Opinion
Docket No. 106231.
1943-03-17
EDITH HILLES DEWEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Martin W. Meyer, Esq., for the petitioner. Harry L. Brown, Esq., for the respondent.
Petitioner's father created an inter vivos short term trust on May 16, 1924, which he extended several times. Under the terms of the trust the grantor retained at all times the right to change the beneficiaries and to substitute new beneficiaries, and to withdraw amounts from the principal not exceeding $50,000. The trust income was payable to the grantor, and, if the trust terminated prior to his death, the principal was distributable to him. Upon the death of the grantor in 1935 the trustee distributed to petitioner certain securities out of the trust corpus in distribution of her share of the residue of the trust, and she sold the securities during the taxable year. Under all of the facts it is held, that section 113(a)(5) of the Revenue Act of 1936 applies; that the grantor reserved the right to revoke the trust; that the basis of the securities received by petitioner is the fair market value at the date of the grantor's death, under section 113(a)(5); and that the date of the grantor's death is the date of acquisition for purposes of determining gain or loss upon sale. Martin W. Meyer, Esq., for the petitioner. Harry L. Brown, Esq., for the respondent.
Respondent determined a deficiency of $1,006.95 in petitioner's income tax liability for the year 1937. Petitioner contests the deficiency in part, only, on the ground that respondent erred in determining that the basis for determining gain or loss on the sale of certain securities was the fair market value on the date of the death of petitioner's father. The securities in question were obtained by petitioner after her father's death, from an inter vivos trust established by her father, and were sold by her during the taxable year.
Petitioner filed her income tax return for 1937 with the collector of internal revenue for the first district of Pennsylvania. The facts have been stipulated.
FINDINGS OF FACT.
Petitioner is an individual, residing at Sweetwater Farm, Glen Mills, Pennsylvania.
On May 16, 1924, Thomas Allen Hilles, petitioner's father, hereinafter referred to as the grantor, executed a trust agreement with the Wilmington Trust Co., as trustee. The trust was to continue to May 16, 1929, if the grantor was living at that time. It was provided in the trust agreement that the grantor, upon written notice to the trustee on or before May 16, 1929, might extend the term of the trust for such period as he might elect, provided that during such extended term the trust should be irrevocable. Upon the termination of the trust, the property, together with any accumulated income, was to be distributed to the grantor. It was provided, however, that if the grantor should die before May 16, 1929, or before any date to which the trust had been extended, the principal of the trust fund should be paid to thirteen named beneficiaries in the amounts specified. Haverford College was named as the beneficiary of the remainder of the corpus after all other distributions.
During the continuance of the trust, the income was payable monthly to the grantor. The trustee was empowered to pay to the grantor, on his request in writing, not to exceed in the aggregate $50,000 from the principal of the trust. The grantor expressly reserved the right at any time during the term of the trust to change the beneficiary or beneficiaries, and to substitute new and other beneficiaries in lieu thereof. There was no provision preventing the grantor from naming his personal representative or his estate beneficiary in the event of his death prior to the termination of the trust. The grantor also reserved the power to appoint a successor trustee in the event that the trustee should resign.
On May 11, 1929, the grantor extended the term of the trust agreement until December 31, 1934, and for such further period as he might designate by written notice delivered to the trustee on or before that date. On December 20, 1934, the grantor extended the trust until December 31, 1937, and for such further period as he might designate by written notice delivered to the trustee on or before that date. In each instance, the trust was declared to be irrevocable during the period of extension.
On July 15, 1927, the grantor entered into a written agreement with the trustee and Haverford College. The trustee agreed to invest $125,000 from the corpus of the trust fund with Haverford College, in exchange for an agreement on the part of the college to pay to the grantor an annuity of $6,000 for the life of the grantor. The payment was accepted by the college as a present payment on account of any share which it might have in the residue of the corpus of the trust. The grantor agreed to hold the trustee harmless and to indemnify it against any claims, loss, or damage which the trustee might sustain by reason of the above transaction.
Prior to August 20, 1935, the grantor, pursuant to the power reserved in the trust agreement, made a number of changes in the beneficiaries under the trust, but in none of the changes was the grantor or his estate named as a beneficiary in the event of termination of the trust through death of the grantor.
