Opinion
Docket No. 44914.
1956-01-13
ESTATE OF ROBERT MANNING McKEON, DECEASED, DANIEL MANNING McKEON, ET. AL., EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Ethan Allen, Esq., and Sandow Holman, Esq., for the petitioners. Richard D. Maloney, Esq., for the respondent.
The decedent and his wife were separated but were not divorced. They entered into a separation agreement under which the decedent established a trust, known as Trust B, the income of which was to be used for the support of his wife and their two children. In the separation agreement. there was settlement of property interests; the wife relinquished all her interest in the decedent's estate and she accepted the provisions made under the trust as full satisfaction of her right to claim support from the decedent. Held:
1. The value of the corpus of Trust B is includible in decedent's estate under section 811(c)(1)(B) of the 1939 Code because the income was used to discharge decedent's legal obligation to support his wife and children for a period which in fact did not end before his death, so that decedent retained the right to and the enjoyment of the trust income for such period. Estate of Ambrose Fry, 9 T.C. 503, followed.
2. Part of the property transferred to Trust B was for the support of decedent's minor children and was used to discharge his legal obligation to support them. Such transfer was for an adequate and full consideration in money's worth under section 811(i) of the Code. The prospective value of the children's support is determined. Only the excess of the value of the trust corpus at the time of death over the combined value of the children's support should be included in the gross estate under section 811(i). D. G. McDonald Trust, 19 T.C. 672,affd. 225 F.2d 621, followed.
3. The wife's relinquishment, under the separation agreement, of her right to support and other rights are ‘other marital rights in the decedent's property or estate’ within the meaning of section 812(b), the relinquishment of which does not constitute consideration in money's worth under section 811(i). William Weiser, Executor, 39 B.T.A. 1144, and Meyer's Estate Estate v. Commissioner, 110 F.2d 367, followed. Ethan Allen, Esq., and Sandow Holman, Esq., for the petitioners. Richard D. Maloney, Esq., for the respondent.
The Commissioner determined a deficiency in estate tax in the amount of $81,732.69. The petitioners claim that estate tax has been overpaid to the extent of $58,960.74.
The questions to be decided are whether the value of Trust B, created by the decedent on November 14, 1941, pursuant to a separation agreement, the income of which was paid to the decedent's wife for her support and the support of two minor children, is includible in decedent's gross estate under section 811(c) (1)(B) of the 1939 Code; and whether all or part of the value of the trust corpus properly is to be excluded from decedent's gross estate under section 811(i) of the 1939 Code.
FINDINGS OF FACT.
The stipulated facts are found. The stipulation is incorporated herein by reference.
Robert Manning McKeon, hereinafter referred to as the decedent, died on May 13, 1948, at the age of about 44 years. He was survived by his wife, Margot, McKeon, and their two children, Robert and Alexander. The petitioners are the executors of his estate. They filed the estate tax return with the collector of internal revenue at Albany, New York, on August 12, 1949. Estate taxes have been paid in the amount of $144,022.98.
The decedent and Margot McKeon were married on November 12, 1929. The decedent was born on January 16, 1904. Margot McKeon was born on September 10, 1908. The issue of their marriage are Robert Manning McKeon, Jr., born on February 19, 1932, and Alexander Bonnyman McKeon, born on December 17, 19-3. Margot McKeon is sometimes referred to hereinafter as Margot, or Mrs. McKeon. At the time of the decedent's death, both children are minors.
On or about September 10, 1941, Margot McKeon initiated an action for a separation in the Supreme Court of the State of New York, County of New York, by serving a summons and complaint on the decedent. The action for a separation was discontinued and simultaneously therewith the decedent and Margot, on November 14, 1941, entered into a separation agreement. It is incorporated herein by reference.
