De Guebriant v. Commissioner

Estate of Irene de Guebriant, Deceased, Avery Claflin and Philip A. Carroll, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent De Guebriant v. Commissioner Docket No. 17081 United States Tax Court 14 T.C. 611; 1950 U.S. Tax Ct. LEXIS 223; April 18, 1950, Promulgated *223 Decision will be entered under Rule 50. Respondent included in the gross estate of decedent, a nonresident alien not engaged in business in the United States at the time of her death, one-half of certain trust funds deposited in the name of the trustees in a New York bank, to which half she was entitled as a remainderman. He also included in decedent's gross estate bonds of the United States issued both before and after March 1, 1941, as well as United States certificates of indebtedness issued subsequent to March 1, 1941, plus the accrued interest on all these obligations. Respondent increased the value of certain stock over the amount reported in the estate tax return of decedent. The deficiency he determined against the estate of the decedent resulted from these actions. (1) Held, the trust funds to which decedent was entitled as a remainderman were excludable from her gross estate as a deposit "by or for" her within the meaning of section 863 (b) of the Internal Revenue Code. (2) Held, that the United States bonds and certificates of indebtedness issued after March 1, 1941, plus interest accrued thereon, were includible in decedent's gross estate. (3) Value of stock*224 in the gross estate of decedent determined. E. L. Finnan, Esq., for the petitioner. E. Randolph Dale, Esq., for the respondent. Hill, Judge. Johnson, J., dissenting. Arundell, J., agrees with this dissent. HILL *611 Respondent determined a deficiency of $ 11,651.31 in the estate tax of petitioner's decedent, who was a nonresident alien not engaged in business in the United States at the time of her death. Petitioner presents three questions for our decision: (1) Were one-half of certain trust funds deposited in the name of the trustees in a New York bank to which the decedent was entitled as a remainderman*225 excludable from her gross estate as a deposit "by or for" her within the meaning of section 863 (b) of the code? (2) What was the value of certain stock which formed a part of the gross estate of the decedent? (3) Were United States bonds issued both before and after March 1, 1941, and United States certificates of indebtedness issued subsequent to March 1, 1941, plus the accrued interest on all these obligations, excludable from decedent's gross estate by virtue of section 4 of the Victory Liberty Loan Act of 1919? FINDINGS OF FACT. Part of the facts were stipulated and are so found. This proceeding is brought by Philip A. Carroll as agent for the estate of Irene de Guebriant (hereinafter referred to as decedent) *612 because there is no representative acting in the United States for decedent's estate. At her death on May 24, 1945, Irene de Guebriant was a French citizen, residing at Saint Jean-Kerdaniel, France, and was not engaged in business in the United States. Her estate tax return was filed with the collector of internal revenue for the second district of New York. In 1884 Royal Phelps died a resident of the State of New York, leaving a will which was admitted to probate*226 in the Surrogate's Court of New York County on August 29, 1884. By this will Phelps divided his residuary estate into as many equal shares as he might leave grandchildren surviving him, and directed that each such share be held in trust for the life benefit of the grandchild for whom set apart, with remainder over in equal shares per stirpes, to the then surviving issue of such grandchild. Under this testamentary provision a trust was established for the life benefit of Anita Maria de La Grange (hereinafter referred to as La Grange), one of the grandchildren of Royal Phelps. On January 15, 1943, La Grange died and Philip A. Carroll, a trustee of the trust for her benefit, was so advised by telegram sent through the Swiss Embassy on May 22, 1943, which information was confirmed in July, 1943, by the Red Cross. She left as her only surviving issue a grandson, Marc de La Bossiere-Thenne, and a daughter, Irene de Guebriant. At the time of La Grange's death the trust corpus was composed entirely of personal property. In July, 1943, the trustees of the La Grange trust, Philip Carroll and Avery Claflin, consulted counsel as to the effect of La Grange's death upon the trust and as*227 to the possibility of making a distribution of the trust property to the remaindermen. They were advised that the trust had terminated and that decedent was entitled to one-half of the trust corpus, subject to settlement and accounting by the trustees. They were further informed that upon La Grange's