On May 9, 1930, the grantor directed the trustee to segregate certain specified securities, none of which are involved in this proceeding, from the balance of the securities held under the trust, and to pay the income from those securities to petitioner, and upon termination of the trust to transfer the securities to a prior trust established for the benefit of the petitioner.
On August 20, 1935, the grantor revoked all gifts of principal to become effective on his death (except the provisions made for petitioner in the instrument executed May 9, 1930) and named new and different beneficiaries. It was provided in paragraph 11 of the amendment of August 20, 1935, that, after payment of certain specified sums, the trustee should pay out of the remaining balance $150,000 to petitioner, and then $250,000 to Haverford College, and then, if there was any further balance remaining, the trustee should divide such balance equally between petitioner and Haverford College.
The written instrument of August 20, 1935, provided further as follows:
I have already declared this trust to be irrevocable before December 31, 1937, and I now declare that it shall continue to be irrevocable after that date until I shall deliver to you a writing directing otherwise.
The grantor died on November 15, 1935, without having made any further changes, alterations, or modifications in the trust agreement of May 16, 1924, as extended.
Also on August 20, 1935, the petitioner's father transferred to her, by way of an absolute gift, a number of securities and all of his tangible personal property. On the same date he also transferred a bank account to a trust, the income from which was to be paid to him for life. Upon his death the principal was to be paid to petitioner. The grantor reserved the right to withdraw any part of the principal of the trust. The above gifts were made at the time petitioner's father first learned that upon his death his wife, from whom he had been separated for forty years, could take personal property against his will. His will, at that time, left everything to petitioner.
The gifts made on August 20, 1935, were made as a substitute for a testamentary disposition. However, the changes in the beneficiaries of the May 16, 1924, trust did not constitute a testamentary disposition of property and the securities in question were not received by petitioner by bequest, devise, or inheritance.
During the continuance of the trust, the trustee made certain changes in investments, and among the securities purchased by the trustee were the following:
+---------------------------------------------------------------+ ¦Security ¦Shares¦Date of ¦Cost ¦ +----------------------------------+------+-------------+-------¦ ¦ ¦ ¦acquisition ¦ ¦ +----------------------------------+------+-------------+-------¦ ¦Electric Bond & Share Co ¦100 ¦June 29, 1931¦$10,375¦ +----------------------------------+------+-------------+-------¦ ¦Electric Bond & Share Co ¦100 ¦July 7, 1931 ¦10,375 ¦ +----------------------------------+------+-------------+-------¦ ¦Missouri, Kansas & Texas preferred¦100 ¦Dec. 7, 1928 ¦10,525 ¦ +----------------------------------+------+-------------+-------¦ ¦Diamond Ice & Coal Co. common ¦200 ¦June 26, 1930¦9,000 ¦ +----------------------------------+------+-------------+-------¦ ¦Diamond Ice & Coal Co. preferred ¦72 ¦June 30, 1930¦7,200 ¦ +---------------------------------------------------------------+
The above securities were held in the trust on November 15, 1935, the date of the grantor's death, and on that date they had a fair market value as follows:
+-----------------------------------------------------+ ¦Security ¦Shares¦Fair market¦ +----------------------------------+------+-----------¦ ¦ ¦ ¦value ¦ +----------------------------------+------+-----------¦ ¦Electric Bond & Share Co ¦200 ¦$14,600.00 ¦ +----------------------------------+------+-----------¦ ¦Missouri, Kansas & Texas preferred¦100 ¦1,112.50 ¦ +----------------------------------+------+-----------¦ ¦Diamond Ice & Coal Co. common ¦200 ¦4,500.00 ¦ +----------------------------------+------+-----------¦ ¦Diamond Ice & Coal Co. preferred ¦72 ¦7,200.00 ¦ +-----------------------------------------------------+
On January 16, 1937, the trustee distributed to petitioner the above securities and certain other property, as her one-half share of the residue of the trust under paragraph 11 of the amendment executed August 20, 1935.