The separation agreement provided, inter alia, that the parties agreed to live separate and apart during their respective lives; that the parties ‘are prepared to define and to settle their property rights and interests for their mutual welfare’; that Robert desires to make provision for the support and maintenance of his wife, Margot, and for the support, maintenance, and education of their children, Robert and Alexander; and that the parties desire to settle and fix the care, custody, and control of their children.
The consideration is stated in the separation agreement to be as follows:
NOW, THEREFORE, in consideration of the premises, and the sum of One Dollar ($1.00) by each of the parties to the other in hand paid, receipt whereof is hereby duly acknowledged, and in further consideration of the mutual promises, covenants, agreements and undertakings hereinafter set forth, and other good and valuable considerations moving from each party to the other, it is hereby covenanted, promised and agreed by each of the parties hereto, and with the other party hereto, as follows, i.e.:
The parties agreed that each could live separate and apart from the other for the rest of his and her life; that Margot should have the sole custody and control of the children, Robert and Alexander, during their respective minorities; that the children should live with their mother; that the mother should direct the education of the children, with stated qualifications; that the mother could apply at any time for appointment of herself as guardian of each child during his minority.
The parties made division of personal property in the separation agreement. Robert agreed that Margot should henceforth hold for her sole and separate use all and singular the real and personal property of which she was or later became possessed. Margot agreed that Robert should henceforth possess for his separate use all and singular real and personal estate and property of which he was or later became possessed, except as in the agreement provided; and Margot released Robert from all claims, debts, and causes of action except as in the agreement provided. Each party released to the other or to the other's executors, distributees, and representatives, all title and interest in the nature of curtesy or dower and rights or claims to the distributive share of the other's estate, real and personal, and each agreed to waive any right of election to take against any will of the other.
The separation agreement also provided as follows, the first party being Robert McKeon, and the second party being Margot McKeon:
NINTH: For the support and maintenance of the second party, and for the support, maintenance and education of the said Robert Manning McKeon, Jr. and the said Alexander Bonnyman McKeon, the first party has executed and delivered, simultaneously with the execution of this agreement, a trust agreement with City Bank Farmers Trust Company, as Trustee, a copy of which trust agreement is annexed hereto, marked Exhibit A, and made a part hereof, and the first party has delivered to the said Trustee the property referred to in the said trust agreement upon the trusts therein set forth.
TENTH: As long as, and only as long as, the first party is required by law to pay income taxes, either Federal or State, upon the income payable to the second party from the trusts above referred to, the following provision shall be operative:
In the event that in the calendar year nineteen hundred and forty-two, or in any subsequent calendar year, the total of all income taxes, both Federal and State, paid by the first party during said year shall be so large that the income enjoyed by the first party from all sources during said year, after payment of said income taxes, shall be less than $6,000, then in that event the second party shall pay to the first party, on February first of the following year, a sum equal to the difference between the said income of the first party and $6,000, provided that in no event shall the second party be required to pay to the first party a sum greater than the amount by which the total income taxes for said year payable by the second party would have been increased if the second party were required by law to pay all income taxes upon the income received by her from said trusts.
ELEVENTH: The second party does and shall accept the full performance of the provisions hereto made, in full satisfaction for her support and maintenance, and the support, maintenance and education of Robert Manning McKeon, Jr., and Alexander Bonnyman McKeon, and agrees that so long as the first party shall duly keep and perform the said covenants, agreements and conditions to be kept and performed by him hereunder, she will not at any time hereafter contract any debt or liability whatsoever for which the first party, or his property or estate shall or may be liable. The second party warrants that she has not heretofore incurred any debt or liability for which the first party is or may be liable, and the second party agrees to indemnify the first party against any such debt or liability.
NINETEENTH: Nothing herein contained shall be deemed to preclude or bar either of the parties from maintaining an action for absolute divorce against the other in any competent jurisdiction upon any lawful grounds whatsoever, but, as far as legally permissible, this agreement shall survive any decree of divorce and shall continue in full force and effect.