death they became mere liquidating trustees and it was their duty to settle their accounts and distribute the trust corpus to the remaindermen as quickly as possible. Wartime restrictions on all business transactions with individuals living in "Occupied France" prevented immediate distribution. Counsel explained that a license from the United States Government was necessary to turn over one-half of the trust corpus to decedent or even to transfer a portion of the trust funds to an account for Irene de Guebriant, since either step required a settlement of the accounts with the remaindermen. Licenses for such purposes were unobtainable during or immediately subsequent to the cessation of hostilities in Europe. In fact, the trustees were not even allowed to communicate with Irene de Guebriant until after November 30, 1944, following the liberation of France. *613 In view of their*228 restricted position regarding distribution of the trust corpus, the trustees proceeded at their own risk, beginning in July, 1943, to sell some of the trust investments and reinvest the proceeds in obligations of the United States Government. They also caused an accounting of their activities to be prepared, with a view to making a final distribution as soon as circumstances permitted. On January 23, 1945, when it was permissible to communicate with all portions of France, Carroll sent a letter to Irene de Guebriant which recited the termination of the La Grange trust and requested her to fill out and return an enclosed power of attorney authorizing both him and Avery Claflin to sell, invest, and manage her share of the trust corpus and to represent her at the time when the trust assets could be distributed. While they received this power of attorney from her shortly before her death, it was impossible for them to act under the power or to make a final accounting, since business transactions with residents of former Occupied France were still blocked by Government regulations. Thus, from the termination date of the La Grange trust on January 15, 1943, until the death of decedent*229 on May 24, 1945, the liquidating trustees continued to collect the income of the La Grange trust and invest it in Government obligations or deposit it with the United States Trust Co. of New York. During this same period the liquidating trustees regularly filed Federal income tax returns on behalf of Irene de Guebriant and Marc de la Bossiere-Thenne as distributees of the trust income and paid the taxes due thereon. Consequently, on May 24, 1945, when Irene de Guebriant died, the trust assets remained undistributed and no accounting by the trustees had been submitted for approval. On that date there was on deposit with the United States Trust Co. of New York in the name of "Avery Claflin, Philip A. Carroll, Trustees u/w Royal Phelps for Anita Maria de La Grange," the sum of $ 63,118.12, comprising all the cash held for the account of the trust, one-half of which or $ 31,559.06 represented the share of decedent. At the time of her death, Irene de Guebriant owned 511 1/2 shares of stock of Phelps Estate, Inc., a New York corporation, organized pursuant to section 116 of the New York Real Property Law. The company was incorporated on February 18, 1924, for the purpose of purchasing*230 undivided interests in certain realty from the holders of testamentary trusts created by Royal Phelps and Royal Phelps Carroll. Further purposes stated in its certificates were to manage, sell, invest, and reinvest the proceeds from the sale of such realty in such investments as were a proper subject for investment of trust funds under the laws of New York. The duration of the corporation was stated to be perpetual. *614 Phelps Estate, Inc., was at all times authorized to issue 3,860 shares of capital stock without par value, all of which was outstanding on May 24, 1945. These shares were originally issued to various trusts of the Phelps family in exchange for the real property conveyed to the corporation, but in the period between incorporation of the company and the death of Irene de Guebriant certain of the original trusts terminated and were distributed, so that on the date of her death the stock of the corporation was held as follows: Shares Marion Carroll Claflin [264] National City Bank of New York, trustees u/w Royal Phelps Carroll, deceased [132] Stuart & Co [396] Philip A. Carroll (individually) [296] Philip A. Carroll and Avery Claflin, trustees u/w Royal Phelps for Helen Carroll Robbins [726] Philip A. Carroll and Avery Claflin, trustees u/w Royal Phelps for Anita M. de La Grange [831] Sieyes & Co 1,119 Irene de Guebriant [96] *231 All of the holders of these shares were either members of the Phelps family or held the shares registered in their names for the account of members of