Durant v. Commissioner

ESTATE OF NORMA P. DURANT - MARSHALL & ILSLEY BANK AND HERMAN F. FRIEDRICH, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Durant v. Commissioner Docket No. 93079. United States Board of Tax Appeals 41 B.T.A. 462; 1940 BTA LEXIS 1181; February 27, 1940, Promulgated *1181 Where decedent transferred substantially all of her estate to a trust under an instrument which provided for monthly payments out of income or corpus to decedent, in stipulated amounts in excess of probable earnings of the trust corpus, and for further payments in the trustees' discretion for travel, the purchase of a home, and for decedent's "comfort, maintenance and enjoyment of living" and, upon decedent's death, for payment of her debts, held, respondent properly included the trust corpus as a part of decedent's gross estate. Herman F. Friedrich, Esq., for the petitioners. Frank T. Horner, Esq., John R. Wheeler, Esq., F. R. Shearer, Esq., and Jonas M. Smith, Esq., for the respondent. OPPER *462 This proceeding was brought for a redetermination of a deficiency in petitioners' estate tax in the sum of $363.66. The sole question involved is whether there should be included in the gross estate the value of the corpus of a trust which had been created by Norma P. Durant, deceased. FINDINGS OF FACT. The case was presented on a stipulation of facts, and the facts are found in accordance with the stipulation, the substance of which*1182 follows. Petitioners are the duly appointed executors of the estate of Norma P. Durant (hereinafter called the decedent) who died August 24, 1935. Her last will and testament was executed December 22, 1925. The Federal estate tax return was filed February 25, 1937, and reported a gross estate of $726.51, deductions of $2,693.35, with no net estate or Federal estate tax resulting. *463 Decedent on March 30, 1926, had executed a trust agreement naming the Marshall & Ilsley Bank, a corporation organized under the banking laws of the State of Wisconsin, as trustee. Under the agreement there had been deposited with the trustee certain securities and other property of which on August 24, 1935, the date of decedent's death, there remained a portion to the value of $74,088.98. The trust agreement provided, inter alia, that the trustee should receive the "income", and after deducting expenses it was: * * * to pay to said Norma P. Durant on the first of each and every month, the sum of $1,250, out of said income and if the income is not sufficient for that purpose, out of the corpus of said property turned over to the Trustee, for and during her natural life or until*1183 the property turned over to the Trustee and the income therefrom has been paid over to said Norma P. Durant. It is further agreed and understood that should said sum of $1,250 per month be insufficient in the judgment of said Trustee to properly provide for the comfort, maintenance, and enjoyment of life by said Norma P. Durant, that said sum to be paid monthly to her be increased to such sum as in the opinion and judgment of said Trustee is proper. Said Trustee shall have the right and power to pay to said Norma P. Durant, in addition to the monthly provision for maintenance, etc., any further sum or sums of money for the purpose of traveling, or purchasing a home, or other real estate solely however for her own use and enjoyment, and said Trustee may further pay to said Norma P. Durant, moneys for other purposes, which in the opinion and judgment of said Trustee it may be advisable to pay her in view of all the existing conditions and circumstances. The trust agreement also provided that upon the death of decedent the trustee should "ascertain and pay all of the just debts of said Norma P. Durant." The agreement then provided for the disposition of the residue in a comparable*1184 manner, and in a large measure in identical language, with the decedent's will executed December 22, 1925. The value of the trust corpus on March 30, 1926, the date of its creation, was $55,950, and there were added thereto on October 24, 1928, securities and other property of a value of $78,730.88. From the date of the creation of the trust, March 30, 1926, to the date of decedent's death, August 24, 1935, there was paid to decedent $61,365.69 from income received from the trust and $70,516.50 from the principal of the trust, making a total payment of $131,882.19. The corpus of the trust was not included as part of the estate's assets in the Federal estate tax return filed by petitioners. The parties have further stipulated: 8. That if the corpus of said trust having a value at the date of death of the said Norma P. Durant of $74,088.98 were included as part of the assets of the estate that the gross estate of said Norma P. Durant has a value of $74,815.49; a net estate after allowing deductions and statutory exemption of the value of $22,122.14. If the corpus of said trust is includable in the gross estate then there is due and payable by the petitioner herein a deficiency*1185 in Federal estate tax in the sum of $363.66, plus interest as provided by law. *464 OPINION. OPPER: Decedent transferred what came to constitute virtually her entire estate by a trust instrument operative during her lifetime, and providing for the payment to her of a stipulated income. Other provisions required the trustee to discharge her debts at death and permitted distribution to her during her lifetime of any part or all the principal if considered advisable by the trustee. This property was proposed for inclusion for estate tax purposes by respondent, one ground given being that it was "a transfer of a material part of the decedent's property in the nature of a final disposition or distribution thereof and therefore in contemplation of death." The stipulation of facts, which constitutes the entire record, is completely lacking in any material from which we could conclude that petitioners have sustained their burden of proving as a fact that this was not a transfer in contemplation of death. On this ground we should be required to sustain respondent's position. See *1186 (C.C.A., 7th Cir.). But it is something less than a satisfactory solution of this controversy to decide it purely on the basis of failure of proof, particularly where the issue is essentially and fundamentally factual. . Happily, we need not do so here since the same result will follow by application to these facts of other provisions of the estate tax section. Among the interests which must be included in gross estate is property "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 * * *." 