Johnstone v. Commissioner

KATE ALLERTON JOHNSTONE, AS EXECUTRIX OF THE ESTATE OF ALLERTON JOHNSTONE, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Johnstone v. Commissioner Docket No. 66798. United States Board of Tax Appeals 29 B.T.A. 957; 1934 BTA LEXIS 1447; February 1, 1934, Promulgated *1447 ESTATE TAX. - Upon the facts it is held that decedent, under two conveyances in trust by him, reserved the right to exercise a control over the ultimate disposition of the trust estates and the value of the trust corpus in each instance is accordingly to be included in his gross estate under section 302(d) of the Revenue Act of 1926. Held, further, in respect to a third trust of which decedent was a beneficiary for life with a general power of disposition of the trust corpus by his will, subject, however, to a right of revocation in the donor, that decedent, having exercised by will the power granted and such power not having been revoked by the donor, the value of the trust corpus is to be included in his gross estate under section 302(f) of the Revenue Act of 1926. John H. Bogardus, Esq., for the petitioner. Lewis S. Pendleton, Esq., for the respondent. LEECH *957 This proceeding was brought for a redetermination of a deficiency in Federal estate tax amounting to $12,881.81. The issues are: (1) Whether the value of the corpus of two certain trusts made by the above named decedent during his lifetime should be included in his*1448 gross estate; and (2) Whether the value of the corpus of a certain trust executed by the decedent's mother by an instrument by which she granted to the decedent a certain power of appointment by will or deed, should be included in the gross estate. *958 FINDINGS OF FACT. The petitioner is the executrix of Allerton Johnstone, deceased, letters testamentary having been duly issued to her on August 19, 1929, by the California Superiod Court in and for the County of Los Angeles, State of California. Allerton Johnstone, the decedent, was a resident of Pasadena, California. On June 8, 1929, he was killed as the result of an accident. At the time of his death he was about 28 years of age, in robust health and unmarried. He left as his heirs at law Hugo R. Johnstone, his father, and Kate Allerton Johnstone, his mother, who is the petitioner herein. He also left a brother, Vanderburgh Johnstone. The decedent left a will which was duly admitted to probate by the Superior Court of jthe State of California in and for the County of Los Angeles. By this will he gave and bequeathed all his property to Kate Allerton Johnstone and nominated her as his executrix. On or about*1449 September 11, 1923, the decedent, as donor, made, executed, and delivered a certain agreement to Robert Allerton, as trustee, whereby the decedent transferred and assigned to the trustee certain properties therein described to be held by the trustee for the benefit of the donor and for the purposes and with the powers and conditions therein set forth. The trust so created will be designated as trust A hereinafter. The trust instrument provided, among other things, as follows: The trustee shall have power to sell, transfer, assign and convey any of said properties and invest and reinvest the same and collect and receive the income arising from any such properties, and invest or reinvest the same, all in the discretion of the trustee. The income arising from the said trust fund or such part thereof as the trustee shall deem advisable, may be by the trustee paid to the donor, as the beneficiary under this trust, in such amounts, and if, as, and when, the trustee shall deem it advisable to so pay the same to the said beneficiary. Upon the death of the said beneficiary, ALLERTON JOHNSTONE, all of the property then held pursuant to this trust shall go to the heirs of the body*1450 of the Donor in equal parts, or if there be no heirs, then to such person or persons or corporation as the said donor may have directed by his last will and testament; or, in the absence of any heir or heirs of the body of the donor and of any such testamentary disposition, then to the heirs at law of the donor according to the laws of descent of the State of Illinois in effect at the time of the death of the donor. On or about the 21st day of January 1926 the decedent made, executed, and delivered a certain other trust instrument whereby he conveyed, quitclaimed, and transferred to Robert Allerton and Michael Phalen certain property therein described to be held by them in trust for the benefit of the decedent upon the terms and conditions therein set forth. The trust thereby created will be referred *959 to hereinafter as trust B. This trust instrument provided, among other things, as follows: The net income arising from said property, after the payment of the necessary expenses in connection with the management and control thereof, including the payment of taxes, repairs, and maintenance, shall be used, so far as in the judgment of the said Trustees may seem wise, in*1451 the improvement of said property and in the payment to me for and during the period of my natural life of an annuity in quarter yearly installments on the first (1st) of January and each three (3) months thereafter as nearly as may be, any remaining income to be invested as above provided. Upon my death, the said property and trust fund, principal and any accumulated income, shall go, be transferred, assigned and delivered to the heirs of my body, if any, in equal parts; if none, then to such person, persons, corporation or corporations as I may designate in my Last Will and Testament, or if I shall have no heirs of my body and no Will, then to my heirs according to the laws of descent of the State of Illinois. * * * This conveyance and agreement may be modified from time to time of rescinded as I and the then acting Trustees or Trustee may in writing agree. On the 13th day of March 1926 Kate Allerton Johnstone, the decedent's mother, as grantor, made, executed, and delivered a certain trust instrument whereby she granted, assigned, and transferred to the First Trust & Savings Bank of Chicago, Illinois, as trustee, certain property therein described to be held in trust for*1452 the benefit of the decedent upon the terms and conditions therein set forth. The trust created by this instrument will be referred to hereinafter as