Opinion
Docket No. 10478.
1953-06-12
ESTATE OF JULIEN W. VOSE, ANNA E. VOSE, LEROY W. VOSE AND DONALD W. VOSE, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Edward J. Keelan, Jr., Esq., and Samuel S. Dennis, 3d, Esq., for the petitioners. Melvin L. Sears, Esq., for the respondent.
The decedent created during his lifetime a trust to which he conveyed improved real estate. The trust was for the sole benefit of the decedent during his lifetime, and after his death, it was for the use of such persons as he should appoint by deed or will. The trustees had the right to issue certificates of indebtedness payable out of trust corpus upon the termination of the trust which bore interest from the time of issuance. During decedent's lifetime, $200,000 face amount of certificates were issued by the trustees and interest payments were made thereon. In his will, the decedent exercised the power of appointment reserved under the trust. After the decedent's death, the trustees filed petition for a Declaratory Judgment in a probate court of Massachusetts for the purpose of construing the trust so as to obtain an authoritative determination of the rights and duties of the trustees, and the rights of the holders of the trust certificates. The probate court decreed in ensuing adversary proceedings that the trust certificates constituted valid primary obligations of the trust in their total face amount; that they were a first charge and encumbrance upon the trust corpus; that they were payable first out of corpus upon termination of the trust; that interest was payable on the certificates; that execution of the certificates constituted an irrevocable appropriation of the trust corpus to the extent of the face value of the certificates, and that the trust corpus thus appropriated was not subject to or affected by the reserved general power of appointment. Respondent disallowed the deduction of the face amount of the trust certificates from the value of the trust which is includible in decedent's gross estate. Held, the decree of the Massachusetts probate court determining that part of the trust corpus was irrevocably appropriated to the extent of the face amount of the certificates and that the certificates constituted a first charge upon the corpus is determinative with regard to the ultimate question of value of trust corpus includible in decedent's gross estate. Freuler v. Helvering, 291 U.S. 35; Blair v. Commissioner, 300 U.S. 5. Estate of Julien W. Vose, 14 T.C. 113, modified. Edward J. Keelan, Jr., Esq., and Samuel S. Dennis, 3d, Esq., for the petitioners. Melvin L. Sears, Esq., for the respondent.
SUPPLEMENTAL FINDINGS OF FACT AND OPINION.
The respondent determined a deficiency in estate tax in the amount of $43,164.66. The issue relates to a trust created by the decedent during his lifetime. The petitioners concede that the decedent's retention of the use of the trust during his life and of a power to appoint those who could have the use of the trust after his death brings the trust within decedent's estate for estate tax. The only question to be decided relates to determination of the value of the trust to be included in the gross estate. The petitioners contend that the respondent erred in not excluding from the value of the trust corpus, the face amount of trust certificates, $200,000, executed and delivered by the trustees during decedent's lifetime. The only question to be decided is the value of the trust corpus which is includible in decedent's gross estate.
Findings of Fact and Opinion in this proceeding has been promulgated but decision has not been entered. See Estate of Julien W. Vose, 14 T.C. 113. We have granted petitioners' motion to receive additional evidence, and to reconsider the question in the light of the additional evidence which includes a decree of a probate court of Massachusetts which was entered after the promulgation of the original Findings of Fact and Opinion in this proceeding.
For convenience, the essential facts, originally found in our prior report, are restated, and additional facts are found based upon the new evidence which has been received.
FINDINGS OF FACT.
The facts which have been stipulated are found as facts, and the stipulation is incorporated by this reference.
The decedent, Julien W. Vose, died on August 3, 1943, at the age of 82, a resident of Edgartown, Martha's Vineyard, Massachusetts. The petitioners are the executors of his will. He was survived by his widow, Anna Vose; his children, Leroy Vose, Elsie Lovewell, and Edna Weston, and their spouses; and seven grandchildren and great-grandchildren.
During his lifetime, the decedent followed a practice of making substantial gifts to the members of his family. He consulted a lawyer in 1935 for advice about making provision for members of his family in the future. One of his purposes was to avoid income tax on the income which he had been giving to members of his family. As a result of his lawyer's advice, the decedent created a trust on December 25, 1935, which is known as The Vose Family Trust. The decedent conveyed to the trustees of this trust a parcel of improved real estate in Boston. The property was subject to a lease under which as annual rent of $25,000 was paid. The trustees were the decedent, Leroy W. Vose, and Frank S. Lovewell. The trust will terminate upon the death of the last born child of the decedent, or upon the death of the survivor of his grandchildren living at the date of the creation of the trust, which event occurs later. The trust was for the sole use and benefit of the settlor, the decedent, during his life, and after his death, for the use of such persons as he should appoint by deed or will. The trustees were directed to pay the net income of the trust to Julien W. Vose, the settlor, during his life, and after his death to such persons as he should appoint be deed or will. The trustees were directed, also, to execute, from time to time, upon the request of Julien W. Vose, and to deliver to him, ‘certificates of indebtedness‘ of the trust, made payable to such persons and in such amounts, not to exceed $300,000, in toto, as he should designate. The trust provided that the principal amount of the certificates was to be paid out of the corpus of the trust upon its termination, and that interest was to be paid on the certificates quarter-annually at the rate of 6 per cent of the face amount of a certificate.
