nephew) outright and free from all trust the principal of the said part. Upon the termination of the trust as to said part prior to said date by reason of the death of (the nephew), the trustees shall pay over the principal of the trust as to said part to or for the benefit of those persons related to (the nephew) by blood or marriage and in such proportions and upon such terms in trust or otherwise as (the nephew) may appoint by his last will and testament. Upon the failure of valid appointment, the principal of the trust of said part shall be delivered to those persons who would then be entitled to the personal estate of (the nephew) were he to die intestate pursuant to the laws of the State of New York as existing at the time of his death. The said power of appointment shall be exercised however only be a specific reference in the will of (the nephew) to the trust created by Charles S. Inman, dated December 27th, 1940.
The dates of birth of the three nephews and their ages at the time of decedent's death are as follows:
+----------------------------------------------------+ ¦ ¦ ¦Age at time of ¦ +-----------------+---------------+------------------¦ ¦Name ¦Date of birth ¦decedent's death ¦ +-----------------+---------------+------------------¦ ¦John I. Pearce ¦Aug. 12, 1909 ¦37 ¦ +-----------------+---------------+------------------¦ ¦Arthur W. Pearce ¦April 17, 1913 ¦33 ¦ +-----------------+---------------+------------------¦ ¦Richard I. Pearce¦Sept. 27, 1915 ¦31 ¦ +----------------------------------------------------+
The principal of the three trust funds amounted in the aggregate to $126,000 at the time of their inception. Decedent filed a gift tax return for the year 1940 which included for tax the entire principal of said trusts, and he paid a gift tax in the sum of $6,303.
On or about December 5, 1944, decedent was adjudged incompetent by the Supreme Court of the State of New York, County of New York, and a committee of his property was appointed. This order was in full force and effect at the time of decedent's death. Decedent was born on March 15, 1885, and was 61 years at age at the time of his death, and the trusts had not been terminated at that time.
The value of the principal of the three trusts as of August 2, 1947, the optional date, was $171,393.55. The actuarial value of the interest of each nephew in his trust at the date of decedent's death for each dollar of principal was as follows:
+--------------------------------+ ¦John I. Pearce ¦Age 37¦$.95925¦ +-----------------+------+-------¦ ¦Arthur W. Pearce ¦Age 33¦.96257 ¦ +-----------------+------+-------¦ ¦Richard I. Pearce¦Age 31¦.96401 ¦ +--------------------------------+
The maximum value of the interests of all other persons for each dollar of principal sum in the trust fund held for the benefit of each of the nephews is as follows:
+-------------------------------+ ¦John I. Pearce Trust ¦$.04075¦ +-----------------------+-------¦ ¦Arthur W. Pearce Trust ¦.03743 ¦ +-----------------------+-------¦ ¦Richard I. Pearce Trust¦.03599 ¦ +-------------------------------+
Respondent has included in decedent's gross estate a portion of the trusts valued at $144,652.15, representing the total value of the trusts on the optional date less only the actuarial value at decedent's death of each nephew's right to receive the income from the trust until December 27, 1950, or until his prior death.
OPINION.
BLACK, Judge:
The issue raised here is whether decedent retained a power of termination under section 811(d)(1) of the Internal Revenue Code so that the trust is includible in his gross estate and what value, if any, should be included.
The decedent created a trust on December 27, 1940, for a 10-year term, naming his three nephews as trustees. The trust was divided in three equal parts and each nephew was given the immediate and continuing right to receive all the income and the right to receive the principal upon the expiration of the trust on December 27, 1950. If the nephew should die before the expiration of the trust, the principal was to go to such persons related by blood or marriage as the nephew might appoint by will. In case of failure to appoint, the principal was to pass to the nephew's distributees. The only power retained by the decedent was to terminate the trust by unanimous agreement with all three nephews. In the event of termination, the nephews would immediately be entitled to the principal. Respondent determined that this power of termination brings the trust within section 811(d)(1). Petitioner contends the retained powers are too slight and trivial to be so included.
The applicable statute is printed in the margin.