trust C. This trust agreement provided, among other things, as follows: The Grantor empowers and directs the Trustee to pay to her son, ALLERTON JOHNSTONE from the net income derived from the trust property, the sum of Three Hundred Dollars ( $300) on the fifth (5th) day of each month, the first payment to be made as soon as practicable after the signing of this instrument. In the event that the estimated net income from the trust property in any year shall not, in the sole judgment of the Trustee, be sufficient to permit the Trustee to make the income payments above provided for, the Trustee may pay to the said ALLERTON JOHNSTONE on the fifth (5th) day of each month an amount equal to one-twelfth of the estimated net income from the trust property for the year in which such payment is made. Any balance of net income remaining in its hands after making all of the payments above provided for shall be paid by the Trustee to said ALLERTON JOHNSTONE on the fifth (5th) day of december in each year. All payments of net income hereunder*1453 shall be made by check payable to said ALLERTON JOHNSTONE and during the lifetime of the Grantor shall be mailed to her for delivery unless otherwise directed by her. Upon the death of the said ALLERTON JOHNSTONE, the Trustee is directed to pay the entire principal of and all unexpended net income from the trust property to the heirs of the body of the said ALLERTON JOHNSTONE in equal parts, per stirpes, or if there be no such heir or heirs, then to such person or persons or corporation as the said ALLERTON JOHNSTONE may have directed by his last will and testament; or, in the absence of any heir or heirs of the body of said *960 ALLERTON JOHNSTONE and of any such testamentary disposition, then to the heirs at law of the said ALLERTON JOHNSTONE, other than his father, HUGO RICHARDS JOHNSTONE, according to the laws of the descent of the State of Illinois in effect at the time of his death. * * * The Grantor reserves the right and shall have the power at any time by an instrument in writing signed by her and delivered to the Trustee during her lifetime to modify, alter and amend, but not to revoke, this instrument either in whole or in part provided, however, that the*1454 duties, powers and liabilities of the Trustee shall not be substantially changed without its written consent, and provided further that the Grantor shall have no right to revest in herself any right, title or interest in or to any part of the income or principal of the trust property. In the estate tax return the petitioner reported for taxation the value of the corpus of trust B. She did not report for estate tax purposes the value of either of the other trusts. The respondent included in the gross estate the value of the corpus of all three trusts. OPINION. LEECH: The respondent contends that the transfers made by trust A and trust B were intended to take effect in possession or enjoyment at or after the decedent's death, that in trust B the decedent reserved the power to alter, amend, or revoke the trust, and that the properties constituting the corpus in all three trusts passed by general powers of appointment which were conferred on the decedent by the respective instruments creating the trust and which were exercised by him by will. Consequently, the respondent contends that the corpus of all three trusts should be included in the gross estate for purposes of the*1455 Federal estate tax. Section 302(c), (d), and (f) of the Revenue Act of 1926 is applicable to the issues and reads in part as follows: SEC. 302. 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, whereber situated - * * * (c) To the extent of any interest therein of which the decedent has at any time made a taansfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * * (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * * * * * *1456 (f) *961 To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth; * * * It is the petitioner's contention that by trust A and trust B the decedent made irrevocable transfers of the properties therein described; that the transfers were complete at the respective dates on which the trusts were executed; that the powers of appointment conferred on the decedent by the trust instruments were limited and not general powers; and that, consequently, the value of the corpus of neither of these two trusts should be included in the gross estate under any of the quoted provisions of the statute. The tax imposed by section 302(c) of the Revenue Act of 1926 is an excise on the transfer of property by death. ; *1457 ; . The real subject of the tax is the shifting of the economic benefits of the property. ; . The phrase in section 302(c) of the Revenue Act of 1926, "to take effect in possession or enjoyment at or after his death," includes the trusts or interests in a trust passing from the control of the donor at his death. . In accordance with these principles the corpus of trust A and trust B should be included in the gross estate under the provisions of section 302(c). In both of the trusts executed by him the decedent reserved at least a qualified control of the ultimate disposition of the corpus of the trust. He was unmarried at the date of the execution of the trusts and remained so until his death. If he died without issue it was provided that the corpus of the trusts should go to the person or persons or corporations appointed by him by his last will, or, there being no such appointment, to*1458 his heirs at law under the laws of descent of the State of Illinois. If the decedent died without issue and exercised the power to appoint the beneficiary or beneficiaries of the trusts, he could divert the corpus thereof from his heirs at law. He could, moreover, revoke any will in which he had at any time exercised the power of appointment and so could have caused the property at his death to vest in his heirs at law, if at death he had no issue. The exercise of the power, however limited it may be, would bring about the shifting of the economic benefits of the property. Likewise, failure to exercise the power of control would operate with similar effect. *962 As a matter of fact, the decedent appears to have exercised the power of control over the ultimate disposition of the corpus of trust A and trust B by his last will. It is our opinion that the instruments