Royce v. Commissioner

ESTATE OF GERTRUDE LEON ROYCE, RICHARD LEON ROYCE AND LOUIS ROYCE, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Royce v. Commissioner Docket No. 105623. United States Board of Tax Appeals 46 B.T.A. 1090; 1942 BTA LEXIS 774; May 7, 1942, Promulgated *774 Decedent's husband created a trust, reserving to himself the income for life and the right to withdrawals of principal for his maintenance and support, within the discretion of the trustee. After his death the income was to be paid to decedent (his wife) for life, with remainders over to his sons. In addition to the income decedent had the right during her lifetime to withdraw any or all of the trust corpus. Held, that no part of the trust corpus is includable in decedent's gross estate for the purpose of the Federal estate tax. C. R. Berne, Esq., for the petitioners. Walter W. Kerr, Esq., for the respondent. SMITH *1091 This proceeding is for the redetermination of a deficiency in estate tax in the amount of $1,268.96. The single issue is whether the value of the corpus of a trust created by the decedent's husband is includable in her gross estate. FINDINGS OF FACT. The petitioners are the executors of the estate of Gertrude Leon Royce, deceased, who died on October 5, 1938. The estate tax return and amended return involved were filed with the collector of internal revenue for the eighteenth district of Ohio. On March 7, 1929, Bert*775 Royce, decedent's husband, transferred title and delivered certain properties to the Cleveland Trust Co., as trustee. Bert Royce died on August 20, 1929. The material portions of the March 7, 1929, trust indenture, with respect to which Bert Royce retained during his lifetime the full power of revocation, are as follows: The entire net income derived from the trust estate shall be paid, in quarterly instalments or oftener, to me during life, and the Trustee shall pay and deliver to me, in addition thereto, from time to time, such further amounts from the principal of the trust as it may deem proper and necessary for my maintenance, support, comfort and enjoyment, absolute discretion being vested in the Trustee to determine what may be necessary or proper for such purposes. * * * Subject to the rights hereinbefore reserved to me during my lifetime, I direct that the entire net income derived from the trust estate shall be paid to my wife, GERTRUDE LEON ROYCE, in quarterly instalments or oftener, during her lifetime. The Trustee is further authorized and empowered to pay to my wife from time to time, such amounts of the principal of the trust estate as she may request in writing, *776 even to the exhaustion thereof, and the Trustee upon making any such payments of principal to my wife, shall be without liability as to the use made by her thereof. Subject to the foregoing provisions for my wife, the trust estate shall be treated as composed of two (2) equal shares or portions, one of which shall be held for the benefit of my son, RICHARD LEON ROYCE, and the other share shall be held for the benefit of my son, LOUIS ROYCE. After the decease of my wife the net income herived from each son's share shall be paid to him, in quarterly instalments or oftener, until distribution of the trust estate is made as hereinafter permitted. In addition thereto the Trustee is authorized and empowered to pay to each of my sons from the principal of his share, such amounts as the Trustee may deem necessary for his maintenance, support and comfort, provided his income hereunder and from other sources is, in the judgment of the Trustee, insufficient for such purposes. Provided, however, that until each of my sons shall attain the age of twenty-five (25) years, the Trustee shall pay to or expend for the maintenance, support and education of each such son, such amounts of the income*777 and/or principal of his share as it may deem necessary for the aforesaid purposes, and unexpended income being accumulated and added to principal. When each of my sons attains the age of twenty-five (25) years, provided my wife is deceased, otherwise after her decease, the Trustee shall pay to him one-half (1/2) of his share of principal; and of and when each of my sons attains the *1092 age of theity (30) years, provided my wife is deceased, otherwise after her decease, the Trustee shall pay to him the balance of his share of principal, and the trusts herein set forth shall then terminate. In the event of the decease of either of my sons prior to receiving distribution of his share, such son's shares shall vest in and be distributed to his nominees and appointees under his last will and testament; or in default of such testamentary disposition, in his issue, or if he leave no issue surviving, then such son's share shall be added to the share of my other son and be subject in all respects to the trusts herein set forth in regard to such other son's share, but distributions to my sons or their testamentary appointees or their issue shall in any event be deferred until after*778 the decease of my wife, the trust estate being held for her benefit subject to the trusts herein set forth. The provisions for the benefit of my sons shall apply, subject to the right of my wife under the power hereinabove given her to withdraw the entire principal of the trust estate. The value of the trust assets on the date of the death of Bert Royce was $55,553.75. Thereafter, the income of the trust was paid to the petitioners' decedent during her lifetime and, in addition, she received $25,700 from the corpus of the trust. At the date of her death, October 5, 1938, the remaining assets of the trust had a value of $41,133.61. On that date Richard Leon Royce and Louis Royce were living and were 29 and 24 years of age, respectively. OPINION. SMITH: The issue presented is whether the value of the corpus of the trust created by the decedent's husband is includable in the decedent's gross estate under the provisions of section 302(a) of the Revenue Act of 1926. The respondent contends that it is, because during her life decedent had complete beneficial ownership of the corpus through her right entirely to withdraw it from the trust. The petitioners contend that any withdrawals*779 of corpus by the decedent were dependent upon the trustee's discretion and, in the alternative, that if an unlimited right to withdraw did exist the statute does not require the inclusion of the value of the trust corpus in the decedent's gross estate. Section 302(a) of the Revenue Act of 1926 provides 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, wherever situated - (a) To the extent of the interest therein of the decedent at the time of his death. There can be no doubt that the trust indenture gave to the decedent the unconditional right to withdraw the entire corpus of the trust. Although the first clause, referring to the privilege of the decedent to