Opinion
Docket No. 46406.
1955-06-24
ESTATE OF ARTHUR SWEET, DECEASED, TRACY-COLLINS TRUST COMPANY, ADMINISTRATOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Maurice J. Hindin, Esq., for the petitioner. Leonard A. Marcussen, Esq., for the respondent.
Maurice J. Hindin, Esq., for the petitioner. Leonard A. Marcussen, Esq., for the respondent.
In June 1947, the decedent conveyed property to a revocable trust. Under the trust agreement, the trust income was to be paid to the decedent for life and then to his wife for her life. At their deaths, the trust was to terminate and the principal was to be distributed to the decedent's children. In July 1948, the decedent amended the trust agreement to give his wife a power of appointment ‘over such portion of the Trust Estate as equals one-half (1/2) of the value of my adjusted gross estate, as appraised for Federal Estate Tax purposes.’ Held: (1) A decision entered by the District Court of Utah construing the instruments as creating two trusts amounted to a consent decree and it is not controlling. (2) The trust instruments executed by the decedent created only one trust. (3) The power of appointment in the decedent's wife did not extend to the ‘entire corpus' of the trust, and, therefore, no part of the trust assets qualifies for the marital deduction under section 812(e)(1)(A) of the 1939 Code.
The Commissioner determined a deficiency in estate tax of $35,565.27. Part of the deficiency is conceded. The amount of the deficiency which is contested by the petitioner is $16,556.45. The question to be decided is whether two separate trusts were created by an amended trust agreement executed by the decedent during his lifetime. The petitioner asserts that the agreement created two trusts, and claims the marital deduction provided for in section 812(e)(1) of the Internal Revenue Code of 1939 with respect to the one over which the decedent's wife, who survived him, had a power of appointment. The respondent disallowed the deduction because he determined that only one trust was created by the agreement, and that the surviving wife's power of appointment did not extend to the entire corpus of such trust.
FINDINGS OF FACT.
The facts which have been stipulated are found accordingly.
Arthur Sweet, hereinafter referred to as the decedent, died on September 29, 1948. He was survived by his wife, Margaret M. Sweet, and by four children. The Tracy-Collins Trust Company of Salt Lake City, Utah, is the administrator c.t.a. of the decedent's estate. The decedent was a resident of Salt Lake City at the time of his death and for a long period prior thereto. The estate tax return was filed with the collector of internal revenue for Utah.
In June 6, 1947, the decedent, as trustor, and the Tracy-Collins Trust Company, as trustee, executed a trust agreement whereby the decedent established a revocable trust. The decedent conveyed 650 shares of common stock of the Sweet Candy Company, a Utah corporation, to the trustee for the uses and purposes of the trust. Thereafter, he conveyed additional securities and his right to a money deposit, to the trustee. Under the trust agreement, the decedent reserved the right to receive the trust income during his life, to withdraw part or parts of the trust income during his life, to withdraw part or parts of the trust principal, and to alter, amend, or revoke the trust. Paragraph III of the instrument provided as follows:
(1) Upon the death of the TRUSTOR, the TRUSTEE shall pay from the principal of the Trust Estate, any and all income, estate and transfer taxes levied upon or assessed against the property constituting the Trust Estate, and the income therefrom.
(2) Upon the death of the TRUSTOR, and after the payment of the items enumerated in paragraph (1) above, the TRUSTEE shall pay the net income from the Trust Estate annually unto MARGARET M. SWEET, wife of the TRUSTOR, during her lifetime.
Paragraph IV of the instrument provided that after the death of the decedent and his wife, the trust was to terminate and the principal and any accumulated and undistributed income were to be distributed, in equal shares, to the decedent's four children.
The trust agreement was drawn up by Samuel J. Carter, who was then engaged in the practice of law. In July 1947, shortly after the execution of the agreement, Carter became a vice president of the Tracy-Collins Trust Company and head of its trust department. On July 13, 1948, Carter wrote to the decedent as follows:
By amending your trust to give Mrs. Sweet the power to appoint final distribution upon her death, after your death, over one-half of your trust estate, your estate would save a very substantial amount in taxes in the event of your death. For instance if your estate should be appraised upon your death at $200,000.00, the tax thereon would amount to approximately $31,500.00. If, however, Mrs. Sweet is given the power of appointment over one-half of your estate, the tax on your entire estate would amount to about $4,800.00. This savings is made possible by the Revenue Act of 1948, which became effective in April of this year. I suggest that you discuss this matter with Mr. Hindin, and if you conclude that an amendment should be made to the agreement, we will prepare one upon your requesting us to do so.
