Summary
defining a `sale' as "an exchange resulting from a bargain"
Summary of this case from Kimbell v. U.S.Opinion
No. 167, Docket 21142.
March 30, 1949.
Petition by estate of Henry J. Mollenberg and others, executors opposed by the Commissioner of Internal Revenue, to review a decision of the Tax Court determining a deficiency in estate tax.
Affirmed.
The decedent died on July 11, 1943, survived by two sons (the petitioners) and two daughters. In 1910 the decedent and Jacob Betz organized Mollenberg-Betz Machine Co., Inc. The company operated a machine-shop and an agency for the sale and installation of refrigeration equipment. Half of the stock, 50 shares, was owned by decedent and half by the Betz family. The decedent, president of the company, was active in the business until 1930, when his wife died. Thereafter, he lost interest in the business and began to work shorter hours; after 1935 he was absent much of the time. His son Harold was in charge of the business in his absence.
On June 9, 1931, decedent executed his last will, giving each of his daughters a 10% share of his residuary estate, and giving his stock in the Mollenberg-Betz Company in equal shares to his sons. At that time, his sons, both of whom were trained engineers working for the company, had long been dissatisfied with the compensation they received. They complained to decedent frequently; he usually told them they would own the business eventually and would get more then. Dissatisfied with his will, they told him they wanted some guarantee that, after his death, they would own his share of the business. They were concerned that he might change his will so that the Betz family would get control of the business (one of his daughters had married Betz' son) or that he might marry again and change his will. One day they told decedent that a friend had created a trust to insure that his business would be transferred to his sons. Decedent said: "We will get this settled," and shortly thereafter consulted his attorney.
On December 28, 1935, he transferred his 50 shares of stock in trust under an indenture which made him sole trustee during his life. The indenture provided that the trust was to continue until the death of both sons. One-half of the income was to be paid to his son Harold, the other half to his son Richard. On the death of either son, his share of income was to be paid to his issue or in default of issue to his brother. On the death of both sons, the principal was to be distributed one-half to the issue living of each son, or in default of issue of one son, to the other's issue; if neither son was survived by issue, the principal was to go to the distributees then living of the decedent.
Article First provided as follows:
"(a) The principal of said trust the Trustee shall hold, manage, sell, invest and reinvest the same and every part thereof in the manner hereinafter set forth and shall collect, recover and receive the rents, issues, interest and income thereof, hereinafter called `income' and after deducting the commissions of the Trustee as hereinafter provided and other proper and necessary expenses in connection with the administration of the trust shall pay over said income and distribute the principal in the following manner: (b) Until the expiration of the trust, one-half of the income therefrom shall be paid over to Harold J. Mollenberg, son of the Grantor, monthly or quarterly or in such other periodical payments as the Trustee may deem advisable and upon the death of Harold J. Mollenberg prior to the expiration of the trust, the said income shall be paid over to his issue in equal shares, per stirpes and not per capita or applied to their use and benefit, respectively, in the discretion of the Trustee or in default of issue said income shall be paid over to Richard H. Mollenberg until the expiration of the trust. The other one-half of said income shall be paid over to Richard H. Mollenberg, son of the Grantor, monthly or quarterly or in such other periodical payments as the Trustee may deem advisable and upon the death of Richard H. Mollenberg prior to the expiration of the trust, the said income shall be paid over to his issue in equal shares, per stirpes and not per capita or applied to their use and benefit, respectively, in the discretion of the Trustee or in default of issue said income shall be paid over to Harold J. Mollenberg until the expiration of the trust. (c) The trust created by this instrument shall continue until the death of both Harold J. Mollenberg and Richard H. Mollenberg, sons of the Grantor, subject, however, to the provisions relative to the invasion of principal under and pursuant to Article Second herein and upon the death of both the said Harold J. Mollenberg and Richard H. Mollenberg the Trustee shall make final distribution of the trust estate, if any, then remaining in the hands of the Trustee as follows: One-half thereof shall be paid over and distributed to the issue then living of Harold J. Mollenberg, share and share alike, per stirpes and not per capita, or in default of issue then to the issue of Richard H. Mollenberg, share and share alike, per stirpes and not per capita or in the event no issue of Richard H. Mollenberg be then living then to the distributees of the Grantor then living under and pursuant to the laws of the State of New York. The other one-half of said trust estate, if any, shall be paid over and distributed to the issue then living of Richard H. Mollenberg, share and share alike, per stirpes and not per capita, or in default of issue then to the issue of Harold J. Mollenberg, share and share alike, per stirpes and not per capita or in the event no issue of Harold J. Mollenberg be then living then to the distributees of the Grantor then living under and pursuant to the laws of the State of New York.
Article Second provided as follows: "(a) The Trustee is hereby authorized in his sole discretion to withdraw from the principal of the trust from time to time such sum or sums as he in his sole discretion may deem advisable and pay over the same to the aforesaid beneficiaries, or any of them, and the judgment of the Trustee with respect thereto shall be binding and conclusive on all parties interested herein.
"(b) In the event that the fair and reasonable value of the principal of the trust hereinbefore created at any time amounts to less than the sum of Ten thousand dollars ($10,000.00) or at any time the Trustee deems it for the best interests of the beneficiaries to discontinue the trust then such trust in the sole discretion of the Trustee may be terminated and the principal of said trust paid over to the beneficiary or beneficiaries then entitled to the income therefrom and the trust shall then and there terminate and the rights of any remainder interest or interests therein shall forthwith be extinguished and the judgment of the Trustee with respect thereto shall be binding and conclusive on all parties interested herein."