During 1937 petitioner sold the above securities on the following dates and for the following prices:
+-------------------------------------------------------------------+ ¦Security ¦Shares¦Date sold ¦Selling ¦ +----------------------------------+------+--------------+----------¦ ¦ ¦ ¦ ¦price ¦ +----------------------------------+------+--------------+----------¦ ¦Electric Bond & Share Co ¦200 ¦Feb. 16, 1937 ¦$17,434.29¦ +----------------------------------+------+--------------+----------¦ ¦Missouri, Kansas & Texas preferred¦100 ¦Dec. 10, 1937 ¦1,087.41 ¦ +----------------------------------+------+--------------+----------¦ ¦Diamond Ice & Coal Co. common ¦200 ¦Sept. 16, 1937¦4,500.00 ¦ +----------------------------------+------+--------------+----------¦ ¦Diamond Ice & Coal Co. preferred ¦72 ¦June 25, 1937 ¦7,475.00 ¦ +-------------------------------------------------------------------+
On her Federal income tax return for 1937, petitioner computed her ‘recognizable gain or loss‘ on the sale of the above securities by using as a basis the cost of the securities to the trust, as set forth above, and by using as the date of acquisition, the date on which the securities were acquired by the trustee. Using that method, petitioner took into account 40 percent of the resultant loss under section 117(a) of the Revenue Act of 1936, or $6,791.32, but claimed as an allowable loss only $2,000, as provided by section 117(d) of the Revenue Act of 1936.
The respondent determined that the fair market value on the date of the grantor's death should be used as the basis in computing the gain or loss on the sale of the securities, and that the date of the grantor's death should be used as the date of acquisition for purposes of determining the percentage of gain or loss to be recognized. Respondent, therefore, determined that petitioner realized a gain of $3,094.20 on the sale of the securities, and that $2,472.38 of that gain should be included in petitioner's gross income.
After the filing of the petition on November 24, 1941, petitioner paid a deficiency in the amount of $1,006.95, plus interest thereon in the amount of $222.69, to the collector of internal revenue at Philadelphia, Pennsylvania.
OPINION.
HARRON, Judge:
The question is what the proper basis was of certain securities sold by petitioner during the taxable year. The securities were received by the petitioner after the death of her father, from an inter vivos trust established by him during his lifetime. Under section 113(a)(5) of the Revenue Act of 1936,
the basis of the securities in petitioner's hands is the fair market value at the date of the grantor's death if the securities were obtained by bequest, devise, or inheritance, or if they were obtained from an inter vivos trust the income of which was payable to the grantor during his life and the grantor at all times retained the power of revocation of the trust. The principal issue is whether or not petitioner's father retained at all times a power to revoke the trust.
SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.(a) BASIS (UNADJUSTED) OF PROPERTY.— The basis of property shall be the cost of such property; except that—(5) PROPERTY TRANSMITTED AT DEATH.— If the property was acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor's death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor's death. For the purpose of this paragraph property passing without full and adequate consideration under a general power of appointment exercised by will shall be deemed to be property passing from the individual exercising such power by bequest or devise.
Respondent contends that the grantor did retain at all times power over the trust property which amounted to a power to revoke, and that a power to revest in the grantor is a power to revoke within the meaning of section 113(a)(5). In the alternative, respondent argues that the amendment of August 20, 1935, was testamentary in character, so that petitioner received the securities ‘by bequest, devise, or inheritance‘ within the meaning of section 113(a)(5). Petitioner argues that the statute must be construed strictly and that under such construction the grantor did not at all times retain the power to revoke the trust, and that the property was not received by petitioner by bequest, devise, or inheritance.
The trust in question was originally for a term of five years. The term was extended twice, and each time it was provided that it should be irrevocable during the period of extension. The grantor did, however, reserve the right to withdraw up to $50,000 of the corpus, and he did reserve the right to change beneficiaries to whom the trust property was to be distributed upon his death. Except for the securities irrevocably set aside for the petitioner in the amendment of May 9, 1930, the grantor was himself the beneficiary as to income, and as to principal upon the expiration of the term of the trust. Only in the event of his death was the principal to be distributed to others. The power to change beneficiaries reserved by the grantor, was, however, broad enough to permit the grantor to name himself or his estate sole beneficiary upon the termination of the trust for any cause, including his death. Respondent contends that the power reserved by the grantor gave him such complete control over the trust property that the trust was revocable within the meaning of section 113(a)(5).