TWENTIETH: This agreement shall be governed by and interpreted under and construed in all respects in accordance with the laws of the State of New York, irrespective of the place of domicile or residence of either party hereto.
In accordance with the provisions of the separation agreement, Robert Manning McKeon simultaneously executed a trust indenture on November 14, 1941, with City Bank Farmers Trust Company, as trustee. It is incorporated herein by reference. It was annexed to and made part of the separation agreement. The trust indenture created two separate, irrevocable trusts, hereinafter referred to as Trust A and Trust B. Robert Manning McKeon transferred to Trust A, 133 1/2 shares of the capital stock of 52nd Street Realty Corporation and promissory notes of the corporation, payable on demand, in the face amount of $186,666.67; he transferred to Trust B, 66 2/3 shares of the capital stock of 52nd Street Realty Corporation and promissory notes of the corporation, payable on demand, in the face amount of $93,333.33. The main asset of 52nd Street Realty Corporation consisted of the realty and the building at 322 West 52nd Street, New York City. The building was leased to the United States Government for use as a post office.
Under the terms of Trust A, the trustee was to pay the income thereof to the decedent for life; thereafter, to his children for life in equal shares; and the remainder is to be paid to issue of the children. The value of the corpus of Trust A is includible in decedent's gross estate, it has been included, and it is not involved in this proceeding.
The net income of Trust B is to be paid to Margot McKeon during her life or until her remarriage.
Upon the death or a remarriage of Margot, whichever event occurs first, the trustee is to do the following: Divide the trust principal into equal shares for the children, and during the child's minority, pay over or apply all or so much of the net income from the child's share of the trust, as the trustee in its absolute discretion shall determine to or for the use of such child. The trustee may accumulate and invest the balance, if any, of net income not so paid or applied. Upon the attainment of a child's majority, the trustee shall pay over and distribute any such accumulation to the child. The child is to receive all of the net income of his share of the trust after attaining his majority for the duration of his life; the principal of the child's share of the trust is to be distributed upon his death to the child's living issue, if any, or to other designated remaindermen, other than Margot McKeon, the mother, and the grantor of the trust, Robert McKeon, and his estate.
In the separation action, Robert and Margot McKeon each employed his own attorney. They were not represented by the same attorneys. In her complaint, Margot McKeon charged her husband with extreme cruelty toward and inflicting physical injury upon herself. The court proceeding was dropped in order to avoid publicity. After the action was commenced, each party, represented by his and her own different attorney, entered into arm's-length negotiations which extended over several months and which culminated in the execution of the separation and trust agreements. Margot McKeon received advice about her legal rights. She made various demands upon Robert McKeon, among which was that she receive one-third of the income of 52nd Street Realty Corporation, and that the property held by that corporation be managed by City Bank Farmers Trust Company. At the time the separation agreement was executed, Robert And Margot McKeon were living separate and apart. After the separation agreement, they continued to live separate and apart at all times.
The City Bank Farmers Trust Company was the trustees of the trusts created by the decedent in November 1941.
The decedent was a member of the New York Stock Exchange. On November 14, 1941, his net worth was about $500,000. For the years 1937 through 1941, his income from dividends, trust funds, rentals, commissions, and interest was about $50,000 a year.
The 200 shares of stock of the 52nd Street Realty Corporation which the decedent transferred to the trusts constituted all of the outstanding stock.
The Commissioner determined that all of the stock and the notes of 52nd Street Realty Corporation which were transferred to the two trusts had a value at the time of decedent's death of $458,661.42.