1 *1187 Powers residing in the decedent either alone or at least in conjunction with the trustee were such that the amendment, revocation, or *465 alteration of the trust was in reality retained by decedent until the time of her death. The stipulated monthly payments were obviously materially in excess of any anticipated income from the property. It resulted, and must have been contemplated, that periodic invasions of principal would be necessary. Only decedent's refusal to accept such fragmentary distributions of principal could prevent the estate from being dissipated in its entirety. In fact, in the period of less than ten years of the trust's operation approximately 50 percent of the principal was so disbursed. At the same rate it would not have lasted for ten years more. Again, the primary obligation of the trustee upon decedent's death was to pay all of her debts, so that by the simple expedient of obtaining by loans or advances such amounts of principal as she might see fit she could effectively prevent all or any part of the property from passing to the remaindermen. Additional considerations may be unnecessary, but, as indicating the flavor of the decedent's provision*1188 for treatment of the trust estate, it may be added that the trustee was expressly permitted to invade the corpus to any extent for the purpose of making payments to decedent. This power was so broad as to preclude the view that there was any real limitation whatever upon the extent to which the devolution and "enjoyment" of the property might be "changed." See . Had it been exercised to its fullest extent at any time up to the moment of decedent's death there would have been no property left upon which the trust instrument could operate. Adding these elements to those previously noted, we think it impossible to escape from the necessity of applying to this property the provisions of section 302(d). Looking at the trust instrument as a whole, it is only with reference to decedent's death that we can determine what "shifting of the economic benefits of property which is the real subject of the tax" 2 would result from decedent's disposition of the trust corpus. That event was "the source of valuable assurance passing from the dead to the living." *1189 . This conclusion is fortified by the Board's decision in , where the same section was found to be inapplicable but on the limited ground that the trustee could not distribute the estate to the grantor except upon specific contingencies which were shown not to have occurred. That ground, of course, is inappropriate here in view of the wide and untrammeled discretion conferred upon the trustee. Moreover, our present conclusion seems a necessary corollary to the decision in . In , the *466 doctrine was reiterated that "the gift tax was supplementary to the estate tax. The two are in pari materia and must be construed together." "There is nothing in the language of the statute * * * to suggest * * * that the test of the completeness of the taxed gift was to be any different from that to be applied in determining whether the donor has retained an*1190 interest such that it becomes subject to the estate tax upon its extinguishment at death." In the Rosenau case a reserved power to change beneficiaries was considered sufficient to prevent the application of the gift tax. See also ; certiorari denied, ; ; . A trust comparable to that created by decedent would apparently escape gift tax. Revenue Act of 1932, sec. 501(c). To hold that the property also escapes estate tax would be to reach a result in direct conflict with the principle of the Sanford decision. This is not a case where "no interest in the property held under the trust deed passed from her to the living; title thereto had been definitely fixed by the trust deed." . Nor is it even one where "Since the power to revoke or alter was dependent upon the consent of the one entitled to the beneficial, and consequently adverse, interest, the trust, for all practical purposes, had passed as completely from any control by decedent which might*1191 inure to his own benefit as if the gift had been absolute." . See also . But cf. . Prior to decedent's death the entire trust could, as we have noted, inure to decedent's benefit by the invasion of the corpus for her use. At her death decedent's interest could have been no more than to see that the property she left behind was distributed in accordance with her wishes. Both benefits she retained until the moment of her death. Upon her failure to receive the corpus during her life, at her death, and only then, did the provisions for succession to her property which she herself had designed become effective. See . The construction which we thus place upon the 1926 Act makes it unnecessary to consider whether resort might be had to the amendment thereto contained in the Joint Resolution of March 3, 1931, or section 803(a) of the Revenue Act of 1932.3 These have been held to be inapplicable to facts comparable to those now before us, in that*1192 the trust was created prior to the enactment of that resolution but *467 the decedent died thereafter, on the ground that retroactive force was beyond the scope of the legislative intent. . But cf. ;;; For the reasons stated we conclude that the 1926 Act is applicable in its original form and that the property in question is includible as a part of decedent's estate. Reviewed by the Board. Decision will be entered for the respondent. Footnotes 1. Revenue Act of 1926. - 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, wherever situated - * * * (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. The relinquishment of any such power, not admitted or shown to have been in contemplation of the decedent's death, made within two years prior to his death but after the enactment of this Act without such a consideration and affecting the interest or interests (whether arising from one or more transfers of the creation of one or more trusts) of any one beneficiary of a value or aggregate value, at the time of such death, in excess or $5,000, then, to the extent of such excess, such relinquishment or relinquishments shall be deemed and held to have been made in contemplation of death within the meaning of this title; * * * ↩ 2. . ↩ 3. "(c) To the extent of any interest therein of which the decedent * * * has at any time made a transfer, by trust or otherwise, 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 (1) the possession or enjoyment of, or the right to the income from, the property * * *." ↩