Specifically section 811(d)(1) brings within the gross estate trusts ‘where the enjoyment thereof was subject * * * to any change through the exercise of a power * * * by the decedent in conjunction with any other person * * * to * * * terminate * * * .‘ Section 811(d) applies even though termination would result only in the acceleration of the nephews' interests as remaindermen because the nephews' enjoyment of the principal is thereby made certain. The trust provided in the event of a nephew's death prior to the end of the trust's term, the principal was to pass by a limited power of appointment by will among relatives or to the nephew's distributees. The Supreme Court held that such a termination power falls within 811(d) in Commissioner v. Holmes' Estate, 326 U.S. 480, and said:
SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, whereever situated, except real property situated outside of the United States—(d) REVOCABLE TRANSFERS.—(1) TRANSFERS AFTER JUNE 22, 1936.— To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of decedent's death;
It seems obvious that one who has the power to terminate contingencies upon which the right of enjoyment is staked, so as to make certain that a beneficiary will have it who may never come into it if the power is not exercised, has power which affects not only the time of enjoyment but also the person or persons who may enjoy the donation. More therefore is involved than mere acceleration of the time of enjoyment. * * *
See also Hauptfuhrer's Estate v. Commissioner (C.A. 3), 195 F.2d 548, affirming a Memorandum Opinion of this Court. This kind of termination power is not too slight or trivial to fall with 811(d). Section 811(d) is not rendered inapplicable because decedent's power of termination required the consent of his three nephews who were the income beneficiaries and remaindermen. Estate of Charles M. Thorp, 7 T.C. 921, affd. 164 F.2d 966, certiorari denied 333 U.S. 843. In the Thorp case we said:
* * * Under paragraph 6 of the trust instrument the request to terminate was to be initiated by the life beneficiaries, but the termination could be consummated only by the act of the settlor. The trust instrument reserved to the settlor, during his lifetime, the right to control the vital act necessary to terminate it. We think the reservation of such a power clearly subjects the transfer to the provisions of section 811(d)(2) of the code. Commissioner v. Estate of Holmes, 326 U.S. 480.
We think the foregoing quotation from the Thorp case is equally applicable to the facts in the instant case. The intervening incompetency of decedent does not extinguish his power to terminate under section 811(d). Article 81, sections 1356 to 1384 of the Civil Practice Act of New York specifically grants the Supreme Court of New York jurisdiction over the care of the person and property of an insane person. The Supreme Court of the United States considered a similar question in a case in which upon proper application to the New York Courts by the incompetent's committee, there was a transfer to the natural heirs of an incurably insane person, and such transfer was held to be in contemplation of death. City Bank Farmers Trust Co. v. McGowan, 323 U.S. 594. Subsequently in a case arising under Massachusetts law which held in effect that powers retained by an incompetent decedent were a nullity, nevertheless the existence of the power and not the decedent's capacity to exercise it rendered the trust includible under section 811(d)(2). Estate of Edward L. Hurd, 6 T.C. 819, affd. 160 F.2d 610.
The three nephews were all in their 30's at the time of decedent's death, and the trust had only about four and one-half years to run. The parties stipulated that the actuarial value of the interests subject to termination was between three and one-half and four per cent of the trust corpus, which interests amounted to a total value of $6,522.67. There is no authority to support petitioner's contention that such an interest excludes the corpus of the trust from section 811 (d). We hold, therefore, that the trust corpus to the extent determined by the Commissioner is includible in decedent's gross estate.
In the alternative, petitioner argues that only this $6,522.67 should be included in petitioner's gross estate. The estate tax is not based on the value of what is received by inter vivos beneficiary, but on property to which the power of decedent attaches. Only that which decedent has released at all events may be deducted from the corpus. In the instant case, just prior to the decedent's death, the nephews were entitled absolutely to the trust income for 4 1/2 years, the remaining portion of the trust's term. However, in order to be entitled to the remainder of the trust's corpus the nephews had to survive until the end of the term unless the trust had been properly terminated prior thereto.
On similar facts of valuation this case is on all fours with Dominick's Estate v. Commissioner (C.A. 2), 152 F.2d 843, affirming a Memorandum Opinion of this Court, October 6, 1944. Although petitioner contends that this decision is incorrect, we hold otherwise and believe that the case adequately settles this question.
In conclusion, we hold that decedent's gross estate should be increased by $144,652.15, the trust corpus less the defeasible term of years.
At the hearing of this proceeding petitioner submitted a motion as follows:
Petitioners hereby move this Court for an order granting them leave to submit hereafter to Respondent proof of expenses incurred at or after this proceeding, including legal, actuarial and other expenses, for the purpose of computing the correct amount of the deficiency or overpayment to be entered as the decision in this proceeding pursuant to Rule 50 of the Rules of this Court and amending the petition herein to include a prayer for this relief.
Respondent did not oppose the granting of said motion and it was granted, and relief will be granted accordingly.
Decision will be entered under Rule 50.