Among the powers reserved to the trustee was the following: "The Trustee is hereby empowered to determine, in his absolute discretion, whether or not money or property coming into his possession shall be treated as principal or income and the Trustee is further empowered to determine, in his absolute discretion, whether or not expenses, losses, the cost of alterations, repairs or improvements or any other disbursements shall be charged wholly against principal or wholly against income or partly against principal and partly against income and the judgment of the Trustee with respect thereto shall be binding and conclusive on all parties interested herein."
The Fourth article provided in part as follows: "The trusts hereby created shall be deemed New York trusts and shall be governed in all respect by the laws of the State of New York. This Indenture and the several trusts herein created shall be irrevocable * * * The Trustee may in his sole discretion hold the trust estate or any part thereof as an undivided whole without separation as between the trusts hereby created but no such holdings shall defer the vesting of any estate in possession or otherwise according to the terms hereof."
Decedent reported the transfer of the stock in trust as a gift on a gift tax return filed for 1935. His salary from the Mollenberg-Betz Machine Company was $15,000 a year, from 1919 through 1931. It was reduced to $11,600 in the years 1932 through 1934; he was paid $12,000 a year in 1935 through 1938, $10,500 in 1939, $10,000 in 1940, and $9,500 in 1941 through 1943. His son Harold received an annual salary of $4,500 from 1920 through 1938, $4,550 in 1939, $5,500 in 1940, $7,500 in 1941, and $10,500 in 1942 and 1943. His son Richard was paid a salary which varied from $1,437 to $3,030 from 1928 through 1936, and thereafter received $3,640 in 1937 and 1938, $3,690 in 1939, $4,640 in 1940, $7,100 in 1941, and $10,100 in 1942 and 1943.
Section 811(d)(2) of the Internal Revenue Code, 26 U.S.C.A. § 811(d)(2), provides: "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, wherever situated, except real property situated outside of the United States * * * (2) Transfers on or prior to June 22, 1936. To the extent of any interest therein of which the decedent has at any time made a transfer, 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, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth."
Robert Ash and Carl K. Goodson, both of Washington, D.C., and John J. Flynn, of Buffalo, N.Y., for petitioners.
Charles Oliphant, Chief Counsel, of Washington, D.C., and Theron L. Caudle, Asst. Atty. Gen. (L.W. Post, of Washington, D.C., and Ellis N. Slack, Sp. Asst. to Atty. Gen., of counsel), for respondent.
Before L. HAND, Chief Judge, and SWAN and FRANK, Circuit Judges.
The Commissioner asserted that the full value of the trust property was includible in decedent's gross estate, because the transfer of the stock in trust was a revocable transfer as defined in § 811(d)(2) of the Internal Revenue Code. Petitioners contend that the transfer should not be included in the gross estate, because the transfer was a bona fide sale for an adequate consideration. In the alternative they argue that the enjoyment of the trust property was not subject to any power on the part of the decedent to "alter, amend, or revoke".
The Tax Court having found that there was no bona fide consideration for the transfer, that finding is binding upon us unless clearly erroneous. Assuming that a power to alter, amend, or revoke is reserved, § 811(d)(2) requires inclusion of the trust in the estate, unless there was a "bona fide sale for an adequate and full consideration in money or money's worth." The word "sale" means an exchange resulting from a bargain, one in which the beneficiary gives or the grantor receives something of money value or a binding promise. There was no evidence here of any such bargain. Although the two sons continued to work in the business at salaries which they probably felt were too low, and the decedent continued to draw a salary although working little, we can find no bargain — that the arrangement would be continued for decedent's life — for which the trust was consideration. The reporting of the trust as a gift is an additional circumstance indicating that there was no sale. Commissioner of Internal Revenue v. Bensel, 3 Cir., 100 F.2d 639, where there was a written agreement reached by "two parties hostile to each other and dealing at arm's length," is quite different.
The second point, whether the grantor reserved a power to "alter, amend, or revoke" the interests transferred in trust, requires construction of the trust instrument. The Tax Court held that Article Second conferred on him such a power. By Article Second, decedent could "withdraw from the principal * * * such sum or sums as he * * * may deem advisable and to pay over the same to the aforesaid beneficiaries or any of them." Taken literally, this provision authorizes him to withdraw all or any part of the trust at any time and, in his absolute discretion, pay over all of the amount withdrawn to either of his sons or to any of their issue. Petitioners try to meet this point by arguing that in fact two separate trusts were created, and that Article Second does not give the trustee power to withdraw part of one son's trust and pay the amount withdrawn to the other son, a beneficiary of an entirely different trust. To support their claim that there are two trusts, they point to provisions of Article Fourth which refer to "the several trusts herein created," or "the trusts hereby created." In this respect, the instrument is ambiguous; but we think the Tax Court correctly decided that there was but one trust. The instrument throughout contains numerous references to "the trust," or "this trust," or "said trust." Some of these locutions persuasively refer to a single trust. Article First, for instance, states: "Until the expiration of the trust, one-half of the income therefrom shall be paid over to Harold J. Mollenberg * * * The other one-half shall be paid over to Richard H. Mollenberg."
Since the decedent, acting as trustee, had power to withdraw the share of one beneficiary from the trust and pay it to another, the trust was subject to a power to "alter, amend, or revoke" and was properly includible in his gross estate. Commissioner of Internal Revenue v. Chase National Bank, 2 Cir., 82 F.2d 157.
Affirmed.