After the creation of the trust, the trustees executed and delivered to Julien W. Vose, 30 trust certificates in the total face amount of $200,000. The certificates were made payable to 12 members of decedent's family, to his wife, children, and grandchildren, in principal amounts ranging from $5,000 to $30,000. Julien Vose gave the certificates to those named therein. None of the payees ever paid any money or property in exchange for the trust certificates; they represented gifts. After the execution and delivery of the trust certificates, the trustees made payment of the designated 6 per cent interest upon the principal amount of each certificate to the payees thereof out of the trust income. The balance of the trust income was paid each year to Julien Vose.
Trust certificates were issued in 1935, 1936, 1937, 1938, 1940, 1941, and 1942. Julien Vose filed a gift tax return for 1935 in which he reported gifts of the certificates made in the other years.
The transfer of property in 1935 to The Vose Family Trust was not made in contemplation of death. None of the trust certificates were given away by the decedent in contemplation of death.
The decedent executed a will on May 7, 1937, which was his last will. He bequeathed the residue of his property, including the property in respect of which he had a power of appointment, in trust for the benefit of his wife, Anna, for her life, and upon her death, for the benefit of each of his three children and of a grandson, Donald W. Vose. The decedent bequeathed to the above-named beneficiaries during their respective lives, interests in the income of his testamentary trust. The testamentary trust is to terminate upon the death of the survivor of the decedent's children and and grandchildren living at the time of the decedent's death, or when the youngest of his grandchildren becomes 21 years of age, whichever shall be later. Upon the termination of the testamentary trust, it will be divided and distributed to the decedent's grandchildren, and their issues per stirpes.
At the time of the decedent's death, a mortgage in the amount of $30,000 on the property held in The Vose Family Trust was outstanding. The fair market value of the corpus of The Vose Family Trust at the date of decedent's death was $250,000, subject to the mortgage of $30,000, or $220,000.
The respondent determined that the net value of the corpus of The Vose Family Trust, $220,000, was includible in decedent's gross estate. In making this determination, the respondent disallowed reduction of the net value of the trust corpus to the extent of $200,000, the fact amount of the outstanding trust certificates. The respondent's explanation of his determination was that the trust certificates were unenforceable because no consideration was given for them; that the certificates did not constitute completed gifts; and that they were made in contemplation of and intended to take effect after death under section 811(c) of the Internal Revenue Code.
After this Court's Findings of Fact and Opinion in this proceeding were promulgated (14 T.C. 113), the trustees of The Vose Family Trust filed a Petition for Declaratory Judgment in the Probate Court of Dukes County, Massachusetts, to which they attached the Declaration of Trust creating The Vose Family Trust, and the last will of the decedent. After reciting the material facts, the petition states the following:
7. The said provisions of Clause 4 of said will constituted an exercise by the said Julien W. Vose of the power of appointment reserved by him under the said Declaration of Trust dated December 25, 1935.
8. Your said petitioners are in doubt as to the validity and legal effect of the so-called Certificates of Indebtedness issued by them as above stated. A controversy has arisen as to whether said certificates are valid debts or obligations of the Trust or as to whether the legal effect of them was to create merely equitable beneficial interests in the trust fund, or whether they are void and of no effect whatsoever, and whether in any event they were subject to the power of appointment reserved by the grantor so that any indebtedness or other interest represented by said Certificates were extinguished by the exercise by Julien W. Vose of the said power of appointment reserved by him under said trust instrument. Your petitioners are also in doubt as to whether said Certificates of Indebtedness became payable upon the death of Julien W. Vose or only upon the occurrence of event specified in Clause VIII of the said Declaration of Trust, or only upon the occurrence of the event specified in paragraph C of said will, or at some other time.
9. That a declaratory judgment and declaratory relief by reason of the aforesaid circumstances is hereby sought in order that relief be afforded your petitioners from the existing uncertainty with respect to the rights, demands and legal relations existing among the various parties interested as aforesaid.
WHEREFORE your petitioners pray that this Court determine and adjudicate the legal effect of said so-called ‘Certificates of Indebtedness‘ issued by your petitioners as Trustees under said Declaration of Trust dated December 25, 1935.
