Opinion
Docket Nos. 5941 5944 5960 5962.
1946-07-31
THE NATIONAL CITY BANK OF NEW YORK, AS TRUSTEE UNDER AN AGREEMENT WITH CHARLES F. LOUDON, DATED OCTOBER 4, 1921, PETITIONER, ET AL.,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John J. Smith, Esq., for the petitioners. Conway Kitchen, Esq., for the respondent.
Decedent in 1921, 1924, and 1925 conveyed certain property to three irrevocable trusts, reserving to himself and his wife the income for life, with income payable upon his death and the death of his wife to his daughter and upon her death to his grandson. The trusts were to continue for the lives of his daughter and his grandson, and the trusts provided that upon their termination, if he were still living, the corpus should revert to decedent; but in case decedent or his wife did not survive the daughter and grandson, the trust corpus was to be paid to the children of the said grandson then surviving; but if said grandson left no child then surviving, the corpus was to be paid to the four nieces of decedent's wife in equal shares. Held, the facts show a survivorship case and the value of the corpora of the three trusts at decedent's death is includible in decedent's gross estate under section 811(c), Internal Revenue Code. Estate of John C. Duncan, 6 T.C. 84, followed. John J. Smith, Esq., for the petitioners. Conway Kitchen, Esq., for the respondent.
The petitioner in Docket No. 5944 requests a redetermination of a deficiency in Federal estate tax which was determined against estate of Charles F. Loudon, deceased, in the amount of $61,332.60. The petitioners in Docket Nos. 5941, 5960, and 5962 request redeterminations of liabilities which were determined against them by the respondent for said deficiency as trustees and transferees in the amounts of $61,332.60, $3,960, and $32,426.81, respectively, plus interest on said respective amounts as provided by law. The proceedings have been consolidated.
The cases were submitted upon the stipulation of facts entered into by the parties and upon certain oral testimony adduced at the hearing.
The respondent determined that the value of the decedent's gross estate should be increased in the respective amounts of $750 and $1,200 on account of the inclusion therein at increased values of certain real estate and certain shares of stock. The inclusion in the gross estate of said decedent of this real property and of the shares of stock at the respective increased values has been agreed to by the respective parties herein. The petitioner in Docket No. 5941 has agreed that it is liable as trustee and transferee under section 827(b) of the Internal Revenue Code for any deficiency in Federal estate tax, plus interest as provided by law, which finally may be judicially determined herein to be due from the estate of Charles F. Loudon, deceased. The petitioners in Docket Nos. 5960 and 5962 have agreed that they are liable as trustees and transferees under section 827(b) of the Internal Revenue Code for any deficiency in Federal estate tax, plus interest as provided by law, which finally may be judicially determined herein to be due from the estate of Charles F. Loudon, deceased, to the extent of $3,960 and $32,426.81, respectively.
In view of the foregoing there remains for our decision only one question, which is as follows: Were the values on the date of the decedent's death of the corpora of trusts created by him on October 4, 1921, July 3, 1924, and August 12, 1925, amounting to $223,613.52, $3,960, and $32,426.81, respectively, includible in his gross estate under section 811(c) of the Internal Revenue Code?
FINDINGS OF FACT.
The stipulation of facts is incorporated by reference as a part hereof and the facts are found as stipulated. The following summary of facts is taken from the stipulation of facts:
Charles F. Loudon died on January 17, 1942, a resident of Santa Fe County, New Mexico, leaving a last will and testament and a codicil thereto which were duly admitted to probate in the probate court of that county. At all times thereafter Helen S. Broome, who is the daughter and only child of the decedent, was duly appointed, qualified, and acting executrix of the decedent's last will and testament. Helen S. Broome was referred to in the trust indentures involved herein as Helen S. Ricker.
On December 22, 1942, the executrix filed a Federal estate tax return for the estate of the decedent with the collector of internal revenue at Albuquerque, New Mexico, and showed no estate tax due.
Under an indenture dated October 4, 1921, the decedent created a trust, with the National City Bank of New York as trustee, and transferred to that trustee certain property to be held in trust by the latter upon the terms and conditions set forth in the indenture. This trust was in full force and effect on the date of the decedent's death and has continued to remain so to the present time. The provisions of the trust indenture of October 4, 1921, which are especially pertinent to the issue involved herein are as follows:
I. To apply the income thereof to the use of Charles F. Louden, (sic) the party of the first part and his wife Luella S. Loudon and the survivor of them so long as either of them shall live during the continuance of the trust; and the receipt of either the party of the first part or the said Luella S. Loudon shall be a sufficient discharge to the Trustee for the payment of such income.