The decedent desired to take advantage of the tax benefits referred to in Carter's letter and requested Carter to prepare an appropriate amendment to the trust agreement of June 6, 1947. On July 27, 1948, the decedent and the Tracy-Collins Trust Company executed ‘Supplemental Trust Agreement’ which Carter had prepared. This supplemental agreement canceled paragraph IV of the original agreement, which pertained to the distribution of corpus after the deaths of the decedent and his wife, and substituted the following:
IV.
(1) MARGARET M. SWEET, wife of the TRUSTOR, shall have the power of appointment over such portion of the Trust Estate as equals one-half (1/2) of the value of my adjusted gross estate, as appraised for Federal Estate Tax purposes. The power of appointment of the said MARGARET M. SWEET shall be exercisable in favor of herself, or in favor of her estate, or in favor of any other person, whom she shall elect to appoint. The power may be exercised by Will, or in the alternative, by written instrument other than a Will. It may be exercised from time to time and each appointment may be revoked or modified. In the absence of an appointment completely disposing of said portion of the Trust Estate, upon the death of the said MARGARET M. SWEET, said portion of the Trust Estate shall terminate and the TRUSTEE shall pay, disburse and distribute the same, in equal shares, unto the daughter of the TRUSTOR, DOROTHY SWEET HINDIN, the daughter of the TRUSTOR. BARBARA SWEET HARTMAN, the daughter of the TRUSTOR, MARGARET ‘PEGGY’ SWEET, and the son of the TRUSTOR, ARTHUR DAVID SWEET.
(2) The remainder of the Trust Estate, over which the said MARGARET M. SWEET has no power of appointment, shall terminate upon the death of the last survivor of the TRUSTOR, and said MARGARET M. SWEET, and the TRUSTEE shall pay, disburse and distribute the same, in equal shares, unto the daughter of the TRUSTOR, DOROTHY SWEET HINDIN, the daughter of the TRUSTOR, BARBARA SWEET HARTMAN, the daughter of the TRUSTOR, MARGARET ‘PEGGY’ SWEET, and the son of the TRUSTOR, ARTHUR DAVID SWEET.
(3) Should any of the said children of TRUSTOR, namely, DOROTHY SWEET HINDIN, BARBARA SWEET HARTMAN, MARGARET ‘PEGGY’ SWEET and ARTHUR DAVID SWEET, predecease the TRUSTOR, or die during the operation of the Trust Estate, then, in either of said events, the share of the Trust Estate to which such deceased child would be entitled, if living, shall be paid and distributed, in equal shares to the then living child or children of such deceased child.
(4) Should any of the said children of the TRUSTOR, namely, DOROTHY SWEET HINDIN, BARBARA SWEET HARTMAN, MARGARET ‘PEGGY’ SWEET and ARTHUR DAVID SWEET, predecease the TRUSTOR, or die during the operation of the Trust Estate, and leave no child or children surviving, then in either of said events, the share of the Trust Estate to which such deceased child would be entitled, if living, shall be paid and distributed, in equal shares, unto the then living brother or sisters of such deceased child.
The supplemental agreement ratified and confirmed the original agreement in all other respects. The final paragraph of the original agreement and of the supplemental agreement reads as follows:
IN WITNESS WHEREOF, the said ARTHUR SWEET has hereunto set his hand, and TRACY-COLLINS TRUST COMPANY, of Salt Lake City, Utah, in acceptance of these trusts, has caused these presents to be executed by its Vice-President, and its corporate seal to be hereunto affixed, duly attested by its Secretary, on the day and year first above written.
In administering the trust agreements, the trustee established and maintained records for only one trust, and filed only one fiduciary return for the trust in each of the years 1948 to 1951, inclusive.
On October 1, 1948, two days after the decedent's death, undistributed trust income in the amount of $7,943.16 was transferred by the trustee from the income cash account to the principal cash account and became part of the trust principal. Thereafter, the entire trust income, after deduction for trustee's fees and other charges, was received and held by the trust for distribution to the decedent's spouse and was disbursed to her from time to time upon her request. The first of these distributions was in the amount of $2,000 and occurred on February 14, 1950. On May 13, 1950, the Utah State inheritance taxes in the amount of $14,244.72 were paid with funds in the hands of the trustee. This disbursement was erroneously charged to the income account, contrary to the provisions of paragraph III of the trust agreement; however, this error was corrected on January 20, 1951, by a transfer of the same amount from the principal account to the income account.