The Dukes County Probate Court entered a decree thereafter in which it found and determined as follows:
That the certificates of indebtedness issued from time to time by the Trustees under said Declaration of Trust in the aggregate face amount of Two Hundred Thousand Dollars ($200,000) constitute valid obligations of said Trust enforceable, according to their tenor, in law and in equity as a first charge against and encumbrance upon the corpus of the Trust;
That the aggregate face amount of said certificates of indebtedness is payable out of the corpus of the Trust as a first charge thereon at the time provided for termination of the Trust in Clause Eight of said Declaration of Trust; and that interest is payable quarter-annually on said certificates of indebtedness at the rate of 6 per cent per annum;
That the execution and delivery of the certificates of indebtedness to the certificate holders constituted an irrevocable appropriation of the corpus of the Trust to the extent of the aggregate face value of said certificates at the time of their execution and delivery and the corpus thus appropriated was accordingly not subject to or affected by the exercise of the general power of appointment reserved by said Julien W. Vose.
The proceeding in the probate court was not collusive. Notice of the hearing in the cause was given to all interested parties. A guardian ad litem was appointed to represent the interest of minors who hold trust certificates, and of non-certificate holders and persons unascertained or not in being. Oral testimony was given and stipulated facts were presented to the probate court.
SUPPLEMENTAL OPINION.
HARRON, Judge:
The respondent has abandoned the contention that the transfer of property to The Vose Family Trust was made in contemplation of death, and that gifts of the trust certificates were made in contemplation of death.
The petitioners concede that part of the value of the trust in question is includible in the decedent's gross estate because of his retention of the use of part of the income thereof, and of a power of appointment by will of those who could have the use of the trust after his death.
The question is whether there shall be excluded from the amount of the trust which is includible in the gross estate, the total amount, $200,000, of the outstanding trust certificates, as petitioners contend. They now rely chiefly upon the recent Decree of the Probate Court of Dukes County. The main authority relied upon is Estate of Rose M. Harter, 3 T.C. 1151.
We have given further consideration to the various contentions of the parties. When this proceeding was first considered, there was not before us any determination under the law of Massachusetts of the obligations of the trustees and of the rights of the holders of the trust certificates under the Declaration of Trust creating The Vose Family Trust. Furthermore, the provisions of the will of the decedent under which he exercised the power of appointment which he gave to himself in the Declaration of Trust, were such that we believed there was ambiguity, or at least uncertainty, about the effect of the exercise of the power of appointment upon the rights of the holders of the trust certificates under The Vose Family Trust. In that situation, we could not conclude that the decedent, during his lifetime, irrevocably disposed of part of the corpus and of interests in the income of the corpus of The Vose Family Trust which the outstanding trust certificates represented, so that the value of the trust corpus so represented should not be included in the gross estate of the decedent under any provision of section 811 of the Code.
We now conclude and hold that the amount of the outstanding trust certificates, together with interest thereon at the date of the decedent's death, must be taken into account in computing the net value of the corpus of The Vose Family Trust which is includible in decedent's gross estate by deduction from the gross value of the trust corpus as of the date of decedent's death. It has been determined by a probate court of Massachusetts in an adverse, non-collusive proceeding, that the outstanding trust certificates in the total amount of $200,000 were (1) valid obligations of the trust; (2) a first charge against and encumbrance upon the trust corpus; (3) payable as a first charge out of trust corpus upon the termination of the trust; and (4) that interest on the trust certificates was payable quarter-annually. The probate court determined, also, that the execution and delivery of the trust certificates constituted an irrevocable appropriation of corpus up to $200,000, and that this amount of corpus was not subject to or affected by the decedent's exercise of the general power of appointment reserved to him.
We understand the decree of the probate court to mean that the decedent, during his lifetime, upon the making of his gifts of the executed and issued trust certificates to the donees, relinquished pro tanto and irrevocably his life interest in the trust corpus and trust income to the extent of the face amount of the interest bearing certificates, and that he, also, relinquished the reserved power of appointment of the trust corpus and income to the extent of the executed and delivered trust certificates. The effect of the decree of the probate court is that present and completed gifts were made of the trust certificates; that they constituted irrevocable obligations of the trustees; and that the trust certificates constitute a prior charge upon the trust corpus ahead of any interests created by the exercise of the reserved power of appointment.
We think we are bound by the decree of the probate court. Freuler v. Helvering, 291 U.S. 35; Blair v. Commissioner, 300 U.S. 5; Estate of Sallie Houston Henry, 47 B.T.A. 843, 849; Estate of Rose M. Harter, supra. See, also, Regulations 105, section 81.15, page 45, where it is said that:
If a portion only of the property was so transferred as to come within the terms of the statute, only a corresponding proportion of the value of the property should be included in ascertaining in the value of the gross estate. * * *
We think it has been established that the decedent irrevocably made gifts, during his lifetime, of interests in the portion of the corpus and income of The Vose Family Trust which $200,000, principal amount of trust certificates represents, and that such portion is beyond the reach of section 811 of the Code. Therefore, the respondent's determination is reserved. This issuepresented comes within the ambit of Estate of Rose M. Harter, supra. The conclusions heretofore reached in this proceeding are, accordingly, modified.
The respondent, in determining the deficiency, did not allow any credit for payment of state inheritance and succession taxes. Allowance therefor can be made in a Rule 50 recomputation of the deficiency.
Decision will be entered under Rule 50.