the family. Half of the 831 shares registered in the name of Philip A. Carroll and Avery Claflin, trustees u/w Royal Phelps for Anita de La Grange, were held for Irene de Guebriant. There had never been a sale of the stock at the time decedent died, nor was it listed on any exchange. The asset value of the stock was $ 42.69 per share on May 24, 1945. Phelps Estate, Inc., on May 24, 1945, remained completely blocked under freezing orders of the United States Government because at least 25 per cent of its stock was owned by nationals of blocked countries. By reason of this status the corporation could not conduct its routine business without first obtaining a special operating license for each transaction from the United States Treasury Department. The fair market value of the 511 1/2 shares of Phelps Estate, Inc., owned by Irene de Guebriant was $ 16,378.70 at the time of her death. The gross estate reported in the Federal estate tax return of decedent included certain United States bonds and United States certificates of indebtedness, *232 as well as accrued interest thereon, at a total valuation of $ 155,365.99, which were physically situated within the United States and were beneficially owned by the decedent on the date of her death. The description of these bonds and certificates and the respective amounts at which they, and the accrued interest thereon, were included in the decedent's gross estate are as follows: *615 Issued Prior to March 1, 1941. $ 4,000 United States of America 2% Treasury bonds, issued on December 8, 1939, due December 15, 1950/48 $ 4,172.60 Interest accrued to date of death 35.34 Total 4,207.94 Issued Subsequent to March 1, 1941. 2,500 U. S. of America 2 1/2% Treasury bonds, issued on March 31, 1941, due March 15, 1954/52 2,649.22 Interest accrued to date of death 11.98 2,500 U. S. of America 2% Treasury bonds, issued on December 15, 1941, due December 15, 1955/51 2,573.44 Interest accrued to date of death 22.09 2,500 U. S. of America 2 1/2% Treasury Bonds, issued on October 20, 1941, due September 15, 1972/67 2,592.19 Interest accrued to date of death 11.98 4,500 U. S. of America 7/8% certificates of indebtedness, issued on June 26, 1944, due June 1, 1945, series C 4,500.00 Interest accrued to date of death 15.87 137,500 U. S. of America 7/8% certificates of indebtedness, issued on September 1, 1944, due September 1, 1945, series F 137,500.00 Interest accrued to date of death 280.70 1,000 U. S. of America 7/8% certificates of indebtedness, issued on May 1, 1945, due May 1, 1946 1,000.00 Interest accrued to date of death .58 Total 151,158.05 *233 On the face of the aforementioned United States Treasury bonds issued prior to March 1, 1941, there appeared the following recital relative to taxes: This bond shall be exempt, both as to principal and interest from all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority, except (A) estate or inheritance taxes, or gift taxes, and (B) graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations or corporations. On the face of the aforementioned United States Treasury bonds, issued after March 1, 1941, there appeared the following recital relative to taxes: The income derived from this bond shall be subject to all federal taxes, now or hereafter imposed. This bond shall be subject to estate, inheritance, gift or other excise taxes, whether federal or state, but shall be exempt from all taxation now or hereafter imposed on the principal or interest hereof by any State, or any of the possessions of the United States, or by any local*234 taxing authority. A similar recital appeared on the certificates of indebtedness issued after March 1, 1941. *616 On the estate tax return filed for Irene de Guebriant the value of her gross estate at the time of her death was reported to be $ 209,255.16, from which a specific exemption of $ 2,000 was deducted, leaving a reported net estate of $ 207,255.16. Her share of the trust funds deposited in the United States Trust Co. of New York in the amount of $ 31,559.06 was reported on the return, but was not included as part of her gross estate. The fair market value of 511 1/2 shares of Phelps Estate, Inc., which were included in her gross estate was stated to be $ 14,557.29. The return was filed on July 16, 1946, and payment of the Federal estate tax liability disclosed therein to be due was made to the collector on that date in the sum of $ 52,876.55. In his notice determining a deficiency in decedent's estate tax liability in the amount of $ 11,651.31, respondent increased the fair market value of the 511 1/2 shares of Phelps Estate, Inc., stock to $ 21,835.94. He also included in the gross estate of decedent $ 31,559.06 representing one-half of the trust funds deposited*235 in the United States Trust Co. Respondent included