During the years 1937 through 1941, the 52nd Street Realty Corporation paid dividends on stock and interest on its notes, as set forth below. The assets which the decedent transferred to the two trusts on November 14, 1941, were productive of the income set forth below during 1937 through 1941:
+----------------------------------+ ¦ ¦ ¦Interest on¦ ¦ +----+---------+-----------+-------¦ ¦Year¦Dividends¦notes ¦Total ¦ +----+---------+-----------+-------¦ ¦1937¦$6,000 ¦$16,800 ¦$22,800¦ +----+---------+-----------+-------¦ ¦1938¦ ¦16,800 ¦16,800 ¦ +----+---------+-----------+-------¦ ¦1939¦15,000 ¦16,800 ¦31,800 ¦ +----+---------+-----------+-------¦ ¦1940¦12,500 ¦16,800 ¦29,300 ¦ +----+---------+-----------+-------¦ ¦1941¦16,750 ¦16,800 ¦33,550 ¦ +----------------------------------+
During the 5-year period 1937 through 1941, the average amount paid by 52nd Street Realty Corporation in interest and dividends was $26,850, one-third of which is $8,950.
After the two trusts were created on November 14, 1941, they derived their respective income from the interest and dividends paid by the 52nd Street Realty Corporation.
Margot McKeon received some financial assistance from her father after the separation agreement was executed. She did not expect to maintain, after her separation from the decedent, the same standard of living as the decedent maintained for his family before the separation.
Prior to their separation, the decedent and his wife maintained a high standard of living. They rented an apartment on Park Avenue; they maintained a large summer home at Southampton, Long Island; they kept two automobiles and several horses; they employed several servants; they traveled extensively; and they enjoyed memberships in several clubs. Their annual living expenses were about $40,000, per annum.
At the time the separation and trust agreements were executed in 1941, the cost of maintaining and supporting the children of the decedent and Margot McKeon was $3,400 per annum, each. This amount included the cost of tuition in private schools, medical expenses, clothing, food, and general care. The youngest child, Alexander, suffered from bronchial asthma. He required special nursing and medical care.
On November 14, 1941, the decedent was 38 years of age; Margot was 33; Robert was 10; and Alexander was 8, all ages computed to the closest birthday.
After November 14, 1941, the decedent did not pay any sum out of his own separate funds for the support of either of his children, or for the support of Margot McKeon. The income of Trust B was paid to Margot McKeon for the support of herself and the two children. All of the income of Trust B which Margot McKeon received was actually used for those purposes.
Margot McKeon was never divorced from the decedent.
The combined commuted value of an annuity of $3,400 for Robert And Alexander for the remaining period of each child's minority amounted to $63,736.80.
The Commissioner determined that the value of the corpus of Trust B, for inclusion in the decedent's gross estate, was $152,887.14. He included that amount in the value of the gross estate under section 811(c) of the 1939 Code, in determining the deficiency in estate tax.
The parties have stipulated that the decedent's interest in 100 shares of common stock of Public service Corporation of New Jersey had a value of $2,397.50 on the date of the decedent's death.
Counsel fees and disbursements in connection with legal services rendered prior to October 16, 1952, have been incurred by the petitioners in the amount of $12,000. Of the amount of $12,000, a total of $8,000 has been paid by the petitioners. Petitioners are entitled, in addition to the above amounts, to deductions for reasonable legal expenses incurred in this proceeding, the amount to be determined by the parties in the Rule 50 computation.
OPINION.
HARRON, Judge:
Issue 1.
The first question to be decided is whether the value at the date of the decedent's death of the corpus of Trust B is includible in the gross estate because of the provisions of section 811(c)(1)(B) of the 1939 Code.
The value of the trust corpus is not in dispute.
SEC. 811. GROSS ESTATE.(c) TRANSFERS IN CONTEMPLATION OF, OR TAKING EFFECT AT, DEATH.—(1) GENERAL RULE.— To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise—(B) 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 (i) the possession or enjoyment of, or the right to the income from, the property, or (ii) 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; * * *
The petitioners concede that the decedent was under a continuing legal obligation to support his wife and children and that under the trust instrument and the separation agreement, the income of Trust B was for the support and maintenance of the wife and children. The petitioners concede, further, that under all of the facts and circumstances the decedent retained the enjoyment of, or the right to the income from Trust B. Therefore, one of the conditions of section 811(c)(1)(B) is present.
