Molter v. Commissioner

ISABEL RICHARDSON MOLTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Molter v. Commissioner Docket No. 47308. United States Board of Tax Appeals 27 B.T.A. 442; 1932 BTA LEXIS 1066; December 28, 1932, Promulgated *1066 Held, that under the provisions of the testator's will petitioner received a vested remainder interest and that the date of acquisition of the property sold in the tax years was the date of death of the testator and not the date of distribution to petitioner. Donald V. Hunter, Esq., and Oscar A. Kropf, Esq., for the petitioner. J. M. Leinenkugel, Esq., for the respondent. LEECH *442 The Commissioner has determined deficiencies in the amounts of $14,035.77 and $937.98 in this petitioner's income taxes for the years 1925 and 1926, respectively. The sole issue is the date of acquisition of certain stocks acquired by request, for the purpose of ascertaining the proper basis to be used in determining the gain derived upon their sale during the years in question. The facts have been stipulated. FINDINGS OF FACT. Petitioner is an individual, residing at Wilmette, Illinois. George P. Richardson, deceased, died testate, a resident of Chicago, on February 13, 1919. Surviving him as his only heirs at law were his widow, Isabel L. Richardson, and his daughter, Isabel M. Richardson, who subsequently married and appears in this proceeding*1067 as Isabel Richardson Molter. The will of George P. Richardson, deceased, was proved and duly admitted to probate in the Probate Court of Cook County, Illinois, on March 18, 1919. The pertinent provisions of the will are as follows: Fourth. I give, devise and bequeath all the rest, residue and remainder of my property, real, personal and mixed, of whatever nature and wherever situated to the First Trust and Savings Bank of Chicago, Illinois, in trust, nevertheless, for the uses and purposes, and subject to the limitations hereinafter declared and expressed in this, my last Will and Testament. *443 Fifth. I will and direct that my said trustee shall take possession of my said estate and hold, manage and distribute the same. It shall, at all times, collect * * * all income of whatever kind arising from said estate. It shall, at all times, make all necessary repairs, * * * and make any and all other payments necessary and proper in and about the said estate and the management thereof. It shall have full power to sell and convey any or all of my real estate, * * * also, if it deems best for the interest of my estate, to sell, assign and dispose of any * * * personal*1068 property of whatever name or nature, to my said estate belonging; provided, however, that no capital stocks of any corporation or corporations belonging to me at the time of my death shall be sold without the consent in writing of my daughter, Isabel M. Richardson, first had and obtained, if she is in the United States at the time of such sale, and if she is not in the United States at such time, such Trustee may sell the same without her consent in writing if deemed best; * * * It shall have full power to invest or re-invest the principal arising from the sale of any of the real estate or personal property * * * except that no loans shall be made or bonds purchased on property used exclusively for dwelling house, flat or apartment building purposes. It is my intention hereby to give to my said trustee, full and absolute power to hold, manage and distribute my said estate, and any and all powers necessary for that purpose, whether such powers are substantially set forth or not, except as above limited, are hereby given to it. * * * Sixth. I will and direct that the net income derived from the control and management of my said estate be paid at the end of each quarter year to my*1069 wife, Isabel L. Richardson, and to my daughter, Isabel M. Richardson, in equal parts, share and share alike, during the lifetime of my wife. In case of my daughter's death before my wife's death, I direct that the entire said net income be paid to my wife in quarterly installments during her life, unless, however, my daughter dies leaving lineal descendants, in which case, I direct that one-half of said net income be paid to my wife and one-half to the lineal descendants of my daughter, if any, share and share alike, in quarterly installments. At the death of my wife, in case she survives me, or at my death, in case she does not survive me, I will and direct that twenty-five per cent (25%) in value of my estate be turned over to my daughter, Isabel M. Richardson, and that twenty-five per cent (25%) thereof shall be turned over to her each second year thereafter until the whole is turned over to her in three additional installments and that the income received from the principal remaining in the hands of the trustee from time to time, be paid over to my said daughter in quarterly installments, provided, however, if my said daughter so elects, this trust may be continued for such time*1070 not exceeding ten years from the date for final distribution for