creating the trusts, by their provisions respecting the disposition of the trust properties at the decedent's death, left the transfers uncertain and incomplete as to him, and, therefore, subject to the tax. *1459 ; cf. . Moreover, in trust B the decedent reserved a power to alter and reovke the trust which was exercisable by the donor with the consent in writing of the trustee or trustees. The petitioner, citing , argues that, since the power to alter or revoke could be exercised only with the consent of the trustees, who were adverse parties, no taxable interest passed from the decedent at his death. It is our opinion that this question has been settled adversely to the petitioner by . In that case the Supreme Court had before it a similar question, arising under the provisions of section 219(g) of the Revenue Act of 1924. That section relates to the taxation of income. But the Court, citing , pointed out that the same considerations as to ownership and control affect the power to impose a tax both on the transfer of the corpus and upon the income. Section 219(g) of the Revenue Act of 1924 provided that where the grantor*1460 of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor. In the Reinecke v. Smith case the person in conjunction with whom the grantor reserved the power to revest in himself the title to the trust was the trustee. The Supreme Court, after some consideration of the duties of the trustees, said that the case must be viewed as if the reserved right of revocation had been vested jointly in the grantor and a stranger to the trust. The Court further said: * * * We think Congress may with reason declare that, where one has placed his property in trust subject to a right of revocation in himself and another, not a beneficiary, he shall be deemed to be in control of the property. We can not say that this enactment is so arbitrary and capricious as to amount to a deprivation of property without due process of law. * * * There is no distinction in principle between *1461 , and the question now under consideration. We, therefore, conclude that trust B is within the provisions of section 302(d). In view of the foregoing we deem it unnecessary to consider whether the powers of appointment reserved to himself by the donor *963 (the decedent) of trust A and trust B were general and, therefore, within the purview of section 302(f). The respondent has included in the gross estate for purposes of estate tax the corpus of trust C, which was created by the decedent's mother for his benefit for life. It provided that upon his death the corpus of the trust was to go (1) to his issue; (2) in the event that the decedent died without issue, to the person or persons or corporations appointed by the decedent by his will; (3) in the event of failure of heirs of his body and failure to exercise the power of appointment, to the decedent's legal heirs under the laws of descent of the State of Illinois, excluding his father. The decedent, dying without issue, exercised this power by his will in accordance with the provisions of sections 1330 and 1331 of the Civil Code of the State of California, which was the state*1462 of his residence. Was such power, so exercised, general or special? The instrument creating the power, to which we must look for its limitations, is unambiguous. Therefore nothing can be added thereto, , nor do we need the assistance of any rule of construction. . Obviously, the donor neither intended to nor did reserve the right to modify, alter, or amend the power of appointment beyond it life as defined by the instrument creating it. Such definition, in limiting the exercise of the power to the will of decedent, which became effective only at his death, ; , expressly made the life of the power concurrent with the life of decedent. The former lapsed with the death of the latter. After decedent's death, in nor event, was there any power which could be changed. Cf. ; *1463 , and cases cited therein. In our opinion, the clear and unambiguously expressed intention of the donor in granting the disputed power in trust C was that, provided decedent died without heirs of his body and the grantor had not modified, altered, or amended it, decedent could exercise the power by will in favor of any person. A power of appointment is general when it can be exercised in favor of any person the donee may select. It is special or limited when exercisable only in favor of persons or classes of persons designated in the instrument creating the power. ; certiorari denied, ; . Conditions or contingencies bearing only upon the right to exercise a power of appointment do not limit it when exercised, and thus are not material in determining whether a power is general or special. . *964 In our judgment, the power of appointment here in question, contained in trust C, was a general power*1464 of appointment granted decedent, with limitations only upon the right to exercise it, within which decedent clearly acted, , and subject to divestiture or change by the happening of a condition subsequent - the modification, alteration, or amendment of the power by the donor - which had not occurred when the power was exercised Cf. , and cases cited therein, ; . Further, though it be said that the mother had the right to modify, alter, or amend the instrument creating the questioned trust and, a fortiori, the power contained therein, until her death, as petitioner contends, which right we deny existed here, the record discloses the exercise of the power granted within its expressed limitations, the passing of the property covered thereby to the appointee under the power, and no modification, alteration, or amendment thereof. Certainly, then, even under petitioner's contention, until so changed, the property included in trust C could and did pass by the exercise of that power of appointment. Cf. *1465 . We conclude the power of appointment granted to decedent in trust C if a general power of appointment and the property passing thereunder is therefore within section 302(f) of the Revenue Act of 1926. Reviewed by the Board. Judgment will be entered for the respondent. VAN FOSSAN VAN FOSSAN, dissenting: Being of the opinion that under the facts of the case and the law as I understand it, the power of appointment was not a general power, I dissent from the above report as to trust C.