Opinion
Docket No. 12341.
1948-03-24
ESTATE OF ELIZABETH HAWXHURST DAVEY, DECEASED, ELIZABETH COVERDALE, DAVID MURRAY DAVEY AND MARY M. DAVEY, EXECUTORS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William H. Harrar, Esq., for the petitioner. Thomas R. Charshee, Esq., for the respondent.
In 1932 petitioner's decedent, a nonresident alien, created a revocable inter vivos trust, naming a New York bank as trustee. Three months prior to her death on March 20, 1945, she revoked the trust by delivery of a properly executed revocation instrument to the trustee. The bank converted the trust assets into cash at her direction and placed the funds on deposit, awaiting transmittal to her. Held, the bank deposits were held ‘for‘ the decedent within the meaning of section 863 (b), I.R.C., and, therefore, were not subject to estate tax. William H. Harrar, Esq., for the petitioner. Thomas R. Charshee, Esq., for the respondent.
Petitioner seeks a redetermination of an estate tax deficiency in the amount of $95.54 and claims an overpayment of estate tax in the amount of $4,001.77. The only question to be decided is whether certain funds arising from the liquidation of an inter vivos trust were deposited with a bank by or for a nonresident alien within the meaning of section 863 (b) of the Internal Revenue Code.
FINDINGS OF FACT.
Petitioner, an estate of a deceased nonresident alien, filed its estate tax return with the collector of internal revenue for the second district of New York.
Elizabeth Hawxhurst Davey (hereinafter referred to as the decedent) died testate on March 20, 1945, while a British subject and a resident of Middlesex County, England. She was not engaged in business in the United States at the time of her death.
Elizabeth Coverdale, David Murray Davey, and Mary M. Davey are the duly appointed, qualified, and acting executors of her estate, pursuant to a decree dated September 27, 1945, of the English High Court of Justice, Probate Division.
On January 27, 1932, the decedent created a trust, naming the Central Hanover Bank & Trust Co. (hereinafter referred to as the bank) of New York as trustee. She transferred to the bank numerous securities, consisting largely of stocks and bonds, to constitute the trust corpus. The trust indenture provided that the net income of the trust be paid to the decedent for her life, with remainders over to her husband and children in a manner not material to the issue herein. Articles 4 and 6 of the trust instrument provided as follows:
4. The Grantor shall have the right and power at any time and from time to time during her life by deed or other instrument executed and acknowledged in the form required by law to entitle a conveyance of real property to be recorded to revoke this Trust Indenture, or to alter or amend any term or provision thereof in any way and to any extent that may seem to her desirable, and to withdraw all or any part of the property at any time constituting the trust estate except that the Grantor shall have no power to diminish the compensation of the Trustee. Upon delivery to the Trustee by the Grantor of such deed or other instrument, this Trust Indenture shall be deemed to have been revoked, altered or amended in the manner and to the extent therein set forth and in case of any revocation or in case all or any part of the property at any time constituting the trust estate shall be withdrawn in accordance with the provisions hereof, the property constituting the trust estate or the portion thereof which is withdrawn or as to which the trust is revoked shall be paid by the Trustee in the manner and to the persons directed in and by such instrument.
6. This Trust Indenture shall be construed according to the laws of the State of New York where it is made and where the trust estate is to be administered.
On October 19, 1944, the decedent instructed the bank by letter to sell all the securities in the trust at the best price obtainable, to airmail ‘total revocation papers,‘ together with details of the sales of securities, as soon as possible, and to remit the sales proceeds to the bank's London, England, office for the joint account of Elizabeth Coverdale and Mary M. Davey. Similar instructions were sent by cable on October 25, 1944, by the bank's London branch to the New York office, the cable being confirmed by airmail letter bearing the same date. Pursuant to these instructions, the bank proceeded to carry out the decedent's wishes and immediately began selling all the securities in the trust, reducing the same to cash.
