Uhl v. Commissioner

Estate of Edgar M. Uhl, Deceased, The National City Bank of Evansville, Administrator, With Will Attached, Petitioner, v. Commissioner of Internal Revenue, Respondent Uhl v. Commissioner Docket No. 53695 United States Tax Court 25 T.C. 22; 1955 U.S. Tax Ct. LEXIS 78; October 17, 1955, Filed *78 Decision will be entered under Rule 50. The decedent transferred property in trust in 1938 whereby he was to receive $ 100 per month for life and the balance of the income was distributable to him in the discretion of the trustee. Held, as the decedent's creditors under Indiana law could have reached the full amount of the trust income, the decedent could have obtained through his creditors the full beneficial use and enjoyment of such income. Therefore, decedent retained "the right to the income" within the purview of section 811 (c) (1) (B), Internal Revenue Code of 1939, and the full amount of the trust corpus was includible in his gross estate. Henry B. Walker, Esq., for the petitioner. John L. Carey, Esq., for the respondent. Bruce, Judge. BRUCE *22 Respondent determined a deficiency in the estate tax of the petitioner in the amount of $ 10,292.87. Petitioner acquiesced in certain adjustments and paid additional taxes thereon in the amount of $ 297.86. The issue for decision is whether the respondent correctly determined that the entire corpus of a trust created by the petitioner's decedent was includible in the gross estate under section 811 (c) (1) (B) of the Internal Revenue Code of 1939. FINDINGS OF FACT. All of the facts were stipulated and are so found. Petitioner's decedent died testate on March 7, 1951, a resident of Evansville, *80 Indiana. The National City Bank of Evansville, Indiana, was appointed administrator with will attached. The petitioner filed a timely estate tax return with the collector of internal revenue for the district of Indiana. *23 On March 2, 1938, the decedent transferred to the National City Bank of Evansville, as trustee, certain personal property, consisting principally of stocks and bonds. The trust agreement provided in part as follows: The said Trustee shall monthly pay to the Grantor during his lifetime, the sum of One hundred dollars ($ 100.00) per month, provided however that the Trustee may in his discretion and after consultation with Louis C. Uhl, pay a greater sum than One hundred dollars ($ 100.00) per month if it shall seem advisable and provided further, that said sum so paid shall not in any event exceed the amount of net income received from said property. * * * * This Trust shall be irrevocable by the Grantor and shall terminate at his death at which time the property remaining in the hands of the Trustee shall be divided into three equal parts and one part shall go to each Louis C. Uhl the nephew of grantor, Helen Uhl Farner a niece of the grantor and Jane Uhl, *81 a niece of grantor. The trust agreement also provided for the disposition of each remainderman's share in the event he or she predeceased the decedent, but all three of the remaindermen survived the decedent. The value of this trust estate as of March 7, 1951, was as follows: Cash $ 60.51 U. S. Bonds 75,068.41 81 shares SIG & E 4.8% Pref 8,788.50 20 shares Spink Arms Hotel 300.00 $ 84,217.42 Net income received by the trust during the years 1943 to 1950, inclusive, was as follows: Year Net income [1943] $ 2,095.56 [1944] 2,174.80 [1945] 1,943.18 [1946] 1,927.20 [1947] $ 1,983.71 [1948] 1,987.26 [1949] 1,986.32 [1950] 2,000.74 From the above tabulated net income, distributions were made to the decedent as follows: [1943] $ 1,200 [1944] 1,200 [1945] 1,200 [1946] 1,200 [1947] $ 1,200 [1948] 1,200 [1950] Additional payments from the trust were made for the benefit of decedent as follows: Deaconess Hospital 1949 $ 923.25 Dr. Shelby Wishart 1949 411.00 Nursing services and drugs 1949 96.55 Nursing Home 1950 1,349.00 Dr. Shelby Wishart 1950 228.35 Deaconess Hospital 1950 115.30 Nursing services and drugs 160.95 Total $ 3,284.40 *24 The*82 petitioner included in the gross estate for estate tax purposes, under schedule G, $ 45,481.61 out of the entire corpus of the trust estate. Respondent determined that the entire value of the trust estate as of March 7, 1951, or $ 84,217.42, was includible in the gross estate. OPINION. The issue presented is whether petitioner's decedent retained for his life "the right to the income from, the property," conveyed in trust in 1938 within the purview of section 811 (c) (1) (B), Internal Revenue Code of 1939, 1*83 so as to cause the entire corpus of the trust to be includible in his gross estate. 