However, the petitioners rest their contention that section 811(c)(1)(B) does not apply upon the narrow ground that the period during which the decedent retained his interest in the trust income was not a ‘period which does not in fact end before his death.’ At the time of the decedent's death, the trust income was still being paid over to Margot McKeon in discharge of the decedent's continuing legal obligation to support her and the two minor children. It is clear, therefore, that the decedent's interest in the trust income lasted for a period which literally did ‘not in fact end before his death.’ The petitioners claim, however, that the language of the statute must not be read literally. They assert that this portion of section 811(c)(1)(B) is not operative, even though the decedent's reservation of income does not in fact end before his death, unless it appears that the decedent intended that the reservation of income should extend for the duration of his life or unless the period of reservation had no possible termination before his death.
The petitioners' argument must be rejected. The language of the statute ‘for any period which does not in fact end before his death’ is clear and unambiguous, Marks v. Higgins, 213 F.2d 884, 887, and applies to the transfer in this proceeding, where the decedent's interest in the trust income did not in fact end before his death. Estate of Ambrose Fry, 9 T.C. 503, 507. Helvering v. Mercantile-Commerce Bank & Trust Co., 111 F.2d 224, 226, reversing on other grounds Estate of Paul E. Donnelly, 38 B.T.A. 1234, certiorari denied 310 U.S. 654. Cf. Estate of Ernest Hinds, 11 T.C. 314, 324, affirmed on other grounds 180 F.2d 930.
The petitioners' contention that section 811(c)(1)(B) is inapplicable because the termination of the decedent's interest in the trust income was dependent upon his wife's death or remarriage and the coming of age of the children, and not upon his death, is based upon certain language in Commissioner v. Nathan's Estate, 159 F.2d 546, certiorari denied 334 U.S. 843. This case involved an inter vivos transfer in trust which was made in 1941, under which the decedent-grantor gave a life estate to his sister and reserved a life estate in himself in the event his sister predeceased him. The decedent-grantor died in 1943, during the lifetime of his sister. The Circuit Court of Appeals held that the corpus of the trust, less the value of the sister's outstanding life estate, was includible in the decedent's gross estate under section 811(c) of the 1939 Code. To the same effect, see Marks v. Higgins, supra. We are unable to perceive any indirect or oblique support in Nathan's Estate for petitioners' ingenious argument. Certainly, the rationale and holding of that decision are in support of the Commissioner's determination here. Also, it appears likely that the discussion seized upon by the petitioners was addressed to other phrases in the statute which are not involved in this proceeding, namely, ‘for his life or for any period not ascertainable without reference to his death.’ See Commissioner v. Nathan's Estate, supra, p. 549.
We hold that the value of the corpus of Trust B is includible in the decedent's gross estate under section 811(c)(1)(B). Helvering v. Mercantile-Commerce Bank & Trust Co., supra; Commissioner v. Dwight's Estate, 205 F.2d 298, reversing 17 T.C. 1317 on other grounds, certiorari denied 346 U.S. 871; Mathilde B. Hooper, 41 B.T.A. 114, 125.
There remain two issues; they involve the provisions of section 811(i) of the 1939 Code.
The petitioners assert, next, that even if the value of the corpus of Trust B is includible in the decedent's gross estate under the provisions of section 811(c)(1)(B), there shall be excluded from the gross estate the commuted values of (A) the cost of the support of both of the children during their respective minorities; and (B) the cost of the support of the decedent's wife, Margot, during the decedent's life. Under the theories of the petitioners, and their contentions as to the commuted values of the alleged cost of support of the three individuals during the stated period, it would follow that the combined, commuted values would exceed the value of the corpus of Trust B at the date of the decedent's death, and, therefore, there would be no ‘excess of the fair market value at the time of death of the property otherwise to be included (in the gross estate) * * *, over the value of the consideration received therefor by the decedent.’ Sec. 811(i).