Sometime in 1951 officials of the Tracy-Collins Trust Company agreed to a determination made by the respondent that the value of the trust corpus should be increased for Federal estate tax purposes. Prior to this revaluation of the trust corpus, the estate received the full benefit of the marital deduction provided for in section 812(e) of the Internal Revenue Code of 1939 by reason of the receipt by the decedent's surviving spouse of certain insurance proceeds and legacies having a value equal to or in excess of 50 per cent of the decedent's adjusted gross estate. After the value of the trust corpus was increased, the value of these insurance proceeds and legacies no longer equaled 50 per cent of the adjusted gross estate. The respondent determined that no part of the trust property qualified for the marital deduction, and a 30-day letter was issued on October 25, 1951, proposing to assert the deficiency involved in this proceeding. The petitioner filed a protest against the proposed deficiency on November 24, 1951.
As a result of the respondent's refusal to recognize that the amended trust agreement created two separate trusts, one of which qualified for the marital deduction, the Tracy-Collins Trust Company, as trustee, filed a complaint in the District Court of the Third Judicial District, Salt Lake County, Utah, on August 22, 1952. The decedent's wife and four children were named as defendants and were given notice of the action. The trustee's complaint alleged that questions of interpretation and construction of the trust instruments had arisen since the decedent's death and that it was vital to the interests of the cestuis que trust and for the protection of the trustee that the court interpret the instruments and instruct the trustee in its duties as trustee. The specific question for decision set forth in the complaint was whether the trust instruments created a single trust or two separate trusts. The trustee alleged that unless the court resolved the issue, great accounting complexities would arise which would impede the administration, control, and management of the trust assets to the injury of the defendants' interests, and that it was without an adequate remedy at law to secure the relief and protection to which it was entitled as a trustee. The complaint suggested that the instruments executed by the decedent created two separate trust estates, and the decedent intended, by executing the supplemental agreement, to have the trust assets segregated into two separate trusts.
The State court held a hearing on the complaint on September 25, 1952. The defendants filed an appearance but failed to answer or otherwise plead to the complaint and did not appear either in person or by counsel. The defaults of each and all of the defendants were entered in the cause by the court. At the trial, the plaintiff, the trustee, appeared by its attorney. The court heard sworn evidence on behalf of the trustee and argument by the trustee's attorney. The court had before it the agreement of trust and the supplemental agreement of trust. The court rendered its judgment the same day. The court found, in almost the exact language of the suggestion set forth in the complaint, in part, as follows:
9. That said trust agreement dated the 6th day of June, 1947, as amended and modified by the supplemental trust agreement dated the 27th day of July, 1948, created two separate and distinct trust estates and by said agreements the Trustor intended to divide and segregate the assets and properties conveyed, assigned and transferred to plaintiff in trust into two separate and distinct trust estates as follows:
(a) One trust estate consists of such portion of the assets and properties held by plaintiff in trust as equals one-half of the value of the Trustor's adjusted gross estate, as appraised for Federal Estate Tax purposes. As to this trust estate the defendant, Margaret M. Sweet, possesses the power of appointment in favor of herself, or in favor of her estate, or in favor of any other person whom she shall elect to appoint; * * * . That said defendant, Margaret M. Sweet, is entitled to receive during her lifetime the net income from this trust estate, payable annually to her.
(b) A second and distinct trust estate consisting of assets and properties remaining after the allocation of the trust estate first above described of the assets and properties of a value as equals one-half of the value of the Trustor's adjusted gross estate, as appraised for Federal Estate Tax purposes. Over this second trust estate the said Margaret M. Sweet shall possess no power of appointment and, the same shall terminate upon the death of Margaret M. Sweet, * * * . That the said defendant, Margaret M. Sweet, is entitled to receive during her lifetime the net income from this trust estate, payable annually to her.
The court ordered the trustee to ‘separate, segregate and divide’ all the trust properties ‘into two separate trust estates of the amounts and values hereinbefore described’ and to manage, control, and administer each trust as a separate entity. On November 12, 1952, the trustee established accounts for two separate trusts. The cash was physically divided into two equal parts placed in two separate accounts. The securities held in the trust corpus were not physically segregated, but the accounts of each of the two trusts were credited with an undivided one-half interest in each class of security then held by the trustee. The accounts were thereafter administered as separate trusts.