II. In case of the death of the party of the first part and the said Luella S. Loudon, to apply the income thereof to the use of the said Helen S. Ricker, during her life, and on her death to apply the said income to the use of her son, Charles Loudon Ricker, as follows:
1. So much thereof as the Trustee, in its absolute and uncontrolled discretion shall deem for his best interest, not exceeding One Hundred Dollars per month, until he shall attain the age of eighteen years, and not exceeding Two Hundred Dollars per month thereafter, until he shall attain the age of twenty-one years, accumulating for his benefit the surplus income.
2. After the said Charles Loudon Ricker shall attain the age of twenty-one years to apply the entire income of the said trust to his use, until he attains the age of thirty-two years, and thereupon to convey, transfer and pay over to him the principal thereof, provided that the Trustee in its absolute and uncontrolled discretion shall deem it for his best interest to receive such payment; otherwise the Trustee shall continue to hold the said principal in trust during his life or until, in the absolute and uncontrolled discretion of the Trustee it shall deem it for his best interest to receive the principal of the said trust fund.
III. Upon the death of the survivor of the said Helen S. Ricker and Charles Loudon Ricker, to convey, transfer and pay over the principal of the said trust fund to the party of the first part or if he is not then living, to the said Luella S. Loudon, or in case neither of them is living to the children of the said Charles Loudon Ricker then surviving, in equal shares, or in case there is no child of the said Charles Loudon Ricker then living to the four nieces of the said Luella S. Loudon, in equal shares, Fern Skaats Ford, Gladys Skaats Briscoe and Louise C. Mitchell of Cincinnati, Ohio and Lucy Skaats of Los Angeles, California.
Under an indenture dated July 3, 1924, the decedent executed a trust agreement, with the Terre Haute Trust Co. as trustee, and transferred to that trustee certain property to be held in trust by the latter upon the terms and conditions set forth in the indenture. This trust was in full force and effect on the date of decedent's death and has continued so to remain to the present time. The provisions of this trust indenture which are especially pertinent to the issue involved herein are essentially the same as those enumerated above from the trust indenture of October 4, 1921. There are some slight differences in the texts, but these seem unimportant and the parties in their briefs treat the meaning of the language used in the two trust indentures as the same.
Under an indenture dated August 12, 1925, the decedent executed a trust, with the First National Bank of Terre Haute as trustee, and transferred to that trustee certain property to be held in trust by the latter upon the terms and conditions set forth in the indenture. This trust was in full force and effect on the date of decedent's death and has continued to remain so to the present time. The provisions of the trust indenture are different in some respects from those of the two other trust indentures referred to above. No point in the briefs of the parties has been made as to these differences. The provisions of this trust indenture of August 12, 1925, which are deemed especially pertinent to the issue involved herein are as follows:
FIRST: To receive, hold, manage, sell, invest and reinvest the same and every part thereof, and to collect, recover and receive the rents, issues, interest, income and profits thereof, hereinafter called ‘Income,‘ and after deducting all proper and necessary expenses in connection with the administration of said trust, including reasonable compensation to said Trustee, to pay the balance remaining (hereinafter called ‘Net Income‘) as follows, to-wit:
(a) Unto the Party of the First Part and/or his wife, Luella S. Loudon, and the survivor of them, so long as either of them shall live during the continuance of said trust, and the receipt either of the First Party or Luella S. Loudon shall be a sufficient discharge to said Trustee for any such payment.
(b) After the death of both the Party of the First Part and the said Luella S. Loudon prior to the termination of said trust, said net income shall be paid to Helen S. Ricker during her life, if she be living at the time of the death of the last survivor of said party of the First Part and Luella S. Loudon.
(c) After the death of said Party of the First Part, said Luella S. Loudon and said Helen S. Ricker, said net income shall be paid to Charles Loudon Ricker during his life provided that said Trustee, in his absolute and uncontrolled discretion, shall pay to said Charles Loudon Ricker until he shall attain the age of twenty-one (21) years only such part of said net income as may be necessary to make the total income of said Charles Loudon Ricker (including other income which may be payable to him) equal the sum of Two Hundred Dollars ($200.00) per month; any excess of net income from said Trust Fund shall be accumulated and added to the principal of said Trust Fund until Charles Loudon Ricker shall attain the age of twenty-one (21) years; after he shall so attain the age of twenty-one (21) years the net income from said Trust Fund shall be paid to him during the term of his life.