The applicable portion of section 113(a)(5) first appeared in the Revenue Act of 1938, where it was originally proposed in conference. See House Report 1882, 70th Cong., 1st sess., p. 3. At page 15 of the conference report the following explanation of the provision is given:
A special rule is provided in section 113(a)(5) by which to determine the basis of property transferred in trust with the right reserved to the grantor at all times prior to his death to revoke the trust where the sale or other disposition of property occurs after the death of the grantor. This rule includes sales or other dispositions by the trustee and also by a beneficiary of the trust. In view of the complete right of revocation in such cases on the part of the grantor at all times between the date of creation of the trust and his death, it is proper to view the property for all practical purposes as belonging to the grantor rather than the beneficiaries and to treat the property as vesting in the beneficiaries according to the terms of the trust instrument, not at the date of creation of the trust, but rather on the date of the grantor's death, for the purpose of determining gain or loss on sale or other disposition of the property after the grantor's death by the trustee or by a beneficiary. Accordingly, it is provided that the basis of such property in the hands of the persons entitled thereto by the terms of the trust instrument after the grantor's death shall be the same as if the trust instrument had been a will executed on the date of his death. Thus property acquired by virtue of revocable trusts of the kind described is treated, for all practical purposes, the same as though it had been transmitted by the grantor by will at his death.
The above statement from the Conference Committee's report indicates that it was the intention of Congress to treat in the same manner as testamentary transfers, transfers of property over which the grantor retained such control that the property should be treated, for all practical purposes, as belonging to him, and not to the beneficiary. There is nothing to indicate that the term ‘right * * * to revoke‘ was used in any technical sense, and, in the absence of such indication, we must heed the repeated statements of the Supreme Court to the effect that ‘the statute taxes not merely those interests which are deemed to pass at death according to refined technicalities of the law of property.‘ Helvering v. Hallock, 309 U.S. 106, 112.
Here the grantor never gave us completely the power to draw the property back to himself. Even in a technical sense, he never parted with the right to get back the property for more than five years at at time, and during the period when he was technically unable to revoke the trust he possessed an absolute power to change the beneficiary. There was nothing to prevent the exercise of that power in favor of his estate or his legal representatives in the event of the termination of the trust by reason of his death. The existence of that right gave to the grantor such power over the trust property that it must be treated, for all practical purposes, as belonging to him and not to the beneficiary.
Furthermore, the grantor could actually regain possession of the trust corpus during his lifetime without waiting for the term of the trust to expire. He was already the life beneficiary as to income, and the remainder beneficiary as to principal, in the event of the termination of the trust upon expiration of its term during his lifetime. Respondent points out that under the law of Pennsylvania, if the grantor life beneficiary had named himself the sole remainderman, he could have compelled the termination of the trust. Respondent cites Long v. Tradesmen's National Bank & Trust Co., 108 Pa.Super.Ct. 363; 165 Atl. 56. See also section 339, American Law Institute, Restatement from the Law of Trusts. Thus it appears that the grantor, at all times during his lifetime, in reality, possessed a power to revoke the trust in question.
An analogous situation is presented in cases arising under section 166, under which the income from a trust is taxable to the grantor if he retains power to revest in himself title to the corpus. In construing that section it has been held that power to change the beneficial interest, which does not prevent a change in favor of the grantor, is such a power as to make the income of the trust taxable to the grantor. Nora C. Todd et al., Executors, 32 B.T.A. 1067; affd., 82 Fed.(2d) 1020; Lelia W. Stokes, 28 B.T.A. 1245; see Knapp v. Hoey, 104 Fed.(2d) 99.
The case of Minnie M. Fay Trust ‘A‘, 42 B.T.A. 765, relied upon by petitioner, is distinguishable from the present case. In the Fay Trust case, it was conceded that the power in question was a power to revoke. That power was possessed, however, by someone other than the grantor. The question was whether or not a power to revoke possessed by someone other than the grantor satisfied the requirements of section 113(a)(5). It was held that the requirements of the statute were not satisfied. A holding that the power to revoke possessed by someone other than the grantor does not come within section 113(a)(5) by no means precludes the holding that the power possessed by the grantor in the present case constituted a power to revoke within the meaning of the statute.
It is concluded that the grantor at all times during his lifetime did possess a power to revoke the trust in question, within the meaning of the statute. Accordingly, the basis of the property received by petitioner from that trust was the fair market value at the time of the grantor's death, and the date of acquisition for purposes of determining the recognizable gain or loss on the sale of securities was also the date of the grantor's death.
The conclusion reached makes it unnecessary to consider respondent's alternative contention.
Decision will be entered for the respondent.