such time within that term as may be designated in writing by her. In case of the death of said Isabel M. Richardson before my death or before such distribution is made to her, I direct that the whole or remaining principal in the hands of such trustee and income hereinabove directed to be paid to her, be distributed and paid to her lineral descendants, if any, at the specified times and in the same manner, share and share alike. Seventh. In case of the death of my said daughter without leaving lineal descendants before distribution is made to her as directed and mentioned in the preceding paragraph, or in case of her death before my death, leaving no lineal descendants, I hereby direct my said trustee, upon the death of my wife, in case she survives me, or one year after my death, in case she does not survive me, to sell sufficient securities remaining in its hands to provide *444 for the following specific payments in cash, and to pay in cash to the following persons, respectively, the following sums: (Here follows a list of beneficiaries each of whom is bequeathed a specific sum, and the rest and residue*1071 of the estate is bequeathed to the Old Peoples Home at Chicago.) Eighth. The provisions hereinabove made for my wife, Isabel L. Richardson, are in lieu of homestead, dower rights, widow's award and of all other rights, interests or claims which she may or might have, or claim in or to my estate, or any part thereof. Ninth. I direct that the income to be paid to the beneficiaries under this, my last Will and Testament, as well as the distributive share of my estate to be paid to them when the same is divided and distributed as hereinabove directed, shall be paid, distributed, assigned and conveyed to each of said beneficiaries in person, or to their lawfully appointed guardian or their representative, and that in no event shall any of said beneficiaries, or the creditors of any of them, have the right or power to anticipate the share of said estate or its income which my trustee is to pay over to such beneficiaries by any order on said trustee, assignment, conveyance or other voluntary transfer by such beneficiaries, or by operation of law, or by virtue of any attachment, garnishment, judgment, decree, or other legal proceedings, against said beneficiaries or my said trustee. *1072 The First Trust and Savings Bank of Chicago was appointed executor of the decedent's estate which, except for one piece of real property valued at $1,250, consisted of personal property valued at over $300,000 for estate tax purposes. The decedent's debts paid by the executor did not exceed $10,000. The executor's inventory of the estate, filed in the probate court on May 28, 1919, included among the assets listed, 40 shares of S. S. Kresge Company common stock and 1,265 shares of Belding Brothers & Company stock. The executor filed the Federal estate tax return for decedent's estate and paid the estate tax according to the value of the property included therein as finally determined by the Commissioner of Internal Revenue. Among the other properties were the following stocks, with their respective value for estate tax purposes: 40 shares S. S. Kresge Company, common, $4,480; 1,265 shares Belding Bros. & Company, common, $158,125. The First Trust & Savings Bank accepted and performed the duties of trustee as directed in the will and the property taken over by it consisted of practically the total estate of decedent, free from debts. Isabel L. Richardson, decedent's widow, *1073 did not renounce the will, but took under the provisions thereof until her death on April 25, 1923. She was survived by petitioner, daughter of George P. Richardson, deceased. On April 25, 1923, petitioner received 20 shares of S. S. Kresge Company common stock having a fair market value of $247.50 per share, as part of the first distribution by the trustee made under the will of George P. Richardson, deceased. *445 On March 19, 1925, petitioner received 10 shares of S. S. Kresge Company common stock as a stock dividend of 50 per cent on the 20 shares mentioned in the next preceding paragraph. On October 19, 1925, petitioner sold 10 shares of the said S. S. Kresge Company common stock and received therefor the net amount of $7,389.10. On January 26, 1926, petitioner sold the remaining 10 shares of the said S. S. Kresge Company common stock and the 10 shares received as a stock dividend on March 19, 1925, and received therefor the net amount of $17,580.20. On April 25, 1923, as part of the above mentioned first distribution made by the trustee, petitioner received 680 shares of Belding Bros. & Company common stock. On March 31, 1925, as part of the second distribution*1074 by the trustee under the will of George P. Richardson, deceased, petitioner received 910 shares of Belding Bros. & Company common stock. On July 1, 1925, petitioner sold 750 of these same shares, for which she received $200 a share or a total of $150,000. Belding Bros. & Company common stock was not listed upon any stock exchange prior