1932 BTA LEXIS 1384 | B.T.A. | 1932
Lead Opinion
The first issue for consideration here is whether or not the value of the corporate stock transferred by the decedent to a trustee under the trust agreement of July 18,1923, should be included in determining the value of the gross estate of the decedent for purposes of the estate tax, under the provisions of section 302 (d) of the Eevenue Act of 1924.
Paragraph 15 of the trust instrument, set out in our findings of fact above, provided that the terms of said instrument might be added to or modified by the joint written agreement of the decedent and five of the seven named beneficiaries, one of whom was also named as trustee. This fact, the respondent contends, brings the case within the purview of the cited statute. The provisions of the Eevenue Act of 1924, pertinent here, read as follows:
Sec. S02. Tie 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 * * *
* * * Si! * * ‡
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, 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 a fair consideration in money or money’s worth.
In computing the deficiency the respondent included the stock, comprising the corpus of the trust, in the gross estate of the decedent at a valuation of $555,310. The petitioner contends that no part of the value of the trust property may properly be included in the value of the gross estate.
Prior to the Revenue Act of 1924, where a grantor reserved the power, acting alone, to alter, amend or revoke a trust agreement, the value of the property thereby transferred was included in the value of the gross estate and taxed under section 402 (c) of the Revenue Acts of 1918 and 1921, as a transfer taking effect in possession or enjoyment at or after death, on the theory that prior to the death of the grantor the transfer was not complete. Chase National Bank v. United States, 278 U. S. 327; Reinecke v. Northern Trust Co., 278 U. S. 339.
In the case last cited, the court, in speaking of the general nature of the Federal estate tax, said:
In its plan and scope tlie tax is one imposed on transfers at death or made in contemplation of death and is measured by the value at death of the interest which is transferred. * * * It is not a gift tax and the tax on gifts once imposed by. the Revenue Act of 1924 * * * has been repealed * * *. One may freely give his property to another by absolute gift without subjecting liimseif or his estate to a tax * * *,
In Reinecke v. Northern Trust Co., supra, the court held in effect that, where the donor reserved the power to modify the trust only with the consent of one or more of the beneficiaries, the transfer was immediately complete, and was not a transfer which occurred at the subsequent date of death; hence, the value of the trust property should not be included in the gross estate subject to tax. On this point the court said:
Since the power to revoke or alter was dependent on 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 enure to his own benefit as if the gift had been absolute.
See also May v. Heiner, 281 U. S. 238.
In the instant case, the decedent reserved the power to modify the trust instrument only by the joint written agreement of himself and five of the seven named beneficiaries, one of whom was the trustee who acted as such for himself and the remaining-six beneficiaries, all of whose interest were adverse to that of the decedent. Under the doctrine laid down in Reinecke v. Northern Trust Co., supra, it is our opinion, therefore, that the transfer was not of a testamentary character, but was as fully completed at date of execution of the trust instrument as if the gift had been absolute. At decedent’s death no transfer occurred, nor was there any shifting of economic benefits in the property. The decedent had no interest in the trust property at the time of his death, and hence it should not be included in deter
We adopted the foregoing view in Colonial Trust Co. et al., Executors, 22 B. T. A. 1377, 1386, where the decedent had reserved the 'right to amend, alterJor modify the trust in 'conjunction with the trustees and beneficiaries. That cáse involved section 302 (d) of the 'Revenue Act’of 1924, Which is the same statute relied upon by the respondent as authority for his action in the prcsentmaSe.
The same interpretation of the law has repeatedly-been adopted by the courts. In White v. Erskine, 47 Fed. (2d) 1014, the decedent reserved the right to amend the trust instrument with' the assent only of the trustee. The c’as'e arose under th‘e Revenue Act - of 1926. 'In affirming the decision of the District Court that the value of the trust property should not be included in the gross estate-'subject to tax, the United States Circuit Court of Appeals for the Firát-Circuit, 'in its opinion at page 1016, said:
The government now contends in effect that by subdivision (d) [óf section 302] Congress has undertaken to impose a new form of excise tax, viz., a tax on-the power to alter or revoke before death a trust created by'the grantor, whether the power be of a general or limited nature. We do not think Congress intended by the addition of subdivision (d) to add a new form of tax. It was only “to the extent-of the interest” of the-decedent-in the trust fund, and-at his death, that subdivision (’d) adds anything to theválue of the gro'ss estate. If the ■ decedent "há‘d no beneficial interest in the trust fund at his death, under the construction of the Supreme Court in the above-cited cases, there was nothing transferred from him at death within the meaning of' section 301, which imposes the tax.
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In other words, where a grantor, either alone or in conjunction with anyone not a beneficiary under the trust, has retained “ the power to- revest ih himself title to any part of the trust,” * * * then the body of the trust at the death of the decedent may be included in the value of the gross estate, but where the decedent hás no such power except by the consent of an a’dverse party as one of the beneficiaries, or"as in this instance of the trustee for the beneficiaries, the right of revocation is gone from the donor and also all beneficial interest for taxing purposes under section 301 of the act.