On November 2, 1944, the bank sent a letter to the decedent stating that the attorneys for the trust had prepared a form of revocation (which was enclosed with the letter) and that the bank's account of its proceedings as trustee could be settled by a receipt and release agreement rather than by judicial decree if the decedent wished. The letter further suggested that the decedent might prefer to have the funds remitted to England for her own account in order to avert a possible gift tax liability occasioned by the disposition originally requested. The decedent answered the bank's correspondence of November 2, 1944, by letter of December 1, 1944, in which she enclosed the original revocation documents duly signed. She also made the following statement:
* * * I wish you to prepare a release agreement for the Trust and to send this to me by Airman as soon as possible. You will also have noted the new instructions to remit the proceeds of the Trust when available to your London Office for my Account.
This letter containing the enclosed revocation form was relayed by the bank's London office to its New York office on December 5, 1944, together with an accompanying letter repeating the new instructions. The gist of these letters was confirmed in a cable sent on the same day from the London to the New York office. The letter and revocation document were received and accepted by the bank in New York on December 20, 1944.
The material portion of the revocation instrument, executed and acknowledged by the decedent before the United States consul in London on December 4, 1944, provided as follows:
Pursuant to and in exercise of the right to revoke reserved to the undersigned, as Grantor, in and by Article 4 of that certain trust indenture dated January 27, 1932, made by and between the undersigned, as Grantor, and Central Hanover Bank and Trust Company, as Trustee, as amended by instruments dated January 7, 1935, May 15, 1941 and March 13, 1944, the undersigned does hereby wholly revoke said trust indenture and each and every term and provision thereof and each and every trust thereby created, and does hereby direct said Central Hanover Bank and Trust Company to deliver to the undersigned all property held by it subject to the terms and provisions of said indenture.
Meanwhile all trust assets were duly converted into cash. Shortly after the middle of January 1945 the bank prepared an accounting of the administration of the trust from the date of its origin through January 16, 1945, which indicated total assets as follows:
+-----------------------------------------------------------------+ ¦Principal balance on hand—cash ¦$38,092.68¦ +------------------------------------------------------+----------¦ ¦Balance of undistributed income remaining on hand—cash¦990.28 ¦ +------------------------------------------------------+----------¦ ¦Total ¦39,082.96 ¦ +-----------------------------------------------------------------+
On February 5, 1945, the accounting, together with a receipt and release agreement, was forwarded to the decedent in London, with the request that the receipt and release agreement be executed and returned. The decedent executed the receipt and release agreement and acknowledged it before a London notary public on March 1, 1945. On the following day the notarial acknowledgment was authenticated by a vice consul of the United States in London. This instrument was received by the bank on April 2, 1945, after the death of the decedent.
The bank is a New York corporation, organized under the banking laws of that state. It conducts business as a bank and a trust company, maintaining a banking department and a trust department as two separate operating entities. It has been a member of the Federal Reserve System since prior to 1928.
It has been the practice of the trust department to deposit cash received, either by initial transfers in trust or from liquidation of trust assets, in its banking department under a general account labeled ‘Personal Trust Funds.‘ These moneys are insured by the Federal Deposit Insurance Corporation and are included in the deposits listed in the bank's balance sheets and published financial statements. The funds are commingled with the general funds and are used freely in the course of the banking business. The bank does not collateralize such funds when they are used in its banking business.
The foregoing procedures were followed with respect to the cash proceeds derived from sales of securities held in the decedent's trust. On the date of the decedent's death the money so held by the bank totaled $39,002.71.
The bank prepared and filed decedent's estate tax return, embracing the net cash proceeds of the trust, which were the only assets in this country. The parties have stipulated that the correct amount of these proceeds should be $39,002.71 rather than $39,082.96, as erroneously reported. At any rate, no computation of estate tax was made, liability therefor being expressly denied. The collector of internal revenue made an assessment and demanded payment on June 20, 1946, of $4,001.77 in estate tax. This amount was paid on October 9, 1946.
The Commissioner determined an additional estate tax liability of $95.54, which gave rise to the instant notice of deficiency. Commissions and attorney fees claimed as deductions in the tax return were reduced by the respondent to amounts representing ‘the portions of such expenses applicable to property situated in the United States.‘
OPINION.