to July 15, 1925, but several sales were made by various persons during the two preceding years and it had a fair market value per share when received by her in 1925 equivalent to the price for which she sold it in that year. In making her income tax returns for the years in controversy, petitioner proceeded upon the theory that under her father's will she received a contingent remainder interest in his estate; that the time of acquisition by her of the stocks in question was her receipt thereof upon distribution by the trustee, and that the basis for determining gain or loss was the fair market value of the stocks on that date. The Commissioner in asserting the deficiencies in controversy, determined that petitioner took a vested remainder, that the time of acquisition was the date of her father's death and that the basis for ascertaining gain*1075 or loss upon the sale of the stock was the value thereof on February 13, 1919, for estate tax purposes, reduced by stock dividends declared subsequent to that date. OPINION. LEECH: The parties have limited the issue to the question of whether petitioner took a vested or a contingent remainder under the provisions of her father's will. The applicable section of the Revenue Act of 1926 is as follows: SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that - * * * *446 (5) If the property was acquired by bequest, devise, or inheritance, the basis shall be the fair market value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision (c) or (e) of section 402 of the Revenue Act of 1921, or in subdivision (c) or (f) of section 302 of the Revenue Act of 1924, or in subdivision (c) or (f) of section 302 of this Act. Petitioner agrees that if she took a vested remainder the deficiencies as determined by the Commissioner are*1076 correct. The Commissioner agrees that if petitioner took a contingent remainder the time of acquisition was the date of the distribution of the stock to her by the trustee; that no gain or loss was realized upon the sale of the Belding Bros. & Company stock, and that the gain realized upon the sale of the S. S. Kresge Company stock may be recomputed under Rule 50, pursuant to the foregoing findings of fact. In determining this issue we are bound by the rules of property established in Illinois, ; ; . The same general principles which regulate the vesting of devises of real estate apply to a considerable extent to personal legacies. The general rule in regard to the vesting of personal legacies, the payment of which is postponed to a period subsequent to the decease of the testator, is that where there is no general gift, but only a direction to pay in the future, the vesting will be postponed until the appointed time. But an exception to the general rule, constituting practically another general rule, is that although a gift*1077 arises wholly out of directions to pay or distribute in futuro, if futurity is not annexed to the substance of the gift for reasons personal to the legatee, but merely for the convenience of the fund or property, because the testator desired to appropriate the subject matter of the legacy to the benefit of another for a certain period (such as a life estate) the legacy in remainder will vest instanter, the right of possession and enjoyment, only, being deferred. ; ; ; ; ; ; ; ; ; . A contingent remainder, by which no present interest passes, is where the estate in remainder is limited to take effect either to a dubious or uncertain person or upon the happening of a dubious or uncertain event, *1078 The status of such estate depends not upon the uncertainty of enjoyment, but upon the uncertainty of the right to enjoyment, ; . A vested remainder, by which a present interest passes to the remainderman instanter, though to be enjoyed in futuro, is where the estate is invariably fixed to remain to a determinate *447 person after the particular estate terminates, Although it may be uncertain whether the remainder will ever take effect in possession and enjoyment, it will nevertheless be vested if the interest is fixed, ; . If survivorship or other conditional element be incorporated into the description of the gift or the designation of the remainderman, such as to the children surviving the life tenant, as a condition precedent, the remainder will be contingent and the vesting deferred, *1079 ;But if the remainderman be designated by name accompanied by words giving a vested remainder interest, a subsequent provision disposing of the same estate in the event he dies before payment or distribution merely creates a condition subsequent, and the estate will vest instanter, subject to being divested upon the remainderman's death prior to the falling in of the particular estate or the arrival of the appointed time for payment or distribution. ; ; ; ; ;;The controlling consideration in deciding whether a remainder is vested or contingent upon the beneficiary being alive at the time of distribution is to discover the intention of the testator, which must be given effect, *1080 