SECOND. Said trust shall cease and terminate upon the death of the survivor of said Helen S. Ricker and Charles Loudon Ricker and upon the death of the survivor of them said Trustee shall convey, transfer and pay over the principal of said Trust Fund to the Party of the First Part if he should then be living, or if he be not then living, to the said Luella S. Loudon if she be then living. In case neither of said Party of the First Part, nor Luella S. Loudon are then living, said principal of said Trust Fund shall be conveyed, transferred and paid over to the children of the said Charles Loudon Ricker then living, if any, in equal shares and to the then living issue of any deceased child of said Charles Loudon Ricker such issue taking the share of said deceased child per stirpes and not per capita. Upon the termination of said trust if there be then living none of the parties hereinabove mentioned entitled to receive the principal of said Trust Fund, the same shall be conveyed, transferred and paid over to the then surviving widow of Charles Loudon Ricker, if any, and if there be no such widow, the same shall be paid to the four (4) nieces of said Luella S. Loudon, namely; Lucy L. Skaats, now of Los Angeles, California, Fern Skaats Ford, Gladys Skaats Briscoe and Louise C. Mitchell, all now of Cincinnati, Ohio, in equal shares or to the issue of such nieces as may then be dead leaving issue, such issue to take the share of such deceased niece per stirpes and not per capita. In case any of the said nieces shall then be dead leaving no issue, the said principal of said Trust Fund shall be divided among the survivors of said nieces and the issue of such of them as shall then be dead leaving issue then surviving, such issue taking the share of such deceased niece per stirpes and not per capita. In event that there be no one then living then entitled to take and receive the principal of said Trust Fund as hereinabove set out upon the termination of said trust, the said Trustee shall convey, transfer and pay over the principal of said Trust Fund to the then heirs-at-law of the Party of the First Part.
The fair market value at the time of decedent's death of the corpus of each of the above named trusts has been stipulated and need not be separately set out here.
On October 4, 1921, the date of the creation of the trust with the National City Bank of New York, the decedent's daughter, Helen S. Broome, and his grandson, Charles Loudon Ricker, whose lives measure all 3 trusts, were respectively approximately 41 and 15 years of age, the decedent was approximately 65 years of age, and his wife, Luella S. Loudon, was approximately 63 years of age. Luella S. Loudon died during the year 1931. Helen S. Broome and the grandson, Charles Loudon Ricker, survived the decedent.
On or about September 15, 1945, the executrix of the will of Charles F. Loudon paid to the collector of internal revenue, Albuquerque, New Mexico, the sum of $70,225.84 on account of the deficiency in estate tax which respondent determined to be due, together with interest thereon, which amount was placed by the collector in a suspense account and has not been assessed.
The following facts are found from the oral testimony in the proceedings:
The decedent was in the canning business and was in good financial circumstances for some time prior to the years 1910 and 1911. As a result of successive crop failures, the decedent's business was wiped out in 1910 or 1911. In various discussions with his daughter the decedent stated that if he should ever get on his feet again he was going to take some steps which would secure for himself and his family a nest egg which would be outside the perils of the canning business. Shortly before the creation of the trust with the National City Bank of New York in 1921, the decedent discussed it with his daughter. In the course of the discussions with his daughter the decedent stated that his purpose in establishing the trust was to make certain that his property so transferred would not be subject to the risks of his business. In 1921 the daughter was married to one Ricker. The decedent did not have much faith in Ricker's integrity and one of his reasons for creating the trust was to prevent Ricker from ever getting his hands on the funds. In 1921 the decedent's daughter and grandson were alive and one of the decedent's purposes in creating the trust was to make the future safe for his daughter and his grandson.
Shortly after the creation of the trust with the National City Bank of New York on October 4, 1921, the decedent had income from separate investments averaging above $30,000 per annum.
OPINION.
BLACK, Judge:
The question which we have to decide in these proceedings is stated by petitioners in their brief as follows: Whether the values of three irrevocable trusts created by Charles F. Loudon during his lifetime are includible in his gross estate for Federal estate tax purposes under the provisions of section 811(c) of the Internal Revenue Code, printed in the margin.
(c) TRANSFERS IN CONTEMPLATION OF, OR TAKING EFFECT AT DEATH.—To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this subchapter.
The petitioners contend that the trusts in question were not intended by the decedent ‘to take effect in possession or enjoyment at or after his death ‘ within the meaning of section 811(c). They support this contention with arguments in their brief which we have noted and carefully considered.
Respondent concedes that the language added to section 302(c) of the Revenue Act of 1926 by the amendment contained in the Joint Resolution of Congress of March 3, 1931, and section 803(a) of the Revenue Act of 1932 is not applicable because the trusts herein involved were created prior to the enactments of such amendments. Hassett v. Welch, 303 U.S. 303. In other words, respondent concedes that the corpora of such trusts is not includible in decedent's gross estate because he reserved to himself the income for life from such property. At least, respondent does not argue to that effect in his brief, and he makes no contention that May v. Heiner, 281 U.S. 238, has in effect been overruled by later decisions of the Supreme Court.