SEC. 811. GROSS ESTATE.(i) TRANSFERS FOR INSUFFICIENT CONSIDERATION.— If any one of the transfers, trusts, interests, rights, or powers, enumerated and described in subsections (c), (d), and (f) is made, created, exercised, or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value at the time of death of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent.
Issue 2. Decedent's Transfer to Trust B for the Support of His Children.
The property to be decided under this issue is whether any part of the property transferred by the decedent to the corpus of Trust B was transferred ‘for a consideration in money or money's worth.’ The petitioners contend that part of the consideration received by the decedent for the transfer was the release of his obligation under State law to support his two children; that the release of a father from his obligation to support his children is ‘a consideration in money or money's worth: within the meaning of section 811(i) of the 1939 Code; that at least $3,400 per year was required to support each child; that the commuted value of $3,400 per year for each of the children during their respective minorities was $63,736.80; and that under section 811(i), the amount of $63,736.80 must be excluded from the fair market value of the corpus of Trust B.
The question is controlled by D. G. McDonald Trust, 19 T.C. 672, 687, affirmed sub nom. Chase National Bank of the City of New York, et. al., Trustees v. Commissioner, 225 F.2d 621; Weiser v. Commissioner, 113 F.2d 486; Estate of Eben B. Phillips, 36 B.T.A. 752; Edmund C. Converse, 5 T.C. 1014; affd. 163 F.2d 131; Roland M. Hooker, 10 T.C. 388, affd. 174 F.2d 863. It is concluded that part of the property transferred to Trust B was made, and is clearly referable to, the support of full and adequate consideration in money's worth. Under this issue the petitioners are sustained.
There is also the question of the valuation of the children's support. Upon consideration of all of the evidence it is concluded that a reasonable prospective value of the children's support is $63,736.80.
Issue 3. Decedent's Transfer to Trust B for the Support of His Wife.
The petitioners contend that the commuted value of the support of the decedent's wife was $233,013.15; that the decedent's obligation to support his wife was satisfied by transfer of part of the property to the trust; and that satisfaction of the decedent's obligation to support his wife constitutes consideration in money's worth. Accordingly, they contend that under the provisions of section 811(i), the value of the corpus of Trust B must be reduced by the amount of $233,013.15.
The respondent contends that the wife's right to support constitutes ‘marital rights in the decedent's property or estate,‘ the release of which may not, under section 812(b), be considered consideration in money's worth for the purpose of section 811(i).
Section 812(b) provides as follows:
For the purposes of this subchapter, a relinquishment or promised relinquishment of dower, curtesy, * * * or of other marital rights in the decedent's property or estate, shall not be considered to any extent a ‘in money or money's worth.’
The support and maintenance rights relinquished by Margot McKeon fall within the phrase ‘other marital rights in the decedent's property or estate, ‘ in section 812(b), William Weiser, Executor, 39 B.T.A. 1144, Meyer's Estate v. Commissioner, 110 F.2d 367, 368, certiorari denied 310 U.S. 651, and the release of these rights does not constitute ‘consideration in money or money's worth.’ Helvering v. United States Trust Co., 111 F.2d 576; Adriance v. Higgins, 113 F.2d 1013. Also, Margot McKeon's release of her dower rights in decedent's property is expressly excluded from consideration as ‘consideration in money or money's worth’ by section 812(b). The petitioners cannot prevail under this issue.
Because of our conclusion under Issue 2, supra, the excess of the value, at the date of death, of the corpus of Trust B, which value is $152,887.14, above the commuted value of the children's support, $63,736.80, namely, $84,150.34, is includible in the gross estate pursuant to section 811(i).
The petitioners are entitled to deductions for a reasonable amount for legal expenses incurred in this proceeding. The parties are to compute such amount under Rule 50.
Decision will be entered under Rule 50.