the latter amount in the estate on the ground it was not excluded by virtue of section 863 (b) of the code. OPINION. Issue 1. -- The first question we have to determine in this proceeding is whether one-half of the trust funds deposited in the name of the trustees of the La Grange trust at the United States Trust Co. constituted money on deposit "by or for" decedent within the meaning of section 863 (b) of the Internal Revenue Code1 at the time of her death. Respondent concedes that all the other requirements of this section of the code are met. While he admits that decedent was entitled to receive one-half of the assets of the La Grange trust after the death of La Grange, he claims that Irene de Guebriant had no right to the specific assets of the trust, such as the bank deposits, until a final accounting, release of the trustees, and conveyance of the trust assets to the remaindermen had taken place. Since no final settlement and distribution of the La Grange trust had been made at the time decedent died, respondent contends that trust funds deposited in the bank were not on deposit "by or for" her within the meaning *236 of section 863 (b). Petitioner asserts that, since the trust had terminated and decedent was entitled to one-half of the trust assets as a remainderman, one-half of the funds deposited *617 at the bank were a deposit "by or for" decedent within the statutory language. We agree with petitioner's contention. If it could be said that, upon the death of La Grange, automatically by force of New York law decedent owned one-half of the trust assets as one of the two remaindermen, then there would be little doubt that the funds in the trustee's account at the United States Trust Co. were deposited "by or for" Irene de Guebriant. *237 See Estate of Anna Floto de Eissengarthen, 10 T. C. 1277. But it is still debatable under New York law whether, in the period between termination of a trust and the distribution of the assets, legal title to the trust funds vests automatically in the remaindermen where, as here, the corpus was composed entirely of personalty. See Matter of Thomas, 254 N. Y. 292; 172 N. E. 513; Russell v. Bowers, 27 Fed. Supp. 13; and In re Fiske's Estate, 88 N. Y. S. (2d) 452. Assuming that decedent did not have legal title to a portion of the trust funds, we are yet convinced that one-half of the trustees' account at the United States Trust Co. was on deposit "by or for" decedent at the time of her death within the meaning of section 863 (b) as we interpreted the above quoted words in Estate of Karl Weiss, 6 T. C. 227. We held in that case that the deposit need not be in the decedent's name, nor need it be made directly by the decedent, nor is a direct contractual relationship between decedent and the bank necessary*238 in order for the deposit to come within the meaning of section 863 (b). This interpretation of the statute rebuts the conclusions drawn by respondent based on the absence of such facts in the present case. Furthermore, we stated in the Weiss case, p. 228, that "a usual meaning of 'for' when thus coupled with 'by' is 'for the use and benefit of' or 'upon behalf of'." We have concluded from the circumstances existing at the time of Irene de Guebriant's death that one-half of the trust funds in the trustees' account at the United States Trust Co. were for her use and benefit. War conditions prevented a final accounting between the trustees and decedent and a distribution of one-half of the deposited funds to her. This circumstance alone held up the settlement of the trust following the death of La Grange. Furthermore, an accounting of their activities was prepared by the trustees in readiness for the day when they could obtain a license to transact business with Irene de Guebriant and so wind up the trust. During the two-year period between the termination of the trust and the death of decedent, Carroll and Claflin were mere liquidating trustees, collecting income on the trust*239 assets and filing tax returns showing the distribution thereof to decedent and Marc de La Bossiere-Thenne. Their fiduciary duties to conserve the trust assets during this period were for the sole benefit of these new beneficiaries, the remaindermen, rather than for the life *618 tenant. The trustees were accountable to Irene de Guebriant for both the principal of the trust and all income accumulating after the expiry date of the trust. See Trust of Bingham v. Commissioner, 325 U.S. 365, 373. Decedent had a direct enforceable claim against the trustees for an accounting and conveyance of one-half of the bank deposit, as respondent admits. The fact that trustees' commissions might slightly reduce the total amount eventually transferred to Irene de Guebriant does not detract from her unconditional right to a portion