To hold that Congress under subdivision (d) intended under the guise of a tax on the transfer of' property'at death to'impose a tax solely'on 'a limited powftr of appointment under it, would be contrary, not only to the spirit of the act, but'the express terms of section "301 * * * and-so doubtful a construction that the contrary intent ■ should be resolved in favor of the taxpayer * * *.
To the same effect, see Brady v. Ham, 45 Fed. (2d) 454, which involved section 302 (d) of the Revenue Act of 1924, and in which case the decedent had retained very broad powers'to alter the trust, change the trustees and name other beneficiaries,- except ■herself.
See also Cover v. Burnet, 53 Fed. (2d) 915, Where the decedent reserved the power to modify the trust, except that-no part of the
On the first issue, the action of the respondent is reversed.
The second issue has been settled by the stipulation of the parties, and pursuant thereto the petitioner is entitled to additional deductions from the value of the gross estate, as determined by the respondent in his deficiency letter, in the amounts of $15,000 and $647.48 on account of expenditures for- executors’ fees and legal services, respectively.
The third issue arises from the affirmative averments contained in paragraph 7 of the respondent’s amended answer, wherein it is alleged that in determining the deficiency certain amounts were allowed as deductions from the gross estate, under the heading of debts of the decedent and mortgages, in excess of the amounts properly so allowable, and the respondent prays that the deficiency be increased accordingly.
The stipulated facts, which we have incorporated in our findings of fact, show that the respondent allowed as deductions from the gross estate (a) the indebtedness of the decedent to Minnie S. and Abbie S, Moore, represented by his unsecured promissory note in the principal amount of $8,500, plus accrued interest in the amount of $36.84, an,d (b) decedent’s promissory note in the principal amount of $75,000, payable to the Northwestern Mutual Life Insurance Company, secured by a mortgage on certain real estate of the decedent, together with accrued interest in the amount of $1,409.38. Both of said items of principal indebtedness are included among those referred to in paragraph 3 of the trust agreement.
In respect of the indebtedness due to the insurance company which was secured by a mortgage upon the decedent’s real estate, the facts show that the real estate was owned by the decedent at the time of his death and the value thereof was included in the value of the gross estate as finally determined by the respondent. The amount of this indebtedness we think is clearly allowable as a deduction under section 303 (a) (1) of the Revenue Act of 1924, which expressly provides that:
Sec. 803. For the purpose of the tax the value of the net estate shall he determined—
(a) In the ease of a resident, by deducting from the value of the gross estate-—
(I) Such amounts for * * * unpaid mortgages upon, or any indebtedness in respect to, property * * * to the extent that such * * * mortgages, or indebtedness were incurred or contracted bona fide and for a fair consideration in money or money's worth,
The unsecured promissory note of the decedent in the principal amount of $8,500, plus accrued interest of $36.84, which respondent allowed as a deduction in computing the deficiency, presents a different problem. This item is properly allowable, if at all, only as a claim against the estate. The respondent now contends that he erred in allowing said deduction on the theory that the indebtedness did not constitute a claim against the estate for the reason that the payment of the indebtedness, under the provisions of the trust instrument, was impressed upon the property transferred to the trustee by the decedent during his lifetime.
We are unable to agree with this contention of the respondent. In the first place, the decedent’s direction that the trustee pay the indebtedness in question was not absolute, but conditional. The trust instrument provided only that the cash dividends upon the transferred stock, if any, should be applied on the indebtedness, and that the principal of said stock might be used for the same purpose at the discretion of the trustee. However, if the decedent had unconditionally directed the trustee to pay said indebtedness out of trust funds or property, unless and until it was in fact so paid the amount of such indebtedness would constitute a claim against the decedent’s estate, unless the creditors had agreed to look to the trustee for payment, which would in effect amount to a novation. It is the generally accepted rule that a creditor may look to the debtor for satisfaction of his claim, which right can not be defeated by a transfer or assignment of the debtor’s property to a trustee, without the consent of the creditor. And this is the recognized rule in Michigan. Parsons v.
The creditors are not compelled to accept the terms proffered in the assignment; they may stand aloof from the assignment, and may rely npon the liability of their debtor to pay.
In the instant proceeding, the respondent has affirmatively alleged that in computing the deficiency he erred in allowing as a deduction the amount of the decedent’s unsecured note of $8,500 plus accrued interest of $36.84. If the holders of this note assented to the assignment of the decedent’s stock and agreed to look to the trustee for payment, or if for any other reason the amount of this indebtedness did not, upon decedent’s death, become a claim against the estate, the burden is upon the respondent to establish such fact by competent evidence. This burden respondent wholly failed to discharge; he offered no evidence on this point, nor was any evidence offered thereon by the petitioner. Eespondent’s contention and prayer for relief in respect to this item are denied. Schilling Grain Co., 8 B. T. A. 1048.
Judgment will "be entered under Rule 50.