However, the law not only favors vested remainders, ;, and in cases of doubt or ambiguity in the language employed, will determine the remainder to be vested, , but will presume that words of postponement relate to enjoyment and possession. The testator's intent to postpone the vesting of the interest must be clear and manifest. A spendthrift trust is the term commonly used to designate a trust created to provide a fund for the maintenance of the beneficiary and at the same time to secure the enjoyment of it to the object of the testator's or grantor's bounty by providing that it shall not be alienable by the beneficiary or be taken by his creditors, ; . The limits of such provisions depend upon the law of the jurisdiction wherein the real property is situate, or, as to personalty, the law of the jurisdiction wherein the trust was created and is to be administered, and, where permitted, *1081 such provisions are a valid restriction even upon a vested property interest, ; The Illinois rule of law is that there is one exception to the rule that any limitation is bad which restrains an owner in fee simple from alienating his property, and this exception is that property may be *448 devised in fee, subject to a spendthrift trust which effects only a deferment of possession or enjoyment. ; ; ; In the case at bar, paragraph sixth of the will provides for a particular estate for the lifetime of the testator's widow, and then provides "at the death of my wife, in case she survives me, or at my death, in case she does not survive me, I will and direct that twenty-five per cent (25%) in value of my estate be turned over to my daughter, Isabel M. Richardson, and that twenty-five per cent (25%) thereof shall be turned over to her each second year thereafter * * *." The last sentence of paragraph sixth provides that, *1082 in case of the death of Isabel M. Richardson before the testator's death or distribution to her, the whole or remaining principal be distributed to her lineal descendants, if any. Paragraph seventh provides that, in the event of the death of testator's daughter without leaving lineal descendants before distribution is made to her as directed in paragraph sixth, or before the testator's death, the trustees are directed, upon death of testator's widow or if she predecease him within one year after his death, to make several specific payments in cash and turn over the residue to the Old Peoples Home. Paragraph ninth of the will is a spendthrift clause applying to both the income and the corpus of the testator's estate. The will makes a specific gift of the remainder of the testator's estate to his daughter by name and at the date of death of the testator she was in esse and then answered fully the description by which she was to take. She had a present fixed right to future enjoyment. There was no intervening circumstance in the nature of a condition precedent which had to happen before she received the right to take in possession, under the terms of the will. Survivorship*1083 was not included in the description of the remainderman, but, instead, the words employed created a vested interest, subject to being divested upon her death prior to the falling in of the particular estate or the periods appointed for distribution to her. Had the testator's wife predeceased him, petitioner would have taken possession of 25 per cent of the remainder immediately upon the death of the testator. The obvious reason for postponing enjoyment of this portion of the remainder was "for the convenience of the fund or property" by providing for the life estate of the widow - not for any reasons personal to the legatee. Certainly then, petitioner took a vested interest in the first 25 per cent of the remainder of testator's estate. There is nothing in the will to denote an intention by the testator that she was to take a vested interest as to 25 per cent of his remainder estate and a contingent interest as to the other 75 per cent. The words of *449 postponement are presumed to relate to enjoyment and possession, for there is no clear and manifest intent expressed by the testator to postpone the vesting of the whole or any part of the remainder interest in his daughter*1084 at the date of his death. The spendthrift clause was a valid limitation upon the right which vested in petitioner at date of testator's death and effected only a postponement of enjoyment. We conclude that petitioner acquired a vested remainder interest. The date of acquisition of the property disposed of in these tax years was the date of death of the testator, namely, February 13, 1919, and the basis for determining gain or loss is the fair market value of such property on that date. . Also, cf. ; ; ; ; . The Commissioner has used, as the basis for determining gain, the value for estate tax purposes of the shares of stock in question on the date of the testator's death, reduced by dividends declared subsequent to that date. No issue has been raised as to those values. Judgment will be entered for respondent.