of these funds. Furthermore, while it is certainly true that during the period between termination of the trust and distribution of the trust assets the trustees had duties and necessary powers to wind up the trust estate, it is not at all clear that the sale of certain securities in the trust and investment of the proceeds therefrom*240 in United States obligations were not outside these powers. Certainly it is a general rule that trustees have no power to invest subsequent to termination of a trust. Scott on Trusts, vol. 3, sec. 344, p. 1890. Such actions by the trustees bespeak an agency, which decedent later ratified as a principal by delivering to the trustees a power of attorney with regard to her property interests in the trust. Respondent argues that the facts of the present case bring it within the rationale of City Bank Farmers Trust Co. v. Pedrick, 168 Fed. (2d) 618. We can find no such similarity in the circumstances of the two cases that would justify this contention. In the City Bank Farmers Trust Co. case, the funds deposited in a bank were held by the trustees of a trust which was still active and, to terminate the trust by revocation and cause a distribution of the trust assets, it was necessary for the settlor to gain the consent of the trustee, whereas in the instant case at the time of decedent's death the trust had long been terminated and she was unconditionally entitled to one-half of the trust funds on deposit. Respondent also asserts that our decision*241 in Estate of Elizabeth Hawxhurst Davey, 10 T. C. 515, supports his contention. It is true that in the Davey case further steps had been taken toward a final distribution of the trust estate than in the instant case, namely, there had been a final accounting and release of the trustee. But, as in our case, there had been no transfer of the trust funds to the account of the claimant, for such funds were still held on deposit by the bank in a general account designated "Personal Trust Funds" at the time of the claimant's death. We feel that the decisive fact in both cases is that the trust had terminated and the decedent had an unconditional right to the trust funds held on deposit. We conclude here, as we said in the Davey case, that the funds to which decedent had a direct, enforceable claim "were held 'for' her ultimate use and benefit." *619 Therefore, we hold that the $ 31,559.06 representing one-half of the bank deposit is not includible in the gross estate of decedent by reason of section 863 (b). Issue 2. -- The next question for our determination is the value of 511 1/2 shares of Phelps Estate, Inc., which formed a part of*242 Irene de Guebriant's gross estate. Respondent determined that at the time of her death the value of these shares was $ 21,835.94, while petitioner contends that their value was $ 14,557.29. The fair market value determined by respondent is based entirely on the asset or net worth valuation of the stock at $ 42.69 per share. While petitioner accepts this figure as the correct asset value per share, yet the assertion is made that there were certain other relevant factors existing at the time decedent died which are not reflected in the net worth valuation and which serve to reduce the fair market value of the stock below $ 21,835.94. Where stock of a family corporation has never been listed on an exchange or sold, valuation is extremely difficult. We recognize that stock in such a closed corporation is hard to sell, there being no other market except that afforded by the few other stockholders. Wood v. United States, 29 Fed. Supp. 853. Both parties agreed that under such circumstances all relevant factors affecting the value of the stock must be considered. Regulations 105, sec. 81.10-(c). Therefore, we are convinced that respondent erred in*243 basing his appraisal of the stock wholly upon its asset or net worth valuation. We think that certain of the factors enumerated by petitioner do serve to reduce the fair market value of the 511 1/2 shares below their net worth valuation. First we note that the 511 1/2 shares constituted a minority interest, approximating one-seventh of the total outstanding stock at the time of Irene de Guebriant's death. Respondent argues that the existence of a minority interest is not, by itself, sufficient grounds for holding that the fair market value of the stock was not equal to its asset value. But minority stock interests in a "closed" corporation might be worth less than the proportionate share of assets to which they attach. Cravens v. Welch, 10 Fed. Supp. 94, 95; Mathilde B. Hooper, 41 B. T. A. 114, 129; Andrew B. C. Dohrmann, 19 B. T. A. 507. Furthermore, by the terms of its certificate of incorporation and under section 116 of the New York Real Property Law, Phelps Estate, Inc., was