withdraw the corpus, is phrased in terms of the power of the trustee to make the payments, a reading of the entire indenture makes it plain that the trustee was given no discretion over the payments to the decedent out of principal. This conclusion is fortified by the *1093 fact that in giving the trustee the power to pay sums out of principal to the sons, the trust indenture*780 expressly places the entire matter in the discretion of the trustee. The basic problem presented in this proceeding is thus brought clearly into focus. Does the absolute right of the decedent under the trust indenture to withdraw the trust corpus warrant the inclusion of the value of the trust corpus in her estate under the authority of section 302(a) of the Revenue Act of 1926? It may be assumed that Congress has the power to impose the estate tax in a case such as this one. ; ; . The question is whether Congress has actually exercised that power. The rights of the decedent to withdraw the trust corpus terminated at her death. Neither the trust property nor her intangible rights therein were subject to distribution as a part of her estate. The interests of the remaindermen as to them passed directly from the settlor of the trust. At no time was the trust corpus actually the property of the decedent. The original text of the section under consideration was designated as section 202(a) *781 of the Revenue Act of 1916 and provided: SEC. 202. That 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: (a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate. In 1926 the section was amended to its present form. With respect to the 1926 amendment, the House Ways and Means Committee Report (H.R. No. 1, 69th Cong., 1st sess.), reads in part as follows: SEC. 302. Under existing law the gross estate is determined by including the interest of the decedent at the time of his death in all classes of property which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate. In the interest of certainty it is recommended that the limiting language above referred to shall be eliminated in the proposed bill, so that the gross estate*782 shall include the entire interest of the decedent at the time of his death in all the property. Clearly the trust corpus was not includable in the decedent's gross estate under the former wording of the section because it was neither subject to the payment of charges against the estate nor to distribution as a part of the estate. Cf. . There is nothing in the language of H.R. No. 1, supra, to indicate that Congress intended to extend the meaning of section 302(a) to include interests of a decedent which terminate at death. *1094 A problem similar to the one which we have before us was considered by the District Court for the Southern District of New York in . In that case the Commissioner contended that because the decedent had a life interest in certain property, coupled with a power of sale, the value of the property was includable in the decedent's gross estate in accordance with section 302(a) of the Revenue Act of 1926. The court, without deciding whether an absolute power of sale did exist, held that such a power would not be an "interest" within*783 the meaning of section 302(a). The court stated: * * * For even if the power of sale were a power over an undivided share outright, such a power is not an "interest" within the meaning of section 302(a). That provision deals with property owned by a decedent and passing at death by will or intestacy. Subsequent provisions in section 302 deal with property over which a decedent had powers. * * * The problem of the scope of section 302(a) was considered in ; reversing in part , which affirmed . The decedent in that case, a minor, was the beneficiary of a trust created by his father and was to receive the income until he reached age 28, at which time he was to become the absolute owner of the property. He was given a general testamentary power of appointment over the trust corpus which he attempted to exercise when he still lacked testamentary capacity in the state in which he was domiciled. The Commissioner contended that the decedent had an "interest" in the trust corpus within the meaning of section 302(a). With respect to this argument*784 this Board said: * * * His power of appointment, which gave him a complete power of testamentary disposition during life, did not, as we read the statutes, constitute an "interest" under subsection (a). That a subsequent subsection, (f), should treat it as taxable in certain circumstances we think is immaterial. We conceive that the word "interest," as used in subsection (a), refers to a transferable estate, and not something which, like a life estate or power, ceases altogether on the donee's death. If it includes anything which ceases at the decedent's death, the inclusion must be in express words. * * * The Supreme Court reached the same result on this point and held that an unexercised general power of appointment is not an "interest" within the meaning of section 302(a). The case of , involved section 302(d) of the Revenue Act of 1926, which provides in substance that the value of property which was transferred in trust, or otherwise, by a decedent during life and is subject at the date of death to any change through the exercise of a power to alter, amend, or revoke retained by the grantor is includable in the*785 decedent's gross estate. The argument was made that section 302(d) was limited by *1095 the provisions of section 302(a). The United States Supreme Court said in answer to this argument: * * * Subsection (a) does not in any way refer to or purport to modify (d) and, in view of the familiar rule that tax laws are to be construed liberally in favor of taxpayers, it cannot be said that, if it stood alone, (a) would extend to the transfers brought into the gross estate by (d). . Moreover, Congress has progressively expanded the bases for such taxation. Comparison of section 302 with corresponding provisions of earlier Acts warrants the conclusion that (d) is not a mere specification of something covered by (a) but that it covers something not included therein. * * * Cf. . The power held during her life by the decedent in the instant proceeding was somewhat similar to those of the decedent in the Porter case. The distinction between the cases is that in the Porter case the decedent had made a transfer of the property and retained*786 the power, whereas here the property never belonged to the decedent. If section 302(a) does not include the powers specified in section 302 (d), it clearly does not include the power to invade corpus. See also . We hold that this decedent had no "interest" in the trust corpus which permits the inclusion of the value of the corpus in her gross estate. The contention of the petitioner is sustained. Decision of no deficiency will be entered for the petitioners.