Opinion
Docket No. 19502.
1949-12-1
ESTATE OF C.DUDLEY WILSON, THE TRENTON BANKING COMPANY, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
W. Arthur Campbell, Esq., and James O. Wynn, Esq., for the petitioner. John T. Rogers, Esq., for the respondent.
1. ESTATE TAX— GROSS ESTATE— CONTEMPLATION OF DEATH— SECTION 811(c).—Transfers held not in contemplation of death where purposes of transfers were connected with life rather than death and poor health did not prompt transfers.
2. ESTATE TAX— GROSS ESTATE— POWER TO TERMINATE— SECTION 811(d).—Decedent, who was not a trustee and who had expressly surrendered all power to alter, amend, or revoke the trust, relinquished all interest in the trust property and divested himself of all incidents of ownership, had no power to terminate the trust despite his retained power to change the trustee and the trustee's discretion to ‘accelerate payments of interest or principal in case of need for educational purposes or because of illness or for any other good reason.‘ W. Arthur Campbell, Esq., and James O. Wynn, Esq., for the petitioner. John T. Rogers, Esq., for the respondent.
The Commissioner determined a deficiency of $42,315.13 in estate tax. The issues for decision are whether transfers by the decedent to his two children at Christmas in 1943 and 1944, and transfers in December of 1937, 1938, 1940, and 1941 to trusts created in 1937 by the decedent for his two children were in contemplation of death, whether the transfers to the trusts were to take effect in possession or enjoyment at or after death, and whether the enjoyment of the trusts was subject at the date of death of the decedent to any change through the exercise of a power by decedent to terminate the trusts.
FINDINGS OF FACT.
The decedent was born on August 28, 1877, and died on February 20, 1945, while residing in Princeton, New Jersey. He was survived by his wife, Vera Spencer Wilson, whom he married in 1921, and by their two children, Eleanore, born in 1926, and Jared, born in 1931.
The decedent devoted his full time to the affairs of the Luzerne Rubber Co. at all times material hereto until January 6, 1945. He was active in civic affairs until the time of his death and engaged in strenuous physical activities regularly throughout his life.
He died of carcinoma of the pancreas. The advance of the malignancy had been rapid and the petitioner did not know that he had cancer until some time in January 1945. The malignancy was in no way connected with any previous illness of which the decedent had been aware.
The decedent created a trust for each of his children on December 29, 1937. The Trenton Banking Co. was named trustee of each trust. The petitioner chose that bank because of his confidence in the ability of its president. He provided in the trust that he reserved the right at any time to substitute another trustee, but ‘expressly surrenders all right and power to amend, modify, or revoke this trust in whole or in part and expressly relinquishes all right, title, and interest in and to the subject matter of this trust and by the execution of this instrument does divest himself of any and all incidents of ownership.‘ The trustee was not permitted to make any change in investments without the approval of the donor or some person designated by him. The income of each trust was to be accumulated until the beneficiary became 21 years of age and thereafter all income was to be paid to the beneficiary. The corpus was to be distributed to the beneficiary when that person became 30 years of age. Children of the beneficiary were to take if the beneficiary died while the trust was in effect, but if there were no children and one beneficiary died, then that trust was to be added to the trust for the other child. The trust provided:
The Trustee may in its absolute discretion accelerate payments of interest or principal in case of need for educational purposes or because of illness or for any other good reason.
The trustee of the trusts was never changed and no distributions were made by the trustee during the life of the decedent.
The decedent had created a savings account in the name of his wife in trust for Jared. $4,380, the total balance in that account, was transferred to the trust for Jared on December 29, 1937. The decedent transferred $5,000 to each trust in December 1937, $3,463.50 to each trust in 1938, $2,500 to each in 1940, and 100 shares of Luzerne Rubber Co. common stock to each trust on December 24, 1941. The stock was reported in the gift tax return as having a value of $222.25 per share at the time of the gift. The value of the stock at the time of the decedent's death was $240 per share. The total value of the assets held by the trustee at the time of the decedent's death was $106,386.71.
The decedent at Christmas in 1943 and in 1944 gave each of his two children 10 shares of common stock of Luzerne Rubber Co.
None of the transfers to the trusts or to the children mentioned above was made by the decedent in contemplation of death or was intended by him to take effect in possession or enjoyment at or after his death. The enjoyment of the two trusts mentioned above was not subject at the date of the death of the decedent to any change by the exercise of a power by the decedent to alter, amend, revoke, or terminate the trust.
The stipulation of facts is incorporated herein by this reference.
OPINION.