severely limited in reinvestment of proceeds from the sale of its realty to assets proper for the investment*244 of trust funds. This restriction made further investment of funds in the stock of Phelps Estate, Inc., unattractive to its stockholders at the time of Irene de Guebriant's death. Finally, the corporation required special licenses from the United States Government in May, 1945, to operate its normal business, *620 due to stock ownership by French and Belgian nationals. At that time it was impossible to tell when Government controls would be lifted. The resulting business uncertainty served to detract from the salability of the company's stock at the time of Irene de Guebriant's death. In the light of these circumstances, we hold that the fair market value of the 511 1/2 shares of Phelps Estate, Inc., was $ 16,378.70 on May 24, 1945. Issue 3. -- The final issue before us in this proceeding is whether certain bonds of the United States issued both before and after March 1, 1941, and certificates of indebtedness of the United States issued subsequent to March 1, 1941, plus accrued interest on all these obligations, should have been included in the gross estate of decedent. On brief respondent concedes that the amount of the bonds issued prior to March 1, 1941, and the interest*245 accrued thereon were not includible in her gross estate. As to the includibility of bonds and certificates of indebtedness issued subsequent to March 1, 1941, plus accrued interest, the parties agree that at the time of her death Irene de Guebriant beneficially owned these obligations and that she was a nonresident alien not engaged in business in the United States. Respondent, nevertheless, contends that section 4 of the Victory Liberty Loan Act of March 3, 1919, 231 United States Code, section 750, did not exclude such United States obligations and the interest thereon from the Federal estate tax. The very same question in regard to post-March 1, 1941, bonds and accrued interest thereon was before this Court in Estate of Karl Jandorf, 9 T. C. 338. After a thorough and comprehensive discussion of the issue, we there decided that the exemption provided for nonresident aliens not engaged in business in the United States applies to direct taxes on the principal or interest of United States bonds and does not apply to the Federal estate tax, which is an excise tax imposed upon the transfer of property at death. *246 This view is supported by a long line of authority, including Plummer v. Coler, 178 U.S. 115; Murdock v. Ward, 178 U.S. 139; Phipps v. Commissioner, 91 Fed. (2d) 627; Hamersley v. United States, 16 Fed. Supp. 768; and United States Trust Co. of New York v. Helvering, 307 U.S. 57. We are aware that our decision was reversed by the Court of Appeals for the Second Circuit in Jandorf v. Commissioner, *621 171 Fed. (2d) 464, but, with due deference to its views, we remain convinced of the soundness of our position as expressed in our own decision therein and adhere to it in this proceeding. No distinction is suggested by either party between United States bonds and certificates of indebtedness so far as includibility in decendent's gross estate is concerned and we can find none. We therefore hold that the United States bonds and certificates of indebtedness issued after March 1, 1941, plus accrued interest thereon, were includible in decedent's gross estate. The amount of *247 the deficiency in petitioner's estate tax will be recomputed under Rule 50. Decision will be entered under Rule 50. JOHNSON Johnson, J., dissenting: In my view the reasoning of Jandorf v. Commissioner (C. A., 2d Cir., 1948), 171 Fed. (2d) 464, is convincing on the third*248 issue herein. Therefore I respectfully dissent. Footnotes 1. SEC. 863. PROPERTY WITHOUT THE UNITED STATES. The following item shall not, for the purpose of this subchapter, be deemed property within the United States: * * * * (b) Bank Deposits. -- Any moneys deposited with any person carrying on the banking business, by or for a nonresident not a citizen of the United States who was not engaged in business in the United States at the time of his death.↩ 2. Sec. 4. That section 3 of the Fourth Liberty Bond Act is hereby amended to read as follows: "Sec. 3. That, notwithstanding the provisions of the Second Liberty Bond Act or of the War Finance Corporation Act or of any other Act, bonds, notes and certificates of indebtedness of the United States and bonds of the War Finance Corporation shall, while beneficially owned by a nonresident alien individual, or a foreign corporation, partnership, or association, not engaged in business in the United States, be exempt both as to principal and interest from any and all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States or by any local taxing authority."↩