For the year 1952, the trustee filed a fiduciary return for each of the two trusts established pursuant to the State court judgment.
OPINION.
HARRON, Judge:
The chief question to be decided is whether any part of the property conveyed in trust by the decedent qualifies for the marital deduction under the provisions of sections 812(e)(1)(F) and 812(e)(1)(A) of the 1939 Code. Decision of the question turns upon whether the Supplemental Trust Agreement executed by the decedent on July 28, 1948, had the effect of converting one trust into two separate trusts.
Under the Supplemental Trust Agreement, the decedent's surviving spouse was given the income from the entire trust property for life, and a power of appointment over such portion of the trust estate as equals one-half of the value of the decedent's adjusted gross estate, as appraised for Federal estate tax purposes. If only one trust was created, rather than two trusts, no part of the trust property qualifies for the marital deduction under section 812(e) (1)(F) because the power of appointment in the surviving spouse did not extend to the ‘entire corpus' of one trust. Estate of Louis B. Hoffenberg, 22 T.C. 1185 (1954); Estate of Harrison P. Shedd, 23 T.C. 41 (1954).
The petitioner contends that the property subject to the power of appointment constitutes the corpus of one trust which was created by the Supplemental Trust Agreement, and that the balance of the trust property constitutes the corpus of a second, separate trust. Accordingly, the petitioner claims that the corpus of one alleged trust qualifies for the marital deduction under the provisions of section 812(e)(1)(F), because the surviving spouse had the right to the income from the trust property for life and a power of appointment over the entire corpus of the alleged trust. No claim is made that the other alleged trust, over which the surviving spouse is said to have had no power of appointment, qualifies for the marital deduction.
The petitioner relies primarily on the decision of the District Court of Utah, dated September 25, 1952. It also relies on the terms of the trust instruments to support its contention that the Supplemental Trust Agreement created two separate trusts. The petitioner does not cite any decision of this Court or of any other Federal court in support of its contention.
The evidence shows that the State court action was instituted by the trustee after the Commissioner refused to recognize the Supplemental Trust Agreement as creating two separate trusts; that the defendants in that action, the decedent's wife and four children, failed to answer or otherwise plead to the trustee's complaint; and that their defaults were entered by the court. The evidence shows, also, that the trustee's complaint set forth one specific question to be decided by the court, namely, whether two trusts were created, and that it suggested that two trusts were created by the instruments executed by the decedent.
The court's decision, which was rendered on the same day as the hearing, found, in almost the exact language of the complaint, that two trusts were created. We think it is clear from the facts that there was no real controversy between the parties in the Utah District Court; that the proceedings were nonadversary proceedings; and that the decision of the Utah District Court amounted to a consent decree rather than a decision on issues regularly submitted by parties to an adversary proceeding. We must conclude that the decision of the Utah court is not controlling here where the issue to be decided arises under the Federal Internal Revenue Code. We are unable to regard the decision of the Utah court as a determination of interests in property under State law. See, James S. Reid Trust, 6 T.C. 438; Erik Krag, 8 T.C. 1091; Lois J. Newman, 19 T.C. 708; and Estate of Ralph Rainger, 12 T.C. 483, affd. 183 F.2d 587, certiorari denied 341 7.S. 904.
Furthermore, the trustee, the plaintiff in the action filed in the Utah District Court, failed to comply with the court's judgment and order. The court ordered that the corpus of the so-called first trust, which was said to be subject to the surviving spouse's power of appointment, was to consist of properties with a value equal to one-half of the value of the decedent's adjusted gross estate. One-half of the value of the adjusted gross estate exceeded one-half of the value of the trust properties. Nevertheless, the trustee allocated only an undivided one-half interest in the trust properties to the so-called first trust, rather than such larger portion of the trust properties as equalled one-half of the value of the adjusted gross estate.