ARUNDELL, Judge:
Estate tax liability imposed on nonresident aliens not engaged in business in the United States falls only on those owning property situated in this country on the date of death. Money deposits meeting the requirements of section 863 (b) of the Internal Revenue Code
are not deemed to be property within the United States for this purpose. The parties have stipulated that the decedent was a nonresident alien not doing business in this country at the time of her death. Consequently, the question for decision are whether the funds arising out of the liquidation of the trust principal were deposited ‘with any person (corporation) carrying on the banking business,‘ and, if so, whether they were deposited ‘for‘ the decedent within the purview of this exemption provision.
SEC. 863. PROPERTY WITHOUT THE UNITED STATES.The following items shall not, for the purpose of this subchapter, be deemed property within the United States:(b) BANK DEPOSITS.— Any moneys deposited with any person carrying on the banking business, by or for a nonresident not a citizen of the United States who was not engaged in business in the United States at the time of his death.
We have no hesitation in concluding that the funds were ‘bank deposits‘ as that term is used in section 863 (b) and as generally understood in banking parlance. Where large banking institutions have separate trust departments, the specialized purpose of which is to serve in a fiduciary capacity, it is common practice for the trust funds to be lodged by the trust department in a general deposit account with the banking department. This is expressly authorized by statute in New York. New York Ranking Law, sec. 100 (b). These deposits possess the usual characteristics of general deposits by individual or corporate depositors, in that they are subject to the order or demand of the trust department out of current banking funds, freely commingled therewith, and insured by the Federal Deposit Insurance Corporation.
The bank has been a member of the Federal Reserve System for many years and is subject to the New York banking laws. Because its trust department deposited the moneys derived from the sale of the trust securities in the manner above described, these deposits were clearly of a type which satisfy the statute. Cf. City Bank Farmers Trust Co. v. Pedrick, 69 Fed.Supp. 517.
Respondent contends that the proceeds were not deposited ‘for‘ the decedent, but were held in trust at the time and, therefore, were deposited ‘for the trustee or custodian thereof acting in a fiduciary capacity.‘ The petitioner urges that it is immaterial whether the funds were held by the bank qua trustee, because the statutory requirements of section 863 (b) have been fully satisfied.
In Estate of Karl Weiss, 6 T.C. 227, we said:
The words used must be given their usual meaning, since no reason appears for giving them any special or restricted meaning. Congress did not describe the deposit as one in the name of the decedent or one made directly by him, nor did it mention a direct contractual relationship between him and the bank. If it had intended to limit the application of the section, as contended for by the respondent, it could have found better words to convey that thought.
The use of the words ‘by or for‘ indicates that the deposit may be made by someone other than the decedent. A usual meaning of ‘for‘ when thus coupled with ‘by‘ is ‘for the use and benefit of‘ or ‘upon behalf of.‘
The objective facts are readily apparent and strongly persuasive. The trust indenture expressly provided that the ‘trust shall be deemed to have been revoked‘ by the delivery to the trustee of a properly executed instrument of revocation by the decedent. The revocation papers, duly executed, acknowledge, and tendered by the decedent, were received and acknowledged by the bank three months prior to her death. The respondent has not assailed the validity of these documents, which clearly terminated the trust at this point. The accounting was completed by the trustee and acknowledged by the decedent's execution of the receipt and release agreement immediately prior to her death.
With respect to final distribution, neither the trust indenture nor the instrument of revocation required more than the delivery of the trust assets in kind by the bank qua trustee. The conversion of the securities into cash was directed by the decedent (and completed prior to her death) under special instructions contained in a letter which was received separate and apart from the order of revocation. It would appear that the act of conversion was performed by the bank, not within the scope of the trustees' powers and duties appropriate for a complete winding up, but as an agent complying with the order of its principal.
On these facts, therefore, we have no doubt that the deposits to which the decedent had a direct, enforceable claim were held ‘for‘ her ultimate use and benefit. Accordingly, we hold that the cash in the amount of $39,002.71 on deposit with the bank at the decedent's death, awaiting transmittal to her, is not subject to the estate tax.
Reviewed by the Court.
Decision will be entered under Rule 50.