Respondent bases his contention that the value of the corpora of the three trusts should be included in decedent's estate upon the fact that each of the trust indentures contained an express reservation by the decedent that the corpus of each trust should revert to him if he survived his daughter and his grandson. ‘Such express reservation‘ says respondent, ‘constituted the retention by the decedent of a contingent interest in the trust property until his death. Therefore said transfers in trust constituted transfers intended to take effect in possession or enjoyment at or after decedent's death within the meaning of section 811(c) of the Internal Revenue Code.‘
Respondent cites in support of his contention Fidelity-Philadelphia Trust Co. (Stinson Estate) v. Rothensies, 324 U.S. 108, and Commissioner v. Field, 324 U.S. 113. He also cites our recent decision in Estate of John C. Duncan, 6 T.C. 84; now on review, C.C.A., 2d Cir.
The Duncan case is similar in its facts, we think, to the facts of the instant case. In the Duncan case the trust was created January 23, 1924, and provided, as the three trusts here provide, that the income of the trust property was to be paid to the grantor for the term of his life. Upon the death of the grantor of the trust, the income of the trust estate was to be paid to John C. Duncan, Jr., for life and upon his death to his sons in equal shares until each respectively became 35 years of age, at which time each beneficiary would receive distribution of his proportionate share of the trust estate. The trust instrument carried the following specific provision:
Upon the termination of said trust term by the death of the survivor of said John C. Duncan, Jr. and Said John C. Duncan III, (if the trusts have not been previously terminated), the whole or any part of the principal of said trust fund shall remain in the hands of the trustee undistributed, such whole or part shall be transferred and paid over to the said Donor, if he then survive, or if he do not survive, shall be transferred and paid over to his issue then surviving, in equal shares, per stirpes and not per capita, and in default of such issue, in equal shares to and among the then survivors of the brother and sister of the said Donor, and the brother and sister of the deceased wife of said donor (the mother of said John C. Duncan, Jr.), the then surviving issue of any such brothers or sisters then deceased, to take per stirpes the share such brother or sister would have taken if living.
Under these facts we held the case was a survivorship case and the value of the trust corpus was includible as a part of decedent's gross estate under section 811(c).
In the Duncan case, as here, the petitioner cited Frances Biddle Trust, 3 T.C. 832. In the instant case petitioners strongly urge Judge Opper's concurring opinion in the Biddle case as the line of reasoning we should follow in arriving at a decision in favor of petitioners. In the Duncan case we distinguished the Biddle case and other similar cases in the following language:
Petitioners cite our decision in Frances Biddle Trust, 3 T.C. 832. But this proceeding on its facts is clearly distinguishable from that case as well as from the facts in the later cases of Estate of Harris Fahnestock, 4 T.C. 1096, and Estate of Mary B. Hunnewell, 4 T.C. 1128. In those cases the grantor of the trust had done everything possible to cut all ties to a reversion of the property. The only condition under which such result could have occurred would have been upon a complete failure of the grantor's line of descent. Here, the grantor has, by a specific provision in the trust, retained a reversion upon the death of the survivor of his son and grandson, under which title to the property would revest in him irrespective of how many direct descendants he might have living at the time, and has further provided that ‘if he do not survive, (the trust estate) shall be transferred and paid over to his issue then surviving * * * and in default of such issue, in equal shares to and amount the then survivors of the brothers and sisters of the said Donor * * * . ‘ Thus it seems clear that the instant case is a survivorship case and comes within the rule of Helvering v. Hallock, supra, and not within the rule of the Biddle, Fahnestock and Hunnewell cases, all supra.
To the same effect we think we must hold in the instant case. The following provision in the trust indenture of October 4, 1921, seems clearly to make it a survivorship case and brings it within the rule of the Duncan case, supra:
III. Upon the death of the survivor of the said Helen S. Ricker and Charles Loudon Ricker, to convey, transfer and pay over the principal of the said trust fund to the party of the first part or if he is not then living, to the said Luella S. Loudon, or in case neither of them is living to the children of the said Charles Loudon Ricker then surviving, in equal shares, or in case there is no child of the said Charles Loudon Ricker then living to the four nieces of the said Luella S. Loudon, in equal shares, Fern Skaats Ford, Gladys Skaats Briscoe and Louise C. Mitchell of Cincinnati, Ohio and Lucy Skaats of Los Angeles, California.
We see no difference in principle between the foregoing provisions of the trust in the instant case and the controlling provisions of the trust in the Duncan case which we have set out above. They seem to be in all essential respects the same, so far as the survivorship issue is concerned. As we have pointed out in our findings of fact, the provisions of the trust of July 3, 1924, are virtually the same as those of the trust of October 4, 1921. There are some differences in the language of the provisions of the trust of August 12, 1925, as we have shown in our findings of fact. However, petitioners do not contend that the controlling provisions of this latter trust, in so far as the issue we have here to decide is concerned, are any different from the other two trusts. We do not think there is any difference in substance. Therefore, following our decision in Estate of John C. Duncan, supra, we sustain the Commissioner in his determination.
Decision will be entered under Rule 50.