MURDOCK, Judge:
Ample evidence was offered to show the condition of the decedent's health, his activities, and his probable motives in making the transfers here in question. Most of the other facts were stipulated and are not in dispute. The evidence shows that the transfers of 10 shares of common stock of the Luzerne Rubber Co. to each of the 2 children at Christmas in 1943 and again in 1944 were ordinary Christmas presents, were in no sense testamentary in character, and were not made in contemplation of death. They were complete and final gifts which took effect in possession and enjoyment immediately. The Commissioner erred by including the value of those 40 shares in the gross estate of the decedent.
Neither were the transfers to the trusts made in contemplation of death. The decedent created the trusts, after consultation with his wife, for the purpose of making sure that the children would have sufficient money for their educations and for other purposes in case the decedent suffered any financial reverses. The decedent was an extremely active man in his community. He attended to his business regularly until January 16, 1945, when he entered a hospital for observation. He was active in civic affairs until the time of his death. He had a farm, on which he did a considerable amount of manual labor, and he was active in sports and other recreational activities. He had been to see doctors occasionally and had had an operation at one time from which he had fully recovered. He had many plans for the future from 1937 through 1944. The record as a whole indicates that none of these transfers was prompted by a belief on the part of the decedent that he was in poor health. The only fair conclusion to be drawn from the entire record is that the decedent had no intimation until after January 15, 1945, that he was harboring a malignancy. He went to his doctor on December 26, 1944, to tell him of some paid which he had been having at intervals during the preceding month, but he was active all during the Christmas holidays and until he entered the hospital for observation on January 16, 1945. The last transfers to the trusts were made in 1941, years before any malignant condition had developed. The primary purpose of the trusts was connected with life rather than with death.
The Commissioner argues that the decedent could have substituted himself as trustee and, as trustee, in his absolute discretion could accelerate payment of interest and principal, thereby terminating the trusts. He cites no authority to show that the decedent could have substituted himself as trustee or that he could have terminated the trusts by accelerating payments. The trust instruments and the evidence show that the decedent had no such intention in creating the trusts, and, in fact, retained no power which would bring the case within section 811(c) or (d). Estate of Milton J. Budlong, 7 T.C. 756, affirmed and reversed in part on other issues, 165 Fed.(2d) 142. The decedent expressly stated in the deeds that he did not retain any power to alter, amend, or revoke. It is at least doubtful whether he could have substituted himself as trustee in view of the quoted provisions divesting himself of all title and interest. The bank of his choice remained trustee throughout. The power of the trustee to accelerate payments of interest and principal was not unrestricted. There first had to be ‘need for educational purposes or because of illness or for any other good reason.‘ Any action by the trustee would be subject to regulation by a court to make sure that he acted within sound and honest discretion granted him so that distributions would not depend upon the mere whim of the trustee and they could not be made to defeat the purpose of the trust. Estate of Milton J. Budlong, supra; Jennings v. Smith, 161 Fed.(2d) 74; Estate of Walter E. Frew, 8 T.C. 1240; Funk v. Commissioner, 163 Fed.(2d) 796. Thus, if the decedent could have made himself trustee, he could not have distributed all of the corpus of the trusts to the beneficiaries unless some condition beyond his control justifying the distribution had arisen. There was unfettered power in Commissioner v. Holmes' Estate, 326 U.S. 480. The present case is also distinguishable for the same reason from Estate of Albert E. Nettleton, 4 T.C. 987; Estate of Paul Loughridge, 11 T.C. 968; and Estate of Cyrus C. Yawkey, 12 T.C. 1164. The decedent was a trustee in two of those cases, whereas here he was not. In none of those cases was the discretion of the trustee to distribute limited by any adequate external standard, whereas here there was the standard of ‘need for educational purposes or because of illness or for any other good reason.‘ The words ‘in case of need‘ were intended to apply to the remainder of the sentence. In none of those cases did the grantor expressly relinquish ‘all right, title and interest in and to the subject matter of this trust‘ and ‘divest himself of any and all incidents of ownership,‘ as did the present decedent. The theory of the Commissioner is foreign to the obvious intent and purpose of these trusts.
The Commissioner also advances two other farfetched arguments. One is that the decedent, a minority stockholder and officer of Luzerne Rubber Co., could have controlled the dividends on its common stock, and, as a director of the Trenton Banking Co., beginning in January 1944, could have controlled the action of that institution as trustee. These arguments are not sufficiently weighty to merit discussion. The respondent also points to the fact that the decedent retained the privilege of approving or disapproving of the changes in investments. That, however, is not an unusual provision in trusts and it gave the decedent no such power as it contemplated by section 811(c) or (d).
Alternative issues raised by the petitioner and an issue which the parties are to settle by agreement need no discussion.
Reviewed by the Court.
Decision will be entered under Rule 50.