We turn now to consideration of the trust instruments executed by the decedent. The original trust agreement was executed on June 6, 1947. In July 1948, the decedent, was informed about the marital deduction provisions which were enacted in the Revenue Act of 1948. The evidence leaves no doubt that the decedent executed the Supplemental Trust Agreement on July 27, 1948, in order to obtain the benefit of these new provisions. But the question to be decided is not whether the decedent intended to obtain the benefits of the marital deduction for his estate. It is, rather, whether the language of the trust agreement, as amended, discloses an intention to create two trusts. U.S. Trust Co. v. Commissioner, 296 U.S. 481; Estate of Louis B. Hoffenberg, supra; James S. Reid Trust, supra. The two intentions are not synonymous. Under the circumstances of this case it is clear that the decedent could have intended to secure the tax benefits without intending to create, or without being aware of the necessity for creating, two trusts. Carter's letter of July 13, 1948, which advised the decedent of the provisions of the Revenue Act of 1948, indicated only that the decedent's wife should be given a power of appointment ‘over one-half of your trust estate,‘ or ‘over one-half of your estate,‘ and it did not refer to the necessity for creating two separate trusts. In any event, the test is the intention expressed by the trust instruments. Estate of Louis B. Hoffenberg, supra; James S. Reid Trust, supra. We think a fair reading of these instruments disclose an intent to create only one trust. The original trust instrument refers to the trust in the singular 26 times, most frequently by the phrase ‘the Trust Estate.’ This instrument also utilized the word ‘trusts' twice, once when the decedent reserved to himself the power to ‘alter, amend, revoke, cancel or annul, in whole or in part, this agreement, and the trusts hereby created,‘ and again in the final paragraph, which recites that the trustee had caused the trust agreement to be executed on its behalf ‘in acceptance of these trusts.’ We do not attach much significance to the uses of the word ‘trusts' in the original agreement. The original agreement admittedly created only one trust, and the two plural references obviously refer to the plurality of beneficial interests and fiduciary obligations arising from the trust. The Supplemental Trust Agreement, which provided only a substitution for paragraph IV of the original agreement, contains nothing to indicate an intention on the decedent's part to change the manner in which the trust properties were held or to have the properties thereafter held in two separate trusts. On the contrary, the eight references to the trust property in the revised paragraph IV are all to ‘the Trust Estate,‘ the same phrase used throughout the original instrument, and demonstrate an intention on the grantor's part that the properties should be held as a single trust.
We conclude that the Supplemental Trust Agreement created only one trust, and that no part of the trust assets qualifies for the marital deduction under the provisions of section 812(e)(1)(F) and 812(e)(1)(A) of the 1939 Code. The respondent's determination is sustained.
It appears that the Supplementary Trust Agreement was prepared for the decedent within a short time after the Revenue Act of 1948 was enacted, and considerably before May 13, 1949, when the Commissioner's regulations pertaining to the marital deduction provisions of the 1948 Act were approved.
The Supplementary Trust Agreement appears to have been drafted more with an eye to section 812(e)(1)(H),
See T.D. 5699, 1949-1 C.B. 181, 191, 212.
as added by the then new statute, than to the requirement of section 812(e)(1)(F) that the surviving spouse have a power to appoint the ‘entire corpus' of the trust. When the trust instruments subsequently were questioned by the respondent, the trustee endeavored to obtain a helpful decision from the Utah District Court, as set forth in the Findings of Fact. But, we have pointed out above, the decision of the State court is not controlling in our consideration of the question, and the relief sought by the petitioner cannot be granted on the basis of the State court's consent decree.
SEC. 812. NET ESTATE.For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate—(e) BEQUESTS, ETC., TO SURVIVING SPOUSE.—(1) ALLOWANCE OF MARITAL DEDUCTION.—(H) Limitation on Aggregate of Deductions.— The aggregate amount of the deductions allowed under this paragraph (computed without regard to this subparagraph) shall not exceed 50 per centum of the value of the adjusted gross estate, as defined in paragraph (2).
Obviously, the result which is reached here is harsh. It is unfortunate that the desire of the decedent and of his advisors, namely, to amend the original trust so that the estate would have the benefits of the marital deduction under section 812(e)(1)(F) of the 1939 Code, is frustrated by the lack of a correct understanding of all of the technical requirements of the statute. The conclusion which this Court is obliged to reach is particularly unfortunate because the decedent originally created a revocable trust and he could have, with ease, revoked that trust and substituted two separate trusts. But in our opinion, with all due deference to the decree of the District Court of Utah in a nonadversary proceeding, the decedent did not create two trusts.
The Court has given the problem careful as well as sympathetic consideration, but after considerable deliberation and lapse of time, during which the mandate of the applicable statutory provision has been made clear, it is concluded that the respondent's determination is correct.
Decision will be entered for the respondent.