2 The trust instrument provides: The said Trustee shall monthly pay to the Grantor during his lifetime, the sum of One hundred dollars ($ 100.00) per month, provided however, that the Trustee may in his discretion and after consultation with Louis C. Uhl, pay a greater sum than One hundred dollars ($ 100.00) per month if it shall seem advisable and provided further, that said sum so paid shall not in any event exceed the amount of net income received from said property. Petitioner contends that the decedent retained the right to the income of the trust to the extent of only $ 100 per month and that only a corresponding portion of the trust corpus is includible in the gross estate. 3 Respondent contends, among other things, that the decedent retained the right to all of the income including that portion which was distributable to him in the discretion of the trustee. The only matter in dispute therefore is whether the decedent retained the right to income which was distributable to him in the discretion of the trustee. *84 We are of the opinion that the decedent in the instant case retained the right to the trust income which was to be distributed to him in the discretion of the trustee. While the decedent may not have *25 been able to force the trustee to distribute the income to him, nevertheless he could have reached the full amount of the trust income through his creditors. Restatement, Trusts, sec. 156 (2) (1935) states the general rule that Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit. See also Ware v. Gulda, 131 Mass. 68, 117 N. E. 137; Greenwich Trust Co. v. Tyson, 129 Conn. 211, 27 A. 2d 166; Petty v. Moores Brook Sanitarium, 110 Va. 815, 67 S. E. 355; Menken v. Brinkley, 94 Tenn. 721, 31 S. W. 92; Griswold, Spendthrift Trusts (2d ed.), sec. 481; 1 Scott, Trusts, sec. 156.2. The case of Herzog, Trustee v. Commissioner, 116 F. 2d 591,*85 affirming 41 B. T. A. 509, is distinguishable as the trustee in that case could distribute the income to another beneficiary, excluding the grantor entirely. Cf. Alice Spaulding Paolozzi, 23 T. C. 182, 187; Griswold, supra; 6 American Law of Property, sec. 26.123, n. 3; 1 Scott, supra, 1954 supplement, sec. 156.2, n. 3. But see Greenwich Trust Co. v. Tyson, supra. The trust in question was, of course, governed by the law of Indiana, and we have been unable to find and the parties have not cited any Indiana case directly in point. We assume, however, that the Indiana courts would follow the general rule. Some support for this assumption is found in the fact that Burns, Indiana Statutes, Annotated, sec. 33-409, provides: All deeds of gift, conveyance, transfers or assignments, verbal or written, of goods or things in action, made in trust for the use of the person making the same, shall be void as against creditors, existing or subsequent, of such person. The above statute was given effect in favor of a subsequent creditor in Carter v. American Trust Co., 82 Ind. App. 587, 147 N. E. 158;*86 and almost the identical statute was construed by the Supreme Court of Alabama to permit a creditor to reach income which was distributable to the grantor in the discretion of the trustee. Henderson v. Sunseri, 234 Ala. 289, 174 So. 767. As the decedent's creditors could have reached the income which was distributable to him in the trustee's discretion, the decedent could have obtained the enjoyment and economic benefit of such income by the simple expedient of borrowing money or otherwise becoming indebted, and then relegating the creditor to the trust income for reimbursement. This was held to constitute sufficient retention of dominion and control over the income of a trust to bar the imposition of a gift tax on property transferred in trust to the extent of the value of the life estate in Alice Spaulding Paolozzi, supra. We are of the opinion that it also constitutes a sufficient retention of "the *26 right to the income" to satisfy the requirements of section 811 (c) (1) (B) and to cause the entire corpus to be includible in the gross estate. Decision will be entered under Rule 50. Footnotes 1. SEC. 811. GROSS ESTATE. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States -- * * * * (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; * * *↩ 2. The Commissioner's determination was made pursuant to section 811 (c) (1) (B) and not (C) as stated on brief by petitioner. Section 811 (c) (2) has no application. Estate of Carolyn Peck Boardman, 20 T. C. 871, 875↩ (on appeal C. A. 2). 3. See Treasury Regulations 105, sec. 81.18; Estate of Ernest Hinds, 11 T. C. 314, affd. (C. A. 5) 180 F. 2d 930; Industrial Trust Co. v. Commissioner, (C. A. 1) 165 F. 2d 142, reversing in part 7 T. C. 756 and 8 T. C. 284↩.